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Chapter 9

ECON-2086EL Chapter Notes - Chapter 9: Foreign Portfolio Investment, Retained Earnings, Neoliberalism

Economics / Science Èconomique
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Chapter 9 Part I Foreign Control in the
Canadian Economy
Hollowing Out moving all the high-value decision-making functions out of Canada and leaving the
lower-value-added functions in Canada.
Portfolio vs Direct Investment
Foreign Portfolio Investment
- A foreign investor buys bonds or a few shares in a Canadian company
- This investor has no effective influence or control of the actions of the Canadian firm
Foreign Direct Investment
- A foreign investor opens or buys in full an existing firm in Canada
The differences of the above examples of foreign investment in Canada is control. A foreign portfolio
investment does not include control of the firm. The foreign direct investment does. However, in Canada,
if the investor owns 10 percent of the shares, it is said to be foreign direct investment has they influence
decisions and have control.
Stocks vs Flows
- Represent the new foreign investments in a particular year
- Accumulated flows of foreign investment, retained earnings (appreciation/depreciation)
The stock shows a snapshot of the foreign capital that has been invested in Canada.
Ownership vs Control
An important distinction must be made between foreign ownership of the Canadian economy and foreign
control. Although only a fraction of a company may be owned by the foreign interest, all of its assets
would be foreign controlled.
Canada’s Experience with Inward FDI and Foreign Ownership
The Ratio of Canada’s Outward to Inward FDI
1930-1970’s More inward FDI than outward (Ratio was between 0.2 and 0.3)
1970’s-2000’s Outward FDI surpassed inward FDI (Ratio was between (1.2-1.4)
Canada was a host country up until the 70’s. Limiting amount of foreign ownership in Canada would
have resulted in retaliation by other countries on Canadian foreign direct investment in their countries.
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Canada Losing Its Attractiveness as a Destination for FDI
At one time prior to the 1970’s, Canada held about 15% of the worlds FDI. In 2006, this share dropped to
only 3.5%. Some say it is due to the emerging economies such as China, India, etc. However, alongside
the G7 and members of the NAFTA, our inward FDI is still very low. Canada is still keeping pace with
outward FDI on the world levels.
Foreign Control
Foreign control of assets and revenues were the highest in 1970 at over 30 percent each. These numbers
have dropped in the coming years, climbing again in late 1990’s, but falling soon after.
Is the Canadian Economy Being “Hollowed Out”?
It is argued that the Canadian economy is losing head-offices, and high-value-added functions when a
foreign takeover is present. The statistics show that the Canadian economy is not “taken over” by FDI as
our outward FDI is still higher than inward. Moreover, as the years have gone on, more Canadian firms,
located in Canada, and owned by Canadians have become more competitive on the global scale. A study
by Stats Can discusses how FDI has increased head offices in Canada, rather than taking away head
offices as discussed by oppositions of FDI.
Foreign Investment and Control in the Canadian Economy
Are There Any Benefits to Foreign Ownership in Canada?
It is said that foreign firms bring many benefits to the Canadian economy. Some of which include labour
productivity (as they close less productive plants and open more productive plants), they make use of better
technology, increase R&D, higher wages (more skilled workforces) and contribute to white collar jobs to
monitor their complex production. It is said that they bring with them large amount of R&D as well that
helps them stay competitive and innovate the economy. Canadian firms absorb the knowledge and
innovation to help themselves.
Do Canadian Companies Need to Be Protected from Takeover by Large Global Companies?
A healthy financial market can lead to the most efficient allocation among the economy. When a publicly
traded company is poorly managed and fails, the stock prices fall. When the prices of stocks are low, the
company is susceptible to foreign takeover where Foreign Direct Investors (or foreign firms) buy the low
priced stocks as a majority, change the management team, and rebuild the company. This is said to increase
the prosperity of the Canadian economy. When foreign takeover or restrictions on FDI are made, the
Canadian economy does not prosper at an efficient level.
(1) It is important to note that outward FDI has surpassed inward FDI in recent years. (2) Canada,
regardless of inward FDI, continues to increase the share of global leaders from Canadian controlled
firms. (3) Foreign ownership brings with it benefits enhanced technology, competition, and managerial
discipline along with prosperity.
This chapter discusses the view that policies should encourage the inward flow of FDI to help the
Canadian economy. It is stated that regulating and restricting FDI will result in a less prosperous
Canadian economy.
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