Nortel, and our techno-nationalist delusions

Technology and nationalism are heady enough intoxicants on their own; combined, the high is very nearly fatal. Still, it’s rare that you get quite such a frenzy of nonsense as has attended Nortel’s bankruptcy proceedings. It’s not uncommon for those who inhale the techno-nationalist fumes to forget some basic principle of economics or other. But in this case they can’t even seem to get their facts straight.

As countless commentators have informed us, the issue at stake in Nortel’s sale of its wireless division to Ericsson, the Swedish telecoms giant, is whether this precious national icon and its next-generation technology will be allowed to fall into foreign hands. Unless Ottawa steps in to prevent the sale, we are warned, we risk a repeat of the Avro Arrow debacle of 50 years ago.

There are just a few problems with this story, quite apart from the emotive Avro Arrow analogy. (The Arrow, far from the triumph of Canadian ingenuity of nationalist myth, was strategically obsolete even before it was built, and eight times over budget to boot.) Nortel is hardly a national icon, for starters. Bankrupt, leaderless, delisted from major stock exchanges, it’s doubtful it could have survived even without the string of accounting scandals and executive departures that sealed its fate.

It’s debatable how “national” it is, with three-quarters of its workforce outside our borders, while Ericsson, which has operated in Canada since 1953 and employs almost 1,900 Canadians, makes an unpersuasive barbarian invader. More to the point, neither Nortel nor its technology are going anywhere. The company will retain ownership of the wireless division’s principal asset, its patents on the Long Term Evolution (LTE) mobile broadband technology. Ericsson has not purchased the patents, but only licensed them. And the licences are non-exclusive: Nortel can license them to someone else, if it likes.

So it’s hard to see what all the fuss is about. Certainly the sale is in the best interests of Nortel’s shareholders and creditors, as its approval in bankruptcy court would suggest: at US$1.13 billion, Ericsson’s bid in last month’s auction was nearly twice as high as the initial, “stalking-horse” bid from Nokia Siemens. The company’s employees, likewise, are better off with an established global player like Ericsson than being forced into the arms of whatever “national champion” the critics would prefer Nortel had sold to.

That would include Research in Motion, whose last-minute intervention before a parliamentary committee did so much to fuel the controversy. For all the fevered rhetoric deployed by its co-CEO Mike Lazaridis—Nortel’s technology is a “national treasure,” the company is being “chopped up and sold off like so much cordwood,” etc.—it remains the case that RIM could have outbid Ericsson for the assets if it chose. Instead, it declined to participate in the auction, citing conditions that every other bidder agreed to.

Indeed, whatever RIM’s interests in the company, they did not seem to extend to the wireless division itself, but only to the patents. And since it remains open to RIM to license them even now, one can only assume its ambitions had more to do with denying them to Ericsson than any strategic purpose of its own.

That’s understandable, if disingenuous. Harder to comprehend are the objections of those without an obvious vested interest in blocking the deal. These seem focused on everything except the deal itself. One common complaint, for example, has it that Nortel was the beneficiary of millions of dollars in government research funding over the years, and so . . . and so . . .

And so . . . what? Again, the objection is dubious on its face—Nortel hasn’t made a profit in over a decade, and so was in no position to collect any R & D tax credits all that time. But quite apart from that, whatever the merits of subsidizing Nortel’s past research, it’s what’s known as a sunk cost: blocking the Ericsson sale won’t get it back. The deal has to be assessed on its costs and benefits in the future—an appraisal that the company’s management, shareholders and creditors are better placed to make than MPs and self-interested rivals. Or Investment Canada for that matter.

Hardly better is the objection that “everybody else does it.” Even if it were true that other countries would not hesitate to prohibit such a sale, it would not make the case that we should. You hear similar arguments in favour of subsidizing this or that high-tech industry—not on its merits, but because other countries do. It sounds hard-headed, in a “we can’t be the only boy scouts” way, but only if you accept its unstated premise: that Canada must be a player in that particular industry—wireless, or biotech, or whatever is fashionable. Just now there’s a group making the rounds insisting that Canada must have its own automobile manufacturer.

Oh? Who says? And why has this divine dogma, so self-evident to the enthusiasts, eluded those in a position to invest their own money in it? The answer is that this has nothing to do with economics, and everything to do with the peculiar anxieties and snobberies of its proponents, their beliefs—tastes, really—about the sorts of activities an advanced economy should be engaged in: what the former chief economist of the OECD, David Henderson, has memorably called their “techno-aesthetic intuition.”

They’re entitled to their beliefs, of course. But you’d think they could find their own companies to try them out on.