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Canada is missing out on billions of investments from cash-rich China because of Ottawa's confusing foreign takeover rules, says a report from the Conference Board.

The Ottawa-based think-tank makes clear it is a supporter of foreign investments — including from China — saying simply that economies that have access to global capital do better in terms of growth and job creation.

But although the federal government has declared Canada open for business and is aggressive on the free trade front, it has kept in place opaque rules that may be scaring away foreign investors, the report says.

It has chosen the example of China because the world's emerging economic super-power is also among the fastest growing sources of foreign capital, with the potential to become Canada's second largest investor base next to the U.S.

But Canada is not getting its share now — Australia attracts three times as much investment from China, the report says. And it blames the Investment Canada Act, with its obscure "net benefit" test, as potential hurdle that may explain part of the poor record.

"The evidence is that our global share of foreign investment has collapsed over the last 25 years," from 16 per cent in 1970 to three per cent in 2009, said Glen Hodgson, chief economist with the Conference Board.

The comparison looks better if investment is put in relation to the size of Canada's economy, but Hodgson said that's still not good enough.

"We have growth potential that many other economies don't have, not just the resource sector, but across our national economy. China is investing around the world right now and maybe we're satisfied with our level, but I don't think we should be."

China has about $14 billion in investments in Canada, half of which is in the resource sector. The report notes that in most cases, China maintains a minority share so as to avoid political problems.

The report agrees that Canada should scrutinize Chinese forays into Canada's resource sector. State-owned enterprises are sometimes servants not of the market but of the shareholder, which in China's case is a communist government.

But the Conference Board argues that once national security issues are resolved, China should be treated like any other foreign investor. As well, Canada should spell out its rules for investors so that they know the tests they need to pass.

That's not the perception today, the report says.

The Investment Act's "net benefit" rule — although seldom invoked to reject a takeover — is unclear and opaque and as a result, adds costs and political risk to what should be a clear-cut business decisions.

"We have no idea how many firms came, sniffed the market and simply didn't want to run the gauntlet," said Hodgson.

The Harper government has rejected two foreign takeovers in its six years in office, the most notable being the failed bid by Anglo-Australian mining firm BHP Billiton for Potash Corp. (TSX:POT) in 2010.

There has been speculation that government would again face a difficult decision should a foreign bid emerge for troubled Research in Motion — one of the country's most globally recognizable brands.

Reacting to the Potash controversy, the government said at the time it would clear up the rules regarding how the net benefit to Canada rule is being applied, but then changed its mind.

This spring, Industry Minister Christian Paradis announced only modest changes to the Act, including an amendment that would permit him to disclose he has sent a preliminary notice rejecting an investment and to explain his reasons.

In an email response to the report, Paradis said the government's "foreign investment review process is sound and encourages investment, economic growth and prosperity in Canada."

The Conference Board says the Act should be amended along the Australian model with clearly defined rules about ownership and governance. It also calls for a national interest test and a national security test.

A key change would be to reverse the onus from the foreign bidder to the government to show that an investment is not in Canada's interest. That was also recommended by the Red Wilson Report, which Ottawa commissioned four years ago.

Hodgson said that foreign investment should be seen as a good, unless the government can show that it is not.

A spokesman for Trade Minister Ed Fast noted that Canada had recently concluded negotiations for a Foreign Investment Promotion and Protection Agreement with China and expects investments to keep growing.

"We ... welcome partnerships between Chinese and Canadian companies that bring together capital and expertise with a view to shared pursuit of new markets and opportunities in Canada, China, and third markets," said Rudy Husny, in an email response.