To Let Them In or Not to Let Them In(vest), That is the Question!

Wednesday, August 30th, 2006
By Inya Ivkovic, MA for Profit Confidential

There is something that Canadian federal officials like to call “net benefit,” predominantly in connection with foreign takeovers. It goes something like this: a foreign company sets its heart on a Canadian one. Before the foreign company can make an offer, it has to go through an approval process with Investment Canada (I mentioned this agency a few PROFIT CONFIDENTIALS ago).

Once the approval is in the bag, and so far in its history, Investment Canada did not veto a single foreign takeover, the official takeover bid is made to the domestic entity. Of course, since most foreign conglomerates are generally more innovative, more flexible, and more technologically savvy, our domestic players rarely stand a chance.

Federal government likes foreign takeovers, costs of doing business in Canada are just as high as anywhere else in the developed world. And although opponents to heavy foreign investing cite the “hollow out” syndrome as the main argument against it, Canadian government begs to differ.

According to officials in Canada’s industry ministry, the “hollow out” syndrome is only an urban myth. Their reasoning goes along the lines of free trade and crossing of economic barriers.

On the other side are economists who are increasingly concerned about huge pieces of our economy being put up for auction to the highest bidder. We already saw some pretty big jewels leave our crown, so to speak, including Molson, Hudson’s Bay, Dofasco, Fairmont Hotels, Inco, Falconbridge, and just last week, Domtar’s takeover by the U.S. forestry giant Weyerhaeuser.

For the second quarter ended June 30, there were a total of 480 foreign-originated transactions in Canada. Their total value was $86.1 billion, or three times more than during the first quarter of this year.

Oddly, losing $86.1 billion in market cap during the recent quarter hardly registered, apart from few articles I’ve seen in the financial press. Additional pressure is coming from Ottawa, where officials believe restrictions on foreign investments should be reduced even further.

Some proponents of this strategy believe certain sectors, traditionally barred from foreign investments, such as telecommunications, airlines, banking, broadcasting, and publishing, should also be made available as potential takeover targets.

Granted, with more foreign players entering our market, competition is surely to get tougher, and, by extension, with more choices, products and services of domestic companies will have to improve.

On the other hand, the fact that Canada’s stock market has fewer and fewer large caps cannot be good in the long run. We need a reason for foreign investment to come to Canada and stay, not just take our best companies and leave.

This is where Ottawa should step in, and, through Investment Canada, impose tougher terms on foreign conglomerates, particularly concerning where the head office is going to be, how the transition will impact domestic operations and employees, etc. There are ways to encourage free trade and eliminate economic boundaries, but not at the expense of domestic workers and resources. So, careful, Prime Minister Harper, your think tank might not be thinking things through.

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Tags: stock market, U.S. economy