Multinationals: The Game and the Rules: Coming Investment Wars?

C. Fred Bergsten

From Foreign Affairs, October 1974

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Summary:  Canada will now permit new foreign direct investments only when they bring "significant benefit" to Canada. The determination of "significant benefit" is explicitly to be a policy decision of the cabinet, based on five criteria: the contribution of the proposed investment to "the level and nature of economic activity in Canada," including employment, use of Canadian components, and exports; the degree and significance of Canadian participation in the enterprise; the effect on productivity, technological development and innovation in Canada; the effect on industrial competition; and the compatibility of the investment with the economic and industrial policies of the national and provincial governments.

Canada will now permit new foreign direct investments only when they bring "significant benefit" to Canada. The determination of "significant benefit" is explicitly to be a policy decision of the cabinet, based on five criteria: the contribution of the proposed investment to "the level and nature of economic activity in Canada," including employment, use of Canadian components, and exports; the degree and significance of Canadian participation in the enterprise; the effect on productivity, technological development and innovation in Canada; the effect on industrial competition; and the compatibility of the investment with the economic and industrial policies of the national and provincial governments.

The following scenario thus becomes almost inevitable. The Canadian cabinet will approve a large and controversial U.S. investment. Nationalist opposition will charge a sellout of Canadian interests. The government will respond that the investment brings "significant benefit" to Canada.

But Canadian politics will not permit the simple assertion of "national interest" by the governing party. Opponents of the investment (and of the governing party) will enumerate the alleged injury it brings to Canada. The government will be forced to counter by specifying the benefits which, in its view, outweigh the disadvantages. It will thus publicly reveal, for example, that the investment will bring x thousand additional jobs and y million dollars of additional exports to Canada.

International conflict becomes certain at this point. The AFL-CIO will charge that the x thousand jobs have been exported from the United States to Canada, validating its case against foreign investment by U.S. firms. The Treasury Department will charge that Canada has diverted the y million dollars of exports from the United States, weakening the U.S. balance of payments and the dollar. One virtually certain result is intensified U.S.-Canadian hostility. Another, which is a theme of this article, is an intensification of political pressure in the United States against all foreign investment by American firms.

Such overt efforts by Canada to capture an increasing share of the benefits of foreign investment would by themselves have a significant impact on U.S. policy, because Canada remains by far the largest single recipient of U.S. investment and because the rapid flow of communications between the two countries assures that adversely affected American interests will become aware of the situation. But the new Canadian policy is only illustrative of one of the basic global trends of the 1970s. Virtually every country in the world which receives direct investment-which means virtually every country in the world, big or small, industrialized or developing, Communist or non-Communist, Left or Right-is levying increasingly stringent requirements on foreign firms.

The objective of these policies of host countries is to tilt the benefits brought by multinational companies as far as possible in their favor and to minimize the costs to them which can be associated with such investments. Few countries any longer ask the simplistic question: "Do we want foreign investment?" The issue is how to get foreign investment on the terms which are best for them, and indeed to use ...

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