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No. 1: Multinationals as Agents of Change: Setting A New Canadian Policy on Foreign Direct Investment

by Lorraine Eden, Carleton University, November 1994


Summary

The trade and investment environment of North America has been transformed dramatically over the past 20 years by pressures coming from two directions. In terms of market structures, the main shaping force has been widespread trade liberalization in the form of such regional trading arrangements as the 1989 Canada-U.S. Free Trade Agreement and the 1994 North American Free Trade Agreement. International investment liberalization has also gained momentum causing the further globalization of world markets. In the same period, fundamental new technologies and flexible automation have caused a massive shift from mass production to lean production methods.

These forces have changed the ways in which firms produce and compete with one another. They are already forcing major structural adjustments by business as competition among firms for market share shifts from being national to being regional. In most sectors, global competition is now the norm.

How are the biggest firms in Canada responding to these changes, and what responses should they evoke from the makers of foreign direct investment (FDI) policy? This paper seeks to answer these questions.

In the context of increasing regional integration and the move to lean production, multinational enterprises (MNEs) are increasingly international actors faced by change, and, at the same time, they are agents of change themselves. As a result, it is time for government to adopt a new approach to FDI policy — one that treats MNEs as investment bridges to the global economy and as diffusers of technology within the Canadian economy.

A brief historical summary traces Canada's treatment of foreign direct investment from 1960 to the present and the development of a "hub-and-spoke" economic relationship between Canada and the United States. The survey points to the deep integration of the Canadian and U.S. economies and suggests that this integration will become even more extensive and multifaceted as a result of regional trading agreements.

After surveying the trade and direct investment links and intra-firm trade between the two countries, the effects of regional integration and technological change on MNEs in Canada are outlined, paying particular attention to their influence on decisions about the function and location of plants. With the advent of regional trading agreements and enhanced economic integration, underlying economic factors will have more impact on MNEs' locational and organizational decisions. Because MNEs are concerned about their shares of global markets, they change the configuration of their activities so as to increase their international competitiveness. Generally speaking, MNEs will locate plants and operations with the new wider North American market in mind. More horizontal and vertical rationalization will take place, leading to more intra-firm exchanges. This means that Canada will have to articulate a clear role for itself in a North American regional strategy to attract investment from abroad. Canadian subsidiaries will have to work hard to define a role for themselves within the overall operations of the MNE.

The paper concludes by suggesting a new foreign direct investment policy for Canada; one that would not differentiate between inward and outward investment, but that would seek to maximize the gains to Canada from MNE activities in both directions. The principal policy direction proposed is for Canada to develop a new national policy centred on the strategic integration of Canada into the global economy. The goal of this new strategy would be to achieve long-run national competitiveness by emphasizing the removal of tariff and non-tariff barriers to trade and investment, by making a commitment to the knowledge-based economy with its focus on innovation, competition and sustainability and by focussing on a national education policy for the 21st century.

This strategic integration policy could be supplemented with other efforts including:

  • getting the basics right by dealing with the deficit, macro-economic policy, regulatory burden and the duplication of government services;
  • moving from confrontation to cooperation with MNEs in Canada;
  • securing access to the U.S. market;
  • reducing state aids to business and adopting a free trade zone strategy; and
  • upgrading to best practice technology by attracting best practice multinationals to Canada.

In the new environment of globalized markets, governments and MNEs are partners in the race to engineer competitive advantage. Given the rising importance of MNEs and the growing importance of intra-firm trade, increasingly Canadian foreign and trade policies will have to focus on MNEs and their investments.

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