foreign investment, trade and canadian domestic politics
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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 - PowerPoint PPT PresentationTRANSCRIPT
Geoffrey HalePolitical Science 3170
The University of LethbridgeNovember 4, 2010
OutlineShifting policy frameworks since the 1970s“Pro-market” vs. “pro-business” investment
policiesM&A cycles, market forces and “creative
destruction”
Canada’s Shifting Approach to Foreign Investment PoliciesNeo-Mercantilism Neo-LiberalismStrong 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 PoliciesTrudeau-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 sectorsTransportation
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 sectorsEnergy 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 sharesMining
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-BusinessStronger 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 levelsMarket 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 limitedSome 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: 1990-2007Same 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 list2003 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
# valueCanadian firms acquiring Canadian-owned firms 4,469 $ 258.5 bn.Canadian firms acquiring foreign firms and foreign- 2,020 $
326.3 bn. owned Canadian subsidiariesForeign firms acquiring Canadian firms and Canadian 797 $ 352.4 bn. subsidiaries of foreign firmsSource: 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
ConclusionCanadian governments traditionally committed to
relatively open policy on foreign investmentIndividual decisions increasingly subject to
political considerationsRelative level of controversyRelative concerns over “special circumstances” vs.
“impact on ‘level’ business playing field”Potential impact on Canadian firms competing
abroad.