11-010-XIB
Canadian Economic Observer
July 2006

Head office employment in Canada, 1999 to 2005

by M. Brown and D. Beckstead*

In the late 1990s and early 2000s, concern emerged in Canada that a rising number of foreign takeovers of Canadian companies was resulting in the ‘hollowing-out’ of Canadian corporations. As a result, it was alleged that corporations would no longer demand the services of financial markets or key business services. Since financial and business service industries are among the fastest growing and highest paying sectors, this phenomenon was seen to hamper Canada’s growth prospects. Recently, this concern has re-emerged with a second wave of takeovers.

Hollowing-out is also perceived to be associated with a decline of the management function. In particular, it is related to the movement of head office employment out of Canada, especially senior management functions. In this paper, we ask again whether the statistical evidence supports the contention that the head office function is in decline.

Our previous study¹ provided an analysis of head office employment from 1999 to 2002. It showed head office employment increased over the period, suggesting head offices were not decamping en mass. This study extends our previous work by adding three years of data. This provides a better perspective on longer term trends, while also providing a more up-to-date picture of head office employment in Canada.

In addition to looking at longer term trends, this study examines the effect of foreign ownership on head office employment. Much of the concern expressed in the past about the alleged hollowing-out of corporate Canada centred on the influence of rising foreign ownership on head office employment. It was hypothesized that foreign firms would consolidate in their home country the management functions (of their newly purchased Canadian operations). In this paper, we directly test this proposition by asking what happens to head office employment when control changes from domestic to foreign. We also examine the extent to which foreign firms contribute to head office employment and head office employment growth.

Concerns about head office employment extend from the national down to the local scale as cities are often anxious to expand their head office base. This interest stems from three factors. First, head offices are thought to bring with them prestige that adds to a city’s image. Second, head offices generate demand for financial and business services, which form an increasingly important part of urban economies. Finally, head offices provide relatively high paying jobs that add to a city’s economic base.²

Because of these interests, concern is often expressed when a city loses a head office. But whether a city should view the loss of a single head office as a significant event depends on the frequency of the entry and exit of head offices. If head offices enter and exit only rarely, then a lost head office might not be replaced. On the other hand, if head offices enter and exit regularly, then a new head office is likely to emerge to replace any lost head office. In order to assess the importance of head office turnover, we measure rates of entry and exit of head offices.

Since head office employment in Canada tends to be concentrated in a few key metropolitan areas—Toronto, Montréal, Calgary and Vancouver—we also provide evidence of the evolution of their head office employment. Our previous research identified distinct trends in head office employment across Canada’s major head office cities between 1999 and 2002. In Eastern Canada, Toronto’s head office employment steadily rose while Montréal’s declined. In Western Canada, Calgary had emerged as the most important head office centre, supplanting Vancouver, which experienced declining head office employment.

There are many questions about how these head office centres have performed in the intervening years since these results were published. Has Vancouver continued its decline or has its recent boom led to a revival? Has Toronto’s growth visibly slowed in the face of Calgary’s rapid growth? Has Montréal continued its slide or has its relatively buoyant economy led to a revival in its head office sector?

National trends in head office counts and employment

One of the questions we are seeking to answer is how Canada’s head office sector has performed over the past six years. Head office employment may be increasing because the economy is growing or because technological change allows firms to consolidate their management functions in their head offices rather than dispersed across their production units (e.g., manufacturing plants). Alternatively, head office employment might be in decline as investments in new information technologies help to streamline the management function or because head office jobs are being moved abroad.

The head office function continues to grow in Canada, measured in terms of counts of head offices or employment in head offices. After a decline in the number of head offices between 1999 and 2000, the number of head offices has risen since, albeit with a slight decline between 2004 and 2005 (see Figure 1). Counts of head offices grew by 4.2% between 1999 and 2005.

Figure 1

Head office employment followed a similar pattern to head office counts (see Figure 2), falling between 1999 and 2000 and then grew afterwards. However, unlike head office counts, there is no apparent slowdown in head office employment in 2004 and 2005. Employment grew by 11% between 1999 and 2005, slightly less than business sector jobs over the same period (14%).

Figure 2

Trends in foreign- and domestically-controlled head offices

There continues to be interest among analysts as to whether foreign control is associated with the hollowing-out of Canadian corporations. In particular, concerns have been raised that, as Canadian firms are taken over by foreign firms, the management functions of these firms are being moved abroad, resulting in the loss of head office employment.

We examine the effects of foreign ownership on head office employment by examining trends in the number of and employment in foreign- and domestically-controlled head offices over time.³ Figure 3 plots counts of head offices by domestic and foreign status.

Figure 3

Domestically-controlled head offices outnumber foreign-controlled head offices by a ratio of just over three to one. The number of head offices of domestic firms fell slightly over the period, while counts of foreign head offices rose. The gains in counts of head offices observed nationally resulted entirely from an increasing number of head offices of foreign-controlled firms.

Figure 4 plots employment in domestic- and foreign-controlled head offices over the study period. Much of the gain in head office employment since 1999 was generated by foreign-controlled firms. The head office employment of domestically-controlled firms increased by 6%, while the head office employment of foreign-controlled firms increased by 21%. As a result, about 63% of employment gained over the period was in foreign-controlled head offices.

Figure 4

There was relatively little change in the size of head offices of foreign and domestic firms over the period. The average level of employment in foreign head offices fell slightly from 71 in 1999 to 68 in 2005, while the average size of domestic head offices increased modestly from 32 to 35.

From 1999 to 2005, foreign firms accounted for all of the growth in the number of head offices in Canada and the majority of the gains in head office employment. This growth might have arisen from two quite different sources. On the one hand, growing numbers of and employment in foreign head offices might be the result of internal organic growth. The number of foreign head offices may have grown because foreign firms are establishing new head offices. Similarly, the strong employment gains in foreign head offices might have resulted from these new head offices or employment growth in foreign head offices that were present all along. On the other hand, the growing importance of foreign head offices might have come from the takeover of domestic firms. Head offices may have been merely switched from domestic to foreign status, swelling the number of foreign head offices and their employment.

Between 1999 and 2005, the net gain in foreign head offices was 191. Most of these gains resulted from births of new foreign head offices exceeding exits. Over the period, 281 foreign head offices exited, while 419 entered. This net gain was 138 head offices or about 70% of the total gain in head offices. The remaining gains in head offices (53) resulted from more head offices switching from domestic to foreign controlled (130) than from foreign- to domestically- controlled (77).

Foreign-controlled head offices increased their employment by about 11,000 workers between 1999 and 2005. These gains can arise from three sources: (1) employment in entering foreign head offices exceeded employment in exiting head offices (births-deaths); (2) net gains in employment for foreign head offices that continued over the period (continuers); and (3) from the switching of head offices from domestic to foreign control (control change). Figure 5 presents the division of the total net change in the level of employment in foreign-controlled head offices into these three components.

Figure 5

All of the net employment gains in foreign-controlled head offices were the result of employment additions from head office births exceeding employment losses from head office deaths (see Figure 5). Continuing foreign head offices lost employment and the net effect of changes in control was also negative. The latter requires some explanation.

Employment in head offices (8,138 in 1999) whose firms switched from foreign to domestic control was greater than that of head offices (7,751) that switched from domestic to foreign control, resulting in a small negative effect for control change.

Despite the fact that the foreign-controlled sector appears to have been more dynamic than the domestically-controlled sector, in terms of the creation of head offices and head office employment, it remains unclear what we should conclude about the effect of changes of control from domestic to foreign on aggregate head office employment. Does the takeover of domestic firms result in the loss of head offices and head office employment as management functions are consolidated in the foreign firm’s home country?

The takeover of a domestically-controlled firm can have several effects. It can cause the closure of the head office, if the management function were consolidated in the foreign firm’s home base. On the other hand, a takeover may also signal a period of growth, requiring considerable management expertise. If this were the case, then the foreign firm might keep a Canadian head office or, if there was no head office, establish a new one to manage its expanding Canadian operations.

The effect of control change can be tested by asking what happens to head offices when control shifts from domestic to foreign (and visa versa) and observing whether this is associated with an increase in the rate at which head offices are closed and whether employment grew or declined in head offices that remained.

Of the 164 head offices that switched from domestic to foreign control between 1999 and 2005, 21% (34) were closed, resulting in a loss of 1,709 jobs. It should also be noted that 38 head offices were added when firms switched from domestic to foreign control, resulting in 2,346 additional jobs. As a result of a change in control from domestic to foreign, more head offices were created than lost and they employed more workers than those head offices that were lost.

Of course, as foreign firms takeover Canadian operations, they may not close down their newly acquired Canadian head office completely, but may reduce employment if only a portion of management functions are moved abroad. Alternatively, they may expand their management function in Canada. Figure 6 shows employment in continuing head offices that switched from domestic to foreign control between 1999 and 2005. Employment in these head offices increased slightly over the period. In contrast, those firms that switched from foreign to domestic control experienced a fall in head office employment. These results suggest foreign firms, on average, maintained head office employment. They also suggest that foreign firms were divesting themselves of less dynamic firms, which experienced a significant drop in head office employment when control was transferred.

Figure 6

Firms that shifted from domestic to foreign control opened more head offices than they closed, the net result of which was an increase in head office employment. The same category of firms also maintained the level of employment, on average, in continuing head offices. These results do not support the assertion that the takeover of Canadian firms by foreign firms is associated with the reduction of head office employment. On a case by case basis, a head office might be downsized or closed after a takeover by a foreign firm. However, a foreign firm might establish a new head office or expand its existing head office after the takeover.

Turnover in head office employment

The loss of a head office in a city or community can generate concern, if the loss is often seen as rare and of considerable importance to the local economy. The perspective is frequently taken that when a head office is lost, it is unlikely that a replacement will emerge. This raises the obvious question: How often do head offices enter and exit the economy? Are these rare occurrences or do they take place regularly? Does the occasional newspaper article reporting of a high profile departure miss the fact that one event does not establish a trend, especially when entry and exit occurs frequently?

We can measure the likelihood that a head office will close by asking what proportion of head offices in 1999 were no longer in operation by 2005. Similarly, we can measure the likelihood that a new head office will emerge by calculating the proportion of head offices in 2005 that were not present in 1999.

Turnover in head offices was considerable over the 1999 to 2005 period. Of the 4,061 head offices present in 1999, fully 1,489 or 37% had exited by 2005. These lost head offices, however, were replaced by new entries. Of the 4,161 head offices present in 2005, 1,589 or 38% did not exist in 1999. The emergence of new head offices was strong enough to renew the head office sector. The remaining head offices were continuing in both 1999 and 2005.

High rates of turnover, in terms of counts of head offices, may not matter much if the head offices are relatively small. High rates of turnover in small head offices may not translate into a larger turnover in employment across head offices. Figure 7 shows the proportion of jobs in head offices in 1999 that were lost by 2005 and the proportion of jobs in 2005 that had been created since 1999. Of the head office jobs present in 1999, fully 27% were lost by 2005 due to the exits of head offices. This is less than the proportion of head offices in 1999 that were closed, but still a significant loss of jobs. In 2005, 36% of jobs were in head offices that had entered since 1999. There was no appreciable change in the aggregate employment in the continuing subset of head offices.

Figure 7

The closure of a head office or the opening of a new one is not rare, it occurs all the time. Moreover, these entries and exits account for a significant share of the net change head office employment.

Head office employment in cities

Canada’s head office employment is concentrated in four major metropolitan areas—Toronto, Montréal, Calgary and Vancouver. While accounting for 38% of Canada’s population in 2005, these four cities made up 73% of Canada’s head office employment in the same year. Although these four metropolitan areas maintained their share of head office employment throughout the period, their individual performances varied widely.

As noted in the introduction, between 1999 and 2002 Toronto and Calgary increased their head office employment, while Vancouver and, to a lesser degree, Montréal faltered. The question at hand is how they have performed since. Has Vancouver continued its decline as a head office center or has Vancouver’s recent boom led to a revival? Has Toronto’s growth visibly slowed in the face of Calgary’s rapid rise? Has Montréal continued its slide or has its recently revitalized economy revived in its head office sector? Table 1 shows the level of head office employment for these four metropolitan areas from 1999 to 2005.

Table 1 Head office counts, employment and average size by city

Toronto continues to be Canada’s most important head office centre. Head office employment in Toronto grew by 19% over the period, and this led to a rise in Toronto’s share of head office employment from 31% in 1999 to 34% in 2005. There was also no apparent slowdown in the growth of Toronto’s head office employment over the period, despite the rise of Calgary as an important head office employment centre.

Calgary’s rise as a major head office centre over the past six years has been remarkable. Head office employment in Calgary increased by 64% over the period, three times Toronto’s second-fastest growth.

Calgary’s rise puts Vancouver’s decline into even sharper relief. Despite Vancouver’s buoyant economy, head office employment continues to decline. In 1999, Vancouver was Western Canada’s most important head office centre, with employment levels well above Calgary’s. In the ensuing years, Vancouver’s head office employment declined. With Calgary’s strong growth, this has led to a reversal of positions, Calgary is now Western Canada’s most important head office centre.

Montréal has been and continues to be Canada’s second most important head office centre, as measured by employment. Between 1999 and 2001 head office employment in Montréal declined, but since 2001 these losses have been fully recovered. Montréal’s recent economic upturn appears to be reflected in its head office employment. Yet Montréal’s head office revival was not strong enough for it to regain its 1999 share of head office employment: in 2005, it had a 21% share of head office employment, versus 23% in 1999.

Ottawa–Gatineau, Winnipeg and Edmonton make up a second tier of head office centres. Head office employment in Ottawa–Gatineau and Edmonton was flat earlier on, with gains in head office employment occurring at the end of the period. Winnipeg experienced a decline in its head office employment, with its losses occurring in the middle of the period.

Conclusion

Despite continuing concerns that rising levels of foreign investment might lead to the hollowing-out of corporate Canada, we find little evidence that this is occurring in terms of head office counts or employment. The number of head offices in Canada and their employment continue to rise.

Much of the dynamism in Canada’s head office sector actually comes from foreign-controlled firms. The head offices of foreign-controlled firms contributed to all of the gains in the number of head offices over the past 6 years and accounted for 6 out of 10 new jobs created. The effect of foreign takeovers has not been to reduce the number of head offices in Canada nor head office employment. As a result of foreign takeovers, more new head offices were created than lost and employment in head offices was as high after the takeovers had occurred than before. Given these facts, it is difficult to argue that foreign ownership of Canadian firms is associated with falling numbers of head offices and declining head office employment.

The loss of a head office or the entry of a new head office is not a rare occurrence. In 2005, over one-third of all head offices did not exist in 1999 and over a quarter of all head office employment is in head offices that are new. Despite the fact that on a national scale head office closings are replaced by new entries, it is apparent that some metropolitan areas have performed better than others. Calgary has continued to assert itself as an important centre of corporate control. Nevertheless, Montréal remains Canada’s second most important head office centre and Toronto continues to experience above average head office employment growth. It is Vancouver that has experienced a serious decline in its head office sector, despite the relative buoyancy of its economy in recent years.

Vancouver’s example helps to put some perspective on how head office employment should be viewed. A strong and growing head office sector is only one among many factors that contribute to economic growth.

References

Baldwin, J.R. and M. Brown. 2005. Foreign Multinationals and Head Office Employment in Canadian Manufacturing Firms. Economic Analysis Research Paper Series. Catalogue no. 11F0027MIE2005034. Analytical Studies Branch. Ottawa: Statistics Canada.

Baldwin, J.R., D. Beckstead and M. Brown. 2003. Hollowing-out, trimming-down or scaling-up? An analysis of head offices in Canada, 1999-2002. Economic Analysis Research Paper Series. Catalogue no. 11F0027MIE2003019. Analytical Studies Branch. Ottawa: Statistics Canada.

Klier, T. and W. Testa. 2002. “Location Trends of Large Company Headquarters During the 1990s.” Economic Perspectives, 2002, 2^nd Quarter. Federal Reserve Bank of Chicago. 12–26.

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Notes