Nationalism's cost; Blocking foreign takeovers, out of concern
for the 'hollowing out' of Canada, may only increase corporate
concentration
National Post
Tue 29 May 2007

Page: FP11
Section: FP Comment
Byline: A.E. Safarian
Source:
Financial Post

The debate on the foreign acquisition of larger
Canadian-owned firms is similar in some ways to the 1960s and 1970s debate on
the effects of foreign control of Canadian industry, except that it focuses more
on the consequent loss of Canadian headquarters operations.

In one sense, such loss is unavoidably the case. To the extent that effective
voting control now lies abroad, some key decisions about the Canadian-based firm
will be made elsewhere. The argument goes much further to say that there is also
a loss of senior officers and career opportunities to other countries, some
headquarters functions such as R&D shift abroad, and a whole range of
support services -- by lawyers, financial industries and consultants -- also
tend to shift abroad.

One study from the C.D. Howe Institute came out with optimistic outcomes. It found
56% of the top 50 companies were owned by nonresidents in 1997 and only 32% in
2003. For the 500 largest firms, the comparable figures were 50% and 37%. It
also found that Canadian firms acquired 43 foreign businesses of at least
$1-billion each from 1995-2004, for a total of $129-billion. On the inflow side,
the comparable figures were 38 firms and $147-billion.

A report by Statistics Canada notes that, far from declining, the number of
head-office jobs in Canada grew by 11% and the number of head offices by 4% from
1999 to 2005. Foreign-owned firms accounted for two-thirds of new head-office
jobs and all of the gains in the number of head offices. About one-fifth of the
head offices in firms that were taken over were closed, but this was offset by
new head offices in Canada by foreign firms new to Canada. Another study by
Statistics Canada showed that foreign-controlled firms in manufacturing
accounted for two-thirds of Canada's growth in labour productivity from 1980 to
1999.

However, the international orientation of the firm dominates productivity
change. Where Canadian firms had plants abroad, they were just as productive as
the foreign-owned plants in Canada. This point is underlined by a study by the
Institute for Competitiveness and Prosperity, which found Canada's world-class
firms have become both larger and more numerous. It found that in 1985 there
were 33 Canadian companies in the top five in the world in their particular
lines, while there were 73 such firms 20 years later. This number can fluctuate
with global consolidation and for other reasons, but the critical point is that
the lines in which Canada now ranks high are quite different from those for the
earlier date.

One sometimes hears that world scale Canadian firms cannot be as large as
those with home bases in larger markets, but the experience of inter- national
firms from countries such as the Netherlands, Switzerland, Finland and Sweden
suggests otherwise. Besides, if the Canadian firms are among the best in their
specialized lines and thus enjoy a significant share of regional or even global
markets, they can be dynamically competitive, even if not as large as more
broadly based firms.

Those who are very concerned about hollowing out, whether for reasons of
economic welfare or otherwise, favour an approach that targets larger foreign
takeovers. This can be done by blocking or limiting such takeovers in sectors
considered sensitive or key in some sense. It can also be done by a general
review of foreign takeovers of larger firms to block those deemed negative in
terms of net benefits and/or to impose and monitor conditions more fully than at
present.

I examined the experience of OECD countries to about 1990 with such
approaches. One conclusion: To avoid stagnation, closing a key sector required
having or developing substitutes for any benefits from multinational firms.
Another: Review mechanisms required clear and effective guidelines, and
interdepartmental (and federal-provincial) coordination -- procedures that few
countries managed successfully.

If one goes the route of a more active and powerful Investment Canada
focusing on the largest takeovers, with or without more designation of key
sectors, a case would need to be made that foreign takeovers in general do more
damage than equivalent domestic takeovers in terms of job loss, productivity
effects and so on. I have seen no such study -- indeed, several studies point
the other way. More generally, a case would need to be made that a new or
revised agency is needed to pursue objectives not now met by other agencies or
policies.

There is already a relatively high degree of ownership concentration in
Canada, in large part because of family holdings. Business professors Randall
Morck and Bernard Yeung have shown that the degree of concentration rose during
the period of the Foreign Investment Review Agency and fell thereafter. Some
studies find drawbacks to a high degree of family control in an economy.

The reasons for mergers and acquisitions vary, something public policy would
have to determine to make welfare-serving decisions. To the extent the reasons
involve restructuring and rationalizing relatively stagnant operations, for
example, blocking this process could involve a large economic loss over time as
resources fail to shift to newer or revitalized growth sectors.

But foreign takeovers occur for many other reasons, not all of which bring a
net benefit to Canada. They could occur because of differences in a variety of
costs between countries, because of a drive for size (and hence perquisites) by
management abroad, or because of mistakes about future growth, as in the dot-com
bubble. People who have to sort out such motives, as well as probable effects,
are likely to fall back on formulas, with uncertain welfare effects, since
detailed case studies are unlikely to be possible within normal time limits.

Other agencies, such as the taxation, competition, and regional development
authorities, will want to have a say in terms of their responsibilities.
Inevitably, there will be pressure from domestic competitors in view of the huge
impact on them of some decisions. Balancing independence and responsiveness in
this type of situation is very difficult and only infrequently well resolved.

Depending on which policies are adopted and how they are implemented, Canada
might find it is challenged in terms of our obligations under the World Trade
Organization, the North American Free Trade Agreement, tax treaties or in other
respects. Admittedly, there can be some room for manoeuvring, or at least
lengthy delays in responding to such challenges, but there is also the risk of
retaliation against our now substantial outward foreign direct investment.

Finally, there could be a large cost to developing and fine-tuning a
relatively successful approach of this kind, including any changes in
complementary policy areas. The main cost, of course, is the opportunities
forgone by the most skilled public servants in tackling these fairly complex
issues. Those forgone opportunities include focusing on removing fiscal and
regulatory obstacles to the development of efficient world-scale Canadian firms.

- - - - Ed Safarian is professor emeritus of business economics at the Rotman
School, University of Toronto.

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Edition: National
Story Type: Business;
Statistics; Opinion
Length: 1152 words