Geoffrey Hale Political Science 3170 The University of Lethbridge November 4, 2010

Outline Shifting policy frameworks since the 1970s “Pro-market” vs. “pro-business” investment policies M&A cycles, market forces and “creative destruction”

Canada’s Shifting Approach to Foreign Investment Policies Neo-Mercantilism Neo-Liberalism Strong 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 Policies Trudeau-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 – Concerns re: SWFs.

Shifting policy approaches to formerly strategic sectors Transportation 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 ( ), 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 sectors Energy and resources Shift away from state-control of resource firms to varied regulations on resource development Oil and gas Industry restructuring  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 shares Mining 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-Business Stronger 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 levels Market cycles key factors in driving “M&A” activity: Takeover booms , Reinforced by N. American or international patterns of industry consolidation (e.g. steel: ; base metals mining: ) “Conventional” FDI significantly influenced by: Trade liberalization Exchange rate shifts Tax rate effects limited Some 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: Same name, shareholder structure7135.5% Canadian controlled, changed shareholder % Same name, shareholder structure no longer in top % Foreign controlled2914.5% Company ‘transformed, renamed’2010.0% 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! firms in business 2009 firms and on list Over $ 1 bn (2*)46  $ 1 bn (1*)6 (1*)43 Total3318 (1*)12 (3*)89 * Firm merged in corporate reorganization. [Source: Institute for Competitiveness and Prosperity, 2010.]

The Canadian Market for Corporate Takeovers – #value Canadian firms acquiring Canadian-owned firms4,469$ bn. Canadian firms acquiring foreign firms and foreign-2,020$ bn. owned Canadian subsidiaries Foreign firms acquiring Canadian firms and Canadian 797$ bn. subsidiaries of foreign firms Source: 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

Conclusion Canadian governments traditionally committed to relatively open policy on foreign investment Individual decisions increasingly subject to political considerations Relative level of controversy Relative concerns over “special circumstances” vs. “impact on ‘level’ business playing field” Potential impact on Canadian firms competing abroad.