Shocking FDI Statistics

No this isn’t the Economics National Enquirer.  I mean shocking.  Really shocking.

Hasn’t anyone else out there noticed what’s happened to Canada’s net FDI position, in the wake of the mega-massive takeovers of Canadian resource companies that have occurred as a result of the global commodity price boom?  Resource companies with more money than they know what to do with have been snapping each other up quickly, and Canada’s been on the “bought” end of the equation much more often than the other way ’round.

By the end of the 3rd quarter of 2007, we had slumped back into the red in our net FDI position for the first time since 1997 (when Canada became a net FDI creditor for the first time in history).  That was a stunning $80 billion reversal in our net position (I am talking FDI stocks here, not flows) in just 9 months.

If this reflected an inflow of real capital that developed our economy and created jobs, that would be one thing.  But of course it doesn’t.  It’s just a corporate shell game in which Canadian-owned assets are replaced with a long-term obligation to pay interest & dividends to foreigners — not to mention making it a little harder to influence the actions of those companies in our economy.  (Canadian-owned corporations are as greedy and socially irresponsible as any others, so I wouldn’t overstate that latest issue.)

Here’s my recent G&M column on the issue:

Country for Sale, Cheap (OBO) 

            Montreal-based Secor Consulting reported last week on the incredible ease with which foreign investors can buy Canadian companies.  Their detailed study of global acquisitions since 2000 confirms that Canada is selling itself off faster than any other industrial economy.  A total of 12 percent of the market value of corporate Canada has been sold to foreigners so far this decade – and the pace of conquest is accelerating.

            Secor points the finger at Canadian securities laws, which reinforce the fire-sale mentality of many Canadian business leaders.  Surely other government policy – in particular the fact we don’t seriously review most takeovers, even in crucial resource industries – is also relevant.

            For example, Investment Canada was established in 1985 to ensure that foreign takeovers generate “net benefits” to Canada.  Since then its scorecard is 1529-to-0 in favour of approving buyouts (not one has been turned down).  Whenever a takeover is being pitched, Investment Canada won’t even publicly confirm that it is examining the case, let alone reveal the parameters of its phony benefit test.

            The Secor study comes on the heels of more shocking data on foreign investment from Statistics Canada.  Buried in its most recent review of Canada’s net investment position was a stunning (and so far unreported) nugget that speaks volumes about what’s happening to our country.  During the third quarter of 2007 (most recent data available), Canada suddenly slipped back into net debt on its foreign investment account.  In other words, for the first time in over a decade, foreign companies once again own more Canadian business, than the other way around.

           Even as late as end-2006, Canada was still $75 billion above water.  But last year’s rash of takeovers made quick work of that, and by the end of September we plummeted back to $5 billion in the hole.  Since 2003, when soaring commodity prices ignited global interest in Canada’s super-profitable resource companies, a net $150 billion in new foreign investment has flooded in – and the stampede shows no signs of abating.
            For a country’s international accounts, this zinger is the equivalent of a government slipping back into deficit after 11 straight years of surplus: it ought to be front-page news.  But in the context of a country that seems content to sell its economic heritage to the highest bidder, the StatsCan data is apparently just another dog-bites-man story.

            There are many long-standing reasons to slow down this grand national sell-off, now being reviewed by Ottawa’s competition policy panel (set up last year in response to public concern over disappearing Canadian companies).  Takeovers tend to eliminate high-value jobs (in head offices, in research and development, and even in secondary manufacturing and processing).  They mean that fewer important decisions affecting Canada’s economy are made in Canada.  And they commit us to an ongoing payment of profit and dividends to foreign owners that imposes a long-term drain on our balance of payments.
            But in my books there’s an even more important problem associated with the foreign capture of so much of our economy – one that goes far beyond the particular companies, and particular industries, which are being sold.  The inflow of foreign money to finance those takeovers has been a dominant cause of the take-off of Canada’s currency, which also began in 2003.  All that money rushing in to buy our companies pushes the loonie higher and still higher.  It soared well above par again last week.

          It is hot foreign demand for our companies, not our products, that is pricing us out of world markets for manufacturing, tourism, and tradable services.  Our trade balance is eroding, our non-resource industries are imploding, and our national productivity is stagnating.  This is all the result, directly and indirectly, of us being the only major country in the world to offer our oil and other resources up to the highest bidder – no muss, no fuss, no strings attached.

            It’s time to take down the ‘For Sale’ sign that neoconservative governments have hung on our national door.  Simply committing to seriously review foreign takeovers, and reject those that do nothing more than transfer control to foreigners, would knock our loonie back twenty cents.  And it would assist us mightily in building a country that is more than just a resource-rich branch plant for the rest of the world.

7 comments

  • Why are Canadian investors selling those assets?

  • Deja Vu, kind of weird Jim, I sat today for a good half an hour thinking about how many takeovers the economic landscape has witnessed in the last while. ( and this is without reading your article) I was thinking back to all my Mel W. readings. Are we all just working, playing, raising families, paying taxes, and so caught up in distraction like watching hockey games in some kind of nationalistic facade that we have just witnessed the rug being pulled from under our feet.

    Well given the Harperites on the hill, we may just have, as the ideological bend these fellows have, will just about provide these news corporate owners with a slowly but surely building, already uneven battlefield between the interests of profits and the interests of people into an even more unfair relationship for the business world. Whatever happened to home field advantage. I think we just sold it for a steady flowing pipe full of bitumen from one foreign owned domestic establishment to another foreign owned foreign based bitumen processing facility.

    Note: Substitute as desired, bitumen for nickel, saw logs, copper, gold, silver, uranium.

    Kidding aside, you are right on with a quite important point on the future of our country. I guess mentioning FIRA might start dating myself a bit but I was just a young lad back then with a keen interest in economics.

    I think the whole notion of political- business sovereignty has got to be made within the media once again. A perfect example is your sector. Now that we have with no auto pact, which to me was a result of the whole culturalized stigma brought on by the branch plant economy fears way back when, what is now going to stop the big three from wiping out our entire auto sector, say if the dollar was to rise to 1.30 or more US. Given the wildness in the markets these days, that is not some kind of long shot.

    And given the ill-health in the auto sector and the dire need for new investment for a new generation of vehicle design that is more environmentally sensitive, potentially we could be soon approaching some notion of renewed wave of investment for the some of the big three. What power in a branch plant economy do we have to influence such decisions (assuming they all survive). Again we are back at square one in the auto sector, a mere investment starved nation amongst all nations awaiting the foreign based multinational to decide where to place investment. Who will get the new work, who will get the R&D divisions, who will get the head offices and all the great extras coming from the center of decision making. Again we are at most likely no other time in our history, with the recent flood of M&A’s acquisitions within that cultural space and of a branch plant mentality.

    The cream always rises to the home country, the whole song and dance that of Transnational corporation has no home is utterly wrong headed and is just a new version of the old song on Multinationals having no home. They have a home country and as much as everybody wants to believe we are now living in a much flatter world, I still say the planet is round. I guess if we had a look at the distribution of profits, reinvestment, dividends and wages by country, we may be somewhat flatter than say some years ago, but still mostly round.

    pt.

  • Well put, Paul.

    Stephen: Why are the Canadian owners selling out? They’re being offered mega-premiums by cash-flush global companies. And, as the SECOR study notes, Canadian securities law may be more oriented toward REQUIRING them to sell out (when a high price is offered).

    The bigger question is why there aren’t more Canadian-based multinationals doing the buying. That raises all kinds of issues like the capacities of Canadian business leaders, the structural weaknesses of resource-based economies, and others. I wish Canada was more like Sweden, Finland, or Netherlands, which have lots of home-based powerful multinationals despite their small size and generous welfare states.

  • It is regrettable more mineral giants didn’t forecast Chinese demand and hold on long enough to reap the benefits, but this is likely because compared to the time-consuming task of developing an ore body from scratch, making acquisitions is a good growth strategy to spend profits on. Whoever was biggest when mineral prices rose, got bigger. For instance, I’d bet an analysis of mining takeovers over the last decade shows Canadian miners have had no problem competing against the USA, former USSR nations, Australia or Scandinavian companies, but get demolished by South Africa and Russia. If the minerals prices were bottoming out, we’d be lamenting about how US and German firms like 3M and Siemens were snapping up all our growing materials science companies.
    Whatever sectors Canadians are specialized in, the Americans are usually just a little bit better. Canadian aerospace companies (post Avro) will never compete with their DoD aided competitors. Biotech, we are behind the UK and the USA. Medical robotics, I’d guess we are behind the USA and Japan. The consumer product sectors; our domestic comsumer sector is 25% of our economy and theirs is 40%. From a societal PoV, their ratio is good in that some consumer product early adaptors pay the cost of manufacturing these products for the globe (the first cellphone market was rich USA), but it also leads to Krispy Kreme, Coca-Cola and McDonald’s.
    Instead of multinationals, we have Universal Health Care (higher life expectancy) and higher education rates. Less consumer-fueled urban sprawl too.
    Canada’s national pandemic response system is the WHO’s model. The expected value of a world with fewer deaths is not captured in Canadian denominated captial flows. Iraq would be screwed up even more (more Canadian soldiers dead, maimed or suffering mental health illnesses too) with major Canadian participation, if a larger oil, defense and neoconservative corporate lobby were present here.

    There are ways we’ve gone too far to the left and are shooting ourselves in the foot. Ontario and probably some local municipalities gave tax breaks for construction of cutting edge auto plants over the past decade. The race to the bottom isn’t necessarily a bad thing save the North American car market is a dying industry. This type of investment is fixed for a very long time, akin to signing hockey players to long-term expensive no-trade contracts. Meanwhile, electric cars like Zenn (Canadian still, another previous Canadian manufacturer fled the country) are illegal on Canadians roads and hurt by regressive federal environmnet policies. Also, Canadian hospitals don’t have to report nosocomial (sickened by hospital germs) staph infection rates, so a Canadian medical consumer product company like Medonyx is hurt in attempts to be a big player in the Western world’s fastest growing industry.
    Maybe for a brief moment, Candians banks are #1. Europe has bad demographics; is immigrant averse. The US has a federally funded pyramid scheme going, maybe Canadian banks are now trying to figure out how to best position themselves to be given US taxpayer dollars just like Canadian corn farmers are already reaping free US dollars. The Japanese banking system is reformed and Asian financial institutions are still immature. So you could say Canadian banks are in a position to ascend, but so what? The “valley of death” (the lifespan of a product or business between publicly financed R+D and privately financed venture cap) is the biggest obstacle preventing a company/product from maturing. If Canadian financial institutions can use their profits to close this valley of death in some way, great. If not, what does it matter if their market caps increase ten-fold? Having assets in other currency denominations (like US subprime mortgages) doesn’t lead to ten-fold profits. It is stabilizing, but major Canadian banks are too big to fail anyway; much better for taxpayers would be for Canadian banks to increase their reserves in record profit environments.
    That leaves the oil sands and patch players. Many American but could be considered a Canadian comparative advantage. Hmm…let’s see: despite record profits they won’t fund their own CCS research, they don’t have any sunset clauses in provincial tax-breaks given at $8 a barrel so their presence is inflationary for every AB construction and trade actor (for instance, civic firehall construction and transit service, provincial hospital renovations, low income housing construction), and they fund thinktanks that encourage an anti-scientific (ie. an oil refining is a science, so are ground penetrating radar surveys) public. No, I’d much rather have Alberta the medical science powerhouse, with public fire, hospital and transit services (at least they are using oil money for education), than Alberta with an oil sand multinational, that comes begging cap in hand in a post-petroleum economy (since the oil industry doesn’t show any willingness to adapt).

    Our University research centers suck compared to the USA and Europe. But our social sciences research is world class and our public health institute has the potential to show the world how health care should be delivered (the leading cause of bankruptcy in the US is health bills). What specific companies would you like to see gain at the expense of this? I like Zenn and Medonyx, but does it really matter if the insurance, banking, telecommunications and petroleum players triple their market caps? If: the banks closed the valley of death and offered free basic bank accounts, the insurance companies offered novel human development and global warming infrastructure instruments, the petroleum players funded at least their own CCS R+D (if not diversify out of oil) and embraced carbon trading; I’d think otherwise.

  • Typo: meant to say the *large* North American auto industry is a dying. Tata motors of India has it right with their golf cart car. Japanese manufacturers use their auto robotics knowhow to make medical robotics technology. This is useful for highend surgeries and treatments but could also be used to comfort lonely seniors. It is a humiliating thing to say, but whoever designs a robot capable of f#$%ing will be the richest person on Earth.

    Both the Liberals and the Conservatives are running on a platform to lower corporate tax rates. It would only make sense to do so if Canada’s mosat profitable companies were positioned in growing global sectors. Of oil, banks, insurance, and telecoms, I think only the telecom sector is positioned for growth. Banks are near the bottom in offering green financial services (the first bank that offers discounts for green building construction or renozvation loans, will gain market share). Small businesses are a great way for individuals to adapt to globalization; cutting these tax rates to nothing is progressive.

  • What do employee ownership and hedge funds have in common?

    Triggered by Phil Huggan’s entry, I just thought I would give you link to the following:

    Employee owners in Europe and the U.S. now hold approximately 1.260 billions Euro (1.934 billion US Dollar) quite similar to the global capitalization of all hedge funds across the world in 2007 (1.160 billions Euro (1.780 billion US Dollar). Any further comparisons are a matter of opinion.

    see:
    http://www.retirementplanblog.com/cat-employee-stock-ownership-plans.html

  • I think Phillip deserves a comment being that he wrote such a lengthy comment and I must admit has some good points.

    I believe one of the many points you bring up is the technology level that seems to come along with the foreign based multinational company in the forms of technology transfers. You are right that these can provide for a comparative advantage to the foreign based multinationals. However, technology as you point out at the end of your piece does not just come from nowhere. It comes from public and private undertakings.

    But it is not just having the brick and mortar or the abilities to develop this technology. The resources for innovation have got to be guided, by both the science that is available and the intangibles within the innovative organization like (and I hate to use such ephemeral words) vision, adaptability and leadership.

    Again lets go back to Jim’s sector the auto sector. Why do you say the auto sector is dying within North America. Is it a lack of technological innovation, investment, industrial organization, and/or institutional vision, leadership and such.

    I am sure there are other dimensions I am not mentioning here, but to me the key causality in the equiation that might cause you to say that the auto sector is dying in North America, lay squarely on the shoulders of those managing the industry. No vision, no leadership, no insight, no adaptability. Everything that the management world has been spouting off about over the past 10 years or more, is everything th auto sector management is not.

    In fact they still are having their problems with vision as one of the key auto executives was caught not too long ago saying that the whole climate change phenomena, is merely an illusion and that the SUV strategy was not a mistake ( I forget who but I could look it). I mean really, just look at the demographics, China and India, have fo the last 20 years been seen as the high growth area, yet did these corporate executives instill and forward push on small sub-compact, fuel efficient cars that would seek to command a leadersip position within these markets. No!. SUV’s, mini vans and v8’s are all that seemed to come forth with any notion of successful dimensions of innovation.

    This is not even to mention the substantial lack of R&D resources put into alternative energy. The future I fundementally believe has some of the highest requirements ever for R&D. We ae no longer talking about tweaks and small improvements here, yet we still live within the innovation culture that is dominated by this thinking.

    With the education potentials of our country, and combining that with some decent commitments of R&D, why could we not have Canadian more made success stories. ou are right though we also need a large helping of change within the regulating process of innovation in this country. We need connection between all the major stakeholder that does not have the large amounts of line leakage as it does today. We need to have these parties to work together, but you need a government that feels it has a role to play in this. For those Shumpeteriens out there, I just am not a believer. The sharp edges of competitive instincts are just not reality. It eventually always settles down into some kind of sleepy cozy business monopoly capitalism, where the drive to innovate is pushed way down below the customer satisfaction objectives.

    It does take the regulation, hand holding, and seeding by government to develop these cluster nodes of innovation and striving for better ways.

    Especially in this day of low-cost international labour, we need alternative ways to compete in this world and it will be our high knowledge, highly productive work force that allows us that leg up. Unions should never try and ratchet down those labour standards,a nd I am glad that both within the auto sector and now the forestry sectors, the unions have said no to such concessions. Hopefully that no will be backed up with some new management and ideas on moving us forward with these high wage\high productivity models. If these were not foreign based multinationals that now predominate our business culture than I would say we would stand a bit more of a chance to push with a concerted action in that direction. However, the dynamics have turned quite against that of late.

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