Tuesday, November 13, 2007

Study: Multinationals in Canada

Foreign-controlled businesses operating in Canada make large investments in knowledge creation via investments in innovation, advanced technology and skilled labour, according to a new report assessing the activities of foreign multinationals.

These investments often translate into superior market outcomes, as foreign-controlled businesses often enjoy relatively high rates of productivity compared with many of their domestic competitors.

The labour productivity of foreign-controlled plants in the manufacturing sector has increased considerably relative to domestic plants over the last three decades.

The report puts into perspective the results of a large number of analytical studies conducted at Statistics Canada that examined the importance of multinationals to the Canadian economy.

Note to readers This release is based on a new report that provides a concise synthesis of a wide array of data and research published by Statistics Canada on multinationals, focusing on both historical and current studies. The first section of the report discusses the macroeconomic contribution of foreign multinationals operating in Canada, focusing on two indicators of multinational activity: foreign control and foreign direct investment. The second section concentrates on the strategies and activities of foreign multinationals that are relevant to ongoing debates over whether the presence of foreign multinationals promotes or hampers Canada's industrial competitiveness. The third section focuses on studies that examine the foreign activities of Canadian-owned multinationals, and how their domestic plants compare to foreign-controlled plants operating in Canada.

Foreign multinationals make valuable contributions to the Canadian economy. Their plants not only have higher productivity, they tend to be more capital intensive, pay higher wages, and hire more white-collar workers than their domestic competitors.

The higher productivity of foreign-controlled plants stems from a variety of factors, such as size, industry membership, technology use, and research and development activity. When these factors are not taken into account, the performance gap between foreign multinationals and domestic companies is large.

But even after differences in size and industry are accounted for, multinationals still enjoy performance advantages over many domestic companies.

Little difference between foreign multinationals and domestic firms with an external outlook

The report cautions against concluding that the plants of foreign multinationals are "simply better" than their Canadian-owned competitors.

Canadian firms that develop an external orientation—those that are active in export markets or that have production activities outside Canada—often stack up well against foreign multinationals.

New research described in the report found that there is little difference between foreign-controlled plants and Canadian-controlled plants whose parent has an international orientation.

These two groups have very similar profiles when it comes to measures of value-added per worker, gross output per worker, wages, skilled workers and technology use.

In terms of research and development and innovation, Canadian companies with an external orientation exhibit slightly better performance than foreign multinationals after differences in firm size, age and industry are taken into account.

Foreign multinationals have long had a substantial presence in domestic markets

Several of the studies described in this report show that multinational firms have long had a substantial presence in Canadian markets in terms of their share of corporate assets and revenues.

The studies note that changes in the amount of multinational activity in Canada in recent decades have coincided with important transitions in the regulatory regime governing foreign direct investment.

The share of non-financial assets under foreign control fell during the more restrictive era of the 1970s and the early 1980s, and rebounded with the subsequent introduction of a less restrictive regulatory environment.

As a result, current levels of multinational activity are similar to historical levels. By 2005, the overall level of foreign control in non-financial industries was at almost the same level as it was during the mid-1960s.

Foreign control is concentrated in the non-financial sector of the economy, especially when measured by operating revenue. This is due, in part, to stricter regulations on foreign control in the finance and insurance industries, especially in banking.

Foreign companies often gravitate to sectors of the economy where their competitive advantages can be more fully exploited. These include the sectors where economies of returns to scale and capital intensity are large, and high-tech sectors, where competition is often based on new innovative technologies.

Since 2000, the foreign-controlled share of operating revenue in non-financial industries has been fairly constant, hovering around 30%.

In terms of assets, foreign-controlled corporations accounted for 27.2% of assets held in non-financial industries in 2005. This has changed little since 2001.

However, these foreign companies are playing an increasingly important role in shaping Canada's economic performance, as the overall contribution that they make to aggregate productivity growth has increased over the last three decades.

Foreign-controlled multinationals have contributed positively to productivity in three ways. First, productivity growth has been relatively high in foreign-controlled plants compared with domestic plants. Second, there are productivity spillovers from foreign-controlled plants to domestic producers. Third, mergers involving foreign producers more frequently lead to gains in productivity, wages, profitability or market share than do mergers between domestic firms.

About two-thirds of labour productivity growth in manufacturing during the last two decades came from foreign-controlled firms, despite the fact that they accounted for less than 40% of employment.

Foreign multinationals contribute to head-office employment growth

The report also notes the impact that foreign companies have had on recent trends in head-office employment. It found little evidence that foreign takeovers lead, in the aggregate, to hollowing out, that is, multinationals shedding head-office employment and moving it abroad.

The impact of foreign takeovers between 1999 and 2005 has not been to reduce the number of head offices in Canada or head-office employment. As a result of foreign takeovers, more new head offices were created than lost from 1999 to 2005, and employment in head offices was as high after the takeovers as it was before.

Over the entire period from 1999 to 2007, total employment in the head offices of foreign-controlled firms was, on average, about one-half of the total head-office employment of domestic firms. Despite this, foreign firms made approximately the same contribution as did domestic firms to the growth in head-office employment during this period.

The research paper, "Global Links: Multinationals in Canada: An Overview of Research at Statistics Canada", part of The Canadian Economy in Transition, no. 14 (11-622-MIE2007014, free), is now available from the Publications module of our website.

More studies related to multinationals are available free of charge at http://www.statcan.ca/english/studies/economic.htm.

For more information, or to enquire about the concepts, methods or data quality of this release, contact John Baldwin (613-951-8588), or Guy Gellatly (613-951-3758), Micro Economic Analysis Division.

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