BUSINESS

THE ‘FOREIGN’ BACKLASH

All over the world, fear and xenophobia are derailing business

COLIN CAMPBELL,JASON KIRBY May 12 2008
BUSINESS

THE ‘FOREIGN’ BACKLASH

All over the world, fear and xenophobia are derailing business

COLIN CAMPBELL,JASON KIRBY May 12 2008

THE ‘FOREIGN’ BACKLASH

BUSINESS

All over the world, fear and xenophobia are derailing business

COLIN CAMPBELL

JASON KIRBY

In 1985, on the heels of the biggest election victory in Canadian history, Brian Mulroney travelled to New York, where he declared “Canada is open for business” in a speech to American financiers. By today’s standards, it sounds like a humdrum slogan—the kind a politician might spout three times before breakfast. But at the time, coming from the new Progressive Conservative leader, it represented a monumental policy shift. As Fortune magazine noted that year: “After a decade of frigid hostility toward foreign investment, welcoming winds are blowing in Canada.”

Those were the early days of a 20-year love affair with open markets and the free flow of capital. Around the world, globalization became the buzzword, and virtually every nation that bought in prospered. But in recent months those friendly winds have begun to shift noticeably. From Ottawa and Washington to the capitals of Europe and Australia, governments have begun to ask tough questions about the motives behind large crossborder corporate takeovers, particularly those driven by state-owned investment funds.

The world over, deals are being rejected on nationalist and protectionist grounds—a Chinese fund prevented from buying a U.S. tech firm; a U.S. firm blocked from buying a Canadian space company; and a Canadian pension fund shut out in a bid to buy a New Zealand airport, to name a few. Now some experts see cracks forming in the world’s onceunshakable faith in globalization. And with the world economy teetering on the edge of a major slowdown, they say it couldn’t happen at a worse time.

Western nations have suddenly found themselves caught on shaky ground: trying to lure essential foreign capital while at the same time throwing up barriers against some of the world’s largest investors. Nowhere is that dichotomy more obvious than south of the border. Last summer, when giant U.S. private equity firm Blackstone went public, it sold a US$4-billion stake to a Chinese staterun investment fund. Then, when some of Wall Street’s biggest banks faced a liquidity crunch in recent months, funds based in Bei-

jing and Saudi Arabia came to the rescue. But rather than easing concerns and demonstrating the value of global capital markets, the deals inflamed xenophobic fears that foreigners are infiltrating the American market.

Much of the controversy is focused on socalled sovereign wealth funds, set up by governments in Asia and the Middle East (as well as Norway and Alberta) and funded by their oil and gas fortunes. Today the funds control US$3 trillion in assets and are expected to grow to US$12 trillion within seven years. Critics worry about the lack of transparency of many such funds and warn that foreign governments could use them to seize strategic assets, such as oil fields, arms manufacturers and utilities. But the backlash doesn’t end there. Two years ago such fears helped kill a takeover bid by a Dubai state-run company to buy six U.S. seaports. Then last month private equity firm Bain Capital, which had teamed up with a large Chinese tech company to buy Massachusetts-based 3Com, axed the deal over concerns it would give China access to crucial American technological secrets. “No one is advocating building a wall around our country,” said Jim Webb, a Democratic senator from Virginia in a recent speech. “But such investment must [be] consistent with protecting U.S. national security and the stability of U.S. markets.”

As America slides into recession, foreign

investors and free trade deals have become convenient targets for resentment. Presidential candidates have tried to outdo each other with anti-NAFTA statements, while even some former advocates of globalization blame America’s woes on the rise of outsourcing. “In any political system the oldest trick in the book is demagoging foreignness and externalness,” says Todd Malan, president of the Organization for International Investment, a U.S. lobby group that represents foreigncontrolled companies operating in the States. “It is an easy score for politicians.” So it’s no surprise the U.S. Congress has taken up the issue of foreign investment with vigour, and last week, the U.S. Treasury Department issued new rules for determining which foreign investments pass the smell test.

But America is hardly alone in demonizing foreign investors. Outrage erupted across Canada recently when Alliant Techsystems, a U.S. defence contractor, said it would buy the space division of MacDonald, Dettwiler and Associates, including the Canadarm and Radarsat observation satellites. The deal was labelled a threat not just to Canada’s withering space program but to the nation’s Arctic sovereignty. Never mind that other major firms, from satellite company Telesat to military camera-maker Wescam had been sold to American interests in recent years without worry. Ottawa blocked the MDA sale, argu-

ing it offered no “net benefit” to Canada. The federal government hasn’t defined exactly what a “net benefit” is, but experts say the move has put investors on notice that the days of rubber stamping takeovers are over.

But amid the rhetoric, there’s no clear consensus on which foreign investments are troublesome and why. “Most of these are shades of grey,” says James Milway, director of the Institute for Competitiveness and Prosperity. And that’s feeding into widespread suspicion about all large foreign investors. Even the Canada Pension Plan Investment Board, which manages the retirement savings of 17 million Canadians, has been caught up in the debate. Last month David Denison, the chief executive officer of CPPIB, testified before a U.S. congressional committee about the structure of the fund. His message was the same one the board has been trying to drive home for months: the CPPIB is an independently managed fund, free from government interference. “We’ve got Canada right in our name and when somebody sees that name prominently displayed, we’re aware there’s an automatic reflex that we must be a government-controlled national fund,” Denison told Maclean’s.

There are 330 billion reasons for Denison to be concerned about a crackdown. That’s how many dollars the fund is expected to manage by the year 2020, with the majority

of its investments likely to be made outside Canada’s borders. For instance, the fund is part of a consortium in the midst of buying Puget Energy, a utility in Washington state, for US$74 billion. The board has warned that’s the type of deal that could be derailed amid a protectionist backlash. Earlier this month, the board learned first-hand how nationalist sentiment can wreak havoc with its investment plans. The New Zealand government rejected CPP’s bid to buy a stake in the Auckland International Airport, arguing it is a strategic asset and having foreigners own it would not be in the country’s national interest. “Our concern is that if countries do implement restrictions or additional criteria for approving investments by sovereign wealth funds, we don’t want to get caught by those additional restrictions,” Denison says.

Even the biggest supporters of unfettered markets say there are reasons to be cautious about some government-controlled enterprises. For instance, a Beijing-controlled com-

pany could theoretically buy up large swaths of Canada’s crucial energy sector and rather than sell oil at market prices, funnel Canadian crude back to China. Fearing such a scheme, Australia last month outlined regulations governing sovereign wealth funds—a move coinciding with reports a Chinese fund plans to buy a big stake in its mining sector.

But so far, there’s no evidence of sovereign wealth funds acting unscrupulously. “It’s the worry of the unknown,” says Steve Foerster, a professor at the Richard Ivey School of Business. Last month, the Organisation for Economic Co-operation and Development said fears about sovereign wealth funds are overblown. Similarly, the European Union warned member nations not to overreact. If anything, the funds have actually stabilized industries, such as the U.S. financial sector. “The case against sovereign wealth funds is not as clearcut as opponents would like to make it to be,” says Subrata Bhattacharjee, a foreign investment lawyer with Heenan Blaikie in Toronto.

The greater danger may be that foreign investment, especially sovereign wealth funds, will be scared off by nationalist sentiment at a time when it’s needed more than ever. “If one particular jurisdiction makes it difficult for them to invest, they will simply look elsewhere. It’s that simple,” says Bhattacharjee. Indeed, there are signs of resentment among spurned state-run funds. An official with the Saudi Monetary Agency noted this year that “sovereign wealth funds have been found guilty before being proven innocent.”

Most Western nations still declare they are open to foreign investment. But while the welcome mats may be there, the door is increasingly closed, and the drumbeats in favour of sealing it altogether are only growing louder. “In the 23 years since Brian Mulroney abolished the foreign investment review agency, there have been 10,924 takeovers of Canadian companies,” says Mel Hurtig, the nationalist author and prominent opponent of free trade. “So, hurray, the score is now 10,924 to 1.” When his new book comes out next month, calling for a crackdown on foreign takeovers, it’s likely to receive a warm reception in many corners of the country.

When Mulroney said we’re open for business, John Turner responded that “Canada is not for sale.” Turner may have lost to Mulroney, but his message is alive and well. M