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.