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?

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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.