Geoffrey Hale Political Science 3170 November 2, 2010 Outline Foreign Investment – Basic concepts Implications of trade liberalization, changes to national tax policies for foreign investment Investment: neutrality vs. “national champions” Foreign investment – basic concepts Portfolio investment Investment in shares or bonds of corporation involving less than 10 percent share of equity ownership. “Passive investment” – not engaged in market for control Foreign direct investment Business investment across national borders that involves controlling ownership share of corporation Depending on ownership structure, may involve majority ownership or ownership of as little as 10 percent of voting shares in widely-held company Inward FDI – investment by foreign-controlled corporations in Canadian-based firms (“greenfield” vs. Mergers & Acquisitions) Outward FDI – investment by Canadian-controlled firms Foreign investment in Canada -- Historical Perspective Ratio of Inward to Outward FDI 1926 4.26 1960 4.63 1980 2.13 2001 0.70 20090.93 Sources: Cross (2001); Statistics Canada (2010). Implications of Shifting Trends in Canadian, Global FDI Canada receiving declining share of global, N. American FDI Trend for global firms to service N. American markets through U.S. based firms in many sectors. U.S. share of new FDI in Canada now below 50% Overall share of FDI as share of GDP has plateaued about 30% -- same level as early 1970s Relative concentration in manufacturing, resource industries Decline in FDI resulting from tariff reductions offset by FDI increases from growth in N. American, global supply chains Implications of Shifting Trends in Canadian, Global FDI Historical trade-offs between increased trade, greater FDI reflecting effects of high national tariff barriers Trade liberalization complementarity (mutual reinforcement) of trade and investment flows Reflects growth of intra-corporate, intra-industry trade through international supply chains May also reflect effects of R&D, services flows in some sectors Implications of Shifting Trends in Canadian, Global FDI Inward FDI Independent research suggests positive contribution to: Productivity – driven by capital investment, inward R&D transfers, necessity for international competitiveness Increased wages – linked to productivity, need for skilled labour Modest positive increase on head office employment (quantitative) Other “spillover benefits” – R&D networks: direct & secondary. – Benefits of increased domestic competition higher productivity, lower prices for consumers. Controversy over: strategic direction, control of major corporations (qualitative) potential risks associated with foreign state-controlled firms, strategic wealth funds whose takeover activities may be driven by political rather than economic factors. Implications of Shifting Trends in Canadian, Global FDI Market disciplines for management of Canadian firms government protection seen to contribute to complacency, declining competitiveness of private sector management, lower share prices. returns for shareholders growing element in government revenues, pension funds returns. Relative availability of capital increases costs of capital to Canadian firms Implications of Shifting Trends in Canadian, Global FDI Outward FDI Canadian firms, investors heavily engaged in outward FDI Total value of outward FDI has exceeded inward FDI since 1997 Canadian acquisitions of foreign firms typically smaller, but more numerous Domestic debates over foreign investment raise issues of reciprocity, equality of market access Growing share of outward FDI to “offshore financial centres” Policy implications Restrict market access for firms from countries that do not provide reciprocal access to Canadian firms Potential to impose conditions on foreign takeovers re: “net benefit” and “national security” rules Potential to impose market-based decision-making, transparency tests on foreign state controlled firms, strategic wealth funds Creative Destruction in the Canadian Corporate Sector Changes in structure and control of Canada’s 200 largest corporations: 1990-2007 Same name, shareholder structure 71 Canadian controlled, changed shareholder 48 Same name, shareholder structure no longer in top 200 29 Foreign controlled 29 Company ‘transformed, renamed’ 20 Out of business 3 35.5% 24.0% 14.5% 14.5% 10.0% 1.5% Source: Michael Grant and Michael Bloom (2008), “Myth and Reality: Corporate Takeovers in an Age of Transformation” (Ottawa: Conference Board of Canada, January), 9. Key drivers influencing FDI levels Market cycles key factors in driving “M&A” activity: Takeover booms 1997-99, 2005-07. Reinforced by N. American or international patterns of industry consolidation (e.g. steel: 2002-07; base metals mining: 2005-07) “Conventional” FDI significantly influenced by: Trade liberalization Exchange rate shifts Tax rate effects limited Some correlation of lower CIT rates, greater outward FDI. Policy Implications: Pro-Market vs. Pro-Business Policies “Pro-Market” “Pro-Business” Emphasis on creating domestic Emphasis on promoting conditions for effective business competition, rather than favouring specific firms Greater emphasis on lower CIT rates, support for general R&D, skilled labour, infrastructure development Generalized investment rules (e.g. net benefit, nat’l security) “national champions”, favouring firm and sector-specific policies within disciplines of int’l trade rules Greater emphasis on sectorspecific subsidies (open and disguised), research support. More ad hoc, restrictive and/or transaction-specific investment rules Policy Implications: Pro-Market vs. Pro-Business Policies Pro-Market Pro-Business Stronger orientation of tax and Securities laws typically give securities laws to shareholder interests rather than those of corporate boards, executives Competition, anti-trust laws and regulations used to promote competition, regardless of individual firms’ national origin Rules for foreign-state owned firms, SWFs more oriented towards market-based decisionmaking corporate boards, executives greater autonomy, flexibility to resist hostile takeovers Competition, anti-trust laws, regs relaxed to protect “national champions” Strong restrictions on foreign- state owned firms, SWFs – or ad hoc decision-making open to political influence.