Foreign direct investment in the United States and Canada: fractured neoliberalism and the regulatory imperative.

• Author: Lan, Gil
• Position: IV. Net Benefit and SOEs - Collapsing Distinctions through VI. Conclusion, with footnotes, p. 1290-1320

4. NET BENEFIT AND SOES--COLLAPSING DISTINCTIONS

   This section commences with a review of the Canadian net benefit assessment process and the Canadian SOE Guidelines. It argues that those guidelines depend on a classic neoliberal conception of private and public demarcations of the economy. The claim advanced is that Canadian SOE Guidelines depend on two assumptions, both of which are incoherent. It then examines each assumption and provides evidence of the incoherency.

   1. Net Benefit, SOEs, and Neoliberalism

      The net benefit assessment provisions of the Investment Canada Act have the good intention of allowing only foreign investments that ultimately further the well-being of its citizens. State-owned enterprises are scrutinized in particular because they are "susceptible to state influence" (180) and need to demonstrate commitment to "commercial operations" (181) and "adherence to free market principles." (182) Implicitly, the net benefit assessment must mean something beyond national security because those concerns are directly addressed in a separate part of the legislation. Under the net benefit provisions, any foreign investment exceeding the monetary thresholds is potentially subject to a net benefit review. But Canada, like the United States, already has provisions in its competition law (183) that review large proposed mergers or acquisitions. Therefore, there must be something particular about foreign acquisitions that provokes the extra attention under the Investment Canada Act.

      The suspicion that foreigners would be acting in ways that harm Canadians should be dealt with under the national security provisions. So, what is the purpose of the net benefit provisions? Language in the Canadian SOE Guidelines suggests that while the analysis is about economic effects, there is no mention of national security. For example, the Canadian SOE Guidelines state that "the

      Minister will assess the effect of the investment on the level and nature of economic activity in Canada, including the effect on employment, production and capital levels in Canada." (184) In addition, they also state that the Minister will assess whether or not the business acquired by the SOE will "likely operate on a commercial basis." (185)

      The language above suggests that the concern is that state-owned enterprises engage in noncommercial activities. If that is the case, then the important question is why would one subject foreign private enterprises to net benefit assessments. Prime Minister Harper's comments on the matter are vague. In his official statement, he discussed the net benefit assessment but focused particularly on foreign state owned enterprises only. (186)

      In particular, he indicated that in the future "the Minister will find the acquisition of control of the Canadian oil-sands business by foreign state-owned enterprises to be of net benefit only in an exceptional circumstance." (187) This implies that the acquisition by a foreign, private company may be acceptable. Yet, the net benefit assessments apply to both private and public foreign entities. Even if one accepts the concern that foreign SOEs are noncommercial and potentially harmful to the Canadian economy, this does not explain why foreign private entities should be subjected to net benefit assessments. One scholar, Ian Lee, has opined that the Prime Minister is indicating that there is a "two tier system" (188) that scrutinizes foreign SOEs but will be more accepting of private, foreign entities. Lee suggests that, with respect to FDI review scrutiny, the Prime Minister is really stating "between the lines that we are not going to do that to private for-profit companies coming from an OECD [Organization for Economic Cooperation and Development] country." (189) This suggests that the current net benefit assessment is directed primarily toward foreign SOEs but is drafted broadly to include a range of discretion for the Prime Minister's office.

      An analysis of the Canadian SOE Guidelines reveals that it depends upon a classical, neoliberal perspective. Neoliberalism is a philosophical perspective that views the world as a dichotomy of private (individuals) versus public (government). (190) It posits that individuals transacting in a free market characterized by private property rights ultimately advance collective best interests. (191) It also contemplates that the role of government is minimized to the essential role of creating, but not interfering in, markets. (192) Cambridge economist Ha-Joon Chang characterizes free market fundamentalism as a myth and presents the myth as stating: "Markets need to be free. When the government interferes to dictate what market participants can or cannot do, resources cannot flow to their most efficient use." (193) He then asserts that there is no such thing as a truly free market--its parameters are always circumscribed by politics. (194)

      The neoliberal vision of private individuals transacting in a free market (supported to a minimal extent by a public government) assumes a clear demarcation between public and private spheres in the economy. Yet, the fragile construction of this assumption was demonstrated by American Legal Realists in the early twentieth century. (195) Their work challenged the dominant laissez-faire idealism of the time, which held that a private market should be free from the intrusion of government measures such as welfare-based legislation. (196) Morris Cohen astutely observed that what one might view as a private property right was actually a delegated power from the sovereign (i.e., the government). (197) He was absolutely correct. Property rights derive their power from the fact that individuals can call upon the government to enforce them. In so doing, he had elegantly restated "almost a generation of American and legal thought." (198)

      Cohen's keen insight continues to have application today, ranging from analysis of the subprime mortgage crisis (199) to this Article's discussion regarding FDI. A FDI involves a foreigner acquiring property rights in the host country. But Cohen's insight is that property rights are a delegation of sovereign power. Therefore, when a foreigner acquires property rights in the host country, in reality the host sovereign is delegating a modicum of power to that foreigner. The underlying tension inherent in this situation increases if the foreigner also happens to be another sovereign state or one that is controlled by the other sovereign state, such as in the case of foreign SOEs.

      Classical understandings of public/private spheres are ambivalent to these power relations because, although the foreign SOE is a government entity in its home jurisdiction, in the host country's jurisdiction it is not "government." The foreign SOE simply owns property; it has no power to legislate in the host country. It is merely a "private" entity in the host country. However, when a foreign SOE wields strong economic power and engages in a large acquisition, public/private categorizations do not obscure the very real sense that there is an exchange of power occurring. Backer suggests that, in the past, governments feared that the growth of private power might rival their own. (200) Moreover, he anticipates that the new fear is foreign governments projecting their public power through the "usurpation of private power." (201)

      How does the host country constrain the power of the foreign government in this case? One possibility would be to enact laws that curtail the power of all private entities. The other approach might be to identify the foreign entity and prohibit investment altogether. However, if the host country wants to continue to welcome foreign investment, then the issue becomes more problematic. How is the exercise of foreign, public power in a domestic, private market curtailed? In the case of foreign SOEs, one might require that the foreign SOE act like other "private actors." This assumes that one can define this type of behavior meaningfully and prescribe it to the foreign SOE, as Backer has observed in his analysis of SWFs. (202)

      The above approach resonates with an underlying tension. Paradoxically, in order to preserve a neoliberal vision of a free market where individuals conduct business free of meddlesome government intervention, the government is now prescribing how private (foreign) actors ought to behave. Notwithstanding this ideological dilemma, the above approach is the one that is encapsulated within the Canadian SOE Guidelines and is based on two assumptions. The first assumption is that it is possible to identify foreign SOEs, and the second is that it is possible to essentialize "free market" and "commercial behavior." Below, this Article analyzes both of these assumptions and finds them to be problematic.

   2. Struggle #1: Identifying the Foreign State Interest Comprehensively

      Both SOEs and SWFs have raised concerns for host countries. Although SWFs are not addressed in the Canadian SOE Guidelines, from the point of view of the Canadian government, they might still be subject to a net benefit assessment for two reasons. First, under the Investment Canada Act, an SOE is broadly defined to include even an entity that is indirectly influenced by a foreign government." (203) Although SWFs and SOEs are different concepts, (204) the definition is arguably broad enough to capture SWFs as well. Second, the net benefit assessment process is not simply restricted to SOEs and thus may potentially apply to SWFs.

      Is it possible to identify an SWF? Large SWFs, such as the China Investment Corporation, are very prominent and identification is not an issue. However, it is not simply the existence of SWFs that concerns host countries. It is the perception that these SWFs may exert their power through equity structures, such as voting shares (i.e., their investments), in order to pursue politically motivated objectives. The problem is that there are at least two legal...