Curtis Matwychuk-Goodman

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Contents

Section I  – Proposed FDI in Potash Corporation by BHP Billiton

Section II – Canadian Rejection of FDI &  the Declaration of a Strategically Significant Industry

Section III – International Relations Theoretical Foundation for Canada’s Position

Theoretical Discussion.

Summary.

Bibliography.

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oreign direct investment has been a key component of the development of the modern Canadian economy.  Since before confederation in 1867 an economic heritage developed based upon foreign investments from European and American sources.  The foreign capital provided basis for much of the infrastructure required to exploit the wealth and diversity of natural resources throughout the farthest reaches of Canada.  This paper will explore a most recent example of Canadian rejection of foreign direct investment – the 2010 case where a hostile bid for Potash Corporation of Saskatchewan was rejected on the grounds of preserving national interest.  This case is unique because it is the second such case in the past three years that has come to define the investment climate of the Canadian economy under Stephen Harper’s conservative government.  This paper will seek to answer the question of whether international relations theory is relevant in the formulation of foreign and domestic policy.

In doing so, this paper will first provide an overview of the case and provide context for why the rejection of foreign direct investment (FDI) in Canada matters.  It will explore the nature of the proposed acquisition of Potash Corporation of Saskatchewan (Potash Corp), the largest global supplier of potash, by BHP Billiton Limited (BHP) an Australian company that is currently the world leader in the iron-ore and coal industries, to name a couple.  Background information on each company will provide clarity to the importance of the proposed deal.  Ultimately this paper will delineate the exact impact such a deal would have on Canadian interests by examining the nature of the global mining industry and the nature of the potash resource for Canada in comparison to the rest of the world. 

Once the nature of the deal is clear this paper will then examine the relevance of federal and provincial governments in reaching the final decision of deterrence.  It will become clear that these domestic actors play an important role in defining the terms of foreign direct investment.  Although, the actual authority of domestic interests on FDI is concentrated at the federal level the provincial governments play a key role in deciding whether to intervene against FDI.  Drawing upon research by Steven Globerman and Daniel Shapiro this paper will demonstrate three distinctive eras of government regimes in response to FDI.  It will become clear that the government of Canada has transformed to become more welcoming of FDI which is reflected in the changing regulations of Foreign Investment Review Agency (FIRA) to the Investment Canada Act.  This second section of the paper will attempt to answer the question – if Canada has become more welcoming to FDI in recent years, then why is the current administration blocking the sale of Potash Corp to foreign interests?

The third section of this paper will explore the theoretical framework of international relations theory to attempt to rationalize why Canada rejected FDI in Potash Corp.  It is generally accepted that the body of work on international relations theory is expansive.  To attempt to apply each major theoretical model – ranging from realism, liberalism, historical structural, to constructivist or reflectivist theoretical approaches – would not provide an adequate analysis of the issue at hand.  Instead this paper will only examine the theoretical approach known as liberalism.

Specifically this paper will focus on the written works: “Liberal International Theory: Commond Threads Divergent Strands,” by Mark W. Zacher and Richard A. Matthew; “International Public Goods Without International Government,” by Charles Kindleberger;   “Hegemony in the World Political Economy,” by Robert Keohane; and “Democracy and Globalization,” by David Held.  This paper will explore each article, describing the central argument of each author.  Once the foundation for liberal theory has been established it will then be utilized to develop an understanding of Canada’s position on foreign direct investment. This paper will demonstrate that international relations theory is indeed relevant to the formulation of Canadian policy positions.

Section I
– Proposed FDI in Potash Corporation by BHP Billiton –

Potash Corp has recently been given status as a strategically vital industry to Canadian interests after an unsolicited bid by Australian company BHP Billiton Limited (BHP) was rejected by Canadian regulators.   The rejection of foreign direct investment (FDI) in Canada should be considered an important event since Canada is not historically known to be in opposition to free market principles.  In a speech given by Prime Minister Stephen Harper to the World Economic Forum in January 2010, he says that Canada plays a leadership role in the advocacy and protection of the free market.  Given the participation in the World Trade Organization (WTO) as well as bi/multi-lateral free trade agreements and the public affirmation of the benefits of free and open trade between nations Canada should be considered a steward of free market principles (Harper, 2010, p. 5).  However, the recent case of protectionism against FDI in Potash Corp marks an important event that may indicate a rising trend against free market principles.

The following section will provide background on Potash Corp and will try to rationalize how the firm gained its special status in Canada.  The discussion will be centered on the relevant history of both companies, Potash Corp and BHP; information on the proposed acquisition; the nature of the global mining industry; and the related importance of natural resource control to Canadian national interests.

According to the history available on the company website, Potash Corp originally began operations as a crown corporation of the province of Saskatchewan in 1975.  Potash Corp was later transformed into a public company after an initial public offering in 1989 for $18.00 per share.  As a publicly traded company Potash Corp is listed on both the Toronto and New York Stock Exchange.  Through the years the company has strategically acquired and merged with potash mines and chemical technology companies from around the world.  Currently Potash Corp has operations and business interests spanning several countries from Canada, Chile, China, Israel, Jordan, to the United States.  The results of the management decisions has positioned Potash Corp as the world’s largest fertilizer producer serving three distinct markets – agriculture, animal nutrition and industrial chemicals – with three distinctive product components – nitrogen, phosphates, and potash.  Each of these components is essential to the formulation of fertilizers. (Potash Corp, 2010)

The operating environment of Potash Corp makes the company ideally suited to maintain it’s near monopoly status in the fertilizer industry.  As part of the global mining industry Potash Corp faces many of the same factors that affect both supply and demand.  The supply of fertilizers is characterized by “substantial barriers to entry, few producers, low government ownership, and no known product substitutes” (Potash Corp, 2010, p. 1).  While the demand for fertilizer is closely correlated to growth in population – where more population signals greater demand for agriculture products.  In the case of a near-fixed amount of farmland throughout the world there is great pressure for each acre to produce more, which is typically assisted by the use of fertilizers.  Potash Corp estimates that without the use of fertilizer forty per cent more farmland would be required to produce the same amount of food (Potash Corp – 5Ws, p. 4).

The bulk of Potash Corp. operations are split between: Canada, where the bulk of potash production occurs because of the nature of the resource deposits; and the United States, which produces and refines phosphates and nitrogen for global export (Potash Corp, 2010).  The primary markets for Potash Corp are China, India, Brazil, South East Asia and North America – wherein China consumes nearly twenty per cent of the total global supply (Reuters, 2010).

One of the reasons Potash Corp has been able to develop into a global leader is the way they have leveraged their dominance in the Saskatchewan marketplace.  After all, Saskatchewan has the location advantage of being the site of “more than half of the world’s potash reserves” and is the leading producer of potash with ten operational mines (Bouw, 2010).  Half of which are operated by Potash Corp.  Furthermore, Saskatchewan has a history of public investment in the economy as a means of jump-starting industry.  The province still maintains public monopolies in sectors like insurance, energy and telecommunications.  The result of initial provincial involvement in the potash industry has been astounding.  The economic impact for the province for Potash Corp alone is borne in the establishment of over 5,000 jobs and the creation of millions of dollars in tax revenue for the provincial government (Hervieux-Payette, 2010).  These benefits are magnified given the local economic trickle-down each mine contributes to Saskatchewan’s economy.

In the summer of 2010 BHP Billiton Limited, an Australian company, made an unsolicited bid to purchase all ownership interests in Potash Corp.  In an August 2010 press release statement issued by Potash Corp the company rejected the $130 per share offer on the grounds that it was “wholly inadequate”.  The company’s President and Chief Executive Officer Bill Doyle stated that the bid fails to “reflect the value of our premier position in a strategically vital industry and our unparalleled future growth prospects. (Potash Corp, 2010)

The company wishing to acquire Potash Corp is BHP Billiton Limited (BHP), a major international resources company involved primarily in mineral exploration and production.  As the “world’s largest coal exporter and third-largest iron-ore shipper” BHP’s economic influence and power is both diverse and enormous (Keenan, 2010).  The Australian-based company operates on all continents of the world and has a history of regulator rejection of the hostile foreign direct investment methods the firm often pursues.

For example, in 2008 BHP made numerous unsolicited offers to invest in the British-Australian company Rio Tinto Group, the second largest iron-ore producer in the world.  The proposed deal was important because it was the largest proposed merger in history, valued at $119 billion dollars which would have effectively provided BHP with near-monopoly powers over the global iron-ore supply (The Economist – Business Section, 2008).  Given the potential of the deal to create a tight grip on iron-ore pricing the European Union’s competition authorities made objection to the merger (Ibid).

Given BHP’s international position as a leader in the supply of strategically vital minerals, like iron-ore, the company would have much to gain by diversifying their portfolio to include other strategically vital industries like agriculture.  It quickly becomes clear that BHP has much to gain from the proposed deal,

Buying Potash Corp., owner of about 20 percent of global potash output capacity, would propel BHP to the top of the league of producers of the mineral, a form of potassium used by farmers to help boost crop yields by improving the ability of plants to withstand dry soil conditions” (Keenan & Behrmann, BHP Billiton Makes Hostile $40 Billion Bid for Potash, 2010).

The addition of Potash Corp would enable the company to gain a strong-hold in the supply of fertilizers to global markets.  It would also provide BHP with a substantial amount of control of one of Canada’s most prized prairie resources that has experienced a boom in the past decade as demand has surged from developing nations like China and India (Reuters, 2010).

As the world’s population continues to increase so will the importance of agriculture-related industries like potash-based fertilizer producers.  Interestingly, BHP had already submitted a proposal to Canadian regulators to launch a new potash mine in Saskatchewan before making the bid for Potash Corp (The Economist, 2010).  This suggests that BHP will enter the Canadian market regardless; the acquisition of Potash Corp would have merely provided the foundation for a near-monopoly over the Canadian production of potash.   If this is the case, why did the Canadian regulators decide to block FDI by BHP?

Section II
– Canadian Rejection of FDI &
the Declaration of a Strategically Significant Industry –

The provincial and federal governments of Canada were not in favour of the proposed acquisition and made their positions clear.  The province of Saskatchewan was quick to oppose the BHP bid to acquire Potash Corp based on the potential of the resource company in relation to the future of Saskatchewan and Canadian interests.  As an ardent opponent Brad Wall, premier of Saskatchewan, points to the fundamental issue at hand, “What other takeover involves 25 to 30% of the world’s anything? … This is not like other takeovers we have contemplated in the country” (as quoted in Koven, 2010).  It is estimated that Potash Corp controls 20 per cent of the global potash supply; producing approximately 12 million metric tons of potassium chloride in 2009, and is expecting to near 20 million by 2014 (Reuters, 2010).  Potash Corp is one of the last remaining owned Canadian mining companies and maintains a strategically dominant position in the international fertilizer market that is paralleled by no other transnational company.

The sub-federal, or provincial, governments of Canada do not have express formal right to block FDI in their respective jurisdictions.  The power of protection over FDI rests at the federal level.  Canada has established ownership restrictions in sectors such as air transport, broadcasting, financial services, telecommunications and uranium mining.  Each of these areas has respective bearing on maintaining Canadian autonomy over national security, culture and heritage, economic solvency, national security and international non-proliferation objectives.  Therefore extra scrutiny by the federal government has always existed which is no different than other jurisdictions like the United States and the European Union.  However, Canada is “one of the few industrialized countries to have foreign investment rules requiring the review of proposed foreign investment proposals based on monetary thresholds” (Competition Policy Review Panel: Executive Summary, 2008).

At the federal level Tony Clement, Minister of Industry, signaled that the attempted hostile takeover would not be a net benefit to Canadians and therefore motioned to deny the acquisition.  Blocking the takeover was done on three-part reasoning; that there would be no ‘net benefit’ effect “on Canada’s ability to compete in world markets; on productivity, efficiency and innovation in Canada; and on the country’s overall level of economic activity” (Ibbitson, 2010).

In the November 4^th issue, The Economist identifies that party politics most likely play a larger role in Harper’s government decision to block the takeover bid on the grounds it would not be a net benefit to Canadians – his party included.  The case is considered unique because “…in the past 25 years, the country has shot down only one other foreign takeover, a case involving satellites and space missions that was vetoed on grounds of national security” (The Economist, 2010).  The Conservative party is currently supported by nearly all of the possible parliamentary seats in Saskatchewan – thirteen of fourteen. Since the premiers of Saskatchewan, Alberta and Manitoba are against the foreign takeover of Potash Corp the federal government must carefully consider the regional wishes to prevent opposition and loss of support in the next election (Ibid).   This suggests that domestic politics have a bearing on the relative success or failure of FDI.

To block FDI in Potash Corp was seen as a controversial ruling by the conservative Harper government which is considered a market-friendly administration (Financial Post, 2010).  However, how does the decision to block FDI in Potash Corp compare to the most recent track record of Canadian market intervention?

According to Globerman and Shapiro Canada has three distinct eras of foreign direct investment policy regimes.  The first era was between 1974 and 1985 and is best characterized by the Foreign Investment Review Act (FIRA).  The FIRA regime of government regulation of FDI in the Canadian market is distinguished by a sense of uncertainty caused by perceived government hostility towards foreign investment.  The government required FDI to be of a ‘significant benefit’ to Canadian interests under FIRA.  This effectively insulated Canadian domestic firms from outside investment which would create competition in the marketplace.  It is estimated that “Over the period 1975-84, the Agency’s disallowance rate was 7.0 percent (Safarian 1993, p.130 as quoted by Globerman & Shapiro, 1999, p. 516).  Although it can never be known how many foreign investors never attempted to invest in Canada because of the uncertainty and added legal and administrative costs associated with ensuring all proposals met FIRA’s expectations.  However, Golberman and Shapiro conclude that during the first era, FIRA had no significant effect on deterring or attracting foreign direct investment (1999, p. 526).

The second era came to be after the realization of the Investment Canada Act of 1985 which fostered greater willingness and openness to greater amounts of FDI in Canada.  Essentially the Investment Canada Act was a renewed and updated version of FIRA that established sectors exempt for review, set a threshold limit for transactions subject to review, and changed the condition of acceptance from ‘significant benefit’ to ‘net benefit’ (Globerman & Shapiro, 1999, p. 517).  Currently the Investment Canada Act thresholds are: “5 million dollars for direct investments and 50 million dollars for indirect transactions,” however, WTO member countries benefit from a 299 million dollars threshold (Industry Canada, 2010).  The update from FIRA to the Investment Canada Act enabled greater foreign access to the Canadian marketplace during the second era described by Globerman and Shapiro.

Under the Investment Canada Act, 1985 the federal government never blocked a foreign takeover on the grounds of failure of the ‘net benefit’ test until 2006.  In the first twenty three years of the Act, between 1983 and 2006 the federal government approved approximately 1,587 foreign takeovers that required formal review and 11,214 foreign acquisitions that required formal notification (CBC, 2008).  Regardless of the added government involvement in the economy no significant deterrence to FDI occurred during this second era; instead the FDI regime of Canada became more clearly defined which increased the accessibility of Canadian markets to foreigners.

The third and final era of FDI regimes discussed by Globerman and Shapiro is based upon the implementation of the Free Trade Agreement, 1988 and subsequent North American Free Trade Agreement (NAFTA) of 1994.  Each of these agreements signaled the further liberalization of the Canadian market to greater inward flows of FDI.  “In Canada’s case, for example, the FTA/NAFTA Agreements appear to have significantly increased levels of inward and outward foreign direct investment” (Globerman & Shapiro, 1999, p. 526).  The results of the study by Globerman and Shapiro signify that Canada has been on a trajectory course that has positioned the country as more welcoming to FDI in recent decades – especially given the increasing character of multilateral and bilateral trade agreements Canada has entered into with other nations.

In the study, ‘Motivations for FDI and Domestic Capital Formulation,’ the authors discuss how Canadian outward FDI surpassed inward FDI in the third era of liberalization.  There is a marked difference of the third era to the first; compared to 1970 levels where inwards FDI amounts were four times greater than inwards levels of FDI (Hejazi & Pauly, 2003, p. 285).  This suggests that Canada has experienced greater involvement in foreign markets by making direct investments in other national economies.  This indicates that in recent years Canadians have had a greater interest in ensuring access to free and open markets than ensuring open access for others’ FDI in the domestic Canadian market.

In a study by Nathan Jensen there is clear evidence supporting the fact that democratic governments attract higher levels of foreign direct investment (FDI).  Where “democratic institutions have a large positive effect on FDI inflows … [and] democratic regimes attract as much as 70 percent more FDI as a percentage of GDP than do authoritarian regimes” (Jensen, 2003, p. 612).  Wherein, Jensen defines FDI as private capital flows between countries and firms that provide some element of control over elements like equity, capital, debt and earnings of the firm or resource.  Jensen concludes that democratic political regimes are most likely favourable to foreign investors because the associated risks of dealing with a democratic regime are perceived to be lower.  One of the defining characteristics of a democratic regime is transparency in how decisions are made.  This begs the question – should Canada be considered a democratic economic regime based on the most recent examples of protectionism against FDI?

The evidence to suggest Canada is protectionist is indeed limited.  For the past three decades the Canadian government has only blocked two attempts by foreigners to invest in Canada.  The 2006 government intervention surrounded the sale of the space division of MacDonald, Dettwiler and Associates (MDA).  The deal was deemed to be a threat to national interests in technology and space and was subsequently the first major government intervention deterring foreign direct investment in Canada since the introduction of FDI regulations.  MDA technologies included Canadarm and Dextre as well as the Radarsat-2 satellite which had major associations with the Canadian Space Agency and were significant factors of Canadian participation in international space efforts.  The second instance of government intervention in FDI attempts is illustrated by the Potash Corp case of 2010 that is at the center of this discussion.

The case of Potash Corp is comparable to MDA because of the impact the firm has on Canada’s control of the potash resource and in turn global food security.  It is also comparable because of the related impact on international relations between Canada and her allies are considered immense.  To illustrate the importance of the resource industry to significant trading partners of Canada we must understand that potash is a strategic input for agriculture and therefore is considered closely linked to national food security.   According to the US Geological Survey, close to half of the total Canadian production in 2008 – nearly five million metric tons of potash (K₂0) – was directly supplied to the United States.  Although the amount of trade in potash fluctuates year-to-year based on prices, Canada is responsible for supplying an average of 86 per cent of all imported potash to the USA between 2005 and 2008.  Based upon this information alone it can be surmised that Canadian interests in the potash industry have direct impact on the food supply of the largest economy in the world.  (Jasinski, January 2010, p. 1 & 2)

Section III
– International Relations Theoretical Foundation for Canada’s Position –

In order to understand Canada’s domestic position on deterring foreign direct investment in the case of Potash Corp it is essential to examine the theoretical models of international relations theory.  Theory often explains action; therefore a review of theory should provide some rationale to the decision to deter FDI in Canada.  It is generally accepted that international relations theory has traditionally been dominated by the realist and liberal perspectives.  For this reason, this paper will utilize the liberal approach to international relations as the basis for illustrating Canada’s FDI rationale.

The chapter “Liberal International Theory: Commond Threads Divergent Strands,” written by Mark W. Zacher and Richard A. Matthew as found in the book Foundations of International Relations Theory is particularly useful to this discussion.  The authors do a comprehensive job delineating the nature of liberalism as an international relations theory.  They argue that there are three fundamental core values of liberal international relations theory inherent in all strands of liberalism:

• The first principle of liberalism is based upon a progressive and optimistic view of human nature.  Reason and learning is part of the human condition.  While it is also accepted that discord and coercion are necessary in some circumstances, human freedoms have been encouraged by the general condition of peace, prosperity and justice.
• The second principle of liberalism is based upon the fact that although anarchy is a reality the state is an essential actor that makes cooperation is possible.  This cooperation is necessary to maximize total group benefits and mitigate damages.
• The third principle of liberalism is that international relations have been transformed by modernization.  The major phases have included the agriculture revolution, industrial revolution, and scientific revolution.  (Zacher & Matthew, 1995)

Zacher and Matthews describe how these core fundamental values have been developed through years of theoretical debate and developments by such authors as Locke, Voltaire, Rosseau, Kant, and more recently Keohane, Nye, and Hoffman.  It is evident that there are numerous strands of liberalism; the strands range from republican, interdependence, cognitive, sociological, and institutional liberal-‘isms’ (1995, p. 121).  It is worth noting, for Zacher and Matthews, individuals are the primary actors of international relations and when comprised are represented by states which are the most important collective actors.  The interests of these actors are constantly evolving and shaped by domestic and international conditions.

One of the main conclusions that Zacher and Matthew present about liberalism is a correlation exists between democratization and free trade as means of preventing international aggression and war.  Wherein international laws and organizations brought about by democratic actions create an international regime that facilitates commerce between nations; where the mutual interests of nations, upholding principles of free trade, maintain the integrity of the regime (1995, p. 137).  That is the mutual interests of the group maintain peace among group members.  However, the authors do point to the inherent roles of self-interest and power in individual action which in general advocates “prudence” in foreign policy decisions (Ibid, 112).

Charles Kindleberger, also a liberal international relations theorist, was best known for his development of Hegemonic stability theory.  His article “International Public Goods without International Government” was a reflection of the changing nature of international relations theory – beyond the strict traditional dichotomy of realism and liberalism.  The result was sort of cross-pollination of disciplines including political science, economics, sociology and philosophy.  In an aggregating many related factors hegemonic stability theory attempts to explain how and why regimes are established and maintained by looking at a variety of contributing factors.

Kindleberger infers that stability in the international system is possible when clearly defined hegemony exists because it will act as an overarching authority.  A hegemon is best understood as a leading or dominant power (1986, 1).  In the international nation state system a hegemonic power could be considered the United States.  Acting as a hegemonic power, the United States has played a primary role in establishing stability because of the way it has founded, maintained, and regulated a common system that promotes free market principles.

In this way, Kindleberger describes that at the root of hegemonic stability is the notion of providing and sustaining public goods.  A public good is non-excludable and non-rival; where everyone has access to it and consumption does not diminish the availability of the good (Kindleberger, 1986, p. 2).  An optimum example of a public good is a free and open market economy.  Today an open trading system between most all countries is made possible by the standardization of weights and measurements, freedom of the seas, and the protection of property rights – all concepts that have been developed and enforced by hegemonic powers (Discussion, 2010).  For Kindleberger the essential role of the hegemon is to police the ‘free riders’ – those who directly benefit from the public goods but who do not contribute to maximizing the delivery of public goods (1986, p. 13).

In Hegemony in the World Political Economy Robert Keohane clearly defines the parameters of hegemony as the control of resources like raw materials, capital, markets and competitive advantages.  An important observation by Keohane is that important economic issues are often closely correlated to military-security issues of the hegemony.  This explains the military power exercises of the United States and her allies in the protection of commercial oil interests in the Middle East (Keohane, 1999, p. 300).

Although Keohane proposes that a single dominant power creates and maintains order in world politics, his understanding is not limited to the dominance of one state as a sufficient and necessary condition for the development of world order.  This idea permits the waxing and waning of hegemonic power as well as the cooperation of many states in an effort of international stability.  Keohane suggests that a single state with ability and willingness can make and enforce rules of a regime.   The key to this understanding is that willingness of a state is driven by domestic politics (Keohane, 1999, p. 295).  That is hegemonic leadership in international relations are determined in part by domestic conditions which create a demand for cooperation or conflict.

In the chapter “Democracy and Globalization” David Held discusses the idea of a cosmopolitan democracy as both necessary and possible in the globalizing world.  He argues that a shift has occurred in human affairs where we are more inter-connected having overcome spatial distances with fundamental changes in the way we perceive communication, culture, the environment, finance, security and transportation (1998, p. 12).  Overlapping spheres of influence create interest dilemmas that present challenges to the way we think of national sovereignty and boundaries in the international arena.

Held discusses the fundamental issue of constituency in a liberal democracy where consent of the community legitimates government’s actions.  He is right to point out that most forms of democracy exist on a domestic or national level.  For Held, in the case of issues where interests are cross-reaching across national interests, like the ready availability of cheap fertilizers, current forms of democracy do not adequately provide representation for global citizens to direct or have input on decisive actions to promote or uphold those interests.  For the most part, economic forces operate at a global level which cannot be contained or directed by the conventional notion of national governments (Held, 1998, p. 27).

Theoretical Discussion

Applying Zacher and Matthew’s observations of the liberal perspective of international relations theory we can make a few conclusions about Canada’s position on FDI.  The first is that the state should be considered an important actor of international relations; since both federal and sub-federal governments influenced the decision to block the foreign investment.  However, individuals should be considered the primary actors motivating action in the international community.  After all, BHP Billiton is a publicly traded company comprised of the aggregated interests of individuals.  Marius Kloppers is the chief executive officer (CEO) of BHP, he is responsible for driving both attempts to acquire Rio Tinto and Potash Corp; two failed events that cost the company approximately $800 million dollars (MacDonald, 2010).  On the other hand, Bill Doyle, CEO of Potash Corp played a key role influencing shareholders and government officials to act in concert with the rejection of BHP’s offer.  Brad Wall and Stephen Harper were also individuals with government regulatory capacity who impacted the final decision to deter FDI.  Their personal opinions no doubt had a direct impact on blocking BHP’s attempt to gain access to the Canadian market by way of acquisition.

The second observation we can draw from Zacher and Matthews liberal interpretation is that international relations are shaped by self interest and power which results in a constant state of flux.  This is demonstrated by Stephen Harper actively promoting the advancement of free and open market principles; when in fact his administrative decisions display hypocrisy between words and actions.  The control of resources as power is mirrored in Canada’s direct protectionist measures to ensure domestic control of the largest potash mines in the world and a considerable portion of the global fertilizer supply.  It is important to weigh the fact that had BHP acquired Potash Corp the monopoly that may have been created could have had a negative influence on global supply prices – thereby negatively affecting the entire group of potash users.  Canada’s display of prudence of self-interest over group-interests demonstrates that coercive intervention by state actors is at times acceptable to maintain the balance of the system.

Based on Kindlerberger’s assertions of liberalism we can infer that the decision to maintain Canadian interests in Potash Corp indicates the desire to maintain stability by way of a level of hegemonic control over the domestic potash resource.  Canada clearly enjoys the economic benefits of the company’s production over the natural resource.  There is also a net benefit to the global community by providing access to the by-products generated by the company’s operations at a fair market price.  In this way Potash Corp is delivering a modern public good – the seemingly limitless production of a commodity necessary to obtain higher crop yields which in turn sustains a greater number of people on the same amount of arable land.  Since the nation of Canada coincides with the geographic location of a majority of the world’s potash supply it is most likely in the best interests of the Canadian people to maintain some sense of control over the largest producer of such a valuable resource.

Applying Keohane’s conceptions of liberalism to the case at hand it is clear that potash is a valuable resource that is closely linked to food security.  For this reason, Canada has a vested interest in maintaining some level of domestic control over the resource’s means of extraction and production.  The second section of this paper demonstrated that there was as domestic willingness to preserve the integrity of Potash Corp as a Canadian entity from both the provincial and federal levels of government.  The government’s ability to control FDI is vested within the Investment Canada Act and is a tool for ensuring dominance over natural resources like potash.

Applying David Held’s conclusions of liberalism to the case study we find a disconnect in his interpretation of the liberal theoretical framework.  While it is acceptable that potash as a commodity does serve cross-reaching national interests, to argue that there was no constituency on the issue to block the BHP bid to acquire Potash Corp seems unfounded.  In fact the shareholders of Potash Corp had the ability to individually block the sale of their shares to BHP in an attempt to prevent the foreign acquisition.  Furthermore, Canadian citizens can demonstrate their acceptance or rejection of the regime advanced by the Harper government during the next election by choosing to vote or not to vote for the conservative party.  In some context, Held is correct to say that the citizens of Malawi, for example, do not have a voice in the nature of FDI permitted in Canada as was the case of Potash Corp – however, it begs the question of whether they deserve a voice in determining the relative openness or closeness of the Canadian economy to FDI.

Summary

This paper has outlined the nature of the proposed foreign direct investment in the case of BHP Billiton and Potash Corporation of Saskatchewan; the influence of federal, provincial, and individuals on the relative success of the deal; and the theoretical basis for liberal international relations theory.  Based upon the information herein presented it can be concluded that international relations theory does influence and explain the formulation of foreign and domestic policies.

Although Canada’s position on free market principles may seem obscure, the actions by the regulatory agencies were indeed influenced by the goal to preserve Canadian national interests of sovereign control over scarce natural resources.  In the past three decades Canada has been an open market and has advocated the same free market principles.  The Potash Corp case marks the second such intervention by Canadian regulators; this prudence in policy is more generally an exception to the norm.  While it may not be the norm it does mark a significant departure and signals a sense of uncertainty to potential foreign investors.

The ‘net benefit’ test has been criticized on the international stage as being too obscure and subjective to the whims of government self-interest.  The government argues that the proposed FDI did not promise to provide a net benefit because the deal would have hampered the country’s ability to compete in world markets.   Since Potash Corp is geographically based within Canada, due to the location of the mines and existing production facilities, how would ownership by BHP differ than the current structure?  It is important to keep in mind that since Potash Corp is already a public company listed on both the New York and Toronto Stock Exchange there is significant diffusion of ownership interests among a large group of individuals, many of whom are not Canadian.

The international criticism is not unwarranted.  The Harper government is now responsible for the two instances of deterring FDI – MDA in 2008 and Potash Corp in 2010.  For a government that publicly advocates principles of the free market to the world through major forums like the WTO it must ensure some level of consistency at the international level in order to be taken seriously by other economies.  Although the evidence presented herein does demonstrate that Canada has a vested interest in advancing a free market agenda to gain FDI access for Canadian investors.  After all, the Canadian levels of outward FDI have outpaced inward FDI in recent years.

The question remains –should Canada be considered a democratic economic regime given Canada’s most recent example of FDI deterrence based upon the principle of “net benefit” to Canadians that is based upon limited transparency?  The fact is this is the second case of FDI deterrence that is marking the beginning of a trend against foreign acquisitions of priority national industries.  Although it may not be entirely clear how the government reached the decision they do seem to exhibit liberal international relations tendencies in their approach to foreign and domestic policy development.  These tendencies are reasonable cooperation in general while minding the needs for power and self-interest in the long-term.

Bibliography

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