Business

The Fear of Losing Control

A ‘moderate economic nationalism’ rises in, of all places, the business community

Mary Janigan July 1 2000
Business

The Fear of Losing Control

A ‘moderate economic nationalism’ rises in, of all places, the business community

Mary Janigan July 1 2000
Is Canada for sale? If it is, is that good or bad? What should Ottawa do? Donald Macdonald should know the answers. It all seemed so easy in 1973 when, as a Liberal cabinet minister, he supported the creation of the Foreign Investment Review Agency to screen acquisitions. But five years later, practicing law in Toronto, Macdonald noticed that FIRA was inadvertently allowing a handful of large Canadian purchasers to snap up companies—and concentrate their power. So when the Conservatives abolished FIRA in 1983, Macdonald was silent. “I would have raised hell except I knew there were distortions and 1 had nothing better to suggest,” he says. “Foreign investment remains a concern: the number of Canadian-headed enterprises is diminishing. I am worried. But I don’t know what to do.”

Across the nation, as foreign investment edges rapidly upward, members of the business community are raising an uneasy alarm. Steady increases in foreign ownership are a worldwide phenomenon as firms and their markets spill across borders, bringing capital that can stimulate growth. But there is an uncomfortable sense that foreign firms are gobbling up too many pivotal Canadian operations because the low value of the Canadian dollar gives them bargain basement prices. As a consequence, head offices—with all of their crucial personnel—are moving elsewhere. And key industrial decisions are being made without consideration for the national interest. “We need a moderate economic nationalism of the center-right,” concludes corporate director William Dimma, who has watched one of his two daughters move to New York City for career reasons while the other considers U.S. offers. “People have to let it seep into their consciousness: this matters.”

Last week’s sale of Seagram Co. Ltd. was emblematic of the situation—even though Seagram effectively left years ago. Its Montreal headquarters only contains about 60 people, while its real operations are run from New York. Now, the company itself has been sold to French firm Vivendi SA—and any semblance of Canadian control has gone with it (page 64). Other Canadian icons have similarly disappeared. Last year, Weyerhaeuser Co. of Federal Way, Wash., completed its takeover of B.C. forestry giant MacMillan Bloedel Ltd. When Eaton’s died, its key properties were snapped up by U.S.-controlled Sears Canada Inc. Increasingly, too, many companies are as binational in operations as they are in ownership. John Roth, CEO of Brampton, Ont.-based Nortel Networks Corp., receives 92 per cent of his revenues from abroad and keeps his accounts in U.S. dollars; analysts have speculated that the company may eventually move south.

There is little agreement in official circles on how to respond—not least because foreign investment is usually a good thing: it expands enterprises, creates jobs, stimulates markets. Few want to return to the days when FIRA could flatly disallow any foreign investment—especially since Canada’s annual foreign investment abroad exceeds foreigners’ investments at home. Such measures would also violate Canada’s obligation under the North American Free Trade Agreement to treat foreign and domestic investors in the same way.

But many argue that Canada has become the hapless nice guy in a tough-guy world. To protect its national interest, the United States has effectively stalled the merger of Canadian National Railway Co. with Burlington Northern Santa Fe Corp. while it examines the public interest implications of the deal. Hugh Segal, president of the Montreal-based Institute for Research on Public Policy and a former Conservative leadership candidate, says Canada did not give up its right to screen takeovers for their competitive implications when it signed NAFTA. “Nobody assumed that governments would roll over and fail to defend the legitimate Canadian interest— but they have,” he says. “And that kind of passivity is really more problematic than who may or may not own 51 per cent of a company that is regulated by Canadians, based on resources in Canada and largely tied to Canadian marketplace realities.”

The issue abounds with ironies. Four decades ago, as foreign investment poured into Canada, left-wing nationalists led the populist protest against Canada’s course. Most members of the business community remained aloof—or were opposed to government intervention. Today, to their discomfiture, it is members of the business community that are leading the debate about the encroachment of foreign firms.

The very scope of the debate has also changed. Then, the controversy centered on the presence of huge multinational corporations, usually U.S.-based. Today, to their chagrin, Canadian business executives know that they have become an integral part of the problem: key operations of many domestic firms are moving into larger markets, especially in the United States. Technically, the head office often remains in Canada, as with Seagram. But the pivotal decisions and the plum jobs are inexorably shifting elsewhere. Last fall, Canadian-owned Nova Chemicals Corp., which can trace its history in Alberta back to the mid-1950s, switched its entire senior executive team to Pittsburgh—although the head office officially remained in Calgary. Former Alberta premier Peter Lougheed says his province should have done everything in its power to prevent the management shift. “I would have been very strong in resisting such a move,” he told Maclean’s. “I was distressed because the resource they use belongs to the people of Alberta.”

The outflow of highly skilled workers alone is deeply worrisome. In a recent study for the C. D. Howe Institute, Daniel Schwanen compared the U.S. share of non-production jobs in high-tech manufacturing with the Canadian share. To his distress, he discovered that firms are integrating their operations vertically across the border: higher-skilled, typically higher-paying jobs such as research and management are gravitating south—while Canadians are being relegated to the production work. “Cross-border investment is booming,” says Schwanen, now senior economist at Segal’s IRPP “But the real story is how firms locate different activities in different countries.”

The only certainty is that the relative size of foreign direct investment—that is, investment that secures a significant voice in the management of the enterprise—is once more increasing after decades of decline. In the early 1960s, as economic nationalism flourished, such investment hit a whopping 34.9 per cent of the size of the entire Canadian economy. That figure has not been equaled. It bottomed out at 18.6 per cent in 1985—the year FIRA was changed into Investment Canada, an agency largely designed to attract and expedite foreign investment. Such investment has been steadily increasing since then, especially after the signing of NAFTA with the United States and Mexico in 1995.

Last year, foreign direct investment was 25.1 per cent of the size of Canada’s gross domestic product—a startling 9.5-percent increase from the previous year. The U.S. share of that total was 72 per cent—up from 64 per cent in 1993. The influence of foreign-owned firms within Canada is also growing. Last month, Statistics Canada reported that, between 1988 and 1997, foreign-owned firms increased their share of corporate assets and revenues in most major industries. The agency attributed part of that growth to the fact that foreign-controlled firms are larger and more likely to export.

The situation distresses Bob Blair, who was Nova Corp. of Alberta CEO from 1970 to 1991. “In the early 1950s, to a very considerable extent, we had a system of foreign branch offices,” he says. “I saw how weakening that is to a society. We began to build a strong Canadian presence—and now I see the whole thing coming apart.”

But the flow of investment funds across borders does go in two directions: Canadians’ direct investment abroad is also expanding—although at a slower pace. In 1999, it increased by 4.5 per cent to 26.9 per cent of the size of the economy. Canadians are setting up subsidiaries, associates and branches on other peoples turf. By the end of last year, slightly more than half of that investment was in the United States.

The pull seems irresistible. Six years ago, Manulife Financial established a national office in Boston to run its thriving U.S. insurance operations. Now, there are 600 people in that office— including 30 Canadians in key posts—and other executives keep clamoring for transfers from the Toronto-based headquarters. “There is an incredible momentum building up among people wanting to work in the United States,” says CEO Dominic D’Alessandro. “The reason is largely because there is a huge gap between what people earn on an after-tax basis.”

A self-described “soft nationalist,” D’Alessandro is alarmed at the exodus. This spring, he startled his annual meeting with an impassioned warning about the pace of foreign takeovers. Manulife now receives about 70 per cent of its revenues from abroad, including 50 per cent from the United States. But D’Alessandro wants to keep the head office in Toronto. I don’t see borders as an irrelevancy,” he says. “But governments must recognize that companies do have options these days.

There are issues that Ottawa can address. The loss of Canadian ownership and head offices may be exacerbated by everything from higher taxes to restricted opportunities for growth. Canadian pension funds, for instance, can put only 25 per cent of their assets into foreign firms. As a result, to get higher returns from ailing firms, they put pressure on Canadian managers to sell out to the highest bidder—often foreign. The growth of Canadian investment abroad may be slowing because the low dollar is hindering Canadian firms in their quest for U.S. acquisitions.

So what is the prescription? Royal Bank of Canada chief economist John McCallum has concluded that fully one-third of the dollar’s decline against the U.S. currency is due to high levels of public debt: financial markets frown on the fact that Canada is diverting enormous resources from productive investments like health care into interest payments. On the other hand, the 150-member Business Council on National Issues argues that Ottawa must concentrate on providing a supportive tax environment. “We are not going to be able to stop the exodus of head offices,” says president Thomas d’Aquino, “unless we bring taxes down more quickly.”

Others are calling for a more activist federal role. Toronto economics professor Mel Watkins, whose research helped to spark the creation of FIRA, argues that Ottawa should differentiate between companies that have head offices in Canada, and companies that do not, when it delivers industrial assistance. “If that gets us into trouble with our free-trade agreements, let’s be tough,” he says. “Our problem is we use those agreements to prevent ourselves from doing things.”

As the business community grapples with the problem, it must confront a final irony: most Canadians now expect benefits from globalization. In a survey of 1,600 respondents conducted last February, pollster Pollara Inc. asked how globalization had affected them: 52 per cent saw no effect, 29 per cent said that it had helped—and only 15 per cent said that it had hurt. Pollara then asked how globalization would affect the next generation: a whopping 58 per cent said it would help and only 22 per cent said it would hurt. “Right now, Canadians see foreign ownership as good business,” says Pollara chairman Michael Marzolini. In effect, ever so hesitantly, the corporate community is becoming the lone convert to the nationalist cause.