Industry Committee on May 3rd, 2023

[The Chair, Liberal, Joël Lightbound]

I call this meeting to order.

Ladies and gentlemen, colleagues, I am glad to see you again on this Wednesday afternoon.

Welcome to meeting No. 71 of the House of Commons Standing Committee on Industry and Technology. Pursuant to the order of reference of Monday, April 17, 2023, we are studying Bill C-34, An Act to amend the Investment Canada Act. Today’s meeting is taking place in a hybrid format, pursuant to the House Order of Thursday, June 23, 2022.

To assist us in the study of this bill, we have with us today, in person, Patrick Leblond, associate professor at the Graduate School of Public and International Affairs of the University of Ottawa Faculty of Social Sciences.

Mr. Leblond, thank you for accepting our invitation to join us, even though it was at short notice. We appreciate it.

We also have Ian Lee, associate professor at the Carleton University Sprott School of Business, who is joining us virtually.

Hello, Mr. Lee, and welcome to the committee.

And last, from Edmonton Global, we have Malcolm Bruce, chief executive officer, who is also joining us by videoconference.

Thank you very much, Mr. Bruce, for joining us this afternoon.

Without further ado, I'll let Mr. Leblond start with five minutes of remarks.

The floor is yours.

[Dr. Patrick Leblond, Associate Professor, Graduate School of Public and International Affairs, Faculty of Social Sciences, University of Ottawa, As an Individual]

Thank you, Mr. Chair.

Good afternoon, members of the committee. Thank you for the invitation to discuss Bill C‑34 with you. I will be giving my presentation in French.

However, please feel free to ask questions in English afterwards.

To begin, I would like to discuss three important aspects of the bill: the nature of an investment that threatens Canada's national security, sanctions for failure to comply with undertakings given by a non-Canadian investor, and transparency.

I will start with the nature of an investment that threatens Canada's national security. Subclause 2(1) of the bill, which amends section 11 of the Act by adding a paragraph (c), refers to “an entity carrying on all or any part of its operations in Canada and that has a place of operations in Canada ... or assets in Canada used in carrying on the entity’s operations.” The bill uses the expressions “material assets” and “material non-public technical information.”

What I wonder about is this: what happens if that non-Canadian investor acquires those material assets or that material technical information directly, without acquiring the entity in question that owns the assets or information? For example, what if the investor buys a bank of personal data about Canadians or the source code of the algorithm for an application associated with critical infrastructure? Is the investor required to give a notice in accordance with the procedure proposed in the bill? Is the acquisition covered by the bill?

If the answer is no, there is a risk that an investor that wishes to use the assets or technical information for legitimate commercial purposes will decide, instead, to acquire them directly from the Canadian entity that owns them, rather than acquire the entity itself and risk having the acquisition blocked by the minister for national security reasons. The same reasoning applies to the owners of a Canadian entity who wish to maximize the value of their assets and technical information: they could put the assets or information up for sale, rather than the entity itself.

In that scenario, the threat to national security is still present. If the Investment Canada Act does not apply to a scenario in which the assets or technical information itself is purchased, and not the entity, such as a business, the acquisition of assets or information needs to be covered by another act or acts. What act or acts would that be? To my knowledge, there are none.

That is the first thing I wonder about regarding the bill, given the intangible nature of some assets, whether they are data or technical information. It is therefore easy to acquire them without necessarily acquiring the business that owns them.

I will now move on to the sanctions for non-compliance with undertakings given by a non-Canadian investor. The bill provides that the minister may approve an investment if the non-Canadian investor gives certain undertakings to limit or reduce the risks of injury to national security. What happens if the investor does not honour their undertakings?

The bill provides a maximum penalty of $500,000. If that penalty applies only once, it seems to me to be very little. We need only think of the millions in profit that material assets or technical information can generate. Is a single penalty of $500,000—because the bill does not provide that it be every day or every year—therefore sufficient to encourage, if not compel, a non-Canadian investor to honour their undertakings? At that point, is it not really just an operating cost?

I wonder why a higher penalty is not being considered, such as the one provided in Bill C‑27? That bill talks about a penalty of the higher of 5% of global revenue and $25 million. Why does Bill C‑34 talk only about a penalty of $500,000? On the one hand, personal information is considered to be so important that the penalty can be millions of dollars and possibly as much as 5% of global revenue. On the other hand, however, when we are talking about national security in connection with what may be the same data, the economic sanction is a mere half million dollars. Does this mean that threats to national security are less important? That is my question to you.

In addition, what is to be done if the investor pays the penalty and continues not honouring their undertakings? Does the minister have the power to stop the investment? Although I am not a lawyer, my reading of the act and the bill suggest to me that the minister does not seem to have that power, unlike in the United States, where it is possible to stop an investment retroactively. Would that be the case here? That is what I wonder when I read the bill.

On the subject of transparency, the bill could increase uncertainty on the part of non-Canadian investors who want to invest in Canada and also Canadians who want to sell all or part of their businesses to non-Canadians or obtain financing from non-Canadians. There is therefore a risk that businesses that have or believe they have material assets or material non-public technical information may decide to move their decision-making centre or headquarters out of the country, to the United States in particular.

The greater the uncertainty regarding the application of the act, the higher the risk of a move happening will be. To reduce the uncertainty, there therefore has to be a degree of transparency in the minister's decisions and the undertakings given by non-Canadian investors, without that necessarily meaning that state secrets or trade secrets would be disclosed. Even if the decisions are made on a case by case basis, there have to be clear guidelines, and those guidelines have to be observed. Simply providing a list of material assets or material technical information does not seem to be adequate.

I will stop there. Thank you.

[The Chair, Liberal, Joël Lightbound]

Thank you, Mr. Leblond. That was very interesting.

Mr. Lee, the floor is now yours for five minutes.

[Dr. Ian Lee, Associate Professor, Sprott School of Business, Carleton University, As an Individual]

Thank you for inviting me.

My disclosures are that I don't donate to or belong to any political party of any kind. I don't consult with any foreign or domestic corporations, and I have no investments in any corporations of any kind.

Please note, I received the invitation less than 48 hours ago and I have had insufficient time to provide a more in-depth analysis of the amendments. However, my knowledge and insights concerning private capital investment, including FDI, are grounded in teaching the strategic management capstone course for 35 years, in which capital investment is a very important corporate strategy of the firm, and in my experience working for a foreign direct investor in Canada early in my career.

I will focus my comments on FDI by private for-profit corporations with head offices in the OECD and rule-of-law countries. I will leave the critical issues of FDI and national security to others far more knowledgeable of those issues.

Turning to the issue of capital investment, it was known as long ago as the time of Adam Smith that capital investment in an economy, any economy, is central and critical to the growth of the economy. To state the obvious, firms invest in long-term assets such as factories, machinery and equipment that allow the firm to create products and services. To correct an enduring popular urban legend that we've been taught by those from Adam Smith to Harvard economist Joseph Schumpeter to Harvard strategy professor Michael Porter, firms do not exist to make a profit.

That may come as a shock. Many professors teach that. It's wrong.

Firms exist to create something of value, a product or a service wanted and needed by buyers and consumers. If the firm is successful at value creation—the reason why firms exist—and buyers and consumers find the value proposition to be advantageous, they will buy the products or services. As an outcome of successful value creation, the firm will increase its market share, its revenues and likely its profitability, but the first step in the value creation chain is capital investment.

Capital investment and value creation are fundamentally a private, strategic decision of investors made by evaluating the gargantuan stream of information, ever changing by the minute, in markets. Restated in the language of politicians and public servants, the net benefit is determined by investors willing to take great risks, with large amounts of capital, in an idea or project that will possibly lead to future value creation success for consumers.

Given the remarkable correlation over 300 years of economic history and evidence of private capital investment and relatively high levels of growth, employment, income and prosperity, evidenced by the astonishing increase in the standard of living in certain countries, what I want to talk about quickly is the hockey stick of prosperity—thousands of years of poverty and subsistence followed by the dramatic, gargantuan increases in prosperity. It has been documented and analyzed by Professor Deirdre McCloskey at the University of Illinois, in Chicago, in her book The Bourgeois Virtues.

Given this remarkable 300-year empirical record of an astonishing increase in prosperity driven by private capital investment and consequent value creation, it seems to me we ought to be encouraging any private capital investment in our economy, subject to my previously stated caveats concerning SOEs and national security.

As an aside, I'm in full agreement with Professor Mintz concerning restrictions on SOEs, or what we in Canada call “commercial Crown corporations”, the existence of which tilts the playing field and allows the state owner of the SOE or the commercial Crown to tacitly pick winners and losers, rather than have competitive forces determining optimal value creation. In very broad strokes, it's reasonable and rational to impose much more rigorous and stringent rules on SOEs and capital investment from countries that do not support the rule of law, but at the same time I urge the committee to at least reconsider the increasingly burdensome restrictions on private FDI from rule-of-law countries.

Inbound FDI to Canada is falling behind outbound FDI from Canada to other countries. In plain, blunt English, investors with wealth increasingly see opportunities to invest that are better than those inside of Canada. Notwithstanding the extraordinary assets and advantages of Canada, investors are voting with their wallets, and I blame our increasingly hostile economic climate in Canada.

I'll close on a very personal note about FDI. When I was 17 years old, I very foolishly dropped out of high school, and for the next three years I bounced around from one minimum-wage job to another in between being unemployed. I applied to two very large Canadian banks that rejected my absurd job application outright.

I then applied to an American finance company operating in Canada that had invested a lot of money in Canada to create a financial network. Amazingly, they hired me and trained the dickens out of me on how to read an income statement and a balance sheet, evaluate credit and yes, collect from delinquent customers. They paid me every two weeks in real, green Canadian dollars.

Members of Parliament, we need more American capital investment, more German FDI, more French FDI and so forth—not less, more.

Thank you.

[The Chair, Liberal, Joël Lightbound]

Thank you very much, Mr. Lee.

I will now cede the floor to Mr. Bruce for five minutes.

[Malcolm Bruce, Chief Executive Officer, Edmonton Global]

Good afternoon.

I would like to start by acknowledging that I am joining this meeting from Treaty 6 territory, the traditional gathering land, ceremonial place and centre for trade for many first nations, Métis and Inuit people.

My name is Malcolm Bruce, and I am the CEO of Edmonton Global, the foreign direct investment attraction and trade corporation for the Edmonton metropolitan region. The Edmonton region is the fifth-largest economy in Canada, with $105 billion in GDP, which approximates one-third of Alberta’s GDP. We have a population of 1.5 million people and are one of the youngest and fastest growing regions in the country. The purpose of Edmonton Global is to transform and grow the economy of the Edmonton region, and we’re focused on attracting investment and helping our regional businesses grow internationally.

The conversation this committee has been having is extremely important. As someone who comes from a military background with over 30 years of service, I fully appreciate the need to prioritize Canada’s national security. Foreign direct investment can, under certain circumstances, undermine Canada’s national security. China is an obvious example; however, bilateral trade with China last year grew by 17%, and they continue to have significant financial stakes, for example, in our energy sector.

As we know, they may not have had our best interests at heart. We need to be paying close attention to how our economic ties with this country develop, and develop it will for the foreseeable future. We can’t be seen as the weak link by our security partners, but neither can we be seen as a weak link in our trade and economic endeavours. Business leaders across the country recognize that Canada’s ability to attract foreign investment is essential to maintaining Canadians’ high quality of life.

Foreign investment fuels company expansions, increases demand for domestic goods and services and promotes market choice and competition. These benefit consumers and create good, well-paying jobs for Canadians. Foreign investment also supports the development of emerging industries. A good example is the extraction and development of critical minerals in Canada, a national security issue in its own right.

One story I’d like to share with you today is about an Edmonton-based company that operates a silica quartz mining operation in Golden, B.C. Silica quartz can be refined into silicon metal, an essential mineral for green energy transformation producing everything from computer chips, EV batteries, solar panels and lightweight alloys to over 7,000 consumer products. This particular company spent millions of dollars over the years trying to build a foundry in Canada that would be able to refine this material here, but ultimately, they were unable make it work in Canada. They have since begun construction of that foundry in Tennessee, an investment that will grow to over $1 billion over time, and we’ve lost the value-added opportunity related to this vital natural resource.

From a national security and resiliency perspective, we’ve lost out doubly. All of the silicon metal that is being produced will go directly to U.S. companies, including the Department of Energy focused industries of computer chips, solar panels and EV batteries. As America prepares itself for the future and independence from global supply chain issues, we may still remain very vulnerable. We need to be paying attention to the resiliency of our supply chains and invest in the infrastructure that will make us less vulnerable to geopolitical and economic shifts. Energy and food security are top of mind for many countries, including our closest allies. Our region is at the forefront of a significant global opportunity in hydrogen and the net-zero economy, global food security and the technology that will transform the way we do everything—artificial intelligence.

I recently spent some time travelling to South Korea, Japan and Taiwan to share the opportunities that exist here in our region. There’s a lot of interest in what Canada has to offer, and they want to invest. We need to ensure they can.

From the investment attraction standpoint, what I want to emphasize today is the importance that investor confidence plays in attracting investment. From friendly investments, we cannot risk lengthy delays in closing transactions or have investors concerned about steep penalties in the event of an unclear legal requirement. It is my understanding that the government is still defining the prescribed business activities that will be required for a pre-closing filing. It’s imperative that this legislation provide reasonable, predictable and transparent guidelines for companies exploring investments in Canada.

Agencies like Edmonton Global need clear guidance on institutional roles and on who, within the federal government, we can consult with to support potential investments.

I also recommend that the government commit to a timeline for reviewing the amendments after they have been in force, and continue to consult with organizations like ours to understand how this legislation is helping or hindering our work.

Once again, I'd like to thank the standing committee for the opportunity to speak with you today. We appreciate all the work that's going on to protect Canada's national interests.

Thank you.

[The Chair, Liberal, Joël Lightbound]

Thank you, Mr. Bruce. We thank you for taking the time to join us this afternoon.

To start the conversation, we'll go to Mr. Perkins for six minutes.

[Rick Perkins, Conservative, South Shore—St. Margarets, NS]

Thank you, Mr. Chair.

Thank you to the witnesses. Those were all great and fascinating opening statements. As a Conservative, it's pretty hard to disagree with any of those statements. Obviously, we need enormous amounts of foreign direct investment to continue to grow our economy. However, we have also always had an eye, regardless of party, on understanding and making sure that those investments are actually a net benefit to Canada and certainly within the confines of our interests, as well, on national security.

That's why my questions, first and foremost, given the presentations, will be for Dr. Leblond.

You outlined three interesting areas. Some of them, actually, are in alignment with my second reading speech on this and a number of other areas. I'd like to ask you about a few of them, perhaps starting with your first point, which was on the nature of investment and national security.

If I heard you correctly, the first part of that is a concern about not just making sure that we have the appropriate national security reviews when warranted. I think we're all probably in unison that this really needs to happen when it's a state-owned enterprise, particularly one from a hostile country because their interests are not always aligned with ours.

You mentioned the area of assets, tangible and intangible, and that a company may choose to review. I think we've had trouble in the last few years even deciding whether or not we should do national security reviews and net benefit reviews on entire companies. We have a long list of them, from Neo Lithium on, that have not had them.

My question to you is on the assets side, tangible and intangible. What is the impact if some of our critical technology....? We've had some of the most inventive blockchain technology, for example, we've heard, invented here in Toronto. Those are subject...not blockchain itself but we constantly see those. From my understanding, I don't think the Investment Canada Act has any provisions for a review of asset sales, whether that be a mine that an overall company sells—so the company is not being sold but the mine is being sold—or whether it's an intangible one like a technology or a database.

Specifically, what kind of amendment do you think we could make to this bill to make that a part of the automatic review process or some sort of threshold for review?

[Dr. Patrick Leblond]

I'd like to say first that I'm not a lawyer and certainly not a legal expert on the Investment Canada Act.

Certainly, as I was reading Bill C-34, I was surprised with this focus on the unit—in French, unité exploitée—which to me refers much more to the legal entity, the enterprise. Then I was thinking, “Okay, is it the enterprise itself that potentially poses the risk in terms of national security?” No. In fact, the bill talks about important assets or important technical information that is not public. If these are the issues and a foreign company decides to buy these assets or this technical information, bypassing the company itself, does it have an obligation to notify? In terms of my reading, it's not clear, which is why I raise the question.

Then, in terms of a solution, instead of talking about the entity, the unité exploitée, why not talk directly about assets and technical information? Why not make that the focus in terms of national security so that any foreigner who buys these assets—whether through a company, an enterprise or whatever or on its own—should notify the government? Then it's up to the government to decide whether there is a national security implication or not. It would be the same for these technical....

Why have this intermediate step focusing on the entity itself? You know, you could strip it and then say, “Oh, well, there's nothing there,” so the transaction goes on and the national security risk remains.

[Rick Perkins, Conservative, South Shore—St. Margarets, NS]

I would suggest that would apply to net benefits as well, because in some cases, that could be not just a security issue; it could be a net benefit issue for Canada.

On your second point, on non-compliance, I agree with you on the fine issue because it doesn't appear to me that the minister has the authority to force a company to divest if they don't meet conditions.

I'll give you an example. Nexen, one of our important oil sands players, was bought by CNOOC, 10 years ago. A number of conditions were put on it by the government of the day—the Harper government. Those conditions were up, and my understanding is that many haven't been met, but it doesn't look to me like the act gives the minister the power to actually say, “You haven't met the conditions. Therefore”—in the most extreme—“you have to divest yourself of that asset because you didn't meet the conditions.”

Is that the idea of what you were looking at?

[Dr. Patrick Leblond]

Yes. In a way, if the idea is that we can ask for commitments to reduce the risks to national security, then the question is how we make sure the foreign investor is actually going to respect those commitments.

To me, a half-million dollar fine—one shot—doesn't do it. Compare that with Bill C-27, where, if you don't protect personal data, you could actually be fined at a minimum of $25 million. Is our personal data so much more important than national security? I would argue not. They should at least be equal, so I'm surprised that this same formula doesn't apply here.

Now, that's one thing. Here's another. Let's say that a company makes billions of dollars from these assets, these important assets or technical information. Even $25 million is nothing. Does the minister then have the ability to impose further sanctions or to say, “No. You actually have to divest now. I'm sorry. We gave you x number of warnings. You can't do it.”

I think the law should be much stronger in terms of holding foreign investors to the commitments that we require of them in the first place.

[Rick Perkins, Conservative, South Shore—St. Margarets, NS]

This fine just becomes a cost of doing business.

[Dr. Patrick Leblond]

Yes, and we see it in real estate all of the time. People just say, “Oh, the house burned,” pay the $25,000 and then move on. It has no impact.

[Rick Perkins, Conservative, South Shore—St. Margarets, NS]

Right.

I have only one other question. It relates to one of the areas that I covered, and we've had a little bit of discussion on this. That asset, that company, may be bought by a company that, at the time, is of net benefit to Canada—or seemed to be of net benefit to Canada, or at least not a security issue—but is subsequently acquired by a state-owned enterprise from China. That is a problem.

Other G7 countries seem to have the ability to force an unwinding of that transaction if that happens, but the Investment Canada Act doesn't. I wonder if you have any thoughts on that.

[Dr. Patrick Leblond]

I think that anything that is a threat to national security at any time should be possibly under review. Certainly, if after things change, a technology that was not a worry 10 years ago becomes a worry now for whatever reason, I think somewhere in our laws, whether it's the Investment Canada Act or something else, the minister should ultimately have the ability to go in and make an assessment to protect Canada.

Obviously it has to be done with rules, standards, guidelines and some degree of transparency. We don't want some protectionist measures to be adopted in the name of national security. We've experienced that. It's not good for economic well-being. At the same time, we need all of the tools possible in order to protect ourselves. If it means forcing a divestment after the fact because something new came up, I think that ability should be there.

Now the big question is whether it should be in.... If it concerns foreign investors, obviously, it should be in the Investment Canada Act.

[Rick Perkins, Conservative, South Shore—St. Margarets, NS]

Thank you.

[The Chair, Liberal, Joël Lightbound]

Thank you, Mr. Leblond.

Mr. Fillmore, the floor is yours.

[Andy Fillmore, Liberal, Halifax, NS]

Thanks very much, Chair.

Many thanks to the witnesses today. I'd like to direct my questions to Dr. Lee, and Mr. Bruce, if I could.

Dr. Lee, thank you for the excellent primer on FDI. That was very well received.

Mr. Bruce, thank you for your service.

Currently, as I understand it, a net benefit analysis can take upwards of 75 days to conclude. Some colleagues here in Ottawa have suggested that perhaps cabinet should be making the final determination at the end of these reviews. I wonder if either of you have any thoughts on whether cabinet's involvement would extend that 75 days even longer, and if so, what are the implications of a lengthened review?

I would ask Mr. Bruce first, and then perhaps Mr. Lee, if you have any thoughts on that.

[Malcolm Bruce]

I thank you for the question. I think it's a very reasonable one.

Ultimately, many large deals in this country take years to make, so adding 75 days to a decision—depending on where that fell under the sequence—may not have the sort of detrimental impact that you would think it would have.

However, that's for large deals. For smaller deals around technology and things like that, I suggest to you that it may have an impact because, when it comes to intangible assets like the technology sector, many of these deals can move quite quickly and cash will flow quite quickly.

I think it depends on the sector a little bit, and I also think it depends on where that is in the decision cycle in trying to get to a final investment decision.

That would be my quick answer.

[Andy Fillmore, Liberal, Halifax, NS]

Thanks very much.

Dr. Lee.

[Dr. Ian Lee]

I don't think it's a good idea to politicize these decisions. That's what we see in developing countries, like Argentina. I'm not going to use real basket case examples, but we see it in countries that have struggled in the last few years to be competitive and to attract foreign investment.

I study the data every year from UNCTAD, the world investment report, and I'm always struck by the fact that the country that attracts the most FDI in the world is the country that least needs it, and that's the United States. Why does the U.S. attract so much foreign capital? It's seen as more friendly to investment in that country. There are fewer barriers to entry.

What this is doing is simply...and I agree with what was just said about “what's another few days, or 75 days, on top of a very elongated process?”, but that's not going to create the impression amongst foreign investors that this is a good place to do business. They now say, gee whiz, now I have to go through yet more hurdles, more hoops, and at the end of the day the politicians can step in—and they're unpredictable people, whatever the political party—and throw the whole thing out the window. They say, I can go just across the border and I can do it lickety-split where those barriers do not exist.

Capital is vastly more mobile today than it was even 25 years ago, so I don't think that's a good idea.

[Andy Fillmore, Liberal, Halifax, NS]

Thank you for that.

I guess you answered me on the involvement of cabinet. I would imagine, though, you might think that any lengthening of the time for review would not be in Canada's interest. Is that fair to say?

[Dr. Ian Lee]

That's right. We have to make that sharp distinction that I referenced in my notes.

I think there are almost two animals in this bill. One's talking about national security, which is really important—and others will talk about that—and we're talking about really wanting to put barriers up to protect national security. On the other hand, we want to welcome more private, for-profit FDI from countries that are simpatico with Canadian values. We want to go in two different directions with this same idea of foreign direct investment.

[Andy Fillmore, Liberal, Halifax, NS]

Thank you for that.

Mr. Bruce, with your background in security and defence, regarding FDI, what do you imagine this bill could do to encourage FDI while still maintaining that national security is uninjured?

[Malcolm Bruce]

Thank you.

I just look at the way the U.S. right now has published a sensitive technology list. Right now, the U.S. has this list of sensitive technologies where they say you cannot get involved with exporting this or getting foreign direct investment from certain agencies into these types of technologies. We do not.

Because the U.S. is our closest trading partner and such an important security partner for us, it would be foolish for anybody in my business to get involved with those kinds of exchanges with countries that may be suspect in terms of using it as dual technologies or being able to funnel it into some other purpose. I think one of the things that I am always cautious of, and it goes back to some of the common themes you've heard from all of us, is that transparency and certainty in process really helps all of us, so those are the kinds of things that I'd be looking for.

Just to reinforce that idea about preconditions that are going to be described in some form of regulation that are not yet described, you're asking us to look at a bill that hasn't set out those prescribed conditions that we need to really know more about the bill in order to be able to say whether this is a good thing or a bad thing before we can close an FDI.

We have scalable FDI so I just think, again, certainty and transparency are so important for investor confidence and without them they're not coming here.

If I may, I'll finish by saying an opportunity lost is not felt by this country, as opposed to, say, a closing of a factory or something that is more real and more tangible, but we are missing out on tremendous amounts of opportunity coming into this country because of the uncertainty the investor feels about Canada and the regulations that we have.

Thank you.