Analysis in Brief
Multinational enterprises in Canada

Introduction

Globalization refers to the economic integration between countries as a result of increasing cross-border trade and capital movements.

Multinational enterprises (MNEs) have been drivers of globalization. These enterprises have taken advantage of innovations in logistics and communications technology over the past four decades to diversify their supply chains and expand into new markets.

MNEs are also an important source of investment in innovation, technology and skilled labour in Canada. The involvement of MNEs in these aspects of the Canadian economy was discussed in a prior Statistics Canada study^Note .

This analytical study describes the characteristics of MNEs^Note  in Canada and abroad, and how their activities in Canada differ from those of Canadian domestic enterprises that do not control businesses outside the country.

The data for the study come from various sources, including Statistics Canada’s 2016^Note  Annual Financial and Taxation Statistics (AFTS) program. The AFTS collects and aggregates data from the financial statements of all enterprises in Canada.

An indicator^Note  that distinguishes MNEs from domestic enterprises in the AFTS data is used in this study to compare size, industry involvement and financial performance for both groups. Data collected by the Canada Revenue Agency (CRA) also provide details about subsidiaries of Canadian enterprises abroad.

MNEs in Canada

At the end of 2016 (see Chart 1), 99.2% of enterprises in Canada were domestic.^Note  Of these, 0.8% were part of an enterprise group, while 98.5% were Canadian non-group enterprises. Only 0.8% of all enterprises operating in Canada were MNEs. Half of MNEs were Canadian majority-owned, with foreign affiliates (MOFAs) and half were foreign majority- owned, with Canadian affiliates (FMOCAs).  

Charts 2 and 3 show the distribution of assets for MNEs and domestic enterprises across industries included in the AFTS^Note  for 2016.

Most MNE's assets in non-financial industries (Chart 2) were held in manufacturing, distributive trades and extraction, while a higher share of domestic enterprise’s assets were held in real estate and construction. Overall, domestic enterprises owned 83.6% of all assets in construction and 70.7% in real estate. The local knowledge required to operate in both industries could account for high share of assets held by domestic enterprises.

Chart 3 shows the distribution of assets across financial industries. MNEs held more assets in depository credit intermediation than domestic enterprises. Generally, large banks have operations abroad while local credit unions do not.

In general, the financial industries were dominated by MNEs, which held 72.1% of total assets (Table 1). The only financial industry with more assets owned by domestic enterprises than MNEs was securities, commodity contracts and other financial Investment and related activities, where domestic enterprises owned 57% of total assets. 

There was also a large discrepancy between the size of MNEs and domestic enterprises in capital intensive industries such as extraction and utilities. In the extraction industry, the median^Note  value of assets held by MNEs was $14.4 million, versus $0.16 million for domestic enterprises. In the utilities industry, the median value of assets held by MNEs was $17.34 million, versus $0.29 million for domestic enterprises. Earlier work also showed that MNEs were more likely to operate in large-firm industries with significant economies of scale and capital intensity^Note .

MNEs had higher operating revenues for the industries where they owned more assets. Chart 4 displays the proportion of operating revenue generated by MNEs in selected industries.

MNEs in the extraction and manufacturing industries had the highest share of operating revenue of all industries (80.8% and 75.4%, respectively). MNEs in construction and real estate had the lowest share of operating revenue (17.3% and 27.8%, respectively).

Overall, one in four employees in the Canadian economy^Note  worked for MNEs in 2016. The employment share of MNEs was the largest for the extraction industry (65.5%) and lowest for construction (12.3%) (Chart 5).

MNE affiliates abroad

The United States had the most corporate ownership connections with Canada in 2016.

The United States had more parent enterprises for FMOCAs than any other country (58.3%), followed by the United Kingdom and Germany (Chart 6).

MOFAs^Note  reported that most of their subsidiaries (49.9%) were located in the United States. The number of subsidiaries located in the United States was nearly seven times higher than the number of subsidiaries located in the United Kingdom, which had the second highest number of subsidiaries (Chart 7).

On average, MOFAs directly controlled subsidiaries in only one other country. However, about 10% of MOFAs controlled subsidiaries in more than four countries in 2016 (Chart 8).

MOFAs had a higher proportion of foreign subsidiaries than Canadian subsidiaries (Chart 9). However, it was most common for a Canadian enterprise without Canadian subsidiaries to control one foreign subsidiary. Over 50% of MOFAs had this simple structure.

Most MOFAs operated in more than one industry,^Note  either in Canada or abroad (Chart 10).

Among enterprises that operated in two industries, the most common pairing was Securities, commodity contracts, and other financial Investment and related activities with Real Estate and Rental and Leasing (7.3%). Oil producers were also involved in mining activities (6.5%), and manufacturers were involved in wholesale trade (5.3%). No other pairings comprised over 5% of the total.

Financial performance

This section compares the profitability, efficiency and leverage of MNEs and domestic enterprises in 2016.^Note 

The analysis includes only non-financial industries because the selected ratios are better suited for those industries. All ratios have been controlled for enterprise size.

Chart 11 represents the percentage difference in profit margin and asset turnover ratios between MNEs and domestic firms. A positive difference represents an advantage for MNEs over domestic firms.

Profit margin is an indicator of profitability and measures the before-tax profit on each dollar of sales. Asset turnover is an indicator of efficiency and measures the sales generated per dollar of investment in assets.

In the distributive trade and manufacturing industries, MNEs had a slightly higher profit margin than domestic enterprises (3.7% and 9.2%, respectively). These two industries contain a large number of firms that make up a competitive market. This could explain why MNEs could not attain a high profit margin, as competition puts a downward pressure on their profit margin. However, it seems that MNEs were more profitable in terms of their asset turnover in these industries, since MNEs were able to generate more sales than their domestic enterprise counterparts with the same level of assets.

The Canadian utilities industry can be described as an oligopoly, as there are relatively few enterprises in this industry. Furthermore, there are significant barriers to entry, with high fixed costs required to operate in this industry. This could explain why, of all the industries, the difference in profit margin percentage between MNEs and domestic enterprises in 2016 was at its highest (42.1%). MNEs seemed to use this oligopoly to increase their profit margin. Despite this, MNEs had no efficiency advantage, as there was no difference in asset turnover between MNEs and domestic enterprises.

The debt-to-equity ratio measures an enterprise’s debt relative to the value of its shareholder equity. It describes the extent to which an enterprise has taken on debt. A high ratio is associated with a high risk, meaning that an enterprise has been aggressive in financing its growth or operations with debt.

The debt-to-equity ratio of MNEs in construction, utilities and transportation and warehousing was the same as domestic enterprises (Chart 12). However, the ratio was lower for MNEs than domestic enterprises in the remaining industries. Since MNEs are larger firms, they are more likely to have access to public equity. This could explain why MNEs financed their operations with less debt.

Conclusion

In 2016, less than one percent of enterprises in Canada were MNEs. Though they were a small share of total enterprises, MNEs had a significant impact on the Canadian economy. These enterprises employed one of four Canadians, and owned 67% of total assets in the financial and non-financial sectors. MNEs also earned more revenue and held more assets than domestic enterprises in nearly every Canadian industry, and, taking into account their size were generally more profitable than domestic enterprises.

The majority of Canadian MNEs affiliates are in the United States, where 58.3% of all parents and 49.9% of all subsidiaries are located.

Appendix A