Industry Committee on May 6th, 2010

[The Chair, Conservative, Michael Chong]

I would like to welcome everybody to the 14th meeting of the Standing Committee on Industry, Science and Technology, this May 6, 2010. Pursuant to Standing Order 108(2), we are here for the study of Canada's foreign ownership rules and regulations in the telecommunications sector.

In front of us today we have two witnesses, both as individuals. We have Professor Morck, who is a professor at the department of finance and management science in the school of business at the University of Alberta. We have Associate Professor Hejazi, who is an associate professor of international business at the Rotman School of Management in the University of Toronto.

So welcome to you both.

We'll begin with an opening statement from Mr. Morck.

[Professor Randall Morck, Department of Finance and Management Science, School of Business, University of Alberta, As an Individual]

Thank you very much.

Let me first explain that I'm an old-fashioned economist. I study why some nations are rich and others are poor, why some regions are rich and others are poor, why some families are rich and others poor. That's the question that got Adam Smith going with his Wealth of Nations. I think it's a useful way to think about almost any problem in economics.

When you think of how many medical researchers, entrepreneurs, musical composers, and so on, languish in third-world poverty, whether in Africa or in our Indian reservations, the waste is just immense. Once you start thinking about that human waste, it's actually very hard to think about anything else, in the words of Nobel laureate in economics Robert Lucas. Because of a lot of hard work, we know a lot more about this now than we used to, and I think we can relate it to policy decisions, such as the one you're facing, with more confidence than we could a quarter of a century ago.

A huge body of empirical evidence now shows that competition and specialization, what Adam Smith originally talked about, caused the productivity growth that's central to wealth creation. In the past few decades, we've learned that some other things matter a lot more than we might have thought: innovation, governance, and the quality of regulation, in particular. Let me talk about each of those contributors to productivity and how foreign ownership restrictions interact with them.

First is competition. Competition depends on the number of firms in an industry, it depends on the extent to which the firms actually really compete with each other, and it probably, most importantly, depends on how easy it is for new firms to get into the industry. If the existing firms are providing poor service at high prices and getting cozy with each other, you really want those entrants to be able to get in. It seems like that is actually the most important thing, not counting the number of firms. High barriers to entry just correlate remarkably reliably with bad economic outcomes.

Now, foreign ownership restrictions are a really good barrier to entry. If you want to block entry, it's actually a very good way to do it. Most obviously, a foreign company can't move into the Canadian sector if there are prohibitions on foreign-controlled companies coming in. But foreign ownership restrictions can be a barrier to entry in more nefarious ways.

First, foreign ownership restrictions mean this for Canadian entrants. If I want to set up a new Canadian company to move into this sector, I have to issue most of my stock in Toronto. I can't go to NASDAQ or the NYSE to issue stock, even if I might be able to get more money there for selling a given percentage of my firm to the public. That makes my cost of equity higher. It makes it more difficult for me to found a new business. It makes it more difficult for me to enter.

Second, a lot of entry in the United States and elsewhere is funded by venture capital funds. Venture capital funds typically back a whole bunch of firms hoping that maybe one out of 99 will be a runaway winner and the other 99 are going to be losers. In that winner they want to have a big equity stake, because that's the way they recoup the losses they made on all the other 99 ventures they backed. Foreign ownership limits keep foreign venture capital firms out of a sector like this. That means that if I want to set up a new Canadian firm to compete in Canada, I can't get foreign venture capital. Now, unfortunately, there isn't much of a Canadian venture capital industry, and such venture capital as we have here is actually hard to get, badly allocated, and sort of expensive. So I have a problem there, too.

Third, if I want to borrow money to set up a new company, I have to worry about the cost of my debt. The reason foreign ownership restrictions increase the cost of debt is that people who lend me money are going to worry about what might happen if I go bankrupt. If I go bankrupt, what typically happens is they seize my company. They become the new shareholders of my company after the bankruptcy. A foreign lender doesn't want to lend me money, because if they become the owner of my company, they have to turn around and sell it right away, and fire sale prices tend not to be really high. But basically foreign ownership is forcing any foreign lender into a fire sale immediately after bankruptcy.

Even a Canadian lender would think twice about lending me money, because if the Canadian lender gets my company in bankruptcy, they either have to hold on to it--and most banks in Canada probably don't know how to run a telecom firm--or they have to sell it. If there are Canadian ownership restrictions on the company they're selling, they can't sell it to just anybody. They have to shop around and find a Canadian who will buy it. That might not be the highest price the lender could get in bankruptcy for my company. That means the lender is going to be more cautious and probably demand a higher-risk premium from me.

All of those things make entry more difficult, and making entry more difficult cuts productivity growth because it lets incumbents rest on their laurels, become friendly with each other. The result is poor costs and poor quality products, at least potentially, and I think there's some evidence that we face that problem in Canada.

I just read an OECD study that says we've fallen very far behind in the ranks in almost every dimension of quality and cost, and there's an even more recent study by Harvard's Berkman Center that corrects some of the methodological criticisms of the OECD study and shows probably even a worse standing for Canada now in terms of Internet and next generations, telecoms penetration, price/quality trade-offs, capability, and so on. We really have slipped badly.

The second thing that Adam Smith talked about in addition to competition was specialization, and there's a related concept called spillovers. Adam Smith wrote that it isn't from the beneficence of the butcher, the baker, or the brewer that we get our dinner, but from their self-interest. Now, the most obvious thing you take away from that is that the economy runs on self-interest, whether we like it or not. That's true, but the second lesson from that quote from Adam Smith is that we all depend on lots of other people who specialize in things we don't do. We don't make our own bread. We don't make our own cold cuts, and so on, and by having people specialize, we get much greater overall wealth, because we can each do one thing really well and we can trade with each other. That's important, but the cost of this specialization is that we really depend on each other.

How does that connect with telecoms? Meat packers, butchers, flour millers, bakers, and brewers, not to mention engineers and automakers, and even government departments like Industry Canada, all depend on being connected to each other. That's what makes the whole system go, and the telecoms industry and the Internet and everything else connected to it are the ways, increasingly, that we connect with each other. So putting a tax on these connections adds to the bottom-line costs of virtually every industry in the country.

So taxing telecoms, increasing the cost of telecoms, decreasing the quality of telecoms, the Internet, and so on, is not just a tax on one industry; it's a tax on almost the entire economy and that's because of this interconnectedness that's very real. I refer you to the work of Jerry Hausman, who is a first-rate economist at MIT. He looks at this interdependence, how one industry can affect other industries, and he tries to figure out the costs and benefits and trade-offs in these interactions. Specifically, he has a bunch of papers, articles, book chapters, and so on, looking at telecoms. What he finds is that deregulation, innovation, and so on, in the U.S. telecom industry dramatically affect overall productivity across a whole bunch of industries. So increasing the productivity, increasing the efficiency of telecoms, doesn't just affect the telecom industry; it affects the whole economy in ways you don't see for other sectors.

I've also done work jointly with Hyunbae Chun and Jung-Wook Kim in South Korea, looking at developments in information technology, and what we find is that developments in the IT industry have major repercussions that you can see in the share prices of firms in every other sector in the economy, from breakfast cereal to automaking. The telecommunications/communications costs are really important, all across the economy.

Every new technology wave is different, of course. Hausman's work looks at past developments in IT and telecoms and shows this effect, but I still think--in fact, I'd be willing to bet several cases of Molson Canadian beer--that if you wanted to retard the growth of every industry in Canada, there would be few more promising ways of doing it than by imposing inefficiencies on telecoms.

Those are the two things Smith talked about in The Wealth of Nations, competition and specialization. More recently, in the past three decades especially, we've learned about innovation, and a huge body of empirical evidence now shows that this is far more critical to productivity growth than we thought back in the 1970s when I was a student.

In particular, it looks like the Austrian economist, Joseph Schumpeter, is right about a whole bunch of things that he wrote way back in 1911 in his book, entitled Theorie der wirtschaftlichen Entwicklung. Part of the reason it didn't get attention was that it wasn't translated into English for a few decades. But basically what he argued was that if a firm finds an innovation.... An innovation is a way to take inputs that don't cost so much and produce an output that customers value more. So Research in Motion can take the same kinds of inputs that Nortel used to make its cellphones but produce a BlackBerry instead of an ordinary cellphone. Customers pay more for a BlackBerry, so RIM makes more profits than Nortel.

That's the kind of innovation that Schumpeter talks about, and productivity is exactly the value of the outputs minus the value of the inputs. So innovations that give us more valuable outputs for the same inputs, or the same outputs for cheaper inputs—process innovations—are the things that boost our productivity, just by simple arithmetic, by the definition of what productivity is: value of outputs minus of inputs.

Canadian firms have a productivity gap that people in Industry Canada have been tracking for well over a decade, or longer than that. For some reason, Canadian firms seem unable to seize these opportunities to find more valuable outputs to produce from inputs than companies in other OECD countries. Instead, our companies tend to buy foreign technology, often after a long delay, and ease it into use in our economy. Somewhere in there lies the source of our productivity gap.

The cost of innovation is mostly upfront. For example, the R and D cost of a new smart phone might be $100 million, but once the plans are drawn up and you're in production, basically the unit cost is really low. So the more smart phones the company produces, the faster they recoup their R and D losses. That's why bigger is better in high-tech industries.

My past work with Bernard Yeung of New York University and the National University of Singapore looks at foreign ownership in this light. What we do is look at U.S. firms that choose to go multinational and U.S. firms that don't go multinational and just stay in the U.S., and we find that some U.S. firms become very successful multinationals when they go abroad. Others choke; they absolutely fall apart when they go abroad, and they run back to the U.S. with their tails between their legs. The difference is that the successful U.S. firms that go abroad tend to have a recent track record of very high R and D spending.

What is going on? Well, we think moving into a foreign country is naturally a disadvantage. You don't know the market. You don't know the laws. You don't know the regulations. You don't know the customs. You need something to boost you to get over all those problems, and a technology advantage is one good way to do that. What that means is that successful multinationals, the ones that move into a foreign country and hang around, are the ones with the technology. Unsuccessful multinationals, the ones that come in and leave, are the ones that don't have the technology. So there is kind of an important technology transfer role that multinationals seem to play. Any country's most successful multinationals are also moving their technology abroad. That's one way the Canadian economy could get access to foreign technology.

In Canada, our telecoms dip their toes in foreign markets, but they tend not to go abroad. They tend to move across industries to get economies of scale. So our cable firms provide telephone services and buy television channels, and so on, and that is probably a less desirable way to get these economies of scale.

Despite a lot of convergence, it's still far from clear that our technology innovation in cable TV translates into making TV content. What's basically going on when we have this movement across industries is that we're losing the advantage of specialization. Our butchers are making bread and brewing beer and our bakers are making cold cuts, and they're probably not necessarily as good at each of these things as they would be if they specialized.

Do you want me to continue?

[The Chair, Conservative, Michael Chong]

Thank you very much, Professor Morck.

We'll now go to Professor Hejazi from the Rotman School of Management at the U of T.

Go ahead, Mr. Hejazi.

[Dr. Walid Hejazi, Associate Professor of International Business, Rotman School of Management, University of Toronto, As an Individual]

Thank you for the opportunity to appear before this committee. I apologize for not being able to appear in person. So because I'm using video conferencing, I guess I'm not an old-fashioned economist. That was a joke.

I'm an associate professor at the Rotman School of Management, University of Toronto. As a professor, I do extensive research on issues related to international trade, foreign direct investment, and international competitiveness, and I've published extensively in this area. I have undertaken many studies for Industry Canada, Foreign Affairs, and CIDA.

In January 2010 I released a study with the IRPP in Montreal, entitled “Dispelling Canadian Myths about Foreign Direct Investment”. In 2008 I wrote a study entitled “Foreign Direct Investment and the Canadian Economy” for the Competition Policy Review Panel Secretariat. I also worked closely with DFAIT and EDC in the preparation of “Assessing the Costs and Benefits of a Closer Canada-EU Economic Partnership”, which was tabled at the 2008 Canada-EU summit. All of these studies relate directly to foreign investment and rules around entry.

In my opening comments this morning I'd like to address three themes. The first relates to Canada's recent experience with foreign direct investment. The second is to highlight the importance of telecommunications as a key infrastructure industry that is special, and enhanced foreign participation would likely yield significant benefits to the Canadian economy. And third, the idea that this sector should be kept in Canadian hands comes at a cost, that cost being reduced competitiveness and prosperity.

On my first theme, Canada's experience with foreign direct investment, Canada as a destination for foreign investment has diminished over the past few decades. If you look at Canada's share of world FDI, Canada's share has fallen. If you look at Canada's share of the developed world's FDI, Canada's share has fallen. If you look at Canada's share of G-7 foreign investment, Canada's share has fallen. Canada's share of North American foreign investment has fallen. The bottom line, regardless of what benchmark you use, is that Canada has become less attractive as a destination for foreign direct investment.

Over the same period, Canada has seen its relative productivity fall, and we've seen the prosperity gap with the United States and other countries increase. Although there are many factors that underlie the slipping productivity and prosperity, one of the factors that certainly contributes to this is Canada's slipping FDI, foreign direct investment, performance.

FDI into the Canadian economy has been shown to bring with it advanced technology and management techniques, and enhanced competition, which Professor Morck alluded to earlier, which is critically important to innovation. All of these have resulted in this slipping performance that has resulted in a reduction in Canada's prosperity and its relative productivity to our main trading partners.

Industry Canada has been tracking this for several decades and has been working very, very hard to develop policies to make Canada a more attractive destination for foreign multinationals, but they have also been thinking of ways to bring those multinationals into Canada so that the impact on the Canadian economy, broadly based, would be maximized.

I must also mention that there is no rigorous evidence to indicate a hollowing out of the Canadian economy. To the contrary, Canada continues to generate global leaders, as demonstrated by the research done by the Institute for Competitiveness and Prosperity. And head office activity is more robust at foreign, in comparison to domestic, head offices, as shown by research done at Statistics Canada.

I must contrast Canada's falling share on the inward side--that is, Canada is becoming less attractive as a destination for foreign investment--to Canada's stellar performance on the outward side. Canadian firms are doing very well globally. We are increasing our reach into the global economy, and this is enhancing our competitiveness, as Canadian companies expand globally at a much more rapid rate than foreign companies are expanding in Canada.

Restrictions on foreign investment tend to have negative outcomes. As my research has concluded, as well as a wide body of related research, the best way to protect Canadian companies is not to restrict foreign ownership. The best way to protect Canadian companies is to create an environment that's conducive to innovation. By exposing Canadian firms to international competition, they will be forced to rise to the challenge of that competition. If it turns out to be the case that a foreign company can serve the Canadian market more efficiently than a Canadian company can, then what is the rationale for preventing entry? For the sole purpose of keeping that industry in Canadian hands? As a result, Canadian consumers are forced to pay higher rates and receive fewer services of lower quality. If Canadian companies cannot compete internationally, then Canadians lose.

Our data on outward investment, the fact that Canadian companies are expanding globally at a much more rapid rate than foreign companies are coming into Canada, shows that Canadian companies are doing well, broadly based, in international markets. They don't need to be protected.

I've also argued that restricting entry on foreign firms removes the discipline on Canadian companies. I don't have time to go in depth on this issue, other than to say that the financial markets impose a discipline on managers to perform up to global standards. In the absence of the possibility of a foreign company to take over a domestic firm, then the discipline imposed on management in Canada is simply to be the best in Canada, not the best globally. And that hurts Canadians.

My second theme is that telecommunications is a key infrastructure industry that is special. Enhanced foreign participation would lead to significant benefits. Telecommunications together with financial services and transportation are critically important infrastructure industries that impact the efficiency and competitiveness of all other industries in the economy. These three industries are different. If Canadian firms and individuals are not able to access such services, both in terms of depth and at low costs relative to those in other countries, then this impacts our ability to compete in the global economy.

If it is the case that Canadian firms are operating in the most efficient way possible, they really have nothing to fear about foreign entry. Foreign firms will not be able to compete, if it is the case that Canadian firms are operating to a global standard. On the other hand, if there is room in Canada for more players, then Canadians will be the beneficiaries. Relaxing restrictions on foreign entry into Canada's telecom industry will do two things: it will enhance pricing and customer service for Canadian individuals and businesses, and in the process it will make Canada more competitive. It must be reiterated: telecom is a critically important sector of the Canadian economy.

There's also evidence demonstrating a strong, positive relationship between broadband access and productivity and GDP growth. It's imperative that we ensure that the Canadian telecom industry has the investment in technology that is necessary to ensure Canada is up to global standards in this industry.

I should also add that the largest source of employment growth in Canada is from small business. The Internet and computer technology have reduced the cost of entry in many of these industries. For these businesses, the Internet and related technologies are key. We must ensure that these firms have access to low-cost yet internationally competitive technologies.

It must also be stated that there's evidence indicating that Canada is one of the most restricted countries in the OECD when it comes to FDI, in large part because of these three restricted sectors I alluded to earlier. Also, Canada has been shown to be very costly when it comes to costs relating to telecom services.

My final point I'd like to make this morning is the idea that this sector should be kept in Canadian hands. This policy comes at a cost. The cost of this policy is reduced competitiveness and prosperity for Canadians.

I have given many lectures in Canada and globally. The process of optimal policy design, as you know, requires that the costs associated with any policy must be set against the associated gains. My research has shown that, in general, restrictions on foreign ownership result in sub-optimal outcomes, and this result underlies the general move globally for governments to pursue policies that attract foreign investment.

Thank you.

[The Chair, Conservative, Michael Chong]

Thank you, Professor Hejazi.

We'll now begin with questions and comments from members of this committee, beginning with Mr. Garneau.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Thank you, Mr. Chair.

I'd like to thank both Professor Morck and Professor Hejazi for their presentations.

I would characterize your presentations as primers on foreign direct investment--foreign direct investment 101. It's a sort of theoretical exposé of the benefits of foreign direct investment.

However, this committee is focused on some very specific situations, namely the telcos, and the highly converged telcos, which of course include not only the transfer of information but a very important content that is linked to the Canadian identity. That is the issue we're grappling with.

We have a telecom act, as you know, and we have a broadcasting act.

I'll ask my first question to Professor Morck. You say the current telecom situation that exists in this country is inefficient. So that I understand what you mean by that, could you elaborate a little more on the current situation?

[Prof. Randall Morck]

There have been two major recent studies of the quality of telecoms, Internet access, third-generation networks, and so on, across countries: one conducted by the OECD and one by Harvard's Berkman Center.

The Berkman Center is the one with which I'm more familiar. It accepts some criticism of the OECD report but still ranks Canada rather badly. Canada was number two in penetration after South Korea in 2003, I think, in a previous OECD report. We had more households and more people connected to the Internet than any country except South Korea. By 2008, we had fallen to number 10.

In the top speed available to customers over the Internet, we were 19th in the OECD report by 2008. In the price of low-speed connections, we were the 21st best country in the OECD report. In the price of medium-speed connections, we were the 23rd best country in the OECD in 2008. In high-speed connections, we were the second worst. Only the Slovak Republic imposed more costs on Internet users for high-speed connections than we did.

We weren't even ranked in the very high-speed category because none of our major national providers provided that service.

The Harvard study looks at specific firms, and then it draws diagrams of clusters, because different firms have different plans at different prices. You get these diagrams with all sorts of dots where the different plans offered by different firms cluster. Our Canadian firms tend to cluster in the low-quality, high-price parts of almost every single graph in the Harvard study.

I think Harvard rates us number 19 among OECD countries in terms of overall price/quality trade-off. Those are pretty sad things. You can always find one good thing. If I look at the Canadian Internet sites, they say they're the best in dollars per minute. There are all sorts of ways of doing this. If we're bad in terms of the value and price of unlimited packages, then we can look at dollars per kilobyte.

If our connections are really slow, then we can look at dollars per minute. You can always slice it in some way that makes Canada look good, but it's hard to make a case that we're where we should be.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

As you can probably expect, as an MP, I've had Bell and Rogers and Telus and the wireless association in my office. They have all heavily challenged the metrics that were used in these studies.

They argue that if different metrics had been used--more than just the one example that you bring up--the results would have been different. You can understand there's a bit of a challenge for us as MPs to figure out who's telling us...or who is doing the best thing.

[Prof. Randall Morck]

None of the telecom companies objected when the OECD ranked us number two in 2003. Then they thought the same methodologies were absolutely wonderful.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

I understand. I'm not going to comment on that.

With Public and WIND and DAVE Wireless, the new entrants, would you say we have a situation today...? Some people have presented the argument that we have quite a few new players in the market now, and we know these new companies are going to try to achieve convergence themselves as they begin their operations.

What about the argument that some people have presented that we have quite a few in here and we should wait and see how it shakes out before going any further? Do you say the more the merrier, and let's keep building it up?

[Prof. Randall Morck]

In general--this goes back to the 101 thing you were rightly commenting on--entry seems to be the best way to get competition. Given that, the Berkman report has some long discussion of Canada and their opinions about why we fell behind. They argue that we did unbundling of local loop access rather badly, that we put sunset clauses in place so that entrants who were planning to use incumbents' fixed-wire systems to get into people's homes only had a certain number of years. Then they would have to either get their own local loops or leave.

We changed the rules. According to the Berkman Center, our incumbents charge the highest cost in the OECD for local loop access, that is, for access to homes, the final little bit where you have to go through copper.

It looks as if we've deregulated and allowed entrants in, but there's still some question as to how viable those entrants are compared to entrants in other OECD economies because of the way we've done it.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Garneau.

We'll go to Monsieur Cardin.

[Serge Cardin, Bloc, Sherbrooke, QC]

We started with a motion that mentioned Globalive and that served to show that the government had issued an order to get around the Telecommunications Act, which does not allow foreign control. Now we are getting into pure economics and international trade, almost. As Mr. Garneau said, we must never lose sight of the fact that, when the Telecommunications Act was put in place, it protected Canadian ownership in order to safeguard Canadian sovereignty and identity. As my colleague will probably tell you later, he who controls the medium also controls the message. So it is even more important to protect Canadian ownership in telecommunications.

We have heard a lot of testimony about research and development, innovation and competitiveness. Of course, some witnesses are still doing a significant amount of research and development. Take Bell, for example; we have been told that they invest more per dollar of sales in research and development than ATT. While participants have told us that we are significantly behind in innovation, I have seen no concrete evidence that we are behind in technology.

As for looking for more players in telecommunications through foreign ownership, a number of participants—especially those who are looking at the situation from the outside—do not seem to be considering the link between competition and territory. Population density counts. In Europe, everyone more or less lives in a 100 km ² area. Setting up or developing in an area that size is not all that difficult.

In broad terms, how far behind are we in technology really? Are we really behind in research and development?

[The Chair, Conservative, Michael Chong]

We'll start with Professor Hejazi, because he hasn't said anything yet, and then we'll go to Professor Morck.

Go ahead, Professor Hejazi.

[Prof. Walid Hejazi]

The evidence is very clear on the prosperity gap between Canada and the United States. Industry Canada, academics, and policy makers have been trying to understand for the last few decades what underlies this rising prosperity gap, why Canada's productivity continues to lag that of other countries.

There's no silver bullet answer to what underlies this poor productivity performance in Canada, but one of the main factors has to do with R and D spending.

If you look at R and D spending as a share of GDP, Canada lags other G-7 countries significantly. I understand the point you make that if you cut the data differently, maybe the Canadian companies would look better. To that I would respond that if the Canadian companies believe the methodology in the OECD study and other studies is flawed, then that means they believe they're best in class. That means they believe they're as good as telecom companies in other countries, to which I reply: why, then, would they fear the entry of foreign companies? It doesn't add up. The idea here is that if they are internationally competitive, if they're up to international standards, why is it the case that they would be so concerned about foreign entry?

One thing that has been shown to be very clear is that it's not just the dollars spent on R and D that matters. It has to do with the competition that the companies undertaking that R and D are involved in. What the evidence clearly shows is that for industries exposed to more competition, the R and D spending goes a lot further towards leading to innovation.

Thank you.

[Serge Cardin, Bloc, Sherbrooke, QC]

Mr. Chair, I would like to comment right away so that I do not get too far away from this gentleman's comments.

I do not believe that any of the companies who have come here to testify—and I am sure that my colleagues will confirm this—are actually afraid of competition per se. Some want the competition, others are more careful, precisely in order to protect our culture and identity.

I will move to Mr. Morck.

[Prof. Randall Morck]

Please forgive me that I'll respond in English. Je parle français, mais pas très bien.

My colleague responded to the R and D issue. I'll just add that R and D is an input to innovation; the output from innovation is productivity growth. You could actually spend a lot on R and D, but if it's not well spent, you don't get the productivity growth.

I'm not saying Bell is not spending its R and D well. I'm not going to talk about any given company. We have some companies in Canada that are very good, but the problem is economy-wide.

The point I was trying to make is that by regulating and taxing, implicitly or explicitly, the telecom sector, we're adding to the costs of every enterprise in Canada, including government, and that affects our productivity.

You made two other points. One was about population density, and I think that's a very legitimate issue. We may need to think about something akin to the rural electrification projects that we had many decades ago to get Internet access to smaller, more remote areas. But I think the way to do it is to use general federal tax revenue to subsidize it--not to tax the communication between different companies, basically tax the circulatory system of our economy. It's better just to tax general income, when you have something like that, rather than tax something that's so critical to so many industries.

On the Canadian culture issue...I'm a big fan of Canadian culture. I read Canadian history. I love reading about Louis Riel and I love reading about Jean Talon. Frontenac was much more interesting than George Washington, and the United Empire Loyalists are far more interesting than most Tudors and virtually any New England Puritan. One of the things I'm kind of disappointed about with Canadian culture is that our Canadian culture is stuff like Stargate SG-1 and programs about crusading coroners and sitcoms set in New York but produced in Canada. So I wonder whether our current policies really are all that effective at getting what we really want.

Now, they're certainly expensive. By taxing the telecom sector we're imposing huge costs on our economy, all across the economy. That's the work that Hausman has presented from the U.S., and I think it applies to Canada. Industry Canada certainly has economists capable of getting that data and giving you those exact numbers.

If we wanted to protect Canadian culture, I suspect that if we got rid of all of our regulations, our Canadian content rules, and our foreign ownership restrictions, our economic growth and productivity increase would support such an increase in tax revenue that you could probably increase the budgets of Radio-Canada, the CBC, and the National Film Board many times over and we'd still come out way ahead.

[The Chair, Conservative, Michael Chong]

Thank you, Professor Morck.

Merci, monsieur Cardin. Je suis d'accord avec vous: c'est une bonne idée.

Mr. Brown.

[Gord Brown, Conservative, Leeds—Grenville, ON]

Thank you very much, Mr. Chairman.

I find our presentations and the answers to the questions from our witnesses, who I want to thank for being here today, very interesting. I think many Canadians would find what they have to say very interesting.

I first want to start with Professor Hejazi.

Back on January 26, in the National Post, you wrote that the notion that restricting foreign investment will make Canada better off is a myth. You also said that Canada's being hollowed out is a myth.

Why are these beliefs held in our country, do you think, and why do you say they are myths?

[Prof. Walid Hejazi]

Thank you for that question.

Whenever I give lectures to MBA students, I always start with a question, and the question I ask is: give me an example of a foreign company operating in Canada. The lists are long and they come quickly. Then I ask them the question, give me examples of Canadian companies operating globally. A few names come up, but then the lists are short and they take a long time to come up.

I think generally Canadians have a fear of being taken over by the U.S., by foreign companies coming into Canada. But they really don't see, they don't appreciate how well Canadian companies are doing globally.

When I show them the data that clearly shows that by 1997 Canada's investment into the global economy exceeded foreign direct investment in Canada, they're really surprised. Canadian companies are doing very well in the global economy, and they're expanding globally at a much faster pace than foreign companies coming into Canada.

Whenever there is a foreign takeover in Canada, it gets a lot of media hype. Whenever there's a Canadian takeover of a foreign company, it doesn't make the media that much; it's not as exciting. Canadians have this fear of being taken over, but it's a myth, because if you look at the data, Canada now has something like 25% more investment abroad than there is foreign investment in Canada—over $600 billion invested abroad. So it's a myth.

Secondly, the argument that the best way to protect Canadian companies is to throw up barriers to foreign ownership is old-fashioned, and it doesn't square with the reality, the reality being that globally, virtually every country in the world is creating policies that will attract multinationals or attract foreign investment.

The best way to protect domestic companies is not by putting up walls to protect them from foreign entry. It's by giving them an environment in which they can rise to the international challenge to be globally competitive, so that in the face of foreign competition they're able to stand up, provide value, provide innovation and prosperity for Canadians.

So that's why I say they're a myth: because the evidence does not support either of those two claims.

[Gord Brown, Conservative, Leeds—Grenville, ON]

Thank you, Professor Hejazi.

I have one more question on that, concerning the benefit consumers could see if we removed the foreign ownership restrictions. What do you think the benefits for consumers might be?

[Prof. Walid Hejazi]

I go back to the argument that if it is the case that the Canadian telecommunications companies are operating at a globally competitive level, there really wouldn't be room for foreign companies to come into Canada. On the other hand, if Canadian companies are not operating to an international standard, then what will happen is, consumers will have a wider variety of choice. So the first benefit we get is to get a wider variety of choice. Second, if foreign companies come in and are not able to provide lower costs or higher quality, individual Canadians will not switch from a Canadian provider to the foreign provider.

On the other hand, if a foreign provider comes into the Canadian market and is able to provide lower costs and/or higher quality, then you'll see switching. So I think the first benefit we will get is increased variety, an increased selection of choices; second, I believe we'll get higher quality and lower costs.

But thirdly and most importantly, and Professor Morck alluded to this, the enhancement in competition would drive innovation in that sector, and telecom is fundamentally different from many other sectors: it's critically important to all other firms in the economy. So the general benefit that Canadians would get is enhanced competitiveness, enhanced innovation across the entire economy, not just in telecom.

Thank you.

[Gord Brown, Conservative, Leeds—Grenville, ON]

Thank you.

I'd like to move over to Professor Morck for a second.

You talked a little bit about the rural electrification program from many years ago to make electricity widespread in rural parts of Canada. I represent a riding south of Ottawa that has a fairly large piece of geography with not that many people. Broadband access has been an important issue there, and governments, both provincial and federal, have been supporting the improvement in broadband access.

Recently, we're hearing from all parties about how they want to see that access improved, and of course our government recently funded the program that's going on for massive improvement in rural broadband access in eastern Ontario. You talked about how government should subsidize it.

What more should the government be doing than it is doing now?

[Prof. Randall Morck]

The way we've tried to impose public policy goals on this sector is through regulation. We say to the cable companies or the channels or the telecom providers, “Do this: provide Canadian content, provide access, and in return we'll kind of give you monopoly profits.” That, I think, is the understanding that we'll protect you from competition if you do these public policy things. That hasn't worked well, because what they do is try to give the minimum possible they can towards the public policy goals while making profits.

I think the lesson from all of this is that if government wants something done, government should simply do it. We want certain things done that don't make a profit; therefore, we have a government to do those things. That's just the way it is. So if we want to have Internet access in places where it's not competitive for a private company to put it in, we'd probably need to have government simply pay for it, rather than try to regulate companies or protect them from competition in all kinds of crazy ways that drive up everybody's costs and sort of, kind of, make the companies do it. It's just not an efficient way to do public policy.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Brown and Professor Morck.

Mr. Angus.