Well managed or not, state-owned enterprises are probably good for Canada

Stephen Gordon responds to Jack Mintz

Jack Mintz provides the best-reasoned defense I’ve seen for the Conservative government’s new rules about how takeover bids by foreign state-owned enterprises (SOEs) should be an “exception,” but I’m still not convinced.

Here is the key paragraph:

The economic role of takeover markets is to enable those with better management skills, technologies or other economic strengths to buy up companies operated less efficiently. In a world absent of taxes and government interventions, the best managers will be able to wrestle control of a firm by outbidding others with a higher premium on share offerings. This is what makes a business sector truly dynamic. For this reason, Canadians should not want to block foreign direct investment that will lead companies to be better managed. But SOEs come to the table with government support, either tax-exempt status or explicit or implicit financial subsidies. They might bring new capital, but they may not provide superior management. One no longer gets the best management operating companies through the takeover process, since SOEs are in position to outbid private competitors who pay taxes (now or in the future) and receive no public support. With the SOE takeover, inferior performance means a loss in profits and potentially job layoffs.

The problem I have with this argument is that even if SOE-managed firms did bring in high-quality management and better business practices, we’d still  see similar effects: the new entrants would also be in a position to outbid existing competitors, driving up the costs of labour and other inputs, and making life more difficult for existing firms.

It is almost certainly true that foreign publicly-owned firms have cheaper access to capital than most domestically-owned resource companies. But then again, so do foreign privately-owned multinationals. (Capital markets are highly integrated, but not perfectly so: multinationals can usually draw from a broader and deeper pool of savings.) In the latter case, this access to cheaper capital is usually presented as an argument in favour of foreign investment; it’s not yet clear to me why access to even cheaper capital makes SOEs less attractive.

Everything else being equal, Canadians should prefer that firms be well-managed: we want companies to produce the most value with their capital. But to the extent that the ability  to conjure new capital out of thin air (or from foreign taxpayers) produces benefits equivalent to good management, we needn’t be too fussy about how that value is created.

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