Foreign Direct Investment in the United States and Canada: Fractured Neoliberalism and the Regulator

The following blog post summarizes Professor Gil Lan’s Foreign Direct Investment in the United States and Canada: Fractured Neoliberalism and the Regulatory Imperative (47 Vand. J. Transnat’l L. 1261 (2014)). Read the full article here.

The United States and Canada recently reacted with concern to a Chinese government-owned enterprise’s purchase of a large Canadian corporation with American assets. This was the largest foreign direct investment (FDI) by a Chinese-owned entity to date. Both the United States and Canada review national security concerns in deciding whether to permit foreign investment transactions, reserving the right to block such investments on security grounds. Security concerns have become increasingly prevalent in relation to investments by state-owned enterprises (SOEs), such as the Chinese enterprise mentioned above, and sovereign wealth funds (SWFs), given that these public entities are state-owned and vulnerable to political influence.

Canada, in addition to security review, applies a “net benefit” test that permits the Canadian government to block a foreign acquisition when it determines that the investment will not constitute a net benefit to Canada. Without defining net benefit, the Canadian government guidelines require that SOEs “demonstrate their strong commitment to transparent and commercial operations,” “adher[e] to free market principles,” and demonstrate that they will “likely operate on a commercial basis” (as opposed to a political basis). Though SWFs are not specifically addressed by governmental guidelines, they arguably also are subject to net benefit analysis. Ironically, the Canadian government’s attempt to ensure that SOEs espouse a free market ideology requires a departure from Canada’s own professed neoliberal principles, which dictate non-intervention in the market. Further, these guidelines imbue the Canadian government with a great deal of discretion in deciding whether to permit or block foreign investments.

In response to calls for the U.S. to adopt its own net benefit test, Gil Lan, in his article Foreign Direct Investment in the United States and Canada: Fractured Neoliberalism and the Regulatory Imperative, argues that the United States as well as Canada should reject such a test. Lan articulates two reasons why the Canadian test is flawed by not adequately capturing the harms it seeks to remedy. First, it assumes that public foreign interests can be distinguished from private domestic interests. Lan notes that SOEs and SWFs by their nature represent both public and private as well as (in an increasingly globalized economy) foreign and domestic interests and so cannot easily be classified as fitting neatly into any of these categories. Second, the test relies on an outdated assessment of an enterprise’s propensity to act “commercially.” Lan explains, “it is not clear how one would define ‘commercial’ or ‘free market’ behavior. If political and socially motivated behaviors are removed, then it appears this is a reference to a desire that the SOE operate with an exclusive view toward profit-maximization.” He then reviews the rise of “socially conscious” business entities that pursue profit and social goals simultaneously, thereby resisting a traditional notion of what it means to act in a commercial manner. He asserts that the test’s commercial behavior prong ignores the reality of modern business structures.

Lan proposes, as an alternative to the net benefit test, a regulatory framework that evaluates the risk of harm presented to a host country by an FDI, without regard to the investor’s national origin or identity as a “private” or “public” actor. This framework would require the government to establish that an investment is “contrary to the national interest” by publishing the harms presented by the transaction and articulating why available law is insufficient to address those harms. This proposed formulation relies on Canadian competition law, which concentrates on preventing the harms posed by large aggregations of power. Lan posits that in the realm of investments, “the real fear should be the harm that can be inflicted by aggregations of economic power, whether they are ideologically distant foreign governments pursuing political goals or powerful domestic corporations pursuing profit by selling subprime mortgages.” Under this more finely tuned and contemporaneously relevant conception of the risks posed by investors, Lan concludes that his proposition more completely captures the harms threatened by foreign state-controlled investors.