Surprise! Foreign ownership is a good thing

Or at least, not as bad as we once feared.

Foreign ownership has been a hot-button issue in Canada since, well, forever. In itself, foreign investment is a Good Thing of course, since it increases the demand for Canadian labour. But it is possible to imagine having too much of a good thing: foreign firms control more than half of the manufacturing plants in Canada. The political implications are obvious, and they've been making themselves felt with varying degrees of intensity ever since the Pearson governments of the 1960s. (American readers who are of the opinion that unending current account deficits are of no concern might want to consider the political implications of a comparable level of foreign control in the US.)

Before FTA and NAFTA, the standard model was the 'branch plant': a US-owned shop set up behind the tariff wall to serve the Canadian market. Although production took place here, everything else - R&D, design, marketing, etc - was done at the multinational's head office. If technical progress is the key to economic growth, it would be worrisome to see it mainly occurring outside Canada.

One of the consequences of FTA/NAFTA was the demise of the branch plant: a welcome development. But - somewhat surprisingly - foreign ownership of manufacturing plants has remained pretty stable. What are the implications for productivity?

A recent StatsCan study suggests that the news is surprisingly good (pdf file here).

Firstly,

The paper finds that foreign-controlled plants are more productive than domestic-controlled plants. Foreign-controlled plants and firms are also more innovative, more R&D intensive and use more advanced technologies.

But it's not the fact that those firms are foreign-owned that's important; it's that they're oriented towards international markets. Canadian-based multinationals do at least as well:

The paper finds that there is not much difference between foreign-controlled plants and domestic-controlled plants whose parent has an international orientation. For R&D and innovation, the results indicate that domestic producers with foreign operations ... actually have a slightly better performance.

The paper goes on to make other observations, but these seem to be the main ones to take home. The 'hub-and-spoke' multinational model - in which only certain production activities take place outside corporate headquarters - seems to have been abandoned for that in which tasks are allocated according to comparative advantages. Canada doesn't have to be the headquarters of a multinational in order to be the place where R&D happens; it just has to be a place where it's profitable to do R&D.

Comments

[Mandos]

But, uh, what about economic democracy? One of the major complaints about multinationals is that it's more difficult to tell them what to do, and it's easy to scare them off.

[Stephen Gordon]

What about it? Democracy - rather, whichever of the myriad of 'democratic' decision rules is used by a specific group to settle certain issues - is used to decide questions that are in the public domain. Savings and investment decisions are, for the most part, private.

[Mandos]

"What about it? Democracy - rather, whichever of the myriad of 'democratic' decision rules is used by a specific group to settle certain issues - is used to decide questions that are in the public domain. Savings and investment decisions are, for the most part, private."

Except the effects and nature of the interests and ownership of capital are, of course, VERY MUCH NOT PRIVATE.