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Study: Impact of foreign ownership on growth in productivity

Ottawa, ON -- Foreign-controlled plants accounted for most of the growth in labour productivity in the Canadian man...


Ottawa, ON — Foreign-controlled plants accounted for most of the growth in labour productivity in the Canadian manufacturing sector during the 1980s and 1990s, a new research report from Statistics Canada shows.

The study examined the contribution that foreign-controlled plants made to the growth of labour productivity in manufacturing by analyzing whether foreign-controlled producers exhibited superior performance, and whether their productivity growth spilled over to domestic plants.

It found that foreign-controlled plants accounted for roughly two-thirds of labour productivity growth in Canadian manufacturing from 1980 to 1990 and the subsequent decade from 1990 to 1999.

U.S.-controlled plants made a larger contribution than other foreign-controlled plants to productivity growth. During the 1990s, U.S.-controlled plants accounted for about 45% of growth in labour productivity.

Other foreign-controlled plants accounted for about 22% of productivity growth during the period, and domestic plants the remainder.

Concerns had been expressed in some quarters that the contribution of foreign firms to the Canadian economy would decline during the 1990s, if firms moved production to the larger U.S. market, as well as the lower-cost Mexican market, in the wake of the two free trade agreements: the Canada-U.S. Free Trade Agreement and the North American Free Trade Agreement.

Yet, between 1987 and 1999, the share of foreign-controlled plants in total output in the manufacturing sector increased from 40.5% to 52.2%.

International orientation also associated with superior performance of domestic-controlled plants

Foreign-controlled plants are more productive than domestic-controlled plants in general. This is because foreign-controlled plants and firms are also more innovative, more technologically advanced and more likely to perform research and development.

Not all domestic-controlled plants were less productive or less innovative. The study found there was little difference between foreign-controlled plants and domestic-controlled plants whose parent had an international orientation.

The study showed that domestic producers with foreign operations (referred to as domestic multinational enterprises) were equally productive and had a slightly better performance than foreign-controlled plants with respect to research and development and innovation.

SPILLOVER BENEFITS FROM FOREIGN-CONTROLLED PLANTS TO DOMESTIC-CONTROLLED PLANTS

The high productivity growth of foreign-controlled firms had a spillover effect on companies in the domestic sector.

The productivity performance of domestic-controlled plants was higher in industries with a larger presence of foreign-controlled plants, according to the report.

This productivity-spillover benefit of foreign-controlled plants was not distributed equally among domestic producers. The paper found that smaller and younger domestic plants captured larger positive spillover benefits than did older and larger domestic plants in industries where the share of foreign-controlled plants was higher.

The study also found that the presence of foreign-controlled plants increased the intensity of competition faced by the domestic sector and the number of advanced technologies used in the domestic sector.

This suggests that the spillover benefits of foreign-controlled plants received by domestic plants arose from increased competition and the increased use of advanced technologies in domestic plants.

The research paper Global Links: Multinationals, Foreign Ownership and Productivity Growth in Canadian Manufacturing (11-622-MIE2005009, free) is now available online at www.statcan.ca. From Our products and services page, under Browse our Internet publications, choose Free, then National accounts.

More studies on multinationals are available free of charge in the analytical series Update on Economic Analysis (11-623-XIE) on the same website.