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State investors are growing, and coming

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VANCOUVER -- The rise of China and other emerging economies is having a profound impact on the international economic and political order established by a handful of Western countries at the close of the Second World War.

Collectively, the emerging economies of Asia, the Middle East, Latin America and Africa will soon account for half of world production and consumption. They have also driven most of the growth in the global economy since the mid-2000s.

One area where emerging economies are making a notable difference is the pattern of foreign direct investment (FDI). Long viewed solely as destinations for FDI by Western-based multinational companies, some emerging economies have become important sources of investment into the U.S. and other advanced country jurisdictions.

Canada is now on the receiving end of such FDI, as seen with two recent proposed takeovers of Canadian energy companies by firms based in China and Malaysia. Specifically, Chinese energy giant CNOOC is seeking to acquire Nexen, a medium-sized Canadian energy firm, while Malaysian-based Petronas wants to buy Progress Energy, another Canadian energy company. Both transactions are under review by the federal government.

An unusual feature of these proposed takeovers is that the acquiring firms are state-owned. This speaks to another trend that is shaping the global investment landscape: the expanding presence of state-owned-enterprises (SOEs) and sovereign wealth funds (SWFs).

SOEs are increasingly well-represented among the ranks of the largest global enterprises. Indeed, some 30 per cent of the emerging world's biggest companies are SOEs.

Sovereign wealth funds -- which are saving and investment vehicles created by governments -- are another force to be reckoned with, having been established in emerging markets such as Russia, Kuwait, Saudi Arabia, and Malaysia, as well as in more advanced jurisdictions like Singapore, Abu Dhabi, and Norway. (At the sub-national level, Alaska and Alberta have their own versions of SWFs.)

SWFs are among the world's biggest pools of capital, boasting $5 trillion in assets under management, a figure expected to reach $10 trillion by 2020. Much of this is available to be invested in equities, bonds, real estate and infrastructure assets in developed economies.

The state, through SOEs and SWFs, is a highly visible player in the international energy marketplace. For resource-rich countries like Canada, SOEs are a significant source of capital to develop and grow their resource sectors.

This should be kept in mind as federal government policy-makers ponder the proposed Nexen and Progress Energy transactions. In both cases, the acquiring SOEs bring not just financial resources, but also expertise and leadership in developing energy assets, related infrastructure and new markets.

For their part, the federal Department of Industry and the Minister of Industry are required to decide whether the Nexen and Progress Energy acquisitions would be of "net benefit" to Canada.

This is not a simple task. It involves assessing the consequences of the proposed foreign investments by inquiring into matters such as the future growth of the Canadian operations, employment levels, procurement of Canadian-made goods and services, tax payments to governments, the retention of head office functions in Canada, and national security. Because the foreign firms in both cases are state-owned, Ottawa will also look at how they behave on a commercial basis -- and whether they adhere to appropriate corporate governance standards.

It should be noted that a foreign takeover of a Canadian energy company doesn't change the underlying ownership of the resources in question: the provinces retain ownership of the oil and gas, while the companies obtain the right to develop the resource.

As the world's centre of economic gravity tilts towards Asia, Canada must consider how to position our country to benefit from this historic shift in global spending power. Given our energy and broader resource endowments and existing commercial ties with Pacific Rim markets, it's clear that Canada's future prosperity will be affected by our success in cultivating and sustaining strong trade, investment and people-to-people connections with Asia.

At a minimum, Canada should seek to be part of the evolving institutional architecture of the Asia-Pacific region by participating in the Trans-Pacific Partnership negotiations and stepping up efforts to conclude trade and other commercial agreements with key Asian nations. While the government has to ensure that the "net benefit" test is met for any acquisition of a Canadian company, it's also important that Canada remain open to foreign investment -- including by SOEs. As C.D. Howe Institute analyst Daniel Schwanen recently wrote, "If Canada wants to benefit from Asia's long-term growth potential, there is no getting around the need to facilitate trade, investment and other exchanges with China... and with other economies where the state plays a determining role."

Jock Finlayson is executive vice president of the Business Council of British Columbia.

--Troy Media

Republished from the Winnipeg Free Press print edition December 1, 2012 J6

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