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



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
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.