« Transfer Dependency's New Friends | Main | Republican profs give out less egalitarian grades. So what? »

Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

I have always been suspicious of foreign control of companies here in Canada. Merely adding up the FDI numbers doesn't say much - for foreigners to own 50% of a canadian company/industry likely equals canadians owning 5% of a company/industry in the US. And it does have an impact.

As a kid, I wanted to be a car designer - but despite the high level of auto production in Ontario, there were no jobs, or schools for that matter - it was all done elsewhere and we just do the bolting and welding.

Dani Rodrik (Globalisation Paradox), Ha Joon Chang (23 things) and others grasp the fact that who owns or controlsd an industry does matter to the development and prosperity of a country. Just look at Stelco.

It is the first line in this post that bothers me - that Canada has always bveen a debtor nation? Why is that so, that a country with such a high standard of living and abundant resources isn't able or willing to save some of its income - and given all of the hype about how we need high immigration because of an aging population, the other way a country prepares for having to support a large number of retirees is to save and invest money now, and then in future it can run a trade deficit and finance it by selling off foreign assets.

This has been the problem with this country, an open door to investment means that we have ended up buying foreign consumer goods, and what we have essentially trade din return is ownership of our resources and means of production (funny, perople forget that comparative advantage is based on the assumtpion of no flows of capital). When we run a trade surplus, we don't benefit because in turn the surplus is needed to finance the flows of dividends and interest payments out of the country.

I have never understood why this country is so gung-ho for yet more foreign investment - its as if people thinkt hat this is free money, like foreign aid, that will create jobs and yet there are no consequencens or costs - that ultimately the income flows out of the country instead of the profits staying here and making us richer. Japan and South Korea understood this 50 years ago, our colonial mindset has been such that we have no problem with it.

"As a kid, I wanted to be a car designer - but despite the high level of auto production in Ontario, there were no jobs, or schools for that matter - it was all done elsewhere and we just do the bolting and welding.
"

Right, and if there was no FDI in Canada -- e.g. foreign plants moving to Canada to create those bolting and welding jobs, then you would be better off? It sounds to me like you are complaining about insufficient FDI, rather than too much.

Stephen - excellent post.

I was employed for 5 years by an American financial services multinational (all employees were Cdn in the Canadian sub) and then by a large Canadian bank competing often for same or similar customers with the American firm. I am mystified by opposition to FDI, as Cdns do not manage differently in a US owned firm operating in Canada than in a Cdn owned firm competing in the same industry in canada.

Indeed, foreign owned firms are driven by the same logic of the market as are Cdn owned firms.

I recall it is the Centre for Living Standards and Productivity that provided the empirics that showed that foreign owned firms have higher levels of investment in machinery and equipment and have higher levels of productivity in Canada.

What is wrong with that?

I agree with pretty much all of this.

Fixed income holders aren't entirely passive. New issues are secured by bond covenants that stipulate various terms and conditions to which the issuer must abide by on pain of default.

The problem that people have with FDI isn't one of economics, its politics. Most people have a difficult time understanding that it's not the FDI that is destructive, its the low corporate tax, hands off approach to companies in attempt to score political points game that leaves us vulnerable.

We need to force companies to invest in research and development, environmentally efficient processes, green technologies (or whatever)through regulation. Then we subsidize growth in those "whatever" industries through education or other programs... Isn't that how we've been succesful historically?

People like btg then would have an opportunity to go to school for car design (which I think is offered in most canadian universities) and apply to the research arm of a company, or have government support to start his own.

If companies won't comply with regulation (most companies talk tough, consult lawyers, make threats to leave and then comply) then we tax them and use the proceeds to do it ourselves.

My problem is that the government has been slow to adjust to our "new economy" of mobile capital and most people haven't been educated on how to profit from the transition.

Its first frustration of losing a job or not being able to find a job, then ignorance, that leads to the anti FDI argument. Its the governments job to educate its people, but it seems that "they" are deliberately not doing so. Where does the buck stop?

Rick B: "We need to force companies to invest in research and development, environmentally efficient processes, green technologies (or whatever)through regulation. Then we subsidize growth in those "whatever" industries through education or other programs... Isn't that how we've been succesful historically?"

In a word, no. In fact, I doubt you can name many examples of "forcing" companies to invest in research and development and green technologies which have been growth enhancing (certainly I can think of a number of examples to the contrary - for example Canada's R&D subsidy program is generally regarded as one of the more liberal R&D subsidy programs, it's also generally regarded as not doing a heck of a lot other than make accounting firms and tax "consultants" rich). Generally, profit-oriented companies don't have to be "forced" to make good investments.

BTG: "Merely adding up the FDI numbers doesn't say much - for foreigners to own 50% of a canadian company/industry likely equals canadians owning 5% of a company/industry in the US."

Which would be a great point, except that owning 5% of a foreign company wouldn't be FDI. According to Statistics Canada:

"Direct investment is a component of the international investment position that refers to investment of a resident entity in one country obtaining a lasting interest in an enterprise resident in another country. The lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise, as well as a significant degree of influence by the investor on the management of the enterprise.

In practice, direct investment is deemed to occur when a company owns at least 10% of the voting equity in a foreign enterprise."

Generally, if you hold less than 10% of a company, that's considered to be a portfolio investment. And these are individual numbers, so if you and I each own 5% of a company (so that Canadians own 10% of the company), our investments aren't FDI, if I own 10% of a company, it is. Inherent in the definition of a FDI is that the investment is sufficiently large to influence the management of a company (and, in practice, a 10% block of a public company is an enormous block). Stephen's point is that Canadians have, in dollar terms, more significant interests in foreign companies than foreigners have in our companies.

As for the claim that there are not automotive design schools in Ontario, I beg to differ. UOIT recently opened up a new Automotive Centre of Excellence, which is one of a number of similar programs established at universities accross Canada. I suppose it would be overkill to point out that these programs where largely funded by GM Canada - a wholly owned subsidiary of a US corporation.

Also, I'm curious as to why you cite Japan and Korea as examples of coutries that "understand this" and are richer than us since, measured in real terms, both Japan and Korea are significantly poorer than Canada is (see a summary of the IMF, World Bank and CIA estiamtes of real per capita GDP at http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)_per_capita). Given that Japan's growth has stagnated for two decades and that Japan's public finances have more than a passing ressemblance to those of Greece (though, happily for the Japanese, their debts are in Yen), I'm at a loss for why you would hold them up as an example to be emulated.

At the end of the day, anti-FDI thought is as often as not a combination of ignorance, protectionism, xenophobia, and knee-jerk anti-capitalism rather than a coherent criticism of FDI.

"I found this article useful in a paper I am writing at university. Hopefully, I get an A+ now!"

Make sure you cite it properly. If your professor isn't a contributor to this blog, he or she might be reader!

FDI is a prime example of Easterbrook's Law: "All economic news is bad."

When we have foreign FDI in Canada, Canada is being hollowed out by foreign corporations.

When we have Canadian FDI abroad, it's evil Canadian corporations moving jobs overseas.

I am trying to square the comments by Bank of Canada governor Mark Carney, meting a tongue-lashing on the business sector for not increasing its foreign exposure, then we see that outbound investment is higher than inbound investment. So what's the problem?

Interesting analysis.

Bob,

I'm confused as your one word, no response to our history of economic growth... Companies don't directly fund public education, it's not in their interest;though it is in the interest of Canada as a whole. We do tax corporations, and in fact give them charitable tax credits for every dollar donated to education related things. We use the proceeds to fund our schools and teach our students the basics of "whatever" industry we have, updating the curriculum when necessary, so that everyone, as in all of Canada benefits.

It's selective anti government rhetoric to say that forcing companies (if you don't like forcing you could substitute "using tax policy to transfer money from the private to the public sector") to invest is never beneficial. I agree that you can't force a company directly, taxation is a way to force indirect investment. And right now with high unemployment, especially for youth it's probably a smart idea (unless someone has a better one????).

And further, how can you argue that the government hasn't done a poor job transitioning a workforce (attitude, skills, education etc.) to this "new" economy? What is their to do except force investment in the future?

this is somewhat on point http://www.tvo.org/TVO/WebObjects/TVO.woa?videoid%3F24658105001 - from 2008.

RSJ - Sweden, with a polulation smaller than Ontario, had Saab and Volvo - South Korea had Hyundai, Daewoo and Kia, Japan numerous companies etc. - all without any foreign investment.

Canada had companies, yet always allowed foreign investment, which pushed out Canadian companies in their infancy - or else they hooked up with biger uS companies to access their technology - but that was true of other countries mentioned above that often bought engines or tooling from others. Mclaughlin is the best known canadian company in this respect. There is a book somewhere that identified over 1000 car companies since 1900.

Another example is to compare france versus britain - france had little foreign investment in autos, yet had renault, peugeot and citroen - renault now owns nissan. the british auto industry is dead, other than branch plants or a few cottage industry companies.

if beoing or airbus wanted to open a factory here to make wings or other parts, i would generally say it was a good thing - these are industries which are mature and consolidated, and where there will never be a canadian company, unless bombardier were gor eventually grow big enough to compete with them.

in fact, bombardier is a good example. diefenbaker killed the avro arrow, and other than making a few bush planes, canada's aircraft industry essentially died. liberal governments under pearson and trudeau tried to rebuild the industry - unfortunately it was very exepensive. mulroney sold it off to beoing, who then sold it off to bombardier.

if nothing else, infant industries need help and protection. there is also clustering - if you lose and industry in a city, or a country, it becomes hard to compete... krugman's early work i found interesting in explaining numerous things about canada versus US, and southern ontario.

books that i found of interest on this include "not for export" by glen williams, and "open for business" by gordon laxer (brother of james laxer) - the problem with this country has been that our policy was to be an exporter of commodities, with a limited protected market for manufacted goods (other than exports to the commonwealth) when korea, for example, did the opposite - emphasizing manufacturing and using domination of their home market in manufactured goods as being the first step towards reliance on export - see ha joon chang's "kicking away the ladder" or "bad samaritans"

Btg, you are saying that the foreign investment crowds out domestic investment. I have a hard time believing this.

I certainly believe in oligopolies and increasing returns, etc. In those cases, foreign *trade* can drive out domestic industries. But not foreign investment.

rsj - i am not quite sure what you mean by crowding out - foreign investment might lead to creative destruction, where the destruction is all the domestic investment that is then worthless.

traditionally, canada's capital markets were very weak - the tsx was mainly mining stocks, utilities and banks - we lacked, and still lack, venture capitalists. most of our investment went into infrastructure, and people invested heavily in saving bonds rather than equities.

capitalism without captialists - or at least, domestic capitalists. albertans complain that US investment - imperial oil etc., was needed to get the oilpatch going in the 40s - for example. and i can understand that a wilderness, as much of this country was, needs capital to get developed, and we lacked it, much as underdeveloped countries in africa today might lack capital to get resource exploration underway. but we never really made the transition to being a fully industrialised country (granted, the US was also a major exporter of oil and commodities, like cotton, well into the 20th century).

this country was infrastructure mad - we had 3 national railways 100 years ago, and before that, we went nuts investing in canals - and our great hope for many years was to build the st. lawrence seaway, or in quebec, james bay (and then the power is sold at low rates to aluminium smelters to create dead-end jobs). that is where our capital went - megaprojects, not knowledge based industries.

most other countries don't want too much foreign ownership - due to national pride.

ontario, and john a macdonald, got a lot of flack from westerners for the "national policy" that was protectionist and had high tariffs - but the reality was that the US had high tariffs against imports from britain, and form us (plus, before income tax and the gst, tariffs were an easy source of revenues for any federal government) - our response was to "reciprocate" by having high tariffs against the US, but an open door policy on investment, except in a few sectors like banking. the americans were happy to invest here because they got access to the commonwealth and british markets.

granted, we were in a poor position to compete - the greater wealth and economies of scale in the US meant that their companies were inevitably ahead of our when it came to developing cars andother technologies - so canadian companies inevitably licensed technolgy from elsewhere, but the licenses were only for canada and never allowed us to compete against the companies/countries we licensed the techology from. plus, our currency/wages were always high by world standards because of resource exports, unlike post war korea or japan.

contrast this with china - GM and other companies investing there always had to have a chinese partner, and often the partner had to have over 50% control, and the system was designed to transfer technology and business experience to the chinese. the book "the end of the free market" by ian bremer goes into some of how china has developed by not taking a laissez faire approach.

so "crowding out?" - it is never that simple - perhaps the surfeit of foreign capital meant that returns were too low for the risks involved for canadians to invest in anything other than resource stocks (and the tsx was pretty shady until the 1960s, with lots of scams mining stocks) - unlike china, where savings rates are high, maybe we consumed imports, even with the high tariffs, instead of investing in industries - it could be like the guy on the street with the lowest income trying to live the richer lifestyle of his neighbours.

We have stopped producing things in Canada. Our balance of trade has turned negative. We are shifting from (completing the shift from) manufacturing and resources to service, financials and resources. This is not a new development.

Economics says that this is good, freer trade, comparative advantage, everybody wins.

This is true on the country scale: Canada in aggregate is better off. But the problem is that this transition has cost us many jobs.

Labor is not as mobile as capital and we don't have the open borders necessary for our "low skilled" workers to move to a place where jobs exist and their skills are valued.

If these jobless people had an opportunity to invest in "emerging markets" and capitalize on their accumulated wealth (skills and savings) there would be no issue. Except that they can't. The capital they have, namely labor, is immobile and they don't have the subsidized access to credit that "capitalists" have in order to invest on the scale to see any returns.

The benefit of this new trade relationship that Canada has with the world, and then some, is collected as rent from large corporations, banks and individuals with significant private wealth.
The "and then some" comes from leveraging this new relationship to manipulate public perception and allow for a government sponsored wealth transfer from laborers to capitalists in the form of tax cuts, reductions in services, wages and benefits. There is a monopoly on trade in this country sustained by credit barriers and asymmetrical information. The government is facilitating it.

We still have a high school curriculum that is catered to manufacturing for goodness sake! We wonder why we have a high youth unemployment rate and and oversupply of available labor putting downward pressure on wages. How does this happen?

The problem doesn't lie in the balance of payments, trade or FDI in any general sense. But there is a problem and it needs to be fixed sooner than later.

The comments to this entry are closed.

Search this site

  • Google

    WWW
    worthwhile.typepad.com
Blog powered by Typepad