Foreign Takeovers [in Canada] Should Hinge on Reciprocity – by Roger Martin (Toronto Star-November 16, 2010)

The Toronto Star is the largest circulation broadsheet in Canada. The paper has an enormous impact on Canada’s federal and provincial politics as well as shaping public opinion. This column was originally published November 16, 2010.

“But it is not reciprocity to allow Vale to buy Inco. The Brazilian government has the absolute right to stop any takeover of Vale. Reciprocity would mean that if Vale has the right to buy Inco, then Inco would have the right to buy Vale. Similarly, it is not reciprocity to allow BHP to buy Potash. As part of the BHP-Billiton merger, the Australian government imposed draconian restrictions on BHP, meaning that BHP can go hunting internationally but it can never be hunted.” – Roger Martin, November/2010

Roger Martin is dean of the Joseph L. Rotman School of Management at the University of Toronto and chairman of the Institute for Competitiveness & Prosperity.

Sadly, the federal government’s decision to block the purchase of Potash Corporation by BHP Billiton Ltd. is likely to hurt the future competitiveness of Canadian companies.

This does not imply that Canada has no right or cause to challenge foreign takeovers of Canadian companies. Far from it. The problem is with the “net benefit” theory and rationale used by our government to block the takeover.

This approach to foreign direct investment is in stark contrast to the approach to merchandise trade, the traditional focus of trade policy, where the theory is reciprocity: you let us send you our BlackBerrys without tariffs or restrictions and we will let in your GE MRI machines.

We need to move policy from net benefit to reciprocity as the defining criterion.

If net benefit was used in merchandise trade, there would never be a lowering of trade barriers because every single industry or company that is adversely affected would wrap itself in the protective flag of net benefit.

Quebec textile makers would declare there to be no net benefit to allowing free trade in textiles and Washington State sawmills would declare there to be no net benefit in allowing free trade in softwood lumber, etc.

The world has gotten to freer trade only by way of utilizing broad reciprocity: we will open our markets broadly to your imports if you open yours broadly to our exports. Nations understand that there will be some net beneficiaries and net benefactors but that overall there will be an efficiency gain for both economies, so it is sensible to put up with the minuses.

We are in the middle of an historic 50-year reshuffling of the ownership of the world’s business assets, making international capital flows centrally important to long-term country competitiveness.

Around the world, national franchise companies (such as Labatt’s) are being bought up by global players (e.g. Interbrew). And smaller or narrower global players (Zenon Environmental or Falconbridge) are being bought up by bigger and/or broader global players (GE and Xtrata respectively).

For this reason, Canada needs to bring the sophistication of the long-established thinking from merchandise trade to the realm of foreign takeovers.

We need our Canadian companies to globalize without being hobbled by government policies related to foreign takeovers. And we can’t be naïve boy scouts while this is all transpiring. Basing our policy on reciprocity, not net benefits, is essential to the desired outcome.

If our policy remained based on net benefits, other countries will start using net benefits logic against Canadian companies when they attempt to grow globally through foreign acquisition. And unfortunately, net benefits is such a vague and subjective concept that every single foreign takeover here or abroad can be struck down if the government in question wants to show that there aren’t net benefits.

For the rest of this column, please go to the Toronto Star website: http://www.thestar.com/business/companies/potash/article/891109–reciprocity-should-be-guiding-principle-in-foreign-takeovers

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