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. 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.

Controversy over:

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 Canadas 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
Emphasis on creating domestic

Pro-Business
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, natl security)

national champions, favouring firm and sector-specific policies within disciplines of intl 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
Stronger orientation of tax and

Pro-Business
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.