Geoffrey Hale
Political Science 3170
November 2, 2010
 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
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
Sources: Cross (2001); Statistics Canada (2010).
Implications of Shifting Trends in Canadian,
Global FDI
 Canada receiving declining share of global, N. American
 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
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
 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
Canadian controlled, changed shareholder 48
Same name, shareholder structure
no longer in top 200
Foreign controlled
Company ‘transformed, renamed’
Out of business
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
 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
 Generalized investment rules
(e.g. net benefit, nat’l security)
“national champions”, favouring
firm and sector-specific policies
within disciplines of int’l trade
 Greater emphasis on sectorspecific subsidies (open and
disguised), research support.
 More ad hoc, restrictive and/or
transaction-specific investment
Policy Implications:
Pro-Market vs. Pro-Business Policies
 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
 Strong restrictions on foreign-
state owned firms, SWFs – or ad
hoc decision-making open to
political influence.