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It may seem like foreign buyers are scooping up Canadian companies left and right, but Ian Russell, president and CEO of the Investment Industry Association of Canada says this is no cause for alarm in a free market economy.

“Stop being so paranoid,” says Russell, speaking at the Economic Club Tuesday afternoon. He told the crowd that despite how it looks, Canada isn’t being “hollowed out” by foreign firms. “Canadian companies are not just being acquired,” he says. “They are also doing some pretty significant acquiring.”

Russell cites a report from investment bankers Crosbie & Company that found that Canadian companies acquired nearly 500 foreign firms last year, while non-Canadian businesses bought up 175 Canadian firms. In the first three months of 2007 alone, Canadian corporations say they purchased 134 foreign companies while 46 non-Canadian companies purchased our homegrown properties.

He also countered the myth that Canada’s not strong enough to compete globally. “As an exporter, Canada has benefited directly and indirectly from China’s industrial revolution,” he says, noting that the dollar value of exports has increased by about 8% since 2001, but strong Chinese demand has pushed up world prices for this country’s commodities.

To the people who say Canada’s becoming a branch-plant economy, Russell says that between 1999 and 2005, foreign takeovers led to a 4% increase in Canadian-based head offices. He also says moving resource-sector jobs to another locale is difficult to accomplish. “It’s pretty difficult to move a mine or a mining job to Brazil.”

While Canada might not be suffering, Russell says if certain things don’t change, the good times could end.

A negative result of the frenzied M&A activity is that Canada’s been left with 72 companies that rank as industry leaders, down from 85 two years ago. The mining sector in particular has had trouble on the global stage, with the number of Canadian companies among the world’s 40 largest public mining businesses dropping from 12 to six in just three years.

Russell also says that the country’s role in global capital markets is falling. “London is almost catching up with Canada as a mining finance centre,” he says.

The IIAC president doesn’t blame globalization for Canada’s problems, instead saying that the government and the financial industry need to take more responsibility. “We do not have strong enough internal or regulatory incentives for growing our businesses,” he says. “In some cases, we actively discourage growth in our corporate sector.”

Russell believes there are six ways Canadians can improve the system, with one being tax reform. He strongly recommends decreasing the capital gains tax, which averages 24% compared to the 15% tax in the States. “While some think taxing capital gains is taxing the rich, that’s far from the case,” he says. “Fifty per cent of Canadians invest in equities… With such onerous capital gains taxes, we are punishing individual Canadians for building their investment portfolios.”

If the government can reduce capital gains taxes, Russell predicts that Canadians will invest more. He cites a study done by the C.D. Howe Institute that found that Canadian businesses spend 20% less on capital investments per worker than American companies do.

He called on the government to reduce corporate and personal income taxes more quickly. “Our top corporate tax rate … is still the second highest among all OECD member countries,” he says. “That sends a signal to companies that growth is punished, not rewarded.”

Russell’s second recommendation is to accept free trade in securities. He says the IIAC’s new committee — the Committee on Free Trade in Securities — will work at removing U.S. regulatory barriers to Canadian dealers who want access to the American stock market. “The objective is to permit Canadian registered investment dealers to directly access U.S. institutional clients, without the need to comply with U.S. registration,” he told the audience. “Policies like this will help Canada compete in our increasingly globalized environment.”

For his third recommendation, he called out the federal government for not being clear and consistent with its policies. “Canadian governments have reversed course without forewarning, causing dislocations in the marketplace and a loss of business confidence,” he says.

He also called on the financial industry to adopt a single regulator, something he’s done many times before. “If we can’t get our national securities house in order, how can we even think of competing in the new globalized world?”

Russell’s fifth point is that Canada needs to adopt a broad-based principles approach rather than a rules-focused one. He says the only way to bring fairness and efficiency to the financial industry is by avoiding a “thick rulebook full of regulations that are irrelevant to our goals for our capital markets.”

His last suggestion is to ask the government to “articulate the urgency of getting on with our competitive agenda.” According to Russell, Canada’s rate of labour productivity growth has lagged behind that of the rest of the developed world. This has hurt living standards and affected the country’s ability to compete globally. “The Harper government has been all but silent on this topic,” he says. “Our government’s top priority should be to explain to all Canadians exactly what improved productivity will mean to our competitiveness.”

In his final comments, Russell reiterated Canada’s global position, saying that while we’re not in danger yet, it’s only a matter of time until things change. “Unless we act to create a more competitive environment for our own homegrown companies, we may be left behind as stronger firms in more enlightened countries prevail.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(06/27/07)

Bryan Borzykowski