Foreign investment in Canada is both direct (made to control enterprises) and portfolio (made only for the interest or dividends paid or the possible capital gain to be achieved).
Foreign investment in Canada is both direct (made to control enterprises) and portfolio (made only for the interest or dividends paid or the possible capital gain to be achieved). The amount of both types is very large, with the consequence that a considerable fraction of the Canadian ECONOMY is controlled by foreigners (mostly Americans) and the annual interest and dividend payments made to them takes a sizeable fraction of Canada's income. In 1995, when the National Income was $558 billion, investment income payments to foreigners totalled $49 billion.
This large foreign presence in the economy, quite unparalleled elsewhere in the world, has deep historic roots. Beginning in the mid-19th century, when Canada was still a British colony, British investors readily supplied capital, chiefly of the portfolio type, that financed construction of canals, railways, urban buildings and public works, in the half century prior to WWI.
Meanwhile, the US was building a huge national economy which would far surpass that of any European country. Its railway network joined all its regions into one immense market, making gigantic industrial plants feasible and profitable. For some of these firms it became desirable to set up distant branch plants that were closer to natural resources or to local markets that could be best served by a local plant. The railway, the telegraph and later the telephone made it possible to exercise effective control over operations far from headquarters.
As natural resources became depleted in the US, American industrial firms sought supplies elsewhere. The first Canadian resource upon which Americans drew heavily was timber, especially that of Québec and Ontario (see TIMBER TRADE HISTORY). American lumbermen came to Canada and built large mills to process lumber for sale in the US. These were not branches of US firms, however; the men who established and owned them eventually became Canadians. The first significant branch plants were newsprint mills, built by US papermakers. They would have preferred simply to buy logs to feed their already established mills in the US, but provincial governments, anxious to secure jobs and economic development, refused to permit the export of logs from forestlands that they controlled, insisting that American companies build local mills. By 1929, Canada accounted for about 65% of world exports of newsprint; 90% of its output went to the US.
The discovery in the late 19th and early 20th century of valuable minerals (gold, nickel, zinc and other nonferrous metals) created a mining industry in which US and some British capital soon played a commanding role. Gold, found in river bars and surface deposits, was extracted first by individuals using cheap and simple methods and then by large-scale, capital-intensive methods. Established American mining firms set up branches to carry on this type of activity, furnishing skills, capital and experience. From the beginning, base-metal deposits were exploited chiefly by companies established and controlled by US mining corporations.
During the 1920s, US firms in other industries began to operate branches in Canada on a large scale. Manufacturing companies set up branch plants to serve the Canadian market, thereby avoiding high freight costs and import duties. Also, US-owned branch plants benefited from the fact that products made in Canada were admitted at preferential tariff rates to other British Empire countries. New variety and grocery-store chains built stores in many cities. By 1930, US direct investment in Canada was more than 5 times that of the United Kingdom.
The 1929 stock market crash and the GREAT DEPRESSION brought practically all forms of foreign investment to a standstill that lasted throughout WWII. Following WWII, US investment resumed in Canada. American industrial corporations undertook enormous mining projects and, following the discovery of the Leduc oil pool (1947), US firms spent enormous sums on oil and gas exploration, and on pipelines and refineries. The increasing population and its growing affluence made the Canadian market highly attractive to US firms. More manufacturers of consumer products set up branches, as did retail and financial firms and suppliers of equipment and services required by business firms.
Conceivably, goods and services produced in the branch plants of US firms could have been provided by Canadian-owned enterprises, but US firms had the enormous advantage of much greater capital and experience and strongly established, valuable connections. US-owned plants in Canadian resource industries had absolutely reliable markets, as parent plants in the US bought all their products. Many US-manufactured products were already well known in Canada, thanks to the wide circulation here of US publications, in which those products were advertised, and the extensive travel and visitation in the US by Canadians. Branch plants tended to buy equipment and materials from their parent organizations or from the US firms that regularly supplied their parents. Canadian-owned firms inevitably could not compete effectively against American branch plants that had these advantages.
Presumably the role of US-controlled firms in the economy would not have grown so rapidly if authorities had restricted it or had provided special assistance to Canadian-owned firms, but they were anxious to achieve as much economic development as possible and were unconcerned by the large increase in US participation in the economy. As a matter of principle, they treated US-owned and Canadian-owned firms with absolute impartiality. In a relatively small number of instances, a foreign firm licensed Canadian firms to use TECHNOLOGY that it had developed so that goods and services based on these new technologies were produced in Canadian-owned establishments.
In addition to setting up branch plants in Canada, US firms bought established Canadian firms, incorporating them into their organizations. Many Canadian businesses were sold to US corporations for considerably more than they would have received from Canadian buyers. As a result of all these considerations, US direct investment of $3.4 billion in 1950 was over 30 times that figure by the end of 1995. Some of this increase was attributable to INFLATION, but a large portion of it reflected increased ownership of physical assets in Canada.
Although US-owned firms initiated the production here of many novel products and services and provided welcome job opportunities, there have been - and still are - problems caused by their presence. Huge and increasing amounts of money have to be remitted to US owners in the form of dividends on their investment and contributions by branch plants toward head office costs of administration, research, product development and advertising. A large proportion of these payments must be made in US dollars; where payment in US dollars is not required by contract, the investors, receiving payment in Canadian dollars, wish to exchange them for US currency. The consequence is that a very large fraction of the US dollars that Canada earns by its exports must be used to make interest and dividend payments and branch plant remittances to US firms. The amount of US dollar earnings left after these payments are made has often been insufficient to pay for all imports, obliging Canada to borrow abroad - and thereby increase the amount of interest that will have to be paid to foreigners in the future.
MULTINATIONAL CORPORATIONS carried on their Canadian operations to serve their own best interests, not those of Canada. INDUSTRIAL RESEARCH AND DEVELOPMENT, essential to industrial innovation and growth and providing highly desirable job opportunities, was generally done not in Canadian branch plants but in US facilities. When demand for the products of some international companies fell, they would reduce the scale of operations or close down the Canadian branch while maintaining operations in the parent plant. When an international firm uncovered a cheaper source of supplies or labour in another country, it might close down its Canadian operation.
The presence of giant, foreign-owned companies made it difficult for the government to stabilize the economy. Possessing great financial power and having wide international interests, these firms could not be induced or pressured to alter the tempo of their Canadian operations to help keep the economy on an even keel. Being subject to American legislation that forbade US firms and their affiliates to trade with US enemies, plants here could not export their products to some countries with which Canada had normal trade relationships. Corporate strategy frequently had the same consequences; branch plants were generally designed to serve the domestic Canadian market and lacked the resources or mandate necessary to develop and to sell products in export markets.
Aside from economic concerns, many Canadians (see COMMITTEE FOR AN INDEPENDENT CANADA; COUNCIL OF CANADIANS) objected on nationalistic grounds to the scale of FOREIGN OWNERSHIP and control over the economy (see ECONOMIC NATIONALISM). The federal government responded in the 1960s with new legislation forbidding foreigners to own radio and television stations (see CULTURAL POLICY); and with restrictions on foreigners' rights to set up banks, insurance companies and other financial concerns; to enlarge established firms; to participate in the exploration of oil, gas and mineral deposits or to acquire uranium mines. In 1973 the federal government established the FOREIGN INVESTMENT REVIEW AGENCY (FIRA) to screen investments by nonresidents, approving only those that would clearly be of benefit to Canada.
The federal government also created the CANADA DEVELOPMENT CORPORATION (1971) and PETRO-CANADA (1974), both of which reduced foreign control by buying out a number of large, foreign-owned concerns. The NDP government of Saskatchewan bought out foreign-owned potash firms. In 1980 the Canadian government introduced its NATIONAL ENERGY PROGRAM, under which it accorded special privileges and financial incentives to Canadian-owned and -controlled firms in the oil and gas industry, prompting the takeover by Canadians of a number of foreign-owned firms. By the early 1980s the proportion of manufacturing, mining, oil and gas industries under foreign control was significantly smaller than it had been a decade earlier.
These measures and actions to limit foreign ownership raised controversy. Businesses that profited from dealing with foreign-owned firms objected, and exponents of private enterprise decried the increasing role of the government in the economy. Provincial politicians, anxious for development that would broaden local economies and add to local employment, objected to federal restrictions that prevented such development. The US government protested against Canadian investment policies and threatened retaliatory action against Canadian firms operating in the US.
While FIRA approved about 90% of the foreign-investment proposals that it reviewed, and was not a significant barrier to foreign ownership, it was angrily criticized for its occasional rejections and sometimes lengthily delayed decisions. In response to the criticisms, the Liberal federal government began to loosen the restrictions. The Conservative administration of PM Brian Mulroney, elected in September 1984, indicated that it planned to extend its reduction of barriers to foreign investment in Canada, and in 1984 it dismantled FIRA, replacing it with Investment Canada, an agency that would welcome foreign investment rather than obstruct or delay it.
As of the end of 1995 foreign investment in Canada totalled $672 billion. Half was by Americans, with 40% of their investment being direct, and therefore conferring control over business operations. Since success in these operations typically depended on the application of expertise developed in the US, Americans insisted on control. Only 16% of non-American investment in Canada was direct, reflecting the lesser role in the Canadian economy of non-American business firms and the large purchases of Canadian government bonds by non-Americans in recent years.
Foreign ownership of agricultural land and urban real estate is also important. British investors acquired large Canadian holdings in the 19th century and continued to buy and sell Canadian properties in the 20th century. Europeans, particularly West Germans and Italians, acquired large amounts of agricultural land in the 1960s and 1970s, prompting provincial governments to pass legislation restricting the acquisition of land by nonresidents. Hong Kong investors acquired a considerable number of urban properties in the 1980s; however, the total value of foreign investment in Canadian real estate is still only a small fraction of foreign investment in Canadian stocks and bonds.
In 1986 the federal government introduced the Immigrant Investor Program under which a foreigner who invested at least $150 000 in Canada, and left it here for a minimum of 3 years, would thereby qualify for Canadian citizenship. (The figure was raised to $250 000 in 1990.) Intended to generate jobs, the program has, so far, attracted relatively little foreign money and generated relatively few jobs.
The flow of investment funds has not been entirely one-way. Canadians have set up branch plants in foreign countries and made portfolio-type investments in foreign stocks and bonds. In 1995 Canada paid out $49 billion in interest income to foreigners but we received only $16 billion from Canadian investments abroad. What's more, in no foreign country does Canadian investment play a dominant role. Canada's largest foreign investment, which is in the US, gives Canadians control over only a minute portion of the US economy, in contrast to the very large fraction of the Canadian economy that is controlled by American interests.
K. Levitt, Silent Surrender (1970); W.H. Pope, The Elephant and the Mouse (1971); Statistics Canada, Corporations and Labour Unions Returns Act: Part I (1985).