International investment is an essential corporate strategy for many Canadian companies competing in today’s global economy. By investing abroad, companies can gain access to overseas markets, reduce input costs, secure access to key resources, acquire new technologies and provide better support to foreign customers. On the other hand, the risks of investing in a foreign country can be high. Such risks include political instability, weak legal institutions, uncertain regulatory regimes and the possibility of expropriation. For this reason, the Canadian government pursues a policy of negotiating Foreign Investment Promotion and Protection Agreements (FIPAs) in order to provide a more transparent and predictable climate for Canadian investors abroad.
FIPAs are part of the expanding global network of bilateral investment treaties (BITs); there are now approximately 2400 BITs worldwide. To date, Canada has 21 FIPAs in force (with Russia, Poland, Czech and Slovak Federal Republic, Argentina, Hungary, Ukraine, Latvia, Philippines, Trinidad & Tobago, Barbados, Ecuador, Egypt, Romania, Venezuela, Panama, Thailand, Armenia, Uruguay, Lebanon, Costa Rica and Croatia). These FIPAs, combined with the investment obligations contained in Canada’s free trade agreements, provide protection for approximately 60% of the outward investment of Canadian businesses.
A FIPA is an international treaty providing binding obligations on host governments regarding their treatment of foreign investors and investments. By setting out clear rules and an effective enforcement mechanism, a FIPA provides a stable legal framework to promote and protect foreign investment. It typically sets out a range of obligations that host governments guarantee pertaining to non-discriminatory treatment, expropriation, transfer of funds, transparency, due process and dispute settlement.
While Canada concludes FIPAs to protect Canadian investment abroad, the disciplines are reciprocal and serve to reinforce Canada as a stable and predictable destination for foreign investment. In this respect, FIPAs help enhance two-way investment flows between signatory countries.
In the absence of a FIPA, Canadian investors rely primarily on host country laws and institutions for protection, which adds a variety of risks to their ventures. While there is a general trend in favour of greater openness to foreign investment, significant country risks still exist. For instance, according to the UNCTAD 2005 World Investment Report, an unusually high number of new policies introduced by host governments in 2004 made conditions less favourable for foreign companies to enter the market and affects the domestic investment conditions more generally.
The global stock of outward foreign direct investment (FDI) has experienced phenomenal growth over the past two decades, increasing more than tenfold from US$600.2 billion in 1982 to US$9.7 trillion in 2004. Throughout most of this period, FDI has been growing faster than trade, contributing significantly to global economic integration. Canada is an active participant in the global economy. Since 1990, the stock of Canadian direct investment abroad (CDIA) has more than quadrupled from $98.4 billion to $465.1 billion in 2005.
CDIA is important for Canadian companies to take advantage of global value chains and maximize efficiencies at every step of the production process. CDIA is a tool for companies to gain access to foreign markets (for example by establishing or acquiring international distribution systems), lower their input costs, secure access to key resources (both human and natural), and acquire strategic assets (for example by acquiring leading edge technologies, specialized skill sets or better management techniques) – thereby increasing their own productivity and profitability. In the services sector, CDIA is often the most effective way of meeting the needs and expectations of foreign customers.
CDIA is beneficial to the Canadian economy, particularly over the long term. For example, CDIA contributes to increased R&D and technology spillovers to the home economy leading to productivity improvements. It can also lead to increased exports of goods and services from Canada.
Most CDIA is concentrated in the services sector and natural resources. In 2005, 44% of CDIA was in finance and insurance, 12% in energy, 12% in service and retailing, and 11% in metallic minerals. The majority of this investment is in the U.S. and the U.K, but it is diversifying (from 1990 to 2005 the US share declined from 61% to 46% and the UK share fell from 13.7% to 9.2%). CDIA in non-OECD countries has been on the rise (from 1990 to 2005, the share of CDIA in non-OECD countries increased from approximately 10% to 24%). The majority of this non-OECD investment (in 2005) is in the Americas (77%), followed by Asia (14%), Europe (6%) and Africa (2.5%), though these numbers are approximations given the available statistics tend to underestimate actual investment.
The Government identifies FIPA partners primarily on the basis of commercial factors. Countries are selected where Canadian investors would benefit most from the protections of a FIPA, for example where Canadian investment might be vulnerable given the host country’s existing investment climate. To make this assessment, a series of criteria are considered. The criteria include: commercial and economic interests, such as the current level of and future prospects for CDIA; existing investor protection, such as application of the rule of law, regulatory quality and corruption; the likelihood of engagement and of achieving a quality agreement; and trade policy or other foreign policy interests.
Given the importance of international investment to the market strategies of Canadian firms, it is now more important than ever to promote a fair, open and secure environment for Canadian investment abroad. The protections provided by FIPAs address a number of key issues facing Canadian firms when investing abroad.
FIPAs protect investors from discrimination on the basis of nationality. This guarantee is important to ensure that a Canadian investor can compete on equal footing with other investors, both national and foreign.
FIPAs provide for fair and equitable treatment and full protection and security in accordance with the principles of international law. This is an undertaking to ensure that treatment does not fall below a basic international minimum standard, for example in cases where there is a lack of due process.
FIPAs protect against expropriation without compensation. It requires that an expropriation be for a public purpose and provides for payment of prompt, adequate and effective compensation when expropriation does takes place.
FIPAs guarantee the free transfer of capital and other payments relating to an investment into and out of the host country. This allows Canadian firms to make payments and repatriate their profits and capital without delay in hard currency using a market rate of exchange.
FIPAs address a number of other issues that can affect the operation of Canadian investments such as the right to appoint individuals to senior management positions or to use suppliers of choice.
FIPAs provide access to international arbitration to resolves disputes. This allows an investor to pursue a claim before an international tribunal.
While FIPAs typically contain the same type of general protections, investors should be familiar with the specific treaty provisions relating to the foreign market in which they are operating.
It is difficult to measure the economic benefits of FIPAs, as the positive impacts of FIPAs are realized over time, whether in the form of enhanced investment flows or bilateral relations in general. The presence of a FIPA, however, is adding security for Canadian investors, and does enhance the investment climate of the host country. Recent studies analysing the impact of investment treaties find they are most effective in promoting governance and improving investor perception of the host country.
In practical terms, the existence of a FIPA and its investor-state dispute settlement mechanism reduces risks and allows an aggrieved investor to prosecute their claims before an international tribunal.
More generally, FIPAs open a channel of communication with the host country regarding measures that may affect a Canadian investor. Over the years, Canadian investors have used FIPAs to make representations to host country authorities and engage the host country in constructive consultations towards resolution of the dispute. Recourse to investor-state dispute settlement has also been made in some instances to seek redress for damages incurred.
FIPAs are part of the growing body of international law governing foreign investment, and Canadian investors can benefit from their protections. A Canadian investor relying on a FIPA can look to a comprehensive and specific set of obligations with recourse to international arbitration for their enforcement. The added security and predictability provided by a FIPA supports and enhances Canadian investment activities in foreign markets.
The answers to the following questions reflect the nature of most of Canada FIPAs. Investors should review the details of each FIPA relating to the foreign market in which they are operating.
Various forms of investment are usually covered by a FIPA. They include tangible assets, such as real estate or other property acquired for business purposes; portfolio investments or other forms of participation in a company or joint venture; intangible assets, such as goodwill; and property rights, such as intellectual property rights.
No. The FIPA is not an instrument of liberalization. It can, however, support the goals of liberalization. For example, most FIPAs, but not all, contain provisions that commit Parties not to adopt measures that are more restrictive with respect to investment; and not to reverse any new liberalization measures that they may adopt. That said, the FIPA does not prevent Parties from regulating in the public interest with respect to health, safety and the environment. Parties may also exempt sensitive sectors from the FIPA’s obligations.
Yes. An equity security of an enterprise, including a joint venture, is considered to be an investment. More generally, an interest in an enterprise that entitles the owner to share in income or profits of the enterprise is considered an investment under the FIPA.
Yes. Provided the subsidiary is owned or controlled by an investor in Canada, the investment of the subsidiary would be covered by the disciplines of the FIPA.
In general, taxation measures are outside of the scope of a FIPA. Taxation matters are addressed through bilateral double taxation agreements. Canada has 86 such agreements in force and several others under negotiation. For further information visit the Department of Finance website. Canada does, however, negotiate its FIPAs on the basis that tax measures will be subject to the disciplines of the FIPA with respect to expropriation and tax measures that form part of a private investment agreement or contract between an investor and the host government.
While a FIPA provides protection for investments in general, it does allow Parties to make exemptions from the FIPAs obligations. For example, cultural industries are typically not covered by FIPA protections.
Yes. The FIPA applies to actions taken by all levels of government - local, provincial and federal.
The investor-state dispute settlement mechanism in a FIPA allows an investor, on its own, to pursue a claim against the host government. The Government of Canada will not be a party to a dispute launched by a Canadian investor. The Department of Foreign Affairs and International Trade, however, can provide assistance to Canadian investors, for example in the form of diplomatic assistance in dealing with the host government or in identifying contacts in the host country. The dispute itself, however, is a legal matter between the investor and the host government.
The first step in resolving an issue with a host government is to pursue the issue directly with that host government. Documenting your complaint and expressing it in clear unambiguous terms are important steps in this process. If you believe there has been a breach of a FIPA obligation, you may wish to obtain legal advice on your options concerning recourse under the FIPA. You can also contact the local Canadian Embassy. They can provide you with relevant contacts should you wish to pursue the matter further.
Each case is different, so it is it difficult to generalize, but resolving a matter through international arbitration is a long process and can take several years.
Arbitral parties are responsible for the costs of the arbitral tribunal, payable in advance. Costs depend on the amount of time needed by the tribunal to hear and decide the case. In recent cases, the investor’s 50% share of tribunal costs has ranged between $500,000 and $1.5 million. In addition, the investor would be responsible for its own legal costs. A tribunal may award costs. For example, it may order the losing party to pay some or all of the successful party’s costs.
For a comprehensive list of Canada's FIPAs, Ongoing FIPA Negotiations, and Recently Concluded FIPA Negotiations, please see the Negotiations and Agreements section.
Export Development Canada (EDC) is a Crown Corporation that provides financing and risk management services to Canadian exporters and investors in up to 200 markets worldwide.
EDC provides political risk insurance to Canadian businesses investing in emerging markets, including countries with which FIPAs have not yet been negotiated, protecting investors against the effects of unpredictable political events that can have an adverse impact on their foreign operations. Examples of such events include war, civil strife, terrorism, restrictions on the conversion and transfer of currency, breach of contractual obligations by foreign governments, and other foreign government interference that affects investors’ ownership rights or business operations.
EDC can also provide financing to Canadian investors or their foreign investments in support of CDIA. EDC financing support can be at the time of the investment or through-out the term of the investment.
C.D. Howe Institute, Investor Protection in the NAFTA and Beyond: Private and Public Purpose, Toronto, 2006.
Conference Board of Canada, “The Benefits of Foreign Direct Investment: How Investment in Both Directions Drives our Economy” Ottawa, March 2006.
Kinnear, Meg, Bjorklund, Andrea K, and Hannaford, John F.G., Investment Disputes Under NAFTA: An Annotated Guide to NAFTA Chapter 11. Kluwer Law International, 2006.
Salacuse, Jeswald and Sullivan, Nicholas, “Do BITs Really Work? An Evaluation of Bilateral Investment Treaties and Their Grand Bargain”, Harvard International Law Journal Vol 46, 2005.
UNCTAD, Investor-State Disputes arising from Investment Treaties: A Review. New York and Geneva, United Nations, 2005.
UNCTAD, World Investment Report 2005: Transnational Corporations and the Internationalization of R&D. Geneva, United Nations, 2005.