Foreign Investment, Trade and Canadian Domestic Politics Geoffrey Hale Political Science 3170 The University of Lethbridge November 4, 2010
Outline • Shifting policy frameworks since the 1970s • “Pro-market” vs. “pro-business” investment policies • M&A cycles, market forces and “creative destruction”
Canada’s Shifting Approach to Foreign Investment Policies Neo-Mercantilism Neo-Liberalism • Strong ambivalence towards foreign ownership in major industries • Preserve Canadian ownership of extensive (but varied) range of strategic industries • Extensive use of Crown Corporations (GBEs) to pursue economic development, policy goals • Foreign investment generally viewed as providing “net benefit” to Canada • Pursuit of policy goals through other forms of regulation • More selective use of GBEs; generally subject to greater range of market disciplines.
Canada’s Shifting Approach to Foreign Investment Policies Trudeau-Era Mulroney-Chretien Eras • Foreign Investment Review Act (1973) investment screening based on “net benefit” test • Burden of proof on foreign firm • Some deals modified • None rejected outright • Disincentive effects? • National Energy Program (1980) • mix of national champions, state-ownership • extensive federal-provincial conflict dilution of NEP measures, defeat of gov’t. • Investment Canada Act (1985) investment screening based on “net benefit” test • General assumption of benefit • First outright rejection in 2007 Macdonald Dettwiler space div. • Followed by rejection of BHP Billiton takeover of Potash (2010) • National treatment provisions in NAFTA, WTO agreements • Gradual introduction, expansion of “national security” rules • U.S. - “Exon-Florio” (1988, 2007) • Canada – 2009. • Concerns re: SWFs.
Shifting policy approaches to formerly strategic sectors • Transportation • Eliminate barriers to entry to airline, trucking, railway sectors following U.S. examples of 1980s • Progressive shift of federal Crown Corporations to private sector: Air Canada (1988), Petro-Canada (1988-2005), Canadian National (1994), Eldorado Nuclear, Potash Corp. • Major Canadian expansion in U.S. Now control 2 of 7 Tier 1 RRs
Shifting policy approaches to formerly strategic sectors • Energy and resources • Shift away from state-control of resource firms to varied regulations on resource development • Oil and gas • Industry restructuring 1988-98 privatization of Petro-Canada (later merger with Suncor), spin-offs and consolidation of former foreign subsidiaries (EnCana, Nexen, Talisman) as part of broader global restructuring extensive two-way investment flows with U.S. • Cross-border integration of energy pipeline firms TransCanada (integrated with power-generation), Enbridge, Kinder Morgan (US) • Nfld/Lab as provincial outlier in bargaining for ownership shares • Mining • Shift away from gov’t ownership (e.g. Eldorado Cameco, privatization of Potash Corp.) shift to global consolidation in recent years (e.g. Inco / Falconbridge takeovers, growth of Teck Resources, major gold mining firms).
Policy Implications: Pro-Market vs. Pro-Business Policies (Micro-economic policy) Pro-Market Pro-Business • Stronger orientation of tax and 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 decision-making • Securities laws typically give 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.
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.
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 35.5% • Canadian controlled, changed shareholder 48 24.0% • Same name, shareholder structure no longer in top 200 29 14.5% • Foreign controlled 29 14.5% • Company ‘transformed, renamed’ 20 10.0% • Out of business 3 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.
Canada’s “Global Market Leaders”:Meet Joseph Schumpeter! 1985 1985 firms in business 2009 firms and on list 2003 2009 Over $ 1 bn. 15 12 7 (2*) 46 • $ 1 bn. 18 6 (1*) 6 (1*) 43 Total 33 18 (1*) 12 (3*) 89 * Firm merged in corporate reorganization. [Source: Institute for Competitiveness and Prosperity, 2010.]
The Canadian Market for Corporate Takeovers – 2003-07 # value Canadian firms acquiring Canadian-owned firms 4,469 $ 258.5 bn. Canadian firms acquiring foreign firms and foreign- 2,020 $ 326.3 bn. owned Canadian subsidiaries Foreign firms acquiring Canadian firms and Canadian 797 $ 352.4 bn. subsidiaries of foreign firms Source: Hale (2008), adjusted for failure of proposed BCE takeover.
The Potash Decision (2010) • Sask. gov’t relinquished control of Potash Corp. – reflected in migration of President, sr. execs to Chicago • Federal Competition Bureau had challenged export cartels – gap between producer / consumer interests in Canada, abroad. • Sask. gov’t could have recovered revenues from changes to tax system • Potential Investment Canada conditions for approval not disclosed • Federal government in minority position; decision to reject takeover based primarily on political factors, decision to conserve political capital. • “Canadian” firm informal instrument of Sask. gov’t resource policies • Foreign investment (51% external ownership) widely dispersed • BHP Billiton challenge to “orderly” marketing of provincial resource (Canpotex) – 53% of world supply • Medium-term financial impact on Sask.’s resource revenues • Saskatchewan gov’t., several resource provinces asked Ottawa to reject takeover. • Canadian public opinion generally opposed to major takeovers
Conclusion • Canadian governments traditionally committed to relatively open policy on foreign investment • Individual decisions increasingly subject to political considerations • Relative level of controversy • Relative concerns over “special circumstances” vs. “impact on ‘level’ business playing field” • Potential impact on Canadian firms competing abroad.