New ICP report refutes fears of hollowing out and need for national champions

A new report from the Institute for Competitiveness & Prosperity (ICP) contends that the hollowing out of the Canadian economy is illusory and that government policies to encourage the creation of national champions do not work. It argues instead for an environment that encourages competitive pressure domestically and internationally and where managers and owners are challenged to continuously innovate.

The ICP's 11th working paper stems from research it was commissioned to undertake by the Competition Policy Review Panel, which released its findings earlier this year (R$, July 7/08). "The Panel asked the ICP to study the impact of head offices on local economies and the value of policies that encourage the creation of national champions in a world setting.

The Institute examined 57 companies that were acquired by foreign interests since 2002 and concluded that the most vulnerable were not competitive globally. Of the 57, only five — ATI Technologies, Alcan, Creo, VersaCold and Zenon Environmental — were deemed to be globally competitive and actively engaged in innovating and upgrading. The report concludes that foreign ownership and investment contribute to the Canadian economy and that even "an excessive level of foreign ownership in our economy is not a problem".

"Foreign investment and ownership are positive factors in our economy. The evidence shows that an excessive level of foreign ownership in our economy is not a problem that needs to be addressed … Our research shows that national champions policies rarely succeed." – ICP Working Paper 11

"Public policy should be directed toward building an environment where companies, no matter where they originate, can prosper in Canada", states the report. "In the global economy, successful companies that have not achieved adequate scale are candidates for takeover by larger predators."

The ICP offers four "high priority domestic initiatives for nurturing the global aspirations of Canadian companies and supporting them in continuously innovating to upgrade their competitiveness:

* Lower the cost of investment: tax policy needs to drive down the marginal tax burden of business investment to among the lowest in the developed world;

* Reduce the barriers to competition: Revisit all business regulatory policy to identify and scale nback regulation that dampens competition without eroding consumer transparency, safety and environmental standards;

* Define innovation more broadly: The US is more innovative than Canada because is values, supports and expects innovation across the whole economy and not just in high-tech;

* Pay disproportionate attention to existing and aspiring global competitors: Senior government officials should meet personally with the CEO of the 40 companies with $1 billion in revenues and are Canadian global leaders. It creates an opportunity to inform economic policy by the experiences of those companies and their leaders.

link between head office and R&D weakening

ICP research found that foreign firms active in Canada perform far more R&D than their domestically owned counterparts. However, Canadian firms spend a larger percentage on R&D as a percentage of revenue in virtually every industry sector.

The report also contends that firms do not necessarily locate their R&D operations close to head offices nearly as much in the past. Of the 30 companies examined, the majority plan to locate their R&D facility away from head office, with most choosing low-cost jurisdictions such as India, China, Russia, Eastern Europe and Vietnam.

Rather than develop policies that interfere in the market, favour domestic firms or build national champions, the ICP argues that governments should focus on building vibrant city regions and skilled human capital. While it empathizes with those who lament the loss of high-profile corporate icons, it notes that the takeover of prominent US and UK firms by Canadian companies has generated similar responses.

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