Starving the new economy to feed the old

What this country needs is fewer entrepreneurs and more accountants. Also tax lawyers, PR flacks, and other of the various breeds of paper-pushers that cluster in and around the nation’s largest head offices.

That, at any rate, is what one would conclude from the latest round of hysteria over the “hollowing out” of corporate Canada, the odd name given to a business sector that has been fairly stuffed to the gills with foreign investment over the last decade or so...

What this country needs is fewer entrepreneurs and more accountants. Also tax lawyers, PR flacks, and other of the various breeds of paper-pushers that cluster in and around the nation’s largest head offices.

That, at any rate, is what one would conclude from the latest round of hysteria over the “hollowing out” of corporate Canada, the odd name given to the phenomenal inflow of foreign investment into Canada over the last decade or so -- hundreds of billions of dollars supplied by obliging foreigners on advantageous terms, without which the task of raising capital for Canadian entrepreneurs would have been that much harder.

The initial Canadian recipients of these headline-grabbing investments, as I have pointed out before, are but the conduits through which foreign capital passes on its way to other investments across the economy, since the shareholders in these large, famous, “mature” (read: overpriced) firms do not tuck the proceeds of sale into a sock, but reinvest in smaller, cheaper, faster growing firms. That, indeed, is the only reason they are persuaded to sell: because they are paid at least as much as the discounted stream of future returns they might expect were they to hold onto their stock, and because they think the same money can earn higher returns elsewhere.

Which is why it hasn’t just been the objects of takeover bids themselves whose stock has soared in recent months and years: it’s the whole market. The economists at CIBC calculate that foreign takeovers, at an average 30% premium over the market price, have fuelled 44% of the roughly 2000 point rise in the Toronto Stock Exchange over the past year. Moreover, the “wealth effect” of all that increased shareholder value can be seen in surging sales of consumer goods, notably cars, and in the continuing robust health of the Canadian housing market, even as its American counterpart craters.

But all of that beneficial investment and reinvestment should be prevented, according to the economic nationalists -- the Liberals, in a preposterous attempt at opportunism, have just called for a moratorium on all foreign takeovers -- in order that ... well, usually they don’t get around to offering a reason, but so far as they do, it’s to preserve those fabled head office jobs, the loss of which has made Toronto, Montreal and Calgary the ghost towns they are today.

Now, I mean no disrespect to accountants and tax lawyers -- indeed, they include in their number some of the finest minds in the country -- but much of the work these fine minds are called upon to perform is, not to put too fine a point on it, socially useless. Though they are undoubtedly worth every penny their clients pay them, that their services are required at all is mostly the creation of an overly complicated tax system and an overly burdensome regulatory apparatus. Reform the tax code, tame excess red tape, and many of these jobs would disappear, freeing their current occupants to put their capacious brains to more productive uses.

Would we bemoan this as a loss to the economy? Would anyone take this seriously as an argument against tax reform? Yet that is what the proponents of foreign investment controls would have us do: stand in the way of a broadly beneficial economic change in order to protect a few beneficiaries of the status quo; starve the new economy to feed the old. The economic vision this reveals -- wealth creation through head-office bloat -- is one of the odder bits of nonsense to surface in this debate, on a par with the claim that mining is a “strategic” industry.

It is in this light no surprise at all, though it seems to amaze many in the media, to find some of the biggest names in corporate Canada leading the charge against foreign takeovers. The otherwise happy life of a chief executive is made miserable by just two things: shareholders and consumers. They are hirelings of the one and slaves to the other, and like any employee (or slave), they chafe at the indignity of their position. Which is why these “free marketers” are forever invoking the government’s assistance, either to extract from taxpayers what they could not persuade them to part with as consumers, or to protect them from the wrath of shareholders.

Takeovers of any kind, foreign or otherwise, put management’s position -- and jobs -- at risk. Takeovers by private equity firms are especially loathsome: where share ownership is dispersed, and boards of directors undemanding, managers tend to have things their way; sole proprietors tend to be less forgiving. As it so happens, the most likely source of takeover bids for Canada’s largest firms, and therefore the main threat to their managers’ jobs, comes from abroad. Of course they’re going to be opposed.

I don’t mean to suggest that all of the protest is self-interested. But chief executives are managers, and take a manager’s view of the world. When Manulife’s Domenic D’Alessandro, for example, frets that Canadians are losing “control” of their largest firms, he isn’t thinking of the owners of these companies -- the shareholders, in whom one would ordinarily assume control of a corporation is vested, who are surely exercising that control by selling their shares. And he isn’t thinking of consumers, who control firms’ fates, whatever their nationality, via their purchases in the marketplace. He means their managers. That’s who’s losing control.