Dr. Karl Sauvant of Columbia University. (Darren Brown, OBJ)

A "backlash" is on the horizon in global foreign direct investment (FDI), especially in FDI between Canada and China, at least one expert is suggesting.

Columbia University's Karl Sauvant, in Ottawa last week to speak at a two-day international conference titled Transnational Corporations and Canada-China FDI: Challenges and Opportunities, said clues pointed towards a worldwide backlash to FDI, and said action would have to be taken to prevent it from materializing.

Canadian groups dedicated to improving foreign investment between the two countries, however, say that they are already taking action to prevent just such a backlash.

Even without getting into politically-charged subjects like Taiwan, Tibet or the imprisonment of dual Chinese-Canadian citizen Huseyin Celil, China and Canada's FDI relationship may be in line for a falling out, the executive director of Columbia's Program on International Investment said.

FDI worldwide has increased greatly in the last two decades, pushed upwards with treaties and more liberalized state economies.

Whereas global FDI was between $40 billion and $50 billion in the early 1980s, last year it was pushing $1.4 trillion, he noted. Where 500 bilateral treaties existed in the 1990s, 2,500 such treaties are in place today, largely to protect private investments.

An alignment of interests of the three main players in FDI (host countries, home countries and multinational corporations) allowed for it to increase as much as it did, he said.

Host counties encouraged it for the jobs and cash infusion. Home countries such as Canada liked it for the increased global competitiveness. And multinational corporations felt it increased their edge in the market through offshoring and prestige.

"The result is a fairly open framework, (and) the level of foreign direct investment will remain at $1.3, $1.4, $1.5 trillion for the next couple of years," he said.

Figures show Chinese investment in Canada has increased greatly since 2004, but is still only 0.29 per cent of GDP, so there's plenty of room to grow.

But the tide is changing, Mr. Sauvant warned, and the tri-partite arrangement is starting to fall apart.

The United Nations Conference on Trade and Development, established in 1964 to promote development-friendly trade integration of the first and third worlds, has recorded more than 250 international disputes between multinationals and host countries, he said. Three quarters of them were in the last five years.

"The question is, is the pendulum swinging back?" he asked. "There are indications that this is taking place."

Foreign direct investment, after all, involves "foreigners," he said. Even Canada, which perceives itself as more tolerant than the average state, shows signs of growing suspicions.

For example, China Minmetals Corp.'s 2004 attempt to buy Noranda, a Canadian mining firm, was rejected because the Chinese company was state owned. This year, China National Petroleum Corp.'s purchase of a majority stake in an Alberta oil sands project, including exploration and extraction rights, drew similar reaction, but it succeeded, largely because the shell company making the purchase was publicly traded.

But China, he said, is accumulating reserves at a rate of $1 billion a day, a growing threat to economic nationalists in Canada and the United States.

Attitudes in home countries like Canada are becoming more hostile to the idea of cross-border mergers and acquisitions, Mr. Sauvant said, "particularly of national champions or strategic resources, particularly if the acquirer is from an emerging country, in particular if the acquirer is a state-owned company, in particular if it is a sovereign investment agency."

Attempts to do so are "bound to lead to reactions," he said, some of which are already visible. Late last month, U.S. President George Bush signed a bill requiring state-owned firms hoping for an acquisition or merger in that country to undergo a review, a measure aimed squarely at China. In Europe, similar bills are proposed, more a shot across the bow of Russian corporate behemoths.

Even in China, debate at the national level is increasingly a question of "does China need more FDI?"

"Cross-border mergers and acquisitions are the most visible sign that something is cooking," he said.

Sarah Kutulakos, executive director of the Canada China Business Council, said her group advises Canadian and Chinese firms on how to do more business in each other's backyards.

She said the council urges Chinese firms to become part of the "Canadian fabric" and be more transparent in order to succeed.

"We don't share the worry of Mr. Sauvant," she said. "More importantly, we try to work with the people who come to us to make the investment more successful. We told them they need to make themselves part of the fabric of Canadian business and society. The most successful investments are the ones that have a benefit for both sides, particularly in natural resources, where there is a sensitivity."

Michael Darch, executive director of global marketing for OCRI, shared her optimism.

"To a large degree, (Mr. Sauvant) deals with the U.S. and American business," he said. "Canada is much more of a trading nation that the U.S., by GDP.

"The U.S. is getting hit by China, India, job losses, and there's concern . . . I think the backlash here would be much smaller."

Mr. Sauvant predicted FDI to continue increasing, if only slightly, and told conference goers that vigilance was necessary to prevent a backlash. n

"If we're not successful . . . I think it may well be what we are seeing are not straws in the wind but a storm in the making," he said.