John Ivison: Intervention argument is as bankrupt as Nortel
July 28, 2009
John Ivison
If the Harper government bows to pressure from opposition parties and Dalton McGuinty’s Liberals to block the sale of Nortel’s wireless assets to Sweden’s Telefon Ericsson, would the last conservative to leave Canada please turn out the lights.
To be fair to the government, there are no serious indications that Tony Clement, the Industry Minister, is set to nix the deal. He has said that he is reviewing the takeover proposal but under Canadian law, he is obliged to do so.
Still, the government’s response will determine if the Prime Minister’s fine words on resisting protectionism were just so much hot air.
There have been suggestions that, since the government bailed out GM and Chrysler, it should intervene to prevent Nortel’s wireless technology from falling into the hands of what one columnist called “absentee owners”. The answer should be that the government has learned from its mistakes.
The Conservatives have been justly criticized for betraying some of their most deeply held principles. Yet, they have also introduced changes that are more closely identifiable with the type of government they purport to be -- namely cuts to corporate income tax and liberalization of some investment restrictions in industries like air transport and uranium mining. The fruits of these policies are already apparent -- Tim Hortons said last month it was coming home and would move its registration to Canada to take advantage of lower corporate tax rates.
Knee-jerk nationalists argue that the government should intervene because the result of the sale would be a brain drain out of Canada and the loss of another “iconic” Canadian company, in the wake of Alcan, Inco, Falconbridge and Hudson’s Bay Company. One supposes that Nortel resonates as an enduring symbol of corporate Canada, in the same way that the Titanic is held as an icon of British shipbuilding.
There is a seductive, if superficial, logic to this “hollowing out” argument that the facts entirely fail to support.
A detailed study by the Conference Board last year showed that corporate takeovers are, in fact, of net benefit to Canada. The study concluded that there was no longer-term trend toward greater foreign ownership in the economy -- with levels remaining stable at around 30%, well below the peak of the 1970s. In the decade between 1994 and 2004, foreign companies made 92 major acquisitions, with an average value of $2.9-billion, which compared to the acquisition of 133 foreign companies, with an average deal value of $2.1-billion, by Canadians.
The Conference Board said that corporate transformation is the norm -- only 71 of the top 200 companies in 1990 are still present in the same form.
Those foreign takeovers have provided shareholders with an average premium of 28%, money that was presumably re-invested elsewhere in the economy. Alcan shareholders received US$101 in cash for their shares in the summer of 2007 -- many times what the company would likely be worth today.
As for the brain drain argument: “There is no empirical macro evidence that supports the view that takeovers lead to fewer quality jobs or reduction in the quality of jobs,” said the report’s author, Dr. Michael Bloom.
Canada already has a more protectionist investment regime than many countries -- whole sectors of the economy from financial services to telecoms are off-limits for foreign companies. Manulife Financial paid $11-billion to acquire Boston-based insurer, John Hancock, in 2003, yet Canadian investment rules mean Hancock would not have been allowed to buy Manulife.
Are we now prepared to send out signals that Canada is closed for business when it comes to technology too?
The government has tightened investment rules in one important area. There were legitimate concerns that state-owned entities -- mainly from China and the Middle East -- were intent on buying up large swathes of Canada’s resources sector. As a result, the government introduced a national security test to block purchases by companies with “non-commercial objectives and unclear governance”.
But that description hardly fits Ericsson, which is already a good corporate citizen in this country, with operations in Toronto, Montreal and Vancouver. In fact, its research and development centre in Montreal is the company’s largest outside Sweden and it claims to have invested $2-billion in R&D over the past 10 years.
The government’s own panel on competitiveness, chaired by former BCE chairman Red Wilson, recommended liberalizing many of the barriers to foreign investors, in part by increasing transparency and predictability. The government has moved to implement many of those recommendations but that good work would be undone with the stroke of a pen, if it intervenes in the Nortel case.
Stephen Harper, an avid student of Adam Smith, used to agree with the great economist that little good has ever been done by those who claim to trade for the public good. Let’s hope he still does.
National Post
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