Flaherty dismisses fears over foreign capital

29 January 2008
Finance Minister backs injections of overseas cash; plans national security test for foreign takeovers
TARA PERKINS, Globe& Mail
State-owned investment vehicles are good for the economies of countries they invest in, federal Finance Minister Jim Flaherty says, having recently met with officials from what’s believed to be the world’s biggest sovereign wealth fund.
“There is no doubt that sovereign wealth funds provide numerous economic benefits not only for the country of origin but for the countries they invest in,” the Finance Minister told a Toronto conference yesterday where hundreds of people gathered to debate whether the Canadian economy is being “hollowed out” by foreign takeovers. [ a new study by the Conference Board of Canada, “’Hollowing Out’—Myth and Reality: Corporate Takeovers in an Age of Transformation”, found that Canadian companies were sold at an increasing rate from 2005 to 2007. ]
“As we have seen during the recent credit turbulence, sovereign wealth funds can be a constructive source of investment in financial markets at times when capital is at a premium,” Mr. Flaherty said.
Many of the world’s most formidable banks have recently accepted needed cash injections from sovereign wealth funds in order to cope with the credit crunch. Mr. Flaherty met last week with directors of the Abu Dhabi Investment Authority, which has put $7.5-billion (U.S.) into U.S. banking giant Citigroup Inc.
They discussed the importance of investments being commercial rather than political in nature; maintaining high standards of international integrity; competing fairly with the private sector with respect to interest rates; and respecting host country rules, he said.
The idea of drafting rules for sovereign wealth funds was a hot topic at the World Economic Forum in Davos, which Mr. Flaherty also attended.
The Organization for Economic Co-operation and Development and International Monetary Fund are working on a list of best practices, and Mr. Flaherty said he expects to see preliminary reports at a coming meeting of finance ministers and central banks in Tokyo.
As many foreign banks soak up billions of dollars from sovereign wealth funds, Canadian Imperial Bank of Commerce received a $1.5-billion shot of equity from a group of private investors that was dominated by Canadians. Insurer Manulife Financial Corp. took up $500-million of the shares.
He said the government plans to finish its work on a national security test for foreign takeovers of Canadian firms by halfway through the year.
“Unlike other G7 countries, we actually don’t have a mechanism in place in Canada to review investment for national security implications,” he said.
“That is something that is being worked on now, as are the guidelines with respect to investments by state-owned enterprises.”
Mr. Flaherty said he told an investment audience in Dubai last week that “these new guidelines will in no way create obstacles or signal any change in the government’s openness to foreign investment in Canada.
“Their intention is in fact to provide clarity to investors around the world so that we can continue to attract foreign investment that benefits Canada,” he said.
He said the country will not achieve its goals by slamming the door to investment.