What is Foreign Capital? Does Canada Really Need it?
By Jim Stanford *
A common undercurrent in recent debates over foreign ownership is the near-universal assumption that Canada “needs” foreign capital to develop our vast energy resources. For example, Friday’s Globe and Mail quoted an Alberta professor who put it unequivocally: “There’s no doubt we need capital to develop our resources, and the biggest single pool is in China.” If the analysis starts with that assumption, then it’s no wonder policy-makers will bend over backwards to attract this essential, precious substance called “capital,” as witnessed by Ottawa’s approval on December 7 of two takeovers by state-owned foreign firms.
In popular discourse, capital is a synonym for “money.” In economics, however, it means something more specific. Capital, for economists, is production saved from current output, in order to be reinvested in the expansion of future output. Corn seed that is saved and replanted next year, rather than being eaten this year, is the simplest example.
To qualify as capital in this sense, the value in question must be produced but not consumed, and then used to produce something else. Complementing the tangible product that is actually reinvested (which we call physical capital), we also need the know-how (or “human capital”) to use ever-more-sophisticated capital goods to enhance future production.
With this distinction in mind, it is worth revisiting the questions that most observers have simply breezed past. What exactly is “foreign capital,” anyway? And why do we need it, to extract the resource wealth buried beneath our feet?
In the case of the two takeovers which Ottawa approved on Friday, we certainly aren’t getting human capital (or know-how) from the foreign investors. To the contrary, it’s our human capital that they, in part, are after (especially in the Nexen case). Bitumen is a unique Canadian resource, and no-one knows how to extract it and process it better than Canadians. Canadian technology is a key asset – and with these takeovers, the human capital will flow out (from Canada to Asia), not in.
The actual capital goods purchased and put to work in energy developments do often come from foreign suppliers. Most investment goods purchased in Canada are imported, and we’ve missed many opportunities to leverage our own resource investments to enhance Canadian content in the resource supply chain. However, importing a foreign-made capital good is different from relying on foreign capital. Remember, we pay for that imported machinery with income saved from our own current production. In essence, when we can’t produce a machine ourselves, we produce something else – usually more resources – to trade for it.
Measured by foreign direct investment, Canada has been exporting capital – not importing it. During the four years ending 2011, Canadian companies invested almost $75 billion more in their own foreign subsidiaries, than foreign companies invested here. By this measure, too, Canada supplies capital to the rest of the world, not the other way around.
Even if we simply equate foreign capital with “money,” we clearly don’t need it. Canadian non-financial businesses are sitting on $600 billion in cash balances (or “dead money,” in Mark Carney’s parlance). After-tax corporate cash flow substantially exceeds new capital spending, so that stockpile is growing even further. Business has de-leveraged dramatically: debt-equity ratios are at their lowest levels in decades. Corporations could clearly re-leverage if money was genuinely in short supply – and Canada’s resilient banking system would be capable and happy to oblige.
There are certainly cases when foreign investment does add real value to a project: supplying proprietary technology or expertise, integrating Canadian operations into global product development plans, or accessing international marketing opportunities. In those cases, I fully support more foreign investment. But none of these criteria fit the CNOOC and Petronas cases. Those takeovers add nothing to our real economic capacity to develop and sell our resources (all depending, of course, on how much and how fast we want to produce and sell those resources in the first place). The only thing these foreign investors bring to the table is money – and we’ve got plenty of that. Our real national capacity to produce is not enhanced by these transactions, and may be undermined (given the risks posed by foreign control over a strategic, non-renewable resource).
In short, there is no real economic sense in which Canada truly needs foreign capital (whether physical, human, or financial) to develop our own natural resources. We are quite capable of doing it ourselves, thank you very much – and we’d be much better off if we did it that way.
* Jim Stanford is an economist with the Canadian Auto Workers union, Canada's largest private-sector trade union. A version of this commentary was originally published in the Globe and Mail.