Silent Surrender: The Multinational Corporation in Canada 9780773569874

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Silent Surrender

CARLETON LIBRARY SERIES

The Carleton Library Series, funded by Carleton University under the general editorship of the dean of Graduate Studies and Research, publishes material relating to Canadian history, politics, society, economy, geography, and related subjects. It includes important new works as well as reprints of classics in the fields. The editorial committee welcomes manuscripts and suggestions, which should be sent to the dean of Graduate Studies and Research, Carleton University. 192

The Blacks in Canada: A History (second edition) Robin Winks

193 A Disciplined Intelligence Critical Inquiry and Canadian Thought in the Victorian Era A.B. McKillop 194

Land, Power, and Economics on the Frontier of Upper Canada John Clarke

195

The Children ofAataentsic A History of the Huron People to 1660 Bruce G. Trigger

196

Silent Surrender The Multinational Corporation in Canada Kari Levitt

197

Cree Narrative Expressing the Personal Meanings of Events Richard J. Preston

198

The Dream of Nation A Social and Intellectual History of Quebec Susan Mann

Silent Surrender the multinational corporation in Canada

Kari Levitt New introduction by the author New foreword by Mel Watkins

Carleton Library 196 McGill-Queen's University Press Montreal & Kingston • London • Ithaca

Dedicated to the memory of Joe Levitt whose enthusiastic encouragement sustained me in the writing of this book.

© Kari Levitt 1970, 2002 ISBN 0-7735-2311-1 (cloth) ISBN 0-7735-2325-1 (paper) Legal deposit third quarter 2002 Bibliotheque nationale du Quebec Printed in Canada on acid-free paper McGill-Queen's University Press acknowledges the support of the Canada Council for the Arts for our publishing program. We also acknowledge the financial support of the Government of Canada through the Book Publishing Industry Development Program (BPIDP) for our publishing activities.

National Library of Canada Cataloguing in Publication Levitt, Kari Silent surrender: the multinational corporation in Canada / Kari Levitt; with a foreword by Mel Watkins. (Carleton library; 196) First ed. published: Toronto: Macmillan of Canada, 1970. Includes bibliographical references and index. ISBN 0-7735-2311-1 (bound).—ISBN 0-7735-2325-1 (Pbk.) 1. Corporations, American—Canada. 2. Corporations, Foreign—Canada. I. Title. II. Series. HC115.L44 2002 332.67373071 C2002-902186-3

Contents

List of Tables

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Foreword to the Carleton Library Series Edition Mel Watkins

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Foreword to the First Edition

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Introduction to the Carleton Library Series Edition Kari Levitt Introduction to the First Edition 1 The Recolonization of Canada

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2 The Old Mercantilism and the New

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3 The Rise of the Nation State

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4 Regression to Dependence

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5 Who Decides? 6 Metropolis and Hinterland

71 92

7 The Harvest of Lengthening Dependence

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Appendix: The New Mercantilism of U.S. Direct Involvement

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Index

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List of Tables

1 Foreign Direct Investment in Canada, 1945 and 1965 60 2 Non-Resident Control as a Percentage of Selected Canadian Industries, 1926-1963 61 3 Foreign Capital Invested in Canada, Selected Year Ends 66 4 Changes in Canadian Long-Term Indebtedness, Select Periods 67 5 Locus of Control of Canadian Industry, 1963 120 6 Concentration of Foreign Direct Investment in the Commodity-Producing Sectors, 1963 122 7 R and D Expenditures as Percentages of Manufacturing Industry Sales, Canada and the United States 132 8 Relationship Between Research Efforts and Export Performance of 19 U.S. Manufacturing Industries 134 Appendix 1 Geographic Distribution of U.S. Direct Investment, 1897-1966 2 Industrial Distribution of U.S. Direct Foreign Investment 3 Net Annual Flows of U.S. Capital for Direct Investments

160-1 162 162

4 U.S. Annual Outflow of Direct Investment in Canada as a Percentage of U.S. Direct Investment in all Countries, 1950-1964 5 Value of U.S. Direct Investments Abroad in 1966 6 Capital Outflows, Remitted Incomes and Net Balance of Direct U.S. Foreign Investments, 1900-1967 7 "Capital Accounts" According to Industrial and Geographic Sectors, 1950-1964 8 Capital Outflows, Incomes and Net Balances of U.S. Direct Foreign Investment, by Geographic Regions and by Industries 9 Sources of Property Income and Royalties Remitted by U.S. Subsidiaries (Percentages) 10 Some Characteristics of U.S. Direct Investment in the Sixties (averages for period 1960-67) 11 Capital Outflow of 19 Participating Companies, 1957-1960 12 Sources of Funds of U.S. Foreign Subsidiaries, Three-year Average (1963-1965) 13 Acquisitions and Sales by U.S. Companies of Foreign Enterprises 1963-1967

163 164

166 167

168-9 170 172 178 180-1 183

Foreword to the Carleton Library Series Edition Out of the 1960s, so full of fun and dashed hopes, there came some lasting good—this book for one. If you weren't around to read it then, now's your chance. And if you were, and wisely did, it's time to treat yourself again. In a world where most books have a shelf life of about six months and then revert to the pulp from which they came, the continuing resonance and relevance of this book, thirty years on and counting, is remarkable. Call it a Canadian classic. In those by-gone days people, though rarely governments, which care mostly about their own survival, worried about foreign ownership. Now it's barely mentioned by anyone: when the famed Montreal Canadiens were sold to an American a few years back there was nary a whisper of protest. Today, however, there's lots of concerns, as there should be, about the Corporate Rule of the giant transnational companies—about how they push nation-states around, claim the rights of the person while reducing the knowledge and creativity of real people to intellectual property for corporate gain, and make a travesty of the notion of a democratic world—but, in fact, Corporate Rule is just another name for the same old imperial game, got worse, of somebody, somewhere else, running and ruining your life. Actually, Kari Levitt anticipated all that back then and wrote it like it was. She is an honourable member of a Canadian school of writing about what is today called "globalization"—a.k.a. the world-wide march of technology and capitalism—a scholarly tradition that includes, in their varying ways, Harold Innis, XI

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Marshall McLuhan, and George Grant in the past and Ursula Franklin, Naomi Klein, and John Ralston Saul today—and others past and present too numerous to name. Innis, the great Canadian scholar and humanist of the first half of the twentieth century, was at the centre of an holistic understanding of Canada that came to be called the Old Canadian Political Economy. The protesters of the 60s became the professors of the 70s and beyond and, building on the old, created the New Canadian Political Economy, a scholarly paradigm that is still with us and flourishing. This book was one of the main bridges between the two. That is, I think, its main legacy. I was there and I can tell you that Silent Surrender took the campuses by storm in the 70s and helped to change some lives for the good. Just as George Grant's earlier Lament for a Nation, on the inevitability of Canada's disappearance as a sovereign nation, ironically inspired the radicals of the 60s to rally to save Canada, so Levitt's Silent Surrender caused the left scholars of the 70s to speak out, to give voice, to vent spleens, against the surrender of Canadian sovereignty for the glory of American capitalism. Gordon Laxer's probing analysis of the roots of foreign ownership in Canada in his book Open for Business was notable in extending Levitt's work. Indeed, this book you are holding contributed to a political environment that culminated in a veritable wave of economic nationalist policies by the federal government in the decade of the 70s—the creation of the Canada Development Corporation as a crown corporation to encourage Canadian rather than foreign ownership, the Foreign Investment Review Agency (FIRA) to monitor the activities of foreign firms in Canada to increase benefits and decrease costs, Petro-Canada as a crown corporation that would give the Canadian people and their government a presence in the oil and gas sector dominated by foreign corporations, and, as the decade closed, the National Energy Program to permit Canadians to have preferential access to the country's energy resources. The powerful are responsible for the fact that most of this came to naught and was systematically undone by the deregulation

xiii and privitization of Canadian governments in the 80s and 90s. Where once government had at least engaged in the pretence of monitoring foreign corporations in Canada, now they are welcomed with open arms. FIRA was re-named Investment Canada, the better to shill for foreign investment. I must not overstate. We still have rules limiting foreign control in the media, for example, which have had the unexpected benefit that the reactionary press baron Conrad Black, who chose to relinquish his Canadian citizenship so that he could become a British lord, sold off his controlling interest in the National Post and left the country. More irony: we now know that the level of foreign ownership relative to Canadian ownership actually began falling in the 1970s - though less, we think, because of Canadian government policy and more because of some maturation of the Canadian business class - but this then led Canadian capital to believe it needed no protection and that it could even take on American capital on its own terrain, as it did with the free trade agreements of the 1990s. The result? Levels of foreign ownership in Canada relative to domestic ownership stopped falling and began rising again, while our trade dependence on the United States, already intolerably high, soared. Incidentally, we'd long been told by mainstream economists that Canadian industrial productivity, and the associated standard of living, lagged the American because of a tariff that facilitated and protected the inefficient and not, as political economists alleged, because foreign ownership in and of itself meant truncated and sub-optimal branch plants doing, for instance, too little by way of R&D. Well, we did the experiment. We got rid of the tariff, we let foreign ownership rise, and now we live with the answer: the productivity and income gap did not disappear. Levitt and the political economists are right: foreign ownership is the problem. Our position in the Guiness Book of Records as the most neocolonial country in the world, the richest dependent developed industrialized country, remains secure. We relate to the global economy not in our own right but through the United States. It

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is globalization with one critical degree of separation. Since the infamy of September 11 we are being made to face up to how much that dependence matters. Meanwhile, the Canadian business class, notably those who manage American-owned companies in Canada, are shocked to discover that, in a free trade world without borders, it is their jobs that are disappearing as head offices of branch plants close with Canadian operations folded into North American operations directly under American management—along with the jobs of those who build the skyscrapers and clean them, etc., etc. It would be naive to imagine that Canadian business people are able to forestall this fate or that the United States would let them. Unlikely to help themselves, they can hardly be expected to help the rest of us. At the same time, however, the Council of Canadians, solely under Canadian management, operating globally from a Canadian base, helped stop the Multilateral Agreement on Investment (MAI), a global charter of rights and freedoms for corporations. Canadian business leaves much to be desired, but when it comes to civil society and popular movements, there is no need there to despair. So long as there are nation-states and corporations—namely, for the indefinite future—there will be foreign ownership and conflicts of interests and the need to make things work in the interest of both entities. That is the issue to which this book speaks and that is why it has not become dated. The "surrender" escalates. It's for us to decide how "silent" to be—or not to be. Read this book, whether for the first or second time, and let the pondering of Canada's fate, to which it has already so powerfully contributed, proceed. February 2002 Mel Watkins Constance Bay, Ont.

Foreword to the First Edition

This book makes a signal contribution to the debate on foreign ownership which increasingly comes to the fore in this country. Let us hope that it succeeds in pushing us closer—much closer —to a strong and positive policy toward the multinational corporation, taming it for the near future and finding an effective alternative to it for the long run. I feel confident that Professor Levitt would join me in that hope. For, as the reader will soon come to realize, while Professor Levitt clearly has the skills of the professional economist and uses them here with great effect, she does not play the all-too-common academic game of writing only for her peers and of pretending detachment and neutrality. Rather she writes plainly and forcefully so as to show us the need for alternatives. She is, in the best sense of that term, an intellectual, one who criticizes the status quo, and prods us into working out new strategies. The debate to which Professor Levitt so effectively contributes is one that has come late in the day for Canada. We could have used a book such as this a century ago when the process of American direct investment in Canada was just beginning. That process was to pick up sharply in the years following the high protective tariff of 1879 and by 1913 important sectors of the Canadian economy had already been alienated into foreign hands. France produced a Servan-Schrieber crying for action when France had about as much American investment proportionately as Canada probably had by the beginning of this cenxv

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tury. Not till this past decade did Canada find its Cassandra in Walter Gordon. He may well have come too late, for if Mr. Gordon's Choice for Canada is one of the most important books of the sixties for Canadians, so too is George Grant's Lament for a Nation. That is not to say that Canadians have been unaware of the extent of foreign ownership of their economy. It is sometimes said now that it was the great paradox of Sir John A. Macdonald's National Policy that the very tariff which was intended to reduce economic dependence by limiting imports in fact increased economic dependence by encouraging the entry of branch plants to produce behind the tariff wall. But Sir John A. and the Canadian capitalists who supported him appear to have been all too conscious of what was happening. Indeed, the point is that, far from deploring the fact, they cited the rising investment and growing job opportunities as proof of the effectiveness of the National Policy. Little is now to be gained by wishing that this increasing dependence through foreign investment had not been so. Rather, we should draw from it two morals of relevance down to the present day. The first is that Canadian capitalists have never been a wholly reliable lot so far as standing up to foreign corporations is concerned, and it is asking a good deal for them now to shoulder a burden which they have never borne. If we want independence, we had best seek more reliable support. The second moral is that the stimulus to the economy provided by foreign investment, and particularly the new jobs created, has always been its chief appeal to the general public. The argument is usually made conversely: that if restrictions were placed on foreign investment Canadians would be economically worse off. This is, to say the least, a legitimate fear. It can hardly be doubted that to inhibit foreign entrepreneurs, and do nothing else, would be a disastrous course of action. After all, Canadian entrepreneurs do leave something to be desired. So it is that "the more reliable support" that one might have hoped would come from Canadian workers has been relatively muted. Yet the branch-plant economy that results, as Professor

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Levitt makes clear, is hardly dynamic by the ordinary standards of an ability to generate its own growth. Nor it is clear that Canadian business would be so passive if it had not been subdued for so long by the greater power of foreign business, for when all is said and done, entrepreneurship, as with any innovative and creative experience, is best learned by doing. In any event, it is no longer necessary to tolerate foreign domination at the risk of falling prey to inefficient Canadian capitalists. For if foreign private investment is one way to create jobs, another is Canadian public investment. If foreigners get frightened away, that is insufficient reason for throwing in the towel. The instrument of the Crown corporation is a potent one to generate new activities and jobs—and very probably more creative jobs than are likely, in the nature of the case, to exist in a branch-plant economy. There is little doubt that another important factor in our history—and one that is particularly relevant in explaining the lateness of the debate—is the recurring argument that the need for heavy reliance on foreign capital will be only temporary, that in due course the Canadian economy will mature to the point of becoming independent. It is clear from today's vantage point that that comfortable view has been, without exception, wrong. It is, perhaps, a sign of our growing political sophistication that such arguments have now disappeared and the phenomenon can be faced for the long-run threat that it is. We know now that it will not go away alone. Nothing in the past, be it booms, wars, or depressions, and certainly not Canadian policy, has stopped the process. Once the most dynamic sectors of our economy have been lost, once most of the saving and investment is taking place in the hands of foreign capitalists, then the best prediction is a steady drift towards increasing foreign control of the Canadian economy with the only certain upper limit being 100 per cent. But the debate finally did come to Canada, thanks largely to Mr. Gordon, and it is instructive to trace it through some of the numerous issues on which it has since touched. The major concern initially was with respect to the consequences of foreign

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direct investment on the viability of the Canadian balance of payments. At times, the matter was stated too simply, to the effect that Canada had a large deficit in its balance of payments which was in itself undesirable. Economists—and I must confess myself included—found it easy to point out that the capital inflow caused the deficit, rather than the reverse, and that the state of the Canadian balance of payments was not such as to weaken our currency, evidence of weakness being more clearly attributable to gross mismanagement by central bankers and Ministers of Finance. In retrospect, we were substantially right, but we managed seriously to miss the point. I suspect now that what Mr. Gordon and others—notably Mr. Coyne—were getting at were quite different things. They sensed that a country that comes to rely on the continuing inflow of capital develops in many ways an appetite that grows with the eating, and becomes increasingly vulnerable to interferences with the free flow of capital. Critics at the time argued that the policies which Mr. Gordon articulated themselves constituted interferences with the inflow of capital about which he worried. But history has been kinder to him and shown him to be simply ahead of his time. Twice in the past decade the United States has chosen unilaterally to interfere with the free export of its capital—first with the Interest Equalization Tax of 1963 and then with the mandatory controls on direct investment firms in 1968—and the vulnerability of the Canadian economy and its currency was both times dramatically demonstrated for all to see. These first serious critics seem also to have understood intuitively something that the conventional economist has a trained incapacity to grasp, namely, that the return flow of earnings to the foreign capitalists was not simply to be judged as to whether the balance of payments could stand it, and whether it was "fair" as a rate of return, but rather must be seen as the appropriation in perpetuity of the economy's surplus. Foreign direct investment is based less on the inflow of new capital than on the retention of earnings made in Canada. It is Canadian savings that have financed much of the foreign investment which then has

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to be serviced indefinitely; relevant data are cited by Professor Levitt. Put differently, the multinational corporation is more certainly a means to drain surplus than to create it. If the state of the balance of payments was a persistent theme, always overhanging the debate, the issue of Canadian sovereignty flared up sporadically around some specific incident— real or alleged—which momentarily captured the attention of the press and then disappeared with little or anything having been resolved. Trucks could not be sold to China; drugs could not be shipped to North Vietnam; flour could not be sold to Cuba. The details are always murky: did Ford ever really receive the order for trucks? But the moral is clear: whether the Chinese did or did not order trucks, the order could not have been filled by Ford of Canada without Washington's permission— unless Ford's Canadian managers were prepared to risk having their American masters go to jail, which is, to say the least, implausible on the face of it. This is what the experts call "extra-territoriality:" It is a nice word for legal imperialism and makes visible the nationality of the multinational corporation. The United States uses its direct investment firms to force constraints on other countries that these countries would not, in general, impose on themselves. There is no doubt that the sovereignty of the host country is eroded. When an incident occurs, it evokes a response that is hot, because U.S. policy is so obviously illiberal. But the response is ephemeral because, after a moment's thought, it is clear that the problem inheres in the situation. It is unreasonable to expect the United States to tie its own hands; no sensible country would unilaterally agree to let its corporations escape its jurisdiction unless it were subjected to substantial external pressures. Not surprisingly, External Affairs in Ottawa, assuming that little can be done, prefers to keep the public ignorant and the issue out of sight—and calls the strategy "quiet diplomacy." While extra-territoriality is an issue in its own right, its real importance lies in the fact that being, in the words of Abraham Rotstein, "the tip of the iceberg," it can alert us to the unseen nine-tenths. What is presumably going on beneath the surface

xx is an insidious tendency for foreign direct investment to result in a shift of the locus of decision-making from Canada as host country to the United States as imperium. To imagine that eliminating extra-territoriality would remove this political cost is similar to believing that removing iceberg tips would make shipping less hazardous. Rather, these periodic incidents should serve to alert us to the pervasive loss of power that inheres in foreign direct investment. No sensible company lets the managers of its subsidiaries have complete autonomy. Foreign ownership means that decision-making in the private sector takes place outside Canada, and one must indeed be naive to believe that where private decisions are made is irrelevant when the economy is chiefly composed of large private corporations. Professor Rotstein excepted, Canadian economists have had little to say on matters political. They have had a good deal to say on the economics—narrowly conceived—of foreign investment but much of it has been of less import than it might have been. In the past decade, increasing attention has been devoted to the wide and persistent difference in the level of productivity of the American and the Canadian economies. The Canadian economy has been aptly described, by H. Edward English of Carleton University, as a "miniature replica" of the American economy, with too many firms producing too wide a range of products for the smaller economy to be as efficient as the larger. The search for causes, however, has too frequently turned up the Canadian tariff, and nothing else. As a result, the possibility that market fragmentation inheres in industrialization dominated by multinational corporations—a possibility that Third World economists, notably in Latin America, have increasingly come to insist upon —has been obscured in Canada. The problem has been laid at the door of Canadian policy in general, and the tariff in particular, and the possibility ignored that the size and profitability of corporations alone are no guarantee that the total structure of the economy is efficient. Size may result from the pursuit of monopoly and profits from its achievement. Indeed, there is reason to believe that large corporations can adapt, in the sense of private profitability, to any condition of economic efficiency or

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inefficiency, while the recently published interim Report of the Barber Commission on farm machinery shows that the economist's universal panacea of free trade is, in fact, no guarantee of either efficiency or low prices. Certainly, reducing the Canadian tariff tomorrow would more likely result in chaos than in greater benefits for Canadians from foreign ownership. The discipline of the competitive economy is absent when dealing with the wide powers of discretion of the multinational corporation where anything goes. What is needed is some drastic restructuring, or rationalization, of Canadian industry. Once that is attempted in a serious way, it will quickly become clear that it matters whether firms are national or multinational—if for no other reason than that the latter, being mostly American-based, may not be able to tolerate restructuring because of another kind of extra-territoriality, American antitrust law and policy. In any event, the need to go well beyond tariff adjustments, and begin such difficult tasks as making Canadian industry more research-oriented and innovative and of having a Canada Development Corporation that acts as a catalyst for moribund industry, would have to be faced. On the issue of industrial structure a Canadian economist at Yale University, Stephen Hymer, wins the prize for relevance. By shifting the topic of foreign direct investment from the relatively sterile world of the theory of international economics to the less tidy but more interesting institutional world of industrial organization, Professor Hymer put his finger on a fact much neglected by economists prior to 1960, namely that most foreign direct investment was accounted for by a small number of firms operating in industries that the economist calls oligopolistic. The consequences for policy-making of that shift in perspective are substantial, for if what foreign ownership is about is big business, or trusts, then what policy toward foreign ownership should be about is a combination of keeping business competitive and regulating the trusts. This insight pervades the Watkins Report, to which Professor Hymer contributed as a member of the Task Force, and that Report can be read as the sustained

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application of policies that recognize the reality of the bigness, and the monopoly power, of the multinational corporation. Only by constant surveillance and regulation can the economic benefits of foreign ownership be made large and accrue to Canadians. The Watkins Report did make an important contribution to the debate on foreign ownership in Canada, though Professor Levitt is too kind. But if the merits of that Report have increasingly been recognized by Ottawa as it moves at last to a more positive policy on foreign ownership, the debate, even since the Report was issued, has served also to show its limitations. To begin to face the reality of the multinational corporation as oligopolist is a step in the right direction, but it need not lead to policy recommendations that go beyond increasing the benefits and decreasing the costs of foreign ownership—that is, it does not compel the search for basic alternatives. There are, in principle, two such alternatives, two options other than that of the dependent capitalist economy which comes with domination by foreign corporations. The first is the one popularized by Mr. Gordon, which might be called building an independent capitalist Canada. The failure of the Watkins Report to come to grips with this alternative is evident in the absence of any serious discussion of a policy on takeovers, the blocking of which would greatly facilitate independent capitalism, or of extending existing policy of keeping certain key sectors as the exclusive preserve of Canadian capitalists. Reality, however, has intruded itself; in the past year these two issues have been near the centre of the political stage, and they promise to figure prominently in the debate for some time to come. The second option burst upon the Canadian scene in a quite unexpected way with the debate at the New Democratic Party's convention in 1969 on the issue of an independent socialist Canada. The continuing interest that has been aroused showed that the issue of economic independence—on which Mr. Gordon had so long struggled almost alone—had become a matter of increasing concern to many Canadians. No other political event so clearly compelled the Liberal government to try, at long last, to formulate a policy toward foreign ownership with at least the

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appearance of seriousness. It has been the fate of the left and its policies in this country to be co-opted. It is too soon to tell whether Mr. Trudeau has managed, Mackenzie King-like, to appear to deal effectively with the issue, though it is already clear that the NDP'S left wing that came out of Winnipeg has no intention of calling it quits. It seems that the debate on foreign ownership will not only continue, but will take place at a much more fundamental level than at any prior time in the Canadian experience. But I am guilty already, not only of special pleading, but of running ahead of Professor Levitt, who had completed her manuscript in the main before these new events intruded. Readers who have stayed with the preface thus far should now be allowed to read the book proper, for it is indeed capable of standing on its own feet and being judged on its own terms. Only one final word is necessary. This book, in an earlier monograph form, has already had an active underground life. Professor Levitt has become one of the few Canadian academics to earn the respect of Canadian radicals, and to achieve the accolade of the footnote, particularly in the recent writings of Charles Taylor and Cy Gonick. Publication now in book form makes her work accessible to a multitude of new readers, who will be informed and stimulated—as I was then and now. MEL WATKINS April 16,1970

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Introduction to the Carleton Library Series Edition I wish to express my thanks to the Carleton Library Series and McGill-Queen's University Press for the republication of Silent Surrender. I hope the reader will find it of more than historical interest. It was an early case study of the effects of foreign direct investment on Canada, a "hinterland" with a historical legacy of economic dependence. At the core of the book is a carefully documented analysis of the modern multinational corporation and the strategic considerations that drive it to capture ever more spaces, real and virtual, private and public, domestic and global. In the thirty years that have passed since this book was written, the power of these private economic entities has grown, while the fiscal resources of the state to redistribute the gains from growth have declined. Increasingly, corporations are defining the "public interest" and governments are engaging in international agreements that grant foreign investors privileges that take precedence over the public control of national resources. In the 1990s a new lexicon was invented to describe a world of diminishing national sovereignty and increasing influence of big business in the making of public policy. Its key word is "globalization"—not found in the Shorter Oxford Dictionary until 1995. Brilliantly marketed as an inevitable result of communication technology, globalization is driven by the search of multinational corporations for new markets and new investment opportunities. It is accompanied by a political agenda that seeks to establish a supra-national regime to protect global trade and investment from pressure by citizens on their home and host governments. xxv

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Complementing "globalization" in this new vocabulary are "governance" and "civil society." "Governance" both extends and limits "government." "Civil society" has been refurbished from its origins in the eighteenth-century Scottish Enlightenment to empower private associations of persons, including business interests. The new lexicon is both a response to the declining power of the nation state and an instrument to speed the process of deregulation, privatization, and liberalization of financial capital. Language matters. The change from "international" to "global" removes national boundaries from view. "Governance" carries the implication that governments are corrupt and repressive and have to be closely monitored by "civil society"—especially in the developing world. It suggests that associations of private persons, whether for profit or non-profit purposes, are a more effective means of democratic "governance" than political contest for control of the state. The discourse is seductive and has been embraced by a political spectrum ranging from the extreme right to the extreme left. But the ideology of economic individualism that accompanies neoliberal discourse is dangerous because it encourages people to believe that politicians and governments are incapable of legislating in the public interest. The most important instrument of the state to moderate the concentration of private economic power and to provide universally available public services is the power to tax. The intended effect of globalization, as an agenda of trasnational capital, is precisely the dismantling of the fiscal capacity of the state and the privatization of delivery of public utilities and public services to eliminate the vestiges of "socialism" from government. "Reform" used to suggest redistribution of income and wealth. In yet another shift in language, "reform" today suggests policies of charity for the "deserving" poor at home and development assistance to "deserving" third world countries that have instituted the required "governance" reforms. Silent Surrender is a carefully documented study of the multinational corporation written at a time when foreign direct investment (FDI) in manufacturing was a relatively new phenomenon. Canada was the first host country to receive significant U.S. FDI

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in manufacturing in the years preceding and following the Second World War and thus provided an important case study of the consequences of relinquishing control of the economy to international corporations. Regrettably, because the original publisher targeted the Canadian college market and had no effective means of international distribution, the significance of this study for other countries with large FDI intake was lost. It is my hope that Canada's experience with continental integration may serve as a warning to countries eager to gain access to the North American market without careful consideration of the economic, social, cultural, and, ultimately, the political con sequences. I dream of a Spanish and Portugese language edition of this book, with index and bibliography. In the 1990s, an explosion of speculative capital and portfolio placements by managers of institutional funds competing for high returns in emerging markets brought the world to the brink of financial collapse. The fiasco of dollarization in Argentina is the latest example of how viable economies have been devastated by financial liberalization and massive capital flight. Because of the problems created by volatile short-term capital flows, FDI may appear to be a more stable and desirable form of capital transfer. I hope that a careful reading of this study will serve as a warning to governments who are offering incentives to attract FDI on terms and conditions that are likely to be costly both in terms of the future outflow of profits and the effects on domestic private enterprise and employment. Canadian Independence as History? The original title of this study was "Economic Dependence and Political Disintegration: The Case of Canada." It gives me no joy that it was prophetic in its prediction of Canada's slide into economic—and now military—absorption in the American empire, to a point beyond which lies the disintegration of the nation state A century ago it did not seem ridiculous to proclaim, with Wilfrid Laurier, that the twentieth century belonged to Canada, a pioneering young nation looking to the future. Today, Canada as a sovereign nation is history.

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In the glow of Expo '67 and the wave of radicalism that swept across the western world in 1968, there was hope that it was possible to regain control over the economy by closing critical sectors to foreign investment; screening incoming FDI, and subjecting existing subsidiaries and branch plants of foreign corporations to regulations designed to maximize Canadian employment and technology transfer. At that time there were still powerful voices in Canada's business community who were economic nationalists, including, among others, Eric Kierans and Walter Gordon, then president of the Privy Council. On the occasion of Canada's centennary Gordon warned that "Canada may not exist as a separate and independent nation for another one hundred years. We can ... regain control of our economy and maintain our independence, or we can acquiesce in becoming a colonial dependency of the United States ... History has taught us that with economic control inevitably goes political control. That is what colonialism is all about" (1). Gordon's resignation from his Cabinet post marked the rejection of economic nationalism by the ruling Liberal Party. Pierre Trudeau's "National Energy Policy" was the last gasp of economic nationalism—and it was rejected both by the Province of Alberta (Texas of the North) and the economic power elite of Toronto. The instrument of the regression of Canada to an economic and political satellite of the United States was the enormous inflow of U.S. FDI. By the end of the 1960s, almost one-third of all U.S. foreign investment assets were located in Canada— more than in all of Europe or all of Mexico, Central and South America. In Canada's centennial year Prime Minister Pearson conceded that Canada was in no position to oppose the Vietnam war because "the first result of any open breach with the U.S. over Vietnam ... would be a more critical examination of certain special aspects of our relationship from which we, as well as they, get great benefit." When asked if this meant that we are a satellite of the United States, he explained that "when you have 60 per cent or so of your trade with one country, you are in a position of considerable economic dependence" (3). Indeed. But Canada now has 85 per cent of its trade with the United

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States —in large part due to the operations of U.S.-based corporations in Canada. This high degree of trade dependence has come at a high cost. The last nails were struck in the coffin of Canadian sovereignty on 11 September 2001. Within days of this event, the U.S. ambassador informed Ottawa that Canada would have to relinquish sovereignty in refugee and immigration policy and agree to the policing of a "common external perimeter." Pressure from the United States was physical and irresistible. With 85 per cent of Canada's exports destined for U.S. markets, lengthy inspections at border crossings threatened to bring Canada's exports to a grinding halt as container trucks backed up for miles. We do not yet know how many other concessions have been—or will be—extracted from Ottawa, But one thing is clear: Canada's treasured image as an international "peacekeeper" has been thrown to the wolves of war. When Canada rejected the offer of a role in the United Nations sponsored and European-led international peace keeping mission to Afghanistan in favour of fighting beside U.S. combat forces under U.S. command, Lester Pearson might have been expected to rise from the grave to return his Peace Prize. National Sovereignty and Democracy The ultimate reason for the regression of Canada to an economic and political satellite of the United States is the embrace by its business elites of continental integration on terms and conditions determined in the boardrooms of U.S. corporations and think tanks and universities funded by them. What then remains of Canadian sovereignty? Who ultimately informs policy decisions in Ottawa? How can the governnment of a country whose resources are predominantly owned and controlled by powerful U.S. corporations resist pressures to subordinate the welfare of the population ("politics") to the welfare of the country's business elites ("economics")? Concern with national sovereignty is too easily dismissed with a vague reference to "globalization." But the concern is as justifiable today as it was thirty years ago, "involving as it does the primacy of

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the citizen and the political institutions within which he may hope to control his environment" (37). Similar concerns regarding the eventual consequences of a branch plant economy were expressed by politicians, political scientists, journalists, historians, philosophers, even accountants, but rarely by economists: a distinguished Canadian historian, Kenneth McNaught, interviewed on the occasion of Canada's centenary in 1967, was clear that if Canadians are going to be able to chose what they like and reject what they don't like "they are going to have to recover control over the major sectors of their economy and assert very loudly the supremacy of politics over economics" (36). Since Professor McNaught expressed fears for the future of democracy in Canada, the popularization of neo-liberal ideology—and the brilliant marketing of "globalization"—have successfully demonized "politics" and politicians, and presented "economics" as an occult mystery, resembling astrology, governed by signs and signals from stock markets, financial analysts, and nightly TV business news. In this cosmology, fiscal deficits are bad, surpluses are good; subsidies are bad, export growth is good; tax cuts on high incomes are good, etc. Although these signs may have little correspondence with the majority of the population's perception of their actual state of well-being—or its absence—they have gained popular acceptance as criteria of "good governance." In this way "economics" rules over "politics"; "exit [of capital] trumps voice." As politicians of opposing parties pay the required respect to the "signs," politics becomes a bare contest for office with no major differences in program or policy. This further devalues politics and politicians, and enhances the rule of "economics" over "politics." Perceptions of the limitations that "globalization" places on policy options become self-realizing. In Canada we no longer have meaningful political choices. Continental integration and north/south patterns of trade have contributed to the regional fragmentation of the country and the splintering of parliamentary opposition to the governing Liberal Party on regional lines. For the foreseeable future, Canada has one-party rule. The loss of effective sovereignty and

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the erosion of meaningful democracy are related manifestations of the transnational expansion of corporate business we now know as "globalization." Canada led the industrialized world in its embrace of the "new mercantilism" of U.S. direct investment. Historians warned that the "continental drift" would fracture Canadian political unity and erode national sovereignty. They were right.

Political Disintegration The final chapter of Silent Surrender presents statistical and survey material, including the findings of the Watkins report, to document the economic consequences of the control of Canada's leading resource and manufacturing industries by U.S. corporations. These results are now well known and have been confirmed by subsequent studies. They include a bias toward imports from the parent company, relatively small inflows of new funds, reluctance to permit minority holdings, transfer pricing to avoid taxation, location of research and development in the parent company, etc. The ultimate political consequences of the silent take-over of the Canadian economy by U.S. subsidiaries is treated in the concluding twelve pages. The publisher wanted to eliminate them, because they transgressed beyond "economics." I refused and threatened to withdraw the manuscript. Canada's dominant business elite is now firmly—even aggressively—continentalist. There is no distinguishable difference between the views of top executives of Canadian or U.S. controlled corporations, or the policy pressures they exert in Ottawa. But how long can a nation survive if its economic elites have no sense of national purpose or commitment? In 1970 I speculated that Quebec, whatever its constitutional status, might prove to have a more viable and dynamic economy than the other Canadian provinces, because its technocratic, professional, cultural, business, labour, and political elites had a "more clearly defined sense of national purpose and a greater confidence in its ability to achieve its objectives" (148). In the context of a liberalized international economic environment, social cohesion and national purpose are critical assets in defining "really existing"

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sovereignty. Interestingly, because Quebec does not have formal political independence (central bank, imposition of tariffs, etc.) the government of Quebec, in concert with business, labour, and social movements, has developed innovative "nation building" institutions in the areas of finance and industrial and social policy, whether under liberal, union nationale, or pequiste governments. As a more solidaristic society than English Canada, Quebec may be better placed to defend the social democratic institutions that have distinguished Canadian from United States social policy—but are fast disappearing in Ontario and other Canadian provinces. The High Costs of the "Special Relationship" The Canada-US. Free Trade Agreement (1986) and the North Atlantic Free Trade Agreement (1994) were both cause and effect of Canada's continental drift. But "drift" is misleading, because every step along the way to economic integration with the United States was negotiated by the federal government in exchange for favours granted to Canada by virtue of the "special relationship." The concessions sought were usually favours to exporters seeking secure market access. With every negotiation for "special treatment" for a sectional interest group, Canada's national autonomy diminished and trade dependence and vulnerability to U.S. pressures increased. (12) The "special relationship" is now encoded in the North Atlantic Free Trade Agreement (NAFTA). This agreement is about far more than trade. It protects foreign investors from regulations regarding "local content" and defines "expropriation" to embrace any regulation that could affect their anticipated future earnings. Corporations can sue foreign governments for damages before special NAFTA tribunals. An international trade specialist once observed that NAFTA is unique because none of the three countries who are party to it believe they have gained— all claim to have lost employment to one or both of the other partners. How can this be when there has been overall economic growth in all three countries? The explanation is that what appears to be an agreement about mutually beneficial trade is

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in reality an instrument for the redistribution of income from labour to capital—in all three countries. Capital has captured most of the gains from growth, while intensified competition in the labour market has reduced real wages in all three countriesmost drastically in Mexico. In the absence of political institutions of redistribution, the "efficiency gains" of economic integration accrue to multinational capital. Canada's experience with the "special relationship" should serve as a warning to other countries—especially in the Americas. The expansion of U.S. trade and foreign investment by a "hub and spoke" strategy of bilaterally negotiated special relationships weaves an ever expanding spiderweb of entrappment It is the declared policy of the United States to extend the "special relationship" to all of the Americas in a free trade greement (FTAA) modelled on NAFTA. The process is proceeding step by step, starting with Chile and the five Central American countries. The Andean bloc is next in line. In exchange for wider, but by no means unrestricted, market access to the United States, these countries will be asked to grant the full range of NAFTA style concessions to U.S. exporters and investors. Moreover, there is no guarantee that some U.S. business group or industry will not be able to manipulate the system to protect its special interest. (As I write these lines, the president of the United States has just announced tariffs up to 30 per cent on imported steel products). It is important to note that there are fundamental differences between the FTAA and the European Union: the EU is negotiated between (presently) twelve sovereign states, with unrestricted freedom of movement of persons and provision for weaker economies to catch up to stronger partners. The first chapter of Silent Surrender relates the circumstances of the sacrifice of Canadian monetary independence to assist the United States to finance the Vietnam war. Pressure was put on Canada to reduce its borrowing on U.S. bond markets and to join in policing "guidelines" issued by President Johnson to 900 U.S. multinationals. In exchange for a special exemption from an interest equalization tax, Canada agreed to limit foreign reserves to a fixed amount and even converted half its exchange reserves

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to U.S. bonds. A spokeman for a major Canadian investment house complained that these agreements would weld Canada and the U.S. into a form of monetary union—"a prelude to what the monetary and exchange rate situation would be under a formal free trade area arrangement between the United States and Canada" (14). In 1971 the United States suspended convertibility of the U.S. dollar to gold. By 1973 all major currencies were floating. In recent years, Canada's dollar has floated all the way down to 62 U.S. cents. Trade greatly increased, but the stimulus that devaluations could have imparted to industrial diversification—in the framework of coherent long term industrial policies—was sacrificed for continental free trade. Thirty years of opportunities to diversify the Canadian economy have been lost Dollarization is currently being discussed as a measure of desperation. Without an independent currency and without national control over immigration and other aspects of security at 4,000 miles of border, how long will take before it is seriously suggested that Canada's provinces would be better served with two senators apiece in the U.S. Congress? (55, quoting Aitken). In the 1960s Canada was richer than Japan and Korea was dirt poor. Today Korea has a successful indigenous automobile industry but Canada, with its branch plant industry, is helpless as General Motors closes its only plant in Quebec and Ford is closing plants in Ontario. Thousands of former industrial workers—and some of their children—are driving taxis, serving hamburgers in Macdonalds, or working in low wage call centers. In the past fifteen years inequality has increased, one-third of Canada's children live in poverty, the health system is in crisis, manufacturing jobs have declined, unemployment benefits have been reduced, and the economy remains excessively dependent on the export of primary commodities. But the profits of financial institutions have never been higher and the Canadian business elite is generally satisfied with the "good governance" of the economy. Their only compaint is that income taxes—severely reduced over previous levels—are too high. Brazil is perhaps the only country in the Americas still capable of setting an independent course—except, of course, Cuba.

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However the refusal of the population of Argentina, including its middle classes, to accept further savaging of living standards in order to restore "confidence" in financial institutions whose mismanagement and corruption have contributed to the collapse of the economy may signal a turning of the tide. The painful experiences of other Latin American countries that embraced neo-liberal policies in the 1990s may set in motion irresistible pressures by social movements to revert to national policies of protection of domestic economies which served this region rather well before the disaster of the debt crisis of the 1980s. Economics versus Political Economy When I started to research the "foreign ownership issue" for a policy committee of the New Democratic Party in the early 1960s, the predominant view of economists influential within the social democratic left was that foreign investment was beneficial to economic growth and any perceived threat to Canadian identity could be dealt with by legislation and regulation. American capitalists were no worse and no better than Canadian capitalists and generally paid better wages. Professor Harry Johnson was the intellectual adversary in this debate. He favoured further and faster continental economic integration and considered efforts to discourage takeovers or repatriate some foreignowned sectors to be misguided nationalism, likely to benefit the greedy and lazy "fat cat" capitalists of Toronto at the expense of Canadian consumers. His argument was based on the theory of comparative advantage. Specialization would increase economic growth and the benefits of growth could be redistributed to support social programmes. As for cultural independence, a wealthier Canada, it was argued, could afford a more independent culture. The argument was—and remains—persuasive, but it is based on assumptions drawn from a nineteenth-century world of small independent national firms that was very different from a world of giant transnational corporations. It is blind to the influence their economic power has on home and host governments. Countering it called for a critique of the theory of the firm and

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the theory of international trade to take into account the advent of the multinational corporation as the predominent institution of international business. My argument was that a subsidiary or branch plant of a multinational corporation is not a Marshallian firm whose shareholders happen to be nonresident but an organic part of a production and marketing organization whose major decisions are taken with respect to the viability, security, expansion, and, ultimately, the global profitability of the enterprise as a whole. The intake of foreign direct investment is not a capital inflow similar to the sale of bonds abroad but the intrusion into a country's social fabric of a tightly controlled private corporate enterprise whose operations are likely to diminish, not enhance, the power and effectiveness of domestic enterprise. Continental integration in the context of an economy dominated by U.S. branch plants and subsidiaries would weaken economic integration within Canada, perpetuate the technology gap with the United States, and deprive the economy of the dynamic comparative advantage of indigenous technological advance and innovation. It was not an argument for tariff protection but [for] the protection of local entrepreneurial intiatives, whether public or private, federal, provincial, or municipal. In the thirty years that have passed since this book was written, the "productivity gap" has not diminished—and the freedom to favour Canadian national enterprise has been sacrificed for continental market access. The economic analysis was informed by studies of the modern corporation and the product cycle in international trade. The emphasis on the role of endogenous entrepreneurship in economic development owes an intellectual debt to Joseph Schumpeter, whose definition of development has informed my understanding since I first encountered his Theory of Economic Development—originally published in 1912. Alfred Chandler's classic studies of the American corporation, John Galbraith's The New Industrial State, and the work of Kindleberger, Vernon, Hymer, Freeman, Mikesell, Wells, and many others was helpful in distinguishing the actual operations of the modern multinational corporation from those of a textbook firm operating in

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conditions of perfect—or imperfect—competition, on assumptions of independently given consumer preferences. Regrettably, the publisher insisted on relegating important text to chapter endnotes and statistical and historical material to an appendix to make the text more appealing to the "college market." Endnotes to chapter 2 are of special interest in this regard. The critique of mainstream economics in this chapter is as valid today as it was thirty years ago.

The "New Mercantilism" of the Multinational Corporation Silent Surrender was different from other studies of the effect of foreign direct investment on host countries in looking at the historical status of Canada as a "hinterland" in the international economy. This perspective owes intellectual debts to Harold Innis's "staple theory," to Latin American eonomic structuralist literature, and to my collaboration with Lloyd Best on studies of Caribbean plantation economies. A special debt is due a study by Hugh Aitken, American Capital and Canadian Resources (1961), which provided many highly relevant quotations and seriously merits republication. This historical perspective yielded insights on Canada's rise from colony to nation in the nineteenth century and its "recolonization" as an economic and political satellite of the United States in the years following the Second World War. When British free trade loosened the ties of the old mercantile system, an indigenous class of Canadian entrepreneurs founded the Canadian state and designed the "national policy." They constructed an east-west economy geared to the exports of wheat to Britain, financed by large British portfolio investment in railway and other infrastructure, and protected from U.S. imports by high tariffs. Assisted migration brought land-hungry peasants from Eastern Europe to establish homesteads on the Prairies. The real costs of industrial development in central Canada were paid by western farmers and the country's industrial workers in high prices and taxes. When Canada's "special relationship" shifted from Britain to the United States, the national economy

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fractured on a north/south pattern along 4,000 miles of common border. The "new mercantilism" of the U.S. subsidiaries and branch plants generated income growth but resulted in the regression of Canada to political and economic dependency. In recent years a predatory financial capitalism has captured the initiative in the formulation of public policy—illustrated by the savaging of Canada's social programmes by the federal government in the mid 1990s. The "window of opportunity" for national economic development that opened in the 1860s for Canada and other "late industrializers, including the United States, Germany, Italy, Japan, and Russia, closed in the last quarter of the twentieth century. The international economic and political environment of the first hundred years of Canada's existence as a nation (1867-1967) had been favourable to the economic development of independent states with strong governments and coherent national development strategies. Whether by coincidence or because of underlying historical trends, the decade of the 1860s witnessed the unification of the United States, Italy, and Germany, the end of serfdom in Russia, and the Meiji restoration in Japan. Arthur Lewis in The Evolution of the International Economic Order noted that Latin America and Eastern Europe missed opportunities at that time because of the domination of large landowners strangled indigenous entrepreneurship. The net export of long term capital from Britain prior to 1914, running at 6 to 7 per cent of GDP, contrasts with the net import of capital by the United States today. Huge destabilizing short term capital flows are accompanied by negative or very small net flows of FDI to the developing world. Large migrations from Europe and Asia to the New World in the nineteenth and early twentieth centuries contrast with today"s "economic apartheid" that guarantees global mobility of goods and capital but severely restricts the mobility of labour. Late twentieth-century "globalization" driven by the expansion of multinational corporations is more like the mercantilism that preceded industrial capitalism than the explosion of national economic development in Canada's first century. It has now become very difficult,

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if not impossible, for countries to replicate the development strategies of earlier late industrialisers, or the successful East Asian economies. Perhaps only China and India are now large enough to chart their own course of national development. This suggests that the development impasse in Africa, Latin America, and South East Asia calls for a harmonization of national policies and pooling of regional resources. The link between economic analysis and history in my work is the concept of the "new mercantilism" of foreign direct investment. By this I do not mean trade protectionism but the transnational corporation as a modern re-incarnation of the chartered companies of the mercantile era that pre-dated industrial capitalism. Like the Hudson Bay Company or the East India Company, the large transnational corporations are private economic entities operating across borders and over distant oceans with political support from their home bases and concessions obtained from host country authorities. They can switch sourcing and production between peripheral locations and capture new markets by selling below production cost. Transactions between parent, affiliate, and contract suppliers are at notional transfer prices. Once affiliates are established, whether by acquisition or construction of new plants, financing is largely from the domestic savings of the host county in the form of reinvested profit and borrowing from local banks. As in the old mercantile systems, the large multinational corporations maintain a mutually beneficial relationship with the political authorities of the home country: they finance political parties and benefit from government contracts and from the protection of their interests in foreign countries. When, in the late 1960s, the United States required their cooperation in maintaining military expenditures abroad, U.S. corporations were reminded that their operations overseas would not survive for long without the protection of the U.S. government. In addressing these "mighty engines of enlightened capitalism," U.S. Secretary of the Treasury Henry Fowler warned that in the absence of military presence of the United States abroad, "I wonder not whether the opportunities for private American enterprise

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would wither ... I wonder only how long it would take" (100). Since that time, inequality and exclusion in the world economy has increased to levels that threaten civilized life on earth. Following the victory of the west in the cold war, a new enemy has been found in the "war against terrorism." The protection of the population of the capitalist heartlands from acts of politically motivated violence—whatever the source—is a legitimate concern of the appropriate authorities. But what is really the purpose of this open-ended "war" with no formally constituted enemy? Vengeance for September 11? Domestic politics? Control of oil and natural gas? A new-age colonialism to suppress protest and insurrection, anywhere, any time? All over the world, people are asking these—and many other—questions about the objectives of U.S. military policy.—questions it is not now possible to ask in the United States. In the name of democracy the United States is becoming a militarized police state. Patriotism is used to silence dissent and the mass media—controlled by four or five powerful corporate conglomerates—is nurturing a hysteria reminiscent of the era of McCarthyism while the world looks on in fear and apprehension. Corporate Plutocracy versus National Democracy The strategic objectives of corporate business require limitations on the sovereignty of legislatures, parliaments, and constitutions. The case for the suppression of democratic politics to serve the purposes of corporate economics was stated with refreshing candour in a speech by a senior representative of a Canadian multinational corporation: "Modern government is unresponsive to the taxpayer because of the way the franchise has been extended. It responds mostly to the demands of people who have no stake in society. The corporation represents those who do have a stake in society—the stockholders. The fact that developing nations must tailor their policies to big corporations is all to the good. It makes rather irresponsible governments more responsible. They have to compete for favours from the more responsible elements in society. The multinatinal corporation is a great force for internationalism" (37). George Ball,

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former U.S. undersecretary of State, made it equally clear: "The multinational corporation is ahead of, and in conflict with, existing political institutions represented by nation states" (98). Barely concealed threats were made by a U.S. Secretary of State Dean Rusk: "we don't challenge in the strictest constitutional sense the right of a sovereign government to dispose of properties ... [but] it would be wise and prudent on their side to create conditions which would be attractive to the international investor, the private investor" (102). In the 1970s the United Nations drew up codes of conduct for mutinational corporations to protect host countries from exploitation by these companies. International negotiations to ratify these dragged on until the great debt crisis of the 1980s, which exposed the developing world to irresistable pressure to grant concession to foreign capital. NAFTA and similar bilateral agreements provide guarantees to foreign investors that they will receive "national treatment" by host countries and will enjoy protection from host country legislation that could adversely affect their profitability. Many developing countries have made similar concessions under duress from the International Monetary Fund (IMF) and the World Bank. Secret negotiations within the Organization for Economic Cooperation and Development (OECD) for a Multilateral Agreement on Investment (MAI) that would have bound all member countries to "national treatment" for foreign investors were exposed by nongovernmental organizations and failed when France refused to sacrifice her film industry to Hollywood. The Canadian government expressed similar concerns regarding Canada's cultural industries. The World Trade Organization (WTO), established in 1994, has extended trade negotiations to include trade in services (General Agreement on Trade and Services—GATS), TradeRelated Investment Measures (TRIMS), and Trade-Related Intellectual Property Rights (TRIPS). The most notorous beneficiaries of WTO agreements on patents are the pharmaceutical companies, who have the capability of supplying all the medications required to eliminate the scourge of malaria and other tropical diseases, as well as treating millons of victims of HIV/AIDS in

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poor countries at minimal cost. Instead of sharing their technology with producers of generic drugs, they have fiercely resisted the right of countries to produce, or import, generic drugs at a fraction of the price of their patent-protected products. The power and influence of the pharmaceutical monopolies was illustrated by their success in extending patents in Canada to a maximum of thirty years, resulting in a steep increase in the cost of prescription drugs to the public health system. An issue that deserves much more attention from the international development community is the privatization of public infrastructure in developing countries. Clean water, sewage treatment, roads, airports, electricity, and telecommunication are essential requirements of modern economic development. But the World Bank and national donor agencies have greatly reduced the financing public infrastructure. Although 2.5 billion of the world's poor lack adequate access to energy supplies, World Bank expenditure on electric power infrastructure has declined from 25 per cent of total expenditure to 3-4 per cent. The multinationals have found profitable investment opportunities in the privatization and upgrading of electricity and telecommunications, with guaranteed rates of profit built into agreements on utility charges. These and other aspects of neo-liberal policies introduced since the mid 1980s have directly contributed to a further increase in the inequality in distribution of income in the world. A study carried out for the World Bank of 85 per cent of the world's households shows that the gap between rich and poor is much greater than was previously admitted. Inequality is growing as fast on a global scale as it grew in Britain during the Thatcher years. In five years (1988-93) world per capita real income increased by 5.7 per cent. But all the gains went to the top twenty per cent, whose income was up by 12 per cent while the income of the bottom 5 per cent actually declined by 25 per cent. The richest 10 per cent of the world's households now receive 114 times as much as the poorest ten per cent. The gap is so big that the richest one per cent (50 million households) with an average income of us$250,000 earn more than the 60 per

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cent (2.7 billion households) at the bottom of the income distribution (Economic Journal, January 2002). The multinationals have no interest in poor people in poor countries—as producers or consumers. The markets they seek and the economic growth they generate are confined to the top 10 to 20 per cent of the world's population. A world this polarized and inequitable is neither politically nor environmentally sustainable. As John le Carre famously said, the fact that communism has failed does not mean that capitalism will not also fail. The challenge to humanity is to bring about a transformation in civilization based on the true needs of individuals and peoples for security, respect, and dignity. The imaginary wall that divided the rich world from the poor came crashing down on September 11. While there is social injustice on a global scale, there will be no enduring peace There will be no safety in the gated communities of the suburbs, or in the high-tech space-age defences of the ultimate "gated community" of the United States, until human rights and human dignity prevail on planet earth. Montreal and Port of Spain 2002

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Introduction to the First Edition

This book presents a sketch of Canada's slide into a position of economic, political and cultural dependence on the United States. It seeks to explain the process whereby national entrepreneurship and political unity have been eroded to a point beyond which lies the disintegration of the nation state. Those of my colleagues who believe that understanding is advanced primarily by the accretion of factual information will perhaps be disappointed by the absence of "original research." Those, however, who share the view that further research on the effects of direct foreign investment is unlikely to yield additional insight unless accompanied by a more relevant intellectual framework —or, to use the academic jargon, a more illuminating model— may find the ideas developed here useful in posing new and meaningful questions. I am deeply indebted to a number of individuals; some of them share some of my views, while others share none. The patient but relentless nagging of my colleague Professor Charles Taylor started me on the task of preparing a number of background papers for the New Democratic Party on the topic of foreign ownership in Canada, culminating in an oral presentation of the skeleton of the argument contained here to a meeting of the National Council of the New Democratic Party in May 1966. My collaboration in work on plantation economy with Mr. Lloyd Best of the University of the West Indies during his two-year stay at the Centre for Developing Areas Studies of McGill University assisted me in clarifying the concept of the new mercantilism. I xlv

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must thank my former teacher Professor John Dales for a new appreciation of the work of Harold Innis, Canada's greatest economic historian. A thorough immersion in Innis's world of fur, fish and staples was imposed on me as a graduate student at the Department of Political Economy of the University of Toronto, before it was transformed into an intellectual branch plant of American orthodoxy. Specifically, I have learnt a great deal from the writings of Professor Hugh Aitken, who parted company with most Canadian economists in his insistence that the "staples approach" remains the single most powerful aid in explaining Canadian economic development in the twentieth century. The essay on which this book is based was written in the summer and autumn of 1967 and completed early in 1968.1 wish to thank the editors of the New World Quarterly, a journal of Caribbean commentary, who published "Economic Dependence and Political Disintegration: the case of Canada," in spite of its length and marginal interest to many readers of that publication. The Watkins Report became available in 1968, when I was in the final stages of preparation of the original essay. If the trend of the arguments in that document bears some similarities to the conclusions which I had arrived at, the reasons are obvious; both efforts flow from the same set of facts and both studies owe a great debt to the most ambitious fact-gathering effort in this area; I refer to the important empirical work of Professor A.E. Safarian. I wish to thank the many friends and acquaintances who encouraged me to prepare the original essay for Canadian publication, and provided the moral support necessary to sustain the effort. I am especially indebted to Mr. Marc Eliesen, Director of the Research Department of the New Democratic Party, for granting me access to research material he has collected over a number of years. In the last round of tidying up the manuscript I have benefited greatly from the advice and encouragement of my friend and colleague, Professor Abraham Rotstein, and the skilful editorial work of Mrs. Diane Mew of the Macmillan Company of Canada. In expanding the original essay, I have refrained from any

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systematic attempt to bring the details of the story up to date. My justification lies in the conviction that nothing has happened since the change of government in 1968 to alter the nature of the Canadian problem. The expansion of my original work has thus been directed towards investigating the process of corporate penetration into the world economy by means of direct investment. Many readers will no doubt be disappointed at the absence of programmatic solutions. Some may infer that the writer believes the trend towards Canadian dependence on the U.S. corporate economy is irreversible. Such a conclusion would be erroneous. Events appear predetermined only in hindsight. I am hopeful that this book will strengthen the resolution of a growing number of Canadians to regain effective control of the economy of the country, because the repatriation of economic decision-making is a precondition of a democratic social order. Political mobilization around a new nationalism is the only way in which the legislative functions of Canadian government both federal and provincial, can be exercised to curb the influence of external corporate power over our physical and social environment. In the absence of a popular nationalist commitment we must expect federal and provincial governments to continue to participate in the destruction of Canada's cultural, economic and political independence. Montreal and Port-of-Spain 1970

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Silent Surrender

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1. The Recolonization of Canada CANADA'S MAIN PREOCCUPATION in centennial year was with her chances of survival as an independent sovereign country. The mass circulation Star Weekly, in its Canada Day issue of 1967, featured interviews with two distinguished Canadians under the heading "Can Canada Survive?" One of these was Walter Gordon, then President of the Privy Council and chairman of the cabinet committee which had responsibility for a task force to enquire into the effects of foreign investment on the Canadian economy. A White Paper outlining government policy was promised for the autumn of 1967. The "Watkins Report," named after Professor Melville H. Watkins, who served as head of a team of economists recruited from the universities, was published in February 1968.' But because the government could not reach agreement no policy proposals were in fact formulated. Here then is part of Walter Gordon's reply to the question put by the Star Weekly in July 1967: During the last fifty years we have freed ourselves of traces of colonial status insofar as Britain is concerned. But having achieved our independence from Britain, we seem to have slipped, almost 1

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Silent Surrender without knowing it, into a semi-dependent position in relation to the United States. While the relationship is a benevolent one, if present trends are allowed to go unchecked — if we fail to arrive at a consensus of national goals and objectives — then, as I've intimated, Canada may not exist as a separate and independent nation for another 100 years. The choice is clear. We can do the things that are necessary to regain control of our economy, and thus, maintain our independence, or we can acquiesce in becoming a colonial dependency of the United States, with no future except the hope of eventual absorption.

And again, from the same interview: Already, in my view, we have surrendered too much ownership and control of our natural resources and our key industries to foreign owners, notably those in the United States. And history has taught us that with economic control inevitably goes political control. This is what colonialism is all about. Indeed, it is sadly ironic that in a world torn asunder by countries who are demanding and winning their independence, our free, independent and highly developed country should be haunted by the spectre of a colonial or semi-colonial future.

Undoubtedly Walter Gordon represented a minority view within the cabinet. The majority opinion of the government was one of apprehension that the views expressed by Mr. Gordon might check the flow of American capital into the country and slow down economic growth. Indeed, Mr. Gordon's subsequent resignation from the cabinet position and his retirement from the political scene can be interpreted as a rejection of his views in the counsels of the Liberal party and the federal government. In an interview in the Centennial Canada Day issue of the country's leading mass circulation monthly, Maclean's Magazine, Mr. Pearson, then prime minister, conceded that Canada was indeed a political satellite of the United States. In discussing Canada's position on the war in Vietnam, Mr. Pearson warned that "we can't ignore the fact that the first result of any open breach with the United States over Vietnam, which their government considers to be unfair and unfriendly on our part, would be a

The Recolonization of Canada

3

more critical examination by Washington of certain special aspects of our relationship from which we, as well as they, get great benefit." To the interviewer's comment that "this isn't really very different from satellite status, is it?" Mr. Pearson admitted as much: "It is not a very comforting thought, but, in the economic sphere, when you have 60 per cent or so of your trade with one country, you are in a position of considerable economic dependence." The links of dependence, however, extend far beyond normal commercial trade. Earlier in the centennial year, in a public reply to an appeal by some four hundred University of Toronto professors for dissociation from the war in Vietnam, Mr. Pearson reviewed the benefits which Canadians gain from the integration of defence production and concluded that for a broad range of reasons it is clear that the imposition of an embargo on the export of military equipment to the U.S. and concomitant termination of the Defence Production Sharing Agreements would have farreaching consequences that no Canadian government could contemplate with equanimity. The New Mercantilism of Direct Investment The links of trade referred to by Mr. Pearson in large part arise from the operations of American-based corporations in Canada. They are manifestations of a new mercantilism of corporate empires which cut across boundaries of national economies and undermine the national sovereignty of the hinterland countries in which their subsidiaries and branch plants are located. A feature which the new mercantilism shares with the old lies in the way enterprises use their economic power and their political influence, and indeed, the military strength of their metropolitan governments, to protect their investments against disruptions in the market for their supplies and their sales. Uncertainty in the free market has been reduced and sometimes even eliminated by converting market transactions into intracompany transfers through the device of vertical integration. Further, the large corporations have used their power to obtain from metropolitan and peripheral governments a network of preferen-

4

Silent Surrender

tial and bilateral trading arrangements and fiscal concessions which, in some ways, resemble the exclusivist privileges of the old mercantile systems. The "special aspects of our relationship" referred to by Mr. Pearson consist of a set of preferential arrangements granted to Canadian businesses by the government of the United States. These include exemption until recently from import quotas on exports of crude petroleum; the partial free-trade agreement in automobiles and automobile parts (which contravenes the general provisions of GATT); the exemption of Canada from the U.S. Interest Equalization Tax; and (until very recently) from U.S. directives to international corporations concerning prescribed levels of overseas direct investment. Preferences and concessions made to hinterland countries are in large part the outcome of the pressure that can be brought to bear on the U.S. government by the various American lobbies and domestic interests. Farm products, in which Canadian interests predominate, obtain few concessions and have largely been shut out of the American market. American farmers are able to exercise considerable political leverage and the American consumer has little power. Canadian lead-zinc exports are subject to highly restrictive quotas in the U.S. market because American metal producers in the Mountain states can exercise political power in the U.S. Senate to protect their regional interests. In contrast, pressure from inefficient American iron ore producers for protection against ore imports from Canada has been ineffective. The huge Labrador iron ore deposits have been developed by capital and enterprise mobilized by the American steel industry, which requires a large, safe and cheap supply of iron ore. These same American steel interests, together with New York State electricity consumers, finally induced U.S. Congress to approve participation in the St. Lawrence Seaway, a good quartercentury after the proposal was first made by the Canadians. Canada's exemption from American import quotas on crude oil had less to do with the successful pleading of Canadian oil producers than with the energy needs of the influential Western states. The participation of the major American automobile companies

The Recolonization of Canada

5

as lormai signatories to the agreement between the governments of Canada and the United States, setting out the conditions of free trade in the continental automobile industry, is perhaps the most dramatic evidence of the fact that trade talks nominally conducted between two countries were in effect joint negotiations between representatives of the two governments and of the three international corporations. The bargaining position of Canada vis-a-vis the United States is neatly summarized by Professor Aitken, who has provided the most carefully documented and penetrating account of the relationship of Canada's resource industries to the United States: Mutual dependence, even when explicitly recognized by both parties affords no guarantee that Canada's interests and aspirations will be given adequate recognition when U.S. policies are decided upon . . . Canada in the past has been reduced to expressing her objections in terms of equity of fair play. Not surprisingly, the results have been disappointing. Experience has underlined a principle that could have been stated a priori. If Canada wants the United States to do something, she must be able to prove it is in the national interests of the United States to do it.2

In this same context Professor Aitken warned that bilateral preferential arrangements between the United States and Canada inevitably weaken Canadian political autonomy: If Canada seriously wishes to resist and retard the process of continental integration, she should refuse to accept such discriminatory treatment when it is offered. It is, indeed, by Canada's reaction to such bilateral proposals that outside observers will be inclined to gauge what weight Canadians do in fact attach to their autonomy and what sacrifices of economic advantage they are prepared to make to achieve it.3

Evidently there is a price to be paid for the special relationship. Thus, Canada is prevented from exporting crude oil to Japan, and Canadian subsidiaries are prohibited by U.S. legislation from filling orders from countries blacklisted by the government of the United States. Because of the U.S. Trading with the Enemy Act, Ford of Canada was not able to supply trucks to China, some flour milling companies were not permitted to fill orders from

6

Silent Surrender

Cuba, and a number of Canadian drug companies were debarred from selling medical supplies to the Society of Friends for use in South and North Vietnam. The potash industry of Saskatchewan, which is entirely controlled by American subsidiaries, was able to fill orders from China only by obtaining special exemption from the American ban on such transactions. While it might appear that business lost by the extra-territorial application of the Trading with the Enemy Act is small compared with the advantages gained by free access to the American market, this is a view which neglects the possibility of radical shifts in the pattern of Canada's trade. Canada's ability to withstand economic and diplomatic pressure from her southern neighbour is determined by the strength of Canadian vested interest — whether private or public — in relation to the American corporations and lobbies. Sectors where ownership is Canadian, and markets are not subject to special arrangements or concessions from the United States, have significantly more freedom. Thus, in the case of the wheat sales to communist countries, American wheat producers could do little more than express displeasure and envy. Furthermore, the gains from the special wheat deals to the prairie farmers, to the transportation industry and to the politicians who were instrumental in negotiating them, have been substantial. An instructive example of unsuccessful American intervention against strongly organized Canadian interests was provided by the Mercantile Bank affair. In this instance, a sharply-worded diplomatic protest was delivered to Ottawa informing the Canadian government that its banking legislation was "unacceptable" to the government of the United States. Neither this intervention nor the threat by American commercial banks to withdraw clearing facilities from Canadian banks was successful in securing entry for the First National City Bank into the Canadian banking system. Citibank had purchased a controlling interest in the Mercantile Bank of Canada, after being warned that Canadian banking legislation would not permit the acquired bank to be expanded into a larger operation. Both the warning and the Canadian legislation were ignored on the miscalculation that sufficient

The Recolonization of Canada

1

pressure could be mounted to break the monopoly of the Canadian banking system. But eventually Citibank had to retreat and finally was forced to bargain for the opportunity to sell their holdings in the Mercantile Bank on terms which would minimize their loss. Although a good case could be made for more competition in the Canadian banking system, the American bank was effectively excluded because Canadian banking is tightly monopolized by a small number of very large Canadian-owned banks. This structure has been well secured by federal legislation. Canadian predominance in banking, transportation and communication is a historical legacy dating from the days of mercantile economy. Canada is one of the few countries who have not permitted American banks to enter—a striking contrast to the permissive attitude she has adopted towards American branch-plant industry. In contrast, American intervention successfully protected the privileged position of Time magazine. The Canadian edition sold 356,000 copies in 1967. It has the most "select" readership of its size in Canada; the average income of Time subscribers was reported to be $13,000. The man who assembles the four Canadian pages of Time was once described by a federal cabinet minister as "just about the most influential newspaperman in Canada." With an editorial product already paid for in the United States, Time raked in $6.5 million of advertising revenue in Canada in 1966. The magazine split its press runs in five regional and even local editions, apart from the Canadian edition. Together with Reader's Digest, it absorbed close to 60 per cent of Canadian advertising revenue. The result was that Canadian mass circulation monthlies such as Maclean's Magazine or Chatelaine were no longer financially viable without subsidy. In a House of Commons debate, spokesmen from the New Democratic Party called Time "disreputable," "deplorable" and "intrinsically vicious." In the same debate, then opposition leader John Diefenbaker said that the magazine "has devoted itself to interpreting the news and re-writing it so as to direct Canadian thinking. It is not a Canadian magazine. It has three or four pages of Canadian news in each issue, which makes it a counter-

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Silent Surrender

feit magazine when it pretends to be Canadian. It uses these four pages to give its viewpoint, which is not a Canadian viewpoint, to Canadians week after week. To what purpose? It is to tell Canadians what they should do." Walter Gordon's comment: "Influential? Yes, perhaps too darn much so, as a Canadian power directed from New York." In 1960 a royal commission investigated what should be done to save Canadian magazine publishing from extinction by unfair competition from Time and Reader's Digest. The chairman was one of Canada's distinguished newspaper editors, Senator Grattan O'Leary. The O'Leary Commission recommended that expenditures on advertising placed in Canadian editions of foreign magazines should no longer be tax-deductible. Implementation of the recommendations of the O'Leary Commission would have driven Time out of competition for the Canadian advertising dollar. The original U.S. edition would of course have continued to enter Canada, like any other American magazine. "It may be claimed," wrote the Commissioner, "that the communications of a nation are as vital to its life as its defences and should receive at least as great a measure of protection." No less a person than President Kennedy interceded to inform the prime minister of Canada that he wished Time to be exempt from any legislation based on the O'Leary report. Washington put pressure on the Pearson administration by making exemption a pre-condition for agreement to the pending treaty on partial free trade in automobiles and parts. As Walter Gordon wrote in his book, A Choice for Canada: "Approval of the automobile agreements might have been jeopardized if a serious dispute had arisen with Washington over Time.""4 Time and Reader's Digest were both exempted from the bill, passed in 1965, which denied tax deductibility for advertising in any foreign-owned publication aimed at the Canadian market. The effect was to leave these two "branch-plant" magazines stronger than ever, protected against future competition from the United States. Senator O'Leary was outraged. He termed it "the probable death sentence on Canada's periodical press with all that can entail for our future voyage through history."

The Recolonization of Canada

9

There were no vested interests in Canada strong enough to counter the pressure mounted by Mr. Henry Luce. Furthermore, in the automobile negotiations the Canadian government was in the position of begging favours not only from U.S. Congress but from the Big Three. In such delicate bargaining even Walter Gordon agreed that "in the circumstances, the decision to grant the exemptions was realistic." The unfortunate Mr. Gordon added that "explaining the reasons to the Liberal party caucus was one of the most unpalatable jobs I had to do during my period in government." The lesson was not lost on Mr. Gordon. Sovereignty is not compatible with branch-plant status; the greater the degree of foreign ownership and control of Canadian industry, the narrower the freedom of choice in economic as well as political matters.

The Abrogation of Fiscal and Monetary Controls For Canada, concern about the degree of control exercised by U.S. corporations was first expressed when the euphoria engendered by the boom of the 1950s was followed by three years during which per capita income did not rise at all. At the same time U.S. economic control continued to grow and there was a dramatic series of purchases of old-established Canadian businesses. Expressions of concern, however, were limited to a handful of public personalities whose warnings were, by and large, dismissed with scorn by business, government and the academic community. Walter Gordon's efforts to impose punitive measures on takeovers in 1963 were rejected by business and by his cabinet colleagues. The unforgettable Mr. Coyne, then governor of the Bank of Canada, warned that Canada was "living beyond her means" and should reduce her dependence on foreign capital. Unfortunately, he failed to understand that the tight-money policies he advocated, in the misguided belief that they would produce more Canadian savings, in fact induced a massive inflow of capital from the cheaper money markets of the United States. Furthermore, tight money depressed the Canadian economy by curtailing purchasing power when it should have been expanded.

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Silent Surrender

Concern became more widespread with the announcement of the "voluntary guidelines" issued to the American financial and industrial community by the U.S. Treasury in 1965. The directives given to nine hundred multinational corporations by President Johnson constituted, as Mr. Kierans observed, "a tightening of the American grip on our economy that threatens the attainment of our own economic objectives and are an infringement of our political sovereignty."5 These guidelines demanded that each of the participating companies take steps to expand exports, increase the remittance of dividends and other payments from abroad, increase long-term borrowing in other countries, repatriate short-term assets held abroad—particularly with Canadian financial institutions—and postpone or eliminate direct investment projects. The total of capital funds sent out of the U.S. by direct investment plus reinvested earnings was not to exceed, in 1965 and 1966 together, 90 per cent of a company's total investment abroad over the three-year period 1962, 1963 and 1964. This was expected to limit U.S. capital outflows by direct investment in 1966 to the levels prevailing in 1964. The president of each of these multinational corporations personally agreed to submit detailed quarterly progress reports to the U.S. government. The statement of December 1965, which extended this program to Canada, as well as to a number of oil-producing countries (all of which had previously been exempted from similar programs), stated explicitly that the purpose of the program was to increase military expenditures, without putting undue pressure on the dollar: I am personally confident [U.S. secretary of Commerce J.T. Connor said] that the leaders of American business fully understand the seriousness of the foreign situation which we face. Furthermore, the increased military effort in Vietnam will put further pressure on our balance of payments. To help compensate for the added drain, we have found it necessary to strengthen the voluntary program for 1966.6

The United States has, of course, the right to reduce the outflow of funds. But when a country has put itself in the situation

The Recolonization of Canada

11

where the government of a foreign country can dictate the investment policy, the dividend policy, and the purchasing policy of the greater part of its commodity-producing economy, that country has in effect relinquished control over the operations of its business sectors. For this reason the guidelines were deeply disturbing to many Canadians who previously did not feel concern about the high degree of foreign ownership of industry. Furthermore, the leverage of control by the United States Treasury is much greater than appears at first sight. In 1964, for instance, gross investment expenditures by American branch plants and subsidiaries in Canada were reported at $2,557 million. Of this amount, however, only $126 million (5 per cent) originated directly from United States sources. Internal financing amounted to $2,008 million (78 per cent), while a further $423 million (17 per cent) was mobilized by Canadian financial institutions. However, the investment policy of the subsidiaries, according to the guidelines, would affect not only the 5 per cent of direct U.S. cash inflows but all funds except those borrowed in Canada. As Mr. Kierans said: "We are no longer dealing with the large numbers of economic theory but with a single directing voice; not with the disparate independent decisions of thousands of businessmen but with hard government policy."7 According to the propositions found in textbooks the government of an independent country with a developed banking system is able to influence the level of economic activity and prices by the exercise of fiscal and monetary policy. Fiscal policy is supposed to control aggregate spending in general and the rate of capital formation in particular. But how can Canada operate global fiscal controls when the investment decisions of the major part of its modern industrial sectors are in effect controlled by the U.S. Treasury? Although monetary policy is of limited effectiveness in a country which is open to large international capital flows and maintains a fixed exchange rate, Canada had had some freedom of action in this area until 1963. In that year the Canadian government voluntarily negotiated away the vestiges of its control over

12

Silent Surrender

monetary policy when it begged and received exemption from the 15 per cent Interest Equalization Tax imposed by the United States, in exchange for a commitment not to allow reserves to rise above a ceiling of $2.6 billion. Mr. Earl McLaughlin, chairman and president of the Royal Bank of Canada, commented in January 1966 that the independence of Canadian monetary policy has never been at a lower

ebb: External vulnerability of monetary policy, under fixed exchange rates was greatly increased by the agreement of July 1963 with the United States, not to allow exchange reserves to rise significantly above $2.6 billion. It is impossible to meet these externally imposed conditions, and at the same time protect the Canadian dollar by monetary restraint. Under the new arrangements, our own monetary authorities appear to be attached to a string, or a system of "guidelines" the business end of which is held in Washington.8 In commenting on the trend towards less and less freedom for Canada to pursue an independent course of action, Mr. McLaughlin was highly critical of the Canadian government: What seem to be purely external pressures are often the aftermath of some concession sought, and obtained, by our government for purely selfish national reasons. But concessions can be withdrawn, and an economy built on concessions is far more vulnerable than it ought to be. In the traditionally conservative words of central bankers, Mr. Louis Rasminsky, governor of the Bank of Canada, explained the situation to his central banking confreres in the following terms: I want to refer briefly to some important limitations to which monetary policy in Canada is subject. There is no foreign exchange control in Canada and there are many channels that link Canadian and foreign capital markets, particularly the United States capital market. There is no official control over new issues and many Canadian borrowers who have access to both markets carefully appraise the conditions that confront them... before

The Recolonization of Canada

13

deciding where to sell their long-term bond issues. The situation may be unique. I do not suppose that many of you find your regional governments and cities, as well as large businesses, selling new long-term issues outside your countries. The connections between the capital markets of Canada and the United States are so close that substantial changes in credit conditions in Canada may give rise to large inflows or outflows of capital. This could of course be a particular limitation in view of the arrangements with the United States by which we have undertaken to work to certain reserve targets in exchange for exemption from the Equalization Tax for new issues of Canadian securities in the capital markets of the United States.9

The recent U.S. balance of payments crises, however, have been of such dimensions that not even Canada could be exempt from counter-measures. The January 1968 directives issued by the U.S. government were no longer "voluntary," but mandatory. They resulted in a considerable outflow of funds from Canada. There was pressure on the Canadian dollar, panic in Ottawa and the usual emergency despatch of the finance minister to Washington to plead Canada's special status as America's most dependable satellite.10 Exemption was once again granted. In return Canada liquidated the remnants of its monetary independence. Washington demanded, and Canada agreed, to convert one billion dollars of her exchange reserves into U.S. securities. This represented over one-half of current holdings, which Canada will only be able to call on at the discretion of the U.S. Secretary of the Treasury. Nor was this all. In exchange for unrestricted access to the American capital market Ottawa agreed to police the United States balance of payments regulations for Washington by placing its own guideline-restrictions on Canadian banks and other financial intermediaries as well as Canadian incorporated industrial companies. Ottawa made it known that it did not wish overall foreign investment by Canadian corporations to increase to such an extent that Washington could claim that American companies were evading U.S. regulations by channelling foreign investments through Canadian companies.

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Silent Surrender

Dr. W.E. Clendenning, the spokesman for Richardson Securities, a leading Canadian investment house, in December 1968 stated that these agreements have in effect "welded Canada and the U.S. to a form of monetary union, a prelude to what the monetary and exchange rate situation would be under a formal free-trade area arrangement between the United States and Canada," and they implied the loss of a further substantial portion of Canada's already limited monetary freedom vis-a-vis the United States.11 Canadian interest rates are in effect tied to U.S. interest rates. They cannot be raised above a certain level, whether this is or is not appropriate for the economy. If interest rates were to be raised above the effective ceiling, Canadian reserves would rise above the agreed floor. In this case Canada would be forced to buy U.S. bonds, i.e. Canada would be forced to lend funds to the U.S. on short term while at the same time importing long-term capital, both in the form of bonds and controlling direct investment. Dr. Clendenning pointed out that any effort on the part of Canada to return to a flexible exchange rate, or to revalue upward the Canadian dollar, would bring retaliation from Washington in the form of withdrawal of exemptions from the balance of payments restrictions on capital flows to Canada. While Dr. Clendenning believes that the price of those arrangements, although high, was on balance worth paying, Dr. D.B. Marsh, assistant general manager of the Royal Bank of Canada, maintained that Canada paid too high a price for these concessions, which were negotiated in the mistaken belief that the Canadian dollar was in a weak position. The Canadian dollar was, and is, according to Marsh, ridiculously undervalued. The implication is that it is not the Canadian dollar but the U.S dollar which is in difficulties and that concessions made by Ottawa are in effect made to assist the U.S. balance of payments, rather than our own. The inability to close the gap between American and Canadian interest rates results in a choice between undesirable monetary expansion and resulting rising prices, and a reduction in

The Recolonization of Canada

15

government spending. Writing at the time of the emergency economy drive in September 1967, Bruce Macdonald, of the Globe and Mail, made the following very interesting observations: In a confidential memorandum quietly circulated recently, an influential private investment consultant with top level contact both in Ottawa and Washington said the substantial increase in credit ground out by the central bank in an effort to keep up with demands of governments and business was responsible in large measure for the greater inflationary spiral that had developed in Canada. With a fixed exchange rate it seems that this government cannot run as large deficits as its predecessors because they lack the ability to press interest rates higher than U.S. levels (as in 1958-62) and when they outrun the willingness of the public to buy their paper they must force it on the banks, with a resultant monetary expansion and consequent rise in prices. Although Mr. Sharp never spelt it out it appears to be a recognition of the limitations forced on the country by the fixed exchange rate and the agreement with Washington on total exchange holdings that led him to conclude that the only viable alternative was a substantial cutback in government spending and borrowing.12 Evidently, Canadian monetary and fiscal policies have both been harnessed to serve the U.S. Treasury in their efforts to close the U.S. balance of payments gap and protect the value of their dollar. This is indeed the classical position of a colonial econo-

my. The cost of special status has been very high. Deal by deal, beginning in 1963, Canada has moved towards a colonial monetary system whereby surplus foreign exchange earnings are automatically lent to the metropolis. "Le droit de batte monnaie" has virtually been relinquished.

Notes to Chapter I 1.

Report of the Task Force on the Structure of Canadian Industry, Privy Council Office, Ottawa, January 1968. 2. Hugh G. J. Aitken, American Capital and Canadian Resources, (Cambridge: Harvard University Press, 1961), p. 156. Aitken adds

16

3. 4. 5. 6. 7. 8. 9. 10.

11. 12.

Silent Surrender that success for Canada is likely only when she is able to "associate her interests with the interests of particular groups in the United States, who, for their own purposes, are prepared to support policies which Canada also supports." (p. 157). Ibid., p. 171. Walter Gordon, A Choice for Canada, (Toronto: McClelland and Stewart Ltd., 1966). Address by E.W. Kierans, Minister of Health of the Province of Quebec, to the Toronto Society of Financial Analysts. February 1966. U.S. Department of Commerce, Press Release, December 6, 1965. Kierans, op. cit. W. E. McLaughlin, chairman and president of the Royal Bank of Canada. Address to the 97th Annual Meeting of Shareholders, January 1966. Louis Rasminsky, governor of the Bank of Canada: Text, opening lecture of the 20th International Banking Summer School. Queen's University, Kingston, August 1967. The incident was graphically described by M. H. Watkins in an article which came to my attention while making final revisions of this manuscript. In reference to the Canadian dollar crisis of January 1968, Watkins commented that the crisis "ended only when Mr. Sharp, then Minister of Finance, telephoned Mr. Fowler, the U.S. Secretary of the Treasury, and asked him to tell the American firms to tell their Canadian subsidiaries to take it easy. Just for a moment the powergrid was let up. Ottawa found it could communicate with Canadian incorporated firms only through Washington. " Journal of Canadian Studies, February 1969. E.W. Clendenning, author of a study on the costs of Canadian exemption from U.S. capital control. Reported in The Gazette, December 7,1969, and the Globe and Mail, December 11,1969. Globe and Mail, September 5,1967.

2. The Old Mercantilism and the New IT is NOW CLEAR that the findings of the Task Force set up on the initiative of Walter Gordon have been rejected both by government and by academia. The great majority of Canada's economists remain convinced that there is no serious cause for concern. By and large, they maintain that direct foreign investment assists economic growth without creating problems that cannot be dealt with by legislation. The economic power of producing organizations and the legislative power of government are believed to be independent of each other: the former subordinate to the democracy of the market place, the latter to the democracy of the ballot box. In this cowboy and Indian world of nineteenth century make-believe, the will of the people can always be made to prevail by the appropriate stroke of the legislative pen. Under the ex-officio deanship of Professor Harry Johnson, an eminent economist of Canadian origin who has made his spiritual and physical home at Chicago and the London School of Economics, the profession has used its influence to stress the desirability and inevitability of further and faster economic integration into the American economy. Efforts to discourage takeovers or to repatriate some to the foreign-controlled sectors 17

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of Canadian industry are widely regarded as misguided nationalism, likely to benefit greedy and lazy Canadian capitalists at the expense of the consumer. Using the apparatus of standard textbooks, Canada's economists have long argued the case for the unrestricted flow of goods, capital and people between the two countries. They have, in the main, opted for "continentalism" and against "economic nationalism." For a decade or more, Professor Johnson led the crusade against Canada's nationalists. On the grounds that increasing interdependence between Canada and the United States has proven beneficial to growth, and that economic integration would be still more so, Canada's economists have bestowed on the continentalist trend the aura of academic respectability. In this discussion the notion of rationality has been preempted to describe policies which maximize the total market value of goods and services. If "continentalism" is more efficient at producing this type of growth, then economic nationalism represents an irrational view held by people incapable of logical thinking, having had insufficient training in economic theory or being the victims of xenophobia dating back to the defeat of the Loyalists in the American Revolution.l Dwelling in a world of textbook categories, academic economists are prisoners of the creations of their discipline. Here transactors such as "the firm," "the consumer," "the entrepreneur" and "the government" exist as abstractions without specific institutional form, engaged in an interplay of equating gains and losses at the margin until some form of "equilibrium" emerges. This academic game would be, at worst, a fascinating waste of time were it not for the fact that the policy conclusions derived from these rather sterile models carry the substantial weight of professional authority. Our plea is not for empiricism but for models which capture the essentials of the politico-economic process. We need theory which leads us to pose meaningful questions because failure to root analysis firmly in reality invites distortion both in research and in policy prescription.2 Common sense tells us that a study of the business decisions of the corner grocery store are not

The Old Mercantilism and the New

19

likely to be revealing in explaining the operations of Sears-Roebuck, any more than a study of the local body-repair shop can assist in an understanding of the investment decisions of General Motors. Yet we persist in clinging to a "theory of the firm" which, in spite of marginal adjustments for imperfect or oligopolistic competition, fails to describe the dominant firm of the contemporary world—the multidivisional, multinational corporation. If Alfred Marshall were to visit our classrooms he would be horrified to observe how we have clung to the letter and violated the spirit of his enquiries. There seem to be few economists in this country who are impressed by the fact that a subsidiary of a branch plant of a multinational corporation is not a Marshallian firm whose shareholders happen to be non-resident, but an organic part of a production and marketing organization whose major decisions are taken with respect to the viability, security, expansion and ultimately the global profitability of the enterprise as a whole; or that the intake of direct foreign investment is not a capital inflow similar to the sale of bonds abroad, but the intrusion into the Canadian social and economic fabric of a tightly-controlled private corporate enterprise whose operations are likely to diminish, not to enhance the power and effectiveness of Canadian enterprise.3 Traditional economic theory has become bogged down in problems which are really not very interesting. The concept of profit-maximization by equating marginal cost with marginal revenue derives from a (static) model of the firm in which all strategic decisions have already been made. This firm is assumed to be producing a standardized product for a known market by means of a predetermined technique embodied in the fixed costs of its capital equipment and other overheads. Even allowing for such analytical improvements as selling and promotion costs and imperfect product markets, price and output determination under these conditions are evidently a routine and rather uninteresting aspect of the managerial function. Because economic analysis has closed in the parameters of its enquiry so

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Silent Surrender

tightly, it has been asking itself false questions and posing fictitious alternatives: is the firm a profit maximizer? a sales maximizer? a growth maximizer? a risk minimizer? Are profits a means to growth or an end in themselves? Is sales expansion a means of securing profits or an end in itself? While some writers have struggled to build an analytical framework which can contain the observed behaviour of the firm, most economists have understandably shied away from the whole problem.4 Despite the glaring gap between contemporary economic theory and reality, there is an evident reluctance on the part of economists to undertake major renovations of an intellectual apparatus of elegance and academically accredited validity. There is no doubt that the construction of a new political economy is going to be an intellectually messy and very difficult task. The prime difficulty lies in the fact that, despite all the efforts of positivists and econometricians to sweep its valuations under the rug, the discipline of economics remains deeply rooted in the utilitarian calculus of pleasure and pain and the Victorian myth of harmony of interest. Consumption is good (pleasure); work and effort are bad (pain); more output with less input are alway better (axiomatic); the market, provided it is not interfered with, is democratic in the sense that it gives the consumer what he wants (optimal allocation). Welfare is equated with an increase in the total volume of goods and services consumed, regardless of quality and kind. The high standard of living and the good life are, in the end, measured by the level of G.N.P. per head. The discipline of modern economic analysis derives from inductive observation of the functioning of a more or less competitive market society in mid or late nineteenth-century Britain and was fashioned into a logical structure of thought by postulating economic motives of behaviour, and building upon these an elaborate and internally consistent set of deductive truths. "Rational" was thus defined as behaviour directed towards the satisfaction of economic wants, postulated to be without limit. As the means of satisfying these wants were limited, a

The Old Mercantilism and the New

21

situation of perpetual scarcity and perpetual choice was implied as a natural order of things. Economic wants were associated with "economic motives" and these economic motives themselves were labelled rational. The mischief was compounded when rational behaviour acquired normative connotations implying a social optimum. Hunger and gain were defined as economic motives and man was supposed to act on them in everyday life. Honour and pride, civic obligation and moral duty, self-respect and common decency were significantly summed up in the word "ideal." Thus man was believed to consist of two components: the one material, the other ideal; the one economic, the other non-economic; the one rational, the other non-rational. In the capitalist system of economic organization society was for the first time in history subordinated to the sole incentives of hunger and gain. Economic motives reigned supreme and the individual was made to act on them under pain of starvation. Traditional social and personal relations were forcibly dissolved and society was geared to the requirements of production and productivity by the imposition of a self-regulatory system of price-making markets, not only for produced commodities, but also for land and labour-power, nature and man.5 Karl Polanyi long ago pointed out that the world of economic motives is based on a nineteenth-century utilitarian fiction. Hunger and gain are no more "economic" than love or hate. There is no such thing as a sui generis economic experience, in the sense in which man may have a religious, aesthetic or sexual experience. (These latter give rise to motives that are broadly aimed at evoking similar experiences. In regard to material production these terms lack self-evident meaning.) The nineteenth century thought of hunger and gain as economic motives simply because the organization of production under a market economy works only as long as people have reason to subordinate all human requirements to the activity of earning a living. But, writes Polanyi, "ranging over human societies we find hunger and gain not appealed to as incentives for production."6 Adam Smith's "invisible hand" and Bentham's calculus of

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Silent Surrender

pleasure and pain are as passe as the technology of the early industrial revolution. While the physical paraphernalia of the nineteenth century have long been locked up in museum showcases, its philosophical and psychological counterparts continue to haunt us. In a world of artificially-created wants we are, however, entitled to question the rationale of the assumption that an increase in national income and expenditure constitutes an improvement in the welfare of the nation. In the affluent society the lash of hunger has long since lost its sting as an incentive to produce. The rattiness of the rat-race is largely a self-imposed juggernaut. There are options for creating a social environment and a corresponding economic organization which are more truly in accord with the nature of man than the competitive jungle in which North Americans exist. Efficiency in the circular flow of taste-creation and taste-satisfaction is imperative only for the institutional survival of the corporations; for the rest of us the system constitutes a collective addiction to the rat-race, with an increasing rate of voluntary drop-outs. Without the social acceptance of its value system, the North Atlantic economy would grind to a halt. Ideology is not, as the cruder Marxists claim, a "superstructure." The consensus of the value system is the infrastructure upon which our economic and political institutions rest.

Economic Theory and Economic Development The most incisive attack on contemporary economic theory is that which challenges its outdated philosophical and psychological underpinnings, and consequently challenges the role of the economist as the unwitting apologist for corporate capitalism and for production-centred "socialism" of the Soviet and Eastern European variety. This, however, is not the principal intellectual challenge to orthodoxy. Economists have become increasingly vexed by internal inconsistencies and the credibility gap between their textbook propositions and the reality of the contemporary economy and polity. It is increasingly evident that two time-honoured pillars of academic orthodoxy fail to sustain any coherent explanation of the transformation of the international economy within the

The Old Mercantilism and the New

23

last fifteen years. We refer to the theory of international trade and the theory of the firm. The authors of a recent study of international trade and international migration of U.S. industry concluded that "neither the theory of the firm nor the theory of international capital movements has much to offer in explanation of managerial decisions to invest in production facilities abroad."7 In a similar vein of dissatisfaction with international trade theory Professor Mikesell observed that the key to understanding the growth of U.S. enterprise in Western Europe "is to be found in the nature of the American firm."8 Nevertheless, the investigation of the typical management-controlled enterprise has largely been neglected by academic economists. It has been hived off as a special area of study called industrial organization, lying in the domain of the business schools. Mathematical economics and general equilibrium theory have reinforced the mechanistic approach to entrepreneurial activity.9 For these reasons the insights which have exercised the imagination of writers who are plainly dissatisfied with mainstream economic theory have been provided by studies of business behaviour on the one hand, and the relationship between technology and patterns of world trade on the other. Much of the interesting contemporary work in the English language emanates from economists associated with the Harvard Business School,10 the School of Industrial Management and the Center for International Studies of M.I.T.,11 the United Nations, the O.E.C.D., and other public and private agencies concerned with problems of world trade and development.12 The ongoing debate concerning the effects of direct investment on the U.S. balance of payments and on the underdevelopment of Latin America have also produced interesting documentation and speculation.13

Development and Underdevelopment The central thesis of our argument is that the subsidiaries and branch plants of large American-based multinational corporations have replaced the operations of the earlier European-based

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Silent Surrender

mercantile venture companies in extracting the staple and organizing the supply of manufactured goods. In the new mercantilism, as in the old, the corporation based in the metropole directly exercises the entrepreneurial function and collects a "venture profit" from its investment. It organizes the collection or extraction of the raw material staple required in the metropolis and supplies the hinterland with manufactured goods, whether produced at home or "on site" in the host country. The new mercantilist ventures operate across geographic boundaries; they must expand to secure their profits and they must increase their profits to finance their expansion. They "export" financial capital and ownership claims, but the organic ties between subsidiaries and parent companies guarantee an increase in the commodity exports of the metropolitan country by creating foreign markets for capital, intermediate and consumer goods. The old mercantilist ventures exercised monopoly market power by their skill in procuring scarce goods from distant lands; in this they were generously aided by a variety of privileges granted by the state. The competitive strength of the modern multinational corporation similarly lies in the superiority of its marketing and business organization14 which enables it to create monopoly-type venture profit by expertise in productinnovation and want-creation. Institutional assistance from the state comes in the form of the political and cultural presence of the metropolitan power and from public funds channelled into multilateral and bilateral aid programs to underdeveloped countries. The international corporation has formed channels of capital and commodity flows, of taste and technique-transmission which cut across political boundaries. The tendency to accumulate internal savings and the preference for wholly-owned or tightly-controlled subsidiaries acts to concentrate the international capital market in the United States, the super-metropole of the contemporary system of multinational corporations.

The Old Mercantilism and the New

25

The new mercantilism destroys the national ties which integrate the economic and cultural life of the countries which it penetrates. Older peripheral countries like Canada regress; new ones gain political independence, but cannot easily escape from their colonial status of economic satellites. Canada was discovered, explored and developed as part of the French, and later the British mercantile system. It grew to independence and nationhood in a brief historical era in which goods, capital and people moved in response to economic forces operating in relatively free, competitive international markets. Present-day Canada may be described as the world's richest underdeveloped country. Its regression to a state of economic and political dependence cannot possibly be attributed, as is fashionable in some quarters, to an unfavourable endowment of resources. Nor can its present lack of independent dynamic be laid at the door of a traditional culture. Thus we are forced to seek the explanation of underdevelopment and fragmentation in the institutions and processes of modern society. We suggest it is to be found in the dynamics of the New Mercantilism of the American international corporation.

Economic Development It is almost axiomatic to equate development with wealth and high income, and underdevelopment with poverty and low income. For this reason Gross National Product per head is widely used as an indicator of economic development. On such a scale Canada is more highly developed than the United Kingdom, France or Germany, and Venezuela is more highly developed than Japan. While there is evidently a relationship between economic development and income growth, we suggest that a more basic explanation of development and underdevelopment must be sought outside the factors normally termed "economic." Here it is useful to turn to the work of one of the few modern economists who declined to concern himself with income growth or capital formation. In Joseph Schumpeter's writings development is defined exclusively in terms of endogenous entrepreneurial initiative and innovation.

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By "development," therefore, we shall understand only such changes in economic life as are not forced upon it from without but arise by its own initiative, from within. Should it turn out that there are no such changes arising in the economic sphere itself, and that the phenomenon that we call economic development is in practice simply founded upon the fact that the data change and that the economy continuously adapts itself to them, then we should say that there is no economic development. By this we should mean that economic development is not a phenomenon to be explained economically, but that the economy, in itself without development, is dragged along by the changes in the surrounding world, that the causes and hence the explanation of the development must be sought outside the group of facts which are described by economic theory.15

The expansion of the international corporation into the world economy by means of direct investment implies the development of the system of corporate capitalism, but not necessarily that of the national economies in which its affiliates and branch plants are located. When the emphasis is placed on endogenous entrepreneurial initiative, metropolitan economies are seen as sources of development (active); hinterland economies as places of production (passive). Foreign direct investment may thus recreate aspects of the old mercantilism which preceded the formation of the nation states of the nineteenth century and may accelerate the fragmentation of national economies and associated national political systems in areas such as Canada. Present conditions are particularly unfavourable to national economic and political integration in many of the new states established in the postwar period. There we are witnessing the simultaneous process of decolonization and recolonization.

The Theory of the Firm Stripped of its frills, the theory of the firm which continues to dominate academic orthodoxy is drawn from the observations of Alfred Marshall. Here firms are programmed by the signals of the price mechanism to serve the needs and wants of consumers, on penalty of extinction for failure. One of the more serious difficulties with the Marshallian theory of the firm—and the Walrasian

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27

theory of market interdependence—is that the entrepreneur is like the fifth wheel that carries the spare tire; not really necessary to the functioning of the system except in the case of an emergency (or "disequilibrium"). According to Marshall, who was not at all unaware of the problem, the entrepreneur provides "organization" for which he receives something akin to a salary. But it is never made really clear why a self-regulating market system requires conscious centres of organization, as distinct from the apparatus necessary to cope with routine administrative tasks.I6 Writing years before the dominant productive enterprise had fully substituted a collective decision-making elite for the individual entrepreneur, Joseph Schumpeter provided the most relevant insight into the nature of modern corporate profit. In Schumpeter's world profit derives from the deliberate introduction of innovation by the entrepreneur. Profit is thus created by his "will and action." Entrepreneurs are distinguished from "capitalists," who are merely rentiers who lend funds and receive interest. Capitalists have money; entrepreneurs have wits, and these they use to create situations of a type which result in venture profit. One individual, or one corporate entity, may, of course, perform both the rentier and the entrepreneurial function. Indeed, this is precisely what happens in the typical modern self-financing corporation. Schumpeter's entrepreneur is a more spirited creature than Marshall's manager. The former imposes his will on consumers and producers; he educates them to want new things. A completely new good, says Schumpeter, must be "forced onto consumers."17 Entrepreneurial profit is strictly distinguished from interest, which is the return on borrowed capital; it is also distinguished from the premium for risk-taking, which is a calculable cost. Entrepreneurs innovate and entrepreneurial profit is a "quasi-rent" accruing to the temporary monopoly created by the innovator. An innovation, in the Schumpeterian sense, consists of the introduction of a new process of production, a new or improved commodity or service, the opening up of a new market, the securing of a new source of supply, and the introduction of new methods of business organization, including the creation or

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destruction of market monopoly positions through mergers.18 In this scheme of things innovation implies economic development and economic development cannot take place without innovation: "without development there is no profit, without profit no development."19 Profit is the result of innovation and the origin of the accumulation of wealth. Profit finances expansion and investment and, by implication, investment creates its own savings. We cannot divine whether the czar of the Procter and Gamble empire ever studied the writings of Professor Schumpeter. The similarity of Mr. McElroy's observation that the large corporation never lacks capital, but "seeks the development of ideas that will justify the investment of capital" with the theories of the scholar would, however, indicate that Schumpeter certainly studied the behaviour of American enterprise. Unlike Marx's capitalist who makes profit from exploiting labour in the production of standard commodities for a competitive market, Schumpeter's entrepreneur may or may not be a producer. The innovating entrepreneur primarily creates situations in which the selling price of his product exceeds the cost of producing and marketing it. Profit is a surplus to which there corresponds no liability. The forerunner of the modern entrepreneur is the old-time mercantile trader who sold glass beads and similar articles to African tribesmen: "The principle of the matter is that a new commodity is valued by purchasers much as gifts of nature or pictures by old masters, that is its price is determined without regard to cost of production."20 It is now widely acknowledged that what gives the United States the capacity to compete in world markets despite its high wages is its ability to produce a steady flow of new products.21 Competition by product-innovation is of course not confined to the export market. Rather, the reverse is true: the technique of product-differentiation and product-innovation was developed by the American firm in the context of its domestic market and subsequently carried into the world economy by foreign trade and direct investment. Because there are no total substitutes for new products they will

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be bought even if they are considerably more expensive than the older less sophisticated products.22 These "quasi-rent" are temporary monopoly profits which can be secured against competition by imitators only by creating a business organization which generates a perpetual stream of innovations. It is inherent in the logic of this Schumpeterian view that markets are never perfect, knowledge is never certain, and that any steps taken to reduce the risk to the producer in securing the necessary inputs at the prices he has estimated they will cost and selling the planned output at the prices he has estimated he can obtain, will make profit more certain and enduring. In contemporary times Schumpeter's entrepreneur has become a collective entity; a sort of "general executive."23 While the boards of directors and the large stockholders have nominal authority as the legal owners of the enterprise, it appears that it is only when dividends stop or when the company is in danger of receivership that they normally exercise it. Even then, there is little they can do except acquire a new set of executives.24 The corporations can thus be described in Sombart's terminology as an independent economic organism over and above the individuals who constitute them. These entities lead, as it were, a life of their own which often exceeds the life of their human members. It is the entrepreneurial skill of the senior executives (who generally include individual members of the board of directors) which will ultimately determine the success of these enterprises.25 The active and directing role which Schumpeter ascribed to his entrepreneur was if anything an understatement of the degree to which the exercise of corporate decision-making power affects the social and economic environment in the orbit of the modern corporation. The corporations have mastered the techniques of manipulating our personal and social requirements in the interests of their private imperatives of survival; they can make people buy things they don't really want and produce things nobody else really needs. As Professor Johnson has pointed out, in the opulent or affluent society real scarcity has been succeeded by contrived scarcity and the successful functioning of our eco-

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Silent Surrender

nomy depends on reiterating the contrivance. Increasing income implies the gratification of ever less and less essential wants. The margin of want-satisfaction tends to move from the physical to the psychological and sociological—the psychological becomes necessities, while the luxuries are psychiatric. The decision-taking structure becomes ever more bureaucratic. Labour itself becomes a produced means of production, an item of human capital equipment. The universities become factories for the production of capital goods.26

The Theory of International Trade Prior to the nineteenth century large-scale commerce was international in the sense that goods and productive factors flowed more freely between countries than within them.27 Industrial techniques and market organization were much more highly developed in internationally traded goods than in goods produced for local consumption. The great merchants of the Hanseatic League residing throughout Europe and the Levant were, as Adam Smith observed, "not necessarily citizens of any country."28 Indeed, Smith's famous diatribes against the merchants had their roots in his desire to see a national economy based on indigenous capital invested in agricultural and manufacturing enterprises. Throughout the nineteenth century internal mobility of goods and factors of production increased with the emergence of modern national economies. Accompanying this was the development of distinct and separate markets for specific factors of production. As financial capital became divorced from entrepreneurial activity, it acquired high international mobility within the institution of a world market for portfolio lending and borrowing. Labour moved across the Atlantic in response to the forces of supply and demand in the newly created world market. While international mobility of financial capital and labour reached a peak in the classical pre-1914 world economy, business enterprise was typically national, and with the exception of colonial plantations and mines, entrepreneurial decisions were typically local.

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31

In the classical system of market-regulated trade, incomes earned in the metropolitan countries from participation in the international economy accrued to producers of export goods, to rentiers who invested in foreign placements to finance the expansion of world trade, and to owners of overseas plantations, mines and oil deposits able to produce and sell agricultural and mineral products on favourable terms. Impotent before the forces of the market, governments were by and large bullied or cajoled into following the rules of free trade, annually-balanced budgets and freely-convertible currencies pegged at fixed rates to gold and to the pound sterling. When England and Europe were pre-eminent in industrial organization, production and exports were undertaken by national firms. When competition became severe, markets were shared by agreements and cartels and there was, of course, a process of concentration. Nevertheless, financing was largely separated from production. The capital market, including banking and non-banking financial institutions, was powerful in relation to the entrepreneurial production unit. The contemporary world economy resembles the old mercantilism in the re-integration of metropolitan entrepreneurship with metropolitan capital. The principal difference lies in the fact that the new international ventures have added largescale on-site manufacturing in foreign countries to the older activity of extracting agricultural and mineral materials for use in the home country. As long ago as 1929 Professor Williams noted the parallel between contemporary developments and the organization of international trade prior to the nineteenth century: "International trade prior to the nineteenth century strikingly displays a movement of the factors of production underlying, requisite to, and proceeding out of the anticipation of profits to be made by international extension of markets and raw material resources."29 Advocates of the new "corporate supernationalism" have also been struck by the similarity between the old mercantilism and the new. Proclaiming the pioneering role of the multinational corporations in the extension of modern technology to the far

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corners of the world, one of their publicists boasted that "in many ways [the international corporations] resemble the British charter trading companies of the seventeenth and eighteenth centuries, for they too are venturing into unexplored terrain," and "often pursue policies which lack the explicit approval or even acquiescence of the governments of the nations they affect." As Professor Williams noted forty years ago, the entrepreneur of modern industry is concerned with his industry and its products, not with political geography. An ever-increasing array of basic industries spread across political frontiers. They represent in some cases the projection by one country into others of its capital, technique, special knowledge along lines of an industry and its market, as against the obvious alternative of home employment in other lines. They represent, in other cases, an international assembly of capital and management for world enterprises ramifying into many countries. They suggest very strikingly an organic interconnection of international trade, movements of productive factors, transport, and market organization.30

The organic relationships noted by Williams are formed primarily through the process of direct foreign investment. And the pioneers of this new mercantilism are undoubtedly the American corporations which have, within the last twenty years, transformed the international economy.

Continentalism or Nationalism? The argument advanced by Canadian economists for continental integration rests on the neo-classical static theory of "comparative advantage." It concludes that lower tariffs would benefit Canada by encouraging further specialization in efficient resource extraction and discouraging inefficient manufacturing. The argument totally misses the point. It fails to provide an effective answer to the concern that economic integration with the United States, in the context of an economy dominated by branch plants and subsidiaries, will weaken internal integration within Canada, will perpetuate the "technology gap,"

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and deprive this country of the "dynamic comparative advantage" accruing to indigenous technological advance and innovation. Professor Harry Johnson does not seem to grasp that the case for economic nationalism, as presented here, is not the case for the tariff protection of industry but rather the case for the protection of local entrepreneurial initiative, whether public or private, particularly in the strategic "new technology" industries. Policies directed towards the protection of Canadian enterprise against penetration by U.S. direct investment will have to be complemented by a lowering of Canadian tariffs on commodity imports from all sources. The case against further Canadian integration with the economic-political-political-military power complex based in the United States cannot be countered by trotting out the tautological propositions of international trade theory. These dogmas are based on institutional assumptions which take account neither of the competitive strategy of the modern multinational corporation nor of the political relationships between these corporate giants and their home government.31 Moreover, the abrogation of sovereignty implicit in the branch-plant economy may yet prove to carry substantial economic cost. In the contemporary world, in which innovation in technology and in social organization is a critical factor in the capacity of a country to utilize her resources and the ability to decide what will be produced and to whom it will be sold, the branch-plant nature of Canada's economy is likely in the not-so-long run to involve a serious loss in the material quality of living. Historical experience of the past century indicates that the key to economic strength lies in the creation of a cultural, social and political milieu which favours indigenous initiatives. This is an area of social science about which we know very little. There is no a priori reason to believe, however, that contemporary improvements in communication and the increased interdependence of the world have diminished the ability of smaller countries to achieve a high standard of living by adopting policies which protect their populations from cultural and economic absorption into the super-empires. On the contrary, it may well turn out

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that countries much poorer than Canada can escape from poverty and unemployment only by deliberately blocking further penetration by the multinational corporations. In the Canadian context, the further continental integration of industries that are for the most part branch plants and subsidiaries of American corporations accelerates the erosion of freedom of choice in economic policy. This may yet prove to be very expensive for Canada.

Rational Policy Objectives Economic policy is rational when it employs the most effective means to achieve a given set of social goals, whatever these may be. If the goal of Canadians includes the desire to remain distinctively Canadian in North America and to enjoy the benefits of small size and a greater sense of community and participation in decision-making, then this must be accepted as no less a reality than their desire to enjoy a comfortable life. The rational economic policy may well be the one which foregoes the dubious material advantages of further "Americanization" for the freedom to shape the social and economic environment. Similarly, if the social goals of French Canada include the desire to feel "maitres chez nous" in Quebec, then a rational Canadian policy must take cognizance of that fact. The same applies to the aims and aspirations of any nation wishing to remain outside of the inter-American system as that is now popularly conceived. If, however, English Canadians are interested primarily in rivalling the United States in living it up in the American style; if there does not exist in Canada a value system basically different from that prevailing in the United States; if private consumption is accepted as the guiding principle of social policy, and the protection of the individual and his community from manipulation by bureaucratic private profit-making complexes is not considered to be an important aim of national policy; if Canadian nationalism is, as Harry Johnson charges, nothing more than a composite of provinciality of outlook, a sense of inferiority, and an anti-Americanism born of greed and envy of our neighbours,32 then the nationalists have no case. They have no

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case because the nation does not deserve to survive. Formal political sovereignty may remain; but coincidence of interest will increasingly guide Canadian political leadership to opt for policies initiated in the United States. Aware of the concern over sovereignty, some continentalists have argued that integration will enhance Canada's income, and with a high income everything can be purchased, including independence. From empirical evidence and from a study of the English novel Professor Johnson claims to have divined that independence comes from the enjoyment of a high income.33 "I would expect that closer economic integration, by enabling Canadians to achieve a standard of living closer to that of the United States, would make them better able and more willing to use the political sovereignty of their country to pursue political and social policies appropriate to their own conceptions and requirements."34 Is it possible that a man as intelligent as Harry Johnson could be so naive? Has it not occurred to him that the characters in those English novels were men of independent means? Who is more notoriously dependent than a highly paid salaried employee? And who more independent than a man who can fall back on his own resources without seeking favour or employment? We are invited to believe that the economy and the polity exist independently of each other and that Canadian governments can always employ legislative means to compel foreign companies operating in Canada—however powerful—to act in accordance with the wishes and interests of this country. It is claimed there is no particular reason why the presence of American corporations here should be permitted to influence Canadian policy in internal or external affairs. While there are undoubtedly some economists naive enough to believe that the formulation of public policy can be subdivided into neat conventional compartments — economics, politics, sociology, etc.— everybody connected with government knows that all economic policies have social and political consequences. Indeed, one suspects that Professor Johnson is not really naive at all concerning the nature of power and dependence. In commenting on the Wat-

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kins Report recommendation that it should be illegal for U.S.controlled companies to follow U.S. policy rather than Canadian policy, Professor Johnson is reported to have called its recommendations "adventuristic" because "they seek to exploit American tolerance of Canadian pretensions to independence and would be accepted in the United States only so long as Canada remained a loyal and useful ally."35

Corporate Plutocracy versus National Democracy Concern over the eventual consequences of branch-plant economy has been articulated by politicians, historians, political scientists, journalists, philosophers, even accountants, but rarely by economists. We have referred earlier to the interview with Walter Gordon in the Star Weekly in 1967. The other distinguished Canadian to be interviewed by the same journal at that time was Kenneth McNaught, Professor of History at the University of Toronto. In referring to Canada's economists, he said: Of all the bits of specialist advice about our future, surely that which says we should not worry about uncontrolled growth of American investment is the most fatuous. Like earlier advocates of commercial union (with the United States), some economists today say we should forget our nationalism and opt only for economic efficiency.... No country, says Madison, will long remain stable where the government does not serve the interests of the principal owners of property. Well, the principal owners of our productive property are now the American corporations. The evidence of this is overwhelming and flows almost daily from the Bureau of Statistics.36

The conclusion which follows is clear. In the words of Proffessor McNaught, if Canadians wish to be able to choose that which they like and reject that which they don't like, "they are going to have to recover control of the major sectors of their economy and assert very loudly the supremacy of politics over economics." The conflict between the imperatives of the multinational corporation and the sovereignty of the nation state is being recognized by an increasing number of scholars and political

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figures. The best-known prophet of the trend is probably Mr. George Ball, former U.S. Under Secretary of State, who declared that the nation state is a very old-fashioned idea that would have to yield to the multinational corporation, which is a modern concept designed to meet the requirements of a modern age. The threat to the nation state is real, since some corporations are larger than many contemporary countries. It has been estimated that the overseas expansion of U.S. corporations will result in the American control of 75 per cent of the noncommunist world's output by the year 2000, if not sooner.37 Concern for the protection of the sovereignty of the nation state is depicted as a retrogressive flag-waving nationalism. But such concern is totally justifiable, involving as it does the primacy of the citizen and the political institutions within which he may hope to control his environment over the concentration of corporate power. Businessmen don't mince words. One could not hope to find a clearer statement of the conflict between corporate power and individual freedom than the following defence of the multinational corporation by an executive of the Canadian-controlled Steel Company of Canada: If what we really need is a free and responsible society, corporate power is a desirable counter-force to the excessive power of government. Modern government is unresponsible to the taxpayer because of the way the franchise has been extended. It responds mostly to the demands of people with no stake in society. The corporation represents those who do have a stake in society—the stockholders. The fact that developing nations must tailor their policies to big corporations is all to the good. It makes rather irresponsible governments more responsible. They have to compete for favours from the more responsible elements in society. The multinational corporation is a great force for internationalism.38

In fact the multinational corporation is responsible to nobody but itself. It pursues its own interests, and is not concerned for those of any group outside itself. Its internationalism is as false as its appeal to laissezfaire and the "invisible hand" of the market. It represents a reassertion of venture capital with high international mobility over the competitive multilateral self-regulat-

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ing system of economic organization typical of the nineteenth and early twentieth century. It seeks to capture the quasi-rents of technological progress through operating a world-wide strategy of corporate planning and control. Under these new conditions of international trade private portfolio capital has been replaced by national and international governmental loans and aid; the overwhelming proportion of what is today called "private international investment" is controlling equity investment. Hinterland economies thus find themselves in a new mercantilist relationship of dependence on international corporations and metropolitan governments. While some international corporations are so powerful that they do not have any special relationship with any one metropole, the majority remain based in the homeland, principally in the United States. In spite of minor conflicts of interest, they are unmistakably integrated into the industrial-political structure of their metropole. The threat to the sovereignty of Canada thus takes the form of a threat of absorption into the American empire. The Canadian case is admittedly unique. However, as Professor R.F. Mikesell has noted, "given the preferences of parent companies for 100 per cent control of their overseas subsidiaries as against joint ventures, and given the tendency of the U.S. government to extend its jurisdiction relating to trade and other matters to the foreign subsidiaries of U.S. firms, American subsidiaries are increasingly in conflict with national policies in the host countries and generate fears of foreign domination."39 Canada's relationship with the United States is not primarily due, as is often claimed, to the strong ties of trade that exist between the two countries. Rather the pattern of commodity trade reflects the ties of corporate integration through the agency of direct investment by American companies. The basic decisions on investment and expansion of Canadian industry are made in New York, Detroit or Chicago, not in Toronto or Montreal. The satellitic status of Canada is reinforced, as in the old mercantile system, by the network of exclusivist favours, preferences and privileges negotiated from a position of weakness vis-a-vis the United States. The vulnerability of Canada to changes in

The Old Mercantilism and the New

39

American tariffs, quotas, credit conditions, defence orders and capital movements increases as commercial exports by Canadian-controlled enterprise are replaced by inter-company transfer and politically negotiated barter deals. It will be argued that the high point of Canadian entrepreneurship was attained in the interlude between the breakdown of the old mercantilism in the middle of the last century and the incorporation of the Canadian economy into the new mercantile system within the last twenty years. Absorption has been facilitated by the legacy of Anglo-Canadian vested interest. The privileged position of this elite has set up conflicts between central Canada and the rest of the country and between English and French Canadians. These tensions reinforce the regionally disintegrating effects of excessive American direct investment. Harry Johnson's distaste for the Toronto-based capitalists has driven him to seek democracy in the supermarkets of suburbia and the degree factories which offer the prospect of turning every graduate into a mini-capitalist capable of earning a profit on knowledge stored up during the educational process. But here there is no democracy. Here there is only the snare of captivity to the silent power exercised by the faceless bureaucracy of corporate wealth operating largely beyond the controls of national democratic processes. Manipulated into addiction to the "comforts and pleasures" of W.W. Rostow's age of mass consumption, Canadians are captives in a not-so-gilded cage. Poverty and chronic unemployment East of St. Lawrence Boulevard, urban and rural blight and frustration by all those excluded from power and status, are the counterparts of corporate efficiency and model trade union conditions of workers employed in a select set of high-profit enterprises. In Canada economic resources are allocated primarily to suit the requirements of large private corporations, and the majority of these are under United States control. The constellation of the old east-west economy and strong central government has largely been destroyed by the economic forces of corporate continental concentration and corresponding regional political fragmentation. The Canadian entrepreneurs of yester-

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day are the coupon clippers and hired vice-presidents of branch plants of today. They have quite literally sold out the country. With some notable exceptions, private industrial enterprise still under Canadian control is either too small or too inefficient to be able to negotiate attractive terms of sale. Only massive and imaginative intervention by the public sector can re-shape the structure of the Canadian economy to accord with the real human needs of our time. Meaningful exercise of political democracy requires the freedom to fully shape Canadian institutions without fear of reprisal by corporate vested interest. This is doubly difficult when the power-base of these interests is located in the world's most nationalistic country with which we share 4,000 miles of backyard fence. Indeed there is good reason to doubt whether it is still possible.

Notes to Chapter 2 1.

See Harry G.Johnson, The Canadian Quandary. Also A.E. Safarian, "Foreign Ownership and Control of Canadian Industry," in Rotstein (ed.), The Prospects of Change (1965), Foreign Ownership of Canadian Industry (1966), and review articles on the Watkins Task Force in Journal of Canadian Studies (August 1968); H.E. English, "Are these Jeremaiahs Really Necessary?" in International Journal (Summer 1966); D.W. Slater, "The Watkins Report," The Canadian Banker (Summer 1968), and also press report of Slater's contribution to Liberal Party Think-In, Globe and Mail, October 1966. The dissenting economists are few in number. They include Professors M.H. Watkins, A. Rotstein, S. Hymer, and a number of eminent non-Canadians (see below). 2. See Gunnar Myrdal, Asian Drama, Vol. I (New York: Random House, 1968), p. 26. As Professor Kaldor has put it so well: "Any theory must necessarily be based on abstractions; but the type of abstraction chosen cannot be decided in a vacuum; it must be appropriate to the characteristic features of the economic process as recorded by experience." Nicholas Kaldor, "Capital Accumulation and Economic Growth," in The Theory of Capital (London: Macmillanand Co., 1961), pp. 177-78. 3. In recent years some American economists have turned their attention to the phenomenon of the multinational corporation

The Old Mercantilism and the New

4. 5.

6. 7.

8.

9.

10.

41

and its relationship to the international capital market. It is typical of our branch-plant metality that the conflict between corporate business expansion and national sovereignty is not likely to be treated seriously by Canadian academics until it has been spelt out for us by colleagues located at prestigious American universities. (See below.) See for example W. Baumol, Business Behavior, Value and Growth, Revised Edition (New York: Harcourt, Brace & World, Inc., 1966). See Karl Polanyi: "Our Obsolete Market Mentality" and "The Economy as an Instituted Process," reprinted in G. Dalton (ed.), Primitive, Archaic and Modern Economies: The Essays of Karl Polanyi (New York: Doubleday, 1968). Ibid., pp. 63-64. William Gruber, Dileep Mehta and Raymond Vernon, "The R and D Factor in International Trade and International Investment of United States Industries," Journal of Political Economy, February 1967, p. 30. On another occasion Professor Vernon complained of an acute sense of the inadequacy of the analytical tools available to anyone who tries to understand shifts in international trade and investment: "Unless the search for better tools goes on the usefulness of economic theory for the solution of problems of international trade and capital movements will probably decline." See "International Investment and International Trade in the Product Cycle," Quarterly Journal of Economics, May 1966, p. 190. Raymond F. Mikesell, "Decisive Factors in the Flow of American Direct Investment to Europe," Economia Internazionale, August 1967, p. 447. Revision of a paper prepared for the "Colloque sur la politique industrielle de 1'Europe integree et 1'apport des capitaux exterieurs," organized by Professors Maurice Bye and Andre Marchal of the University of Paris, May 1966. The dominance of the Marshallian profit-maximizing firm and of Walrasian general equilibrium models have placed entrepreneurial profit outside the mainstream of economic analysis. For this reason Joseph Schumpeter's work has never really been integrated into the hard-core "principles" of contemporary micro and macro economics, or international trade theory. See also comments by R.A. Gordon, Business Leadership in the Large Corporation (Washington: Brookings Institution, 1945), p. 18. Perhaps it is not accidental that the university which sheltered

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Silent Surrender

the late Joseph Schumpeter during the many years he spent in America has been fertile soil for fruitful work on the relationship between the American corporation and economic development in the Schumpeterian sense of the term. Of especial interest is the work of John Kenneth Galbraith, particularly The New Industrial State (Boston: Houghton Mifflin Company, 1967); and the work of Professor Raymond Vernon: "International Investment and International Trade in the Product Cycle," (Quarterly Journal of Economics, May 1966), "Multinational Enterprise and National Sovereignty," (HarvardBusiness Review, March-April 1967), and "U.S. Enterprise and the Canadian Economy," (Canadian Forum, April 1969). A number of relevant doctoral dissertations were also produced at Harvard in the 1960's: Y. Aharoni, The Foreign Investment Decision Process (Boston: Division of Research, Harvard School of Business, 1966); G.C. Hufbauer, Synthetic Materials and the Theory of International Trade (Cambridge: Harvard University Press, 1966); S. Hirsch, Location of Industry and International Competition (Oxford: Clarendon Press, 1967); L.T. Wells, Product Innovation and Directions of International Trade (unpublished doctoral thesis, Harvard School of Business, 1966). 11. For a comprehensive and lucid study of innovation in corporate organization see Alfred D. Chandler, Strategy and Structure, Chapters in the History of the Industrial Enterprise (Cambridge: M.I.T. Press, 1962). See also: Charles P. Kindleberger, Foreign Trade and the National Economy (Yale University Press, Chapters 6 and 7) and "The International Firm and the International Capital Market," The Southern Economic Journal (October 1967); and Stephen Hymer, The International Operations of Foreign Firms, A Study of Direct Foreign Investment (unpublished Ph. D. dissertation, M.I.T., 1960). 12. Problems and Prospects in the Export of Manufactured Products from the Less Developed Countries, U.N. Conference on Trade and Development, December 1963 (mimeo, written by Raymond Vernon); C. Freeman and A. Young, The Research and Development Effort in Western Europe, North America and the Soviet Union, (O.E.C.D., 1965); C. Freeman, "The Plastics Industry, A Comparative Study of Research and Innovation," (National Institute Economic Review, No. 26, November 1963), 2262, and "Research and Development in Electronic Capital Goods," (ibid., no. 34, November 1964), 40-91. For the best brief account of the relationship between the American corporation and the in-

The Old Mercantilism and the New

13.

14. 15. 16.

17. 18. 19. 20. 21. 22.

43

ternational economy through direct investment see Raymond Mikesell, "Decisive Factors in the Flow of American Investment to Europe." (See note 8.) The most useful book produced by the U.S. controversy is undoubtedly Judd Polk, Irene Meister and Lawrence Veil, U.S. Production Abroad, A Survey of Corporate Investment Experience (New York: National Conference Board Special Study, 1966). See also Walter Salant, The U.S. Balance of Payments in 1968 (Washington: The Brookings Institution, 1963); Phillip Bell, "Private Capital Movements and the Balance of Payments Position," U.S. Congress, Subcommittee on International Exchange and Payments of the Joint Economic Committee: Factors Affecting the U.S. Balance of Payments, 87th Congress, 2nd Session, 1962, pp. 395-481; Jack N. Berman, "The Foreign Investment Muddle: The Perils of Adhoccery," (Columbia Journal of World Business, Fall 1965). See for example, D.B. Keesing, "Impact of Research and Development on United States Trade," Journal of Political Economy, Feb. 1967, pp. 38-48. Joseph Schumpeter, The Theory of Economic Development (Cambridge, Mass.: Harvard University Press, 1949), p.63. See R.H. Coase, "The Nature of the Firm," Economica, Vol. IV, 1937. Reprinted in Stigler and Boulding (eds.) Readings in Price Theory (Homewood, Richard D. Irwin, Inc., 1952), pp. 331-51. I am indebted to Professor Stephen Hymer for drawing my attention to this article. Schumpeter, The Theory of Economic Development, p. 135. Ibid., p. 66. Ibid., Chapter IV. Ibid.,p.\35. See for example D.B. Keesing, "Impact of Research and Development on United States Trade," Journal of Political Economy, February 1967. All the work on the "product cycle" and international trade is highly relevant to our argument. In a useful summary article of the work of Professor Raymond Vernon, it is observed that "in the early stages of the product life cycle the consumer is frequently not very much concerned with price. Success comes to the manufacturer who can quickly adjust both his product designs and marketing strategy to consumers' needs which are just beginning to be well-identified." See L.T. Wells, Jr., "A Product Life Cycle for International Trade," Journal of Marketing, Vol. 32, July 1968.

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23. The general executive, as described by Professor Chandler in Strategy and Structure, is undoubtedly Schumpeter's entrepreneur. While operating decisions may ultimately be made by one responsible individual, at the entrepreneurial level group decision appears to be the more usual procedure. Problems are more complex, less routine, long-term rather than short, more concerned with difficulties to be surmounted and less with specific and immediate demands and requirements to be met. The group of men who make the critical decisions in any economy are those who have the actual or real, rather than the legal, power to allocate resources available to them. They set the goals of the enterprises they command. 24. Ibid, p. 313. 25. Ibid., p. 8. 26. H.G. Johnson, "The Political Economy of Opulence," a paper presented at the annual meeting of the Canadian Political Science Association, Kingston, June 1960. Reprinted in Johnson, The Canadian Quandary (Toronto: McGraw-Hill, 1963), pp. 236-52. 27. J.H. Williams draws attention to the fact that Bagehot in his Postulates of English Political Economy concluded that the "comparative advantage" value theory based on the Ricardian hypothesis of the international immobility and the national mobility of factors of production could not apply to any country in the world prior to the English classical period itself, and then only to the "large commerce" upon which England, in advance of other countries, was embarked. Seen in this light, the century of European industrialization dominated by Britain, the gold standard and relatively free trade was characterized by a proliferation of units of productive enterprise, a separation of entrepreneurship from sources of capital, large-scale movements of people across the Atlantic and the consolidation and formation of nation states in Europe and the Americas. It was the period during which institutional realities corresponded more closely to the assumption of relatively free competitive markets than before or since. Williams, Postwar Monetary Plans (New York: Alfred A. Knopf, 1944), p. 137. 28. Adam Smith, Wealth of Nations, Book III, Chapter IV: "A merchant, it has been said, very properly is not necessarily the citizen of any particular country. It is in great measure indifferent to him from what place he carries his trade, and a very trifling disgust will make him remove his capital, and together with it all the industry it supports, from one country to another."

The Old Mercantilism and the New

45

29. Williams, op. cit., p. 149. 30. Ibid., pp. 144-45. 31. Lest it be thought unfair to hold Professor Johnson to the views he expressed several years ago, we should point out that he remains unrepentant. In a review of the Watkins Report he dismisses the suggestion that the multinational corporation is a new entity qualitatively different from the textbook firm, with the comment that the authors have been excessively impressed by the propaganda put out by the International Chamber of Commerce and the Harvard School of Business. See Johnson, "The Watkins Report," InternationalJournal, Autumn 1968, pp. 615-20. 32. Johnson, "Problems of Canadian Nationalism," International Journal, Summer 1961; reprinted in The Canadian Quandary, p. 16. 33. Ibid., p. 127. 34. Ibid., p. 15. 35. Globe and Mail, July 29, 1968. Press report of the Couchiching Conference. 36. Star Weekly, July 1967. 37. Toronto Star, July 31, 1968. Report of address by Dr. J.N. Behrman, former U.S. Assistant Secretary of Commerce, to the Couchiching Conference. Dr. Behrman added that his projection would come true only if "some way can be found for everyone to share the wealth." Otherwise the U.S. monopoly of these riches would be "unacceptable" to the rest of the world. 38. Mr. J.W. Younger, Secretary of the Steel Company of Canada, Hamilton, reported in the Globe and Mail, February 11, 1969. 39. R.F. Mikesell, "Decisive Factors in the Flow of American Direct Investment to Europe," in Economia Internazionale, August 1967.

3. The Rise of the Nation State A Plea for Historical Perspective IT SEEMS to have escaped the attention of most of our economists that the insights contained in the writings of the late Harold Innis are highly relevant to an understanding of our contemporary relationship to the United States.1 The misconception that Innis's staples of fish and fur are an unpalatable diet compared with the elegant apparatus of modern economic theory has deprived recent generations of Canadian economists of the building blocks of a theory of Canadian development. In an excellent survey article on the staple theory of economic growth Professor M.H. Watkins notes that the decline in the influence of Innis in Canada has been paralleled by a rising interest in his theories among Americans.2 What is more, Innis was the chronological antecedent of the Latin American economists in developing a "metropolis-periphery" approach to American staple economies, and shared with them the attempt to widen the parameters of analysis to comprehend categories which are conventionally assumed to lie beyond the strictly economic.3 In his writings Innis traces the manner in which the commercial relations between hinterland and metropole have shaped the 46

The Rise of the Nation State

47

economy, the society and the structure of government of one of the peripheral countries of the New World. Specifically he analyses the relationship between the staple and the pattern of economic development; the symbiotic relationship of "centre and margin"; and the influence exerted by the characteristic unit of enterprise on the political superstructure of northern North America. The economic history of Canada has been dominated by the discrepancy between the centre and the margin of western civilization ... agriculture, industry, transportation, trade, finance and governmental activities tend to become subordinate to the production of the staple for a more highly specialized manufacturing community. These general tendencies may be strengthened by governmental policy as in mercantile systems.4

The old mercantilism which began with European colonization and exploration at the end of the fifteenth century gave birth to the new world of the Americas. Canada's contemporary problems cannot be understood without the dimension of historical perspective, any more than can the "structural" problems of Latin America, or those of the Caribbean plantation economies. The typical economic institution of the old mercantilism was the merchant trading company, operating under royal prerogative, or similar monopoly, granted in the metropolis. Operations in the peripheral areas extended from exploration, plunder and exchange to the organization and financing of local cultivation or extraction of the staples for the metropolitan market. The particular institutional forms within which production was organized and the particular relationship between the producing establishment in the hinterlands and the metropolitanbased mercantile enterprises became important formative factors in the foundation of the different New World societies. In Canada the large centralized organizations characteristic of the fur trade had their political counterpart in centralization and bureaucratic government. The paternalism of Old France was reinforced by the fur trade. The dependence of American and English fur-trading merchants on cheap British manu-

48

Silent Surrender

factured goods insulated 'the St. Lawrence against absorption into the new American republic and assured an attachment to Great Britain. The staple-producing areas of North America— the American South and the St. Lawrence system—were closely dependent on industrial Britain. As a result the fur-producing area was destined to remain British. The cotton-producing area was forced after the Civil War to become subordinate to the central territory just as the northern fur-producing area, now producing wheat, pulp and paper, minerals, and lumber, tends to be brought under its influence.5 Professor Aitken is one of the few Canadian economic historians who has had the imagination to perceive that Canada remains, in spite of her greater wealth and in spite of her politically independent status, a peripheral satellite. He realized that there is continuity in Canadian economic development: "Throughout its history Canada has been an economic satellite of both Britain and the United States."6

The Commercial Entrepreneurial Class The fur trade gave Canada an indigenous entrepreneurial class, which was able to shift to other staples when fur declined. It was transcontinental in orientation, commercial in outlook and pro-British out of self-interests. When fur collapsed in the early 1820s, some Montreal merchants went bankrupt but most managed to switch their capital into the entrepot trade between Britain and the interior of the continent. Until 1825, when the Erie Canal was opened, the whole basin of the Lower Lakes, including the American old northwest, was tributary to Montreal. For the next twenty years the Montreal merchants attempted to use their political influence to mobilize internal and metropolitan resources to improve the St. Lawrence waterway system. They hoped to capture from New York the entire export and import trade of the American mid-west. The canals were built, but the gamble failed. This was an expansion of a commercial economy, whose potentialities were conceived as lying not so much in production as in trade. As the old British mercantile system was dismembered in the

The Rise of the Nation State

49

1840s, Canada was thrown into a crisis. The square timber trade had folded up with the removal of British preferences. The Navigation Acts had been repealed. Efforts at replacing the New England states in the provisioning of the West Indies had failed, and the grand design to capture the continental entrepot trade had come to nought. Without shelter from the old mercantile system, the ancestors of some of Montreal's most respected English families opted for annexation to the United States. The continentalist pull had begun. Moreover, agricultural settlement in Upper Canada was beginning to reach the limits of good land and had started to climb up the marginal lands of the rocky Pre-Cambrian shield. There was no open frontier as in the United States. With the signing of the Reciprocity Treaty of 1854, Central Canada and the Maritimes were well on the way to becoming a raw-material supplying hinterland to the United States.

Confederation But a decisive reversal came in 1866. The North having conquered the South, the American metropolis was born. Confident in its "manifest destiny," the United States turned protectionist and abrogated reciprocity. Unable to secure preferential tariffs from Britain or reciprocity with the United States, Canada was thrown on her own resources. At the same time the hostile Northern armies were believed to constitute a military threat. Only transcontinental economic and political integration remained. In 1867 the British Parliament passed the British North America Act uniting the three provinces of Canada, New Brunswick and Nova Scotia under a federal legislature. The voters of New Brunswick had rejected Confederation and the legislature of Nova Scotia would certainly have done so, given the opportunity. The maritime colonies were outmanoeuvred by a teamplay of British colonial authority and local colonial politicians who have come to be known as the Fathers of Confederation. Thus Canada was reluctantly projected into nationhood.

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Silent Surrender

The Consolidation of the Nation State If the typical economic institution of the old mercantilism was the merchant enterprise closely integrating the hinterland with the metropolis by ties of trade, investment and exclusivist arrangements, the dominant economic agent of nineteenth-century industrialization was the firm acting within highly competitive markets. This unit of enterprise was either a "Marxian" accumulating family business or a "Marshallian" firm incorporating numerous shareholders. In both cases, the success or failure of the entrepreneur depended upon his capacity to play the market and to manipulate the government. Here we have, more or less, the textbook case of the firm. In Canada, the role of entrepreneur was exercised primarily by railway and financial promoters. These, rather than the wheat producers, were the men who occupied the strategic controlling positions in business and government. The entrepreneurs and the local politicians were indeed members of a single social class, there being few politicians without personal interests in the railways. The exchange of favours, which this association permitted, effected the institutional mechanism of capital accumulation. In contrast to the United States this mechanism in Canada, as indeed in many Latin American countries, did not function through business pressure and lobby on government. Rather, business was directly represented in the federal government. It was government that exercised national entrepreneurship, formulated the policies and set the terms on which private initiative could be exercised and private profit-making pursued. The relationship between Canada's first prime minister and the private entrepreneurs is well described by the Liberal historian, Frank Underbill: What Macdonald did was to attach to the national government the interests of the ambitious, dynamic, speculative or entrepreneurial business groups, who aimed to make money out of the new national community or to install themselves in strategic positions

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51

of power within it—the railway promoters, banks, manufacturers, land companies, contractors and such people. They provided the drive behind his so-called National Policy, and they stood to reap the greatest benefits from it. They also required lavish expenditure of taxpayers' money in public capital investment if their ambitions were to be realized. In return their support was necessary to keep the Conservative government in office. The actual functioning nationalism therefore, that emerged out of confederation was based on a triple alliance of Federal government, Conservative party and big business interests.7

The strategy of the National Policy is well known. Agricultural expansion to the West was basic to the design. The rising demand for foodstuffs for the growing industrial cities of Britain was expected, sooner or later, to provide a market for Canadian prairie wheat. The opening and settlement of the Canadian West required a transcontinental railway which had to span a thousand miles of uninhabitable muskeg between the settlements of the St. Lawrence system and the Red River valley. The railway would eventually pay for itself by hauling wheat to Montreal for transshipment to Britain and by hauling the manufactures of Central Canada to the new Western settlements. As an integral part of the policy, the system was partially closed against the importation of American goods by a high tariff imposed in 1878. For current and future financing, the Canadian Pacific Railway received 25 million acres in alternate sections of 640 acres in a belt 24 miles deep on each side of the tracks. In addition it received $25 million in cash, a twenty-year railway monopoly in the Western areas, extraordinary authority over passenger and freight rates, the free gift of all completed government road beds, and exemption from taxation in perpetuity. The Central Canadian capitalists who gained from the protection of Canada's manufacturers were the same set of people who benefitted from government assistance to the railways. Canadian private venture capital flowed freely from railway enterprises into the financial sector and into manufacturing industries, including those supplying steel and rolling stock to the railway, fertilizer and farm equipment to the Western farmer. As a develop-

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Silent Surrender

ment design the system could hardly have been more consistent or efficient. Domestic savings were effectively mobilized in this teamplay by the Anglo-Canadian power elite. Large amounts of British capital were harnessed by the sale of government-guaranteed railway bonds. The cost—and the risk—of foreign borrowing was ruthlessly passed on to the general population in the form of high import duties, high prices for Canadian manufactured goods and high freight rates and financial charges. The heaviest cost was borne by the farmers of the prairies where governmentally-organized exploitation by private Canadian railway and commercial interests financed Western expansion. Railway revenues were boosted because the tariff induced a flow of highcost manufactured goods, both imported and produced in Central Canada. The financial strength of the railways was further protected by government-granted monopoly which gave them the power to maintain high freight rates. All this assured a safe return to the London coupon-clippers. Canada thus falls into the classic pattern of pre-1913 British foreign investment. The investor was assured a safe return in solid pounds sterling while the risk—and the control—remained with the borrowing entrepreneur and the government of the hinterland. By 1913, some 75 per cent of all British foreign investments were located in Canada, U.S.A., India, Latin America, and Australia and New Zealand. Of all these countries, the heaviest major concentration of British capital was in Canada, with 14 per cent of all British investments placed in this relatively small country. The risk of fixed-interest debt contracted in foreign currency fell on the prairies with dramatic impact in the 1930s. When locusts and drought compounded the disaster of the collapse of the wheat market, tens of thousands of farmers whose lands and homes were mortgaged to Eastern financial interests went bankrupt; as did scores of municipalities and even some provinces. By 1930, the interest burden on Canada's external debt had risen from previous levels of 3 per cent to 6!/£ per cent of G.N.P.— claiming 25 per cent of the country's export earnings. But in

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53

spite of the disaster, entrepreneurship and control remained firmly in Canadian hands. Excluded from economic and political power, the Maritimes and the Western population paid the highest price for nation-building. There was much protestation: from the Maritimes, constant complaints about the tariff and demands for financial compensation in the form of subsidies; and from the West, mounting resentment against exploitation by the Canadian Pacific Railway and by Central Canadian financial and manufacturing interests. But the power complex was secure enough to survive. It is true that success did not come at once; it is also true that, whenever the success of the National Policy appeared to be in doubt, continental integration in the form of reciprocity was offered to the electorate as an alternative. But, in spite of the heavy burden placed upon the population by the entrepreneurial classes, reciprocity was rejected by the electorate in 1891,191 land 1921. Aitken suggests that out of the National Policy there emerged a sense of national identity and purpose: The overall objective of the policy was to make possible the maintenance of Canadian political sovereignty over the territory north of the American boundary; that is to say, to prevent absorption by the United States and to build a national state that could guide its own economic destiny, and assert its independence, both from the mother country and the United States, within limits no more restrictive than those necessarily applicable to an economy dependent on staple exports for its overseas earnings. Sustaining the policy was an emerging sense of national identity and purpose, analogous to the sense of manifest destiny which had coloured the expansion of the United States.8

The vision of Canada's wheatlands stretching from eastern to western prairie horizon brought European immigrants by the million in the first decade of the twentieth century. The country achieved a rate of growth equalled only by the boom of the 1950s. The proclamation that the twentieth century belonged to Canada did not at that time sound ludicrous. But the grand construction of a Canadian national economy built on an east-west spine was imperceptibly being overlaid and intersected by a

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Silent Surrender

multiplicity of north-south linkages of trade and investment. The older staples, principally wheat, continued to move east to Europe but the newer staples were moving to the United States and the pull of the American market was reinforced by the corporate linkages of direct investment. Canada was drifting away from the satellitic orbit of Britain, into the stronger gravitational field of the rising American superstar. The country reached a maximum of independence during the years when Britain could provide political shelter and portfolio capital to support a Canadian strategy of "defensive expansion"9 against absorption by the United States. The design of the traditional "national policy" cracked when Britain lost its pre-eminence during the First World War and the United States rose to the status of a world power. The cracks were widened during the collapse of the international economy in the thirties. The political economy of east-west structure disintegrated altogether during the years which followed the Second World War. These secular trends are, as Aitken observed, harder to resist than military attack or aggressive annexationalism. The threat they pose, if it is a threat, is a subtle one. Its effectiveness lies in the fact that it is no longer in Canada's immediate economic interest to resist. It is, as Mr. Pearson recently observed, not rape but seduction. So why not relax and enjoy it?10 The case for resistance to American penetration rests in the end on the value which Canadians place on cultural survival and Aitken suggests that this threat is similar to that which French Canadians have been experiencing within Canada since 1760. Concurrent with the fracturing of the old national economy came a regression to the regional fragmentation of the political system. The emergency measures taken by the federal government to deal with the catastrophe of the Depression, the mobilization of the country for the Second World War, and the initial moves toward the "welfare state" obscured for a long time the new trend towards economic and political decentralization. The reversal of the process of national unification does not, however, date from the late 1950s when it came into the open, but

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55

from the break-up of the international economy in the inter-war period and the rise of a new mercantilism of U.S.-based corporations which disintegrated the older links of the Canadian national economy and undermined the control of the federal government over the economic life of the country. The ascendency of continentalist economic forces are a primary factor in regional decentralization. Resource development is within provincial jurisdiction and experience shows that the provinces favour maximum resource extraction in the shortest possible time and on the largest possible scale, without particular concern for the nationality of the interests to whom these resources are sold. Once more credit must be accorded to Aitken whose work on the "new staples" led him to perceive so clearly the implications of direct U.S. investment on federal-provincial relations in Canada: If continental economic integration is in any sense a threat, it is a threat to Canada as a nation. It is not a threat to the provinces as such, many of whom, dependent as they are on American capital and American markets would find it easier to defend their regional interests if they had two senators apiece in the U.S. Congress than they do at present, when all the pressure on the United States government must be exerted through Ottawa. l '

In contemporary discussion of national unity, Quebec is generally singled out as the troublemaker in the area of federal-provincial relations. This is a superficial, indeed an erroneous, analysis of the problem. The major national problem is not Quebec separatism, but the problem of maintaining political sovereignty at a time when economic sovereignty is so gravely threatened. The unique resistance to linguistic and cultural assimilation on the part of Canada's Quebec-based population of French origin could be a decisive factor working for the continued existence of Canada. There will be serious trouble only if the crisis of identity in English Canada results in the destructive attempt to define "Canadianism" in terms of the preservation of outdated and dysfunctional relationships between Ottawa and Quebec. The political counterpart of a "new national policy"—if it is not already too late—must be the de facto and de jure accord-

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Silent Surrender

ance to Quebec of a status which acknowledges its unique role as the cultural patrie of francophone North America. The alternative to the explicit recognition that Quebec is not a province like any other is the continued fragmentation of the federal structure, as all the other nine provinces claim the fiscal and other powers which Quebec requires. It is indicative of the trend to political fragmentation and the reduced powers of the federal government that the Conservative party leadership race of 1967 narrowed down to a contest between the premiers of two marginal provinces. The entrenched Conservative leaders of Ontario and Quebec showed no inclination to abandon the solid power base of provincial politics for an uncertain and shadowy fate in Ottawa. The Liberal party found its new leader and prime minister almost by accident. Mr. Trudeau's telegenic personality, FrenchCanadian origin and intransigent opposition to the aspirations of Quebec to greater sovereignty touched off a love affair of national dimensions in English Canada. How his philosophical liberalism and anti-nationalism will equip him to strengthen Canada vis-avis the United States remains to be seen. The triple alliance of federal government, Conservative party and Canadian big business which gave birth to the Canadian nation state and secured its economic and political viability in a triumph of "history over geography" and "politics over economics" has conclusively disintegrated. The continentalist tide has been running strong. It has been permissively assisted by successive Liberal administrations who opened the floodgates to massive American direct investment in the postwar period. Never has a country's control over the "commanding heights" of its economy and over the policy levers of its fiscal and monetary controls been surrendered so swiftly, silently and hospitably.

Notes to Chapters 1. See especially H.A. Innis, The Fur Trade in Canada: an Introduction to Canadian Economic History (New Haven, 1930); revised edition, Toronto, 1956.

The Rise of the Nation State 1.

3.

4. 5. 6.

7. 8. 9. 10. 11.

57

M.H. Watkins, "The Staple Theory of Economic Growth," reprinted in Easterbrook and Watkins, Approaches to Canadian Economic History (Toronto: McClelland and Stewart, 1967), pp. 51-52. These include the American economists D.C. North and R.E. Baldwin, who have re-interpreted the causes of American growth prior to the Civil War in terms of the plantation staple in particular and the shifting regional impact of staple production; H.S. Perloff and L. Wingo, who distinguish between "good" and "bad" resource exports in the context of American regional growth; and R.E. Caves and R.H. Holton, who resurrected the staple approach in an econometric study of export-propelled growth in Canada. See especially Celso Furtado, The Economic Growth of Brazil (first published in Spanish, 1959), University of California Press, 1963; Development and Underdevelopment (first published in Spanish, 1961), University of California Press, 1964. See also W. Baer, "The Economics of Prebisch and E.C.L.A." in Economic Development and Cultural Change, No. 2, Part 1, 1962, pp. 169-82. Innis, "The Importance of Staple Products," from The Fur Trade in Canada, reprinted in Easterbrook and Watkins, op. cit., p. 18. Innis, "The Fur Trade," in Easterbrook and Watkins, op. cit., pp. 25,26. H.G.J. Aitken, "Defensive Expansionism: The State and Economic Growth in Canada," in H.G.J. Aitken (ed.) The State and Economic Growth (New York, Social Science Research Council, 1959); reprinted in Easterbrook and Watkins, op. cit., p. 185. Frank Underbill, The Image of Confederation, Massey Lectures, Third Series (Toronto, 1964), pp. 24-25. H.G.J. Aitken, "Defensive Expansionism", op. cit., p. 209. Aitken, AMerican Capital, p. 134. Globe and Mail, July 29,1968. Aitken, op. eft., p. 178.

4. Regression to Dependence SOME SIXTY YEARS AGO Sir Wilfrid Laurier declared that the twentieth century belongs to Canada. By the middle of the century it had become clear that Canada belongs to the United States. Indeed Canada provides a dramatic illustration of the stultification of an indigenous entrepreneurial class and the regression to a condition of underdevelopment in spite of continuous income growth. Until recently the change in Canada's status has largely gone unnoticed. Most Americans are barely aware of the existence of Canada; if they were, it would not be necessary for our political leaders to remind them so often and so politely that Canada is not the fifty-first state of the Union, nor the thirteenth district of the Federal Reserve System. Canadians tend to be more impressed by their relative wealth than by their neo-colonial satellitic relationship to the United States. As for the rest of the world, it is not really interested. The instrument by which the Canadian economy has been recolonized since the days of Sir John A. Macdonald and Sir Wilfrid Laurier is that of direct investment—more specifically U.S. direct investment. The distinction between the import of foreign capital by the sale of bonds or debentures or non-controlling equity stock, and the intake of direct investment in the form 58

Regression to Dependence

59

of subsidiaries and branch plants controlled by externally-based parent corporations is crucial. In the former case control remains with the borrower; in the latter it rests unequivocally with the lender. Liabilities incurred by debt borrowing can be liquidated by the repayment of the loan. Direct investment creates a liability which is, in most cases, permanent. The following description of the difference between direct and portfolio investment is taken from a study prepared by an organization representing American corporations with interests in scores of foreign countries.1 Direct investment refers to an investment made to create some kind of permanent organization abroad—plants, refineries, sales offices, warehouses—to make, process and market goods for local consumption and, in some instances, for sale in third areas. Such operations typically combine U.S. personnel, technology, knowhow, machinery and equipment, to expand the productive capacity of the countries in which the investment is made and to open important markets for the products of the investing country. Venture capital engaged in the location, extraction and refining of mineral resources; in developing agricultural resources; in establishing manufacturing, trade and banking enterprises; and in building and operating public utilities that serve foreign areas—all these represent direct investments. It is important to distinguish between direct investments and the other forms of private investments abroad—banking and portfolio. A bank loan or credit to a foreigner is strictly a financial transaction between the lender and the borrower with a fixed maturity; .. .the bank may require the borrower to deposit some collateral. A portfolio investment may take two forms—purchase of foreign bonds and debentures or purchase of foreign stocks by a U.S. resident. Purchases of bonds and debentures are, like bank credits, at fixed terms with no equity interest; purchases of stocks involve equity interest, but generally not controlling interest. Only when 25 per cent or more control is attained is the investment considered a direct investment. This assumes some measure of managerial influence. This exposition stresses the acquisition of markets for the investing country as a prime motive for direct foreign investment. The literature of underdevelopment, including that written on

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Silent Surrender

Table 1: Foreign Direct Investment in Canada, 1945 and 1965

Wood and paper products Iron and ore products Non-ferrous metals Vegetable and animal products Chemical and allied products Non-metallic minerals Textiles Miscellaneous manufactures TOTAL MANUFACTURING

(Excludingpetroleum refining) Petroleum and natural gas Mining and smelting Utilities (excl. pipelines) Merchandising Financial Other enterprise TOTAL

U.S. DIRECT

ALL OTHER FOREIGN

INVESTMENT

DIRECT INVESTMENT

(millions of 1945 316 272 203 184 118 39 28 31 1,191 141 215 358 147 198 54 2,304

dollars) 1965 1,164 1,769 1,021 798 947 160 97 142 6,098

3,600 1,875 286 695 1,041 345 13,940

(millions of dollars) 1945 32 5 8 63 26 4 28 2 765

7965 195 244 91 181 224 102 44 6 1,087

— 22 17 55 141 6 409

930 143 20 362 644 82 3,268

SOURCE: Dominion Bureau of Statistics: Canadian Balance of International Payments, Third Quarter 1968, p. 25, December 1968.

Canada, has emphasized the expectation that the host country will acquire markets when it takes in direct investment. The contradiction is more apparent than real; in general the host country acquires a market for its raw materials and becomes a market for the manufactured goods of the investing country. Direct American investment in Europe has concentrated on producing and selling manufactures in these markets; in the underdeveloped countries of Latin America and the Middle East it has concentrated on extracting raw materials. In Canada we are in the unique situation of playing host to large American investments both in the resource and in the manufacturing sectors. As a result Canada has acquired markets for its industrial raw materials and has become a market for manufactured goods produced by American corporations located both here and in the United States.

Regression to Dependence

61

Table 2: Non-Resident Control as a Percentage of Selected Canadian Industries, 1926-1963 PERCENTAGE OF TOTAL CONTROLLED BY ALL

1926

1939

1948

1963

Manufacturing Petroleum and natural gas Mining and smelting Railways Other utilities

35

38

43

38 3 20

42 3 26

40 3 24

60 74 59 2 4

TOTAL

17

21

25

34

NON-RESIDENTS

PERCENTAGE OF TOTAL CONTROLLED BY U.S. RESIDENTS

Manufacturing Petroleum and natural gas Mining and smelting Railways Other utilities

30

32

39

32 3 20

38 3 26

37 3 24

46 62 52 2 4

TOTAL

15

19

22

27

SOURCE: Dominion Bureau of Statistics, Canadian Balance of International Payments, 1963,1964and 1965, August 1967, p. 127.

Prior to the First World War Canada was the prototype of a borrowing country, old style. It contained the highest concentration of British portfolio investments to be found in any major area of the world; 14 per cent of all British foreign capital was invested in Canada, compared with 20 per cent in the United States and 20 per cent in all of Latin America. Within fifty years Canada had become the prototype of a borrowing country, new style. By 1964, 80 per cent of long-term foreign investment in Canada was American, $12.9 billion in the form of U.S. direct investments in branch plants and subsidiaries. Canada, a relatively small country, accounted for 31 per cent of all U.S. direct investment abroad, more than the total U.S. investment in Europe, more than in all of Latin America. As a result of the penetration of the Canadian economy by direct investment some 60 per cent of Canada's manufacturing

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Silent Surrender

industry, 75 per cent of her petroleum and natural gas industry and 60 per cent of her mining and smelting industry are now in the control of foreign corporations. This contrasts with the situation only twenty-five years ago when 38 per cent of manufacturing and 42 per cent of mining and smelting were under foreign control (see Tables 1 and 2).2 The switch from portfolio to direct investment and the associated displacement of Canadian by American entrepreneurship has taken place against a relatively diminishing need for foreign capital. It has been estimated that the book value of all foreign assets in Canada in 1926 amounted to 117 per cent of Canada's annual output (G.N.P.). By 1948 the corresponding figure had declined to 50 per cent. Since then it has risen to 61 per cent.3 A similar picture emerges from the trend in the cost of servicing foreign borrowing. These diminished from 3 per cent of G.N.P. in the late twenties, rose to 6 per cent in the depressed thirties and fell to a mere 2 per cent over the period 1957 to 1964. Interest and dividend payments abroad as a percentage of export earnings declined from 16 per cent in the twenties and 25 per cent in the thirties to 9 per cent in the recent period. The use of the value of foreign assets in Canada as a measure of the contribution of foreign capital to Canadian productive capacity invites two words of caution. First, this measure of "capital inflow" includes the appreciation in the book value of direct investment due to the ploughing back of retained earnings. This reflects the fact that a significant portion of foreign assets in Canada have been financed from Canadian savings. Second, the measure is a gross figure; in order to obtain an estimate of Canada's net indebtedness it is necessary to subract the value of Canadian assets abroad. For both these reasons the value of foreign assets in Canada exceed significantly the sums of the net inflow of capital as shown in Canada's balance of payments. Prior to the First World War Canada, like the United States, was unquestionably short of capital. She borrowed heavily, lent almost nothing abroad. At the time of the wheat boom in the early years of the twentieth century net capital imports reached a peak of $42 per person during the five years 1909-1913.

Regression to Dependence

63

In the 27-year period spanning the Depression and the Second World War (1930 to 1947) there was no increase in the value of foreign assets in Canada. Indeed during the Second World War and the immediate postwar period Canada had attained a level of economic strength and maturity of fiscal and monetary institutions which enabled her to export capital on a large scale, and to contribute to the financing of the British war effort and postwar reconstruction. In the ten years 1940 to 1950 Canada's surplus on current account totalled $6.5 billion. Between 1946 and 1950 the net export of capital averaged $8 per head.5 The acceleration in the loss of control over the manufacturing and mining industries commenced with the decade of the 1950s. Since 1950 there has been a deficit on current account on the balance of payments in every year except one, and during the boom of the 1950s net capital imports averaged $12 per head. After the recession of 1957-58 capital continued to flow into Canada despite rising rates of unemployment and a slowing down of the growth of output. During the ten-year period 1957 to 1967 Canada's net indebtedness more than doubled from $11.8 billion to $24 billion. Those who believe that all the fuss about foreign ownership and control is misguided nationalism, have taken comfort in the diminishing dependence of Canada on external sources of finance. The figures, however, lend themselves to a different interpretation: it is simply not true that Canada is short of capital. The expensive infra-structure required by her peculiar geography has long been put in place and paid for. Levels of per capita income are second only to the United States and the rate of personal savings is higher. The brutal fact is that the acquisition of control by U.S. companies over the commodity-producing sectors of the Canadian economy has largely been financed from corporate savings deriving from the sale of Canadian resources, extracted and processed by Canadian labour, or from the sale of branch-plant manufacturing businesses to Canadian consumers at tariff-protected prices. Thus, over the period 1957 to 1964 U.S. direct investment in manufacturing,

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Silent Surrender

mining and petroleum secured 73 per cent of their funds from retained earnings and depreciation reserves, a further 12 per cent from Canadian banks and other intermediaries and only 15 per cent in the form of new funds from the United States. Furthermore, throughout the period payout of dividends, interest, royalties and management fees exceeded the inflow of new capital.

Pattern of Investment from Confederation to Centennial The accompanying chart illustrates the stages by which the British-financed east-west national economy has yielded to the new mercantilism of direct foreign investment of American corporations. (See also Tables 3 and 4.) In 1867, there was little foreign capital in Canada. Of $200 million, $185 million was in the form of U.K. bonds; the remaining $ 15 million was American direct investment. In the formative years (1867-1900) of the Canadian nationstate, there was an inflow of $815 million of U.K. bond capital and $160 million of U.S. direct investment. In the period of the wheat boom (1900-1913), there was a total increase in indebtedness of $2,545 million, in the form of portfolio investments, predominantly British, and $530 million in the form of direct investment, mainly American. By 1913 foreign capital in Canada was $3,850 million of which $3,080 million was portfolio debt, almost all of it British. Significantly, of the remaining $770 million of direct investment, $520 million was Amercian. As in Australia, India, Latin America and the United States, British portfolio capital was used primarily to finance the construction of a transcontinental system of communication geared to the growing markets for foodstuffs and agricultural raw material required by metropolitan industrialization in Europe. The borrowers were Canadian entrepreneurs, both public and private. Canada was indeed short of capital—but not of entrepreneurship. Control over commodity-producing sectors remained in Canadian hands. The number of well-known

Composition of Foreign Investment in Canada Confederation to Centennial

Table 3: Foreign Capital Invested in Canada, Selected Year Ends (Book value of assets in millions of Canadian dollars) 1867

1900

1913

1926

1939

1946

1952

1960

1964

1965

U.K. direct portfolio Total

185 185

65 1,000 1,065

200 2,618 2,818

336 2,301 2,637

366 2,110 2,476

335 1,333 1,668

544 1,340 1,884

1,535 1,824 3,359

1,944 1,519 3,463

2,013 1,485 3,498

U.S. direct portfolio Total

15 — 75

175 30 205

520 315 835

1,403 1,793 3,196

1,881 2,270 4,151

2,428 2,729 5, 757

4,532 3,466 7,998

10,549 6,169 16,718

12,901 8,542 21,443

13,940 9,365 23,305

Other direct portfolio Total

_ — —

35 35

50 147 797

43 127 170

49 237 286

63 290 353

144 358 502

788 1,349 2,737

1,044 1,404 2,448

1,255 1,449 2,704

15 185 200

240 1,065 1,305

770 3,080 3,850

1,782 4,221 6,003

2,296 4,617 6,913

2,826 4,352 7,178

5,220 5,164 10,384

12,872 9,342 22,214

15,889 11,465 27,354

17,208 12,299 29,507

Direct as percentage of total foreign investment

7.5

18.5

20.0

30.0

33.5

39.0

50.0

58.0

58.0

58.3

U.S. as percentage of totalforeign investment

7.5

15.5

21.5

53.0

60.0

72.0

77.0

75.0

78.5

79.0

All direct All portfolio GRANDTOTAL

SOURCE: Dominion Bureau of Statistics, The Canadian Balance of International Payments, 1963, 1964 and 1965 and International Investment Position, p. 126, and Quarterly Estimates of the Canadian Balance of International Payments, ThirdQuarter1968, p. 17.

Table 4: Changes in Canadian Long-Term Indebtedness, Select Periods (in millions of Canadian dollars) Other

Total

+30

+35

+ 1,105

+345

+285

+ 162

+2,545

-181

+883

+ 1,478

-27

+2,153

Breakdown of world economy 1926- 1939 (13 years)

-161

+478

+477

+ 116

+910

Second World War 1939- 1946 (7 years)

-808

+547

+459

+67

+265

Early postwar boom 1946-1952 (6 years)

+216

+2,104

+737

+ 149

+3,208

Late postwar boom 1952- 1960 (8 years)

+ 1,475

+6,017

+2,703

+ 1,635

+11,830

The Sixties 1960-1965 (5 years)

+ 139

+3,391

+3,196

+567

+7,293

TOTAL IN FLOW ( 1 867- 1 964)

+3,498

+13,940

+9,365

+2,704

+29,507

INFLOW 1952-1965(13YEARS)

+1,614

+9,408

+5,899

+2,202

+79,723

Formative years 1867-1900 (33 years)

U.K.

U.S. (Direct)

+880

+ 160

Wheat economy 1900-1913 (13-years)

+ 1,753

First World War 1913-1926 (13 years)

SOURCE: Derived from Table 3.

U.S. (Portfolio)

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Silent Surrender

Canadian businesses established before the First World War bears testimony. During the First World War and its aftermath, there was largescale liquidation of British investments and a corresponding increase in American portfolio investment. As a result of British financial weakness and some acceleration of U.S. direct investment, American ownership of total foreign assets in Canada had topped the halfway mark at 53 per cent by 1926. Direct investment as a percentage of all foreign investment stood at 30 per cent. In the breakdown of world economy (1926-1939), the rate of foreign capital inflow slowed down in Canada, as everywhere else in the world. During these thirteen years the value of foreign assets increased by only $910 million, compared with the increase of $2,153 million in the previous thirteen years or indeed the increase of $2,545 million during the years of the wheat boom. British assets declined, while the book value of American direct investment continued to increase by $478 million, in spite of the Depression. During the Second World War when Canada became a heavy net exporter of capital, foreign indebtedness increased by only $265 million, but American direct investment increased by $547 million, reflecting heavy liquidation of $808 million of British assets. By 1946 the American share of Canada's foreign liabilities had climbed to 72 per cent and direct investment liabilities accounted for close to 40 per cent of all Canada's external indebtedness. The early stage of the postwar boom (1946-1952) was dominated by the Korean War and the stock-piling of raw materials by the United States. Canada's foreign indebtedness rose by $3,208 million in six years. Of these investments, two-thirds were in the form of U.S. direct investment, mainly in resource industries. By 1952, direct had exceeded portfolio investment, and the American share of Canada's foreign debt had reached 77 per cent. The later stage of the postwar boom (1952-1960) witnessed the largest inflow of capital in Canada's history. Over half of the total

Regression to Dependence

69

increase in foreign liabilities of $11,830 million came in the form of U.S. direct investment ($6,017 million), much of it in manufacturing. Portfolio borrowing also increased because the boom caused a severe shortage of capital in the public as well as the private sectors. Tight monetary conditions drove regional and local governments as well as corporations to New York to borrow funds. By 1960, 58 per cent of Canada's long-term indebtedness was in the form of direct investments. Forty-eight per cent of all foreign capital in Canada was directly controlled by American corporations. In the sixties, there are indications of a change in the pattern of investment. Although half of the increased indebtedness of $7,293 million in the five years 1960-1965 was U.S. direct investment, the share of Canada's debt represented by such investments had levelled off at 58 per cent. In part this is to be explained by the relative shift of U.S. direct investment toward Europe in the 1960s, and in part by the unusually heavy portfolio borrowings on the American capital market by provincial governments and corporations. These briefly are the trends. Total reliance by Canada on foreign capital has declined. Yet the degree of dependence and the degree of control by metropolitan enterprise have increased. The key to this apparent paradox lies in the misleading practice of treating direct investments as capital inflows, presumed to be similar to portfolio borrowings. In fact, the element of capital transfer is only incidental to the process of direct investment, which involves a transfer of market organization, technology, and marketing channels. There is no explicit borrower, as in the case of portfolio capital. Direct investment comes for reasons of its own. Loans floated in foreign countries can, in due course, be redeemed, leaving no trace of foreign ownership. Direct investments have no necessary termination. Lenders of portfolio capital are attracted by a market rate of return. Direct investment capital comes for reasons which are quite different. Aitken has perceptively described the impact of direct investment on the Canadian economy:

70

Silent Surrender Direct investments typically involve the extension into Canada of organizations based in other countries; these organizations establish themselves in Canada for purposes of their own and bring with them their own business practices, their own methods of production, their own skilled personnel, and very often their own market outlets. If all Canadian borrowings from other countries were to cease tomorrow, these direct investment organizations would continue to exist and function. Many of them, indeed, would continue to expand, financing their growth from retained earnings. And the corporate linkages which integrate them—and the sectors of the Canadian economy that they control—with organizations in other countries would still survive.5

Notes to Chapter 4 1. 2.

3. 4. 5.

The United States Balance of Payments, An Appraisal of U.S. Economic Strategy, International Economic Policy Association (Washington, D.C., 1966), pp. 24,25. These figures exclude the estimated book value of foreign branch plants of Canadian enterprises which themselves are controlled abroad. The inclusion of these branch plants of branch plants would raise the value of direct investments in Canada from $17.2 billion in 1965 to $22.9 billion. A.E. Safarian, Foreign Ownership of Canadian Industry (Toronto, 1966), p. 10. Calculated by P. Hartland, and quoted in Aitken, American Capital and Canadian Resources (Cambridge: Harvard University Press, 1961), p. 60. Aitken, pp. 66-67.

5. Who Decides? THE DOMINANT INSTITUTION in the peripheral economy in the contemporary period is the foreign affiliate or branch plant of the great modern corporation. In The New Industrial State, Professor John Galbraith has given a name to that part of the American economy which is characterized by a few hundred technically dynamic, massively capitalized and highly organized corporations. He calls it the "Industrial System." What is important here is not the particular name Galbraith has chosen to distinguish the phenomenon, but that he perceives so clearly the way in which a system characterized by very large corporations is qualitatively different in its processes from a system comprised of an infinite number of small enterprises.1 These differences are crucial in understanding the impact of the expansion of the metropolitan corporation on the hinterlands, the peripheral fringes and margins of its domain. In summary, the argument runs as follows: the imperatives of modern technology increase both the amount of capital committed and the time for which it is committed. Further, the commitment of time and money tends to be ever more specific to a given task. This sets up requirements for specialized manpower and the inevitable counterpart of specialization, which is organization. In 71

72

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the interest of securing stable and growing profits and of reducing risk and uncertainty, the firm is motivated to engage in planning. It may be added here, in anticipation, that risk is not so much eliminated, as shifted to small-scale entrepreneurs and to the peripheral or hinterland economies. The "Industrial System," and the New Industrial State which is its political counterpart, entails a massive concentration of power in the hands of the corporate elite, or "technostructure." The commitment of time and money inherent in contemporary technology means that the needs of consumers must be anticipated by months or years. The modern corporation engages in systematic and comprehensive planning, ruthlessly efficient and responsible only to its own requirements of survival. In addition to deciding what the consumer will want and will pay, the firm must take every feasible step to see that what it decides to produce is wanted by the consumer at a remunerative price. It must see that the labour, materials and equipment that it needs will be available at a cost consistent with the price it will receive. It must exercise control over what is sold. It must exercise control over what is supplied. It must replace the market with planning.2

Contrary to the postulates of economic doctrine, it follows that the initiative in deciding what is produced comes not from the sovereign consumer who issues instructions to the market which bend the productive mechanism to his will, but rather from the great producing organization which reaches forward to control the markets that it presumes to serve. In this process, it is the corporation that bends the consumer to its needs, and in so doing deeply influences his values and beliefs. The economic calculus whereby the corporation acts to shape consumer tastes and needs is central to the argument. The creation of particular tastes for particular products largely determines the technology to be used, the parts, supplies and capital goods required, the complementary goods demanded, the professional skills used, and the channels of distribution through which inputs and outputs flow. Metropolitan demands are transferred to hinterlands as the more privileged strata of the population there attain higher income levels and aspirations approximating those of

Who Decides?

73

the metropolitan countries. The phenomenon has variously been labelled the "demonstration affect," the "trickle-down effect," and "Cocacolonization." For the hinterlands, the significance of the accretion of control and power in the head offices of the multinational corporations lies in their increasing dependence on entrepreneurial initiatives originating in the metropoles. The hinterlands are the countries in which subsidiaries are located to supply the corporations with their inputs of raw materials and to dispose of their output of consumer, intermediate and capital goods. They may be older metropolitan centres, such as those of Western Europe, or they may be peripheral economies in which foreign subsidiaries and branch plants have always been the dominant economic institutions. Canada lies somewhere along this spectrum of dependence. For the hinterlands the result is the re-creation of certain patterns of the old mercantilism and the fragmentation and destruction of national economies and associated national political systems in states such as Canada and some of the Latin American countries. Present conditions are particularly unfavourable to national economic and political integration in the many new states established in the postwar period. Thus we are witnessing a simultaneous process of de-colonization and re-colonization. In pursuit of security, the corporation is driven to minimize uncertainty by converting market transactions into internal allocative decisions. Increasingly, the market is replaced by corporate planning. Thus a steady flow of raw material at predictable cost can be secured by direct control over extractive operations; while the sale of output can be assured by control over marketing and distribution facilities. In this way the play of market forces on strategic cost factors is minimized by an extension of corporate planning.3 It follows that the most obvious requirement for effective corporate planning is size. There is virtually no limit on the size of the corporation. Size is not, as economists generally believe, determined by the requirements of economies of large-scale production; nor is it determined simply by the desire to exercise monopoly power in markets. The typical corporation is large enough

74

Silent Surrender

to afford a score of production units of optimum technical size, and typically extends into the production of a large diversity of goods. As for market power associated with monopoly, the threat of competition requires a constant stream of product-innovations designed to capture markets by want-creation and product-differentiation.4 The strategy of eliminating market uncertainty by eliminating the market is not confined to the procurement of supplies and the disposition of outputs. The capital market has also been severely restricted. The control of the supply of savings is strategic for industrial planning. No form of market uncertainty is so serious as that involving the terms and conditions on which capital is obtained. Insofar as the corporation can rely on self-financing, the decision on what will be saved and what will be invested has largely been converted into an internal decision.5 By and large the big corporation no longer faces the risk of the capital market. According to Galbraith, it has full control over its rate of expansion, over the nature of that expansion, and over decisions between products, plants and processes. No banker can impose conditions as to how retained earnings are to be used. It is well known that personal savings are a relatively unimportant source of finance compared with the internal savings of business. In 1965, for instance, in the United States savings by individuals, much of it institutional, amounted to $25 billion, while business savings was $84 billion. The decisions which supply the bulk of the community's supply of savings are made not by individuals but by the managements of a few hundred corporations. The decisions as to what will be invested are made by the same set of large firms. The decision to save is not made by the individual earner of income—the corporation does not give him the choice. The individual serves the industrial system, not by supplying it with savings and the resulting capital; he serves it by consuming its products. On no other matter, religious, political or moral, is he so elaborately and skilfully and expensively instructed.6

Who Decides?

75

Sovereign Corporation, Captive Consumer The shaping of consumer tastes is central to the strategy of profit-maximization of the large corporation. Seen in this light it is the corporation which is sovereign; the consumer is captive. The savings of the corporation arise from the sale of goods produced by persons who as consumers have been conditioned to need pa~ quotille. Galbraith reminds us that, in the olden days, commodities such as tobacco, alcohol, and opium which involved a physical and progressive addiction were considered useful trade goods. Nowadays, in all underdeveloped countries, the effort inspired by the introduction of modern consumer goods—cosmetics, motor scooters, transistor radios, canned foods, bicycles, phonograph records, movies, American cigarettes—is recognized to be of the highest importance in the strategy of development.7

It is becoming clear that this strategy of economic development is really the strategy of long-term profit maximization of the international corporation. The success of the large corporation is reflected by a fact which has been little noticed: they do not lose money. In 1957 for instance, which was a year of recession, not one of the hundred largest U.S. corporations failed to turn in a profit. Only one of the largest two hundred finished the year in the red. It follows from all this that the summing of the market value of goods and services produced or consumed cannot logically be accepted as a measure of economic welfare. G.N.P.-fixation may be regarded as the projection onto the national and international level of the requirements of the corporation for continuously expanding markets and sales.8 It is discouraging to note that the elevation of the rate of growth of output of material goods and services to the prime social goal is not confined to countries dominated by corporate capitalism. Galbraith reminds us that no other test of social success has such nearly unanimous acceptance as the annual increase in Gross National Product. And this is true of all countries, developed or underdeveloped, communist, socialist or capitalist. It is now

76

Silent Surrender

agreed that ancient cultures—India, China and Persia—should measure their progress towards civilization by their percentage increase in G.N.P. Their own scholars are the most insistent of all.9 Because economies of scale in research, design and technology are realized by spreading costs over total output, the global profitability of the international corporation is assisted by every influence which eliminates cultural resistance to the consumption patterns of the metropolis. The corporation thus has a vested interest in the destruction of cultural differences and in a homogenized way of life the world over.10 In a deep insight into the "internationalism" of the modern corporation, George Grant has observed that "corporation capitalism and liberalism go together in the nature of things," and that "liberalism is the ideological means whereby individual cultures are homogenized."11 Further, he observed that "at the heart of modern liberalism lies the desire to homogenize the world. Today's natural and social sciences are consciously produced as instruments to this end." In this context it appears that the economists are the high priests of corporate capitalism—they have elevated the rate of increase of consumption of goods and services to the ultimate criterion of social good. For the corporation, there is no shortage of capital—only a shortage of homogenized consumers. The corporation has institutionalized capital accumulation within the framework of its organization. The process is self-sustaining and self-financing so long as new products can be devised and new markets created. In the words of Neil McElroy, chairman of the board of directors of the Procter and Gamble Company: "Our problem is not access to capital and I believe this is true of most American companies. Our problem is the development of ideas that will justify the investment of capital."12 Galbraith's model of the New Industrial State is largely drawn from the experience of the United States and focuses attention on the role of the American corporation within the domestic economy. But his insights are particularly helpful in understanding the operations of the corporation in the international economy. They illuminate the processes which have created an "overseas econo-

Who Decides?

77

my" of the United States corporations whose annual sales had reached $90 billion by 1964—almost four times the total value of U.S. commodity exports.

Entrepreneurial vs. Managerial Decisions The executives of branch plants are managers, not entrepreneurs. They dispose of funds, equipment and personnel within the means allocated to them. They do not formulate policy, they administer it. The decisions they make are routine in the sense that they are constrained by budgetary allocation made at head office. While some have more scope than others, every subsidiary is of necessity an instrument of its parent company. An economy composed of branch-plant industry must of necessity lack the self-generating force which characterizes successful entrepreneurship. To the degree that Canadian business has opted to exchange its entrepreneurial role for a managerial and rentier status, Canada has regressed to a rich hinterland with an emasculated, if comfortable, business elite. In a fascinating study of the strategy and structure of industrial enterprise Professor Alfred D. Chandler defines entrepreneurial decisions as those which concern the allocation of resources for the enterprise as a whole. They are the domain of the executive.1 Operating decisions, in contrast, refer to decisions by managers within the means allocated to them. Executives operate from the general office and deal with several industries, or with one industry operating in several geographic regions of countries. Their business horizons range over national and international economies. The executive determines the long-term basic goals and objectives of an enterprise. Decisions to set up distant plants, to move into new functions (vertical integration), develop new products (diversification), are examples of entrepreneurial or strategic decisions.14 Managers on the other hand make decisions about prices charged on specific products, about design and quality of the existing products and the development of new ones, about more immediate markets and marketing, about probable sources of supply, about technological improvements and about the flow of

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product from supplier to consumer. But these decisions are made within the framework set by the policy guides and financial budgets through which the general executives determine the present and future allocation of the resources of the enterprise as a whole.15 It follows from this that, protestations notwithstanding, the executive of Canadian and other foreign operations of American companies are managers, not entrepreneurs. They do not make the guiding decisions concerning the global goals of the enterprise or the allocation of money; they operate within guidelines set down by the general office. The role of the management of a branch plant is perhaps best described by a man who was director and vice-president of a large prestigeous Canadian subsidiary of a well-known multinational corporation: "Clearly any subsidiary is always the chosen instrument of its parent company. Its very reason for existence is to carry out the functions of the parent in its designated sphere of activity, and it must recognize this relationship in all its actions. . . . "16 The general executive as described by Professor Chandler is Schumpeter's entrepreneur. The active role which Schumpeter ascribed to his entrepreneur was, if anything, an understatement of the degree to which the exercise of corporate decision-making power affects the economic and social environment in the scores of countries in which the great multinational corporations operate. The successful corporation creates the market for its products and creates the financial resources required to sustain perpetual expansion. It is an entrepreneurial operation geared to the "development of ideas that will justify the investment of capital." Success is assured to the enterprise which can* keep its resources effectively employed. Of these resources trained personnel, with manufacturing, engineering, scientific and managerial skill often becomes more important than warehouses, plants, offices and other physical facilities. With increased emphasis on "know-how" rather than hardware, competitive advantage accrues to enterprises whose resources of men and equipment are transferable in the sense

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they are geared to handle a range of technology rather than a specific set of end products or of raw materials. Thus, as Chandler points out, in the chemical, electrical, electronic and power machinery industries the same personnel, using much the same raw materials, were able to develop synthetic fibres, new films and plastics, new electrical and electronic devices, and new machines and new household articles. Increasingly large amounts of total resources were invested in research and development and these resources became less and less tied to any specific product line. Continued growth and accumulation of resources typically came in new product lines which the companies had themselves developed. It should be noted that this account accords well with the findings of investigations into patterns of international trade which proceed from the "product cycle" hypothesis and emphasize the competitive advantage of the American firm in R and D resources and product-innovation.

The Direct Investment Decision Efforts to apply traditional equilibrium analysis to incremental capital expansion by means of direct investment fly in the face of the observed fact that direct investment is not particularly sensitive to earning differentials; nor does it move to those sectors and countries where, by the aggregative reckoning of textbook economics, capital is the scarce factor and profit rates allegedly highest. Indeed the "lending" aspect of direct investment is in an important way incidental to the purposes of the operation. Thus the National Conference Board Study by Polk, Meister and Veit found that a differential profit rate was unlikely to induce a company to establish production facilities abroad and even less to suggest that a company would, because of the disappearance of this differential, discontinue the investment support needed for its marketing position. They found that even a continual decline in a market may provoke rather than discourage further investment, depending on the company's

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opinion of what is required to safeguard its larger-range financial interests.17 They concluded that direct investment is the response of the individual corporation to the requirements of competitive survival and that market strategy is clearly the dominant element in the investment decision. To stand still is to lose: Normally investment, even when it appears new or expansionary, is necessary to maintain competitiveness and is made to strengthen the continued earning ability of the enterprise as a whole, not just to produce additional profits.... Growth is organic and not incremental and can be arrested only at the expense of viability.18

Since the borrowing subsidiary and the lending parent are of course the same corporation, the "loan" implied in direct investment is best regarded as an accounting fiction. Behind it lies a real transfer of corporate resources, an extension of the corporation's productive apparatus and the creation or strengthening of an organic connection between the productive structures of the two countries concerned.19 Exporting from the metropolis and the setting up of production facilities abroad are complementary rather than competitive activities, being firm investments in the strategy market expansion: In the producers' view, the familiar course of marketing on the usual basis of producing at lowest achievable cost for any potential market demand, is first to export to a market, next to produce abroad as directed by local circumstances abroad (of which cost is only one), then to export more as market opportunities are established, then to produce more — and so on in a sequence alterable by changing circumstances but always in accordance with the principle of meeting market opportunities in the most suitable competitive manner."20

When the corporation undertakes direct investment, the market expansion involved enables it to maintain and extend its technological and marketing initiative in research, design and taste-formation and promotion. Increased sales permit the spreading of a larger volume of output over committed costs

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and with that bring larger profits out of which to finance further expenditures on further expansion. Even if in the corporate economy the individual entrepreneur has been replaced by a faceless bureaucracy, it is more than ever Schumpeter's world: the rewards accrue to managerial and technological initiative and innovation. In this dynamic world the fixed element in costs is not the physical hardware of plant and equipment, which have traditionally preoccupied economists. These have, indeed, become a relatively variable item of cost; the most "fixed" element is the specialized managerial, financial, marketing and innovative capacity of the corporation. The motivations and mechanisms of U.S. direct investment abroad do not differ substantially from those which guided American business in its earlier expansion within the domestic market. The competitive techniques perfected in the domestic environment have now been transferred to the world scene.21 Subsidiaries and branch plants, take-overs and mergers, are innovative techniques of competition. The obstacles placed in the way of corporate expansion by trust-busting legislation and by the fragmented and localized character of the American banking system may have been contributing factors in breeding a particularly resilient and self-contained form of business enterprise. Whatever the explanation, there is no doubt that the identity of interest and the single-focus decision-making involved in the American corporation was a superior device to its European counterpart, the business arrangement or cartel.22 The following summary of the characteristic behaviour of the modern corporation is based principally, but by no means exclusively, on an article by Professor Raymond F. Mikesell:23 1. The typical management-controlled firm is motivated mainly by the desire to grow. Considerations of short and long term market conditions are paramount in all strategic decisions and in innovation, including innovation in internal organization. Growth is necessary for the survival of the corporation as a collective entity.

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2. Profits are regarded by management more as a means of growth than as ends in themselves. They provide resources to be disposed of by internal decision and direction and they strengthen the credit position of the firm on the capital market. The paid-out portion of profit keeps shareholders quiet and in effect transforms them into rentiers. 3. Because of the exigencies of competitive strategies, firms tend to take a long-run view towards profit and are normally willing to sacrifice higher immediate profits for the opportunity to enter a market with a large growth potential. 4. Growth and profits are primarily a function of the internal resources of the firm, in terms of managerial ability and experience and initiative to bring to fruition new profitable areas of activity which must in turn increase the internal resources of the firm for further growth. 5. The large and even the medium-sized firm is not confined to expansion of any particular product line, or to any one regional or national market. Managerial ability and technical experience can be transferred and extended to new products and new markets. 6. Expansion frequently takes the form of the acquisition of existing firms rather than starting from scratch to build new plant or develop a wholly new market. Such acquisitions also bring into the firm new managerial and technical talent which constitutes the most important source for growth. 7. Parent companies have a strong preference for 100 per cent control over subsidiaries. Concentration of legal ownership claims in the stock of the parent company maximizes the flexibility of the administration in deploying the total resources of the firm. 8. Because the strategy of the firm is global, differences in profit rates at home and abroad do not provide a satisfactory explanation of the movement of American direct investment abroad, just as differences in profit rates do not provide an adequate explanation of the movement of investment among different industries within the United States.

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The Parent-Subsidiary Relationship It is evident that the contribution of the subsidiary to the parent is evaluated with respect to its effect on the profit rate of the corporation as a global financial unit. The subsidiary is an instrument to be used within the context of the total operation. Conflicts of interest would be inevitable if the subsidiary were an independent financial unit. As Mr. Frank S. Capon, director and vice-president of the Dupont Company of Canada, put it: ... often it is impractical to sell equity shares at anything like the per unit value to the parent company because of initial loss periods or because the chief impact of the subsidiary is on the incremental earnings of the parent, rather than any direct profit in the subsidiary.24

This explains the well-established reluctance of parent companies to permit direct shareholding in subsidiaries, and their many statements to the effect that subsidiaries are frequently not operating at a profit. The attitude of the typical multinational corporation to minority shareholding in subsidiaries is illustrated by the resounding negative response to a three-year campaign by the Montreal Stock Exchange to encourage American companies to sell a part of the equity of their subsidiaries to the Canadian public. Ninety-four of the largest fully-owned subsidiaries were approached by the Montreal Stock Exchange in the early 1960s. Sixty-four replied, only one of which said it planned to issue minority shares. From the scores of replies received by the president of Montreal Stock Exchange we select three25: We have been represented in Canada for many years by whollyowned subsidiaries. As a matter of fact we do business through wholly-owned subsidiaries in some twenty-two countries throughout the world. A change to public ownership of any one of these companies would represent a substantial departure from the pattern in which we are geared to do business and at the moment we do not feel we are prepared to undertake a change of this kind.

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Silent Surrender All operations outside the United States are handled by whollyowned subsidiaries. The Canadian company represents one of foreign subsidiaries all of which are wholly-owned. To date we have found this method of operations has been very beneficial to our customers and employees as well as to our stockholders, throughout the world. At the present time we have no plans for outside financing at all so we do not contemplate any sale of any stock. At present the stock of is listed on the New York Stock Exchange and is available to investors, and an investor has the opportunity for investment in the entire scope of operations. We consider this preferable from an investor's point of view, since the broader scope of the investment should make for increased stability of the investment. [Our emphasis.]

Some of the replies were more explicit in explaining why the parent corporations did not wish to have stockholders in subsidiaries. Where the subsidiaries were engaged in extracting raw materials for use by the parent company, obvious conflicts of interest could arise over the selling price and the degree of processing, if parent company control were not assured. Thus, a U.S. steel producer with iron ore mining operations in Canada, explained its position as follows: As you no doubt realize, the only subsidiary functions which we have in Canada are related to iron ore operations. We do not construe this operation as an independent function but rather as one of several essential functions of an integrated steel manufacturer. We have never felt that this type of venture was appropriate for public participation in the United States and this viewpoint also holds with respect to Canada. [Our emphasis.] Another United States corporation with wholly-owned Canadian mines explicitly refers to the conflict of interest which would result from minority stockholding: In our case, the overwhelmingly important Canadian operation from a financial standpoint is that of mining—the mines produce raw material for factories in the United States and Canada—but of course, on account of the difference of population, the United

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States factories consume by far the larger part. This makes the mine an integrated part of our entire production scheme. If we had minority stockholders in the mine itself with our parent company's stockholders therefore owning only part of the mine, we would have two conflicting interests within the company regarding a single integrated process. This fact has always caused us to reject the idea of selling a minority interest. [Our emphasis.]

It is implicit in the above statements that the raw materials supplied by the subsidiary to its parent are under-valued as an export from the hinterland. Indeed, there are good reasons why it serves the interests of an integrated corporation to undervalue raw materials. One of these is that the output of small independent producers can be purchased at a depressed price. Another is that to show unduly large profits might result in the reduction or withdrawal of concessions, or in increases in taxation. Then again, low valuation of exports of staples reduces the exchange risk to the companies where hinterland governments find themselves in revenue or balance of payments difficulties and might seek to prevent the repatriation of profit. Considerations of corporate security thus point towards pricing policies which provide the parent companies with cheap inputs. Ultimate control over the ability of marginal or new producers to sell to independent users, however, is assured only when processing facilities are tightly controlled by the existing big companies. Corporate resistance to minority shareholding in the raw material sector is, therefore, also a defence against demands for local processing installations. Interestingly, it is no longer enough for a raw material producer to control smelting and refining facilities. The new trend is to vertical integration forward towards final manufacturing. This is in the service of both corporate security and profits to be made from technological advance in manufacturing. An interesting example of this trend is provided by the aluminum industry, which experienced serious over-expansion of ingot capacity in the 1950s. All through the world aluminum industry, the jostling is still going on to align smelter capacity with fabricating mills and markets for

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Silent Surrender sheet and shapes. More and more, the big producers are going vertical and farther into technically-oriented products—because that's where the profits lie. An ingot producer can't live alone these days. He's murdered on the open markets.26

Where subsidiaries are engaged in manufacturing or assembly and constitute market outlets, there is an equal desire for full control over operations. In this connection the following comments by Mr. Eric Kierans when he was Minister of Revenue of Quebec are interesting: The purpose of investment in subsidiaries is not simply to earn a profit. In the parent-affiliate relationship, a profit on inter-company transactions may be taken at either end, but is normally taken by the parent. Thus, a subsidiary could lose money and still make a net contribution to the parent company's income by the profit on purchases of raw materials and component parts from the parent, by patents, royalties and fees for management, advertising and research services. In fact, the primary purpose of investment in overseas markets is to earn a profit for the parent by the control of markets for the export of parts, components and raw material concentrates. It is not essential that the affiliate show a profit.27

Here too, the low profitability of subsidiaries was frequently offered as a reason why it would not be feasible for multinational corporates to sell minority stock of subsidiaries. Insofar as the costs of these subsidiaries include management fees and charges for similar services supplied by the parent company as well as expenditures on commodity inputs, it is difficult to know whether the profit margins of Canadian subsidiaries are really as low as they are reported to be. These subsidiaries are integrated units of a manufacturing complex and there is an obvious conceptual difficulty in establishing profit rates for them. Low profit margins of subsidiaries, however, become important when we consider the difficulties experienced by independent firms in competing with branch plants. The former cannot charge back losses against profitable parent companies. The parent company can offset losses against profits

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earned on exports to subsidiaries, royalties and fees received, and so justify the continuance of the branch plant, even where the accounting profit of the individual subsidiary is small or negative. If the independent firm, however, can make only a small profit or if it makes a loss it cannot long survive. In these conditions of branch-plant industrialization there is a tendency to over-expansion of capacity. The manufacturing sector becomes both inefficient and highly competitive, in the sense that too many competing but slightly different products are produced. This has been named the "miniature replica" effect.28 It is most dramatically illustrated in Canada, where the variety of products produced and assembled can only be explained in terms of the economics of the international manufacturing corporation. Because there exists a market for each of these products created by the spill-over of the taste pattern of the American consumer, it pays the multinational corporation to produce a great variety of products in Canadian subsidiaries. Inefficiency, which is usually laid at the door of protective tariffs, is in fact the result of a combination of two circumstances—the tariff and the entry of numerous branch plants. In the decade 1950 to 1960 direct investment in manufacturing subsidiaries in Canada was very heavy. The total number of companies engaged in manufacturing in Canada rose from ten thousand to seventeen thousand. The percentage of manufacturing output controlled by foreigners rose from 50 per cent to 60 per cent over the decade. The percentage of loss companies rose from 26 per cent to 31 per cent. The rate of profit after tax fell from 9.5 per cent to 4 per cent. While low profitability is the reason corporations advance for refusing to issue equity stock in subsidiaries, the truth is probably that their financial strength permits them to expand to the margin and beyond the margin of profitability. We must, however, draw attention to the fact, already mentioned, that the profits shown in statements of subsidiaries must be added to the contributions they make to the profits of the parent by their purchase of goods and services.

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An important effect of the tendency to take the profit at the metropolitan end of the parent-affiliate relationship is the assured and substantial increase in the earnings of the parent company. Shareholders in the parent company can be shown highly satisfactory and secure earnings, in hard and familiar currency. This enables management to set limits to the rate of dividend pay-out in the parent concern. The shareholders know that they can, if they wish, realize capital gains by selling their stock which appreciates to the extent that investment is financed from internal savings. Management stresses the advantages of holding shares in the parent company and discourages shareholding in subsidiaries. To the extent that it succeeds it is faced by only one set of shareholders, who themselves are, in a way, "insiders," insofar as the corporation goes to the market only for marginal financing. A number of countries have legislated to force corporations to entertain local participation. The companies appear to regard compliance as a concession to be made in particular circumstances and to be opposed as a matter of general policy. An example: We have characterized our... operations as a "Free-World Enterprise," based in the United States. We have manufacturing plants in 18 foreign countries and our products are available in more than 80 countries of the free world. We consider each of our branches and subsidiaries as part of a unified whole, with a large degree of interdependence. We believe that less than full ownership usually presents problems and complications that tend to limit the activities of the subsidiary to a particular product or group of products. Nevertheless, in some cases we have taken in local partners. In deciding initially, or giving consideration to a change in organizational structure, some of the key points we consider are: (a) The contribution that local participation can make including financial, marketing, and general operating knowhow, and public, government and employee relations; (b) The Government Attitude. (c) The possibilities of conflict of interests between...and local interests on the basic and operating philosophy of the company, research policy, product line and product promotion, managements and personal policies, and dividend policies.29

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Local participation is thus found where legislation forces it, where a subsidiary is acquired by buying interests in an established concern, where local people can supply access to marketing and operating know-how, or where public relations indicate the advisability of selling subsidiary stock to nationals. The need to obtain funds does not appear to motivate companies to issue equity stock in foreign subsidiaries. Where additional local funds are required it is more likely that they will be sought in the form of bank loans or longer-term debt borrowing. Safarian speculated that the reason why a number of firms revert to the parent rather than seek local resources probably reflects the relative ease and cheapness of funds from this source, particularly where the parent is generating surplus funds itself or has easy access to low-cost sources of financing itself in more highly developed money markets.30 While this may provide part of the explanation, it does not explain why subsidiaries borrow by bank loan and bond issues in hinterland countries. The chief reason is probably to be sought in the reluctance of the companies to dilute monopolistic quasirents by increasing the number of stockholders, particularly stockholders in subsidiaries whose interests may conflict with that of the global enterprise.

Notes to Chapter 5 1. John Kenneth Galbraith, The New Industrial State (Boston: Houghton Mifflin Co., 1967), p. 9. 2. /fetf., pp. 23,24. 3. AW., pp. 27,28. 4. "The size of General Motors is in the service not of monopoly, or the economies of scale but of planning. And for this planningcontrol of supply, control of demand, provision of capital, minimisation of risk—there is no clear upper limit to the desirable size. It could be that 'the bigger the better.' The corporate form accommodates to this need. Quite clearly it allows the firm to be very, very large." Ibid., p. 76. 5. Ibid., Chapter 4. 6. /tod., p. 38. 7. Ibid.,p. 211.

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8. "The belief that increased production is a worthy social goal is very nearly absolute." "That social progress is identical with a rising standard of living has an aspect of faith...it is important to the technostructure that technological change of whatever kind be accorded a high value." Ibid., p. 164. 9. Ibid., p. 173. 10. See comments on the "product cycle" below. 11. George Grant, Lament For A Nation (Toronto: McClelland and Stewart, 1965). 12. Hon. Neil McElroy, to the House of Representatives, Committee of Ways and Means, 87th Congress, Sessions on Tax Recommendations, pp. 2921-2938. 13. Alfred D. Chandler, Strategy and Structure, Chapters in the History of the Industrial Enterprise (M.I.T. Press, Cambridge, Mass., 1962). I wish to express my thanks to Professor Stephen Hymer for drawing this book to my attention. 14. QuotedbyChandler,/6/d.,pp.310-ll. 15. Ibid., p. 302. 16. Frank S. Capon, director and vice-president of the Dupont Company of Canada, Problems of Canadian Subsidiaries: Seminar on Canadian-American Relations, University of Windsor, November 1961, p. 108. 17. Judd Polk, Irene Meister and Lawrence Veit, U.S. Production Abroad and the Balance of Payments, A Survey of Corporate Investment Experience (N.Y., National Industrial Conference Board, 1966), p. 61. 18. Ibid., p. 59. 19. A. E. Safarian, Foreign Ownership of Canadian Industry (McGrawHill Company of Canada Ltd., 1966), p. 188. 20. Polk et al, op. cit., p. 19. 21. Ibid., p. 55. 22. C. Kindleberger, "The International Firm and the International Capital Market," The Southern Economic Journal, Oct. 1967, p. 228. 23. Raymond F. Mikesell, "Decisive Factors in the Flow of American Direct Investment to Europe," Economia Internazionale, August 1967, p. 447. Revision of a paper prepared for the "Colloque sur la politique industrielle de 1'Europe integree et 1'apport des capitaux exterieurs," organized by Professors Maurice Bye and Andre Marchal of the University of Paris, May 1966. 24. Frank S. Capon, op. cit., p. 108. 25. Material prepared by the Hon. Eric Kierans, formerly president of the Montreal Stock Exchange, as 'Appendix B' to "The Economic

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26. 27. 28.

29.

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Effects of the Guidelines," an address to Toronto Society of Financial Analyists, Feb. 1, 1966 (mimeo). All subsequent extracts from replies to the M.S.E. enquiry are from the same source. Montreal Star, Feb. 20,1968. Eric Kierans, "The Economic Effect of the Guidelines." See note 25 above. H. Edward English, Industrial Structure in Canada's International Competitive Position, Canadian Trade Committee, Private Planning Association of Canada, June 1964, p. 40. Professor English argues that the Canadian tariff is the primary cause of the excessive number of products produced and assembled in Canada. There is no doubt that the tariff has induced Canadian branch-plant production by U.S. firms. There is no reason to suppose, however, that a tariff without foreign investment in manufacturing would have resulted in "the miniature replica" effect. Furthermore, a considerable number of branch plants would have located in Canada even if there had been no tariff. It is the combination of Canadian protective commercial policy with heavy direct investment that has resulted in excessive numbers of products being produced in quantities insufficient to realize economies of scale. Another reply to the M.S.E. enquiry produced this comment: To move from the general to the particular, we have very flexible policies with regard to local equity situations. In a Latin American Company where we have recently applied for a license to . .. , we have decided that the best course is to create a joint venture company with considerable local participation. In our Canadian situation it is our view that the operation's size and fluctuating fortunes do not warrant changing our present equity situation. A number of large American corporations in the recent past have expressed the view that the long range solution to internationalizing one's shareholder base and broadening the foundations of the private enterprise system lies not so much in the sale of local equities—with its many potential conflicts of interests—but rather with making it easier and more attractive for the local investor to purchase common shares of the parent U.S. corporation and thus, of course, share in the world wide profits. [Our emphasis.]

30. A.E. Safarian, op. cit.,pp. 243-44.

6. Metropolis and Hinterland THE INTRUSION of the metropolitan-based corporation into the world economy is proceeding at an explosive rate. According to the most recent estimates the production of all multinational corporations, outside their home countries, in 1968 exceeded $300 billion, a figure considerably larger than the whole of non-communist trade in that year. The foreign production of these companies alone now forms in aggregate the third largest economy in the world following only the domestic economies of the United States and the Soviet Union.1 Addressing the Couchiching Conference of 1968, Professor J.D. Behrman, former U.S. Undersecretary of Commerce, estimated that the output of American industry and its foreign affiliates accounted for some 55 per cent of total non-communist world production in the mid-sixties. As American multinational corporations are growing roughly at twice the rate of domestic ones, the share of total world production under American control is expected to rise to 64 per cent by 1980 and 80 per cent by 1990.2 In a more recent projection Professor Behrman predicted that the multinational corporations alone will control one-third of the output of the non-communist world by 1987.3 The concentration of private economic power on such a scale is 92

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unprecendented, particularly if we take into account the fact that the multinational corporations are gaining almost exclusive control over new technologies. American business enterprise enjoys an evident advantage in the new commercial and industrial mercantilism which is reflected in the fact that two hundred of the largest multinational corporations in the world operate out of the United States, but only some twenty to thirty out of other countries. American enterprise has been extending itself into the neighbouring areas of Canada and Mexico, the Caribbean and Latin America since the Civil War. The appendix to this book traces the pattern of U.S. direct investment from the beginning of the twentieth century. The next five paragraphs summarize some of the statistical material contained in this appendix. The rate of American corporate expansion by means of foreign direct investment did not attain its current momentum until the post-Second World War era. In 1950 the book value of U.S. direct investment assets abroad was a mere $11 billion; by 1960 it had grown to $32 billion and in 1966 had reached $55 billion. The value of assets of U.S.-controlled manufacturing facilities abroad increased from $3.8 billion in 1950 to $22.1 billion in 1966. Thirty-five per cent of all U.S. manufacturing assets and 31 per cent of total direct investment assets are located in Canada. The book value of U.S. subsidiaries in Canada exceeds the amount of total U.S. direct investment in Europe, and total U.S. investments in Central and South America. Some indication of the rate of expansion of the Americanbased multinational corporations may be gleaned from the fact that, despite balance of payments crises and restrictions, new U.S. capital outflows for foreign direct investment in the eight years 1960 to 1967 ($19.4 billion) exceeded the sum of all U.S. direct investment undertaken in the previous sixty years ($17.2 billion). These investments are so profitable that annual remittances of dividends, royalties, licence fees, rentals and management charges exceeded the value of new capital outflows in every year since 1900, with the exception of the depression years of 1928-31. The

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flow into the U.S. of profits and royalties during the eight-year period 1960-67 amounted to $33.3 billion—slightly more than total U.S. income from foreign direct investments over the previous sixty years ($31.7 billion). Currently remittances from U.S. subsidiaries to the metropolis are running at the level of $5.5 billion per annum, with a further $1.5 billion of non-remitted, reinvested profit. The net contribution of foreign direct investments to the U.S. balance of payments in terms of the surplus of remitted income over new capital outflows was $13.8 billion over the eight-year period 1960-67, almost as much as the net contribution of $14.5 billion over the previous sixty years. These "capital-income" balances underestimate the total effect of foreign subsidiaries on the metropolitan economy. To the remitted profits and royalties must be added the increase in the book value of foreign assets by the ploughing back of retained earnings in hinterland countries, and the boost to the profitability of domestic industry by the generation of new markets for commodity exports and the availability of new raw materials on favourable terms. A regional breakdown reveals the fact that the "Development Decade" of the 1960s has witnessed a substantial transfer of income from poorer to richer areas through the system of multinational corporations. In the period 1960-67, U.S. subsidiaries took $8.8 billion out of Latin America in remitted profits while investing only $1.7 billion; from the Middle East, Africa, Asia and the Far East they extracted $11.3 billion in profits while investing $3.9 billion. The funds extracted from the poorer areas of the world were, in effect, transferred to the rich and growing markets of Europe, where U.S. direct investment inflows of $9.6 billion exceeded the remittance of profits of $7.3 billion. Canada, which in the 1950s was a net gainer in the sense that U.S. direct investment inflows exceeded remitted profits by $1.2 billion, became a net loser in the 1960s. In the period 1960-67 remitted profits of American subsidiaries in Canada ($5.9 billion) exceeded new capital inflows ($4.1 billion) by $1.8 billion.

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The New Mercantilism Within the new mercantile nexus, direct investment complements and stimulates metropolitan exports. Indeed, insofar as "international investment has become the major channel of international economic relations" and "the international corporation the main expression of this unprecedented phenomen,"4 the distinction between international trade and the "domestic" sales of foreign subsidiaries is becoming increasingly irrelevant to the calculations of the multinational corporation. The dynamics of competition are creating a new world economy. If there were no barriers to trade in the form of tariff and currency restrictions the corporations would still locate their manufacturing facilities abroad, and the operations of these facilities would still be complementary to economic activity in the metropolis.5 Direct investment complements and stimulates metropolitan exports. Expansion by American corporations has contributed to the favourable balance of payments of the United States and to the profits and further expansion of the companies which undertake these investments. We may list seven ways in which direct investments abroad promote U.S. exports and contribute to the American balance of payments: 1. Where the high-cost structure of domestic production, tariffs in foreign markets, or transportation costs make it impossible for firms to export from the U.S., overseas subsidiaries generate a flow of dividends and branch profits back to the United States. Incomes created in hinterland countries by the payment of wages and taxes and by local purchases increase the demand for imported goods in these countries, including imports from the United States. 2. If investments in foreign markets were not made by American firms they would sooner or later be made either by local or by other foreign firms. In this way direct investment blocks potential competition from rival producers, and assures a continuing return from profits.

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3. As "local residents" in the host countries, subsidiaries are in a position to aggressively promote and sell abroad goods produced in the United States by their parents, which could otherwise not be exported. 4. Investment abroad leads to the export of capital goods and provides a continuing market for replacement equipment from the United States. 5. When finished goods cannot be exported from the United States, foreign subsidiaries facilitate an outflow of goods for further processing and assembly. 6. Direct investment in the extraction of raw materials ensures a constant and cheap supply of inputs to the processing industries of the United States, and a very considerable inflow of profit and dividend income. 7. The presence abroad of some four thousand subsidiaries and branch plants contributes to the cultural homogenization of the countries in which these branch plants are located, and thus expands the market for the output of the American economy at a rate faster than that at which income grows. Hinterland countries which borrow on the U.S. capital market, the American taxpayer who finances U.S. aid programs and the many subsidies granted to U.S. corporations are assisting in the expansion of American export sales. The growth of the world market is assisted by the funds made available to the rest of the world by U.S. government lending, private portfolio lending and the aid programs of national and international agencies. In this regard there exists a similarity with conditions in the old world economy by which long-term fixed interest loans supplied the funds to purchase the exports of the metropolitan countries. The difference lies in the fact that, by means of direct investment, American corporations supply the expanding world market from facilities located abroad, as well as those located in the United States. In this way they gain a competitive advantage over enterprises in the countries in which they establish themselves. The incomes they generate expand the

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markets for their sales and provide the profits from which they can finance further expansion. The logic of competition drives them to make the world their domain. American companies long ago developed the techniques of internal self-financing. When they go "international" they finance the major part of expenditures on continued foreign expansion from the domestic savings of the hinterland countries. The capital consumption allowances and retained earnings of foreign subsidiaries are at one and the same time the internal savings of the corporations and the domestic savings of the host countries. The resources they mobilize in the hinterlands are not confined to financial capital in the sense of command over purchasing power. To an increasing degree, the international corporations are drawing the technical and managerial resources of hinterland countries into their private domain. This they achieve principally by the acquisition of existing firms in hinterland countries. The personnel of these firms then become, in effect, citizens of private corporate empires.

The International Corporation and National Sovereignty It is becoming clear that the international corporations would find it profitable to impose on the world an "internationalism" which would break down all possible cultural, institutional and political barriers to their unlimited expansion. It is evidently in their pecuniary interests to wash away all resistance to "modernization" in a sea of detergent. To this end, President Nixon's Secretary of Commerce proclaimed a new charter of four economic freedoms: the freedom to travel, the freedom to trade, the freedom to invest and the freedom to exchange technology. The counterpart of these freedoms—which sound innocuous enough—is the suggested adoption of "rules of good behaviour" to outlaw "discrimination by host countries inconsistent with a reasonable exercise of sovereignty." It has been said that the old colonialism brought the bible

Silent Surrender 98 and took the land. It imposed Christianity and carried off the wealth of the Indies, the Americas and Africa. The new colonialism is carried by the ideology of materialism, liberalism— and anti-nationalism. By means of these values they seek to disarm the resistance of national communities to alien consumption patterns and the presence of alien power. Their spokesmen proudly tell us that the large globe-circling corporations are, in fact, immensely powerful political states; they are "the colonizers of the twentieth century, and the chief colonizers because of their vast wealth and technological superiority will be the large American companies. Their armies consist not of men bearing arms but of engineers and executives equipped with vast amounts of capital and organizational know-how. Their embassies are their factories and their sales offices. The only thing they usually lack is a flag."6 If the nation state is a barrier to the efficient production of material goods by international corporations then, in this liberal view, the nation state is regressive, reactionary and obsolete. It should be food for thought to the liberal that this view coincides so snugly with that of the great corporations. We draw attention to the well-known statement of the former United States Undersecretary of State, Mr. George Ball: The multinational corporation is ahead of, and in conflict with existing political organizations represented by the nation states. Major obstacles to the multinational corporation are evident in Western Europe and Canada, and a good part of the developing world.

Resistance to the assumption that the quality of life is undoubtedly improved by the mass consumption of Americantype consumer goods, and to the consequent conclusion that national and cultural barriers which act to reduce the efficiency with which these goods can be supplied should be swept away, arouses the deepest indignation of American liberals. How can American corporate capitalism be assured that the values which serve their interests can be made to prevail all

99 over the "free" world? To ask the question is to answer it—it cannot. The attempt to do so, however, has been great and costly. In this effort lies the basis of co-operation between big business and the government of the United States. Metropolis and Hinterland

Corporations and Metropolitan Government The contribution by the international corporations to surpluses on current account forms one basis for their co-operation with metropolitan government in international relations; part of the surplus of foreign exchange created by the operations of the corporations is made available to government for economic, political or military expenditures abroad. The point is made succinctly by the authors of a book published by the International Economic Policy Association, on the U.S. balance of payments. "Without the income from U.S. direct investments abroad, it is doubtful that the U.S. would be able to meet its world-wide military, political and economic commitments."7 In return, the investments of the citizens of the metropolitan country are protected by the political and military strength of their government. In this respect, also, the new mercantilism resembles the old. Economists have created the impression that the European states of the seventeenth and eighteenth centuries wished to accumulate gold because their statesmen were not sufficiently schooled in the wisdoms of political economy to understand the difference between real wealth and a bag of gold. Is it not more likely that these governments and the mercantile ventures which they promoted and protected required access to a universally acceptable means of payment to finance both their international expenditures on navies, on armies and foreign supplies, and their domestic expenditures on law and order? In discussing some areas of common purpose from the standpoint of the United States and its multinational corporations, the government assured the corporations that it was well aware of the magnitude of American investments and of their

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contribution to increased employment, assets and earnings of profit. In referring to the increasingly important role in the expansion of world trade of these "mighty engines of enlightened capitalism," Mr. Henry Fowler, U.S. Secretary of the Treasury, declared that: "For this nation, therefore, they have not only a commercial importance—but a highly significant role in the United States foreign policy that has met with general approval by the Atlantic countries."8 He elaborated on the reasons why the corporations should, in their own self-interest, assist the government of the United States in maintaining military expenditures abroad, without running down reserves to a dangerously low level. . . . for let us understand that the United States government has consistently sought, and will continue to seek to expand and extend the role of the multinational corporation as an essential instrument of strong and healthy economic progress through the Free World.

Mr. Fowler then explained that the American firms abroad could not long continue to operate without the American political presence: Indeed, while it is most difficult to quantify, it is also impossible to overestimate the extent to which the efforts and opportunities for American firms abroad depend upon the vast presence and influence and prestige that America holds in the world. It is impossible to overestimate the extent to which private American ventures overseas benefit from our commitments, tangible and intangible, to furnish economic assistance to those in need and to defend the frontiers of freedom... in fact if we were to contemplate abandoning those frontiers and withholding our assistance. . . / wonder not whether the opportunities for private American enterprise would wither—/ wonder only how long it would take. [Our emphasis.]

He went on to warn the corporations that the rising tide of nationalism in both developed and less developed countries was generating public attitudes that could obstruct their growth and expansion.

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There are signs in quite a few developed countries that their political leaders believe they have a diminished need for foreign capital, technology and management. In a number of less developed countries, new political leaders manifest a distinct preference for government-to-government grants and loans for local or state-owned enterprises over the entry of foreign direct investment.

While acknowledging that the multinational corporation is subject to the laws of the country in which it operates, Mr. Fowler suggested that the United States would assist the corporation by bringing pressure to bear on these governments to "forego voluntarily as a matter of national policy the exercise of extremes of nationalism, even though within the bounds of sovereignty." The areas in which countries may expect to experience pressure to "forego voluntarily" the exercise of their national sovereignty were clearly defined by American government in the same speech. There will be pressure to create or enlarge regional marketing areas. These, it was specifically pointed out, "are conducive to the infusion of capital, initiative and technology from external, as well as internal sources." We have already referred to the remarks of Mr. George Ball to the effect that the interests of the multinational corporation are in conflict with the political sovereignty of the nation state. The corporations were warned by Mr. Fowler that failure in the efforts to reduce trade barriers "will bring the multinational corporation hard up against national or larger regional interests seeking self-containment and self-sufficiency and turning away from the post-war movement toward increasing interdependence." These remarks appeared to be addressed as much, if not more, to the countries of Western Europe and Canada, as to the so-called developing countries. Pressure will be placed on the less developed countries to understand "by word and by deed" that "an institutional environment which accepts state confiscation or state operation of competitive units on an unrestricted basis as a national policy" is incompatible with the interests of the multinational

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corporation. A few years earlier Dean Rusk was less oblique in spelling out the possible consequences to aid-receiving countries of exercising their national sovereignty in a manner detrimental to the multinational operation: "We don't challenge in the strictest constitutional sense the right of a sovereign government to dispose of properties and people within its sovereign territory. We do think as a matter of policy it would be wise and prudent on their side to create conditions which would be attractive to the international investor, the private investor."9 Whereas commercial capital outflows from the United States generate, after a period, inflows of dividends, interest, and similar income as well as commodity exports, government expenditures on military purchases abroad do not produce any compensating inflows. These foreign military expenditures have been rising rapidly. Between 1946 and 1950 the U.S. spent an average of $589 million per year; between 1951 and 1955 foreign military spending rose to an average of $2,300 million. Since 1956 these expenditures have been running at $3,100 million per year. If we add the net effect on the U.S. balance of payments of foreign aid, the deficit is raised to at least $3,500 million per year. The cost of protecting the "enlightened engines of capitalism" is increasing. The message of the various "guidelines" programs is that Americans must increase their contribution to the financing of the empire. The demands on the corporations to cut back the outflow of direct capital means they must slow the rate of capital accumulation, and in fact liquidate assets. The request by the government brought the charge that the restriction of U.S. investment abroad "will not only kill the goose that lays the golden eggs but will serve to deplete our store of golden eggs as well." America's closest friends have been harnessed in the effort to finance the rising costs of empire. Canada, which has contributed more than any other country to the overseas expansion of U.S. corporations, and whose share in world trade of manufactured goods has declined in the past decade, agreed to

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restrict its official exchange reserves no matter what the cost in terms of inflationary pressures. Heavily geared to the continuing inflow of American capital, Canada is highly vulnerable to a reversal in the established patterns of capital investments in the service of protection of the U.S. balance of payments and the U.S. dollar.

Hinterland Economy While we have seen the close relation between government and the economic aim of the multinational corporation, an entirely different set of effects and relationships prevails in the hinterland or host country where the multinational companies operate. We now have a system of corporate empires, most of them centred in the United States. They extend into hinterland countries through branch plants and subsidiaries. Where the subsidiaries and affiliates are located in countries which are not themselves in a relation of metropolis to other countries, there is extreme technological, financial and organizational dependence. But there exists a range of intermediate situations where a country stands, at one and the same time, in a metropolitan relation to some countries and in a hinterland relation to others. Canada falls into this category. Both her resource and her manufacturing industries are dominated by foreign-controlled concerns. At the same time her financial institutions, which have always been highly concentrated and powerful, have extended to the Caribbean and other countries, through affiliated branches. So have some of her resource industries, such as the aluminum industry. It is widely believed that countries benefit from metropolitan direct investment because they thereby acquire entrepreneurship as well as funds. This, so the argument runs, compensates for the weakness of the local entrepreneurial class and introduces the necessary "know-how" of modern industrial techniques into the hinterland economy. In the course of time, it is argued, the presence of modern enterprise will impart managerial and technical skills to the population and local entrepreneurship will be stimulated.

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Branch-plant development, however, results in the erosion of local enterprise, as local firms are bought out and potential local entrepreneurs become the salaried employees of the multinational corporation. Enterprises which remain locallyowned tend to be marginal in the sense that they are small, or inefficient, or operate in industries which do not lend themselves to corporate organization. Exceptions to this pattern include publicly-owned or controlled enterprises or firms which have established an early technological lead over the metropolitan concerns. The entrepreneur, operating in a well-developed branchplant economy, is increasingly confronted with an organizational and institutional complex which presents him with a choice either of joining his resources with those of the international corporation, as a salaried employee or contenting himself with a very limited role. In the mineral resource industries, independent enterprises face a situation where the large established corporations control the terms of sale of raw materials. For independents, markets are uncertain, prices too low to cover costs, and for these reasons their capacity to borrow funds is limited. Their activities tend, therefore, to be of the riskier kind—drilling, prospecting, exploration, operation of marginal mines in abnormal market conditions, and sub-contracting for work where large companies enjoy the stronger bargaining position. Ironically, success increases the risk. At the point where a venture succeeds in reaching the threshold beyond which it could become really profitable, it discovers that the doors to entry are opened only by coming to terms with those already inside. The nature of manufacturing industry makes entry very much easier, but independent entrepreneurs have less security against loss than do branch plants. The latter can charge back losses against parent companies, which can offset them against profits earned on their exports to subsidiaries and against royalties and fees received. The existence of the branchplant firm is thus justified even where its profits are small or

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negative. The disadvantage of the local firm is even greater where incentive programs are biased in favour of foreign concerns. It is to be noted that entrepreneurship does not bear any simple relationship to high levels of income, or to high levels of education. Canada, as well as some countries of Latin America and some Caribbean countries today, has higher levels of per capita income than prevailed in the metropolitan countries during the heyday of private accumulation. They have far higher levels of per capita income than contemporary Japan, where private and public entrepreneurship is highly developed. The lack of entrepreneurship in countries where branchplant economy has taken root has sometimes been explained in terms of religious or ethnic factors. The superficial nature of all these explanations is best illustrated by the case of Canada. The relative decline in local entrepreneurship in contemporary English-speaking Canada as compared with the late nineteenth and early twentieth century has occurred in a period of rising income, rising educational attainment and within a framework of "modern" culture and institutions. One of the few economists who has suggested that branchplant economy may be as much the cause as the result of a lack of indigenous entrepreneurship is Dr. Stephen Hymer. Although addressed to the Canadian case, the following observation may well have general validity: The large volume of foreign investment in Canada seems to suggest a shortage of Canadian entrepreneurs. But which is cause and which is effect? We usually think of foreign investment as a consequence of a shortage of domestic entrepreneurs, but perhaps the former has helped to create the latter. Suppose, in the extreme case, Canada forbade all foreign direct investment. This would certainly slow down the flow of technology and create a gap between techniques used in Canada and the best available technique elsewhere. What would happen then? Through time the gap would grow and there would be an increasing incentive for Canadians to learn how to breach it. Might not this

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stimulate a growth of Canadian entrepreneurship? Once over their initial learning period, might not Canadian entrepreneurs be able to stand on their own feet? The shortage of entrepeneurs in Canada might disappear and with it the need for so much foreign investment.10

A branch-plant economy dependent on imported technology is assured of a perpetual technological backwardness visa-vis the metropolis. Furthermore, dependence is addictive and the dynamics of dependence are cumulative. Countries with indigenous entrepreneurship and with consumption and behavioural patterns differing from those of the metropolis relinquish a potential advantage in production for domestic and foreign markets, when they permit branch-plant economy to take over indiscriminately and on a large scale. These tendencies become more pronounced to the degree that product and technological innovation play an increasingly important role in international competition. The advantages of temporary monopoly acquired by manufacturers in some nations by producing new products or differentiating old ones have been offered as explanations for the pattern of trade in manufactured goods. This "technology-gap" theory coincides with the argument we have been presenting throughout this book, that advantages accrue to countries to the extent that they are innovators and not takers of technology. The importance of maintaining distinctive consumption and cultural patterns in encouraging the development of indigenous innovation has received less attention. It is noted in the literature, however, that there is a tendency for exporters of manufactured goods to find markets in countries where income levels are similar. Resistance to the importation of metropolitan values and consumption patterns, and barriers to the absorption of a country's intellectual, scientific and managerial resources into the world of the multinational corporation, force the country to develop its own resources of entrepreneurship. Obviously products developed on the basis of particular climatic, geographical and cultural factors, or traditional

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skills and crafts, have an advantage similar to that accruing to the "temporary monopoly" acquired by producing new products or differentiating old ones. Obvious examples are small aircraft developed for use in the Canadian north, the small-scale automobiles of Europe, the glassware of Czechoslovakia, the wood-working industries of Scandinavia, or the many Italian industries developed on the basis of excellence of artistry in design. Indigenous entrepreneurship can "learn by doing." It has been pointed out that the dynamic economies resulting from indigenous technological innovation are of particular importance for countries of limited size, and further that they are irreversible in that a nation, having acquired them, will not lose them. The importance of these factors is best illustrated in countries which are relatively poor in resources but, perhaps for that reason, rich in resourcefulness. Examples include Japan, Switzerland, Israel, the Scandinavian countries. Branch-plant economy destroys the mobilizational basis of indigenous entrepreneurship. Direct investment produces growth, but not development: The main weakness of direct investment as a development agent is a consequence of the complete character of its contribution. As it brings enterprise, management and technology to the country, it may inhibit the emergence and formation of local personnel and local institutions to perform these essential functions. Insofar as this happens foreign investment does not help the country to advance itself towards self-sustaining development.... Direct investment increases production and income, expands employment, creates jobs of higher productivity, augments tax revenues and raises foreign exchange receipts or reduces foreign exchange payments. The country receives benefits but not as a result of its own initiative and effort; and the production facilities created do not belong to the country nor are they run by i t . . . . For the abovementioned reasons, direct foreign investment can be depended on to play an important role in development but not a decisive one; that must be played by local entrepreneurs.11

The most direct expression of technological dependence in branch-plant economies is found in the relative absence of

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research facilities in these countries. Technological and innovational activity is concentrated in the research laboratories, boardrooms and academic centres of the metropolitan countries. Where research is carried out in hinterland countries, it tends to be limited to the modification of products developed in the metropolitan country to special conditions in particular hinterland countries. Professor Chandler has suggested that a country's investment in research and the development of the technical skills and equipment that can handle a range of products is a far more meaningful indicator of economic strength than is the output of steel, or meat, or automobiles.12 Skilled personnel are attracted to the metropolitan industrial and academic centres by high salaries, superior facilities and the fact that the professionals involved have internationalized the values of the metropolitan society. By means of the "brain drain," the brightest and ablest people from lower-income countries swell the technological resources of private international business empires. Similar processes are at work with respect to managerial skill. The following account of company policy, provided by the Procter and Gamble Company, illustrates the point: When Procter and Gamble moves into a country for the first time, it has to bring in a skilled top-management team, already developed. The initial cadre goes about building an organization in depth. Just as soon as local talent can be developed, it is. Of the American group in Canada Procter and Gamble in 1947, only two of us are left. The others have gone to Geneva, to Venezuela, to Cincinnatti, and elsewhere. More important, from the organization they built, we have taken cuttings. Today the General Manager of Procter and Gamble in France is a Canadian; the General Manager in Morocco is a Canadian, the General Manager in Mexico is a Canadian; and the man responsible for all our business in the "outer Seven," including Britain is a Canadian. The important thing is that in the total organization they were neither helped nor hampered by their nationality.

These Canadians have become citizens of an international corporate empire. Their professional and management skills have been harnessed to the service of some particular international

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company. Meanwhile there is much wailing that Canada is short of managerial talent. Although the total savings generated by the activities of branch plants are considerable, the access to these savings by local enterprise is limited. The major part of the contribution which the branch-plant sector makes to national income comes in the form of wages and salaries and government revenue. The overwhelming part of profit income, whether distributed or retained, accrues as factor income to shareholders of the parent corporation or to the corporation itself and makes no direct contribution to national income. The branchplant economy thus chokes the development of local capitalists and inhibits the development of a local capital market. Mr. Kierans once complained that international corporate "free enterprise" discriminates against capitalism in the hinterland. The advantage of a capitalist system is that it provides income from savings and investment, as well as from labour. To deny local participation abroad is to confine the benefits of capitalism to the United States. We need capitalists in all parts of the world.13

The savings out of employment income, even when the latter are high, come in the form of contributions to insurance and pension plans and are channelled through financial intermediaries whose placements tend to flow into less risky investments or the blue chip stocks of the multinational corporations. This is in contrast to the classical mechanism by which high personal income accrued to men of property, who were in fact the transactors on both sides of the capital market and could match savings with investment opportunities. In a branch-plant economy, the reinvested profits of the subsidiaries form a significant portion of private domestic savings. The decision to dispose of these domestic savings in order to increase the assets of the branch plants is not however taken in the hinterland countries. In this case the domestic savings of the hinterland country are really part of the national economy of the metropolitan country.

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The increase in foreign investment which occurs in the hinterland when subsidiaries finance expansion from retained earnings can have a serious impact on the current balance of payments situation in the event that the corporations decide to transfer capital out of the country. Such transfers may take the form of heavy payments of dividends to parent companies, repayment of loans to parents, a halt to reinvestment, or even a liquidation of reserves held by subsidiaries. The distinction between the payment of dividends and the withdrawal of capital, and between the retention of earnings and the inflow of capital are not really meaningful in transactions between parents and foreign subsidiaries. According to a study of remittance policies of U.S. subsidiaries in Europe decisions to remit dividends from subsidiaries are made solely by the parent: The international headquarters reserve the right to make the final decisions on almost all matters concerning the timing and size of the flow of corporate-controlled funds across national borders. The centralization of authority is often explained in terms of headquarter's "unique, world-wide point of view"—which apparently refers to top management's ability to identify all of the alternatives open to the international company, and to make decisions which are in the best interest of the entire organization.14

Evidently remittances are not determined only by the past and future profit position of the subsidiary, as would be the case for an independent national company. They are, we are told, made with respect to all alternative options open to the parent company. It may suit the parent company to step up remittances (as they were, in effect^ asked to do by the U.S. government) even where earnings are not particularly high; or again it may pay the parent company to expand by borrowing local funds in the host country, even though the cost of borrowing there is raised in efforts to cut back aggregate investment expenditures and relieve inflationary pressures. Clearly funds flow more freely within the multinational corporation than they do between sectors of the national economy of hinterland countries. Canada is an excellent example. The

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underdeveloped state of her capital market is not due to low income, nor to a low rate of personal savings, nor to the proverbial "conservatism" of the Canadian investor. It is the result of a colonial past and the proximity of the United States.15 It has been widely noted in recent years that the growing importance of U.S. foreign direct investment and the related financial and commercial flows between American firms at home and abroad has transformed "foreign" economic relations: The traditional balance-of-payments identification of these flows as taking place between Americans and foreigners is increasingly inadequate as a description of exports and imports of goods and capital. Some executives and economists alike now ask whether the relation between exports and foreign investment has not gone beyond the realm of traditional balance-of-payments analysis, requiring a global (not national) orientation as the pre-requisite for understanding trade among nations and national balance of payments itself.16

As national economies are increasingly penetrated by the operations of private corporate empires it may indeed become necessary to redefine the conventions of national accounting; it may become appropriate to draw up a "balance of payments account" of the large multinational corporations.17 The international corporations have evidently declared ideological war on the "antiquated" nation state. George Grant's charge that materialism, modernization and internationalism is the new liberal creed of corporate capitalism is a valid one. The implication is clear: the nation state as a political unit of democratic decision-making must, in the interest of "progress," yield control to the new mercantile mini-powers. Although the new mercantilism of the multinational corporations is to be distinguished from the older territorial imperialism of annexation and political subjugation by colonial and quasi-colonial political administrations, cultural colonization is undeniable and undenied. Patronat frangais, the publication of the French management association, has expressed concern that the dominant American economy is

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stamping its own character on industrial society the world over. This character consists of a set of values, a way of life, a philosophy, and a social structure. There is, they suggest, increasing recognition of the fact that the American corporation has a deep sociological effect on the United States. Its impact on a foreign society, which did not generate the structure in the first place, may be far greater and less understood.18 When corporations plan their operations to reduce or eliminate uncertainties, these are not so much removed as shifted to all those who stand outside the protection of the corporate system: small entrepreneurs, unorganized workers, inhabitants of urban ghettos and decaying rural areas, and the entire populations of peripheral or hinterland countries. As technology is harnessed to the requirements of the corporate system an unknown amount of risk is incurred in upsetting the ecological balance of the planet. Concern over the consequences of alienating man from his natural and human environment range all the way from the "normal" daily pollution of air and water to the destructive possibilities inherent in the existence of vast stockpiles of chemical and biological killing-power; all the way from the "normal" incidence of violent crime, suicide and personal insanity to the irrationalities of organized genocide and the rise of racial conflict and confrontation the world over. Mr. Fowler's "enlightened engines of capitalism" may, if they are not brought under control, literally pollute the world with the "fall-out" from unrestrained technological "progress." Canada's Minister of Justice, the Hon. John Turner, expressed similar fears, although no solutions were offered: Next to the nation state, the international corporation is today's most influential institution. It commands vast resources, stretches across countless boundaries, directs the fate of millions of world's citizens and carries a common culture which has been labelled "Cocacolonization." We have no international institutions to control the power of the multinational corporation. Can't we readily see a world of economic behemoths, in fierce competition, owing some loose alliegance to some nation state, but really having the

Metropolis and Hinterland • 113 power of a private government? The implications are serious. They will largely determine the quality and standard of life—not just in the western world but in Asia, Africa and Latin America.19

Even economists are finally expressing concern, although it is a sad commentary on the timid-minded colonial attitudes of the profession in Canada that the articulation of concern has largely come from Americans and Europeans. Sweden's Goran Ohlin, speaking in Montreal in October 1968 conceded the "power and flexibility of multinational corporations to thwart designs of national policy,"20 while Professor Charles Kindleberger called for international regulation: "The corporations are too large and too powerful to turn them loose."21 Professor Rosenstein-Rodan recently advised underdeveloped countries to announce which are the more and the less desirable sectors for foreign direct investment, and to close certain sectors altogether to foreign equity investment for political reasons.22 The suggestion that countries might negotiate international agreements for the control of multinational corporations has come from a number of sources.23 The difficulties experienced by the U.S. government in imposing voluntary restraint on their own U.S.-based corporations for balance of payments reasons indicates that, as Professor Mikesell has said, "a rational solution achieved through international arrangements will not readily be welcomed either by international business or by most sovereign states."24 Meanwhile, there is no escaping the fact that the defence of each nation's interest remains the responsibility of the nation itself. In no country is the matter more urgent than in Canada.

Notes Chapter 6 1. Abraham Rotstein: Statement Before the Standing Committee on External Affairs and National Defence, January 20,1970. 2. See also J. N. Behrman,"An Essay on Some Critical Aspects of the International Corporation," Economic Council of Canada, Special Study (January 1970), p. 7.

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3. Interim Report on Competition Policy, Economic Council of Canada (Ottawa, 1969), p. 180. 4. Mr. Neil McElroy, chairman of the Procter and Gamble Corporation. 5. "The political boundaries between markets... have no inherent economic significance for producers in their role of responding to demand. Expansion to serve foreign markets is, in principle, not different from expansion to meet domestic, regional, or national demand possibilities, and may actually present itself to producers as a necessity of maintaining their existing competitive position. . . . Were there no obstacles to their exports competitive considerations leading to expanding marketing would in time require greater production and therefore more investment abroad." Polk, Meister and Veit, U.S. Production Abroad and the Balance of Payments, p. 134. 6. Richard J. Barber, "The Political Dimensions of Corporate Supernationalism," in Worldwide Projects and Installations Planning, Sept./Oct., 1969, pp. 77-90. 7. Polk et al, op. cit. See also Walter Salant, The United States Balance of Payments in 1968 (The Brookings Institution, Washington, D.C., 1963), p. 22. 8. Remarks by the Hon. Henry H. Fowler, Secretary of the Treasury, before the U.S. Council of the International Chamber of Commerce, December 8, 1965. U.S. Information Service, Press Release. And subsequently quoted statement by Mr. Fowler derived from the same source. 9. Dean Rusk addressing a Senate Committee in 1962. Quoted by Melville Watkins, Toronto Daily Star, March 22,1969. 10. Stephen Hymer, "Direct Foreign Investment and the National Economic Interest," p. 198, in Nationalism in Canada by the University League for Social Reform, ed. Peter Russell. Copyright ©McGraw-Hill Company of Canada Limited, 1966. 11. Dr. Felipe Pazos, "Organization of American States," in J.H. Adler (ed.), Capital Movements, Proceedings of a Conference held by the International Economic Association (Macmillan, Toronto, 1967), pp. 196-197. 12. Chandler, Strategy and Structure, p. 395. 13. Mr. Eric Kierans, "Economic Effects of the Guidelines," op. cit. 14. David B. Zenoff, "Remittance Policies of U.S. Subsidiaries in Europe," The Banker, May 1967. 15. G.R. Conway, The Supply of, and the Demand for, Canadian Equities, A conspectus of the study commissioned from the

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16. 17. 18. 19. 20. 21. 22. 23. 24.

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Faculty of Administrative Studies, York University, by the Toronto Stock Exchange (Toronto, September 1968), (mimeo). Polketal.,op. cit.,p. 127. Dr. Rolfe recently commented that "the system of national accounting is becoming anachronistic." Globe and Mail, May 13, 1969. "U.S Investment in France: The Case of the Hesitant Host," in the Conference Board Record, January 1967. Toronto Daily Star, October 3,1968. Toronto Daily Star, September 17,1968. C. Kindleberger, American Business Abroad, Selective or Direct Investment (McGill University Press, 1969). P.N. Rosenstein-Rodan, "Philosophy of International Investment in the Second Half of the Twentieth Century," in J.H. Adler (ed.), Capital Movements, pp. 179,180. See for example Raymond Vernon, "Multinational Enterprise and National Sovereignty," Harvard Business Revue, MarchApril, 1967, pp. 156-72. R. Mikesell, o/>. cit.,p.452.

7. The Harvest of Lengthening Dependence AFTER TWENTY-FIVE YEARS of heavy American direct investment Canada's freedom of action has been progressively restricted to the point where it is doubtful whether it can be regained. The loss of sovereignty is most evident in the matter of "extra-territoriality." When the metropolitan government insists on the primacy of its law over subsidiaries located in hinterland countries there is a direct conflict of jurisdiction.' The subsidiary is faced by the question: which law is to be respected, the law of the land in which the firm is located, or the law of the country in which the owners reside? As the authors of the Watkins Report put it: "Confronted with two peaks of sovereignty, it is likely to defer to the higher peak on which its foreign owners reside." In Canada the extra-territorial issue has arisen in three areas of conflicting jurisdiction: export policy, anti-trust legislation, and measures taken by U.S. authorities to protect their balance of payments. In each case, Canadian subsidiaries of U.S. corporations have been obliged, by American law or administrative pressures, to follow practices which are in conflict with pronounced Canadian policy; indeed, in some instances, in conflict with Canadian law. Although the extension of U.S. anti-trust legislation to Ca116

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117

nadian subsidiaries may yet prove to be the most serious aspect of the "extra-territoriality" issue public attention has fastened on the export policies of American subsidiaries.2 The U.S. Trading with the Enemy Act prohibits affiliates and subsidiaries, in which 50 per cent of the stock is American-owned, from engaging in trade with Communist China, North Korea and North Vietnam. Violation of the law invites criminal action against all Americans who are stockholders or directors of the parent company. The law applies even where subsidiaries do not use American materials, components or technology. Although similar legislation with respect to Cuba is slightly less restrictive, U.S. authorities called for "voluntary compliance" which, in effect, placed administrative pressure from the U.S. Treasury Department on their foreign subsidiaries not to engage in trade with Cuba. These practices are in direct conflict with Canadian trade policy, which is much more liberal. China is becoming an increasingly important customer for Canada. Although the volume of business lost is not known, it is obvious that Canada is losing both cash and legal jurisdiction over the large Americanowned segment of her economy by permitting U.S. legislation to govern the export policy of a substantial part of Canadian industry. In all these situations there are, of course, the inevitable exemptions and special deals. Concessions are made by the U.S. authorities on a case-by-case basis, when Ottawa can prove that a particular order is of importance to the Canadian economy, or that it cannot be filled by a comparable Canadianowned company. Once again, we have the pattern of begging favours from the metropolitan power to lift restrictions which violate Canadian sovereignty in the first place. In commenting on the legal and administrative apparatus set up by the U.S. government to implement their legislation abroad, the Watkins Report concluded that: This poses for Canada a basic political problem, namely that for an uncertain future the "elbow room," or decision-making power of the Canadian government has been reduced in regard to economic relations involving American subsidiaries. The essence of

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the extra-territorial issue is not the economic costs... but rather the potential loss of control over an important segment of Canadian economic life.3

Twenty years of unprecedented intake of American capital, technology, know-how and marketing connections have probably resulted in increased income and employment. Direct American investment has not, however, secured the basis of continued growth. Indeed, there has been a regression in Canada's economic position relative to other equally industrialized countries. The author of a survey of recent trends and patterns of Canadian trade concluded that "Canada's position resembles more closely that of a less developed nation than that of other developed countries."4 The golden days of easy export earnings have long passed. The resource boom which fed the income-generating process of the fifties and attracted the heavy inflow of direct investment in secondary manufacturing is largely played out. In the sixties the trend of U.S. direct capital flow is towards expansion of manufacturing facilities in the rich and growing markets of Europe. The honeymoon is over, and the realization is dawning that the heavy intake of direct investment and the consequent loss of economic control has restricted Canada's freedom of action in a highly competitive world economy. In the key sectors of the Canadian economy, decisions concerning what is to be produced, where it is to be sold, from whom supplies are to be purchased and what funds are to be transferred in the form of interest, dividends, loans, stockpurchases, short-term balances, charges for management, research or advertising services, and so on, are made externally in accordance with considerations of global strategy of foreign corporations. Nor is dependence confined to decisions transmitted through parent-affiliate links. For Canada, freedom of action has been progressively restricted by a proliferation of commitments—both formal and informal—arising from bilateral arrangements with the government of the United States. In this manner the free market is being replaced by internal transfers within multinational corporations. Correspondingly,

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119

inter-governmental relationships resemble increasingly those of the old mercantilist systems. Although the country is richer, the Canadian economy is less flexible than it has been in the past. The instruments of public policy are constrained by umpteen commitments made in exchange for "special favours." In the private sector there is little entrepreneurship and technological dynamism. The share of crudely processed materials in exports has not diminished significantly. Imports of manufactured goods as a percentage of domestic production have increased. Technological dependence is greater than ever and unequalled by any other industrialized country. In a world in which competition places a premium on innovation and entrepreneurship, imitative technology is reflected in a high cost structure and lagging productivity. The capital market is distorted in the sense that Canadian savings cannot find attractive equity investments in Canada, while large proportions of savings generated in Canada are not available to other sectors of the economy because they accrue in the form of retained earnings and depreciation allowances of foreigncontrolled corporations. The structure of ownership and control is such that there are barriers to the flow of Canadian savings to finance new Canadian enterprise. Technology-oriented industries are firmly in the hands of foreign corporations. As the Watkins Report observes: "Power accrues to nations capable of technological leadership, and technical change is an important source of economic growth."5

The Mercantilist Nexus The facts concerning foreign control of Canadian industry are well known: 60 per cent of manufacturing industry, 75 per cent of petroleum and natural gas and 59 per cent of mining and smelting were foreign controlled in 1963. The degree of control has increased significantly since 1939, when the corresponding figures for manufacturing and mining were 38 per cent and 42 per cent. As recently as 1954 foreign control in both manufacturing and mining was only 51 per cent. By contrast, railways have always been and continue to be

Table 5: Locus of Control of Canadian Industry, 1963 CONTROLLED IN (Billions of dollars) Total

Canada Public Private

CONTROLLED IN (Percentages)

U.S.A.

Other

Total

Canada Public Private

U.S.A.

Other

Manufacturing Petroleum and natural gas Mining and smelting Railways Other utilities Construction and merchandising

13.7

0.1

5.3

6.3

1.9

100

1

39

46

14

7.3 3.8 5.3 12.2

0.1 3.7 8.3

1.9 1.5 1.5 3.4

4.6 2.0 0.1 0.4

0.8 0.3

— — 69 68

26 40 29 28

62 52 2 4

12 7

0.1

100 100 100 100

9.8

0,1

8.6

0.7

0.5

100

1

87

7

5

TOTAL

52.1

12.2

212

14.0

3.6

100

24

42

27

7

Canadian Balance of International Payments, 1963, 1964 and 1965, August 1967, page 80.

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under Canadian control. Here foreign portfolio capital has diminished from 57 per cent in 1939 to 22 per cent in 1963. The only sector which has experienced a marked reduction in foreign control from 26 per cent in 1926 to the present level of 4 per cent is utilities. Canadian control in railways and utilities is public rather than private. Indeed, in 1964, of $34.4 billion Canadiancontrolled assets of all corporate non-financial enterprise, over one-third, or $12.2 billion, was in the public sector — almost exclusively railways and utilities (see Table 5). Public investment in utilities is more than twice the value of railway assets and equals the entire value of Canadian-controlled assets in manufacturing, mining and smelting, and petroleum. It equals also the value of assets of all foreign branch plants in manufacturing. This would indicate that very large sums of capital have been mobilized under Canadian entrepreneurship —where this has taken the form of public enterprise. We should note that a significant amount of these utility investments are provincial rather than federal public assets. In manufacturing, for reasons previously suggested, foreign capital seeks control rather than participation. There is no significant foreign portfolio investment in Canadian manufacturing. This is not so in the mining industry. Thus, in manufacturing, the percentage of assets owned by foreigners was 54 per cent, whereas the percentage of assets under foreign control was 60 per cent. By contrast, in mining and smelting the foreign ownership percentage (62 per cent) exceeded the foreign control percentage (59 per cent). Foreign control in general and U.S. control in particular is highest in those industries in which metropolitan taste-formation and technological and product innovation are crucial. These are automobiles (97 per cent), rubber products (97 per cent), chemicals (78 per cent), electrical products (77 per cent) and aircraft (78 per cent). All these industries primarily serve the Canadian domestic market. Industries in which Canadian control predominates are characterized either by small production units, such as sawmills, construction concerns or certain food-processing industries or, as in the case

Table 6: Concentration of Foreign Direct Investment in the Commodity-Producing Sectors, 1963 Percentage of capital under foreign control Total capital in enterprises controlled in: Percentage of capital controlled in: INDUSTRY

1954

1963

Canada

U.S.A.

Elsewhere

Canada

U.S.A.

Elsewhere

(in million of dollars)

Manufacturing Automobiles and parts Rubber Chemical Electrical Aircraft Agricultural machinery Pulp and paper Textiles Beverage Primary iron and steel Other Total manufacturing Petroleum and natural gas

95 93 75 77 36 35 56 18 20 6 — 51 69

97 97 78 77 78 50 47 20 17 14 70 60 74

15 6 45 22 55 104 1,217 568 488 752 1,790 5,451 1,841

558 195 295 161 85 103 817 96 101 14 3,154 6,308 4,609

— 15 727 458 113 — 279 49 — 108 944 1,595 845

3 3 22 23 22 50 53 80 83 86 30 40 26

97 90 54 66 33 50 35 13 17 2 54 46 62

— 7 24 11 45 — 12 7 — 12 16 14 12

Mining Smelting and refining of non-ferrous ores Other mining Total mining

— — 51

51 62 59

521 1,038 7,559

545 1,435 1,980

— 270 270

49 38 41

51 52 52

— 10 7

"60

8,851

12,897

3Trio

"36"

~52~

72"

TOTAL OF ALL INDUSTRIES

Canadian Balance of International Payments, 1963,1964 & 1965, August 1967, page 128.

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of textiles, by thoroughly dim prospects. Among industries in which there still exists a substantial degree of Canadian control, and where technology does play an important part we find pulp and paper (with 40 per cent foreign control), agricultural machinery (50 per cent), and primary iron and steel (20 per cent). In all three industries Canada established and maintained a technological lead. The production of agricultural implements and primary iron and steel dates from the period of railway construction and the wheat economy. The pulp and paper industry, even where foreign-controlled, is characterized by considerably more autonomy in decision-making than are other foreign-controlled industries. The research conducted by Professor Safarian into 288 Canadian subsidiaries suggests that this may be due to the fact that in this industry Canadian subsidiaries tend to be large compared with their corporate parents.6 Similar independent behaviour is found in some sectors of mining, particularly where foreign-controlled concerns do not have any corporate parent, as in the case of the Aluminum Company of Canada or International Nickel Company (see Table 6).

Foreign Subsidiaries in Canada Foreign subsidiaries are strongly entrenched in both resource and in manufacturing industries. Of a total of $17.6 billion invested in foreign controlled enterprises in 1963, $2.3 billion were invested in mining and smelting, $5.4 billion in petroleum and natural gas and $8.2 billion in manufacturing. Because foreign investment in Canadian resource industries is substantial and concentrated in large concerns, it is widely believed that direct investment in Canada is mainly directed to exports. In fact, the sales of foreign subsidiaries are heavily concentrated in the Canadian domestic market. A study on foreign subsidiaries in Canada published by the Department of Trade and Commerce in 1967 showed that 82 per cent of the output of foreign-controlled companies covered in this survey was sold in Canada. Of total sales of $15.1 billion by subsidiaries and branch plants in 1965, $12.7 billion were domestic sales and only $2.7 billion were

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exports. These exports represented over one-third of total Canadian exports for 1965 and were almost entirely resource-based. Branch-plant export sales of manufactured goods amounted to a mere $900 million—and these were strongly related to special bilateral deals.7 The degree to which intra-company transfers between parents and subsidiaries have replaced market transactions is revealed by the fact that 50 per cent of export sales of subsidiaries were sales to parent companies and 70 per cent of their purchases of imports were procured from parent companies. The percentage of exports made by transfers varied considerably: minerals and primary metal 68 per cent; gas and oil 59 per cent; pulp and paper 40 per cent. Transportation equipment was by far the most important fully-manufactured export: here 68 per cent of export sales were intra-company transfers. In other manufacturing industries, exports, though small, were also organized primarily through transfers. For example, 91 per cent of the exports of machinery and fabricated metal products were corporate transfers. Similar corporate links were reported on the import side. Total imports of the surveyed companies accounted for over one-third of all Canadian imports in 1966, and 75 per cent of these were purchased from parent companies. Subsidiaries in the mining and petroleum industries, for example, obtained over 80 per cent of imports from parents, as did machinery and metal fabrication branch plants. In the branch-plant economy the valuations placed on goods transferred to the parent company affect the distribution of profit between foreign and local residents. Evidently there is here considerable scope for arbitrary valuation of intra-firm transactions. Where the wage bill is small in relation to the capital invested, as is the case in most resource industries, the tax yield on the profits of the subsidiary may be the most important gain which accrues to the host country.8 The authors of the Watkins Report urge Canadian tax authorities to exercise caution in the granting of special tax treatment or special subsidies to industries which are predominantly foreign-owned,

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particularly industries which do not generate substantial earnings for Canadian factors of production.9 While there may be a case for concessions which attract employment-creating industry, there is an obvious danger that further transfer of the corporation tax field to the provinces could result in a game of competitive tax concessions from which nobody except foreign capital can gain. The fact that 70 per cent of the imports of subsidiaries were obtained from parent and affiliated companies substantiates our earlier argument that branch-plant manufacturing in the hinterland is the result of new forms of market competition which transfer tastes, techniques and assembly facilities to the hinterland. This creates a built-in demand for materials, components, capital goods and fully-processed goods for resale. Branch-plant imports are, to some extent, captive sales. Here the mercantilist nexus does not result in over-valuation of imported inputs—although this may occur—but rather in a backward linkage of product differentiation. Typically, branch-plant technology requires a number of specific inputs which are supplied only by the parent company. The U.S. Department of Commerce study of 1963 showed that American branch plants located in Canada purchased a far higher proportion of their materials in the form of imports than did similar branch plants in any other major area of the world. For U.S. subsidiaries in Canada, imports amounted to 15.5 per cent of gross sales, compared with 8.8 per cent in Latin America and 4.8 per cent in Europe. It appeared that one reason for the high import content of Canadian branch-plant costs was the large volume of purchases of finished goods for resale. The ties of the mercantilist nexus were revealed in the year following the devaluation of the Canadian dollar in 1962. While the value of total imports into Canada rose by only 6 per cent, imports purchased by U.S. subsidiaries from parent companies increased by 15 per cent. If we remember that these are substantial (about one-third of all Canadian imports) it is clear that the purchasing policies of the subsidiaries inhibited the substitution

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of domestic for imported goods, when the latter rose in price as a result of devaluation. Professor Safarian's study concluded that to the extent that the subsidiary produces items identical to or marginally different from those of the parent there is a built-in incentive to buy from the parent. He found that the smaller the subsidiary in relation to the parent, and the more it tends to assembly-type operations, the higher the proportion of imported purchases.10 The fact that the Canadian branch-plant economy is characterized by an excessive number of firms, each producing too many product lines, is reflected in the high import content of their purchases. Safarian concluded that: "The only systematic difference between [resident and non-resident firms] in terms of economic performance... is with respect to imports. The non-resident owned firm makes relatively more of its purchases abroad."11 The Watkins Report also found that non-resident owned firms appear to have a greater orientation towards imports than do resident-owned firms.12 The study by Wilkinson finds that "imports of secondary manufactures are an increasing function of the extent of foreign ownership of industry."13 In an interesting argument Wilkinson approaches an explanation which is similar to ours: he suggests that manufacturing subsidiaries will buy from their parents at a price which does not need to cover total fixed costs in the short run. The "short-run," however, is perpetuated "by the continuous development of new products and processes." As a result, the author suggests, foreign owed firms will always tend to buy a larger proportion of imported inputs than will domestically-owned firms.14 The most serious consequence of the bias towards imports resulting from branch-plant economy in Canada is the discouraging effect on Canadian entrepreneurship, as we have noted earlier. The more market demand is shaped by metropolitan corporations, the more restricted becomes the area in which independent Canadian enterprise and innovation can operate. The results of this situation are most clearly reflected in current trends in Canada's external trade.

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Profile of a Rich, Industrialized, Underdeveloped Economy In spite of Canada's high income and high degree of industrialization, the country has not shared in the recent world trend towards an increase in the importance of trade in relation to domestic production. In consequence, Canada's trade as a percentage of that of industrial countries dropped from 9.6 per cent in 1953 to 7.2 per cent in 1965 and her commodity terms of trade declined from 101 in 1954 to 97 in 1965. The deterioration in terms of trade for all underdeveloped countries over the same period was from 109 to 97. In developed countries the corresponding improvement in terms of trade was from 96 to 104.15 The reasons for these trends are to be found in the high proportion of primary or crudely processed materials in Canada's exports and the correspondingly high proportion of finished manufactures in her imports. Canadian exports are heavily concentrated in a few product lines. These are either pure raw materials such as wheat, iron and other metallic ores, petroleum and natural gas, or crudely processed manufactures such as woodpulp, newsprint, lumber, flour, aluminum, copper and metal alloys, and primary iron and steel products. In a study of thirteen industrialized countries of the Western world it was found that end-products accounted for 60 per cent of exports. For Canada the comparable ratio was only 19 per cent. Although there has been an increase of 12 per cent in the share of highly manufactured goods in Canada's exports in the last decade, the increase for other relatively small industrialized countries16 over the same period was 37 per cent.17 In 1954 Canada was exceeded only by New Zealand in value of trade per head. By 1964 Canada ranked eighth, exceeded by Belgium, Luxembourg, Holland, Switzerland, Denmark, Norway and Trinidad-Tobago, in that order. In none of these countries, with the exception of the last-mentioned, do crudely processed materials account for as high a percentage of exports as they do in Canada. Recent trends in Canada's imports are equally suggestive of

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structural underdevelopment. The share of consumer goods in imports rose from 29 per cent in the mid-fifties to 34 per cent in the mid-sixties, mainly due to increased imports of automobiles and new-technology manufactures. End products increased their share in imports from 50 per cent to 54 per cent over the same decade. The indication is that technological advance of a type that results in new products not produced in Canada, together with imitative demand by consumers and producers, are an important factor in explaining Canadian import patterns. It should be noted that the heavy inflow of direct investment to Canada's manufacturing industries has coincided with a rise in manufactured imports relative to domestic production. This ratio rose from 18 per cent in 1954 to 21 per cent in 1965, reversing a contrary trend in operation since the mid-1920s.18 It is well known that world trade in highly manufactured goods is rising more rapidly than trade in industrial raw materials and primary products. Canada appears unable to share in the gains which these trends offer to other industrialized countries.19 While there has been an increase in the export of manufactured goods in recent years, this has been strongly related to the implementation of the Defence Production Sharing Agreements of 1959 and the automobile agreements of 1963. The proportion of highly processed exports which fluctuated between 11 per cent and 14 per cent in the 1950s had risen to 19 per cent in 1965. Inedible end products rose from less than 8 per cent of total Canadian exports in 1959-60 to a level of 15 per cent in 1965. Most of the expansion took place in the U.S. market. While the devaluation of 1962 undoubtedly resulted in some increase in commercial exports, the bilateral arrangements between the governments of Canada and the United States accounted for the greater part of the increase. These special arrangements are a manifestation of increasing corporate and governmental integration between the two countries. The industries directly involved are the automobile, aircraft, electrical, chemical and machinery industries—all heavily controlled by U.S. capital. Increased export sales to the United States have been gained at

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129

the expense of economic and political vulnerability. The Defence Production Sharing Agreements, whereby Canadian firms are permitted to bid on equal terms with U.S. firms for American war contracts, accounted for $260 million of Canada's exports in 1965, or 30 per cent of all Canadian inedible end-product exports to the U.S. In 1966, U.S. defence contracts placed in Canada had increased to $317 million. Although these sales are small in relation to total Canadian production, the concentration of employment exposes Canadians to the possibility of severe unemployment in given areas in the event of the termination of these agreements. As the Canadian Minister of External Affairs explained: "Think of the impossible position we would be in if the Defence Production Sharing Agreements were abrogated ... to pull out would be to endanger our economy and safety." It should be noted that the foreign exchange earned by these defence exports is pre-empted by the undertaking of the Canadian government to purchase American war supplies. Thus in 1966 Canadian defence purchases in the U.S. amounted to $332.6 million. Of greater importance than the defence arrangements are the automobile agreements which lifted exports of cars and parts to the U.S. from a level of $36 million in 1963 to $231 million in 1965 and to $2,428 million in 1968. The quid pro quo for these automobile exports, however, has taken the form of increased imports by the automotive corporations involved, and the balance of commodity trade in cars and parts with the U.S. remains in deficit. This deficit rose from $551 million in 1963 to $714 million in 1965, and has since declined to $343 millions in 1968. The expansion of normal commercial sales of highly manufactured goods abroad has thus been extremely modest. This is so in spite of efforts to promote exports, including the provision of export credit, the work of the Export Finance Corporation, the promotional efforts of the Department of Trade and Commerce, and strings on foreign aid which sometimes require 80 to 90 per cent Canadian content.

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Research and Development The difficulties of expanding commercial manufactured exports are compounded by the low level of industrial research and development expenditures in Canada and their high concentration in industries which service the special requirements of the U.S. defence department. Canadian expenditures on research and development are smaller, in relation to its G.N.P. (1.1 per cent) than that of industrial countries of Western Europe —West Germany (1.3 per cent), France (1.5 per cent), the U.K. (2.2 per cent), and very much smaller than expenditures in the U.S. A. (3.1 per cent). What is more, in Canada 79 per cent of such research is performed by government and only 12 per cent in the business sector compared with the United States where, even though much of the work is done under government contracts, 71 per cent is carried on by industry. Comparable figures for West Germany, France and the United Kingdom are 61 per cent, 48 per cent and 71 per cent.20 The bulk of industrial research expenses in the U.S. are, however, subsidized by public funds. The situation in Canada was summed up by Dr. Steacie, president of the National Research Council in the following words: "Because of the financial relationship between Canadian and American firms, most Canadian plants are essentially branch plants and research is normally done by the parent organization outside the country. As a result Canadian industry has been largely dependent on research done in the U.S. and Britain."21 The most recent survey conducted by the Dominion Bureau of Statistics reported a total of $264 million spent on industrial research and development. Thirteen firms accounted for half of these expenditures and they were heavily concentrated in the electrical, aircraft and chemical industries. The electrical products and aircraft industries accounted for 47 per cent of total research and development expenditure and these same industries received 83 per cent of federal funds granted to industry for research. Four companies alone received 55 per

The Harvest of Lengthening Dependence

m

cent of total federal support. We already observed that Canadian government subsidies to industry are heavily directed towards industries in which foreign firms predominate and which are heavily engaged in defence production. The huge utility industry is, by contrast, according to the Dominion Bureau of Statistics' report, entirely self-financing as regards research. Industrial research in Canada is strongly biased towards applied rather than basic work. The Dominion Bureau of Statistics survey reports that only 356 of 6,367 trained scientists and engineers engaged in R and D in Canadian industry in 1965 were doing basic research.22 Information compiled by Professor Wilkinson shows the lower levels of R and D expenditures in almost every industry in Canada as compared with the U.S. The comparison is interesting because there is evidence of a strong correlation between R and D expenditures on the one hand, and success in the export of manufactured products on the other. Gruber, Mehta and Vernon, following the hypothesis suggested by Professor Vernon in his article on "International Investment and International Trade in the Product Cycle,"23 offer impressive statistical evidence that American strength in the export of manufactured goods does not lie in a greater abundance of capital, but rather in the ability to develop new products and costsaving processes. Initiatives in R and D thus yield an oligopoly position in supplying foreign markets to countries which have the capacity to innovate. Their results are summed up in Table 8. In this analysis comprising nineteen industries, the five most research-intensive ones accounted for 89 per cent of total R and D expenditures, 78 per cent of company-financed R and D expenditures, and employed 85 per cent of industrial scientists and engineers. While their sales were only 39 per cent of the total sales of all nineteen industries, they accounted for 72 per cent of the exports. The study debunks a widely held belief that hightechnology industries are, to use economists' jargon, capital-intensive, and consequently that countries in which capital is cheap relative to labour enjoy a "comparative advantage" in such indus-

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Silent Surrender

Table 7: R and D Expenditures as Percentages of Manufacturing Industry Sales, Canada and the United States

Industry

R and D as Percentage of Sales Canada, 1963 Intramural and Extramural a

Aircraft Drugs and Pharmaceuticals Scientific and professional equipment Electrical products Other chemical products Petroleum and coal products Machinery Pulp and paper Primary metals (non-ferrous) Rubber Primary metals (ferrous) Non-metallic mineral products Textiles Metal fabricating Other manufacturing Food and beverages Other transportation equipment Furniture and fixtures Wood Average, all manufacturing

10.09 3.92 3.19 2.58 1.53 1.17 1.04 0.72 0.86 1.50 0.33 0.35 0.26 0.22 0.1 l c 0.10 0.06 0.05 0.02 0.7

United States 1962 27.2 4.4

7.1 7.3 3.8 0.9 3.2 0.1 0.8 1.4b 0.5 1.1 0.2 0.8 0.4d 0.2e 2.8 0.1 0.1 2.0

a

Intramural refers to expenditure on R and D within the firm. Extramural refers to outlays for research and development performed outside the reporting firms, and primarily outside the country. b Includes plastics. 0 Includes tobacco and products, leather, clothing and knitting mills, and miscellaneous manufacturing. d Covers same industries as in note c , plus printing and publishing. e Food only. SOURCES. Canadian data: Dominion Bureau of Statistics, Daily Bulletin Supplement—3: "Industrial Research and Development Expenditures in Canada, 1965," April 12, 1967, Table 2; and Manufacturing Industries of Canada: Section A, 1963. U.S. data: Gruber, Mehta, and Vernon, "The Rand D Factor in International Trade and International Investment of United States Industries," Journal of Political Economy, February, 1967, p. 23, Table 1. Reproduced from Wilkinson, op. cit. p. 122.

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tries. The correlation to this proposition of course is that countries in which capital is relatively scarce should not attempt to develop such industries. The Gruber-Mehta-Vernon study found that labour costs form a larger percentage of value added in the five most research-intensive industries (24.7 per cent) than in the fourteen others (17.2 per cent). Correspondingly, the capital component of cost measured in terms of depreciation as a percentage of value added is smaller in the five most research-intensive industries (4.3 per cent) than in the other fourteen (5.3 per cent). Net fixed assets as a percentage of value added is also lower in the five leading industries (31 per cent) than in the other fourteen (41 per cent). The picture is completed by the observation of the authors that: Industries with comparatively high export sales of products involving scientific and technical aspects in their sales and servicing will have a high propensity to invest in manufacturing subsidiaries in the markets they serve and that in these "oligopoly industries" therefore, individual firms are likely to consider foreign investments as important forestalling tactics to cut off market pre-emption by others. And they are likely to feel obliged to counter an investment by others with an investment of their own.

While Canadian industry is basically derivative and imitative, there exist the proverbial exceptions. These consist of cases where indigenous Canadian R and D has been a vital factor in gaining export markets. The list is familiar because it is pitifully short. It includes Canadian developments in nuclear power plants, telecommunication systems, the STOL aircraft developed by De Havilland for bush mining and explorational landing fields, the air navigational devices of Canadian Marconi and Computing Devices of Canada, and products pioneered by the Polymer Crown Corporation. The Canadian steel industry, primarily Stelco, has, as previously mentioned, maintained its world-wide reputation for innovation. The list, however short, belies the negative attitude of many experts that Canada is too deficient in technical skills to develop its own products. A tragic feature of Canada's technological hinterland status is the frustration experienced by her scientists, many of whom

Table 8: Relationship between Research Effort and Export Performance of 19 U.S. Manufacturing Industries EXPORT PERFORMANCE

RESEARCH EFFORT

Total R&D expenditures as a percentage of sales

Scientists & Engineers in R&D as apercentage oftotal employment

Exports as apercentage of sales

Excess of exports over imports as a percentage of sales

10.0 7.3 7.1 3.9 3.2

3.4 3.6 3.4 4.1 1.4

5.5 4.1 6.7 6.2 13.3

4.1 2.9 3.2 4.5 11.4

Five (above) industries with highest research effort

6.3

3.2

7.2

5.2

Fourteen other U.S. industries

0.5

0.4

1.8

-1.1

Transportation equipment Electrical machinery Instruments Chemicals Machines (non-electrical)

SOURCE.- Gruber, Mehta and Vernon, op. cit.

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sooner or later depart in search of more challenging work in the United States. In the words of a Canadian scientist: It is well known that many a Canadian scientist in the U.S. would happily return to the land of his birth and early nurture if the same scientific opportunities existed here. But there is the rub—the same opportunities do not exist in Canada; partly this is to be expected from the disparate populations of the two nations, but partly it arises as a concommitant of Canada's satellite role in economic affairs ... not only are opportunities lacking in Canada, but the organization of science in Canada... and our attitudes toward it, are largely fashioned in the U.S.... It is one thing to learn something from the American way of doing things, but complete integration into the American way stifles development of a distinctive Canadian style and a distinctive Canadian attitude about science, particularly with regard to its cultural values in society.24

Another measure of the technological dependence of Canadian industry is the nationality of patent applicants. Here we find that 95 per cent of all patents taken out in Canada over the period 1957-61 were by foreign applicants, with 65 to 70 per cent by U.S. applicants. This is probably the most remarkable single statistic of technological dependence. The proportion of foreign applicants for patents is much higher for Canada than for any other developed country. Similar figures for other industrial countries were 80 per cent for Belgium, 70 per cent for Scandinavian countries, 59 per cent for France, 47 per cent for the United Kingdom and 32 per cent for West Germany.25

The "Miniature Replica" Effect The effect of branch-plant economy on the structure of domestic industry is by now well established: too many firms producing too many product lines at high unit cost. When branch plants enter a tariff-protected market in which consumer tastes approximate those of the metropolitan economy we get what Dr. English has named the "miniature replica" effect.26 The spill-over of advertising and other corporate overheads related to product-differentiation and promotion make it profitable for foreign companies to assemble or sell a large range of their products in the hinterland.

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In many instances the international corporation does not enjoy a technical superiority as much as a marketing advantage arising from the familiarity of the consumer with the trade marks and brand names of its products. As Safarian has observed, "the great majority of the companies are a small fraction of the parent in size yet they are producing almost the full range of the identical or slightly modified products of the parent. Not surprisingly their unit costs are in most cases higher than those of the parent on major comparable products."27 The case best documented is that of the refrigerator industry. Here it has been estimated that the Canadian market of 400,000 per annum could be efficiently served by two plants. In fact there are nine plants, and seven of these are U.S.-controlled branch plants. In 1966 these accounted for 80-85 per cent of refrigerator production, compared with 71 per cent in 1960. These Canadian subsidiaries almost duplicate in number the plants producing refrigerators for the much larger American market. All of them operate well below optimum size.28 It is not true that the Canadian domestic market is too small to support a diversified manufacturing industry. Rather the combination of tariff protection and branch-plant organization has resulted in the inefficient production of too many similar products. The manufacturing industry catering to the domestic market, both foreign and locally-controlled, tends to be inefficient. Safarian's original study and the more recent investigations he undertook as a member of the Watkins team found that the nationality of ownership is irrelevant to economic performance. Foreigncontrolled subsidiaries are no more efficient than locally-controlled firms. Nor are they less efficient. The evidence suggests that the key to efficiency in Canadian industry lies in rationalization, specialization, and innovation. Economic policies designed to this end would require a reduction of Canadian tariffs, the planned rationalization of select sectors of the manufacturing industry by means which include the takeover of redundant branch plants, and a large increase in research and development expenditures in high-technology industries catering to commercial markets. It requires above all a rejection on the part of Canadians of the branch-plant mentality which breeds a debilitating attitude of

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complacent incompetence and resignation to perpetual dependence on external initiatives.

Canadian Savings and the Growth of U.S. Subsidiaries There is a widely held belief that Canada needs foreign investment because the country is "capital-hungry" and domestic savings are inadequate to finance expansion. While it may be advantageous to borrow portfolio capital, which does not transfer control, there is no conclusive case for the view that foreign direct investment constitutes the only way in which sufficient savings can be mobilized. Nor can a convincing case be made for the view that direct investment is necessary because entrepreneurial opportunities cannot be exploited without it. In fact the inflow of direct investment funds constitutes a small fraction of total gross national saving in Canada. In 1965, for example, which was a year of relatively heavy foreign direct capital investment, the flow of new funds into Canadian subsidiaries was $500 million, or less than 5 per cent of total Canadian domestic savings, which exceeded $10 billion in that year. Indeed, these new funds are a minor source of finance for expansion by the subsidiaries; the major portion is provided by the re-investment of profit, by depreciation and depletion allowances, and by borrowings from Canadian financial institutions. Over the years 1957 to 1965, 85 per cent of the funds used to expand U.S.-controlled industry in Canada was provided from Canadian domestic savings. More specifically, U.S. subsidiaries in Canada obtained 73 per cent of their funds from retained earnings and depreciation, and a further 12 per cent from other Canadian sources, and only 15 per cent from the United States. While the mining industry received 19 per cent of total funds from the U.S. and the petroleum industry 22 per cent, manufacturing branch plants obtained only 9 per cent from the U.S. throughout the period.29 In the year 1964, for example, of a total investment of $2,557 million by U.S. subsidiaries in Canada, $1,244 million was financed from retained earnings, $764 million from depreciation allowances, $423 million from Canadian and third-country

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borrowing and only $126 million from funds from the United States. Of the funds obtained in Canada, only $71 million was issue of equity stock. The Dominion Bureau of Statistics has estimated that, in the nineteen-year period 1946-64, the accumulation of undistributed earnings added $5.2 billion, or 40 per cent, to the increase in Canadian external indebtedness. Well over half of these reinvestments accrued to manufacturing subsidiaries.30 We have estimated that the gross internal savings of foreigncontrolled firms constitute about 15 per cent of total annual Canadian domestic savings. The proportion of profit which is ploughed back is much higher in the branch-plant sector than in the rest of the Canadian economy. Thus about one-third of total Canadian retained earnings accrued to foreign-controlled companies. These internal savings are pre-empted for investment in the concerns in which they are generated. If the parent companies do not wish to re-invest subsidiary profits, they can and do transfer funds out of the country. Such funds, whether re-invested or transferred, are not available to finance the expansion of other sectors of the Canadian economy. The Canadian Department of Trade and Commerce study revealed a similar pattern of financing. In 1965 a total of $1.8 billion was available to foreign-owned subsidiaries for investment expenditures. Of this amount, $1.2 billion was generated within the subsidiaries by retained earnings and depreciation. The remaining $658 million was raised from sources external to the subsidiaries: $274 million in loans from parents; $113 million in equity holdings by parents; $254 million in bank loans and longterm borrowing; and only $37 million in equity holdings by independent shareholders.31 The shortage of finance is at least in part the result of branchplant economy. Contrary to common belief, Canadian savings are not low, nor is the Canadian investor averse to taking risks. Despite lower average incomes in Canada, the rate of personal savings is substantially higher than that in the United States. In 1967 Canadians saved about 9 per cent of disposable after-tax income

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compared with a rate of 7 per cent in the United States. What is more, the average Canadian is more inclined to invest his savings in equity stock than his U.S. counterpart. Thus interest income forms a larger proportion of total investment income in the United States than in Canada, despite the fact that interest rates are lower there.32 There appears to be no shortage of demand for equity investments in Canada—only a shortage of available stock. For these reasons Canadian financial institutions have, in recent years, greatly increased their holdings of foreign equities. As recently as 1960, major Canadian financial institutions held only 10 per cent of their stock portfolios in foreign equities; the proportion had risen to 24 per cent by 1966. The trend was most pronounced in mutual funds which held 17 per cent of equity holdings abroad in 1962, 35 per cent in 1966, and 53 per cent in 1967. Most of the foreign stock portfolios of the major Canadian financial institutions are in industries which are not listed on the Canadian market. Over 40 per cent is invested in office equipment and airline stock, and about 35 per cent in electrical and electronics, drug and cosmetics, automotive, aerospace, photography and rubber stocks. The York University study points out that "if suitable Canadian stock issues do not become available, there is some likelihood that half the equity holdings of these institutions may soon be in foreign equities, a proportion already exceeded by the mutual funds." While the trend towards internal financing and reliance on banks' trade credit and the bond market is creating a general scarcity of equity issues, the proportion of listed equities which are "locked in" is substantially higher in Canada (30 per cent), as compared with the United States (10 per cent). The total annual demand for additional equities in Canada has been estimated to be almost double the supply provided through new Canadian issues. The meagre supply of Canadian equities results from the fact that so many Canadian corporations are private companies, and even where they are public a very substantial portion (40 per cent) of listed Canadian equities are held as direct investments by non-residents.

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There is a lack neither of savings nor of opportunities for profitable economic activity. Canada provides the classical case of a rich underdeveloped economy in which the capital market is too narrow to channel local savings into local investments. A substantial volume of trading in Canadian shares takes place on U.S. exchanges and large blocks of Canadian shares are held as direct investments for the purpose of guaranteeing control. While fifteen stock exchanges in the United States increased the volume of trading in equities by 171 per cent between 1962 and 1967, the six exchanges in Canada increased trading volume by only 38 per cent. A comparison of the industry-composition of listings of the Toronto Stock Exchange with the New York Stock Exchange underlined the difference between a metropolitan and hinterland economy: 25 per cent of TSE listings represent mining stocks, compared with 3 per cent of New York listings, while very little automobile, chemical, electrical and electronic stock is traded in Toronto. On the assumption that Canadian financial institutions may find it necessary to invest half their total equity portfolios in foreign equities, the York University study estimated that, by the early 1970s they could hold $5 billion in foreign equities. Not only are the Americans buying up Canadian industry with Canadians savings, but they have in effect mobilized Canadian savings to assist in the expansion of the U.S. based multinational corporations. As Professor Conway suggests: The sizable outflows of Canadian institutional and private capital coupled with the substantial direct investment holdings of Canadian equities by non-residents raises questions. If Canadian money must go abroad for suitable equity vehicles while non-resident capital in the form of direct investment creates such vehicles based on viable enterprises in Canada, possibly some additional effort must be made by the investment community towards encouraging a climate where Canadian entrepreneurs and financiers undertake to create more domestic investment vehicles which will attract domestic capital.33

Evidently, barriers to the expansion of Canadian enterprise do not lie in a global shortage of savings but rather in the structure of the goods and capital markets which places the independent

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enterprise at a disadvantage with respect to the branch plants. Frequently the former do not have access to sales outlets because markets are firmly controlled by existing corporations.34 The capital market places the foreign branch plant at a decisive advantage in obtaining funds. Although it typically relies on internally-generated capital, large expansion can be financed by transfers from parents and affiliates in the form of loans or equity purchase by the parent. Here the small branch plant enjoys a strong advantage vis-a-vis the small independent firm. The Royal Commission on Banking and Finance, 1964, noted that small independent Canadian-owned firms appear to have more difficulty at all times in obtaining long-term finance than do those which are subsidiaries of large and well-financed Canadian or American corporations. It is interesting to note that more than one-third of Canadian-controlled firms with assets under $1 million reporting to a C.M.A. questionnaire reported sources of long-term capital as inadequate. This compares to one out of twenty-nine non-resident firms in the same size category.35 The authors of the Watkins Report suggest that the only way Canadian savings seeking equity investment can be channelled into Canadian industry is by incentives that would make all large private companies in Canada offer equity shares. Many, although not all, of these are wholly-owned subsidiaries of foreign corporations, such as British Petroleum, General Motors, General Foods, I.B.M., Canadian International Paper, and many others. It is doubtful how many of these firms would respond because, as the authors of the Report themselves admit "the commitment of some firms to the wholly-owned subsidiary is too strong to be shaken by any feasible set of incentives."36 It is estimated that a 25 per cent minority share in all corporations with assets over $25 million or more amount to $3.5 billion or $4.5 billion at a minimum. Even if some of the capital so raised were transferred abroad, there would be an increase in Canadian minority participation, and a reduction in the long-run drain of dividends abroad. Apart from the fact that U.S. subsidiaries have shown little enthusiasm for selling any part of their equity to Canadians, there remains an obvious need to develop new Canadian-controlled

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enterprises. To this end the Watkins Report recommended the implementation of the Canada Development Corporation proposed by Walter Gordon years ago. This corporation would be a large quasi-public holding company with entrepreneurial and managerial functions. It might organize and participate in consortia of investors, both domestic and foreign, so that large projects beyond the capacity of a single institution could be undertaken under Canadian control. There would presumably be emphasis on joint ventures, on rental of foreign licences and patents, where necessary, and on arrangements in which controlling interests would remain Canadian. Other instruments of policy, including those proposed by the authors of the Watkins Report, can be devised without difficulty. The real question is whether there exists the will to regain control over the economy. This is not a question which economists can answer. This fact does not, however, relieve them of the responsibility of asking it.

Political Distintegration The most bitter harvest of increasing dependence and diminishing control may yet be reaped in the form of the internal political balkanization of Canada and its piecemeal absorption into the American imperial system. The final outcome of a branch-plant society is a merging of value systems and a meshing of corporate and technocratic elites which must ultimately call into question English Canada's willingness to pay the price of continued independence. The ruling elite which founded Canada a hundred years ago were nationalists. But they were never called upon to pay. There was, in the days of Macdonald's National Policy, no conflict between the pecuniary interests of the dominant classes and their nationalism. Circumstances were such that they could enjoy both wealth and power. Power was exercised within a political framework which granted to the central government wide rights of control over the population. In distinction to the open frontier lawlessness of American democracy, Canada was an ordered,

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stable, conservative and authoritarian society, based on transplanted British institutions. Canada's constitution was appropriately enacted by the British Parliament, on the initiative of a group of colonial politicians, venerably depicted as the "Fathers of Confederation," who could evade the necessity of seeking the popular consensus which they could never have obtained. The arrangements were quite compatible with the interests of the bureaucratic clerical elite of French Canada. Between these groups, there was no serious conflict of interest or of outlook. The elite of English Canada was defined by their rejection of American democracy. The elite of French Canada was in effective control of a national community which had been by-passed by the French Revolution. Canada has been, from its foundation in 1867, a conservative society. Hitched to an east-west spine of trade and investment, the Canadian nation found strength to resist American annexationist pressures in the might of the pound sterling and in British imperial power. For decades Canadian politicians refined the techniques of compromise and survival. Externally, they manoeuvred between the British and the American metropolis. Internally, French-Canadian national survival was guaranteed by the powers exercised by the Catholic Church and the isolation of French Canada from modernizing influences. Members of the FrenchCanadian elite were integrated into the political structure on the terms of the English-Canadian elite, which controlled the economic structure. There developed over these years, a sense of Canadian national identity, corresponding to the conservative character of the nation under construction. Canadian patriotism vis-a-vis the United States was defined in terms of loyalty to the British monarchy. The passing of time has eliminated Britain as a significant factor in Canadian politics. The problems are more difficult than they were in 1867 and the structures appropriate a hundred years ago are plainly obsolete today. The English-Canadian elite are no longer sure where they are going. Compromise and accommodation are useful political techniques for a small or middle power

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that knows what it wants, and can navigate the cross-currents created by stronger external powers. But compromise and accommodation as an operating philosophy of a community that does not know what it wants, in a situation in which the current runs powerfully in one direction, can lead only to drift and eventually to disintegration. The performance of Prime Minister Pearson and his administration bears witness. The crisis of Canada's national existence is expressed in three distinct, but related confrontations: Canada versus the United States; Ottawa versus the provinces; and English Canada versus French Canada. Our theme is the effect of the new mercantilist links with the American empire on each of these conflicts, and the interplay of these relationships on Canada's chances of survival. It is clearly no longer in the interests of the economically powerful to be nationalists. As George Grant has said: "Most of them made more money by being the representatives of American capitalism and setting up branch plants.... Capitalism is, after all, a way of life based on the principle that the most important activity is profit-making. That activity led the wealthy in the direction of continentalism."37 In the National Policy era Canadian business could enjoy both wealth and power. The former was always primary; power was mainly a means to wealth. If today wealth comes more easily without power, no tears are shed. In the words of E.P. Taylor, "Canadian nationalism? How oldfashioned can you get?" While economic factors are quick to act on the orientation of the business class, the erosion of the value system, which was formed during the nation-building phase of Canada's history, is a slower process. Although branch-plant industry, branch-plant trade unions, branch-plant culture and branch-plant universities are undermining traditional Canadian values, yet these values persist. Respect for law and order, regard for civil rights, abhorrence of mob rule and gangsterism (whether practised at the bottom or the top of the social scale), and traditional respect for Ottawa as the national government of the country are still deeply felt in English Canada. These are the elements of English-Cana-

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dian patriotism and they define the English Canadian, as distinct from the American. This value system is as real as the branch plants. It is the source which nourishes English-Canadian nationalism, and it is reinforced by every action of the United States which violates these values. Whereas these values were created by the older Canadian elite, which shaped the nation, the existing business class cannot give effective expression to Canadian nationalism because it has been absorbed into the world of corporate empire. It rejected John Diefenbaker because he is a nationalist; it rejected Walter Gordon for the same reason. Grant has observed that the power of the American government to control Canada lies not so much in its ability to exert direct pressure as in the fact that the dominant classes in Canada see themselves at one with continentalism.38 The effect of the American corporate presence on relations between central and provincial governments is clear; the linear transcontinental axis, which once integrated the nation under an active and strong central government, has largely disintegrated. The new pattern of north-south trade and investment based on resourcedevelopment and branch-plant manufacturing, does not require a strong central government. The central government is left to manage the old infra-structure of communications and commercial institutions carried over from the previous era. However, new public expenditures are typically regional—hydroelectric schemes, highways, schools, hospitals and the like. The system of fiscal redistribution conflicts with the economic interests of the richer and more fortunate provinces. The federal function of providing for the defence of the nation is not sufficiently urgent to offset the shift of so many other functions to the regional level. Furthermore, a considerable part of the prosperity of defence work originates from the United States government, and is strongly regional in its impact on employment and income. Political fragmentation along regional lines serves the interests of the international corporations. While the Ottawa mandarins ponder how to emasculate the Canada Development Corporation, the provinces have been forced to create their own development agencies. Recent efforts to launch regional development

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policies at the federal level have produced a bureaucratic structure whose organizational sophistication far out-distances that of the policies which have to date been announced by Ottawa. In the absence of effective federal initiatives to provide the means of mobilizing and directing Canada's resources towards the elimination of regional disparities, the provinces will reinforce the continentalist trend by joining the competitive scramble for foreign investment. They opposed the rationalization of the fiscal structure proposed by the Carter Commission and the government White Paper on taxation; they pressured the federal government into begging exemption from the U.S. interest equalization tax. They may be expected to oppose each and every measure devised to control the terms on which foreign capital may enter Canada. In the absence of effective leadership by Ottawa they reinforce the continentalism of big business by dismembering the federal structure of Canada. The relationship between English Canada and Quebec is a special one. Quebec is both a province within Confederation and the patrie of the French-Canadian nation. The demand for more autonomy by the province of Quebec thus has a dual character. In part, it resembles demands for increased provincial powers expressed by all the larger provinces, in part, it is the political form in which the desire for self-determination of French Canada expresses itself. Clearly, there can be no national equality for French Canada without power over economic decisions. In the area of public policy, we thus have the demand for a larger share of revenue, and for a voice in tariff, monetary and immigration policy. For French Canada, more economic power for the government of Quebec is crucial, because the provincial public sector is the only effective lever by which French Canadians can influence decisions affecting their lives. While the English-Canadian elite is rapidly relinquishing economic control to the American corporations, the French-Canadian elite urgently desires entry into private corporate power. Such entry is highly restricted at present, and the situation has been fully documented by John

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Porter in his book The Vertical Mosaic. Yet national equality requires that economic decisions affecting Quebec must be made by French Canadians, not by English-Canadian or American corporations. Nothing less can assure the continued existence of a French-speaking community on the North American continent. For French Canada, modernization has meant not only dislocation and disruption of settled routines but also incorporation into the industrial system, and the new humiliation of daily dictation by the anglophone. This is as true for the miner, the factory worker, the sales clerk, as it is for the professional and middle classes. Whereas the latter may have an educational advantage in terms of ability to function in the language of those who hold economic power, the humiliation is greater rather than less. Their education and their wider horizons enable them to articulate the frustrations of the French-Canadian community in Canada. The island of anglophone privilege which extends from McGill University and Westmount to the western edge of Montreal and which controls much of the commercial and industrial life of the French-speaking province, acts as a constant abrasive to these frustrations. This experience is unknown to the English Canadian. It is unknown also to the immigrant, who chose to leave his native land to come to North America. In this sense the so-called "ethnic groups" are assimilated and become an integral part of English Canada. The experience of linguistic domination also explains the lack of discrimination in French-Canadian resentment between English-Canadian and American domination. It is interesting that public opinion polls constantly show less concern about American domination in Quebec than anywhere else in Canada, and no less a politician than Rene Levesque does not appear to fear the consequences of "liberating" Quebec from the domination by the English-Canadian financial elite with the help of more powerful American capital. What difference, after all, to the French-Canadian worker in Arvida, whether

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orders are received in English from a foreman employed by a Canadian company like Alcan, or an American company, like Union Carbide? The French-Canadian middle class is comprised of selfemployed professionals, small businessmen and bureaucratically-employed technocrats. No private French-Canadian entrepreneurial group can effectively challenge the powers of the anglophone corporations. The logic leads from nationalism to state entrepreneurship. This was the policy which guided the more radical elements of the Lesage administration during the so-called Quiet Revolution. It was symbolized by the creation of Hydro-Quebec as the first step to a more extensive expansion of the public sector into the resource industries of the province. In such a confrontation with the corporation, the advantage which French Canada has over English Canada is a more clearly defined sense of national purpose and a greater confidence in its ability to achieve its objective. That objective is to build, in North America, a modern French-speaking society in which the population can enjoy both prosperity and dignity. If this can be achieved in union with English Canada, so much the better. If English Canada makes this impossible, there is every indication that, eventually, Quebec will secede. If there is an economic price to be paid for control by French Canadians over the terms on which their daily lives are lived, an increasing minority seems ready to pay it. Nationalism and separatism have struck a chord because the population of Quebec is Quebecois in the sense in which no resident of Ontario is Ontarian. Those who view Quebec separatism as the main threat to Canada's survival, might ask themselves why French Canadians should remain within Confederation when the dominant EnglishCanadian majority appear to put such a low value on Canada's national independence? What is being offered? To wander hand-in-hand, biculturally and bilingually, into the gravitational orbit of the American empire? Is it any wonder that some Quebeckers believe that separation might offer a better chance for cultural survival in North America? At worst, Quebec

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would have its own Roi negre to administer the French marches of the Empire, while the Ottawa bureaucrats are presiding over the English marches. The "continentalist" orientation is fundamentally destructive of Canadian unity because it rejects the maintenance of a national community as an end in itself. The value system by which a nation is ultimately defined is put up for sale. In every "cost benefit" calculation concerning the gains and losses from the continued U.S. presence within the Canadian economy there is an implicit price tag on national values and beliefs. The American corporations which reach forward to control the markets they presume to serve homogenize the culture of the inhabitants. Continentalism extends the American meltingpot philosophy into Canada. Bilingualism and biculturalism, even if it were to be translated from a pious wish to reality, is no defence to this process of seduction. By the intake of branchplant factories and the associated branch-plant culture, national values in the hinterland are shaped in the image of the metropolis. When the process is complete there remains, as Gad Horowitz has suggested, no reason to regain control. The process is far advanced. What is in question today is the will of English Canada to survive as a distinct national community on the North American continent. If the will is waning, if English Canada is succumbing to a sort of national death-wish in relation to the United States, why should Quebec, and in particular the young people now pouring out of schools and universities, wish to remain junior partners in this sad venture? Writing in 1960, before the consequences of Canada's branchplant status were as apparent as they are today, Professor Aitken summed up the dilemma in the following words: No one doubts that American investment has accelerated the pace of economic development in Canada;... but it seems also likely to convert Canada into a hinterland of United States industry.... To each spurt of expansion there is a corresponding shrinkage in Canada's freedom of action, in its self-reliance, and in its ability to chart its own course for the future.39

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The locus of decision-making has been transferred from Canada, where in the past it was subject to strong direction by the federal government, to the board rooms of huge U.S. corporations, operating on a world scale and each charting its own future under the protection of its metropolitan government. An increasing number of English Canadians (and undoubtedly the majority of her academic economists) do not care who charts the course so long as income continues to grow. An able young English-Canadian economist recently dismissed as "pernicious" the argument that American corporate control constitutes a constraint on Canadian decision-making, with a reference to Buridan's ass which starved because it could not choose between two piles of hay. "He did achieve the goal of preserving the freedom to choose, but at what a price!" The preservation of freedom, we are told, is a means to an end. As such it should not be elevated to the status of a goal. Not even economists can put a value on a means, so that we are asked to pay a price to achieve something whose worth can never be assessed. Very few of us are willing to pay an infinite price for anything—and certainly not for such poor excuses for a national objective. Because freedom is priceless, it is worthless. A strange conclusion even for an economist. The logic, of course, is flawless. "Maitres chez nous," in French, or in English, is plainly assinine; it is a "non-goal." The rational Canadian presumably will not lift his head from the trough for long enough to explore unknown pastures in search of greener grass. He will eat whatever hay is dished up, secure in the knowledge that he is getting the same ail-American grub — albeit a somewhat smaller ration. The attitude of the Quebec technocrats presents a striking contrast. Confident in their ability to chart their own course, French Canadians are asserting their determination to control their economy—including the right to make their own mistakes. In the words of one of Quebec's leading economists: French Canadians in Quebec can set themselves concrete objectives, achieve them fully, partially, or even fail to meet them,

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like any other people.... When a society has been for so long in search of fulfilment and has found it within itself, it is very unlikely that it can be distracted from this purpose.40

The dominant Protestant culture of English Canada resists the idea that a nation, like a family, is more than an aggregation of individuals; that it is a community shaped by common cultural and historic experiences. More particularly it does not seem to understand that the experiences shared by English and French Canadians have left a very different imprint on the consciousness of the two national communities. Instead of an outward-looking and self-confident sense of national purpose, English Canada has at times exhibited an angry reaction to the fact that French Canadians do not want equality on the terms set down by the dominant English-Canadian elite. The effort to head off French-Canadian self-assertion with a bilingual federal civil service and French schools in English Canada has little appeal in Quebec, while causing considerable dissention in some areas of English Canada. The refusal of Ottawa to recognize French Canada as a nation, and its insistence on the ten provinces concept of Confederation has led to the balkanization of the country, as the pressures applied by Quebec are used as a lever to escalate the fiscal demands of all the provinces at the expense of effective central government. As Rene Levesque put it, there must be more to English Canadian nationalism than just "holding on to Quebec." If there isn't, then "it's cheaper cars and cigarettes for you all, and U.S. citizenship—along with the fading away of a growing (even though 'branch-plant') economy and its managerial society; and the draft, and present and future Vietnams and a share in the terrific agony the American society is inflicting upon itself."41 The refusal of the dominant English-speaking community to recognize explicitly the national aspirations of Quebec is propelling the fragmentation of the country to the point of piecemeal absorption into the American empire. Under these conditions it becomes increasingly difficult to repatriate the locus of decision-making, or to implement the "new national

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policies" suggested by Professor Watkins and his associates. The obstinate refusal of Ottawa to accommodate the demands of Quebec for national equality within a Canadian partnership of two nations is pushing nationalist forces in the French province to seek their own independent hinterland relationship with the United States, on the theory propounded by an economist close to Rene Levesque and the Parti Qu^be'cois that "we have no choice but to strike our own bargain with American capital." As Peter Regenstreif reported in January 1969, Quebeckers are selling out and Americans, who regard the province as a relatively safe place in comparison with really troubled areas of the world, are buying in. The Quebec economy is becoming ever more Americanized in the process.42 One is entitled to doubt the wisdom of exchanging domination by St. James Street for domination by Wall Street and the American corporations. The tragedy, however, is that the root of this dilemma rests in the failure of Ottawa to accommodate the special fiscal needs of Quebec within the framework of a national policy aimed at making all Canadians masters of their own house. The advent of Trudeau promised to rescue the federal government from the all-time low in prestige and power associated with the Diefenbaker and Pearson eras. In spite of the flair of the new prime minister for projecting the image of revitalization, the pattern of subservience to Washington continues. The erosion of Canadian sovereignty and national unity has not been arrested by proclamations of bilingualism and biculturalism and a "get tough with the provinces" policy. The ambivalence of English Canada concerning the reality of the nation as a community underlies the difficulties of communication with Quebec. Sadly, this same ambivalence renders English Canada so vulnerable to the disintegrating forces of continentalism. If national purpose is nothing more than a cumulation of individual purpose, and if individual purpose consists essentially of more money, more leisure and more consumer goods, then why trouble about Canada's loss of independence? And yet English Canada is deeply troubled. The "foreign investment" issue in Canadian politics will remain

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unresolved until English Canada redefines its goals as a national community. As Horowitz asked: "Control our economy for what?" That question, in the end, is one which individuals must answer. Dwelling in the web of the new mercantilism of the great corporations, Canadians will have to decide what value they place on living in a human community that they can control and handle. For French Canada that community appears to be Quebec. From the desire to control their environment arises the demand for effective political and economic power. In English Canada there exists the possibility that the cultural integration into continental American life has proceeded to the point where Canada no longer is a meaningful national community. Yet here there is the possibility that the current reaction among the younger generation against domination by the efficiency-mongers of big business, big government or big anybody may revive the "conserving" nationalism which derives from the desire to control and shape the conditions of life within a community. Only the emergence of a new value system within English Canada can ensure the continued existence of a nation here.

Notes to Chapter Seven 1. In the words of the Watkins Report: "The successful intrusion of foreign law constitutes a direct erosion of the sovereignty of the host country insofar as the legal capacity of the latter to make decisions is challenged or suspended. Insofar as subsidiaries become instruments of policy of the home country rather than the host country, the capacity of the latter to effect decisions, i.e. its political independence is directly reduced." Foreign Ownership and the Structure of Canadian Industry, p. 311. 2. For a comprehensive treatment of the Trading with the Enemy Act and U.S. subsidiaries in Canada see J.I.W. Corcoran, "The Trading with the Enemy Act and the Canadian Controlled Corporation," Me Gill Law Journal, Vol. 14,174-208. 3. Foreign Ownership, p. 339. 4. B. W. Wilkinson, Canada's International Trade: An Analysis of Recent Trends and Patterns. Canadian Trade Committee, 1968, p. 17.

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5. Foreign Ownership, p. 35. 6. A.E. Safarian, Foreign Ownership of Canadian Industry (Toronto: McGraw Hill Company, 1966). 7. Foreign-Owned Subsidiaries in Canada, a report on operations and financing based on information supplied by the larger subsidiary companies. Published by authority of the Hon. Robert H. Winters, Minister of Trade and Commerce, Ottawa, June 1967, pp. 7-15. 8.

9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19.

20.

Consider the case of a foreign firm which enters Canada to develop a new resource. Assume that the technique of production makes intensive use of machinery, which is imported, and uses little labour, and that the output is exported and at prices determined, in part, by the foreign firm; these assumptions are often, though not always, realistic. To the extent that relatively little domestic labour is employed and the resource is exported, benefits will accrue mostly to foreign consumers and foreign factors of production, and Canadian benefits will consist largely of taxes imposed on foreigners. To the extent that the foreign firm is able, at least for tax purposes, to set the export price, Canadian benefit will further depend on the Canadian tax authorities ensuring that the firm, for whatever reason, does not price low and therefore shift profits and tax liability outside Canada. Foreign Ownership, pp. 72-73.

Ibid., p. 86. Safarian, op. cit., chapter 5. Ibid., p. 304. Foreign Ownership, p. 205. Wilkinson, op. cit. p. 150. "The more important become innovations of products and processes, the more consequential becomes this explanation." Ibid.,p.l29. International Monetary Fund, International Financial Statistics, Supplement to 1966-67 issues; and United Nations Yearbook of International Trade Statistics, various years. The small industrial countries here are Austria, Belgium, Luxembourg, Denmark, Netherlands, Norway and Sweden. M. G. Clark, Canada and World Trade, Staff Study No.7, Economic Council of Canada, Ottawa, 1964. Wilkinson, op. cit., chapter 3. If Canadian trade follows this pattern (and it promises to do so) then total imports which are heavily concentrated on highly processed commodities will tend to rise more rapidly than will total exports, which are largely raw and crudely processed materials. Ibid., p. 44. See Gruber, Mehta and Vernon, op. cit., p. 26.

The Harvest of Lengthening Dependence

155

21. Dr. E. W. R. Steacie, president of the National Research Council. Statement to the Royal Commission on Canada's Economic Prospects, quoted in Safarian, op. cit.,p. 171. 22. D.B.S. Industrial Research and Development Expenditure in Canada, Dec. 1967. See pp. 15 & 16 and 38-40. 23. Raymond Vernon, op. cit. 24. L.E.H. Trainor, "Americanization of Canada—A Scientist's Viewpoint." (Mimeo). 25. C. Freeman and A. Young, The Research and Development Efforts in Western Europe, North America and the Soviet Union (Paris, O.E.C.D., 1965). For comment by Watkins and associates, see Foreign Ownership, p. 97. 26. H. E. English, "Industrial Structure in Canada's International Competitive Position," The Canadian Trade Committee, Montreal, June 1964. 27. Safarian, op. cit., p. 305. 28. Foreign Ownership, pp. 154-55. 29. Sources of Funds of Direct U. S. Investments in Canadian Manufacturing Mining and Petroleum percentage

Funds from the U.S. Re-invested profit Depreciation Funds from Canada

average

1957 1958 1959 1960 1961 1962 1963 1964 1957 1964 8 5 15 21 13 10 26 25 20 45 49 42 32 41 43 35 39 45 34 32 33 30 31 26 30 35 30 14 17 12 14 11 -1 12 13 15

SOURCE: U.S. Survey of Current Business, various issues.

30. D.B.S., The Canadian Balance of International Payments: A compendium of statisticsfrom 1946 to 1965. 31. Foreign- Owned Subsidiaries in Canada, op. cit., section 3. 32. G. R. Conway, "The Supply of, and Demand for, Canadian Equities," op. cit. 33. Ibid.,p.44. 34.

In the primary resource field industries, a guaranteed long-term market in the parent for at least part of the subsidiary's output has often been the critical factor in the decision to exploit the resource, sometimes much more important than the supply of capital or of technology. Foreign Ownership, p. 76.

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35. Report of the Royal Commission on Banking and Finance, Ottawa, 1964, pp. 87-88. 36. Foreign Ownership, pp. 291,412. 37. George Grant, Lament for a Nation, p. 47. 38. Ibid., p. 41. 39. Hugh G. J. Aitken, American Capital and Canadian Resources, pp. 112-113,114. 40. Jacques Parizeau, quoted by Rene Levesque in The Star Weekly Magazine, Toronto, January 20,1968. 41. Ibid., Levesque. 42. Peter Regenstreif, Montreal Star, January 18,1969.

Appendix

157

Appendix The New Mercantilism of U.S. Direct Investment The book value of U.S. direct investment assets abroad increased from a mere $600 million at the opening of the century to $54.6 billion in 1966. Over half of these assets were acquired since the mid 1950s. The export of capital from the United States has largely taken the form of direct investments because of the circumstances in which American industrialization proceeded. The rise of France, Germany and Russia to industrial ascendency in the late nineteenth and early twentieth centuries took place on a fully settled continent. A large number of industrial concerns were competing on a continent divided up into many nation states, large and small, each with its own institutions. The early predominance of Britain was reflected in a world monetary and financial system in which the activities of national financial intermediaries were co-ordinated through the City of London. The international gold standard ensured that all currencies were convertible at fixed rates of exchange and that large-scale international lending in the form of fixed-interest bearing bonds could finance the expansion of world purchasing power and the export sales of metropolitan goods, with minimal risk to the lender and minimal cost to the borrower. In spite of the new markets captured in the colonial division of Africa, the conditions of competition between European rivals eventually necessitated agreements to share markets and allocate raw materials through the organization of international combines, cartels and syndicates. To the extent that such arrangements were in fact coalitions of

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business interests of rival nationals, they were international in the sense that control did not rest exclusively with the propertied interests of any one metropolitan country. Throughout the earlier period the United States borrowed abroad in the form of long-term portfolio investments, mainly for infra-structure developments. There was as yet not much of a capital market at home. Prior to the First World War the United States was thus engaged in the export of direct capital, while it was a large-scale net borrower of portfolio capital. This stands in contrast to the typical colonial pattern which is the reverse: the simultaneous inflow (borrowing) of direct investment capital and the outflow (lending) of funds through the financial intermediaries and the holding of large reserves of foreign exchange. Canada and Australia fall midway along this spectrum as large-scale borrowers of both portfolio and direct investment capital.

Early Patterns of U.S. Investment At the turn of the century U.S. direct investment abroad was heavily concentrated in the New World: of $365 million invested abroad in 1897, 25 per cent was in Canada, 32 per cent in Mexico, 8 per cent in Cuba and other Caribbean islands, and 9 per cent in other Latin American countries. The remainder was invested almost entirely in Europe (see Table 1). By 1924 the situation had changed. Britain and the pound sterling had been decisively weakened by the First World War. The United States had ceased to be a net borrower, and was now holding a considerable amount of foreign portfolio assets. Direct investments, nevertheless, still exceeded the newly acquired portfolio assets and their geographic distribution remained remarkably unchanged; 72 per cent were still located in the New World, 20 per cent in Canada, 14 per cent in Mexico, 18 per cent in Cuba and other Caribbean islands, and 20 per cent in other Latin American countries. The collapse of the world economy in the thirties and the defensive response in the form of higher tariffs, prohibitions, preferential trading blocs, exchange controls and other barriers to trade and capital flows, induced new strategies for expanding markets. By means of direct investment, manufacturing companies could jump tariff walls and so maintain or even increase revenues. They could secure raw materials with minimum risk, and take advantage of falling prices to buy up bankrupt businesses. The gains from these subsidiaries could be taken in the form of cheaper raw material inputs. This last consideration was particularly relevant in the case of Latin America where, in addition to high tariffs, monetary convertibility had largely been suspended.

Appendix

159

In spite of the contraction of world trade and a drastic faff in world prices, U.S. direct investment increased during the period of the slump. The book value of assets rose from $5.4 billion in 1924 to $7.4 billion in 1935. Investment remained concentrated in the Americas to the extent of 69 per cent of the total. Both in Canada and in Latin America, resource industries and transportation claimed the major share. In Canada, however, manufacturing already accounted for 40 per cent of American direct investments. In part, this was a northward extension of the American market which, because of the tariff and transportation costs, could more conveniently be serviced from local branch plants. In part, it was an effort to gain access to the British Commonwealth market, which had been hedged in by the Ottawa Agreements of 1932. Whereas direct investment in manufacturing may initially have been a routine expansion of the American domestic market into neighbouring areas, and a means of jumping tariff and other barriers to trade erected in the 1930s, the effectiveness of direct investment as a weapon of aggressive sales strategy became increasingly apparent after the Second World War, when the reconstruction of Europe created a rich and fastgrowing market. The big upsurge of U.S. direct investment in manufacturing started toward the end of the 1950s. The value of U.S. direct investment abroad increased from $27 billion in 1958 to $55 billion in 1966. The annual outflow of direct investment rose from a level of $0.6 billion in 1950 to $3.6 billion in 1965 and in 1966. By 1966 the assets of U.S. corporations abroad totalled $54.6 billion composed of $22.1 billion in manufacturing facilities, $16.2 billion in petroleum and $4.1 billion in mining and smelting. In 1929 less than 40 per cent of U.S. direct investment abroad was in manufacturing and petroleum. By 1950, prior to the wave of European investments, the share of manufacturing and petroleum had risen to 61 per cent. In 1966, these two activities represented 70 per cent of all U.S. direct investment abroad. The share of mining and public utilities declined correspondingly from 37 per cent in 1929, to 21 per cent in 1950 and 12 per cent in 1966 (see Table 2). In 1958, 70 per cent of U.S. direct assets were still located in Canada and Latin America. Europe's share was at an all-time low of 16 per cent. Only after the formation of the Common Market and the free convertibility of European currencies did U.S. direct investment shift heavily towards Europe. American-controlled industry in Europe increased swiftly from $4.3 billion in 1958 to $16.2 billion in 1966, and Europe's share in total U.S. direct investment assets rose from 16 per cent in the late fifties to 30 per cent in 1966. Here is to be found the cause of the recent European concern that American corporate business is colonizing Europe. The shift towards the rich markets of Europe represents a con-

Table 1: Geographic Distribution of U.S. Direct Investment, 1897-1966 Book value in millions of U. S. dollars 1897

1914

1924

1935

1958

1964

1966

131.0

573.3

921.3

1,369.6

4,382

12,100

16,200

—

—

—

n.a.

1,038

n.a.

n.a

Canada

159.7

618.4

1,080.5

1,692.4

8,929

13,800

16,840

Mexico

200.2

587.1

735.4

8,730

8,900

9,854

Europe European dependencies

651.7

Latin America

59.1

413.7

f,690.6

1,878.2

Cuba and other

49.0

281.3

993.2

731.3

Caribbean All other countries TOTAL

1,400 11,668

3,996 35.5

179.5

567.7

896.0

634.5

2,652.3

5,388.7

7,219.2

8,10 27,075

44,300

54,562

Percentages 1897

1914

1924

1935

1958

1964

1966

20.6

21.7

17.4

19.0

16.2

27.0

29.6

—

—

—

—

3.8

n.a.

n.a.

Canada

25.3

23A

20.0

23.5

32.0

31.0

31.0

"

31.5

22.2

13.7

9.0

32.2

20.0

18.1

14.8

22.0

21.3

100.0

100.0

100.0

Europe European dependencies

Mexico

Latin America

9.3

15.7

20.2

26.0

Cuba and other Caribbean

7.7

10.6

18.4

10.1

All other countries TOTAL

5.6

6.4

10.3

11.4

100.0

100.0

100.0

100.0

SOURCE: Aitken: American Capital and Canadian Resources, for years 1897 to 1958. Data from 1964 to 1966 from U.S. Survey of Current Business, September 1967.

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Table 2 industrial Distribution of U.S. Direct Foreign Investment (billions of U.S. dollars) 7929

1946

1950

1957

1960

1964

1966

Manufacturing Petroleum Mining and smelting Public utilities Tradeandother industry

1.8 1.1 1.2 1.6 1.8

2.4 1.4 0.8 1.3 1.3

3.8 3.4 1.1 1.4 2.1

8.0 9.0 2.4 2.1 3.7

11.2 10.9 3.0 2.5 5.2

16.9 14.4 3.6 2.0 7.5

22.1 16.2 4.1 2.3 9.8

TOTAL

7.5

7.2

11.8

25.2

32.8

44.3

54.6

SOURCE: U.S. Survey of Current Business, various issues.

Table 3: Net Annual Flows of U. S. Capital for Direct Investments (millions of U.S.dollars, selected years)

Year

All countries

Canada

Europe

Cuba and Latin America

1950 7954 7957 1960 7967 7962 7965 7964 7965 7966 7967

621 667 2,442 1,674 1,599 1,654 1,976 2,435 3,418 3,623 3,020

287 408 678 451 302 314 365 253 913 1,135 392

117 45 287 962 724 868 924 1,388 1,479 1,809 1,442

40 70 1,164 149 219 29 235 266 271 307 217

SOURCE: U.S. Survey of Current Business, various issues

Allother %Shareof areas Europe 177 144 313 112 354 443 452 528 756 372 969

19 7 12 57 45 52 47 57 43 10 48

163

Appendix

tinuing trend towards the extension of direct investment in manufacturing. In the eight years 1960-67 almost half the net annual outflows of U.S. direct investments went to Europe. In 1960, and again in 1964, this figure reached a peak of 57 per cent. Throughout the 1960s Europe's share in the annual outflow of new capital for U.S. direct investment did not fall below 43 per cent (see Table 3). It is instructive to note the relatively declining importance of Canada in the new flow of American direct investment. During the years dominated by the Korean War and American fears of a shortage of strategic raw materials, Canada received about one-half of annual total U.S. investment outflows. In the year 1954 a record 61 per cent of the outflow of new U.S. direct investment capital came to Canada. Since the midfifties Canada's share in new U.S. investment flows has been diminishing, and reached a low of 10 per cent in 1964. In 1965 and 1966, however, U.S. direct investment flows to Canada increased again to raise her share to 27 per cent and 31 per cent respectively (see Table 4). In spite of the changing patterns of American direct investment Canada remains by far the largest branch-plant economy in the world. In 1966 31 per cent of the assets of U.S. foreign affiliates were located in a country with a population of only 20 million: 47 per cent of all U.S. mining and smelting subsidiaries; 35 per cent of all U.S. manufacturing subsidiaries; and 22 per cent of petroleum extraction and refining subsidiaries (see Table 5).

Table 4: U. S. Annual Outflow of Direct Investment in Canada as a Percentage ofU. S. Direct Investment in all Countries, 1950-1964 Year

Share

Year

Share

1950 7957 7952 7953 7954 7955 7956 7957 1958

46% 46% 51% 55% 61% 43% 31% 28% 36%

7959 7960 7967 7962 7963 7964 7965 7966 7967

30% 27% 19% 19% 18% 10% 27% 31% 13%

SOURCE: U.S. Survey of Current Business, various issues.

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Table 5: Value of U. S. Direct Investment Abroad in 1966 (millions of U.S. dollars)

Mining and smelting Petroleum Manufacturing Public utilities Trade Other

All countries

Canada

Canada as percent of all countries

4,135 16,264 22,050

1,942 3,606 7,674

47 22 35

12,113

3,618

30

54,562

16,840

31

SOURCE: U.S. Survey of Current Business, various issues.

Transfer of Funds to the U.S. as "Capital-Income" Account of Foreign Subsidiaries It is instructive to note that the foreign operations of American corporations are so profitable that their annual remittances of dividends, royalties, licence fees, rentals and management charges substantially exceed the annual outflow of U.S. capital. This has been so in every single year since 1900, with the sole exception of the depression years 1928-31, when American corporations used their superior financial strength to buy up bankrupt businesses in foreign countries. The large increases in the annual outflow of new capital in the sixties was accompanied by substantial increases in income remittances. At the same time, retained and reinvested profits of subsidiaries increased significantly. In 1967, for example, the subsidiaries remitted to the United States $4,518 million in profit and interest and $1,140 million in royalties and fees, while reinvesting $1,578 million of retained earnings in further expansion abroad. The outflow of new capital in 1967 was $3,020 million, resulting in a favourable balance in the capital-income account of $2,638 million. The rapid growth of U.S. direct investment in the postwar period is illustrated by the fact that remittances of profit, interest and royalties in the eight years 1960-67 amounted to $33,283 million compared with $23,982 million for the fifteen-year period, 1945-59. The net contribu-

Appendix

165

tion of foreign direct investment to the U.S. balance of payments in terms of remitted income was $13,882 million in the eight years 1960-67, compared with $10,363 million for the fifteen years 1945-59. This substantial increase took place in spite of the larger outflows of direct investment in the recent period, and a lower ratio of remitted income to capital outflows. Capital outflows for direct investment abroad in the eight years of the 1960s ($19,400 million) exceeded the sum of all direct foreign investment undertaken in the previous sixty years ($17,163 million); and the net contribution to the U.S. balance of payments in the 1960s ($13,883 million) almost equalled that of the previous sixty years ($14,510 million), (see Table 6). If we break down the "capital-income" account according to geographical regions and industries (Table 7), we observe that manufacturing investments yielded an excess of income over capital outflows in every area over the period 1950-64. In this regard Canada contributed $1,832 million, or almost two-thirds of America's favourable balance on "capital-income" account. It is to be noted that the large outflow of dividends and other property incomes from Canadian manufacturing subsidiaries occurred in spite of relatively low profit ratios and high rates of profit retention. The explanation is to be found in the fact that many of these subsidiaries were established long ago, and the value of their assets has increased with constant ploughing back of profits. It is interesting to note, however, that even in Western Europe, where there was rapid increase in new capital inflows to manufacturing in the 1960s, remitted profits from previous investments exceeded these capital inflows. In both Canada and Western Europe it was only the heavy flow of new capital into petroleum extraction and refining which reduced the overall favourable balance accruing to the United States. The ratio between new capital inflows and the outflow of profits and interest in petroleum investments in Latin America and the Middle East is in striking contrast. The excess of income remitted over new capital invested in petroleum mining installations located in these underdeveloped areas amounted to $12,619 million, or 77 per cent of the total overall favourable balance of the United States. The establishment of wholesaling and distribution facilities overseas has also resulted in large net contributions to the U.S. on "capital-income" account, especially in Latin America, Africa and Asia. After the lapse of a gestation or payout period, recent heavy investments in Western Europe may also be expected to yield substantial favourable net flows to the United States. It should be borne in mind, however, that the contribution of foreign investments in manufacturing and trade is by no means confined to remitted profit, interest and royalties. These investments stimulate commodity exports from the United States and thus contribute both to the

Table 6: Capital Outflows, Remitted Incomes and Net Balance of Direct U.S. Foreign Investments, 1900-1967 (in millions of U.S. dollars) Net outflow of direct capital (excluding retained subsidiary profits)

Remitted dividends and interests

Royalties, fees rents, etc.

Net contribution to U.S. balance of payments

1900-1929 (30 years)

-3,109

+4,798

—

+1,689

1930-1939 (10 years)

-435

+2,893

—

+2,458

Period

1945-1959 (15 years)

-13,619

+22,113

+1,869

+10,363

1900-1959 (excluding 1940-44)

-17,163

+29,804

+1,869

+14,510

1960-1967 (8 years)

-19,400

+27,496

+5,787

+13,883

TOTAL

-36,563

+57,300

+7,656

+28,393

SOURCE: U.S. Department of Commerce, Balance of Payments Statistical Supplement, 1963, and Survey of Current Business, various issues.

Table 7:" Capital Accounts" According to Industrial and Geographic Sectors, 1950-1964 (in millions of U.S. dollars) PETROLEUM Western Europe

Canada -2,401 +595 -1,806

All other Countries

Total

-1,272 +5,951 +4,679

-1,818 +9,758 +7,940

-7,965 + 17,275 +9,370

America

Outflow U.S. capital Income to U.S. Balance

-2,474 +971 -7,503

Outflow U.S. capital Income to U.S. Balance

-2,945 +3,687 +742

MANUFACTURING -1,429 +3,261 +1,832

-1,114 + 1,227 +113

-616 + 1,119 +503

-6,104 +9,294 +3,790

Outflow U.S. capital Income to U.S. Balance

-1,093 + 1,413 +320

TRADE -972 +1,385 +413

-631 +2,220 +7,559

-356 + 1,001 +645

-3,052 +6,019 +2,967

MINING AND SMELTING -1,105 +673 -432

-610 +1,610 +1,000

-261 +521 +260

-1,976 +2,804 +828

-3,627 + 11,008

-3,051 + 12,399

-19,097 +35,392

Outflow U.S. capital Income to U.S. Balance

—

ALL INDUSTRIES TOTAL Outflow U.S. capital TOTAL Income to U.S.

-6,512 +6,071

-5,907 +5,914

+76,295 BALANCE +7,381 +7 +9,348 -441 SOURCE: Computed from U.S. Department of Commerce, Balance of Payments Statistical Supplement, 1963, and Survey of Current Business, various issues.

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profitability of American enterprise and to the balance of payments position of the United States. The special role of direct investment in manufacturing and distribution facilities abroad is reflected in higher rates of profit-retention within these branch plants as compared with subsidiaries engaged in mining and petroleum activity.

Redistribution From Poorer to Richer Areas Within the New Mercantilist System The 1960s witnessed a major shift in the allocation of direct investment both with respect to location and industrial composition. Capital flows to Europe were more than five times as large in the sixties as in the fifties. In the years 1960-67, 49 per cent of new capital outflows were directed towards Western Europe, compared with 17 per cent in 1950-59. For Canada this meant that the dollar value of new capital inflows of $4.1 billion in the period 1960-67 was only fractionally greater than that for the decade of the 1950s and Canada's share in new capital outflows fell from 39 per cent to 21 per cent. New capital flows to Central and South America slowed to a trickle, reflecting primarily a shift of petroleum and mining investment to the Middle East, and other areas. Here there was an absolute decline in new capital flow from $3.2 billion in 1950-59 to $1.7 billion in 1960-67. The Latin American share of new direct investment capital dropped from 30 per cent in the fifties to 9 per cent in the sixties (see Tables 8 and 9). Table 8: Capital Outflows, Incomes and Net Balances of U.S. Direct Foreign Investment, by Geographic Regions and by Industries The Fifties

The Sixties

Total

1950-1959

1960-1967

1950-1967

-4,238 +3,030 -1,208

-4,125 +5,869 + 1,744

-8,363 +8,899 +536

+ 94 + 194

-1,842 +2,468 +626

-9,596 +7,280 -2,316

-11,438 +9,748 -1,690

+521 +295

Percentage change of 1960s over 1950s.

By Geographic Region CANADA

Capital outflows Remitted income Net balance WESTERN EUROPE

Capital outflows Remitted income Net balance

Appendix

169

CENTRAL AND SOUTH AMERICA

Capital outflows Remitted income Net balance

-3,202 +6,655 +3,453

-1,693 +8,807 +7,114

-4,895 + 15,467 + 10,567

- 53 +132

-1,471 +6,923 +5,452

-3,986 + 11,326 +7,340

-5,457 + 18,249 + 12,792

+271 +164

-2,509 +4,236 +1,727

-8,251 + 10,497 +2,246

-10,760 + 14,733 +3,973

+329 +247

^,965 +9,357 +4,392

-6,387 +14,068 +7,681

-11,352 +23,425 +12,073

+ 129 + 150

-3,279 +5,483 +2,204

-1,302 +3,238 +1,936

-8,041 +14,201 +6,160

+ 145 + 159

-30,153 +52,359 +22,206

+180 +174 + 166

RESTOFTHEWORLD

Capital outflows Remitted income Net balance By Industry MANUFACTURING

Capital outflows Remitted income Net balance PETROLEUM

Capital outflows Remitted income Net balance MINING AND SMELTING

Capital outflows Remitted income Net balance ALL OTHER ACTIVITY

-3,460 +5,480 +2,020

Capital outflows Remitted income Net balance Total, all areas and industries Capital outflows Remitted income Net balance

-10,753 + 19,076 +8,323

-19,400 +33,283 + 13,883

SOURCE: Compiled from U. S. Survey of Current Business,various issues.

The shift toward direct investment in the rich and growing markets of Western Europe was related to a very large increase in the acquisition, expansion and construction of manufacturing facilities abroad. Manufacturing investments increased more than threefold from $2.5 billion in 1950-59 to $8.3 billion in 1960-67. In this recent period 43 per cent of new funds went into manufacturing subsidiaries, compared with 23 per cent in the 1950s. There was a corresponding decline in the

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Table 9: Sources of Property Income and Royalties Remitted by U.S. Subsidiaries (Percentages) 1950-1959

1960-1967

1950-1967

16 13 35 36

18 22 26 34

17 18 30 35

100

100

100

22 49 29

32 42 23

28 45 27

100

100

100

BY AREA

Canada Western Europe Latin America and Caribbean Africa and all other areas TOTAL BY INDUSTRY

Manufacturing Petroleum All other industry TOTAL

Allocation of New Capital Flows to U.S. Subsidiaries (Percentages) 1950-1959

1960-1967

1950-1967

39 17 30 14

21 49 9 21

28 38 16 18

100

100

100

23 46 31

43 33 24

36 38 26

100

100

100

BY AREA

Canada Western Europe Latin America and Caribbean Africa and all other areas TOTAL BY INDUSTRY Manufacturing Petroleum All other industry TOTAL SOURCE: Calculated from Table 8.

share of petroleum from 46 per cent to 33 per cent of total new capital outflows. The dollar value of new investments in petroleum mining and refining facilities increased by only 30 per cent from a level of $5.0 billion in 1950-59 to $6.4 billion in 1960-67. New mining outlays were located chiefly in the Middle East, while much new refining capacity was created in Western Europe.

Appendix

171

Perhaps the single most striking aspect of the changing pattern of U.S. direct investment abroad is the fact that $13.7 billion, or 71 per cent, of new capital went to Canada and Western Europe, while $20.1 billion, or 60.1 per cent, of remitted profits, interest and royalties derived from investments located in Latin America and the rest of the underdeveloped world. In the "Development Decade" of the 1960s a substantial transfer of income from poorer to richer areas was effected through the system of multinational corporations and the metropolitan capital market. For Latin America, the situation was particularly unfavourable. Here there was a reduction of 47 per cent in new direct capital inflows and an increase of 32 per cent in the outflows of profits, resulting in an unfavourable balance of $7.1 billion for the seven-year period 1960-67. Canada was also adversely affected by the shift in investment patterns. While capital inflows were unchanged, the outflows of profits and interest increased by 94 per cent from 1950-59 to 1960-67, turning a favourable balance of $1.2 billion into an unfavourable one of $1.7 billion (see Table 8.) The picture which emerges is the re-creation of the patterns of the old mercantile system; terminal extractive and distributive activities are located in the hinterland, while manufacturing and processing activities are located in the metropolitan areas of the United States and Western Europe. Although these patterns also obtained during nineteenthcentury conditions of relatively free trade, control over sources of raw materials and processing and manufacturing installation were not then concentrated in a set of very large corporations with power to allocate and reallocate resources on a world scale in accordance with the requirements of long-term corporate expansion and survival. The scope for entrepreneurial initiative by countries possessing raw material resources is today constrained by the control of multinational corporations over raw material markets and processing facilities, and by the patterns of industrialization which they impose on the world economy. The importance of corporate market strategy is reflected in the fact that earnings ratios of foreign subsidiaries, calculated on the basis of total earnings (after payment of local taxes) on book value of assets do not correspond with shifts in new investment. Thus earnings ratios of Latin American investments in the 1960s (12.7 and 14.1) were substantially higher than those for Europe (10.0 and 12.9) and very much higher than those for Canada (7.8 and 9.0), (see Table 10). New capital flows directed towards Europe nevertheless increased by 421 per cent, while flows to Latin America diminished by 47 per cent. Capital flows to Canada were large and unchanged in spite of the lower earnings ratios obtaining here. Another reflection of the hinterland status of Latin America, in relation to both Europe and Canada, is the higher pay-out ratio. Thus 78.7 per cent of earnings after tax were remitted out of Latin America,

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Silent Surrender

Table 10: Some Characteristics of U.S. Direct Investment in the Sixties (Averages for period 1960-67)

Book value end of!967 (billions of U.S. dollars^

BY AREA

Canada Western Europe Latin America and Caribbean Africa and all the rest of the world

New capital inflows (as % increase in book value) %

Earnings ratio1 Pay-out Retention (a) (b) ratio2 ratio3 % % %

18.1 17.9

52.6 76.0

7.8 10.0

9.0 12.9

57.0 60.0

43.0 40.0

11.9

45.0

12.7

14.7

78.7

21.3

11.4

67.0

21.7

23.5

55.4

44.6

24.1 17.4

57.0 90.0

11.1 13.3

14.1 14.2

52.2 94.0

47.8 6.0

4.8

61.6

14.5

n.a.

81.4

18.6

12.9

54.0

10.4

n.a.

55.5

44.5

BY INDUSTRY

Manufacturing Petroleum Mining and smelting All other industry TOTAL

NOTES-.

59.3

1. Earnings are defined as profits of subsidiaries after payment of local taxes. The ratio (a) relates earnings to book value of assets at the beginning of the year; the ratio (b) relates earnings plus royalties to book value of assets. 2. Pay-out ratio relates remitted income to earnings of subsidiaries. 3. Retention ratio is the complement of the pay-out ratio. 4. All ratios are averaged over the period 1960-1967.

SOURCE: Calculated from U.S. Survey of Current Business, various issues. compared with 60 per cent for Western Europe and 57 per cent for Canada. Heavy direct investment in areas where both earnings and pay-out ratios are relatively low indicate that long-term market considerations are a more important determinant of the geographic allocation of direct foreign investment than the short-term profit ratios of the subsidiaries.

Appendix

173

The lower earnings ratios in manufacturing and trade (11.1 and 10.4 respectively) as compared with petroleum and mining-smelting (13.3 and 14.5) are consistent with such an interpretation, as are the lower payout ratios in the former (52.2 and 55.5) as compared with the very high ones in the latter (94.0 and 81.4). The high pay-out ratios typical of extractive subsidiaries are of course also a reflection of the tighter control of parent companies over subsidiaries in these extractive industries.

The Stimulation of U.S. Exports The total favourable effect of direct investment on the U.S. balance of payments far exceeds the surplus on "capital-income" account, because the presence of branch plants and subsidiaries abroad stimulates U.S. commodity exports. In addition to equipment, parts and finished goods sold directly by U.S. parents to their foreign subsidiaries, the American presence effects a general orientation of demand towards U.S. suppliers. According to the latest U.S. Department of Commerce survey, covering 330 American corporations with 3,379 foreign affiliates, export sales by these companies amounted to $8.5 billion in 1965—almost onethird of total U.S. merchandise exports, and nearly 45 per cent of total U.S. non-agricultural exports.1 Of these $8.5 billion, more than one-half ($4.4 billion) was sold directly to affiliates; the remaining $4.1 billion might be termed "indirect exports" sold to unaffiliated foreign customers. Total purchases of U.S.produced goods by the 3,379 subsidiaries amounted to $5.1 billion. The fact that $4.4 billion of these were supplied by parent companies, and only $0.7 billion by other U.S. suppliers indicates the importance of the branch plants in the channelling of U.S. exports. Of the $5.1 billion U.S. exports sold to subsidiaries almost half ($2.5 billion) consisted of goods for resale without further processing, composed almost exclusively of manufactures and destined for the markets in which the subsidiaries were located. About half ($1.2 billion) of these goods were channelled through manufacturing subsidiaries, the remainder through trade and distribution affiliates. Canadian manufacturing facilities disposed of $580 million of these U.S. exports; European manufacturers of $380 million; and Latin Americans of $150 million. The role of Canadian manufacturing subsidiaries as distribution agencies for the "full line" of parent company products is also reflected in the fact that U.S.-controlled Canadian manufacturing companies sold four times the amount of U.S. exports as did U.S.-controlled Canadian distribution firms. This is in contrast with the situation in all other parts of the world where distribution firms accounted for the major share of sales of finished U.S. goods.2

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Silent Surrender

Canadian Subsidiaries More Closely Integrated Than Other Foreign Subsidiaries According to the same survey, about one-third ($1.7 billion) of the $5.1 billion purchased by U.S. subsidiaries represented parts, supplies and other intermediate goods. The special role of Canada as a market for U.S. exports of semi-finished goods is reflected in the fact that 66 per cent of Canadian manufacturing subsidiaries bought U.S. goods for further processing, compared with 50 per cent in Japan, Australia and South Africa; 45 per cent in Latin America; 43 per cent in Europe and 40 per cent in Latin America. Furthermore, average expenditure of the typical Canadian branch plant was $4.3 million, more than four times as much as the comparable expenditure by affiliates located elsewhere in the world. While the reported export of $365 million capital goods to U.S. subsidiaries abroad was obviously an understatement, the survey produced an interesting spectrum of technological dependence in America. Insofar as technology is embodied in capital goods, it is instructive to note that the percentage of Canadian manufacturing subsidiaries which reported purchases of American capital equipment was twice as high as the corresponding percentage for subsidiaries located in Europe. These two areas form extremes in a spectrum which ranges from 33 per cent for Canada, 25 per cent for "underdeveloped countries" in Asia and Africa, 24 per cent for Latin America, 19 per cent for Japan, to a low of 16 per cent for Europe. In countries of continental Europe not included in the Common Market, the corresponding figure dropped to 12 per cent. The fact that investments in Europe tend to generate fewer U.S. direct exports than investments in other areas is of course related to the broader based industrial capacity of Europe, which provides alternative sources of equipment and capital goods. One might speculate on what the situation in Europe might have been were it not for the fact that strong, diversified and culturally distinct industrial economies were in existence long before the Americans acquired or constructed their branch plants there. In this connection it is significant that manufacturing affiliates located in continental Europe are much less inclined to buy U.S. exports than similar enterprises located in the United Kingdom. The percentage of manufacturing subsidiaries which purchase U.S. goods for processing or assembly was found to be significantly higher in the United Kingdom (66 per cent) than in the Common Market countries (41 per cent). In continental countries not included in the Common Market it was lower still (29 per cent). Corresponding figures relating to the purchase of American capital goods were 20 per cent, 16 per cent, and 12 percent.

Appendix

175

The greater economic (or technological) dependence of the United Kingdom reflected in these data is related to the fact that American subsidiaries were established there long before they moved to the continent. The common language and the "special relationship" between the new Anglo-Saxon metropole and the old undoubtedly contributed significantly to the flow of American direct investment to the United Kingdom. How much these branch plants have contributed to the growth and dynamism of the British economy is another question. In the case of continental Europe, all the indications are that U.S. direct investment has been a result, rather than a cause, of economic growth. As for Canada, the latest U.S. Department of Commerce study confirms the findings of an earlier one which reported that parent-to-affiliate sales were more significant for Canada, both in terms of their absolute dollar value and in relation to total Canadian imports from the United States, than they were for any other part of the world. The 1963 U.S. Department of Commerce study found that Canada accounted for 39 per cent of total sales of U.S. manufacturing parents to their affiliates, and that 61 per cent of all Canadian imports of manufactured and semi-manufactured goods from the United States consisted of transfers from parent companies to their subsidiaries. The latter figure contrasted with significantly lower ratios of 36 per cent for Latin America, 32 per cent for Europe, and 17 per cent for the rest of the world.3 The 1969 study noted that "major differences exist between the purchasing policies of Canadian and non-Canadian manufacturing enterprises, and that Canadian subsidiaries are, in effect, regarded as domestic rather than foreign operations."4

Concentration of International Corporations One of the most interesting results of the U.S. Department of Commerce study is the fact that relatively few very large international corporations account for the bulk of U.S. exports to subsidiaries. Of the $3.2 billion of sales to manufacturing subsidiaries, six automotive affiliates in Canada accounted for $856 million or 27 per cent of sales.5 Another 31 affiliates contributed $161 million, representing another 27 per cent; a further 74 affiliates contributed $626 million, or 20 per cent; 250 affiliates $55 million, or 17 per cent; and 791 affiliates the remaining 9 per cent. Evidently, 2,427 affiliates did not purchase any goods from the United States at all. The concentration of international corporations is reflected in the fact that 39 parent companies accounted for $5.4 billion of the total $8.5 billion of export sales of the 330 international surveyed companies. Of these 39 corporations, 24 were engaged in the chemical, machinery, electrical and automotive industries. These 24 corporations

176

Silent Surrender

exported $4.5 billion from their U.S. plants to affiliated companies and other customers. The representatives of these very large multinational corporations have been most eloquent in pointing to the contribution made by their enterprises to the American balance of payments. An executive of the Joy Manufacturing Company which produces machinery and capital goods explained how direct investment increases commodity exports: The surprising volume of exports to our foreign subsidiaries results first from the sale from parent factories of critical components of machines made abroad and, second from Joy International's constant pressure on each subsidiary to import new Joy products bought out by the parent company. I must emphasize that without these foreign subsidiaries operating as they do, our exports would be only a fraction of what we see here. Joy International's sales promotion and servicemen also call on all our foreign distributors, assist in training their sales and servicemen, call with them on their customers, and foster the sale of Joy equipment in every way possible....6

Over the decade 1951 to 1961, this company invested $7.5 million in foreign subsidiaries, including expenditures on foreign licence and royalty fees, and a further $10.7 million on commissions, sales promotion and other services for a total capital outflow of $17.7 million over a ten-year period. In return it received $5.4 million in fees and royalties, $1.3 million in dividends and interest, and exported $161 million worth of goods from the United States, most of it directly sold to or through its subsidiaries. A little over $10 million of the profits of the subsidiaries were retained abroad, building up a net worth of $17.5 million in assets of overseas subsidiaries. From the same source comes the following testimony by Mr. Harold D. Arneson, president and general manager of Abbott Laboratories International Company, speaking on behalf of the Chicago Association of Commerce and Industry. He explained that his company's operations had yielded a net favourable balance of $57.1 million to the United States in the five years, 1955-1960: I should like to add that, even though we manufacture only pharmaceutical products in our company, our investments abroad have resulted not only in exports of chemical or pharmaceutical raw materials from the United States but also of American machinery and other capital equipment to equip our manufacturing facilities in foreign nations. It is significant that Abbott Laboratories International Co.'s employment in Chicago, as a result of its increased capital investment abroad, rose 50 per cent in the last 6 years. In addition, a large number of scientists, engineers, technicians, researchers, manufacturing and other personnel are now employed by our parent company, as a result of our expansion in foreign markets made

Appendix

111

possible by our increased investment abroad. Our own experience is in conformity to the fact that, as American investment in industry abroad tends to raise the level of United States exports, such investments are a positive factor in maintaining and augmenting employment in the United States.7

In this five-year period Abbott Laboratories earned $50 million from sales of goods exported from their United States plants—after deducting the cost of imported supplies used in production. In addition, they received $9.3 million in dividends, loan repayments and other transfers from their overseas affiliates. During the same period Abbott's foreign investment in the form of loans and investments from the United States amounted to only $2.2 million. In this connection it is interesting to consider the consolidated statement of 19 multinational corporations representing an assortment of manufacturing enterprises, but excluding automobiles and petroleum.8 The 19 companies included such well-known concerns as the General Electric Company, Goodyear International Corporation, Eastman Kodak Company, Procter and Gamble Company, Continental Can Company, Union Carbide Co., H.J. Heinz Co., and American Machine and Foundry Company. The statement showed that remitted common dividends substantially exceeded the outflow of new capital from the parent companies, in every one of the four years 1957 to 1960. In 1957 dividend incomes together with management fees, royalties and other services were four times larger than the outflow of new capital. By 1960, the outflow of funds for new direct foreign investment by these companies was three times as high as in 1957. Even in this peak year of investment, the earnings of the subsidiaries were substantially higher than the new capital outflows. These earnings show only part of the profit and foreign exchange earnings related to direct investment overseas. Export sales from parent companies to their subsidiaries totalled $339 million in 1960; there were additional U.S. exports of some $250 million related to foreign investments. These sales, of course, yield profit to the parent corporations and tax revenue to the U.S. government (see Table 11). One of the 19 companies included in this consolidated statement was the Procter and Gamble Company. In testimony, submitted by the Hon. Neil McElroy, chairman of Procter and Gamble, it was pointed out that the first Canadian subsidiary was established in 1915, but dividends were not taken from this operation until 1939. The first Cuban investment was made in 1931, but dividends were not remitted until 1939. By the 1950s this company was well established in its foreign operations. Over the ten-year period 1951 to 1961 the subsidiaries remitted $47 million in dividends to the United States, while new capital outflows over the same period were only $ 11 million. In addition, the subsidiaries

178

Silent Surrender

Table 11: Capital Outflow of 19 Participating Companies, 1957-1960 (in millions of U.S. dollars) 7957

1958

7959

7960

Capital outflow Imports of finished goods from foreign subsidiaries

24.4

31.3

30.5

61.3

3.5

3.8

3.9

3.9

TOTALOUTFLOW

27.9

35.1

34.4

65.2

Capital Inflow of Participating Companies

Remitted common dividends Receipts for services and fees from foreign subsidiaries Royalties and licences Management Other services and fees U.S. sales of (a) capital equipment and (b) materials for further processing to foreign subsidiaries U.S. parent Other U.S. firms Exports to foreign subsidiaries for resale U.S. parent Other U.S. firms Other exports attributed to direct foreign investments TOTAL INFLOW

1957

1958

1959

1960

64.8

64.2

78.6

81.2

8.0 14.8

8.6 17.3

8.8 13.7

11.4 18.6

3.3

3.0

4.5

5.4

102.9 53.9

98.4 55.1

114.3 58.3

128.6 65.4

183.2 19.0

165.9 16.2

189.1 24.4

210.3 18.9

152.3

190.6

177.0

171.9

602.2

619.3

668.7

711.7

SOURCE: U.S. House of Representatives, Committee on Ways and Means, 87th Congress, Vol. 4, pp. 3185-3209.

Appendix

179

were able to draw on domestic savings in the countries where they were located to the tune of $67 million in the form of borrowings and reinvestment of undistributed profits. Commenting on these rather spectacular results the Board of the Procter and Gamble Company said: We have returned to the United States in dividends more than four times as much in dollars as was sent out. If we are permitted to proceed as before, this favourable picture should continue, and we would expect the ratio even to improve. In our case, the past three years record has been better than the past 10-year record. All this has been under the careful scrutiny of the fiscal and tax authorities of foreign governments, which encourage this kind of development of business activities as a means of strengthening their own economies.

He added that, in addition to the earnings of dividends and the increase in overseas assets from reinvestment of retained earnings and from local borrowing the subsidiaries had, over the decade of the 1950s, generated United States commodity exports of $243 million in raw material and equipment, much of it purchased from the parent company.

Sources of Funds for Corporate Expansion in Hinterlands Even prior to the voluntary guidelines programs, U.S. international corporations were reluctant to add to their equity positions in foreign subsidiaries by an intrusion of new dollar funds from the parent, and more than reluctant to raise equity capital in the hinterland. The chief means of financing the expansion of the subsidiaries and branch plants is by ploughing back their profits and raising capital locally by bank loans and long-term borrowings, often guaranteed by the parent company itself. The effect is to put pressure on the capital markets of the hinterland countries, thus forcing up interest rates, particularly in the Euro-dollar market and in Canada. Cash flows from the operation of the subsidiaries themselves are the primary source of finance of gross capital expenditures, and subsidiaries are normally required to remit all excess earnings to the parent company and to finance themselves with local debt capital. Final decisions concerning the division of subsidiary profits between remittances and retentions necessary to finance capital expenditures are made solely by the parent company. Foreign affiliates are typically not permitted to retain locally generated funds in excess of working capital requirements. Their participation in the local capital market is confined to debt borrowing: they do not normally contribute tradable equity stock nor do they directly add to the supply of investment funds which can flow into other sectors in the hinterland.

Table 12: Sources of Funds of U. S. Foreign Subsidiaries Three-year Average (1963-1965) (Percentages)

New capital inflow

Retained profits

Depreciation

14.3

37.4

24.2

24.1

100.0

5.6

55.9

23.2

15.3

100.0

Petroleum

17.4

40.3

24.8

17.5

100.0

Manufacturing

13.5

32.1

23.9

30.5

100.0

CANADA

11.4

42.4

28.3

17.9

100.0

1.6

57.6

24.9

15.9

100.0

Petroleum

19.2

33.7

32.4

14.7

100.0

Manufacturing

10.9

41.8

27.5

19.8

100.0

ALL AREAS

Mining and smelting

Mining and smelting

Local borrowing

Total

5.9

47.4

27.0

19.7

100.0

Mining and smelting

-8.1

73.9

27.8

6.4

100.0

Petroleum

-3.9

60.3

37.8

5.8

100.0

Manufacturing

19.3

27.0

17.2

36.5

100.0

EUROPE

19.1

22.0

25.7

33.2

100.0

Petroleum

35.7

0.6

25.1

38.6

100.0

Manufacturing

13.1

29.4

25.8

31.7

100.0

ALL OTHER AREAS

16.7

44.6

17.2

21.5

100.0

Mining and smelting

23.9

30.0

14.0

32.1

100.0

Petroleum

16.8

53.3

16.6

13.3

100.0

Manufacturing

14.4

29.9

19.2

36.5

100.0

LATIN AMERICA

Mining and smelting

SOURCE: Calculated from U.S. Survey of Current Business, Jan. 1967.

182

Silent Surrender

Expansion By Take-over It has been noted that almost no small and medium-sized firms and very few large manufacturing firms enter European production by starting from scratch. To a lesser degree this is also true for Canada. The ideal acquisition or take-over is a closely held local company with competent personnel and good marketing facilities. The rate of take-overs in recent years has been so high that the prices offered for local enterprises may constitute a considerable over-valuation of assets, and thus become irresistibly attractive both to European and Canadian owners. Take-overs are particularly advantageous in manufacturing and trade. Over the period 1963-1967, of total net acquisitions of 1,520, 1,192 were takeovers of manufacturing firms. In the five-year period 1963 to 1967, U.S. international corporations bought 2,085 foreign firms and sold 565. The balance sheet of purchases and sales of hinterland enterprises resulted in the net acquisition of 1,369 firms in Europe, 194 firms in Canada and the net sale of 43 firms in the rest of the world. Roughly one-third of these take-overs occurred in the year 1966 (see Table 13). It need hardly be pointed out that the result of the buying and selling of hinterland enterprises is a qualitative improvement in the total position of the U.S. corporations, as weaker firms are sold and stronger ones purchased. When firms are purchased they are used as a base to transfer American technology, marketing and organizational methods which, when adapted to the local environment, yield a substantial competitive advantage over independent competitors. From this it is once more clear that the advantage of the multinational corporation lies in its superior organizational structure and its willingness and ability to sacrifice profits for expansion. If the key to industrial success lies in the area of entrepreneurship—and all the evidence indicates that it does— then the incorporation of independent entrepreneurial units in hinterlands into private American multinational mini-empires is a very proper cause for concern in Europe, in Canada and the rest of the world. The replacement of local entrepreneurship by multinational corporations must inevitably lead to a weakening of economic and national life in the hinterland. In no other area of the world has this been so clearly demonstrated as in Canada. Canadians who are concerned about the dangers inherent in excessive U.S. corporate control have, by and large, accepted the dogma that it is foolish to try to "buy back" Canada. We are short of capital. Better to concentrate efforts in building new enterprises than waste money on buying back existing ones. In this way the share of the Canadian economy under the control of multinational corporations will eventually diminish. So the argument runs.

Table 13: Acquisitions and Sales by U.S. Companies of Foreign Enterprises 1963-1967

TOTALS

1963

All enterprises Canada Europe Allother Manufacturing enterprises Canada Europe Allother

1965

1964

1967

1966

1963-1967

228 71 147 9

52 32 7 13

176 39 140 _4

434 86 324 24

106 80 3 23

328 6 321 1

369 69 258 42

90 47 2 41

279 22 256 1

583 65 427 91

29 13 4 12

554 53 422 79

471 117 282 72

288 183 74 38 58 229 192 -120

2085 408 1437 238

565 210 74 281

1520 194 1369 -43

170 23 140 7

38 18 7 13

132 5 133 -6

339 80 246 13

15 13 1 1

324 67 245 12

268 22 207 39

46 44 2

222 -22 205 39

315 59 182 74

25 12 4 9

289 46 178 65

330 39 245 46

105 38 50 17

1422

229 125 64 40

1 192 97 956 139

SOURCE: U.S. Survey of Current Business, various issues.

225 1 195 29

223 1020

179

184

Silent Surrender

The case appears to rest on the asumption that Canadian enterprise must necessarily be less efficient, less dynamic, less imaginative and less profitable than branch plants and subsidiaries of foreign companies. If this is really so, however, what guarantee is there that Canadians will be any more successful in starting from scratch than in buying into U.S.controlled business? When an international company enters a foreign country it usually buys up an existing asset; the purchaser pays a good price, and still expects to improve his overall profit position. The seller is satisfied that the price he receives will provide a larger or more secure income than he could have earned by continuing to operate the business. If it pays international corporations to "develop" by harnessing resources of men and equipment through the acquisition and reorganization of existing enterprise, why should it not pay Canadian industry— whether public or private—to do the same? If Canadians lack imagination and enterprise then all their ventures will fail. If they can exercise initiative, the repurchase and reorganization of firms presently under U.S. control may prove to be the only way to gain re-entry to strategic technology-oriented industries. There is no shortage of capital in Canada. There is only, to recall the words of the Procter and Gamble tycoons, a shortage of ideas that will make the investment of capital worth while. A country's most valuable resource is the imagination of its population, and the most serious consequence of Canada's regression to dependence is the resignation of Canadians to a perpetual self-imposed sense of second-raters and an imitative mentality. Living in the shadow of the United States, most Canadians are more aware of the fractional difference in their relative income than in the potential of a country whose annual output exceeds that of all Africa, and is more than half that of the South American continent. In the carefully measured commonsense approach characteristic of his writing, Professor Vernon has remarked that any simple model the economist is capable of providing is too naive to capture the critical long-term effects of U.S. direct investment in Canada. "Perhaps," he suggests, "Canada's reliance upon the United States for capital and upon the Lord for natural resources, has led her to neglect somewhat the development of the one thing she herself has single-handedly produced, namely, her own people."9

Appendix

18^

Footnotes to Appendix 1. Marie T. Bradshaw, "U.S. Exports to Foreign Affiliates of U.S. Firms," Survey of Current Business, May 1969, pp. 34-51. In contrast with earlier Department of Commerce Surveys for 1964, no attempt was made to inflate the results obtained to "universe totals." Certain crude materials and military grants in aid are excluded from U.S. exports for the purpose of this calculation. 2. Average Expenditures by Manufacturing Affiliates and all Other Areas, (in millions of U.S. dollars). All manufacturing Transportation equipment Machinery Chemicals

Canada 4.3 28.2 1.7 1.6 1.0

Allo ther areas 1.0 4.1 1.1 0.8 0.6

SOURCE: M. Bradshaw, op. cit. 3. Survey of Current Business, December 1965. 4. "U.S. Exports to Foreign Affiliates," op. cit., p. 44. 5. The survey was mad? for the year 1965. Partial free trade in the automotive industry was not at that time in full-scale operation. These six-year automotive subsidiaries were operating for most of the year under the previous arrangements. 6. U.S. House of Representatives, Committee on Ways and Means, 87th Congress, Vol. 4, pp. 3242-3262. Statement by J.D. Morrow, Chairman, Finance Committee, Joy Manufacturing Company. Note that although the remittance of dividends to the U.S. was very small, the total contribution of this company to the U.S. balance of payments was considerable. 7. Ibid., pp. 2844-58. 8. Ibid., pp. 3185-3209. 9. Raymond Vernon: "U.S. Enterprises and the Canadian Economy," Canadian Forum, April 1969.

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Index

Abbott Laboratories, 176-7 agriculture, Canadian, 51^, 64 Aitken, Hugh, xxxvii, 5, 48, 53, 54, 55, 69-70,149 Aluminum Company of Canada, 123 anglophones (in Quebec), 147 anti-trust legislation, U.S., 116-17 Argentina, xxvii, xxxv balance of payments, xiv, 111; U.S., 95-7, 99,166 table 6, 167 table 7 Ball, George, 37, 98,101 Behrman, J.D., 92 "brain drain," 108,135 branch-plant economy. See mercantilism branch plants, xxxv, 8, 9, 23-4, 77-8, 81,103^, 125,135-7; in Canada, 174-75; capitalization, 137,179,180-1 table 12; and local entrepreneurs, xi, 107,109; and local industries, 104-5,141; local shareholding in, 83-9,141; markets for, 123-4; relationship with

parent company, xvi, 82,1246,173,175-6; and research, 130. See also multi-national corporations Brazil, xxxiv British invesments. See foreign investments. British mercantile system, 47-9 British Petroleum, 141 Canada, government of: fiscal policy, 11-15,103,146; foreign policy, xv; military expenditures, 129; policies limited by continental integration, 33-4; research funding, 130-1; trade policy, 5,6 Canada Development Corporation, 142,145 Canada-United States relations, xxxii, 13, 38-9,102-3,118 - U.S. influence over Canadian: economic policy, xvii, xxxii-xxxv, 5, 6, 8; foreign trade, xiv, xv, 10; immigration and security, xxix; public policy, xxxii, 5, 6, 35,118 187

188 Canadian economic development, centre and periphery, 46-9; in Latin America and the Caribbean, 47. See also Innis, Harold Canadian International Paper, 141 Canadian Marconi and Computing Devices, 133 capital flows, xxxviii. See also balance of payments capital markets, Canadian, 111, 119,137^2 Carter Commission, 146 Chandler, Afred D., 44n23, 77, 78, 79,108 colonialism, 97-8 "comparative advantage", theory of, xxxv, 32-3, 44n27, 131-2 Confederation, 49 consumers, 76 consumption, 22, 72-3,75, 78, 87,106; and foreign investment, 121, mass, 39; superfluous, 29. See also culture, homogenization of continental integration, xxvii, xxvix, xxx, xxxiv, xxxvi, 38-9, 128,146; and Canadian politics, 144-53; historical development, 48-9, 54-5; income distribution, xxxii-xxxiii continentalism, xxix, xxxv, 32-4, 145,149,152. See also Johnson, Harry Conway, G.R., 140 corporations, 23, 42nlO, 72-4, 76, 77-8, 80, 81-2, 83-9; Canadian, 6, 86; local, 104;

publically owned, xi, 104,121; U.S. corporations, 81 See also branch plants; firm, theory of; multi-national corporations Coyne, James E., xii, 9 Cuba: U.S. commercial embargo of, 117 Crown corporations. See corporations, publically owned cultural autonomy, 33; and local entrepreneurship, 33,106-7 culture: Americanization of Canadian, 34,149,151; English Canadian, 151; homogenization of, 96, 111-12,149; local, 106 debt, 52, 62,138; historical evolution of Canadian, 67 table 4 Defence Production Sharing Agreement, 128-9 De Havilland, 133 dependence, 103,106,151; Canadian, xxviii, 48,103; Caribbean, 103; economic, xiii, xxviii, 2, 3, 72-3,118; technological, 107-8,119,135 Diefenbaker, John, 145 democracy, xl Dupont Company of Canada, 83 economic activity, related to: collective psychology, 30; culture, 33,105,149; politics, xxix-xxx, xl, 35,149,153; social values, xxx, 21-2, 111-12,144-5,149,153 economic development, 75,107, 184; Canadian, 118,127,184;

and foreign direct investment, 107; future prospects, xl; and nation-building, 50-6; theories of, 22-3 economic incentives, 21-2 economic nationalism, xxviii, 18 economic policy, objectives of, 34-6 economic theory, traditional (critique of), 17-22,184 economists, xi, xxx,17-18, 22-3, 36,142,150 elites, Canadian, 39, 52,143^4; Canadian business, xxviii, xxxi; French-Canadian, 143^, 146-7,150 elites, corporate. See entrepreneurs, entrepreneurship English, H. Edward, xvi, 91n28, 135 entrepreneurs, 44n23, 81; Canadian, xii, xxx, 39-40,48-51, 105-6,145; executives as, 77-8; local, 104; national affiliations of, 30, 44n28; as political lobby, xxviii, 50-1 entrepreneurship, 27-9, 32, 789,106,119; in branch-plant economies, 103-4,107,126 environmental issues, 112 European Union, xxxiii exports, 127,128; and research, 131 extra-territoriality, xx, 116,117 federalism, Canadian, xxx, 49-56,142-3,145-53 firm, theory of the, xxxv-vi, 19-20, 23, 26-30. See also Marshall, Alfred

189 firms. See corporations; multinational corporations Ford, xxxii foreign direct investments, xii, xiv, xxxv, 59, 69, 95,119,137; and balance of payments, xiv; control of, xxviii, xxxv - Canadian: broken down by country and industry, 60 table 1, 61 table 2,120 table 5, 123; causes, 79, 82, 86; in commodity-producing sectors, 122 table 6; historical evolution of, xi, xxviii, 64, 66 table 3, 68-70, 87, illust., 65; in manufacturing sector, 87, 128; by U.S. corporations 58, 60-3, 64, 68-70, 83-5,163 table 4,158-64, - U.S.: 81, 82, 92-4,172 table 10; broken down by sector, 162 table 2; and exports, 173; geographic distribution of, 160-1 table 1; historical evolution of, 158-64. See also, mercantilism, new foreign investments, 52; British investments in Canada, 52; broken down by kind, 62-4; Canadian, 139; U.S. investments in Europe, xi, 118. See also foreign direct investments Fowler, Henry, xxxix-xl, 100-1 freedom, 150 free trade, xvii, xxxii, 97; and direct investments, 95; nineteenth-century 30-1. See also, Free Trade Area of the Americas, North American Free Trade Agreement

190 Free Trade Area of the Americas (FTAA), xxxiii French Canadians, 55-6,146-53. See also Quebec

Galbraith, John K., xxxvi, 71, 74,75, 76. See also New Industrial State General Foods, 141 General Motors, xxxiv, 19, 89n4, 141 globalization, xxv-xxvi, xxx, xxxviii Gordon, Walter, xii-xiii, xxviii, 1-2, 8, 9,142,145 governance, xxvi Grant, George, 76, 111, 144,145 Gross National Product, 25, 75-6 Hanseatic League, 30 hinterland. See mercantilism HIV/AIDS, xli-xlii Hydro-Quebec, 148 Hymer, Stephen, xvii-xviii, 105

IBM, 141 imports, 127-8 income distribution, xlii-xliii industrialization, 157 industries, Canadian (by sector): aluminum, 85-6,103; banking, 6,7,103,139-41; gas and petroleum, 64,119; manufacturing, xxxiv, 63, 87,119,121,123, 128-9,136,173; mining, 63,64, 84-5,119,123; pharmaceutical, xlii, railways, 51-3,119,121; steel, 84; utilities, 121. See also foreign direct investment.

Innis, Harold, xxxvii, 46-8 International Nickel Company, 123 international trade: agreements, 128-9; Canada-US., xxviiixxix; Canadian, 127; historical development of, 30-2; product cycle, 43n22, theories of, xxxv, 31-2; U.S. exports, 173. See also Vernon, Raymond international trade law, conflicts over, 116-18 investments. See foreign direct investments Johnson, Harry, xxxv, 17-18, 29, 33, 34-6, 39, 45n31 Kaldor, Nicholas, 40n2 Kierans, Eric, xxviii, 4, 86,109 Kindleberger, Charles, 113 Korea, xxxiv labour mobility, 30 le Carre, John, xliii Lesage, Jean, 148 Levesque, Rene, 147,151 Lewis, Arthur, xxxvii liberalism, 76, 98 Liberal Party of Canada, xxx MacDonald, John A., xii, 50-1 McNaught, Kenneth, xxx, 36 managers, 23, 77-8, 97; and national affiliation, 108-9 markets, development of national, 30 Marshall, Alfred, 19, 26-7 mercantilism:

191

- new; xxxi, xxxvii, 3, 23-6, 31-2, 39, 93, 95-7, 99,109, 111, 150,151; and branch plant economy, xiii; capital flows under, 168-73; compared to traditional mercantilism, xxxix; impelled by foreign direct investment, xvi - traditional, xxxvii, 23-5, 26, 31-2, 39,46-7, 111,119 mergers and acquisitions, 182-4 metropole-hinterland relations, 116 Mikesell, Raymond E, 23, 38, 81-2,113 militarization, xxviii, 112. See also U.S. government, military spending; Vietnam war, "war against terrorism" "miniature replica" effect, xvi, 91n28,135-7 modernization, 97,105,147 monopolies, 73-4 Montreal Stock Exchange, 83 multi-national corporations, xxxvi-xxxvii, 10,19,23^,37-8, 73, 76-8, 79-80, 83-5, 92,103; and democracy, xl; distribution of profits within, 86-8, 109-10,124,138,164-8,178 table 11; expansion of, 79-80, 81-2, 92; and globalization, xxvi, xxxviii; legal protection of, xli; and nationalism, 100-1; and nation-states, xv, xli, 37, 85, 88-9, 98-113; profits of, xiv-xv; and taxation, 124-5; transfers within, xxxix, 124-6, 138,175-9

- Canadian multi-national corporations, 103 - U.S. multi-national corporations, 32, 92-3, 95-7,125; concentration of, 175-9; influence over Canadian government, 35,102-3,105-6,150; profits of, 93-4,164-8,176-9; and U.S. foreign policy, xv, xxxix, 100-1; and U.S. government, xxxiii, 38, 40, 99102,110. See also corporations, branch plants National Energy Policy, xxvi nationalism: Canadian, xxxi, 34-5,144-5,148-9,151; and multi-national corporations, 100-1; Quebecois, xxxi, 148; U.S., 40; and U.S. foreign policy, 101 National Policy, xii, xxxvii, 51^4 national sovereignty. See sovereignty nation-state formation, xxxviixxxviii Navigation Acts, 49 neoliberalism, xxvi, xxx, xlii New Democratic Party, xxii, xliii New Industrial State, 71-2,76. See also John K. Galbraith Newsprint industry, U.S., 7, 8 North American Free Trade Agreement (NAFTA), xxxiixxxiv oligopolies, xvii Parizeau, Jacques, 150-1 Patronat frangais, 111-12

192 Pearson, Lester B., xxix, 2, 3, 54,144 Polanyi, Karl, 21 Polymer Crown, 133 product innovation, 28-9, 33, 77, 79, 81, 87,106-7,131. See also consumption patterns, research and development Proctor and Gamble, 108,177 public services, xlii

Quebec, xxxi, 55-6,146-53; economic sovereignty, xxxii, 146, 148,152-3; self-determination, 34,153 Rasminsky, Louis, 12-13 rationality, economic, 34,149, 150 research and development, 79, 80,108,130-5,136; in Canadian manufacturing, 130-1, 132 table 7,133; investment in, 130; in U.S. manufacturing, 134 table 8. See also product innovation Rostow, W.W., 39 Royal Commission on Banking and Finance, 141 Rusk, Dean, 102 Safarian, A.E., xx, 87,123,126, 136 savings, 109; Canadian, 119, 137-42; and foreign investments, 109-10; U.S., 74 Schumpeter, Joseph, xxxvi, 25, 27-9, 41n9, 42nlO, 44n23, 78, 81 Sears-Roebuck, 19

Smith, Adam, 21, 30, 44n28 Sombart, Werner, 29 sovereignty: - economic, 33, 34-6, 39-40, 118,146,148 - national 5, 33, 35,116; Canadian, xxvii-xxxi, 54; challenged by liberalism, 98, 111. See also Quebec staples, xxxvii, 46-8, 55 Steacie, E.W.R., 130 Stelco, 133 subsidiary companies. See branch plants Taylor, E.P., 144 technology gap, 106,128. See also product innovation; research and development Time, 7, 8 Trudeau, Pierre Elliott, xxviii, 56,152 Turner, John, 112-13 underdevelopment, 25; Canadian, 127-9,140 United States government: foreign policy, xl; and economic sovereignty, 101-2; and nationalism, 101, military spending, xxxiii, xxxix, 102 U.S. imperialism, xvi universities, xxix, 30 Vernon, Raymond, 41n7, 43n22, 131 vertical integration, 77, 85. See also multi-national corporations

193

Vietnam war, xxviii, xxxiii, 3, 10,151 "war against terrorism", xl Watkins, Melville, 1,16nl9

Watkins Report, xvii-xviii; 1, 35-6,116,117-18,119,124-5, 126,141,142,152 Williams, J.H., 31-2, 44n27 Wilkinson, B.W., 126,131