Tom Flanagan has some advice for the federal government on the CNOOC takeover bid for Nexen:
Rewrite the “net benefit” standard, and put it in the fall budget implementation act… In the meantime, approve the Nexen acquisition and keep Canada open for business.
As it stands now, the “net benefit” test is vacuous: a takeover bid passes the test if the federal government says it does. There are no objective criteria that firms and investors can consult when preparing a bid; they can only hope that their proposal doesn’t create the sort of controversy that might lose votes for the governing party.
Improvisation may provide great entertainment, but it’s a terrible way to govern: markets function best when everyone knows the rules. So it’s a good idea to want to set up a sensible, predictable set of guidelines for approving or rejecting takeovers of Canadian firms by foreign investors.
Foreign investment review criteria should start with a justification for why we’d be comfortable with rejecting a foreign takeover in the first place. The logic behind adopting this stance involves a tricky bit of blurring possessives. First, an asset owned by a Canadian investor is transformed into a “Canadian-owned” asset. It’s only a short leap of logic from there to conclude that the asset belongs to all Canadians, and that the decision of to whom it should be sold is a collective one that should be made by the government. (Please do not attempt this manoeuvre at home. In particular, please do not try this with my Canadian-owned home.)
It is possible that foreign ownership incurs collective costs that outweigh the individual benefits of freely selling an asset at a mutually-agreed-upon price. It’s possible, but available evidence suggests that it’s extremely unlikely.
Foreign ownership became an issue some fifty years ago, and there were credible reasons for concern. Foreign-owned branch plants tended to be less productive and less interested in innovation. But the problem wasn’t foreign ownership per se, it was the fact that the raison d’être for these branch plants was the high tariff wall protecting Canadian industry. Firms with nothing to fear from foreign competition have little reason to be concerned with low productivity.
Things are very different in the post-NAFTA world. This Statistics Canada study (opens pdf) finds that:
foreign-controlled plants are more productive, more innovative, more technology intensive, pay higher wages and use more skilled workers… [Multinational enterprises (MNEs)] have accounted for a disproportionately large share of productivity growth in the last two decades. Finally, we find robust evidence for productivity spillovers from foreign-controlled plants to domestic-controlled plants arising from increased competition and greater use of new technologies among domestic plants.
But it’s not the fact that foreign-owned companies are, well, foreign that endows them with these qualities. The key is that these companies are competing on world markets. Canadian-owned companies with an international orientation do just as well:
What matters for economic performance is whether plants belong to [MNEs] rather than ownership per se. Canadian multinationals are as productive as foreign multinationals.
Another recent study published by the Institute for Research on Public Policy (opens pdf) reaches similar conclusions:
A dispassionate analysis of the evidence shows that the benefits of foreign investment far outweigh any real or imagined drawbacks. Foreign firms operating in Canada are more innovative and productive than their Canadian counterparts, and they pay higher wages. More importantly, they import significant amounts of technology from their parent companies, and the benefits of these technologies spill over to domestic firms.
There are other arguments for using the government to block asset sales to foreigners, but I don’t find them convincing. These include:
- Claims to the effect that Canadian-owned companies are more likely to sacrifice profit in order to advance the Canadian public good. I don’t think even the people who use this line believe it.
- Arguments that hinge on the use of the word “strategic.” Military analysts use this term for things that are necessary to maintain operations. If we’re obliged to apply this idea to economics, a strategic asset would be something that is vital to the functioning of an economy. There are a few privately-owned assets that fit this definition (large financial institutions, communications companies) and many that don’t (most notably resource extraction companies). The operations of these “strategic” firms are regulated, because private companies can’t be expected to sacrifice profit for the public good—see point 1 above. The nationality of the owners of these assets matters much less than the regulatory environment in which they operate.
- Blocking the takeover as a way of punishing the behaviour of the other government. There is a certain nobility in sacrificing financial gain in order to demonstrate your support for a point of principle. There is markedly less nobility in sacrificing someone else’s financial gain in order to make your point.
- Linking the takeover to an unrelated issue. For example, the benefits of foreign investment don’t depend on whether or not the other country allows its investors to sell their assets to Canadian buyers.
It’s a good idea to replace the existing “net benefit” test with explicit criteria for rejecting the sale of an asset to non-Canadians. The problem is that when you start to look for good economic reasons for refusing a foreign takeover, you quickly realise that there aren’t any.