WORKING PAPER SERIES CANADIAN-BASED MULTINATIONALS: AN ANALYSIS OF ACTIVITIES AND PERFORMANCE Working Paper Number 2 July 1994 WORKING PAPER SERIES CANADIAN-BASED MULTINATIONALS: AN ANALYSIS OF ACTIVITIES AND PERFORMANCE by Industry Canada, Micro-Economic Policy Analysis staff, including Someshwar Rao, Marc Legault and Ashfaq Ahmad Working Paper Number 2 July 1994 Aussi disponible en français ACKNOWLEDGEMENTS We are grateful to Ross Preston, John Knubley and Steven Globerman for their support with the project and their comments on the draft paper. We would also like to thank Chris Roth and Phillip Massé for their assistance throughout the project. The views expressed in these working papers do not necessarily reflect those of Industry Canada or of the federal government. Details of the titles available in Research Publications Program and how to obtain copies can be found at the end of this document. TABLE OF CONTENTS EXECUTIVE SUMMARY .................................................. i CANADIAN-BASED MULTINATIONALS: AN ANALYSIS OF ACTIVITIES AND PERFORMANCE Introduction ........................................................ 1 CDIA Trends and Determinants ........................................ 3 Global Trends ................................................. 4 Trends in CDIA ................................................ 4 Reasons for the Trends ........................................... 8 The Role of Top Canadian TNCs ...................................... 16 Characteristics ................................................ 16 Industrial Distribution .......................................... 20 Degree of Outward Orientation and Geographic Distribution ............ 20 Consequences of CDIA .............................................. 28 Direct Effects ................................................. 29 Indirect Effects ................................................ 30 Performance of U.S. Affiliates: Canadian and Other Foreign Affiliates ..... 32 Conclusions ....................................................... 41 ENDNOTES ............................................................ 43 APPENDIX 1: Description of the Micro Data .............................................. 53 APPENDIX 2 List of Top Outwardly-Oriented Canadian-Based Firms ......................... 57 APPENDIX 3 List of Top Domestically-Oriented Canadian-Based Firms ........................ 63 APPENDIX 4 Relative Performance of U.S. Affiliates of Canadian-Based MNEs, 1990 ............. 73 APPENDIX 5 Relative Performance of U.S. Affiliates of Canadian-Based MNEs, 1980 ............. 95 APPENDIX 6 Performance of Outwardly-Oriented and Domestically-Oriented Canadian Firms .... 117 BIBLIOGRAPHY ....................................................... 123 RESEARCH PUBLICATIONS PROGRAM .................................. 127 LIST OF FIGURES AND TABLES Figures Figure 1 Ratio of Stock of Canadian Direct Investment Abroad (CDIA) to Foreign Direct Investment (FDI) in Canada, 1980 to 1991 ....................... 5 Figure 2 Distribution of CDIA Stock (Book Value) by Major Countries/Regions - Average Share of CDIA for Selected Periods .......................... 6 Figure 3 Distribution of Book Value (Stock) of CDIA by Industry, 1960 and 1991 (% of Total and $ Billion) ......................................... 7 Figure 4 Distribution of Book Value (Stock) of CDIA in Manufacturing, 1960 and 1991 (% of Total and $ Billion) .................................... 8 Figure 5 Average Annual Growth Rate of Private Non-Residential Capital Stock by Country for Selected Periods (%) .................................. 10 Figure 6 Relative Profitability - Gross Operating Surplus as a % of Gross Private Non-Residential Capital Stock, 1970 to 1991 ......................... 12 Figure 7 Average Annual Growth of Real Domestic Demand for Selected Countries/Regions, 1972-1992 .................................... 13 Figure 8 Exchange Ratesa, Canada, the United Kingdom and the United States, 1970-1992 ................................................... 14 Figure 9 Relative Unit Labour Cost in Manufacturing, Canada, the United Kingdom and the United States, 1977-1992 .................................. 15 Figure 10 Investment Income from CDIA, Selected Periods ...................... 30 Figure 11 Canadian Share of Foreign Affiliate Activities in the United States, All Industries, 1980 and 1990 ........................................ 33 Figure 12 Canadian Share of Foreign Affiliate Activities in the U.S. Manufacturing Industries, 1980 and 1990 ........................................ 34 Figure 13 Manufacturing Productivity Gapa, Canadian Affiliates vs Other Foreign Affiliates in the United States, 1980 and 1990 ......................... 35 - 2 - Figure 14 Trade Performance of Foreign Affiliates in the United States, 1990 ......... 36 Figure 15 Average Annual Growth of Outward-Oriented and Domestically Oriented Canadian-owned Firms, 1986-1991 ................................ 37 Figure 16 Performance of Outward-Oriented and Domestically Oriented Canadian- owned Firms .................................................. 38 Tables Table 1 Elasticity of CDIA and FDI to Private Non-Residential Capital Stock, 1970 to 1991 ...................................................... 11 Table 2 Industrial Distribution of Sales, Assets, Foreign Sales and Foreign Assets of Outward-Oriented Canadian-Based Firms (%) ...................... 18 Table 3 Top 20 Outward-Oriented Canadian-Based Firms ...................... 21 Table 4 Top Three Outward-Oriented Canadian-Based Firms ................... 22 Table 5 Average Firm Size by Sales and Assets of Outwardly-oriented Firms ....... 24 Table 6 Geographic Distribution of Assets and Sales of Outwardly-oriented Firms ... 26 Table 7 Elasticities of Trade to Investment Stocka, Selected Periods .............. 32 Table 8 Five-Year Growth Performance of Domestically Oriented and Outward-Oriented Canadian-Based Firms, 1986-1991 .................. 39 Table 9 R&D Intensity and Profitability of Domestically Oriented and Outward-Oriented Canadian-Based Firms ............................ 40 EXECUTIVE SUMMARY 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 TNCs 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. i ii Executive Summary • 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.