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Increased foreign investment provides Canadian consumers with lower prices and higher wages

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Release Date: November 8, 2007

VANCOUVER, BC-Increased foreign investment and foreign business activity in Canada leads to lower prices for consumer goods, greater choice, better quality goods and services, and higher wages, according to a new paper by economists with independent research organization The Fraser Institute.

"Restrictions on foreign investment and business activity are designed to protect certain domestic industries and do nothing to help Canadian consumers or the overall economy," said Jason Clemens, The Fraser Institute's Resident Scholar in Fiscal Studies.

"Canada should be encouraging foreign investment and foreign business activity, rather than considering additional restrictions."

The Benefits of Foreign Business Activity in Canada reviews existing research on foreign business activity in order to assess the economic impact of restrictions on activities such as foreign direct investment, foreign ownership, and foreign competition.

"With the sale of large Canadian companies such as Inco, Dofasco, the Hudson's Bay Company, Sleeman's Brewing, and Alcan to foreign investors, a great hue and cry has arisen for stricter limits on foreign investment," Clemens said.

"But Canada has some of the most restrictive rules among industrialized countries on foreign business activity. More rules will further penalize Canadian consumers and harm our economy."

The paper found that Canada has a plethora of regulations restricting foreign business activity. The most significant is the Investment Canada Act, administered by Industry Canada. Under this act, foreign investments are reviewed before they are approved in order to ensure that such investment will be of net benefit to Canada. Additionally, there are a number of industry-specific regulations that limit foreign ownership or investment in particular business segments such as telecommunications, airlines, banking, pipelines, mining, oil and gas, radio and TV broadcasting, and publishing.

The research shows that industry-specific regulations shelter domestic firms from competition, ultimately resulting in higher prices for consumers, reduced choice, and slower access to technology on the part of industry.

Among countries within the Organization for Economic Cooperation and Development (OECD), Canada ranks 25th out of 29 nations in terms of openness to foreign business, joining other countries with heavy restrictions such as Iceland and Mexico. The countries most open to foreign business activity tend to be European, led by Belgium.

In fact, Clemens noted that several OECD reports have been quite critical of Canada's restrictive policies on foreign business activity. A 2006 survey singled out Canada as one of the most restrictive countries for foreign business activity in many sectors, and suggested it needed to lift restrictions of foreign activity in heavily regulated sectors such as airlines, telecommunications, and broadcasting if it wanted to increase competition and efficiency.

The study breaks down foreign business activity into three areas: foreign direct investment (the investment in assets of domestic companies), foreign ownership (a foreign firm gains a controlling interest in a domestic company), and foreign competition (foreign companies are allowed to compete directly with domestic companies in the Canadian market).

In all instances, the research shows that the foreign business activity improves the performance of domestic companies, usually by increasing productivity by creating competition or facilitating the transfer and use of new technology. Consumers benefit from additional choice and lower prices, while workers benefit through higher wages.

"The research is clear; foreign business activity increases investment, competition, innovation, and access to new technology. This leads to lower prices for consumers, additional choice and higher wages for workers," Clemens said.

"There's no sound, logical reason why Canadians should fear foreign investment and competition in Canada."

In light of the evidence showing the benefits of foreign business activity, Clemens called on the federal government to create a framework that encourages, rather than restricts foreign business activity, in order to increase Canada's competitiveness relative to other industrialized countries.

"We need to recognize that the economic benefits of foreign business activity will play a critical role in shaping future investment and competition policy in this country."



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