Global Links: Multinationals in Canada: An Overview of Research at Statistics Canada

This paper addresses three questions.

1. How important are foreign multinationals to the Canadian economy?

Answer: During the last 40 years, foreign multinationals operating in Canada experienced a retrenchment followed by a resurgence in their activities. These changes in foreign multinational activity coincided with important transitions in the regulatory regime governing foreign direct investment (FDI). The share of non-financial corporate assets under foreign control declined appreciably during the more restrictive regulatory era of the 1970s and early 1980s, when FDI was subject to tighter controls, only to rebound in subsequent years when the regulatory environment was made less restrictive. Consequently, the level of foreign control in Canada's economy by 2005 was at about the same level as it was during the mid-1960s.

Answer: Foreign multinationals make up a distinct group of firms in the Canadian economy. There are a large number of differences between these firms and domestic firms that operate solely within Canada. These include the following:

1. The plants of foreign-controlled firms are generally larger, have a higher labour productivity, pay more per worker and have a higher percentage of their employment in white-collar workers. Foreign firms are also more likely to diversify across industries than are domestic-controlled firms. It should be stressed that many of these differences between foreign-owned and domestic-owned businesses reflect structural factors — such as the size of business or industry membership. When these factors are not taken into account, the performance gap between foreign multinationals and domestic companies is large. But even after size and industry controls are accounted for, foreign multinationals were often shown to enjoy performance advantages over domestic companies.


2. Foreign multinationals react differently to economic conditions. For example, the diversification of domestic firms is related to domestic market characteristics while this is not the case for firms owned by foreign multinationals. Domestic entry responds to higher profitability at the industry level, but entry by foreign firms does not. The profitability of domestic firms is affected differently by industry- and economy-wide events than that of foreign firms. The investment decisions of domestic firms, as opposed to foreign firms, are influenced differently by changes in the domestic relative price of capital and labour. Establishments of foreign multinationals create and eliminate fewer jobs in response to output changes than their domestic counterparts.


3. Foreign-controlled firms are more likely to have a Canadian head office than are domestic firms. The head offices of foreign-controlled firms accounted for six out of ten new head-office jobs created from 1999 to 2005. The effect of foreign takeovers 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 in the post-1999 period, and employment in head offices was as high after the takeovers as it was before.


4. Domestic and foreign firms renew themselves quite differently. Greenfield entry — entry via the creation of new plants — is more important for domestic firms: merger or acquisition entry is more important for foreign firms.


5. A comparison of the extent and impact of innovation activity of domestic- and foreign-controlled firms shows that foreign-controlled firms innovate in all sectors more frequently than do Canadian-owned companies in almost all size categories. They are also more likely to introduce world-first rather than more imitative innovations. They are more likely to have a research and development (R&D) division. They are more likely to use advanced technologies.


6. Foreign-controlled plants not only have higher productivity, they are also more capital intensive, pay higher wages, and hire more white-collar workers (non-production workers). The higher productivity of foreign-controlled plants derives from a variety of factors, such as size, industry membership, technology use and R&D activity. Thus, many of the competitive advantages enjoyed by foreign-controlled establishments are bound up in what many observers regard as underlying structural or demographic factors — such as size of business and industry membership. But this tells us much about how foreign multinationals have integrated themselves into Canada's economic system. Foreign companies often gravitate to sectors of the economy where their competitive advantages can be more fully exploited. These include the large-firm sector, where economies of returns to scale and capital intensity are large, and high-tech sectors, where competition is often based on new innovative technologies. Foreign-controlled plants operate in those industries and in those segments of industries where size, technology and innovation capabilities are required for success. They bring to these sectors special capabilities related to their ability to manage knowledge assets.


7. Foreign-controlled multinationals have contributed positively to productivity in three ways. First, productivity growth has been relatively high in foreign-controlled plants compared to domestic plants. The relative contribution of foreign-controlled plant renewal (new plants replacing closed plants) to productivity growth has increased from 1970 to 2000. In the 1970s, the contribution that was made by domestic-controlled plant renewal was larger than that of foreign-controlled plants. This changed in the 1980s and 1990s, when foreign-controlled plant renewal contributed considerably more than the domestic sector to overall productivity growth. As a result, the contribution of foreign-controlled plants to aggregate productivity growth has increased over the last three decades. 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.


8. The studies described in this report contribute to a deeper understanding of the role that foreign multinationals play in Canada's economic system. Canadian establishments of foreign multinationals have long held a substantial presence in Canadian markets in terms of their share of Canadian corporate assets and revenues. New microeconomic evidence to emerge from business surveys suggests that these establishments are not truncated, branch plant operations that do little to enhance the competitiveness of domestic industries. To the contrary, Canadian establishments of foreign multinationals are businesses that, on balance, make large investments in their knowledge capital — via relatively large investments in innovation, advanced technology and skilled labour. These investments often translate into superior market outcomes, as foreign-controlled establishments often enjoy relatively high rates of productivity growth compared to many of their domestic competitors.

Answer: Many of the studies described in this report found that, even after controlling for factors such as size and industry membership, foreign-controlled establishments still enjoyed performance advantages over domestic competitors. But new research has also shown that it is misleading to conclude that foreign-controlled businesses are somehow intrinsically better than their Canadian-owned counterparts. The data show that the performance advantages enjoyed by foreign multinationals may stem from the organizational advantages that these businesses enjoy that are associated with their international operations, as evidenced by the fact that domestic establishments of Canadian-owned multinationals — a subset of the domestic business population — resemble their foreign-owned competitors in many important respects. When it comes to measures of value-added per worker, gross output per worker, worker wages, the share of non-production workers and types of technologies used, there is not much difference between foreign-controlled plants and domestic-controlled plants whose parent has an international orientation. For R&D and innovation, the results indicate that domestic producers with foreign operations (referred to as domestic multinationals) actually exhibit a slightly better performance after controls for firm size, age and industry are taken into account. This suggests that the organizational advantages of multinationality, more so than the nationality of the parent firm, may help account for the success of foreign companies in Canadian markets.

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