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Multinationals >

Overview and description of publications

Overview of the research program

Canada is often described as having an ‘open’ economy. It relies heavily on trade with foreign countries. During the 1990s, its export to GDP has risen dramatically. It relies heavily on capital flows to finance its industries. More than half of all assets in the manufacturing sector are controlled by foreign multinationals.

Understanding the implications of foreign-ownership in Canada has engaged several generations of Canadian economists. Reports by Watkins (Foreign Ownership and the Structure of Canadian Industry. Ottawa: Privy Council. 1968), Safarian (Foreign Ownership of Canadian Industry. McGraw-Hill. 1966), and Caves, Porter, Spence and Scott (Competition in the Open Economy. Harvard University Press. 1980) have focused on the impacts of this unique aspect of Canada’s industrial structure.

The Research Program on Multinational Performance has made use of Statistics Canada data to better understand the differences in the performance of foreign as opposed to Canadian-controlled plants in Canada. It consists of three main bodies of research. The first examines basic differences in productivity. The second focuses on differences in the innovative and technological stance of these two groups of firms, because productivity growth ultimately depends on the innovative capabilities of firms.

Productivity differences between domestic and foreign-controlled Plants

Considerable attention has focused on the extent to which foreign controlled firms bring new and superior technologies to Canada thereby enhancing productivity. Superior technologies are often more capital intensive. They require different worker skill sets. They ultimately allow firms to produce more per worker and to pay their workers higher wages.

Several studies have examined the extent to which there are differences between Canadian- and foreign-controlled plants in productivity per worker, the extent to which these differences have changed over the last thirty years, and the particular sources of these differences.

The first paper demonstrates that foreign-owned plants have exhibited substantial advantages over Canadian-controlled plants in terms of labour productivity since 1973. Part of this difference is due to the fact that foreign-controlled plants are more likely to be in industries that have higher labour productivity, part is due to the fact that foreign-controlled plants are larger and larger plants tend to have higher labour productivity. But even after allowance is made for differences in terms of industry and plant size, there is still a gap in favour of foreign-controlled plants. What is more significant, this gap has been growing over time. There is little evidence of a catch-up in the domestic sector.

Baldwin, J.R. and N. Dhaliwal. 2000. Labour Productivity Differences Between Domestic and Foreign Controlled Establishments in the Canadian Manufacturing Sector. Analytical Studies Research Paper Series 11F0019MIE2000118. Analytical Studies Branch. Ottawa: Statistics Canada. See also Chapter 5 in Productivity Growth in Canada. 2001. Catalogue 15-204-XPE. Ottawa: Statistics Canada.

A second paper in this series asks which characteristics of a plant are related to productivity growth. It finds that plants that employ more advanced technologies have seen higher productivity growth. But even after controlling for technology use, size, industry, whether R&D is being performed, foreign-controlled plants have still been gaining at the expense of domestically controlled plants in the late 1990s.

Baldwin, J.R. and D. Sabourin. 2001. Impact of the Adoption of Advanced Information and Communication Technologies on Firm Performance in the Canadian Manufacturing Sector. Analytical Studies Research Paper Series 11F0019MIE2001174. Analytical Studies Branch. Ottawa: Statistics Canada.

Baldwin, John R. and David Sabourin. 2002. “Advanced technology use and firm performance in Canadian manufacturing in the 1990s.” Industrial and Corporate Change. Volume 11, number 4, 761-789.

A third research study has focused on the extent to which the new plants created by multinationals have provided the main source of overall productivity growth in the manufacturing sector.

Entry of new plants is important because new firms provide an important source of competition to incumbents. They are a source of new products and technologies. This study outlines the size of the turnover in plants that have entered and exited the Canadian manufacturing sector over the each of the last three decades—1973-1979, 1979-1988 and 1988-1997.

More importantly, it also examines the contribution of plant turnover to the growth in labour productivity in the manufacturing sector over the three periods. The first part of the paper considers issues relating to methodology—how the contribution of entry and exit should be measured. It points out that the methods that have been employed in the past use different implicit assumptions about the nature of the competitive process. It then discusses which assumption accords best with the empirical evidence.

The second half of the paper provides empirical estimates of the contribution that plant turnover makes to productivity growth. The evidence shows that plant turnover makes a significant contribution to productivity growth as more productive entrants replace exiting plants that are less productive. One of the more important findings of the paper is that a disproportionately large fraction of the contribution of plant turnover to productivity growth is due to multi-plant, foreign-controlled firms closing down and opening up new plants. The plants opened up by multi-plant, foreign-controlled firms are typically much more productive than those opened by single-plant or domestic-controlled firms.

Baldwin, J.R. and W. Gu. 2003. Plant Turnover and Productivity Growth in Canadian Manufacturing. Analytical Studies Research Paper Series 11F0019MIE2003193. Analytical Studies Branch. Ottawa: Statistics Canada. See also OECD Working paper of the same title published by the Science and Technology Directorate.

Differences in innovation rates between foreign versus domestic firms

The Canadian interest in multinationals has often centered on the contribution that these firms make to the Canadian innovation system. For a long time, it was argued that their presence in Canada fostered a branch-plant mentality. The operations of multinationals in Canada were portrayed as being truncated. In particular, they were not perceived to foster the type of R&D facilities that would produce innovations in Canada.

Research on this topic examines whether new views of the multinational that see these firms as decentralizing R&D activities abroad to exploit local competencies accord with the present activities of multinationals in Canada.

The research describes the innovation regime of multinational firms in Canada by examining the differences between foreign- and domestically owned firms. It focuses on the extent to which R&D is used; the type of R&D activity; the importance of R&D relative to other sources of innovative ideas; whether the use of these other ideas indicates that multinationals are closely tied into local innovation networks; the intensity of innovation; and the use that is made of intellectual property rights to protect innovations from being copied by others.

The research reports that, far from being passively dependent on R&D from their parents, foreign-owned firms in Canada are more active in R&D than the population of Canadian-owned firms. They are also more often involved in R&D collaboration projects both abroad and in Canada. As expected, foreign subsidiaries enjoy the advantage of accessing technology from their parent and sister companies. While multinationals are more closely tied into a network of related firms for innovative ideas than are domestically owned firms, their local R&D unit is a more important source of information for innovation than are these inter-firm links. Foreign subsidiaries also more frequently report that they are using technology from unrelated firms. Moreover, the multinational is just as likely to develop links into a local university and other local innovation consortia as are domestically owned firms. This evidence indicates that multinationals in Canada are not, on the whole, operating subsidiaries whose scientific development capabilities are truncated—at least not in comparison to domestically owned firms.

A comparison of the extent and impact of innovation activity of domestically and foreign-owned firms shows that foreign-owned firms innovate in all sectors more frequently than Canadian-owned companies in almost all size categories. They are also more likely to introduce world-first rather than more imitative innovations. Their superiority is most pronounced in the consumer goods sector. Finally, foreign-owned firms are more likely to protect their innovations with patent protection.

The research also compares foreign subsidiaries to Canadian corporations that have an international orientation. These additional comparisons show that the two groups of multinationals are quite similar, both with regards to the likelihood that they conduct some form of R&D and that they introduce innovations. These results indicate that it is as much the degree of globalization as the nationality of ownership that affects the degree of innovativeness.

Baldwin, J.R. and P. Hanel. 2000. Multinationals and the Canadian Innovation Process. Analytical Studies Research Paper Series 11F0019MIE2000151. Analytical Studies Branch. Ottawa: Statistics Canada.

Technology profiles

A number of other studies have examined the difference between domestic and foreign-controlled firms in the area of technology use. These reports generally find substantial differences between domestic and foreign-controlled firms, after accounting for other characteristics like firm size and industry of location.

One report reviews the use of advanced technologies by Canadian and U.S. manufacturing plants over the period from the late 1980s to the late 1990s. Using data from three surveys that investigated the use of advanced technologies like CAD/CAM systems, robots, and flexible manufacturing systems, this report compares changes in the intensity of advanced technology use over time in Canada and differences in the use that is made of these technologies by domestic as opposed to foreign-controlled plants.

Domestic plants generally are behind foreign-controlled plants when it comes to the use of advanced technologies. The gap widened during the recession of the 1990s but has narrowed slightly in the period thereafter. This suggests that the recession had a greater influence on the investment of domestic than on foreign-controlled firms.

Baldwin, J.R., E. Rama and D. Sabourin. 1999. Growth of Advanced Technology Use in Canadian Manufacturing During the 1990s. Analytical Studies Research Paper Series 11F0019MIE1999105. Analytical Studies Branch. Ottawa: Statistics Canada.

Baldwin, J.R., E Rama and D. Sabourin. 2000. "Advanced Technology Use in Manufacturing During the 1990s," Canadian Economic Observer. Catalogue 11-010-XPB.March. Ottawa: Statistics Canada.

A second report examines the use of advanced technology in a particular sector of the manufacturing sector—the food-processing sector. It too finds that foreign-controlled establishments are more likely to use a broad range of advanced technologies, even after controlling for plant size and industry.

Baldwin, J.R., D. Sabourin and D. West. 1999. Advanced Technology in the Canadian Food Processing Industry. Catalogue No. 88-518-XIE. Analytical Studies Branch. Ottawa: Statistics Canada.

Baldwin, J.R. and D. Sabourin. 2000. “Innovative Activity in Canadian Food Processing Establishments: the importance of engineering practices.” International Journal of Technology Management. 20: 511-527.

A third report examines differences in the innovation rates of domestic and foreign firms to see whether there are differences in the extent to which the latter are more innovative. The report finds that foreign firms are more likely to introduce process innovations than domestic firms, even after differences in R&D intensity are taken into account.

Baldwin, J.R., P. Hanel and D. Sabourin. 2000. Determinants of Innovative Activity in Canadian Manufacturing Firms: The Role of Intellectual Property Rights. Analytical Studies Research Paper Series 11F0019MIE2000122. Analytical Studies Branch. Ottawa: Statistics Canada.

Baldwin, J.R., P. Hanel and D. Sabourin. 2002. “Determinants of Innovative Activity in Canadian Manufacturing Firms.” In Innovation and Firm Performance. Edited by A. Kleinknecht and P. Mohnen. Houndsmith, Basingstroke, Hampshire: Palgrave.

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