The Truth About Canada (26 page)

Are we short of money in Canada? Hardly. Aside from the evergrowing assets of our big banks, our four largest public-sector retirement funds had $420-billion in assets by spring 2007. And, as
Globe and Mail
economics reporter Heather Scoffield has pointed out, “Canadian corporate liquidity — i.e., money in the bank — has risen steadily over the past 15 years, and is now so far in record territory that historical comparisons are almost meaningless.”
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Worth noting is that Statistics Canada balance-of-payments figures do not include the massive amount of funds foreign corporations raise in Canada every year, so that the actual value of foreign ownership is substantially higher than the published balance-of-payment figures. For example, the takeover of the recreational products division of Bombardier was financed by two Canadian banks (BMO and RBC) and a Quebec caisse. The CIBC was the leading lender in the takeover of Shoppers Drug Mart. The CIBC and the Bank of Nova Scotia helped finance the Yellow Pages sale. A full list would fill many pages.

As I have pointed out many times in the past, no one in Ottawa knows just how much of the sale of our country has been financed with our own money, not the Department of Finance, not the Bank of Canada, not Statistics Canada, not the Prime Minister’s Office or the Privy Council Office — no one!

Why is that? Simple. None of them are interested. They don’t care. One thing is for sure: such appalling ignorance could not be found in any other developed country.

Meanwhile, incredibly, thanks mostly to our banks and other Canadian financial institutions, the outflow of foreign direct investment from Canada in the period from 1995 to 2004 was greater than the outflow
from Germany, the United States, Italy, Finland, Sweden, Portugal, Belgium, Luxembourg, Norway, Austria, New Zealand, Australia, and Ireland put together.

Under the terms of both the FTA and NAFTA, Canada gave away many of the tools used by nations around the world to keep a reasonable check on excessive and/or detrimental foreign ownership and control, and even abandoned many of the options to ensure that takeovers had to clearly bring benefits to this country.

All of this raises two very interesting and important questions, one easy to answer, the other very difficult. The easy question is why do other developed countries reject such high levels of foreign ownership and foreign control?

There are many important reasons, far too many to do justice to them in this chapter, but to begin, here’s just one. Foreign subsidiaries import much of their goods and services from their parent company, almost always at high, non-arms-length prices. Here are G7 figures for imports of goods and services as a percentage of GDP.

These figures represent a huge loss of overall economic activity. They are caused by excessive imports resulting from excessive foreign ownership and control. Overall, foreign firms operating in Canada import three times as many parts and components and services as similar sized Canadian companies. In a truly remarkable comparison, an OECD study showed that the ratio of foreign parts and components in manufacturing in the United States was 13 percent, in Japan 7 percent, while in Canada it was over 50 percent.

Very high levels of imports of goods and services purchased by foreign branch plants at inflated prices from their parent companies have been very profitable for the foreign parent. The loss of profit for the branch plant is equally intentional, as it neatly reduces taxes payable in Canada. This will likely continue to be true even if tax rates are now lower in Canada, as Eric Reguly explains below.

Again, how does our level of import penetration in Canada compare with other developed countries? In 2005, the OECD 30-country average was only 20.2 percent. No wonder both the United States and Japan have long had such very low unemployment rates!

The
Globe
’s Eric Reguly adds his similar viewpoint on the impact of foreign takeovers:

There’s something wrong with this picture. Canada is a G7 country that doesn’t act like one. We are told that Canada is no worse for it, that foreign companies can treat their Canadian subsidiaries with love and care, that some of them even expand in Canada and add jobs. But, how many jobs would the companies have created if they were still owned and managed locally? And ask the lawyers at Osler, Hoskin and Harcourt how they feel about Inco, one of the firm’s biggest clients, going to an owner in Rio de Janeiro.

The loss of Canadian head offices is an issue for all Canadians, if only because foreign owners restructure their foreign subsidiaries to minimize taxes. Watch the tax payments made by Inco and Falconbridge plummet as they become branch plants. Typically, the Canadian subsidiaries of foreign companies are loaded up with debt. Debt payments are tax deductible. Ottawa’s corporate tax haul can only fall. Individual taxpayers will have to make up the difference.
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And, of course, provincial tax revenue will also fall.

Of the 250 largest private companies in Canada, over 54 percent are foreign-controlled. For reasons that are entirely impossible to comprehend,
the Liberal government abolished the previous long-standing requirement for these corporations to publicly report such information as profits, assets, and return on capital. Bizarre, to say the least. Of the top 50 foreign-controlled companies in Canada, 44 are 100 percent foreign-owned.

Among the long list of foreign companies in Canada that are 100 percent foreign-owned are: General Motors, Chrysler, Ford, Honda, Costco, IBM, Safeway, Cargill, McDonalds, General Motors Acceptance Corp, Nissan, Mitsui, Kinder Morgan, Siemans, Mazda, Unilever, American Express, Sony, and Citigroup.

Three points. First, many of these companies are 100 percent foreign-owned because they don’t want to share corporate information, especially matters relating to transfer pricing and debt charges, with nosy Canadian shareholders who would object to profits being transferred out of Canada.

Second, even if you wanted to buy shares in their “Canadian” companies, you couldn’t, unless you wanted to buy shares in the foreign parent, if they are available. And, of course, you would likely buy these shares in the United States, so more Canadian investment dollars would end up south of the border.

Next, for Canadian investors the choice in Canada is narrowed as we sell off the ownership of our companies to foreigners. And, at the same time, the resulting smaller range of TSX alternatives artificially inflates the price of Canadian shares.

In 2005, the outflow of dividends, mostly to the United States, was at a record level, $15.46-billion, up from $12.14-billion in 2004. In 2006, they increased again, to $18.18-billion.

Meanwhile, the
Globe and Mail
, in a lead editorial (August 20, 2006), called foreign ownership of Canadian corporations beneficial and supported the idea that it provides a net benefit to Canada. The
Toronto Star
was far more perceptive, pointing out that crucial decisions concerning business in Canada will be made in corporate boardrooms “by men and women with no ties to this country,” while the branch plants and subsidiaries cannot plan their own affairs and rarely are allowed to compete
with their parent companies or determine where they purchase their parts, components, and services.

As Professor Harry Arthurs, one of Canada’s leading labour law scholars, has observed about the head offices that remain in Canada, “That’s what the whole thing is about. That is why it’s called hollowing out. You still have something that looks like a head office but it’s hollow — there’s nothing inside. The mere number of head offices means nothing.”

Ian Telfer, chairman of Goldcorp, says, “It’s tragic that Canada has lost so many potential champions with such a devastating effect on support industries such as accountants, bankers, geologists and a knowledge base that starts to disappear.”
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Tom Caldwell, of Caldwell Securities, in powerful full-page ads in the
Globe and Mail
and the
National Post
on July 27, 2007, under the heading “The Sellout of Corporate Canada,” wrote, “The loss of head offices and industrial leadership by Canada is one of the great corporate tragedies of our time. Future generations of Canadians, wishing to climb the corporate ladder, will increasingly be compelled to go elsewhere. The current trend guarantees Canada’s losing some of its best and brightest people.”

For Gerald Schwartz, CEO of Onex Corp.,

What happens when companies headquartered in Canada increasingly are being sold to foreign head office buyers?

For one thing, the ambition of Canada’s young business people is stopped dead in its tracks. They have to move to other countries, usually the United States, to achieve their aspirations.

When a head office leaves Canada, so do all the support positions at accounting firms, law firms, recruiters and other key suppliers of head office intellectual capital. Just watch the corporate donations budgets decline when a Canadian company gets taken over by a foreigner.
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Suggestions by the Conference Board and others that foreign companies create more head office employment in Canada is ludicrous. A
head office is a place where vital decisions are made, not a place misleadingly designated in this way because it has permission to order its own toilet paper.

How do other countries handle this challenge? In the United States, when China National Offshore Oil Corporation tried to take over the American oil firm Unocal Corp., the ninth largest U.S. oil company, Washington stepped in to thwart the Chinese bid. In May 2007, the Australian government regulator blocked the attempted takeover of Quantas Airways.

In Italy, “there is political resistance to foreign ownership” as witnessed by failed attempts to take over a large Italian telecom company. Selling control of telecoms in both France and Germany to outsiders is “all but unthinkable and practically speaking impossible.”
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In France, when Pepsi attempted a takeover of the famous Danone food company, the French prime minister, Dominique de Villepin, warned Pepsi not to proceed further.

In both Germany and Spain, the government has made it clear that it prefers domestic ownership of major corporations, and in both Italy and Poland, government is discouraging foreign attempts to take over banks and other firms. In France, there is legislated prohibition of foreign takeovers in 11 different major sectors of the economy. Germany, India, Japan, Russia, and Bolivia are all in the process of toughening their regulations regarding foreign ownership.

In the European Union, new EU takeover rules now allow countries a wide variety of options to turn back foreign takeovers. In Indonesia, there are tough new rules to thwart foreign takeovers. And in the fall of 2007, Japan took steps to make foreign takeovers more difficult. There are many, many other examples every year of governments stepping in to control foreign takeovers in every part of the world.

One reason excessive foreign ownership is discouraged in other countries is that the dominance of foreign corporations in an industrial sector inevitably brings pressure on government policy in both domestic and foreign policy development. The job of foreign subsidiaries is to make as much profit as possible for their foreign parent. The Canadian national
interest plays no role in such considerations. Exxon, to give one example, tells Imperial Oil what to do about maximizing or minimizing their public positions regarding petroleum reserves, and the result no doubt benefits Exxon — but it may well not be in Canada’s national interest.

Other downsides include the marginalization of Canadian directors, the inability of subsidiaries to compete with their parent in export markets unless permission is granted, and, above all, the fact that key decisions on the opening and closing of plants, the level of wages and dividends, and the adoption of U.S. standards, values, and policies are made by the foreign parent.

There’s no room here to do proper justice to all the other foreign ownership negatives, but much can be summed up in my favourite quote on the subject of takeovers, which comes from none other than Brian Mulroney: “I’ve yet to see a takeover that has created a single job, except of course for lawyers and accountants.”
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Try looking at the number of jobs per million dollars in sales and compare Canadian firms and U.S. subsidiaries where their numbers are available. The numbers are shocking and most revealing. In 2000, foreign firms in Canada made 53 percent of all manufacturing shipments in this country, but employed under 32 percent of manufacturing workers.

The second important question referred to above is much more difficult to answer, and truly borders on the bizarre. After the takeover of the Hudson’s Bay Company and Dofasco in February 2006,
The Economist
had this to say: “In many other countries, the sale of national heirlooms would spark fierce opposition. Not in Canada.”

Peter C. Newman says, “In all other developed countries the economic elite defend their country’s sovereignty because not only is it in their own interest to do so, but they are proud of their country and wish it to be more than a place where their children and grandchildren can best look forward to being serfs.”

David Crane pinpoints one element of the problem: “The upsurge in foreign ownership and control in the Canadian economy would not be taking place if our financial markets were focused on building Canadian companies, rather than selling them.”