Tampering with FDI

When it comes to the effects of foreign direct investment (FDI), Canada's policy makers have been an indecisive bunch. Our fickle policy stance has been a reflection of that. Surely this comes at a cost.

From The Globe and Mail (28 August), “Bernier backs bureaucrats on foreign investment”:

...Some Canadians view almost any foreign takeover as bad for Canada. Mel Hurtig, a publisher and noted economic nationalist, said foreign investment is almost always a purchase of an existing business, not an investment that creates a new operation. In the past two decades, he said, Investment Canada has reviewed $620.7-billion in foreign investment and that 97.1 per cent of that involved acquisitions. "Foreign investment is not good for us,” Mr. Hurtig maintains.

I'm of course making an example of an extreme view. Hurtig sees FDI as zero-sum and fails to recognize the ambiguous effects of FDI. Hurtig, who argues that FDI is invariably bad, is not alone with his view; however, surely he is the minority among economists. Still, this doesn't stop the media from pandering to them.

The point remains: over the years, policy makers have been indecisive about the effects of FDI. Canada's irresolute policy stance is a reflection of that. Never mind the inherent costs associated with FDI, surely a nation's indecisiveness comes at a cost, too.

Lucie Laliberte, “Globalization and Canada's International Investment Position,” Canadian Economic Observer (1993):

The Foreign Investment Review Agency (FIRA) was created in 1974 to screen new
foreign investment and to review foreign acquisitions of existing assets. This was followed in 1980 by the National Energy Program, which, among other things, also monitored the extent of foreign control in the energy industry. The foreign control ratio dropped dramatically from a peak of 36% at the end of 1971 to 23% at the end of 1986, largely through Canadian takeovers of foreign controlled companies. In 1985, Investment Canada was set up with the mandate of promoting, among other things, [FDI] in Canada. Subsequently, the foreign control ratio rose to 28% at the end of 1991. The recent gain in foreign control was widespread in non-financial industries except for two sectors (food, beverage and tobacco; electrical and electronic products) where foreign control declined.

Another paper points out, “Canada agreed to stop imposing performance requirements, such as requiring an investor to export a certain amount of goods, and) beginning in 1992, to stop screening U.S. direct acquisitions of Canadian assets of less than C$150 million (in constant 1992 Canadian dollars).”

The actions that Canada undertook (to allow FDI, and later to prevent FDI, and even later to promote FDI ...) occurred all the while that economic conditions varied (eg – changes in the exchange rate regime, increases in efficiency, changes to tariff structures). This makes the impact of FDI in Canada all the more difficult to account for. This only adds to the uncertainty about the merits of FDI.

One thing we can assume is that tampering with FDI policy (for example, performance requirements), is not a good thing. Never mind the costs associated with FDI in itself, it's surely not unreasonable to hypothesize that all of the potential volatility caused by Canada's indecisiveness could possibly be more costly. If the benefits of FDI are relatively greater in the long run, stylized fact would lead us to believe that turning the FDI tap on and off will damper the benefits the nation could reap. Studies have shown that with the proper performance requirements in place (when necessary, such as in certain cases in the mining industry) the benefits of FDI in Canada generally outweigh the costs (such as the loss of control of domestic policy) in the long run.

We can't agree on the merits of FDI, but surely Hurtig would agree that inconsistency hurts.