Foreign investment not always a benefit

Acquisitions by foreign corporations of Canadian companies may be in the interests of shareholders and corporate executives, but harmful from the perspective of workers and local communities.

The inside of a derelict old steel mill.
Photo by Peter Herrmann on Unsplash.

The federal government heeded the advice of the business dominated Economic Advisory Council and set out a new welcome mat for foreign investors in the recent  Economic Statement. The threshold for review of foreign take-overs of Canadian companies will be raised from $600 million to $1 billion (up from just $369 million in 2015); a new agency, the “Invest in Canada Hub,” will be set up with a mandate to woo foreign corporations; and reviews of the security implications of foreign take-overs are likely to be limited.

The report of the Advisory Council expressed alarm about Canada “falling behind” in the competition for foreign investment, without a single critical word on the possible costs of foreign take-overs. This is consistent with the Liberal record (a Liberal government has never turned down a foreign takeover) but at odds with the Canadian public interest and even the government’s own broader economic agenda.

Not to be misunderstood, new “greenfield” foreign investments and take-overs, especially in advanced manufacturing and the so called knowledge economy, can indeed be a good thing for Canada,  Foreign investors can bring better access to new markets, to new technology, new capital and technical expertise. Some of Canada’s most innovative and dynamic companies, such as Pratt and Whitney are foreign owned.

But, foreign investment, especially in the form of foreign takeovers, is not always and necessarily a good thing, and can lead to the loss of productive capacity, new investment and good jobs in Canada. Accordingly, it is reasonable to continue to review take-overs and subject them to the test of being of  “net-benefit” to Canadians.

Foreign takeovers risk the loss of control to non-residents who seek to maximize returns on a world-wide basis and have no specific interest in maintaining and expanding Canadian operations. This has recently been the case in the mineral resource sector where some huge transnationals have shut down Canadian mining and processing operations as part of a global capacity reduction strategy, rather than operate them on a reduced basis in response to a temporary slump in demand.

Foreign ownership carries serious macro economic risks. Sudden large inflows, as in the resource company takeover boom of the mid 2000s, helped drive up the exchange rate of the Canadian dollar at the cost of non resource Canadian exporters. And a rise in foreign ownership involves a long-run flow of  profits to foreign owners and reduced personal income tax revenues.

Canadian-owned companies which operate on an international basis are just as, or even more, innovative and productive than foreign-owned transnational corporations operating in Canada. Our key goal as a country should be to promote the growth of the former.

Canadian-owned transnational companies are more likely to maintain significant head office employment; more likely to undertake significant research and development in Canada and to build links to our universities and colleges; more likely to engage Canadian suppliers of goods and services, including professional, financial, and consulting services; and are more likely to be part of regional networks and clusters of firms.

It is for these reasons that many prominent representatives of corporate Canada have argued that foreign takeovers can lead to a “hollowing out” of Canadian operations.

In the important “knowledge-based” sector, a foreign corporation may make an acquisition in Canada mainly to gain control of patents and other intellectual capital developed in Canada, with the aim of transferring that knowledge out of the country. This was flagged as a major problem by the “Expert Panel on Innovation” headed by Tom Jenkins, which reported to the Harper government in 2011.

The problem is particularly significant given that corporate research and development in Canada is highly subsidized through tax credits and other government incentives which are likely to be increased as part of the Trudeau government’s new innovation strategy.

The case for support is based on the premise that knowledge developed in Canada will lead to more innovative Canadian businesses and better Canadian jobs, but this is less likely to happen if there is no regulation of take-overs.

The central point is that acquisitions by foreign corporations of Canadian companies may be in the interests of shareholders and corporate executives, but harmful from the perspective of workers and local communities, and negative in terms of the desired path of sectoral and national economic development.

That is why it makes sense to review significant take-overs to examine  the impacts on employment, productivity, innovation, and technological development; and compatibility with broader economic development policies. To further ensure that there is a net benefit for Canadians, the government may require the company to amend its plan in the form of specific undertakings and commitments. 

Certainly we need a more nuanced approach to foreign ownership than just putting out the welcome mat.

Sign up for Perspectives

Perspectives is a Canadian journal of political economy and strategy by the Broadbent Institute. Sign up today to receive the latest analysis for building a just and equitable society.

Note: you will receive occasional messages from the Broadbent Institute
Opt in to all news from the Broadbent Institute
This field is for validation purposes and should be left unchanged.