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Geoffrey Hale Political Science 3170 November 2, 2010

changes to national tax policies for foreign investment  Investment: neutrality vs.Outline  Foreign Investment – Basic concepts  Implications of trade liberalization. “national champions” .

Mergers & Acquisitions) Outward FDI – investment by Canadian-controlled firms . 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.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.

Foreign investment in Canada -.13 2001 0.93 Sources: Cross (2001).63 1980 2.Historical Perspective Ratio of Inward to Outward FDI 1926 4.70 20090.26 1960 4. . Statistics Canada (2010).

American markets through U.S.Implications of Shifting Trends in Canadian. N. based firms in many sectors. American.same level as early 1970s  Relative concentration in manufacturing. American FDI  Trend for global firms to service N.  U. global supply chains .S. share of new FDI in Canada now below 50%  Overall share of FDI as share of GDP has plateaued about 30% -. Global FDI  Canada receiving declining share of global. resource industries  Decline in FDI resulting from tariff reductions offset by FDI increases from growth in N.

Implications of Shifting Trends in Canadian. services flows in some sectors . intra-industry trade through international supply chains  May also reflect effects of R&D. greater FDI reflecting effects of high national tariff barriers  Trade liberalization  complementarity (mutual reinforcement) of trade and investment flows  Reflects growth of intra-corporate. Global FDI  Historical trade-offs between increased trade.

control of major corporations (qualitative) potential risks associated with foreign state-controlled firms. – Benefits of increased domestic competition  higher productivity.  Controversy over:   . strategic wealth funds whose takeover activities may be driven by political rather than economic factors. need for skilled labour Modest positive increase on head office employment (quantitative) Other “spillover benefits” – R&D networks: direct & secondary. inward R&D transfers. lower prices for consumers. Global FDI  Inward FDI  Independent research suggests positive contribution to:     Productivity – driven by capital investment. necessity for international competitiveness Increased wages – linked to productivity. strategic direction.Implications of Shifting Trends in Canadian.

pension funds returns. declining competitiveness of private sector management. Global FDI  Market disciplines for management of Canadian firms  government protection seen to contribute to complacency.  returns for shareholders growing element in government revenues.Implications of Shifting Trends in Canadian.  Relative availability of capital increases costs of capital to Canadian firms . lower share prices.

transparency tests on foreign state controlled firms. but more numerous  Domestic debates over foreign investment raise issues of reciprocity. investors heavily engaged in outward FDI  Total value of outward FDI has exceeded inward FDI since 1997  Canadian acquisitions of foreign firms typically smaller.Implications of Shifting Trends in Canadian. strategic wealth funds . 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. Global FDI  Outward FDI  Canadian firms.

0% 1.0% 14.Creative Destruction in the Canadian Corporate Sector Changes in structure and control of Canada’s 200 largest corporations: 1990-2007  Same name. 9. January). renamed’ 20 Out of business 3 35. “Myth and Reality: Corporate Takeovers in an Age of Transformation” (Ottawa: Conference Board of Canada. .5% 10.5% 14.5% 24.5% Source: Michael Grant and Michael Bloom (2008). changed shareholder 48 Same name. shareholder structure      71 Canadian controlled. shareholder structure no longer in top 200 29 Foreign controlled 29 Company ‘transformed.

American or international patterns of industry consolidation (e.  Reinforced by N. greater outward FDI. 2005-07. 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.Key drivers influencing FDI levels  Market cycles key factors in driving “M&A” activity:  Takeover booms 1997-99. .g.

net benefit. nat’l security) “national champions”. support for general R&D.g. skilled labour. rather than favouring specific firms  Greater emphasis on lower CIT rates. research support. infrastructure development  Generalized investment rules (e. Pro-Business Policies “Pro-Market”  Emphasis on creating domestic “Pro-Business”  Emphasis on promoting conditions for effective business competition. favouring firm and sector-specific policies within disciplines of int’l trade rules  Greater emphasis on sectorspecific subsidies (open and disguised).Policy Implications: Pro-Market vs.  More ad hoc. restrictive and/or transaction-specific investment rules .

regardless of individual firms’ national origin  Rules for foreign-state owned firms. . SWFs more oriented towards market-based decisionmaking corporate boards. SWFs – or ad hoc decision-making open to political influence. 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. anti-trust laws. anti-trust laws and regulations used to promote competition. executives greater autonomy. regs relaxed to protect “national champions”  Strong restrictions on foreign- state owned firms.Policy Implications: Pro-Market vs. flexibility to resist hostile takeovers  Competition. executives  Competition.