Canadian fears of foreign control unfounded

Corporate assets, revenues and profits of foreign-controlled firms in Canada took a beating as the share of Canadian-controlled firms grew at an increased pace in 2008, according to a recent Statistics Canada report.

Foreign control in the Canadian economy is measured, in addition to corporate assets, by operating revenues and profits earned by firms operating in Canada that are controlled by non-resident or foreign interests.

Canadian economists, however, argue that the report is outdated and not indicative of any trend. Many have been quick to dismiss it as lacking in substance.

“Obviously 2008 and was a special year, the year when the economy went down the tubes, so sometimes returns and conditions aren’t particularly representative,” says Eric Lascelles, chief economist at RBC Global Asset Management.

Lascelles says foreign control tends to be in sectors such as manufacturing and energy. Given the extent to which energy prices crashed in the second half of 2008, it wasn’t a particularly opportune time for the sector. Similarly, one of the worst hit sectors of the economy in late 08 was the manufacturing sector. “That might well be due to the fact that foreign control was disproportionately tilted towards sectors that struggled in particular (in 2008),” says Lascelles.

He also put in perspective concerns of those hung up on the notion of foreigners coming in and buying Canadian “bell weathers” and “corporate champions”. Despite some recent attempts, some of them successful, Lascelles argues that “it continues to be the case that Canadian companies are buying more foreign companies” than the other way round. “Direct investment flows on net basis are directed outwards not inwards.”

Doug Porter, deputy chief economist, BMO Capital Markets holds similar views. “At the very least, this should quiet down some of the fears and concerns we’ve heard about hauling of Canada.”

Corporate assets under foreign control increased 5.0% from 2007, less than half the growth rate of 13.7% posted by Canadian-controlled firms, the report noted. Consequently, foreign-controlled firms accounted for 20.3% of assets in 2008, down from 21.6% the year before.

The Stat Canada report shows there is still very significant domestic control of assets, revenues and profits in Canada. “If anything in recent years we’ve seen a bit of an increase of Canadian ownership,” says Porter. “At the very least it puts some perspective on the debate on hauling.”

Canadian-controlled assets among firms operating in Canada’s financial sector increased 18.0% in 2008, compared with a 1.2% decline in assets for firms under foreign control, says the report. As a result, the proportion of assets under foreign control declined from 15.7% in 2007 to 13.5% in 2008.

These firms also held 21.2% of revenues and 19.5% of profits in 2008, both down from their shares of 21.8% and 21.4%, respectively, the year before.

Experts are urging investors to keep their alarmist instincts in check and take it with a pinch of salt. “I’m not sure investors should read too much into it,” says Porter. “First of all, the figures are a little bit stale; a lot has happened since [2008] and, of course, 2008 was a very exceptional year [marred by] highly unusual events that gave financial markets a heart attack.”

Porter identifies the pullback in the auto sector [densely represented by U.S.-owned firms] as one of the reasons for decline in revenues and profits of foreign-controlled firms, but insists nonetheless that the short time-line of the report renders it inconsequential.