Introduction to the impact of the multinational
Introduction to the impact of the multinational
Prime Minister Brian Mulroney was elected in late 1984 and soon thereafter replaced the agency formed by the eleven-year-old Foreign Investment Review Act (FIRA) with a new agency called Investment Canada. Whereas the FIRA's purpose had been to limit foreign control of the Canadian economy, Investment Canada's intent is to persuade foreign firms to invest in Canada. Investment Canada reduced substantially the number of investment applications that are subject to scrutiny: Under it, direct takeovers of Canadian firms with assets of less than C$5 million and indirect takeovers of less than C$50 million need not be examined. The old review board criterion that an investment be of "significant benefit" to Canada has been replaced with a loosely denned "net benefit" to Canada.
The birth of Investment Canada did not mark the first time Canada had changed its stance toward foreign investors. In 1972, after decades of luring foreign capital to Canada, it was estimated that of the $58 billion of total corporate assets in Canada, $43 billion, or 74 percent, were foreign-owned. No other advanced economy was so dominated by foreign ownership; such a degree of foreign control was unusual even among developing countries. The U.S. ownership was $35 billion, or about 60 percent, of the total corporate assets in Canada. (Map 12.1 shows a map of Canada.)
The evolving public opinion at that time was that foreign ownership should be restricted. This does not mean that Canada had heretofore allowed unrestricted entry of foreign firms. There were already limitations on foreign ownership in certain industries considered to be particularly sensitive to national sovereignty, including banks and other financial institutions, newspapers and magazines, broadcasting, and the uranium industry. Given these existing restrictions, what difference did it make that other firms were controlled outside of Canada? Would operations or decisions be any different than if the ownership were held by Canadians? Obviously, many Canadians thought they would be.
lOne such allegation concerned the level of positions
and type of production taking place in Canada. The Science Council, a governmental advisory board, contended IN that even in high-technology industries, very little re-
search and development was being performed by the Ca-CANADA1 nadian subsidiaries of foreign firms. Furthermore, very
little of the production of newer sophisticated products was being done in Canada. Canadian subsidiaries depended primarily on manufacture of mature products and components. These generally had a lower profit margin and employed a higher portion of lower-skilled people than the more innovative output taking place in the MNEs' home countries. Furthermore, since the corporate headquarters of the MNEs were located abroad, Canadians in the subsidiary operations could aspire to upper-level management positions only by leaving Canada. Given the high educational level of the Canadian population and the
shrinking opportunities for advancement in Canada, there was a net flow abroad of technical and managerial persons with high skills—a so-called brain drain. Many of these workers joined the parent companies' operations, meaning that Canada then had to import the costly technical advancements that its own citizens helped to develop abroad. Many Canadians thus expected that greater Canadian control would bring increased opportunity in Canada for using their skills and would make the country less dependent on foreign technology.
There also was widespread agreement among critics of foreign ownership that in conflict situations the investors would do what was best for the home, rather than the Canadian, situation. Many observers believed that, if given a choice of exporting from Canada or the parent country, the MNEs would choose the latter. Critics were particularly upset that the U.S. government had prevented the Canadian subsidiaries of U.S. firms from exporting to China during the period before the United States opened trading relations
with that country. These export limitations contributed to a drain on Canadian foreign exchange, which proved substantial because of dividend remittances to parents that exceeded the flow of foreign exchange into Canada.
Because of these contentions about foreign investment, the FIRA was passed in late 1973. It provided that any foreign takeover of an existing company would have to be screened by the Foreign Investment Review Agency, which would recommend to Parliament whether or not the investment was of "significant benefit" to Canada. The procedure applied to Canadian companies with assets of at least C$250,000 or annual sales exceeding C$3 million. A takeover would involve acquisition of 5 percent or more of the Canadian company. By the end of 1974 the law was extended to cover new investments and expansion of foreign-controlled companies into new areas of business.
The term significant benefit was never defined specifically: Some of the factors that were considered were the effects on employment, exports, competition, productivity, and industrial efficiency. Approval also depended on the degree of Canadian participation in a venture, although no quota of Canadian representation in the management of a company was spelled out. After Pierre Trudeau's election as Prime Minister in 1980, a ten-year National Energy Program was announced to reduce foreign ownership in the energy industry to 50 percent. This program led to the "benefit" of an 8 percent drop in foreign control of oil and gas but sparked a two-year outflow of direct and portfolio investment as many foreign investors feared a political environment that would not allow them to operate profitably. This in turn led to downward pressure on the Canadian dollar and upward pressure on Canadian interest rates.
The simultaneous occurrence of costs and benefits is one explanation for the historic disagreement within Canada on the question of foreign investment. Some critics have claimed that restrictions have not been sufficient; others have felt that controls should be eased on the foreign ownership of Canadian enterprises. Even when FIRA was passed, Premier Gerald Regan of Nova Scotia said, "We want all the foreign investment we can get." At the time, 10 percent of Nova Scotians were out of work.
While FIRA was operating, some people favored greater control, contending that FIRA had a positive impact but did not go far enough. These critics showed that although foreign firms increased their research and development (R&D) in Canada, the amount they undertook has been less than their share of the economy. The percent of GNP spent on R&D in Canada is still small in comparison with the percentage in some other industrial countries (e.g., about 60% of that in Switzerland). Critics feel that Canadian control will produce increases in R&D. They point to the Canadian takeover of de Havilland from Britain's Hawker Siddeley Group in 1974 and of Cana-dair from General Dynamics of the United States in 1976. With Canadian
ownership and management these firms have greatly increased R&D, developed new products, increased employment, and are competing internationally. Observers believe that Canadian takeovers of other industries will lead to similar growth in Canada's technical capabilities.
Those who wanted fewer controls questioned whether Canada could fulfill its technological and capital needs if controls resulted in a lowering of direct investment flows into Canada. First, they questioned whether indigenously controlled firms would undertake in Canada the kind of R&D that foreign firms were criticized for not undertaking. These analysts have cited the fact that Northern Telecom, Canada's telecommunications giant, itself maintains an R&D facility with 500 people in the United States. Second, they have shown that technology flows more quickly, more cheaply, and with fewer restrictions between a parent and a subsidiary than by license among independent companies. In terms of restrictions, for instance, there is a high incidence of limiting output only for sale in Canada under the licensing arrangements. Among controlled operations, however, a number of investors have transferred technology so that Canada serves as the production base for worldwide sales (e.g., Westinghouse, steam turbines; Motorola, mobile radios; Honeywell, hydronic valves). In terms of capital, they pointed to a Royal Bank of Canada estimate that by the year 2000, Canada will need $1.4 trillion for energy investment alone, of which $300 billion will have to come from foreign sources. The capital-need argument became particularly pervasive as unemployment remained high during the recession in the early 1980s.
Because of these arguments Investment Canada replaced the FIRA. But how liberal has Canada become toward foreign investors? There is no definitive answer. On the one hand, Canada has permitted some very large foreign takeovers, such as the purchase of 51 percent of Hiram Walker by Britain's Allied-Lyons. On the other hand, Canadians remain worried about foreign domination, especially from the United States. Four of Canada's ten largest companies are U.S. direct investments, and in 1990 the United States illegalized the sale of goods by subsidiaries of U.S. firms to Cuba. Canadians are particularly concerned about protecting their culture, since a high percentage of English-language television and movies viewed by Canadians are from the United States. This has led the president of Investment Canada, Mr. Paul Labbd, to say, "More non-Canadian control in cultural industries is not welcome." Foreigners continue to control Canadian investments that account for about 40 percent of Canadian manufacturing employment. Recently, Canadians have questioned the value of the influx of Japanese investments, especially since the provinces have competed with incentives to attract that investment.
The ambivalence toward foreign direct investment has been further enhanced by the US-Canada Free Trade Agreement. Many Canadians fear that Canadian-controlled firms and Canadian-based production will be at a further competitive disadvantage. A particular worry is that both Canadian and non-Canadian controlled firms will choose to locate more of their production within the United States in order to avoid paying the higher Canadian social benefit taxes.
In Canada as well as in other countries, the rapid growth of international companies has been controversial. In fact, there are powerful pressure groups in both home and host countries that have pushed their governments to implement policies restricting the movement of multinational firms. These critics are sure to play an even greater role in the future expansion of world business. This chapter examines the major contentions regarding the practices of MNEs and the main evidence supporting or refuting the contentions.
The primary criticism is that multinational firms are inadequately concerned about national societal interests because of their global bases of operations. Furthermore, the sheer size of many MNEs concerns the countries with which they come in contact. For example, the sales of General Motors, Exxon, and Mitsubishi exceed the GNP of such medium-sized economies as Argentina, Indonesia, Poland, and South Africa.2 Large MNEs such as these have considerable power in negotiating business arrangements with nation-states that may be of greater consequence than many treaties among countries. In fact, the executives of MNEs frequently deal directly with heads of state when negotiating the terms by which they may operate.
Prime Minister Brian Mulroney was elected in late 1984 and soon thereafter replaced the agency formed by the eleven-year-old Foreign Investment Review Act (FIRA) with a new agency called Investment Canada. Whereas the FIRA's purpose had been to limit foreign control of the Canadian economy, Investment Canada's intent is to persuade foreign firms to invest in Canada. Investment Canada reduced substantially the number of investment applications that are subject to scrutiny: Under it, direct takeovers of Canadian firms with assets of less than C$5 million and indirect takeovers of less than C$50 million need not be examined. The old review board criterion that an investment be of "significant benefit" to Canada has been replaced with a loosely denned "net benefit" to Canada.
The birth of Investment Canada did not mark the first time Canada had changed its stance toward foreign investors. In 1972, after decades of luring foreign capital to Canada, it was estimated that of the $58 billion of total corporate assets in Canada, $43 billion, or 74 percent, were foreign-owned. No other advanced economy was so dominated by foreign ownership; such a degree of foreign control was unusual even among developing countries. The U.S. ownership was $35 billion, or about 60 percent, of the total corporate assets in Canada. (Map 12.1 shows a map of Canada.)
The evolving public opinion at that time was that foreign ownership should be restricted. This does not mean that Canada had heretofore allowed unrestricted entry of foreign firms. There were already limitations on foreign ownership in certain industries considered to be particularly sensitive to national sovereignty, including banks and other financial institutions, newspapers and magazines, broadcasting, and the uranium industry. Given these existing restrictions, what difference did it make that other firms were controlled outside of Canada? Would operations or decisions be any different than if the ownership were held by Canadians? Obviously, many Canadians thought they would be.
lOne such allegation concerned the level of positions
and type of production taking place in Canada. The Science Council, a governmental advisory board, contended IN that even in high-technology industries, very little re-
search and development was being performed by the Ca-CANADA1 nadian subsidiaries of foreign firms. Furthermore, very
little of the production of newer sophisticated products was being done in Canada. Canadian subsidiaries depended primarily on manufacture of mature products and components. These generally had a lower profit margin and employed a higher portion of lower-skilled people than the more innovative output taking place in the MNEs' home countries. Furthermore, since the corporate headquarters of the MNEs were located abroad, Canadians in the subsidiary operations could aspire to upper-level management positions only by leaving Canada. Given the high educational level of the Canadian population and the
shrinking opportunities for advancement in Canada, there was a net flow abroad of technical and managerial persons with high skills—a so-called brain drain. Many of these workers joined the parent companies' operations, meaning that Canada then had to import the costly technical advancements that its own citizens helped to develop abroad. Many Canadians thus expected that greater Canadian control would bring increased opportunity in Canada for using their skills and would make the country less dependent on foreign technology.
There also was widespread agreement among critics of foreign ownership that in conflict situations the investors would do what was best for the home, rather than the Canadian, situation. Many observers believed that, if given a choice of exporting from Canada or the parent country, the MNEs would choose the latter. Critics were particularly upset that the U.S. government had prevented the Canadian subsidiaries of U.S. firms from exporting to China during the period before the United States opened trading relations
with that country. These export limitations contributed to a drain on Canadian foreign exchange, which proved substantial because of dividend remittances to parents that exceeded the flow of foreign exchange into Canada.
Because of these contentions about foreign investment, the FIRA was passed in late 1973. It provided that any foreign takeover of an existing company would have to be screened by the Foreign Investment Review Agency, which would recommend to Parliament whether or not the investment was of "significant benefit" to Canada. The procedure applied to Canadian companies with assets of at least C$250,000 or annual sales exceeding C$3 million. A takeover would involve acquisition of 5 percent or more of the Canadian company. By the end of 1974 the law was extended to cover new investments and expansion of foreign-controlled companies into new areas of business.
The term significant benefit was never defined specifically: Some of the factors that were considered were the effects on employment, exports, competition, productivity, and industrial efficiency. Approval also depended on the degree of Canadian participation in a venture, although no quota of Canadian representation in the management of a company was spelled out. After Pierre Trudeau's election as Prime Minister in 1980, a ten-year National Energy Program was announced to reduce foreign ownership in the energy industry to 50 percent. This program led to the "benefit" of an 8 percent drop in foreign control of oil and gas but sparked a two-year outflow of direct and portfolio investment as many foreign investors feared a political environment that would not allow them to operate profitably. This in turn led to downward pressure on the Canadian dollar and upward pressure on Canadian interest rates.
The simultaneous occurrence of costs and benefits is one explanation for the historic disagreement within Canada on the question of foreign investment. Some critics have claimed that restrictions have not been sufficient; others have felt that controls should be eased on the foreign ownership of Canadian enterprises. Even when FIRA was passed, Premier Gerald Regan of Nova Scotia said, "We want all the foreign investment we can get." At the time, 10 percent of Nova Scotians were out of work.
While FIRA was operating, some people favored greater control, contending that FIRA had a positive impact but did not go far enough. These critics showed that although foreign firms increased their research and development (R&D) in Canada, the amount they undertook has been less than their share of the economy. The percent of GNP spent on R&D in Canada is still small in comparison with the percentage in some other industrial countries (e.g., about 60% of that in Switzerland). Critics feel that Canadian control will produce increases in R&D. They point to the Canadian takeover of de Havilland from Britain's Hawker Siddeley Group in 1974 and of Cana-dair from General Dynamics of the United States in 1976. With Canadian
ownership and management these firms have greatly increased R&D, developed new products, increased employment, and are competing internationally. Observers believe that Canadian takeovers of other industries will lead to similar growth in Canada's technical capabilities.
Those who wanted fewer controls questioned whether Canada could fulfill its technological and capital needs if controls resulted in a lowering of direct investment flows into Canada. First, they questioned whether indigenously controlled firms would undertake in Canada the kind of R&D that foreign firms were criticized for not undertaking. These analysts have cited the fact that Northern Telecom, Canada's telecommunications giant, itself maintains an R&D facility with 500 people in the United States. Second, they have shown that technology flows more quickly, more cheaply, and with fewer restrictions between a parent and a subsidiary than by license among independent companies. In terms of restrictions, for instance, there is a high incidence of limiting output only for sale in Canada under the licensing arrangements. Among controlled operations, however, a number of investors have transferred technology so that Canada serves as the production base for worldwide sales (e.g., Westinghouse, steam turbines; Motorola, mobile radios; Honeywell, hydronic valves). In terms of capital, they pointed to a Royal Bank of Canada estimate that by the year 2000, Canada will need $1.4 trillion for energy investment alone, of which $300 billion will have to come from foreign sources. The capital-need argument became particularly pervasive as unemployment remained high during the recession in the early 1980s.
Because of these arguments Investment Canada replaced the FIRA. But how liberal has Canada become toward foreign investors? There is no definitive answer. On the one hand, Canada has permitted some very large foreign takeovers, such as the purchase of 51 percent of Hiram Walker by Britain's Allied-Lyons. On the other hand, Canadians remain worried about foreign domination, especially from the United States. Four of Canada's ten largest companies are U.S. direct investments, and in 1990 the United States illegalized the sale of goods by subsidiaries of U.S. firms to Cuba. Canadians are particularly concerned about protecting their culture, since a high percentage of English-language television and movies viewed by Canadians are from the United States. This has led the president of Investment Canada, Mr. Paul Labbd, to say, "More non-Canadian control in cultural industries is not welcome." Foreigners continue to control Canadian investments that account for about 40 percent of Canadian manufacturing employment. Recently, Canadians have questioned the value of the influx of Japanese investments, especially since the provinces have competed with incentives to attract that investment.
The ambivalence toward foreign direct investment has been further enhanced by the US-Canada Free Trade Agreement. Many Canadians fear that Canadian-controlled firms and Canadian-based production will be at a further competitive disadvantage. A particular worry is that both Canadian and non-Canadian controlled firms will choose to locate more of their production within the United States in order to avoid paying the higher Canadian social benefit taxes.
In Canada as well as in other countries, the rapid growth of international companies has been controversial. In fact, there are powerful pressure groups in both home and host countries that have pushed their governments to implement policies restricting the movement of multinational firms. These critics are sure to play an even greater role in the future expansion of world business. This chapter examines the major contentions regarding the practices of MNEs and the main evidence supporting or refuting the contentions.
The primary criticism is that multinational firms are inadequately concerned about national societal interests because of their global bases of operations. Furthermore, the sheer size of many MNEs concerns the countries with which they come in contact. For example, the sales of General Motors, Exxon, and Mitsubishi exceed the GNP of such medium-sized economies as Argentina, Indonesia, Poland, and South Africa.2 Large MNEs such as these have considerable power in negotiating business arrangements with nation-states that may be of greater consequence than many treaties among countries. In fact, the executives of MNEs frequently deal directly with heads of state when negotiating the terms by which they may operate.
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