The Mercantilist Nexus

The facts concerning foreign control of Canadian industry are well known: 60% of manufacturing industry, 75% of petroleum and natural gas and 59% of mining and smelting were foreign-controlled in 1963. The degree of control has increased significantly since 1939, when the corresponding figures for manufacturing and mining were 38% and 42%. As recently as 1954 foreign control in both manufacturing and mining was only 51%.

By contrast, railways have always been and continue to the under Canadian control. Here foreign portfolio capital has diminished from 57% in 1939 to 22% in 1963 The only sector which has experienced a marked reduction in foreign control from 26% in 1926 to the present level of 4% is utilities. We may note from Table l5 that Canadian control in railways and utilities is public rather than private. Indeed, in 1964, of $34.4 billion Canadian-controlled assets of nil corporate non-.6nancial enterprise, over one third or $12.2 billion was in the public sector – almost exclusively railways and utilities.

Public investment in utilities is more than twice the value of railway assets and equals the entire value of Canadian-controlled assets in manufacturing, mining and smelting and petroleum. It equals also the value of assets of all foreign branch plants in manufacturing. This would indicate that very large sums of capital have been mobilised under Canadian entrepreneurship – where this has taken the form of public enterprise. We should note that a significant amount of these utility investments are provincial rather than federal public assets.

Foreign control is significantly lighter in manufacturing than in mining and smelting. In manufacturing, for reasons previously suggested, foreign capital seeks control rather than participation. There is no significant foreign portfolio investment in Canadian manufacturing. The same is not so of the mining industry. Thus, in manufacturing foreign ownership was 54%, whereas foreign control was 60%, of assets. By contrast, in mining and smelting the percentage of foreign ownership (62%) exceeded the percentage of foreign control (59%).



(in billions of dollars)

CONTROLLED IN (Billion $) CONTROLLED IN (Percentages)
Total Public Private U.S.A. Other Total Public Private U.S.A. Other
Manufacturing 13.7 0.1 5.3 6.3 1.9 100 1 39 46 14
Petroleum and Natural Gas 7.3 1.9 4.6 0.8 100 26 62 12
Mining & Smelting 3.8 0.1 1.5 2.0 0.3 100 40 52 7
Railways 5.3 3.7 1.5 0.1 100 69 29 2
Other Utilities 12.2 8.8 3.4 0.4 0.1 100 68 28 4
Construction and Merchandising


9.8 0.1 8.6 0.7 0.5 100 1 87 7 5
TOTAL 52.1 12.2 22.2 14.0 3.6 100 24 42 27 7
Canadian Balance of International Payments, 1963, 1964 and 1965 August 1967, page 80.

From Table 16 we note that foreign control in general and American control in particular is highest in industries where metropolitan taste-formation, technology and product innovation are crucial. These are automobiles (97%), rubber (97% ), chemicals (78% ), electrical products (77%) and aircraft (78%). All these industries primarily serve the Canadian market. Industries in which Canadian control pre­ dominates are characterised either by small production units, such as sawmills, construction concerns or certain food-processing industries, or by dim prospects, like textiles. Among industries in which there is still a substantial degree of Canadian control and where technology does play an important part we find pulp and paper (with 40% foreign-control),·agricultural machinery (50% ) and primary iron and steel (20%). In all three enterprises Canada established an early technological lead. A cultural implements and primary iron and steel date from the period of railway construction and the wheat economy. Pulp and paper, even where foreign controlled, tends to show considerably more autonomy of decision -making than other industries. Safarian’s research suggests that this may be due to the fact that in this industry Canadian Subsidiaries tend to be large compared with their corporate parents. Similar independent behaviour is found in some sectors of mining, particularly where foreign-controlled concerns do not have a corporate parent, as is the case with concerns such as Alcan or Inco.

Table 15 shows that foreign subsidiaries are strongly entrenched in both resource and in manufacturing industries. Of a total of $17.6 billion in foreign­ controlled enterprises in 1963, $2.3 billion was invested in mining and smelting.

$5.4 billion in petroleum and natural gas and $8.2 billion in manufacturing. Because foreign investment in Canadian resource industries is substantial and concentrated in large concerns, it is widely believed that direct investment in Canada is mainly directed to exports. In fact, the sales of foreign subsidiaries are heavily concentrated in the Canadian domestic market. A major study on foreign subsidiaries in Canada published by the Department of Trade and Commerce in 1967 showed that 82% of the output of foreign-controlled companies covered in this survey was sold in Canada. Of total sales of $15.1 billion by subsidi.1ries and branch plants in 1965, $12.7 billion were domestic-sales and only $2.7 billion were exports. These exports represented over one third of total Canadian exports for 1965 and were almost entirely resource-based. Branch plants export sales of manufactured goods amounted to a mere $900 million – and these as we shall see later, were strongly tied to special bilateral deals.

Table 16 -Concentration of Foreign Direct Investment in the New and Dynamic Commodity-Producing Sections, 1954 & 1963
1963 1963
Industry Percentage of Capital Under Foreign Control Total Capital in Enterprises Controlled in Percentage of Capital Controlled in
1954 1963 Canada U.S.A. Elsewhere Canada U.S.A. Elsewhere
Automobiles & Parts 95 97 15 558 3 97
Rubber 93 97 6 195 15 3 90 7
Chemical 75 78 45 295 727 22 54 24
Electrical 77 77 22 161 458 23 66 11
Aircraft 36 78 55 85 113 22 33 45
Agricultural Machinery 35 50 104 103 50 50
Pulp & Paper 56 47 1,217 817 279 53 35 12
Textiles 18 20 568 96 49 80 13 7
Beverage 20 17 488 101 83 17
Primary Iron & Steel 6 14 752 14 108 86 2 12
Total Manufacturing 51 60 5451 6,308 1,895 40 46 14
Petroleum &Natural Gas 69 74 1841 4,609 845 26 62 12
Smelting & Refinery of Non-Ferrous Ores 51 521 545 49 51
Other Mining 62 1,038 1,435 270 38 52 10
Total Mining 51 59 1,559 1,980 270 41 52 7
Total of All Industries   60 8,851 12,897 3,010 36 52 12
Canadian Balance of International Payments 1963, 1964 and 1965, August 1967 page 128.

The degree to which intra-company transfers between parents and subsidiaries have replaced market transactions is revealed by the fact that 50% of export sales of subsidiaries were sales to parent companies and 70% of imports purchased by them were procured from parent companies. The percentage of exports made by transfers varied considerably: minerals and primary metal 68%; gas and oil 59% and pulp and paper only 40%. By far the most important fully manufactured export was automobiles. Here 68% of export sales were transfers. In other manufacturing industries, exports though small, were organized primarily through transfers to parents: machinery and metal fabricating, for example, 91 %.

Similar mercantilist links were reported on the import side of the account. Total imports of the surveyed companies accounted for over one third of all Canadian imports in 1965, and 75% of these were purchased from parent companies. Subsidiaries in the mining and petroleum industries, for example, obtained over 80% of imports from parents as did machinery and metal fabrication branch plants.

In the branch plant economy the valuations which are placed on a-ports in the form of intra-company transfers of goods affect the distribution of profit between foreigners and Canadians. As the Watkins report points out “there may be consider­ able scope for arbitrary valuation of intra-firm transactions. This poses special problems for host countries and particularly to its tax collectors and customs officials”.

Where the wage bill is small in relation to the capital invested, as is the case in most resource industries, the true yield on the profits of the subsidiary may be the most important gain which accrues to the host country:

“Consider the case of a foreign firm which enters Canada to develop a new resource. Assume that the technique of production makes in­tensive use of machinery, which is imported, and uses little labour, and that the output is exported at prices determined in part by the foreign from; these assumptions ore often, though not always realistic. To the extent that relatively little labour is employed and the resource is exported, benefits accrue mainly to foreign consumers and foreign factors of production, and Canadian benefits consist largely of truces imposed on foreigners. To the extent that the foreign firm is able, at least for true purposes to set the export price, Canadian benefit will further depend on Canadian tax authorities ensuring that the firm, for whatever reason, does not price low and therefore shift profit and tax liability outside Canada.”

The authors of the Watkins report suggest that recent U.S. guidelines regulations asking companies to “charge subsidiaries closes to arms-length prices for service rendered than they appear to have done in the past in order to increase tax receipts by the U.S.” are evidence of the fact that changes in valuation can shift income from the hinterland to the metropolis. They go on to urge Canadian tax authorities to:

“exercise caution in the granting of special tax treatment or special subsidies to industries which are predominantly foreign-owned, particularly industries which do not generate substantial earnings for Canadian factors of production.”

While there may be a case for concessions which attract employment creating industry, there is an obvious danger that further transfer of the corporation tax field to the provinces could result in a game of competitive tax concessions from which nobody except foreign capital can gain.

The fact that 70 percent of subsidiary imports were obtained from parent and affiliated companies substantiates our earlier argument that branch plant manufacturing in the hinterland is the result of new forms of market competition which transfer tastes, techniques and assembly facilities to the hinterland. This creates a built-in demand for materials, components, capital goods and fully-processed goods for resale. Branch plant imports are, to some extent, captive sales. Here the mercantilist nexus does not result in overvaluation of imported inputs – although this may occur – but rather in a backward linkage of product differentiation. Typically, branch plant technology requires a number of specific inputs which arc supplied only by the parent company.

A very interesting study made by the U.S. Department of Commerce in 1963 showed that American branch plants located in Canada purchase a fur higher proportion of their materials in the form of imports than do similar branch plants in any other major area of the world. For U.S. subsidiaries in Canada, imports amounted to 15.5% of sales, compared with 8.8% in Latin America and 4.8% in Europe. It appears that one reason for the high import content of Canadian branch plants is large purchases for re-sale. These are the …indirect” exports which the National Conference Board pointed out “derive from the presence of U.S. production facilities aboard”. They are metropolitan gains from the homogenization of Consumption patterns abroad.

The fact that Canadian branch plant imports include a large amount of finished goods purchased for re-sale, appears to place special difficulties in the way of independent Canadian enterprise. In the year following the devaluation of the Canadian dollar in 1962, total imports into Canada rose by only 6 per cent. Imports of all kinds purchased by U.S. subsidiaries from parent companies, however, increased by 15%. If we remember that these are very substantial (about ono third of all Canadian imports) we can infer that the mercantilist nexus inhibits the substitution of domestic for imported goods, when the latter rise in price.

Safarian’s major study of 288 Canadian subsidiaries concluded that “to the extent that the subsidiary produces items identical to or marginally different from those of the parent there is a built-in incentive to buy from the parent”. He found that the smaller the subsidiary and the more it tends to assembly-type operations, the higher the proportion of purchases imported. The fact that the Canadian branch plant economy is characterised by an excessive number of firms, each producing too many product lines, is reflected in the high import content of their purchases.

The Watkins report also found that “non-resident owned firms appear to have a greater orientation towards imports than do resident-owned firms”. The study by Wilkinson referred to earlier similarly 6nds that “imports of secondary manufactures are an increasing function of the extent of foreign ownership of industry’. In an interesting argument Wilkinson approaches an explanation which is similar to ours: ho suggests that manufacturing subsidiaries will buy from their parents at a “price” which does not need to cover total fixed costs in the short run. The “short-run”, how­ ever, is perpetuated ”by the continuous development of new products and processes”. As a result, the author suggests, foreign-owned firms will always tend to buy u large-r proportion of imported inputs than will domestically owned firms.

The most serious consequence of the bias towards imports resulting from branch plant economy in Canada is the discouraging effect it has on Canadian entrepreneurship. The more market demand is shaped by metropolitan corporations, the more restricted becomes the area in which independent Canadian enterprise and innovation can operate. The results of this situation are most clearly reflected in current trends, in Canada’s external trade.