A Modest Response

We are coming out with a foreign-investment policy that is going to be the weakest of any industrialized nation's. If I were an American, I would be amazed by the sweet reasonableness of it.

--A Canadian Cabinet Minister

When that long-awaited policy statement was finally released last week, U.S. investors were indeed pleasantly surprised. After two years of intense study by a task force under Canadian Revenue Minister Herbert Gray, the Ottawa government decided merely to "review" proposed takeovers of sizable Canadian companies by foreigners and to permit only those that seem likely to bring "significant benefit" to the country.

That was a modest response to the smoldering nationalist resentment against "domination" of the Canadian economy by U.S. business. The Canadian Cabinet had considered much tougher proposals, which would have given Ottawa control over the flow of investment to start plants in Canada or expand subsidiaries already operating there. But the Cabinet rejected those ideas. Executives of U.S. companies that have poured $28 billion into Canada--mostly by setting up wholly owned subsidiaries instead of buying out Canadian companies--noted that the new policy will have no direct effect on their operations, or on the $1.8 billion in earnings that they bring back home each year.

Nationalists denounced the new policy as a "sellout," "hoax" and "one big zero" and threatened to make it a hot issue in the forthcoming Canadian election campaign. Prime Minister Pierre Trudeau may well beat them because he has taken aim at an unpopular form of investment. Takeovers, mostly by U.S. firms, account for only 17% of the flow of foreign investment money into Canada, but they are especially noxious to many Canadians because they do nothing directly to expand production or jobs but only transfer ownership to outsiders. Whatever happens in the next election, it would be a grave mistake for U.S. executives to underestimate the deep worry that their operations north of the border cause among many Canadians.

U.S. companies own 99% of Canada's oil refineries, 85% of its primary metal smelters, 84% of its rubber factories, 78% of its chemical industry, 77% of its electrical-apparatus business and 73% of the transportation-equipment industry--indeed, 90% of all Canadian plants that employ 5,000 or more workers. Many a Canadian suburbanite begins his day by brushing his teeth with Crest, grabbing a cup of Maxwell House instant coffee, hopping into a Mustang and heading for work at, say, Du Pont of Canada Ltd.

U.S. investment has unquestionably enabled these industries to grow larger than they would have if they had been dependent solely on Canadian capital. In many a provincial town, U.S.-owned factories are almost the only source of employment and prosperity. Still, Canadians commonly complain that U.S. parent companies (known in Canada as "American mothers") treat the country like one gigantic branch plant. The "mothers" are accused, for example, of concentrating research and development in the U.S.; the percentage of Canadian gross national product devoted to R. and D. is among the lowest of industrialized nations.

Most important, many Canadians worry that their country cannot control its own economy. Walter Stewart, a well-known author, sums up the widely held nationalist viewpoint: "The decisions to expand or retract, to open new plants or close old ones, to conduct research here or buy it elsewhere, are made in the U.S." In response to such criticism, some U.S. companies have recruited more Canadian directors for their subsidiaries and have given Canadian managers top jobs. But U.S.-based chiefs of many companies still seem to see Canada only as an extension of the U.S. Douglas Aircraft last year refused its Canadian workers a wage increase, contending that it was bound by President Nixon's U.S. wage freeze.

On the other hand, Canadians generally appreciate the fact that, in Trudeau's words, "it is because of American capital investment, and the technology that came with it, that we enjoy one of the highest standards of living in the world." Even some nationalists concede that U.S. companies have largely filled a vacuum left by the reluctance of some Canadian capitalists to invest in their own country. Such considerations clearly have won in shaping the government's policy.

In Australia, too, the welcome mat is being pulled back a bit. Nationalist suspicion was brought to a head when ITT, internationally somewhat notorious because of its political troubles at home, tried to buy Frozen Foods Industries of Australia Ltd. The Australian Cabinet last week hurriedly decided in principle to restrict foreign takeovers, though formal rules are unlikely to be framed for months.

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