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No. 7: Implications of Foreign Ownership Restrictions for the Canadian Economy — a Sectoral Analysis

by Steven Globerman, Western Washington University, April 1999


Introduction

The purpose of this report is to assess the implications of foreign ownership restrictions for the Canadian economy on a sectoral level. The assessment draws largely upon a literature review, although it also incorporates some original theoretical analysis.

It is worth briefly noting how this review differs from the numerous and fairly comprehensive reviews of the welfare implications of inward foreign direct investment (FDI) for host countries.1 One is that the review concentrates on sectors rather than on the overall host economy. While a fundamental consensus has emerged over time in favour of the view that inward FDI imparts substantial net economic benefits to the host economy, primarily in the form of a variety of "spillover" efficiency benefits, these efficiency gains are not necessarily uniformly distributed across host country industries.2 Moreover, to the extent that there are certain costs associated with inward FDI that are not borne completely by the foreign investor, and to the extent that the nature and magnitude of those costs vary across industrial sectors, application of "macroeconomic" findings to the liberalization of inward FDI within specific sectors may lead to biased, if not misguided, conclusions.

This review also differs from most found in the literature in that it considers economic benefits and costs in a somewhat broader context than most similar studies. This is because, at this point in time, significant remaining government restrictions on inward FDI (in Canada and elsewhere) tend to be focused on so-called infrastructure industries such as transportation, telecommunications and financial services. Critics of inward FDI often take the positions that while the net costs of inward FDI may be insignificant for other industries, infrastructure industries are "critical" to the economic development of the host economy, and that the role of infrastructure companies will only be satisfactorily executed if the latter are domestically owned. Hence, a particularly close look at these infrastructure industries seems merited.

Unfortunately, there have been relatively few studies of the sectoral impacts of inward FDI, as well as few studies of the impacts of government policies on FDI flows on a sectoral basis. Hence, it is necessary to evaluate in some detail the organizational structure of the sectors of interest, as well as the nature of government FDI policies in those sectors, in order to assess whether the "conventional wisdom" about FDI and government policies toward inward FDI are applicable to specific industrial sectors.

The report proceeds as follows. The second section reviews the general arguments for and against host government restrictions on foreign ownership and summarizes the available evidence bearing upon the relevance of these arguments. The third section provides a conceptual discussion of the applicability of the theoretical arguments and the empirical evidence to the sectors of interest to this report: transportation, telecommunications, financial services, oil and gas and agriculture. The fourth section reviews the available empirical evidence on the impacts of inward FDI on the host country sectors of interest, as well as the effects of government restrictions on and regulation of FDI in those sectors. The fifth and concluding section evaluates existing Canadian government FDI policies in the sectors and offers an analysis of those policies.

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