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.