Foreign-owned or home-grown plants: as the C$ flies high, which are more apt to flee? - Macleans.ca
 

Foreign-owned or home-grown plants: as the C$ flies high, which are more apt to flee?


 

The pattern is familiar: a U.S. parent company closes a Canadian factory and we are once again thrust into the ancient debate over the vulnerabilities of Canada’s “branch-plant economy.”

Lately, such closures, especially in the manufacturing heartland of Ontario, have hit the news regularly, from Pittsburgh Glass Works walking away from three auto glass plants to John Deere closing its Welland, Ont. factory.

Of course, Canadian-owned operations can close, too, especially when a rising loonie makes all Canadian exports more expensive. The question has always been whether there is really any difference between how foreign and domestic owners respond to precisely the same bottom-line hit.

The argument typically boils down to anecdotes and impression. Economic nationalists bemoan the way rootless foreign owners pull out fast; proponents of foreign investment tout the virtues of outsiders bringing expertise and creating jobs.

A recently released Statistics Canada study called Death of Canadian Manufacturing Plants: Heterogeneous Responses to Changes in Tariffs and Real Exchange Rates, injects some cold facts into this heated debate. It offers ammunition to both sides.

First, the good news about foreign ownership. The report found that 35.7 per cent of domestic-controlled plants either shut down or moved abroad from 1984 to 1990 but only 26.4 per cent of foreign-owned operations. (The 1984-1990 period might seem a bit stale, but focusing on that stretch offered researchers a rich supply of data on exchange rate and tariff fluctuations.) The authors said plants owned by foreign multi-nationals were, on average, bigger and longer-established, enhancing their productivity and ability to survive.

But when they adjusted to compare only foreign- and domestic-owned plants of similar size and efficiency, the edge shifted to the home-grown operations. In this comparison of equals, the foreign-owned plants were twice as likely to shut down or move away because of a rising Canadian dollar. Overall, exchange rate changes pushed “plant exits” up four per cent for foreign-controlled plants, compared to 1.7 per cent for comparable Canadian-controlled plants.

The report speculated that foreign owners might have more options for moving production elsewhere. “Another possible explanation,” it said, “is that multinationals are more sensitive to changes in profitability.”

Whatever the reason, as the loonie flirts with U.S. dollar parity, or better, these findings bring badly needed evidence to counterbalance the biases and hunches that tend to dominate discussion of the pros and cons foreign ownership.


 

Foreign-owned or home-grown plants: as the C$ flies high, which are more apt to flee?

  1. Mr. Geddes, you are a superb journalist and your articles on this site are consistently through provoking. Thanks for that.

    One quibble: please stop repeating the typical media refrain that a rising C$ "makes all Canadian exports more expensive". It is simply not true.

    Virtually all Canadian exports are prices in US$. Little or nothing sold to buyers outside this country is priced in C$. Thus, a rising C$ (vs. the US$) has absolutely no impact on the US$ denominated prices of exports. The impact of a rising C$ is realised by domestic exporters when (and if) they convert their US$ export proceeds into C$. In this situation a continually rising C$ yields LESS C$ REVENUE for the exporter but, does not make exports more expensive. I have yet to see any research on the Cdn. manufacturing response to these revenue pressures (save those of the sort you report, above). So, suggesting that all export prices increase is not only incorrect financially, but (as far as I can see) as yet unsupported economically.

    Moreover, because for many manufacturing exporters imported material is a major portion of their input costs – again almost always priced in US$ – a natural hedge exists to mitigate the export revenue impact (decline) resulting form a rising C$.

    The issue, as your note above suggests, is far more complex than: rising C$ = bad. Still, it's important that we not begin every discussion of the issue with a false premise.

    • Depends on the sector. High dollar decimates pulp and paper exports.

  2. I don't think that the rising loonie is really an issue. I think that most manufacturers are happy to use the loonie as an excuse for something that they have been looking to do for some time.

    The fact of the matter is emerging markets in Asia make more sense for their bottom line. If Western governments want to keep these plants within their jurisdiction, they have no choice but to come up with incentives a la we'll-make-u-an-offer-u-can't-refuse.

    • or tariffs.

      Just sayin.

  3. The smart ones will recognize that this is a sign of economic health, not weakness, and will therefore trim the fat in their organizations to be able to compete at these export prices. Then if the loonie falls again they will be able to take advantage of it without relying on it to turn a profit.

  4. I saw " home-grown plants" in the headline…not the plants I was thinking of…hey, Doritos!

  5. Many large corporations hedge their currency exposures (see their annual reports) so Canadian dollar parity can actually mean that some of them lose a bundle (at least on their books) on their hedge positions. Some years, they can make a bundle (on the books).

    With growth in the economies of the BRIC countries, it is no wonder that jobs are leaving Canada. Rather than being related to exchange rate changes, I suspect that the governments of the BRIC countries are doing what they can to influence manufacturers to create domestic jobs. Canada has (and is) doing the same thing. I look at Canada's provinces scrapping over a few hundred jobs by offering incentives to corporations to open (or not close) plants. I wonder how many of Ontario's plant closures were because another country simply offered better incentives to operate there rather than in Ontario.
    http://viableopposition.blogspot.com/

    • "Rather than being related to exchange rate changes, I suspect that the governments of the BRIC countries are doing what they can to influence manufacturers to create domestic jobs. "

      Absolutely. Something along the lines of "if you want us to buy your product, you need to manufacture/assemble it here by either partnering with a local or set up shop."

      "Canada has (and is) doing the same thing."

      I don't think so. Local content requirement is not a policy in this country.