What is Foreign Capital, Anyway? And Exactly Why Do We Need It?

http://www.caw.ca – news/FactsFromtheFringe/index.asp  – No. 252
Dec. 10, 2012.   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 Friday 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.

< http://www.caw.ca/en/11757.htm >

A version of this commentary was originally published in the Globe and
Mail

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