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Wednesday, June 8, 2005

Study: Impact of foreign ownership on head office employment in manufacturing

1973 to1999

Foreign firms were three times more likely to operate a head office in Canada during the 1990s than domestic firms, all else being held equal, according to a new study that analyzes factors affecting head office employment in the manufacturing sector.

After controlling for certain characteristics of firms, such as size, geographic spread and industrial diversity, the study also found that foreign firms had about 25% more head office workers than domestic firms.

This study looked into the role of head offices because of recent concerns that Canadian corporations are being "hollowed-out," that is, they are shedding head office employment, which is being moved abroad. Some of this concern is aimed at foreign-controlled firms.

These concerns stem from the role of head offices in the economy. Head offices are where key decisions are made. They are seen by some as prize jewels for cities, providing them an important economic base and relatively high paying jobs. They are also thought of as providing an important source of demand for legal and financial services.

During the 1990s, head office employment in manufacturing averaged 42,000, or about 7.3% of total manufacturing employment.

In this study, head offices are defined as units that primarily perform an administrative function. When this function is conducted at a location that is geographically separated from production units, the head office is reported separately from the latter. However, even when the head office is co-located with a production unit, the head office may be reported separately if the management function serves other plants and operates as a profit centre.

Influence of foreign ownership on head office employment

Foreign ownership can influence the level of head office employment in two ways.

First, it may affect the likelihood that a head office is created- whether a firm operates a head office that can be distinguished (functionally or geographically) from its other operations. Second, it may affect the proportion of the work force employed in a head office.

Domestic firms were much less likely to operate a head office than foreign firms. During the 1990s, there were five domestic firms with a head office for every 1,000 without. For foreign controlled firms, this ratio was 116 for every 1,000 firms.

However, foreign ownership was only one factor among many that had an impact on the likelihood a firm has a head office.

The more complex the nature of the firm, the more likely it was to establish a head office. In addition, geography was also a factor.

Complexity refers to the size of firm, whether it has multiple plants, and whether it is industrially diversified. Larger firms, those with multiple plants, and firms that were diversified across industries were more likely to create a head office.

In addition, firms whose plants are located in rural areas are more likely to create a head office and to place it in an urban area. Large urban areas are attractive for several reasons. They often provide a large pool of skilled labour, a wide variety of producer services demanded by managers, such as management consulting, and greater access to investment bankers and other forms of investment capital.

After controlling for complexity and geography, as well as the industry of the firm, the odds that a foreign firm had a head office were about three times that of a domestic firm in 1999.

Foreign controlled firms had larger head offices than domestically controlled firms. During the 1990s, there were six head office workers for 100 non-head office employees in a domestic firm. For foreign firms, there were about 10 head office workers for every 100 non-head office workers.

After controlling for certain characteristics of firms, such as size, geographic spread and industrial diversity, the study found that foreign firms had, on average, about 25% more head office workers than domestic firms.

The results of this study suggest that, in a broad sense, the management structure of foreign firms is more developed than domestic firms. Whether this stems from the complexity of their operations, the nature of their assets, or their technology, foreign firms are more likely to create a head office unit and to employ more therein than domestic firms.

The research paper Foreign Multinationals and Head Office Employment in Canadian Manufacturing Firms, no. 34 (11F0027MIE2005034, free) is now available online. From the Our products and services page, under Browse our Internet publications, choose Free, then National accounts.

More studies on multinationals are available free of charge in the analytical series Update on Economic Analysis on our Web site (11-623-XIE).

For more information or to enquire about the concepts, methods or data quality of this release, contact John Baldwin (613-951-8588) or Mark Brown (613-951-7292), Micro-economic Analysis Division.

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Date Modified: 2005-06-08 Important Notices