Archived — Working Paper Number 2: Canadian-Based Multinationals: An Analysis of Activities and Performance
Prepared by Industry Canada Micro-Economic Policy Analysis staff, including Someshwar Rao, Marc Legault and Ashfaq Ahmad, July 1994
Rapid changes in technology and the comparative advantage position of firms and nations, and fierce global competition among firms for markets, capital, skilled labour and technology have both facilitated and necessitated the internationalization of the activities of transnational corporations. These companies are therefore adopting a variety of complementary strategies to improve their competitive positions and reduce the risks and uncertainties associated with their investments in physical and human capital and R&D. These strategies include mergers and acquisitions, greenfield investment, minority ownership, joint ventures and strategic alliances, subcontracting, and licensing, among others.
The role of transnational corporations (TNCs) in the world economy has increased dramatically in the past decade or so and this trend is expected to continue in the future. For instance, the stock of world outward direct investment increased almost fourfold from US$ 519 billion in 1980 to US$ 2 trillion in 1992, considerably outpacing the growth of world output and trade.
Canadian-based transnationals have also participated actively in the process of globalization. In the 1980s, the stock of Canadian direct investment abroad (CDIA) increased much more rapidly than the stock of world direct investment – from C$ 27 billion in 1980 to C$ 99 billion in 1992. As a result, the share of CDIA stock in Canadian GDP increased from 8.7 percent to 14.4 percent during this period.
The effect of foreign direct investment on the Canadian economy has been studied extensively. By comparison, however, there has been little analysis of the potential consequences of CDIA for Canada. The broad objective of this study is to examine the recent trends in CDIA, to analyze the performance of outward-oriented Canadian firms and to assess the impact of their activities on the Canadian economy.
Our major findings are:
- In the 1980s, Canadian TNC actively participated in the process of globalization. From 1980 to 1992, the stock of CDIA increased at a faster pace than the global stock of direct investment as well as Canadian GDP, reaching C$ 99.0 billion in 1992. The increased outward orientation is pervasive across all major Canadian industries.
- The relationship between inward and outward direct investment has become much more balanced in the last 25 years. The ratio of outward to inward stock increased from 0.23 in 1970 to 0.72 in 1992. This trend is also pervasive across all major Canadian industries.
- The share of Europe and the Asia Pacific Rim in CDIA has increased significantly since 1985, primarily at the expense of a declining share of the United States. However, the United States is still the dominant location for CDIA.
- Resources, and resource-based manufacturing industries still account for over 40 percent of CDIA. However, the shares of financial services and technology-intensive industries (such as chemicals and chemical products, communication and communication equipment, and non-electrical machinery) have increased dramatically over the last 30 years.
- In the past 15 years, the relatively high sensitivity of CDIA to foreign economic activity, the higher profitability and faster rate of capital accumulation in the United States and United Kingdom relative to Canada, and the increased outward orientation of Canadian firms have all contributed to the rapid growth of CDIA.
- Similarly, a number of pull factors such as the fast rate of growth of real aggregate demand in Europe and the Asia Pacific Rim, the significant improvement in the relative profit position of the United Kingdom, the opportunities and fears associated with the creation of Europe 1992, and improvements in the U.S. savings-investment imbalance appear to have contributed to the recent decline in the importance of the U.S. market for CDIA. However, the U.S. continues to be the dominant location for CDIA. With the successful conclusion of the North American Free Trade Agreement (NAFTA), however, investment linkages between Canada and the United States could strengthen further in the future.
- The rising share of financial and technology- and information-intensive industries in world GDP, especially in the industrialized countries, partly explains the growing importance of these industries in CDIA.
- The foreign activities of Canadian TNC are highly concentrated. The top 159 Canadian MNEs, identified in this study, account for about 50 percent of all the foreign assets of Canadian-based firms. In addition, about 80 percent of the foreign assets of the 159 Canadian firms belong to the top 20 firms.
- The industrial and geographic distribution of the foreign assets and sales of the top Canadian firms are similar to the distribution of CDIA and foreign assets of all Canadian firms.
- On average, the top firms are relatively more outward-oriented (as measured by the higher proportion of foreign assets and sales in their total assets and sales) in manufacturing (especially in printing and publishing, textiles and technology-intensive manufacturing) and in mining industries.
- A priori, there is either a positive or no relationship between trends in CDIA and domestic investment spending. Our econometric analysis of the determinants of domestic capital formation in Canada and the selected G-7 countries supports this view.
- The investment income receipts associated with a rapidly expanding CDIA made a contribution to the real income growth and improvements in the Canadian current account balance during the 1980s.
- The increased outward orientation of firms could contribute significantly to the future enhancement of Canada's trade performance.
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