After the Gray Report:
The Tortuous Evolution of Foreign Investment Policy
Charles J. McMillan*
INTRODUCTION
On May 4, 1972 the Hon. Herb Gray introduced to the House of
Commons Bill C-201, an “Act to Provide for the Review and Assess-
ment of Acquisitions of Control of Canadian Business Enterprises By
Certain Persons”.1 The proposed Bill was directed specifically at the
potential takeovers of Canadian companies by foreign corporations,
mainly American-controlled firms. According to the Minister’s state-
ment in the House when the Bill received first reading:
…
takeovers are the form of investment least likely to add significant
benefits to the Canadian economy. The extent of foreign control of a
number of industries in Canada is large enough to make the acquisitions
of more Canadian businesses a matter of concern to the government and
to Canadians generally32
Bill C-201, with its successor, Bill C-132, is the most recent policy
instrument of a very short list of legislative enactments by the
federal government directed towards the social control of foreign
investment in Canada.3 Despite the plethora of government studies
and academic writing on foreign investment in Canada and the
growing literature on multinational enterprises, the emergence of a
comprehensive government policy on foreign investment has been
conspicuous by its absence, despite the fact that “the extent of foreign
control of Canadian industry is unique among the industrialized
nations of the world”. 4 To date, the few policy initiatives presently
in force deal with specific industrial sectors, such as banking5 and
“B.A. (St. Dunstan’s), M.B.A. (Alta.), Research Fellow (Bradford).
‘Bill C-201, 21 Eliz. II (1972).
2 Press Release, “Foreign Takeovers Review Policy”, May 4, 1972.
3 For a review of these measures, see Foreign Direct Investment in Canada
(1972), ch. 20, 319-328. Hereinafter referred to as the Gray Report.
4 Task Force on the Structure of Canadian Industry, Foreign Ownership and
the Structure of Canadian Industry (1968), 1. Hereinafter referred to as the
Watkins Report.
5 Arnold, Restrictions on Foreign Investment in Canadian Financial Institu-
tions, (1970) 20 U. of T. LJ. 196.
McGILL LAW JOURNAL
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cultural activities, with voluntary guidelines for good corporate
“behaviour by foreign-controlled corporations, 6 or with attempts to
improve Canadian entrepreneurship. 7 Superficially, therefore, one
might conclude that the new bills represent nothing more than
another limited measure within a general ad hoc approach to foreign
investment in Canada. Bills C-201 and C-132 will be discussed at
length in section V.
the foreign investment review process; 2)
The Gray Report outlined encompassing policy alternatives,
namely: 1)
the key
sector policy; and 3)
the minimum nationality requirements. The
Gray Report favoured the first alternative, that is, the review
process, which envisaged screening the following categories of
investment: 8
1) takeovers of Canadian operations by foreign firms;
2) new foreign investment;
3) licensing and franchising;
4) expansion of foreign owned firms now in Canada;
5) current operations of foreign firms in Canada;
6) Canadian multinational firms.
It will be seen that Bills C-201 and C-132 fail to regulate many of
these categories and are therefore merely additional instruments in
the ad hoc arsenal.
The issues raised by the Gray Report and by the findings of a
number of research studies on the multinational corporation suggest
that a more comprehensive policy on foreign investment is needed.
Such a policy would require a radically different approach to the
process of collecting information, data analysis, and strategic
decision-making from the uncertain, stopgap measures character-
izing the federal government’s present approach.
The purpose of this inquiry is to review the basic issues raised
by the Gray Report as a means of identifying the critical areas where
policy decisions are urgently needed. Two aims in particular stand
out: first, to show the inadequacy of the present disclosure laws on
various aspects of both the foreign-owned and Canadian-controlled
sectors of the economy, an inadequacy which leads one to question
whether the data required to implement the full screening proposals
of the Gray Report are presently available; and second, to demon-
OThe Winters Guidelines, in the Gray Report, supra, f.n.3, 324.
7 Most notably in the case of the Canada Development Corporation. See
Couzin, The Canada Development Corporation: A Comparative Appraisal,
(1971) 17 McGiU L. . 405.
sThe Gray Report, supra, f.n.3, 462 et seq.
1974]
THE GRAY REPORT
strate the limited usefulness of any foreign investment policy without
a change in general economic policies. This paper proposes first, to
review briefly the origins of the foreign investment debate in Canada
and to identify the main themes and their origins; second, to provide
a realistic description of the multinational enterprise (MNE), its
corporate structure and source of flexibility; third, to relate the
corporate development of the MNE to the main economic regulations
in Canada, namely the tariff, taxation and anti-combines policies;
and finally, to propose a Foreign Investment Council as a means of
bridging the information gap for effective policy-making in the
future.
The Issues in Perspective
Few public policy issues in Canada can claim such an enduring
aura of priority and importance as that of foreign investment.’
Concern over foreign investment dates as far back in Canadian
history as Macdonald’s National Policy in 1878 and the building of
the CPR, and it has been related to trade discussions with the United
States over reciprocity. Today it relates in the minds of some observ-
ers to the very independence of Canada as a sovereign state. In short,
foreign investment in Canada is intimately connected to what Pro-
fessor Morton describes as the character of Canadian nationhood,
“an effort to preserve a slowly evolved independence as the intimate
neighbour of a great world power under the stress and novelty of
the power politics of the nuclear age”.’0
Canada’s catharsis over the unparalleled magnitude of foreign
investment has often been described as simply an unfortunate
resurgence of Canadian nationalism, or as a counter-response to the
actions of the foreign countries themselves and their instruments
of economic policy.” On the other hand, foreign investment in Ca-
nada may also be viewed as part of a fundamental shift in the
nature and operations of the world economy, a shift so profound
that it represents a force of discontinuity with the past. According
to Drucker:
Today the whole world, whatever its actual economic condition –
and
whatever the political system in force in a given area –
has one common
demand schedule, one common set of economic values and preferences.
9 One of the earliest studies dates to the thirties: Marshall et al, Canadian-
American Industry: A Study in International Investment (1936).
10 Morton, The Canadian Identity (1961), 3.
“1 For example, compare comments by Russell, and those of Rotstein in
Nationalism In Canada 2d ed. (1973).
McGILL LAW JOURNAL
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The whole world, in other words, has become one economy in its expecta-
tions, in its responses, in its behaviour.’2
Furthermore, the developing world economy requires new insti-
tutions:
Because world economy is strictly an economic community, the institution
which represents it will have to be an economic rather than a political
institution…. Such an institution, too, we already have at hand. Its
development during the past twenty years may well be the most significant
event in the world economy, and the one that in the long run will bring
the greatest benefits. This institution is the “multinational corporation”. 12 a
It
is paradoxical, therefore, that what appears to be a new
development in the world economy has existed to a considerable
degree in Canada for much of the last century. It perhaps tells
something of the nature of the Canadian public policy process that
the present foreign ownership debate has emerged as much from
concern expressed in countries such as Japan, France and even the
United States, as from any attempts by Canadian politicians and
academics to articulate a coherent industrial strategy to meet these
international changes in the global economy.
To an outsider, then, it might be startling to learn that of two
of the major government-sponsored documents on foreign owner-
ship in Canada, one was immediately denied official support (the
Watkins Report), while the other was leaked to the public through
the back door under the auspices of the Canadian Forum before
official publication several months later (the Gray Report)1 3 It is
hardly a record of public concern and open debate which can be
regarded as a prelude to an orderly and specific government strategy
on the whole question of foreign ownership, industrial policy, and
guidelines for the multinational corporation.
Few can deny the enormous complexities of the basic issues. The
literature on the multinational firm has grown enormously.14 It
encompasses a wide variety of disciplines: economics, political
science, sociology, law, international relations; and an even wider
variety of topics: international trade, industrial organization, organ-
ization theory, managerial economics, corporate law, international
law, extra-territoriality, tariffs, customs unions, administrative de-
12 Drucker, The Age of Discontinuity (1968), 79-80.
12a Ibid., 91.
13 The abbreviated version appeared in the Forum in December 1971. The
Gray Report was tabled on May 2, 1972.
14 Most of it is written by economists. For a review of the major themes,
see the following edited works: Kindleberger, The International Corporation
(1970); Dunning, The Multinational Enterprise (1971); Brown, World Business
(1970); Paguet, The Multinational Firm and the Nation State (1972).
1974]
THE GRAY REPORT
cision-making, imperialism, mercantilism, and economic develop-
ment, to list only the major themes dominating the most widely cited
studies.
Certainly the Canadian public is now more aware of the presence
and extent of foreign investment in the economy than at any time in
the past. The roots of the current debate leading to the publication of
the Gray Report probably date most specifically from the Royal
Commission on Canada’s Economic Prospects,5 although previous
studies had examined certain aspects of the question. Devoting a
chapter to foreign investment, the commission reviewed the basic
issues with remarkable insight and clarity, given the lack of data
and theoretical refinements available even now, fifteen years later.
The report emphasized the major areas of concentration of foreign
ownership in the resources and manufacturing
industries, and
brought attention to the rapid growth of companies by expansion due
to retention of earnings. As the report noted:
The retention and reinvestment of earnings, plus amounts set aside for
depreciation and depletion, ensures the rapid growth of existing com-
panies and particularly the larger ones which are well entrenched, well
financed and which hold dominant positions in their respective industries.
In many of Canada’s fastest growing industries the principal companies,
the ones which hold the dominating positions, are controlled by non-
residents. This concentration in certain key industries, and in large com-
panies wielding extensive influence is the most important factor to be
considered in connection with foreign investment in Canada.’0
Despite the cogent analysis of this section of the Report, govern-
ments of successive administrations failed to act on the recommen-
dations, probably because other aspects of the Report were viewed
with some scepticism or as having greater priority. However, the
debate was only in its infancy and inspired Walter Gordon’s own
pleadings. His ill-fated attempts at implementing policy as Finance
Minister from 1963-65 are well known.’ 7 In the interim, various
Canadian economists have analyzed the foreign investment issue
and the growth of the multinational corporation in great detail.
Notable among these studies are Johnson’s essays on Canadian public
policy and nationalist preoccupations, 8 Safarian’s detailed study of
15 Final Report of The Royal Commission on Canada’s Economic Prospects
(1957), ch. 18. The terms of reference of the Commission do not specifically
mention the question of foreign ownership (P.C. 1955-909) but the Commis-
sioners’ recommendations make interesting reading in light of proposals put
forward today.
16 Ibid., 383.
17 For example, see Gordon, A Choice For Canada (1966); and Godfrey and
Watkins, Gordon to Watkins to You (1970).
1′ Johnson, The Canadian Quandary (1963).
McGILL LAW JOURNAL
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the economic performance of Canadian subsidiaries, 9 Litvak and
Maule’s analyses of extraterritoriality and multilateral policy direc-
tions, 20 and, most recently, Levitt’s polemic, Silent Surrender.2 ‘
In addition similar reports have been sponsored by the government
of Ontario, 2 the stock exchanges2 and the Private Planning Associa-
tion,24 but no specific study of the question has been made by the
Economic Council of Canada. Legal research on the multinational
corporation is practically non-existant, as regards both the consti-
tutional questions of foreign investment 25 and international law. O
In terms of the policy environment, it is rapidly becoming Iobvious
even to politicians that some kind of regulation of foreign investment
is required, even if only within the traditional economic framework
of a competitive market. At the very least, therefore, there must be
a recognition of the need for a maintenance of effective competition
and the removal of any trade restrictions where foreign-based com-
panies operate. As will be noted in the next section, there is some
evidence to suggest a great deal more regulation is necessary, and
the harshest critics of the MNE would go considerably farther in
public regulation.2 7 Ironically, it appears that successive federal and
provincial governments have pursued what amounts to a national
policy least likely to increase the advantages of foreign investment
within a market economy, namely a policy of non-intervention of any
kind, except in cases calling for ad hoc crisis legislation motivated
by political values.
Only now is this picture slowly starting to emerge in the political
arena, and the growing evidence of mature studies like the Gray
10 Safarian, Foreign Ownership of Canadian Industry (1966).
20 Litvak and Maule, Conflict Resolution and Extraterritoriality, (1969) 13
1. of Conflict Resolution 305: Litvak, Maule and Robinson, Dual Loyalty:
Canada/US Business Arrangements (1971).
2
1 The Multinational Corporation In Canada (1970).
22Report of the Ontario Inter-departmental Task Force on Foreign Invest-
ment (1971).
23 The Moore Report (1970). See also Financial Post, June 30, 1970, 1-2.
24For example, Lindeman and Armstrong, Policies and Practices of U.S.
Subsidiaries in Canada (1961).
25For an attempt to define the legal parameters, see Arnett, Canadian Regu-
lation of Foreign Investment: The Legal Parameters, (1972) 50 Can. Bar Rev.
213. See also Hahlo, Smith and Wright, Nationalism and the Multinational
Enterprise (1973).
20Vagts, The Multinational Enterprise: A New Challenge For Transnational
27What is involved here are political and social values about the nature
of the economic system itself, i.e., quasi-capitalist, free enterprise or socialist.
For a critical discussion, see Baran and Sweezy, Monopoly Capital (1966).
Law, (1970) 83 Harv.L.Rev. 739.
1974]
THE GRAY REPORT
Report corresponds with a recognition of a rapidly changing world
-economy and the need to search for Canada’s role in it. For many
this search requires some form of industrial strategy, perhaps on a
model such as Japan or Sweden, or one tailored more to particular
Canadian needs and traditions28 In any case, the preponderance of
foreign-owned companies in the Canadian resource industries and
manufacturing sector makes coordinated economic and commercial
policies imperative if the maximum advantages of foreign investment
are to be gained. Furthermore, the specific recommendations of the
Gray Report must be considered in this context. The adequacy or
feasibility of these recommendations rests to a very large extent on
the understanding of the operations of the MNE in Canada and else-
where, and the economic environment the government develops by
its economic and commercial policies.
The Multinational Enterprise
Modern industrial societies have long been familiar with very
large corporations, high market concentration, and powerful business
interests.2 9 What is not so familiar, however, is the extension of the
corporate network across political boundaries, so that the power
of the corporate boardroom extends far beyond the citizenship of
the legal charter. The multinational firm has been praised as the
harbinger of a new economic order and business statesmanship in
the aftermath of the cold war, and danned as the newest form of
industrial imperialism and unchecked power3 0 The multinational
firm has also been viewed largely as an American phenomenon, an
outcome of the first trillion dollar economy and superior manage-
ment practices.
Some estimates predict that some 300 corporations, two-thirds of
them American, will dominate the world economy, just as a limited
number of firms now dominate domestic economies.3’ The growth
of American based MNE’s has resulted in a fear for survival on the
part of many host industrialists. Servan-Schreiber dramatically
28 For various proposals, see Rotstein (ed.), An Industrial Strategy For
Canada (1972).
29 Galbraith, The New Industrial State 2d ed., revised (1971).
30For positive views of the MNE, see, for example, Ball, “Cosmocorp:
The Importance of Being Stateless” in Brown (ed.), World Business, supra,
f.n.14. For a critical view, see Penrose, The Large International Firm In
Developing Countries (1968).
3 1 Turner, Invisible Empires (1970); Permutter, Super-Giant Firms in the
Future, (1968) 3 Wharton Quarterly.
McGILL LAW JOURNAL
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writes of the trend as follows: “Fifteen years from now, it is quite
possible that the world’s third greatest industrial power, just after
the United States and Russia, will not be Europe, but American
industry in Europe. ‘3 2 This picture has itself been challenged on the
basis of rapid growth of European based multinationals. What is
perhaps most dramatic is not only the large number of American
based MNE’s, but the rapid growth of European and Japanese
MNE’s into the American economy.3
These events signal a very different epoch in international eco-
nomic relations, and countries that fail to recognize and adapt to
these changes do so at their peril. A different picture of the multi-
national corporation is also required.
Economic Orthodoxy: International Trade
By any standard of comparison, the present structure of the
world economy has no precedent. Historians sometimes draw
parallels between the multinational corporation and the large
institutions of the past: the ancient trading organizations of Ur and
Babylon, the Medici finance institutions of Florence in the fifteenth
century, the East India companies of Britain and Holland in the
seventeenth century and the Hudson Bay Company in Canada in the
eighteenth century8 4 Yet the multinationals, however similar they
may seem to the historic international enterprise, differ not only in
size and magnitude, but also qualitatively, in their technology and
organizational structure.
Economists have devoted a great deal of effort and resources
to explain economic relations between nations. Today orthodox
international trade theory has reached elegant refinement over the
classical writings of Adam Smith, David Ricardo and John Stuart
Mill. Economic inquiry into international trade and finance actually
dates from them and the basic trade models stem from their theo-
ries.3
r, At the heart of orthodox theory is the free market and the
32Servan-Schreiber, The American Challenge (1968), 1.
33 0n the growth of European MNE’s, see Faith, The Infiltrators (1971);
Hymer and Rowthorn, “Multi-National Corporations and International Oli-
gopoly: The Non-American Challenge” in Kindleberger, supra, f.n.14; and
Rhodes, The American Challenge ‘Challenged’, (1969) Harv.Bus.Rev. 45. On
Japanese MNE’s, see Tsurumi, Japanese Multinational Firms, (1973) 7 J. of
World Trade Law 74. On foreign investment in Asia, see Kapoor, Foreign
Investment In Asia (1972).
34 Ellsworth, The International Economy (1964).
3 For an extensive treatment, see Kindleberger, International Economics
4th ed. (1968). A highly readable introduction to the subject is Kenen, Inter-
national Economics (1967).
1974]
THE GRAY REPORT
doctrine of comparative advantage. According to this perspective, a
nation should pursue policies which, by the nature and extent of
its factor endowments (land, labour and capital), equip it to produce
goods more efficiently than any other nation. It must surrender its
production capacity to the dictates of the international division of
labour. In its development, this theory, first articulated by Adam
Smith, was a radical departure from mercantile theory, the para-
mount orthodoxy of its day. The mercantilists advocated national
economic policies to increase the stock of gold bullion, the standard
of wealth in vogue at the time.
But it was for Ricardo to refine the principle of comparative
advantage in modern terms. He recognized that countries could not
only export goods to advantage, but could also import goods and
thus promote the international division of labour through special-
ization (thereby using the optimal mix of factor endowments and,
gaining in experience, reducing unit costs). Rational policies of
exporting and importing would result in a total net gain for all
trading nations. Thus he thought that Britain should trade its wool
to France for wine even though Britain might be able to produce
both commodities. Diminishing costs and improvements in quality
of each commodity would produce a gain for each partner to the
trade, regardless of either’s stage of economic development. An
important corollary of this theory is that factor prices tend to
equalize among trading countries, so that in the long run countries
will make the best use of their own factor endowments.3 0
Although somewhat brief, these ideas are the central canons of
economic trade theory. But the theory is valid only if nations are
willing to play by the rules of the game, without barriers to free
trade such as tariffs, surcharges, customs unions, or the like. Further,
however elegant, the theory leaves much to be explained, not the least
being the failure of international trade theory to reconcile the
disparities between rich and poor nations. The major trading nations
erect barriers to free trade for a variety of reasons: balance of
payments, national security, corporate lobbying and military and
economic exploitation. Indeed, as Professor Gordon has argued,
countries typically have promoted and adopted free trade policies
only from a position of economic strength (e.g., Britain in the nine-
teenth century) .Y But the most obvious deficiency of the theory is its
36 For one of the classic analyses of factor equalization, see Samuelson,
International Trade and the Equalisation of Factor Prices, (1948) 58 Economic
J. 163.
-37 Gordon, “The Historical Perspective: Nineteenth Century Trade Theory
and Policy” in English (ed.), Canada and the International Economy (1961).
McGILL LAW JOURNAL
[Vol. 20
failure to explain why trade and investment go hand in hand in the
form of multinational corporations. Why do firms trade between
subunits of the same corporate shell across political boundaries
instead of trading by export? Trade is not promoted by the inter-
national division of labour of the market, but by the promotion of
the international division of labour of the firm. The standard theory
can apply here only if the subsidiaries of a multinational firm act no
differently within the MNE shell than without. The workings of the
boardroom of any MNE demonstrate how mistaken this proposi-
tion is.
The MNE Organizationally Viewed
Few academic economists have devoted much attention to the
corporation as an organization, preferring instead to examine the
organization of the market and the interplay of prices and exchange
mechanisms between firms. Perhaps not surprisingly, it has been
left to business school scholars to study the corporation as an organ-
ization and the multinational enterprise as the largest organization
of all. The analytical focus is thus on corporate decision-making,
managerial personnel and skills, the allocation of capital and know-
ledge resources and the means of maintaining operating control.
Normative economic theory conceptualizes corporate behaviour
in terms of atomistic surrogate entrepreneurs who strive for profit
maximization. Market domination is avoided by free competition,
since the assumption of perfect knowledge allows consumers to
switch demand to lower priced companies. As Herbert Simon, one
of the most scorching critics of economic decision-making has
observed, the macro-economist “often assumes competition which
carries with it the implication that only the rational survive. Thus,
the classical economist theory of markets with perfect competition
and rational agents is deductive theory, that requires almost no
contact with empirical data once its assumpitons are accepted. ‘ ‘
8
3
The sheer size of multinational corporations gives prominence to
its decision-making structure. From a cluster of organizations de-
38 Simon, Theories of Decision-Making in Economics and Behavioural Science,
(1959) 49 American Econ. Review 253, 254. As Galbraith has noted, “Few
subjects of earnest inquiry have been more unproductive than study of the
modern large corporation. The reasons are clear. A vivid image of what
should exist acts as a surrogate for reality. Pursuit of that image then
prevents pursuit of the reality”: supra, f.n.29, 72. It should be recognized that
Galbraith’s ill-concealed scorn for the conventional economic wisdom, and
his own formulations of the firm, are based in part on the work of Simon
and his colleagues: Cyert and March, A Behavioural Theory of the Firm (1963).
1974″I
THE GRAY REPORT
signed as profit-centers one may distinguish a central policy-making
body. The emphasis is on the link between the separate operating
units (divisions or subsidiaries) and overall, unified strategy. In
this respect, the multinational firm epitomizes the large divisional,
federated structure of management theory.3 9 The evolutionary de-
velopment of MNE’s, as in the case of domestic corporations,
emphasizes the change from small single-plant, single-product firms
to multi-divisional structures, and the role that expanding markets
and changing technology play in this transformation. 0
One of the most significant studies in the growing literature on
organizational growth and development is that of Alfred Chandler’s
case histories of American enterprise 41 According to Chandler:
Four phases or chapters can be discerned in the history of the large
American industrial enterprise: the initial expansion and accumulation of
resources; the rationalization of the use of resources; the expansion into
new markets and lines to help assure the continuing full use of resources;
and finally the development of a new structure to make possible continuing
effective mobilization of resources to meet both changing short-term
market demands and long-term market trends.42
Chandler notes that it was the growing U.S. population, the resulting
new markets and technological virtuosity which provided the impulse
for corporate expansion.
The prospect of a new market, or the threatened loss of a current one
stimulated geographical expansion, vertical
integration, and product
diversification. Moreover, once a firm had accumulated large resources,
the need to keep its men, money and materials steadily employed provided
a constant stimulus to look for new markets by moving into new areas,
by taking on new functions, or by developing new product lines.42a
In his case study of four corporations (Dupont, General Motors,
Standard Oil, and Sears Roebuck), Chandler develops his central
theme:
created by changing population, income and technology –
Strategic growth results from an awareness of the opportunities and
needs –
to
employ existing or expanding resources more profitably. A new strategy
required a new or at least a refashioned structure if the enlarged enter-
prise was to be operated efficiently.43
39 For a classic analysis, see Drucker, The Concept of the Corporation (1945).
For a recent analysis, see Stopford and Wells, Managing the Multinational
Enterprise (1972).
40 Wilkins, The Emergence of Multinational Enterprise (1970). For one of
the few case studies of the MNE, but lacking a clear conceptual framework,
see Neufeld, The Global Corporation (1969).
4’ Chandler, Strategy and Structure (1962).
42bid., 385.
42aIbid., 15.
431bid.
McGILL LAW JOURNAL
(Vol. 20
Chandler identified three types of structure in the development
stages. 44 Type I is similar to the small firm of economic theory,
highly centralized, dominated by and subject to the interests and
limitations of the Chief Executive. Type II is a larger unit but limited
in product lines and still organized as a centralized structure run by
narrowly trained executives. Thus it was Type III, with divisional
structures organized as profit centers, flexible enough to train per-
sonnel for top levels and operating levels, and capable of generating
new products by institutionalizing research and development, which
became the archetype organizational form to adapt to growing
markets and changing environments.
Empirical evidence supports the thesis that multinational firms
develop in world markets in much the same fashion as small cor-
porations developed Type III structures in response to the widening
of the American market to encompass the entire continent. For
example, Fouraker and Stopford4 5 analyzing Chandler’s typologies
on the largest American corporations listed in Fortune’s industrial
directory, found a strong and significant correlation between Type
III structures and corporate expansion abroad. Corporations with
limited technology (steel and non-ferrous metals), predominantly
Type II organizations, had little expansion overseas, while firms
displaying Type III characteristics (electrical, automobile, power
machinery, and chemicals) had substantial overseas expansion.
It must be recognized that the exact structure of MNE’s does
vary considerably from Chandler’s typology: Fouraker and Stopford
found that 18 of 170 had a Type I structure, 90 a Type II structure
and 62 a Type III structure. However, it would appear that the basic
organizational processes identified by Chandler appear to hold across
societal boundaries, particularly since overseas companies develop
cosmopolitan executives with the management skills of their Amer-
ican counterparts.40
The important implication of examining the internal divisional
structure is that it points to the flexibility of the large corporation,
in part derived from its sheer size and the resources at its command,
(1968) 13 Admin.Sci. Quarterly 47.
44 Ibid., ch. 1.
45 1Fouraker and Stopford, Organization Structure and Multinational Strategy,
4
6 There has been little research on the attitudinal characteristics of MNE
managers and directors in any systematic way, despite the importance of
the subject to good parent-subsidiary relations. See, for example, the conflict-
planning models in Rutenberg, Organization Archetypes of A Multi-National
Company, (1970)
16 Man. Science B-337; and Brooke and Remmers, The
Strategy of Multinational Enterprise (1970).
19741
THE GRAY REPORT
especially finance and technology. In addition there is a flexibility of
management to learn by doing, the entrepreneurial experience of
innovation first in the home market which, with relatively easy
transferability of skills, can be used in the new market 7 In its
evolutionary form, the large corporation shifts from entrepreneurial
functions to managerial functions, from tasks which originate as
being unique to tasks which become recurrent. Thus it is the ability
to produce goods, embodied in high technology sectors of industry,
that becomes critical, rather than the goods themselves.48 In terms
of the orthodox trade theory model outlined above, the study of
organizational structure shows the premium on knowledge and
management skills as factors of production, a point often lost in
economic theories of the firm 9 But innovation implies elements of
monopoly, at least temporarily. In the growth process, domestic
firms may seek out new markets after home markets become
saturated to exploit this monopoly. The study of organizational struc-
ture illuminates the process of innovation; the study of market
structure shows how firms seek to defend the monopoly advantages
accruing from innovation.
Market Structure and the MNE
The traditional doctrine of international trade and capital
movements has been the cornerstone of economic orthodoxy in
explaining foreign investment. A rather different theoretical ap-
proach to direct foreign investment has been provided by Stephen
Hymer in a doctoral thesis at MIT, and more recently by Richard
Caves.50 Their explanation is that direct foreign investment (i.e.,
equity investment) is to be found in the theory of industrial or-
4rFor a brilliant elaboration of this “learning” model of organizational
decision-making, see March and Simon, Organizations (1958).
4sConsider the following comment about the development of Japanese
MNE’s: “Japan is generally less technologically advanced than the United
States and Europe, and is distinctly more technologically advanced than her
Asian neighbours and other developing nations. The recent technological in-
novations of Japanese firms have been directed to the improvement of produc-
tion processes rather than to the outright development of new products”.
Tsurumi, in supra, f.n.33, 75. Italics added.
49 The shift in emphasis is illustrated by the revision of a recent work
by Kemp from The Pure Theory of International Trade to The Pure Theory
of International Trade and Investment (1969).
5o Hymer, The International Operations of National Firms: A Study of Direct
Investment, Doctoral Thesis, M.I.T. (1960); Caves, International Corporations:
The Industrial Economics of Foreign Investment, (1971) Economica 1.
McGILL LAW JOURNAL
[Vol. 20
ganization, that is, in market behaviour and imperfect competition
in both the home country and the host country. Thus, for direct
investment to occur in foreign markets, it is necessary not only
for a multinational corporation to earn in the foreign market a
greater profit than in the home market, but also a greater prof-
it than competitors in the host market. In other words, there
is a strong element of monopoly conduct in the host market, since
the firm attempts to exploit or protect a particular economic
advantage over its competitors –
or potential competitors.51 In
the case of horizontal integration, corporations produce in the host
market what is produced at home, and product differentiation
typically prevails. In the case of vertical integration, corporations
exist in oligopoly structured industries at home and seek sources
of raw materials on production inputs for production in the home
market.2
This analysis represents a dramatic shift of focus in the study
of foreign investment, for it emphasizes the oligopolistic advan-
tages accruing to the multinational firm, and more importantly,
the techniques employed to secure and maintain these advantages.
It also calls into question many of the economic policies adopted
by host countries, some of which, like tariffs and taxation, may
actually aid foreign investors to the detriment of local entrepre-
neurs.
The emphasis on market structure put forward by Hymer and
the subsequent empirical studies of the largest multinationals high-
lights the primary role of technology and the timing of innovation
as the dynamic engine of corporate growth.53 Corporations which
develop unique products first produce them in the home market.
In time domestic saturation is reached. The uniqueness of the
product, together with the firm’s oligopoly industry position (i.e.,
limited competition), enables the firm to gain monopoly profits
in the short run. Over a period of time the high profit margins
decline because of market saturation and an increase in potential
domestic competition. The firm is then left in the position of having
to face further decline in profit margins to maintain domestic
customers, or to seek new markets abroad while searching for
5’For a lucid explanation, see Kindleberger, American Business Abroad
52 Hymer, “Direct Foreign Investment and National Interest” in Russell,
(1969), ch. 1.
supra, f.n.11.
53 The intellectual antecedent of this approach owes much to Schumpeter’s
Innovation hypothesis. See Schumpeter, Capitalism, Socialism and Democracy
3d ed. (1950).
1974]
THE GRAY REPORT
new products for existing customers in the home market. Corpora-
tions can attemp to export to foreign markets, but such factors
as cheap labour, access to foreign capital, and high transportation
costs may induce production in the host market by national en-
trepreneurs. More likely, however, is the possibility of tariff or
customs barriers by host governments, and even potential com-
petition by other foreign corporations in the host market –
all
inducing direct foreign investment. This emphasis on the product
cycle of high technology products appears to have empirical sup-
port, especially for American-based multinationals.54
In a dynamic world, therefore, direct investment often occurs
from a defensive posture intended to forego entry by competitors
to a captive market. Size, technology, and even initial entry are
strategic weapons to gain comparative advantage over any rival
firm.55 Direct investment does provide a certain amount of risk
in that, once established, withdrawal is very costly for the firm
and for the host country. From the perspective of uncertainty and
unpredictability, multinational firms in oligopolistic markets must
weigh the danger of remaining in existing markets, even when they
are very profitable, as against the risk of entering new markets
not necessarily as profitable, in order to forestall competitive entry
and possible future barriers to entry. 6
This motivation for direct investment demonstrates a very
subtle but central issue in the analysis of foreign investment and
the multinational firm. The subtlety rests in the fact that it is
the barrier to trade through export, not the removal of barriers
which is the raison d’6tre of the multinational corporation. As
noted, there are obstacles presented by the location of one or
54 The link between organizational structure, innovation, and the product
cycle is extensively explored in Wells (ed.), Product Life Cycle and Inter-
national Trade (1972).
55 Vernon argues that costs may not be so crucial as many economists
often assume; market presence in a national market with high incomes, rapid
communications, potential for inrfovation in production, and labour-saving
devices may be more important location considerations. It follows that
innova-
the United States would be the source of the most technological
tions, since these factors are more abundant than in any other national
market. See Vernon, International Investment and International Trade in the
Product Cycle, (1966) 80 Quarterly J. of Econ. 190.
56 Caves, supra, f.n.50. It should not be deduced, however, that all foreign
investment decisions are subject to rigorous analysis by top management,
since many factors motivate the decision to move abroad, including executive
contacts in foreign countries, ethnic ties, and the like. For discussion, see
Aharoni, The Foreign Investment Decision Process (1966).
McGILL LAW JOURNAL
[Vol. 20
more MNE’s in a foreign market to the competitive detriment of
any rival multinational which motivate entry by direct investment
of additional firms. A further factor, however, is the action of host
governments, most notably in the case of tariff barriers, but also
in the case of differential monetary and fiscal policies and a bat-
tery of industrial policies (e.g., tax advantages, subsidies to invest-
ment, etc.) which can provide a motivation for multinational firms
to exploit local opportunities by entry into the host market. In
other words, in a world of very high factor mobility, multinational
firms are capable of moving from one jurisdiction to another, and
if economies of scale are great enough (as they usually are), they
can exploit the differentials created by national policy to their
own profitable advantage.
The foregoing analysis, although somewhat abbreviated, brings
out the link between multinational corporate structure, illustrated
by the seminal work of Chandler outlined above;
the market
structure advantages conceptualized by Hymer and Caves; and the
role that technology plays in fostering imperfect market conditions
across a given industry in all countries where production occurs.
These points serve to show that the more developed a multinational
firm becomes, the more important is the need to integrate the
production facilities in each country. In part the integration may
be vertical, where the output of a subsidiary becomes the com-
ponent input to another subsidiary’s production; in part it may
be horizontal, where subsidiaries exchange finished products. It
also may be a combination of both. The fact that such integration
clearly increases the potential conflict between the MNE and the
nation state is only now beginning to be realized7 An absence
of sensible economic policies to coincide with the potential costs
to efficiency in the host environment, as well as a lack of infor-
mation about economic performance, can largely dissipate the
gains from foreign investment.
Indeed the study of foreign investment in Canada must be
examined in this light. The basis of any foreign investment policy,
57This conflict has typically been examined in the context of extraterri-
torial application of foreign laws. The three sources of conflict have been
in the areas of anti-trust, repatriation of earnings and trade with communist
countries. For a legal analysis in the American context, see Berman and
Garson, United States Export Controls-Past, Present and Future, (1967) 67
Col. Law Review 791; Brewster, Antitrust and American Business Abroad
(1958); Steiner and Vagts, Transnational Legal Problems (1968). See also
Behrman, National Interests and the Multinational Enterprise (1970). An ex-
cellent treatment of extraterritoriality in Canada is given in the Gray Report,
supra, f.n.3, ch. 16.
1974]
THE GRAY REPORT
whether a limited approach such as that embodied in Bill C-201
or a much more global strategy, should be designed in terms of
the economic environment in which the MNE operates (the MNE’s
subsidiaries in foreign countries and domestic corporations capable
of growth toward global marketing). An analysis of how Canada
has shaped its economic environment is the subject matter of
the next section.
The MNE in Canada
The first forms of direct foreign investment originated with
American corporations during their continental expansion in the
nineteenth century.P8 In many cases, U.S. companies developed
subsidiaries in Canada which were not much different from other
branches established across the North American continent, and
until very recently, many such companies often included their
Canadian branches as part of the U.S. operations for financial and
managerial control purposes. Although Britain was the main source
of foreign capital until 1914, this took the form of portfolio (loan)
capital, while U.S. investment has consistently taken the form of
equity.59 By 1930, the U.S. had overtaken Britain as the main
source of foreign capital in Canada, accounting for 61.2 per cent,
compared to 36.3 per cent from Britain. This proportion has
increased ever since, and American capital now amounts to 80.7
per cent of all foreign capital in Canada.
Despite the shocking lack of reliable information, the picture
the following general
of foreign investment in Canada reveals
characteristics: 60
1. Direct foreign investment is not only very high, but it continues
to grow, both by new investment into the economy and by
growth financed from internally generated funds. At present,
the book value of foreign-controlled firms, as distinct from the
market value, is estimated at $30 billion, about 34.2 per cent
of all Canadian corporate assets.
58 Wilkins, supra, f.n.40, 141. “Practically every American manufacturing
company that exported sought to sell in Canada. As in Mexico before 1910,
because the Dominion was a neighbour, American companies often adminis-
tered their Canadian marketing within the framework of their domestic
organization rather than as “foreign” business. Many more U.S. companies
wanted to sell in Canada than in Mexico, because of the higher standard of
living in the Dominion, which carried an ability to purchase.”
59 The Gray Report, supra, f.n.3, 15.
60 Ibid., ch. 2.
McGILL LAW JOURNAL
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2. Profitability of foreign-owned firms is generally higher than
Canadian-controlled companies. In manufacturing, foreign-owned
firms had a higher proportion of profits and taxable income
than sales.
3. The extractive industries are predominantly foreign-controlled (74
per cent in petroleum and natural gas, 65 per cent in mining
in 1967). The proportions have not changed appreciably in the
last twenty years, but show marginal changes to less owner-
ship by Canadians. Moreover, non-resident ownership is greatest
in the high technology industries.
These “facts” about foreign ownership are not in dispute,
despite the limited availability of information about certain as-
pects of particular sectors. What is in dispute is the long term
implications and trends of so much foreign investment in the key
sectors of the economy. That Canadians in general and policy makers
in particular have consistently and studiously avoided an assess-
ment of the basic issues has hardly encouraged a meaningful debate
over the range of available options.
Dissenting opinion within the federal cabinet, an increasingly
“articulate” nationalist press, nationalist sentiments among younger
Canadians and possibly some general disillusionment with American
foreign policy have stimulated a new foreign investment strategy,
even if the federal government has not acted with much urgency
in the matter. However, how long this stance will last is now open
to question. It seems imperative that the causes of the foreign
investment problem should be analyzed rather than the mani-
festations of large scale foreign ownership. Canadian social policy
has for too long failed to mobilize Canadian skills and resources;
yet at the same time governments have employed what many ex-
perts see as an inappropriate blend of economic policies. Minor
adjustments to this present mixture of economic and social poli-
cies, such as the advocacy of more Canadian directors or managers
in foreign-controlled firms, or bilateral agreements to dilute the
potential problems of extraterritoriality, serve only to postpone
the ultimate reckoning. Three primary considerations stand out,
namely the tariff, taxation, and anti-combines legislation.
This section outlines the costs and dysfunctions of each of these
policies in the context of foreign investment and the MNE.
19741
The Tariff
THE GRAY REPORT
Few economic subjects dominate Canadian policy questions as
much as the national tariff.6 1 Historians have generally adopted
a sympathetic attitude towards the tariff, in the context of Sir John
A. Macdonald’s tripartite National Policy: the tariff, the railroads,
and immigration to the West. The goal of the National Policy was
east-west economic development, the cornerstone of Canadian nation-
hood, and its success is considered as vindication of its basic pur-
pose. 2 Economists, on the other hand largely speak with one voice on
the tariff, citing it as one of the most defective policy instruments
of Canadian authorities, and in consequence one of the root causes
of much of Canada’s imbalanced growth and market imperfections.
The tariff is also seen as a major contribution to foreign invest-
ment inasmuch as American corporations, faced with the tariff,
have traditionally established Canadian subsidiaries as a substitute
for exports. The long run result has been a truncated economy of
foreign subsidiaries with too many plants producing sub-optimal
product lines at production costs exceeding world levels. As the
Gray Report states succinctly, “[tihe Canadian tariff provides suf-
ficient protection to a wide range of industries to enable them
to compete in the domestic market even when they are less efficient
than foreign producers.””6
The economist’s objection to the tariff is that it fosters inef-
ficiency, oligopolistic market structures and less than optimal
economies of scale. Wilkinson summarizes the basic points as fol-
lows:
There are at least five issues regarding economies of scale. First, while
the Canadian market could support one or more optimum-size plants,
frequently more than the required number of plants (many of which are
less than the minimum optimum size) are in operation. Second, even
those plants which appear to be of at least minimum optimum size, in
terms of the investment necessary, are producing too many product lines
to achieve the length of production required for unit costs to be at a
minimum. Third, even though some economies of scale in production are
61 The literature is voluminous. Representative works include the following
studies: Young, Canadian Commercial Policy, Royal Commission on Canada’s
Economic Prospects (1957); Dales, The Protective Tariff in Canada’s Develop-
ment (1966); Eastman and Skykolt, The Tariff and Competition in Canada
(1967); English, Industrial Structure in Canada’s International Competitive
Position (1964); Wonnacott and Wonnacott, Free Trade Between The United
States and Canada (1967).
62 For a biting review, see Dales, Some Historical and Theoretical Comment
on Canada’s National Policies, (1964) 71 Queen’s Quarterly 297.
6 3 The Gray Report, supra, f.n.3, 218.
McGILL LAW JOURNAL
[Vol. 20
achieved, there may be additional, potential economies of large scale,
selling, which Canadian firms have difficulty achieving. Fourth, Canadian
firms may be unable to realize economies of large scale research and
development. Finally, external economies from having vast concentrations
of industry within given areas (e.g. the availability of specialized services)
may not be fully realized in Canada.64
Recent theoretical developments in tariff theory indicate that
it is necessary to recognize and evaluate the distinction between
“nominal” tariff rates and the “effective” tariff rates on imported
goods. The effective tariff rate is a measure of industry protection
since it adds value to purchased inputs in production, and includes
the differences in the tariff rates between the output and input
of a particular industry. Nominal rates are simply the scheduled
tariff rates for imports. The distinction is important because in
many cases, even though the nominal Canadian rates are low in
the manufacturing sector, the effective rates provided are much
higher than the nominal ones.65 The Canadian practice has been one
of high tariffs on finished manufactured products, but much lower
rates on raw materials and intermediate inputs (components). The
tariff thus becomes a rule of thumb by Canadian producers de-
ciding pricing policies against foreign competitors, regardless of
the relative efficiency (in terms of economies of scale) of the largest
Canadian producers. Neither Canadian-owned nor foreign-owned
firms in the Canadian market have a real incentive to reduce the
selling price below the foreign price plus the tariff. Moreover, there
is little incentive to improve economies of scale and specialization;
therefore, the problem of too many plants and too many production
runs persists even with the presence of foreign subsidiaries. 66 The
reason is simple: the tariff makes it profitable for Canadian manu-
facturers, regardless of ownership, to be less efficient than Ameri-
can firms.
The tariff has had a dysfunctional effect not only on production
inefficiencies but also in promoting disparities between the eco-
nomic regions of Canada (especially the Atlantic provinces and
the West) where proximity to the cheap American market is less
than in central Canada.67 The exact economic cost of the tariff for
64 Wilkinson, Canada’s International Trade: An Analysis of Recent Trends
and Patterns (1968), 110.
05 For an elaboration, see Melvin and Wilkinson, Effective Protection in the
Canadian Economy, Study No. 9, Economic Council of Canada (1968), 2-9,
38-44.60 Daly, Keys, Spence, Scale and Specialization in Canadian Manufacturing,
Study No. 21, Economic Council of Canada (1968), 53-59.
07 Economic Council of Canada, Fifth Annual Review (1968), 154-157.
1974]
THE GRAY REPORT
each region is not known but there is some significance in the fact
that it is in the West and the Maritimes that public sentiment for
strong foreign investment initiatives has been least strong, histori-
cally and in the present situation. The Gray Report recognized the
impact of the tariff, although surprisingly little attention was de-
voted to it. However, the report does raise the question of the
“miniature replica” effect, that is, the production by subsidiaries
of a larger than optimal line of products, usually the full line of
the parent0 8 Two alternative paths to rationalization are suggested
as the direct result of the removal of the tariff. The first form is
a rationalization between the parent and the subsidiary, enabling
the subsidiary to import (duty-free) part of the parent company’s
product line, while concentrating on the production of a more
limited range of products. A second form of rationalization, clearly
more beneficial, arises where the parent and subsidiary each con-
centrate on a specific product line which is sold to the entire
foreign market. The level of foreign tariffs might have an influence,
depending on the economies of scale achieved in the subsidiary.
Evidence of such consequences are slim, although a recent case
study of automobile components suggests that this second alter-
native might occur. 9
Tariff policy alone, however, is not likely to bring about the
required changes in Canadian industrial structure, or to improve
the benefits of foreign investment. For example, in the short run
small Canadian firms might have so significant a disadvantage,
relative to the equally inefficient foreign subsidiaries (but backed
by access to the huge resources of the parents) that they would
not survive trade liberalization. The overall effect might be an
oligopoly structure totally dominated by foreign-owned firms. Even
if some Canadian firms did survive, the resulting structure would
probably increase intra-company economic integration with Ameri-
can industry, with all that this implies for Canadian political in-
dependence” These two consequences –
a potential oligopoly
Os The Gray Report, supra, f.n.3, 219. There is also some evidence that
subsidiaries replicate the administrative and communications structure of
the parent firm. See Brooke and Rimmers, supra, f.n.46, 40-42.
69 Murray and Helmers, Market Structure and Trade Liberalization: A
Case Study, (1973) 7 J. of World Trade Law 117, 126. “Markets in the United
States and Canada often can be viewed as a single North American market-
place rather than as separate entities. And competition in this larger market-
place would not be Canadian industry versus American industry but rather
company versus company, be they American or Canadian.”
70 Moore, How Much Price Competition?: The Prerequisites of An Effective
Canadian Competition Policy (1970), 129-130.
McGILL LAW JOURNAL
[Vol. 20
structure and closer integration of the Canadian-American eco-
nomies –
indicate that tariff policy must also be linked with
competition and fiscal policy: the first to allow mergers and ration-
alization among small Canadian plants to gain economies of scale;
and the second to provide the motive for such a rationalization.
The Tax System
Taxation is a difficult subject in any country, but in the context
of the MNE, it has a special complexity often overlooked even by
the experts. 71 The fact that corporate income tax has a built-in
incentive for companies to expand by investment of internally gen-
erated funds is generally recognized even by the tax authorities,
but the relationship of corporate taxation to market power is often
overlooked.2 The notion that taxation policies also relate to foreign
investment is only now beginning to be recognized. In Canada,
which has just undergone an extensive period of tax reform, sur-
prisingly little has been said about the link between these two
issues, at least until the October 1972 election, and even then,
often in highly politically charged terms. Yet taxation policies are
a crucial source of host country benefits from foreign investment,
and any obstacles to such benefits merit detailed attention.” Debate
on this aspect of foreign investment has been limited and the
Gray Report devotes no more than six pages to its analysis.7 Three
71 Vernon, Sovereignty At Bay (1971), 274-277.
7 2 Milton Friedman criticizes the practice of leveling a high corporate tax
rate, which has the. incentive of promoting expansion and tax avoidance.
“This tax structure encourages retention of corporate earnings. Even if the
return that can be earned internally is appreciably less than the return that
the stockholder himself could earn by investing the funds externally, it may
pay to invest internally because of the tax savings. This leads to a waste of
capital, or its use for less productive rather than more productive purposes.
It has been a major reason for the post-World War II tendency towards
horizontal diversification as firms have sought outlets for their earnings. It
is also a great source of strength for established corporations relative to new
enterprises. The established corporations can be less productive than new
enterprises, yet their stockholders have an incentive to invest in them rather
than [in new enterprise]… .” Capitalism and Freedom (1962), 130. Market
power, of course, permits the corporation to pass its taxes on to the con-
sumer. An improved tax policy to the corporate tax rate would be to tax
the corporation as a partnership and have the shareholder subject to the
full tax rate.
73 Meier, “Private Foreign Investment” in The International Economics of
Development (1968), 131-161.
7- The Gray Report, supra, f.n.3, ch. 13. The following discussion differs
somewhat from the Report’s analysis.
1974]
THE GRAY REPORT
issues are involved: multinational transfer pricing to minimize the
tax burden in order to maximize retained earnings; prejudicial
treatment of foreign-owned companies at the expense of Canadian
firms; and economic distortions through a favourable treatment
of the resource industries to the detriment of the manufacturing
sector.
(a) Transfer Pricing
The development of the “profit center” concept in management
theory was a response to the need to coordinate the exchange of
goods and services between operating divisions, and to develop a
yardstick of performance.75 Internal resource allocation among
semi-autonomous divisions or subsidiaries is controlled by means
of transfer pricing. In recent years most large corporations practice
this technique, even though its arbitrary calculus makes exact
checks difficult.76 In the context of the multinational firm, transfer
pricing is a powerful management tool to distribute internal re-
sources (raw materials, unfinished goods and components and
overhead charges), especially in the stages prior to the develop-
ment of a product divisional structure.7 7 In the more mature stages
of corporate development, profit levels of each subsidiary based
on internal transfer pricing rates take on less priority than the
national tax differentials in the jurisdictions where they operate.78
Indeed such differentials in national tax rates may be sufficient to
increase the rate of return in the low tax rate country such that,
without the tax differential, the investment would not be a viable
economic proposition.7 9 In some cases, the shifting of. the tax
burden to the low tax country may not compensate the extra costs
incurred by higher import duties or tariff rates. It is hardly sur-
7 5Drucker, supra, f.n.39; Sloan, My Years with General Motors (1965).
76 For a good textbook treatment of the subject, see Shillinglaw, Cost
Accounting: Analysis and Control (1967), ch. 27.
77 Brooke and Remmers, supra, fAn.46, 172-178. As Penrose states, “[i]f we
assume that firms attempt to minimize taxes in their efforts to maximize
retained earnings, we can infer that they will attempt to use the scope thus
provided to allocate overhead costs among their foreign branches, subsidiaries,
and affiliates, and to adjust their transfer prices, in order to reduce their
total tax outlays”. Supra, f.n.30, 43.
78 Shulman, When the Price Is Wrong – By Design, (1967) 2 Col. Journal of
World Business 69; Thomas, Transfer Prices of the Multinational Firm, (1971)
7 Abacus.
79 Brooke and Remmers, supra, f.n.46, 141.
McGILL LAW JOURNAL
[Vol. 20
prising that the MNE undertakes the study of such advantages,
since the tax benefits in a world of mixed rates can be substantial. 0
The economic approach to transfer pricing, and the one un-
derlying the philosophy of the Canadian Income Tax Act is the arm’s
length or fair market comparison, thereby avoiding monopoly and
monopsony practices.”‘ But arm’s length pricing can also be arbi-
trary, and it is often very difficult to show that there is an ap-
proximation to fair market value, a demonstration on the part of
host countries which probably varies with bargaining position and
power. On the other hand, as long as multinational corporations
maintain 100 per cent equity in their subsidiaries, as American firms
prefer, transfer pricing is a highly rational practice not only for
reducing corporate tax liabilities, but as some governments have
learned to their cost, for taking advantage of shifting currency rates. 2
There is little empirical evidence to document Canadian ex-
perience in the past, due to the lamentable disclosure laws for both
foreign-owned and Canadian companies. However, Safarian’s study
indicates that when Canada had a corporate tax rate of 47 per cent,
relative to the American tax rate of 52 per cent, U.S. corporations
found it advantageous not to charge the Canadian subsidiary for
management licensing fees and technology, since this would have the
effect of reducing the Canadian subsidiary’s tax burden and in-
creasing the American parent’s liability in the high jurisdiction.
Similar practices are reported in the tax policies pursued by MNE’s
in other countries.8 Obviously, as long as the Canadian tax rate
remains below the American one, the likely effect will be to increase
80 Rutenberg, for example, has shown a variety of techniques –
transfer
pricing on goods and services, temporary loans among subsidiaries, and
selective dividend payments – which reduce the world tax burden on MNE’s
by taking advantage of tax havens, tariffs, and varying tax rates. See Ruten-
berg, Maneuvering Liquid Assets In A Multi-national Company, (1970) 16 Man.
Science B-671.
81 The Gray Report, supra, f.n.3, 231; Copithorne, International Corporate
Transfer Prices and Government Policy, (1971) 4 Can. Journal of Economics
324, 329-330.
82 A recent study by the United States Tariff Commission discovered that
liquid assets held by MNE’s amounted to $268,000 million at the end of 1971,
a sum equal to twice as much as all the central banks and international
monetary institutions in the public sector: Financial Times, February 16, 1973,
5. For a comparison of national systems of corporate transfer pricing, see
Arpan, International Intracorporate Pricing: Non-American Systems and Views,
(1973) 3 Journal of International Business Studies.
83 Safarian, supra, f.n.19, 194-196.
19741
THE GRAY REPORT
revenue in this country. How long American authorities would allow
this-net transfer to Canada is another matter.
b) Prejudicial Taxes
Canadian companies have long complained to tax authorities
about the prejudicial effects of the tax system which tended to induce
foreign takeovers of Canadian firms. The ten year review process
leading to the 1972 tax reform bill has brought to light various
anomalies in previous tax practices, and several of these have been
corrected in the new Income Tax Act. For more than a decade,
various budgets put forward limited proposals to use the tax system
as a means of discouraging foreign equity investments. For example,
in 1960 the Income Tax had been amended to repeal the differential
in withholding tax on income paid abroad, a practice which en-
couraged wholly-owned subsidiaries.”‘ It was an attempt to encourage
capital inflows away from equity investment into debt securities.
Tax on dividends paid abroad from wholly-owned subsidiaries rose
from 5 per cent to a uniform 15 per cent. But the most notable
attempt to relate the tax system to a policy of controlling foreign-
owned firms was the Gordon budget of June 13, 1963Y This budget
changed the withholding tax to 10 per cent from 15 per cent for
companies where Canadians owned 25 per cent of their voting stock.
Later this proposal was redefined to apply to companies whose
shares were no more than 75 per cent foreign-owned and listed on
a Canadian stock exchange. At least 25 per cent of the directors had
to be Canadians. Another proposal, considerably more controversial,
was the 30 per cent takeover tax on sales of Canadian companies,
subject to specific restrictions of the transactions. This tax proposal
was withdrawn within a week of the budget.8 6
Until the recent tax act, American firms had a particular tax
advantage over Canadian firms in buying out a domestically-owned
company. Not only would the American firm normally have access
to cheaper capital in the U.S. market – or, in fact, in the Canadian
market if it had a good credit rating –
than the potential Canadian
purchaser, but the American company could also deduct for income
tax purposes the interest on capital borrowed for the acquisition, a
tax liability not permitted the Canadian purchaser.87 Just how
84 Canada: House of Commons, Debates, December 30, 1960.
85 Ibid., June 13, 1963, 1004-1007.
86 Ibid., June 19, 1963, 1321. Also June 24, 1963, 1497.
s8Servan-Schreiber has made a similar point about American purchase of
European companies. See supra, f.n.32. A recent amendment proposed by
McGILL LAW JOURNAL
[Vol. 20
significant this tax differential was in promoting takeovers
is
difficult to ascertain since the motive to purchase involves several
other factors, but it points to the need for complementary enactments
across a spectrum of legislative acts if prejudicial policies are to be
avoided.18
c)
Imbalanced Tax Mix
The third major implication of the tax system to foreign owner-
ship is the general policy since 1949 of providing accelerated depre-
ciation and investment allowances which reduce the cost of capital
equipment compared to labour. The most articulate opponent of this
policy is Eric Kierans, who views such investment stimulants as
an instrument which favours the resource industries at the expense
of the manufacturing and service sector, and large corporations over
small firms. In an address to the Canadian Economics Association,
he outlined his basic charge:
Some of you have again called for investment stimulants or incentives.
I am completely opposed to them as providing a solution to Canada’s
long term chronic unemployment problems. I also believe that they have
contributed more than any other single policy to the concentration of
American ownership that now exists in Canada. In other words it is not
what the Americans have done to us but what we have done to ourselves.8 9
Kierans cites evidence from CALURA data for 1968 to show that
such service sectors as retail trade and wholesale trade had an
effective taxable income, as a percentage of book profits, of 90 and
87 per cent respectively: metal mining was 13 per cent, mineral fuels
Finance Minister Turner allows Canadian companies a tax credit against
Canadian tax for income taxes paid not only to foreign countries, as per-
mitted at present, but in addition, from January 1, 1973, income taxes paid
to the provinces or states of foreign countries. This is a revision to the tax
reform legislation, and forms part of a strategy to foster the development of
Canadian based MNE’s. See The Financial Post, December 9, 1972, 1-3.
88 There has been only one major study of the takeover of Canadian firms;
it is somewhat out of date, and suffers from a shortage of critical data.
Reuber and Roseman, The Takeover of Canadian Firms, 1945-1961 (1969).
Various reasons account for sell-outs, including finance, management, and
technology. One can speculate that capitalization has a good deal to do with
it, especially for small, family-owned corporations. Recent evidence from
Europe shows that British firms, backed by access to Britain’s capital markets,
can afford to buy out French firms with low price earnings ratios, and then
to raise the ratio to about 15. How much this parallels the Canadian case
is difficult to say without better data. See The Economist, February 17, 1973, 88.
89 Kierans, Contribution of The Tax System to Canada’s Unemployment and
Ownership Problem, Can. Econ. Assoc., Memorial U., June 3, 1971, 8.
19741
THE GRAY REPORT
5.7 per cent, and other mining 32 per cent. In terms of the size of the
corporation, small firms of less than a million in assets pay a tax of
76 per cent on their book profits, firms with up to 5 million in assets
pay 70 per cent and finns with up to 25 million pay 64 per cent. For
larger firms, the rate drops to 47 per cent. At the same time, the
Reserve for Future Income Taxes, an account which represents the
amount of tax saved by excess depreciation, increased from a reserve
amounting to 1,472 millions in 1965 to 2,778 millions in 1968. Ac-
cording to Kierans, this is tax relief with a vengeance, a relief which
amounts to interest-free loans for investment in plant and equip-
ment.90 From the perspective of foreign ownership, this relief re-
presents a principal means of superceding market forces for invest-
ment in the areas where foreign investment is highest, namely in
capital intensive industries like oil, gas and mining.
A preferential tax system not only promotes foreign investment in
the capital intensive sectors of the economy, but contributes to
unemployment, since the industrial sectors which have high labour-
capital ratios are less favourably treated. Moreover, growth in the
capital intensive resource industries does not necessarily provide a
corresponding increase in employment. As Kierans notes:
… an additional $1 billion export of energy resources to the United States,
for example, would give us $68 million in wages and salaries. The balancing
inflow of $1 billion manufacturing goods could mean that we are im-
porting anywhere from $200 million to $350 million in wages and salaries,
depending on the industry. An exchange of dollars but not of em-
ployment! 91
Despite Kieran’s arguments against the conventional wisdom of
the Department of Finance, the incumbent government has con-
tinued its tax policy with only minor modifications and a promise
to study the matter in 1974.92 The Gray Report makes no reference
to these tax issues and their relationship to foreign ownership,
except for a passing reference to the Tax Reform Bill.93 Public debate
about the efficacy of Canadian tax policy increased during the 1972
federal election, with David Lewis’s campaign against “corporate
90 Ibid., Table 2 and Table 3. An identical argument has been given before
Congressional hearings on tax reform. See Samuelson, “America Turns Against
Its Own Multinationals”, The Sunday Times, March 11, 1973.
91 Kierans, “Towards A New National Policy”, in Rotstein, supra, fm.28, 88-89.
921n his 1973 budget address, the Hon. John Turner promised an end of
the system by 1974 and a thorough review by his department.
93 The Gray Report, supra, fL.3, 360-365. The discussion in the report centres
around the use of the tax system to increase both Canadian ownership and
the benefits from foreign direct investment. Only two paragraphs are devoted
to the second point.
McGILL LAW JOURNAL
[Vol. 20
welfare bums”. 4 Unfortunately, the debate served to obscure the
fundamental issues of the tax policy by placing blame on the com-
panies and not on the assumptions underlying it. Criticisms directed
at the companies which paid low tax rates seem misplaced. The tax
concessions were legal, and there is no duty for a corporation or an
individual to pay more tax than the legal requirement. What should
be questioned are tax laws which allow such deductions. Many
economists have advocated the abolition of similar tax allowances in
the United States, and some, like Milton Friedman, have gone so far
as to propose that the corporation tax should be replaced by a tax
on the corporation as a partnership, with each shareholder paying
his full pro rata share.”
The difficulties imposed on the United States by the balance of
payments deficits have brought to light the tax implications of Amer-
ican laws on U.S. tax credits. At present, U.S. law allows American
MNE’s to offset dollar for dollar tax paid to foreign governments
against American taxes. Proposals have been made in Congressional
hearings to change this practice by allowing foreign taxes to be de-
ducted only against income, not taxes. Since this proposal would have
the effect of levying an effective tax rate on foreign income of about
75%, the elimination of the tax credit could have serious implica-
tions for the taxes paid by American corporations in Canada. But
the questions of how much tax the corporations are actually paying
and what benefits they receive through tax allowances require
detailed study,90 and the lead taken by the U.S. Congress may
provide the incentive for a new look at the policies in effect in
Canada.
Competition Policy
It is paradoxical that an economy operating on the principles
of the invisible hand needs a visible hand to guide it. In other
words, the entire case for free enterprise rests, in the real world of
commerce, on its proximity to perfect competition. Regulation by
government through anti-trust action is one of the principal means
of enforcing competition. While it may be true, as Professor
Samuelson has argued, 97 that anti-trust policy is “a thorn in the
94This is the charge by the Hon. David Lewis of the “corporate rip-off”
during the 1972 election. See Lewis, The Corporate Welfare Bums (1972).
N Friedman, supra, fn.72
06 For one such attempt, see Mauser, Financial Role of Multinational Enter-
prises (1973).
0 Samuelson, Foundations of Economic Analysis (1965), 203.
19741
THE GRAY REPORT
side of what are usually thought of as conservative interests”, even
conservative economists favour vigorous anti-trust laws, and Ralph
Nader has made anti-trust the cornerstone of his consumer move-
ment.98
Despite the fact that Canada’s 1889 anti-trust laws predate the
American Sherman Act by one year, anti-trust enforcement has been
singularly selective and generally more ineffective than U.S. regula-
tion 9 Competition policy generally and anti-trust in particular
are still high on the agenda in the foreign investment debate. Like
tariff policy, anti-trust legislation touches on market structure,
which in turn relates to economic performance. However, the close
relationship between competition policy and foreign ownership has
only recently been recognized, as the works of Hymer and others
reviewed above indicate. 10 It will be recalled that foreign invest-
ment and the MNE thrive in an environment of market imperfec-
tions. Government policy which, by omission (in the case of strong
anti-trust legislation) or commission (in the case of tax legislation
or tariffs),’ promotes market imperfection actually increases the
likelihood of foreign investment, and at the same time reduces the
probable benefits of such investment.
Only recently has the federal government reviewed Canadian
competition policy.’0 ‘ The excellent background study carried out
by the Economic Council provides the major proposals for Bill
C-256, presented to Parliament in June 1971, and now being re-
vised.1′ This new competition bill is the first major reform of anti-
combines legislation since 1960. Experience with existing legislation
has been adequately reviewed elsewhere, 1′ 3 but it is generally
agreed that it has not been a success. This legislation, the Combines
Investigation Act,1
11a amended on August 1, 1960, received the follow-
ing assessment in the Interim Report of the Economic Council:
9s Green, et al., The Closed Enterprise System (1972). This study was carried
out by Nader’s Centre for Study of Responsive Law.
99 For a useful collection of papers on the Canadian experience, written by
lawyers and economists, see Stanbury (ed.), Competition, The Law and Public
Policy (1970). An important text on the subject is Gosse, The Law on Com-
petition in Canadat (1962).
100 Hymer, supra, f.n.50.
101 Economic Council, Interim Report on Competition Policy (Ottawa, 1969).
102 Bill C-256, 19-20 Eliz. II (1970-1971).
103 See, for example, Rosenbluth, “Monopolistic Practices and Canadian
Company Law” in Oliver (ed.), Social Purpose for Canada (1961), 212-234;
Bell, The Development of Canadian Anti-Trust Legislation (1973); and- ch. 4,
supra, f.n.101.
103a S.C. 1953-54, c.51.
McGILL LAW JOURNAL
[Vol. 20
There appear to be few grounds for supposing that the total impact of
the legislation on economic efficiency has been more than modest. Certainly
the impact has been uneven. The Act has mainly been effective
in
restraining only three kinds of business conduct deemed to be detrimental
to the public: collusive price-fixing, resale price maintenance, and
misleading price advertising….
It is unlikely that the Act has done much to effect efficiency via
changes, in the structure of the Canadian economy… But in respect of
corporate mergers which are one of the most important means by which
changes in industrial concentration and other dimensions of economic
structure takes place, the Act has been all but inoperative. The only two
cases brought to court under the merger provisions (the Canadian Brew-
eries and Western Sugar Refining cases) were both lost by the Crown
and were not appealed.104
The new act, Bill C-256, significantly departs in four ways from
the existing legislation. First, the practice of exclusive reliance on
criminal courts is broadened to extend to civil law, greatly modifying
the “punishment” aspects of prevailing law. Second, it is left to the
courts to deal with the practices subject to outright prohibition
(Sections 16-26). Thirdly, the new Act extends competition policy
to the service sector. Finally, the responsibility for administering
certain aspects of the Act, especially those relating to mergers, will
fall on a Competitive Practices Tribunal. On the tribunal will sit a
body of experts:
… who should possess a blend of experience and qualifications appropriate
to the very difficult tasks with which they would be faced, and also be
able to take a balanced and unbiased view of economic questions. The
individual members would have to take particular care to avoid any
conflicts of interest arising out of matters coming before them.10 5
The importance of the new Act should not be under-estimated,
for viewed in the context of foreign ownership and tariff policy,
some fundamental contradictions in Canadian commercial policy
emerge. The contradictions relate primarily to the conflicting pur-
poses of competition and anti-trust policies and how each relates
to the overall goal of economic efficiency. Two observations can
be made at the outset.
First, despite many mergers in several areas of the economy,
there is some reason to question whether this has resulted in great-
er efficiency. Thus, the Economic Council’s Interim Report pro-
vides data from a questionnaire survey on acquisitions from the years
1945-1961. (Service industries were excluded.) Despite methodolo-
gical caveats, the study indicated that in a large percentage of cases
where acquisitions occurred (46.4 per cent), negligible economies
104 Supra, f.n.lO1, 64.
105 Ibid., 111.
19741-
THE GRAY REPORT
resulted. In cases where some economies were achieved, they
could be ascribed to other factors.0 6 It is tempting to draw certain
conclusions about management talent and administrative overhead
expenses as a result of this rather surprising finding, but this should
await further evidence. What is particularly relevant here is the
fact that the fairly high number of mergers and acquisitions has
not in the past corresponded with a high degree of industrial ration-
alization, as might be expected, or as the branch plant nature of
the economy would require.
Second, the Canadian economy displays not only a very high
level of concentration in absolute terms, but has a higher degree
of economic concentration than the United States.’ 7 More than a
third of all Canadian manufacturing shipments come from indus-
tries which are very highly concentrated, as compared to only 13.7
per cent in the U.S.’ 8 Equally important is the relationship between
non-resident ownership and industry concentration. Stewart found
that industries dominated by Canadian-owned firms showed high
concentration. However, of 33 industries in the study dominated by
foreign-owned firms, all but three were in the high concentration
categories. 09 Not surprisingly, industries in Canada which are
highly concentrated are in general the same industries which are
most concentrated in the U.S.” 0 In other words, oligopoly structures
of U.S. corporations extend their oligopoly structures to the Cana-
dian market, often by the takeover of a Canadian firm or by a direct
merger with a domestic operation. While it may be true, as Green
et al., point out,”‘ that the impact of such mergers and acquisitions
is marginal on competition, the ultimate result of 300 to 400 such
acquisitions by U.S. companies is the effective reduction of compe-
tition by international oligopoly. Moreover, European and Japanese
anti-trust laws, like Canadian legislation to date, have different
aims than their American counterparts. Thus moves towards lessen-
ing concentration are unlikely.”2
106 Ibid., 216-219.
10′ Stewart, Concentration in Canadian Manufacturing and Mining Industries
(1970).
108 Ibid., 62.
109 Ibid., 72.
11D Rosenbluth, The Relation Between Foreign Control and Concentration In
Canadian Industry, (1970) 3 Can. Journal of Economics, 14-38.
11 Green, supra, fmn.98, ch. 7.
112 Indeed, government policy has been directed towards the creation of
larger units to compete with the American giants. For a study of European
competition policy, see Cairns, The Regulation of Restrictive Practices –
Recent European Experiences, Economic Council of Canada (1972).
McGILL LAW JOURNAL
[Vol. 20
In the theory of industrial organization, two schools of thought
emerge with regard to anti-trust policy.”-3 The first, more conserva-
tive, emphasizes conduct variables in market behaviour. Here, regu-
latory practices govern such factors as price collusion, resale price
maintenance, misleading advertising, etc. The proposed Competition
Act is a marked improvement over existing legislation, and covers
the concerns of this first “school”. The second school is more radi-
cal, and advocates changes in the market structure to lessen con-
centration. This, it is thought, makes collusion among firms less
likely and market entry more possible.
The structural approach to anti-trust problems has a special
complexity in the Canadian context. In the first place, the likely
economic need is for greater rationalization among existing opera-
tions because of less than optimal economies of scale.
Secondly, many of the inefficient plants located in Canada are
foreign-owned, chiefly by Americans. In consequence, these plants
could be subject to American anti-trust law, and rationalization on
a massive scale would appear unlikely. Both the Watkins Report
and the Gray Report went into these problems in great detail and
outlined certain options available to Canadian policy-makers, inclu-
ding special legislation to prevent foreign anti-trust applications in
Canada. 114
The proposed Competition Act does provide for flexibility in
meeting the need for some kinds of mergers, especially where in-
creased efficiency is attained and there is no reduction in competi-
tion. Even where reduced competition may result, a merger might be
allowed if improvements led to better products or lower prices.
Section 44 of the proposed Bill outlines a number of factors to
evaluate mergers, including size, concentration and competition in
the industry, previous mergers, the degree of international compe-
tition and the effect on other firms in the industry. What should be
noted, however, is that the proposed Tribunal requires a consider-
able amount of information to assess these factors, information
that present disclosure laws do not require. Moreover, there are
very real difficulties in assessing mergers where efficiency may
result for the companies, but where the cost savings may not be
passed on to the consumer. Would direct price-fixing be necessary?
The possibility that the terms of reference and jurisdiction of the
113The theory discussed here follows the treatment by Low, Modern Eco-
nomic Organization (1970).
270-279.
114 The Watkins Report, supra, f.n.4, 408-409; The Gray Report, supra, f.n.3,
1974]
THE GRAY REPORT
new Competitive Practices Tribunal and the Review Agency recom-
mended by the Gray Report in many ways overlap and possibly
conflict, will be dealt with in the next section.
However, as regards foreign investment and Canadian competi-
tion policy, the record is clearly inadequate in terms of structural
conditions: concentration of industry, limited entry features and
strong market power.” 5 Worse still, this inadequacy also extends
to conduct variables, such as pricing, misleading advertising and
resale price maintenance.”” Viewed in the larger context of eco-
nomic policy, Canada’s record of competition policy, taxation legisla-
tion, and tariffs has created an economic environment inducing the
creation of small sub-optimal plants, protected from the rigours of
full domestic and international competition. Perhaps the real won-
der is that even more foreign investors have not been attracted to
such an environment.
THE TORTUOUS EVOLUTION OF PUBLIC POLICY
The foregoing analysis of the structure and development of the
MNE and the description of the Canadian economic environment
suggest what new public policies are required. The MNE is a large,
flexible, powerful economic actor; governments typically act with
slow bureaucratic inefficiency. The policies Canada adopts must
take cognizance of these basic realities.
Fortunately, the debate on foreign ownership in Canada has
reached the stage where concrete proposals supercede polemical
discourse and academic niceties. Two basic proposals have been
introduced in Parliament. One is a Competitive Practices Tribunal,
as embodied in Bill C-256 and proposed by the Economic Council’s
Interim Report on Competition. The second, a screening mechanism
of certain aspects of foreign investment decision-making, as embo-
7 follows directly
died in Bill C-201 and its successor, Bill C-132,1
1
115 That competition policy must be strengthened is given support by the
evidence of exclusive dealerships documented in the Royal Commission on
Farm Machinery, Special Report on Prices (Ottawa, 1969). This report is
particularly interesting, but it documents corporate practices in an industry
where tariffs have a small significance – a point which illustrates that various
commercial policies must be integrated to have maximum effect.
116 Thompson, Resale Price Maintenance in Canada, (1971) 21 U. of T. L.J. 67.
117Bill C-132, 21 Eliz. II (1973). The name given to this Act, the Foreign In-
vestment Review Act, indicates its increased coverage of foreign investment
screening, in contrast to Bill C-201, the Foreign Takeovers Review Act.
McGILL LAW JOURNAL
[Vol. 20
from the recommendations of the Gray Report. In practice, both
proposals represent a major shift in Canadian commercial policy,
and both provide, even in minimum form, a new and direct regula-
tion of many aspects of business behaviour. 118 These proposals
should be analysed in concert since both deal with similar character-
istics of the market structure (competition and efficiency), and
would operate with much the same criteria. This section sketches
the main administrative features of each agency and examines their
operation in light of foreign investment regulation in other coun-
tries with particular reference to Japan.
The Review Agency
Of the three major alternatives examined, including the key
sector approach and across the board ownership rules, the Gray
Report chose the Review Agency. The alternatives are not mutually
exclusive, but the Review Agency is sufficiently novel to merit closer
examination as a foreign investment strategy. The original legis-
lation, Bill C-210, would have limited screening only to takeovers
of Canadian firms, but the revised act, Bill C-132, introduced on
January 24th, 1973, extends this limited coverage to include expan-
sion of existing foreign-controlled firms and the entry of new foreign
investment. Bill C-132 is very similar to Bill C-210. It provides for
a Review Agency, headed by a Commissioner who is the chief execu-
tive officer responsible to the Minister. The Commissioner will
have access to the staff and resources of the Minister’s depart-
ment “as are necessary for the proper conduct of the work of the
Agency”.”19
The Act applies only to Canadian firms with assets valued at
more than $250,000 or with gross revenues exceeding $3,000,000,
determined by the previous fiscal year’s operations. No change was
made to these levels, although some criticism was levied against
them after Bill C-210 was introduced. The Canadian Manufacturers’
Association, for example, urged an increase in size, arguing that it
might hinder small businessmen wishing to sell their firms.120 A
more important difficulty, however, with a uniform threshold may
be the uneven composition of assets among small businesses. The
118 Yet the nature and extent of regulation remain relatively limited, even
in comparison to the United States, where disclosure laws, antitrust laws,
and some regulatory agencies are much more stringent than in Canada.
“19 Sections 7(1) and 7(2), Bill C-132.
120 The Globe and Mail, June 16, 1972. The CMA presented its views before
the House of Commons Finance Committee in a written submission.
1974]
THE GRAY REPORT
asset composition would likely vary considerably by industry and
by industrial sector: receivables and inventory would be two cases
in point. Profitability probably also varies as a ratio of assets and
sales across industries. Statistics in the Gray Report indicate that
there were 30 takeovers in 1968 and 44 in 1969, involving less than
half a million dollars in assets.”” The screening mechanism would
apply to these cases and it may be found that variations are great
enough to warrant a variable threshold.
But these are small points and can be ironed out over time. A
more serious issue with regard to the Review Agency is the criteria
established to guide the weighing of costs and benefits. Bill C-132
and its predecessor Bill C-201, adopt the same general criteria out-
lined in the Gray Report:
(a) The effect of the acquisition on the level and nature of eco-
nomic activity and employment;
(b) the degree and significance of Canadian participation;
(c) the effect of the acquisition on productivity, industrial
efficiency, technological development, product innovations,
and product variety in Canada;
(d) the effect of the acquisitionl on competition within any
industry or industries; and
(e) the compatibility of the acquisition with Canadian industrial
and economic policies.122
Much discretion would have to be exercised in applying these
criteria. The requirements of each criterion could vary greatly in
the circumstances, and one criterion might have to be weighed
against another. For example, a takeover bid might increase employ-
ment in the first criterion but mean less competition in “d”. How
would the Review Agency weigh the presumed benefits and costs?
Would the entry of new business to Canada which satisfied all but
the second criterion be accepted, or would the lack of Canadian
participation be sufficient to block approval? (Legislation on Cana-
dian participation could easily be enacted separately, so that this
criterion would not then conflict with the others.) 23 It can be seen
1
3
2 1 The Gray Report, supra, f.n3, Table 57, 475.
122 In s.2(2)(e) of Bill C-132, recognition is given to the industrial policies
of the provinces where acquisition or establishment of a new firm has some
significant effect. In practical terms, this criterion probably means political
pressure from the provinces on the Review Agency’s proceedings.
23 In fact, legislation for federally incorporated companies may be forth-
coming, and some provinces have ahnounced plans for similar legislation for
corporations in their jurisdiction. Financial Post, February 11, 1973, 3. It is
McGILL LAW JOURNAL
[Vol. 20
that no matter how specific the criteria laid down for the operation
of the Review Agency, administrative discretion would still be
an integral aspect of the screening process. On the other hand, the
worst features of arbitrariness are reduced by the provisions for
advance notice, for a right to representation including third party
representation and consultation and for the right of appeal.
Bill C-132 defines the acquisition of control of a Canadian public
company as occuring when 5 per cent of the voting shares are owned
by foreigners; in the case of a private company, when 20 per cent
of the shares are held by foreigners.1 24 On the basis of these criteria,
a large Canadian company, publicly quoted and having only 10 per
cent of its voting shares held by foreigners, would have to apply to
the Review Agency for approval to purchase another Canadian com-
pany –
a situation which might occur in several takeovers each
year. A similar anomaly exists in the case of the outright sale of
a Canadian business by a foreign individual or corporation. If the
Canadian assets are not owned through a corporation but sold
directly, the Act would not apply, whereas if the assets were owned
through a Canadian corporation, the sale would be covered by the
screening mechanism. Is this really the intention of the Act? There
is also the possibility of gradual foreign acquisition of a Canadian
company without facing the Review Agency. A group of foreign
investors could purchase shares in a Canadian public company such
that no one purchase amounts to the 5 per cent limit under Section
3(3). As long as there is no joint action on the part of the foreign
purchasers, the takeover legislation would not apply to such gradual
acquisitions. Just how important these points are for the operation-
al basis of the Act remains to be seen; in any event, it is possible
that certain amendments or supplementary
legislation may be
passed to cover such loopholes.
A more problematic matter for the Review Agency is its working
relationship to the Competitive Practices Tribunal to be established
by the proposed Competition Act. Unlike the Review Agency, which
would be responsible directly to a Minister, the Tribunal would act
with a considerable degree of independence. Consisting of seven
members appointed for ten years, it would function as a “court of
an interesting yet melancholy commentary on Canadian affairs that while
this country is preoccupied with getting Canadian citizens into positions of
management and directorships in the largest corporations, several European
countries are establishing guidelines to attain worker participation in these
same positions. See, for example, The Economist, March 24, 1973.
124 Sections 3(3)a and 3(3)b.
1974]
THE GRAY REPORT
record” which would examine anti-competitive practices and “bring
its judgement to bear”.25
The Tribunal would be empowered to examine corporate mer-
gers, inter-company export and franchising agreements and certain
trade practices such as price discrimination or trade allowances; and
to conduct special inquiries such as those provided for in Section
42 of the present Act. The Tribunal would conduct hearings which
would be more informal than the proceedings of a court. As the
Economic Council suggested:
Hearings would ordinarily be public. The prevailing atmosphere would
ideally be one of a collective search for understanding of business practice
and its economic effects, and for the progressively clearer discernment
of the nature of the public interest in particular cases. In line with this
objective, the Tribunal might wish to give witnesses considerable freedom
in their presentation of evidence.’ 26
One of the principle functions of the Tribunal is the examination
of corporate mergers. It is in this area where concentration of the
Canadian economy persists, and where the activities of the Tribunal
relate most directly to the screening mechanism of the Review A-
gency. Mergers between companies would be registered and reviewed
where combined assets or annual revenus exceeded five million
dollars, or where one of the companies is under foreign control.
Advance approval may be sought, but once the Tribunal grants
approval, it cannot later recommend its prohibition. The major
criterion used to permit corporate mergers is an improvement in
corporate efficiency with no reduction in competition. It will be
recalled that the Economic Council’s Interim Report found that in
the minority of cases where efficiency was increased by mergers/take-
overs, the improved efficiency could be attributed to other factors.
The Tribunal may still grant approval to a merger even when
this will adversely affect competition “if substantial benefits will
accrue to the community through increased efficiency, better prod-
ucts, or lower prices”, according to the explanatory notes to Bill
C-256. Section 44 of the proposed bill outlines several factors which
the Tribunal would take into account in assessing the likely effects
of a merger on competition:
(a) the relevant market structure of a particular industry,
including actual and potential market shares;
(b) the history of previous mergers and concentration trends;
(c) the likely effects on market entry by existing firms, new
firms, or expansion of existing firms in the relevant market;
125 Interim Report on Competition Policy, supra, f.n.10,1, 68.
126 Ibid., 64.
McGILL LAW JOURNAL
[Vol. 20
(d) the history of anti-competitive behaviour on the part of
the parties to the merger;
(e) the amount and intensity of domestic and import competi-
tion in the relevant market;
(f) the likelihood of foreclosure of sales markets or sources
of supply.
The following criteria relate to the determination of potential
improvement in efficiency arising from the merger:
(a) the economics of the relevant market and minimal scale
economics;
(b) the size of the merger parties relative to the minimal scale
of operations;
(c) the likelihood of improved economies of scale;
(d) the potential effects on meeting import competition, increas-
ing export trade, improving research and development,
or any other relevant factors the Tribunal feels necessary.
It is obvious that both sets of criteria are closely related to the
criteria established for the screening mechanism of the Review A-
gency. Indeed, the questions of corporate mergers and foreign acqui-
sitions of Canadian companies are so closely intertwined that it is
difficult to treat them separately. The Gray Report foresaw this
eventuality and specified what the likely administrative links would
be. Where a foreign controlled firm is involved in either an acqui-
sition or a merger, the Review Agency would have jurisdiction to
examine the potential results in addition to the Competitive Prac-
tices Tribunal. Consequently both bodies would have to apply their
criteria of assessment before granting approval. As elaborated by
the Gray Report:
If a review process were implemented, a proposed takeover would be
subject to examination by two public bodies. This cannot be avoided,
however, without removing all consideration of foreign mergers from
competition policy, or all takeovers from the jurisdiction of the review
process. Neither of these alternatives is desirable for both policies would
be serving a well defined public objective. It would be inappropriate to
have the review authorities administer competition policy for foreign
takeovers and the Competitive Practices Tribunal for domestic mergers,
since conflicting interpretations of competition policy could arise. 2 7
The Gray Report suggests that “only a few” takeovers would
be subject to the work of both the Review Agency and the Tribunal.
In these cases, corporations could seek application first to the
Review Agency for approval, which would in turn notify the Tribu-
127 The Gray Report, supra, f.n.3, 464-465.
19741
THE GRAY REPORT
nal. If the Tribunal granted permission for a takeover on grounds
of improved efficiency or the absence of adverse competitive effects,
it would be then left for the Review Agency to negotiate the best
terms.
What then are the probable effects of both bodies on the struc-
ture of Canadian industry? The combined influences of the tariff,
various tax policies and an ineffective combines policy have resulted
in a highly concentrated, sub-optimal scale, branch plant eco-
nomy. To view either the Review Agency or the Competitive Practices
Tribunal in anything less than this larger perspective is economic
and legal myopia of the highest order. The basic thrust of both
bodies must be directed to this larger issue, and not necessarily to
the question of foreign ownership per se. The MNE has enormous
resources and bargaining skills at its command. It should have little
difficulty showing some benefits of any takeover or new invest-
ment even if some doubt remains regarding one or two criteria.
Armed with its negotiating power and capacity to reach out to the
sources of power within Government, the MNE will face both the
Review Agency and the Tribunal with coherent policies and the
means of articulating them. Any screening mechanism, however
general in its application, must have the resources, skills, and
coherent operating strategy to face this prospect. Has the ground-
work been laid for the Tribunal or the Review Agency? Are public
servants available with the necessary blend of experience in law
and business to weigh the criteria of the Review Agency, the indus-
trial goals of the nation and the economic priorities of the prov-
inces against the corporate needs of the multinational corporation?
Has sufficient attention been given to the development of coherent
strategies for industrial development of Canadian resources within
the framework of a mixed economy? There is reason to believe
not: first, because information, the lifeblood of any administrative
agency, is lacking; and second, because of the persistance of con-
flicting goals and purposes. These points need elaboration.
(a)
Information
One of the difficulties about foreign investment in Canada is the
problem that present disclosure laws do not provide sufficient infor-
mation for economic analysis and government surveillance of firms.
Ironically, one of the best sources of data on foreign investment in
Canada is the U.S. government! The Watkins Report, the Wahn Re-
port, and the Gray Report all recommended changes in existing
means of collecting and analyzing information relating to foreign
ownership and investment. This is necessary since the successful
McGILL LAW JOURNAL
[Vol. 20
administration of both the Review Agency and the Competitive
Practices Tribunal is contingent on having a great deal of informa-
tion which is not presently available.
At present information is collected from three sources: CALU-
RA,’128 the International Investment Position (IIP), and the Depart-
ment of Industry, Trade and Commerce. All these sources use a
different conceptual reference and a varying data base. Certain
concepts sucli as “control” and “ownership” are not employed
consistenly for purposes of economic analysis generally, for identifi-
cation of foreign control, and most critically for the operation of
the review process. In an excellent chapter outlining the most signi-
ficant gaps in information, the Gray Report glosses over the improve-
ment of corporate disclosure laws as a prerequisite to the opera-
tion of the Review Agency.129 It does offer some possibilities of the
Review board getting better information from other government
departments, from the corporations which appear before it or from
special studies undertaken under its auspices. Such a glib response
to the “knowledge gap” about foreign ownership is rather start-
ling, particularly because Canadian disclosure laws are even less
stringent than American ones. It is worth noting that a recent study
commissioned by Ralph Nader recommended the establishment of
an Economic Information Centre, to which all publicly and privately
held corporations would report sales and profit along divisional
lines, as well as general data ranging from their investment accounts
to advertising expenditures, in order to promote intelligent “plan-
ning for competition”. 18 0
It is not clear how the members of the Review Agency or the
Tribunal could decide on the technical matters of corporate effi-
ciency without better data. It is true, of course, that the American
economy is considerably larger than the Canadian one, but the
need for information is no less great. Information about product
lines, technological licensing, minimal economies of scale or any
of the several other operational criteria which must be weighed is
not now available. Information provided by one of the parties to
a merger or a takeover might narrow the gap, but would hardly be
sufficient to ascertain industry averages and market conditions in
aggregate. It is doubtful whether even a very large and experienced
research staff could provide the required data without better
disclosure laws.
2
1
8 Cf. the Canadian Corporations and Labour Unions Returns Act, 10-11,
Eliz. II, c.C-26.
129 The Gray Report, supra, f.n.3, ch. 22.
130 Green, et al., supra, f.n.98, ch. 4.
1974]
THE GRAY REPORT
(b) Conflicting Goals
Mention has already been made of the argument that consumer
protection aspects of the Competition Bill should not be included
with the provisions relating to mergers and market structure. A
more serious problem exists in the need to restructure the Cana-
dian branch plant economy. Two industrial goals are involved in
this matter: first, to provide anti-competitive regulations for firms
which will not be subject to industry rationalization; and second, to
foster consolidation of small, inefficient firms within the same
industry. New foreign investment is one way of promoting compe-
tition and rationalization, but at a cost of greater foreign owner-
ship.
The difficulties attendant in this administrative process are very
great and are further exacerbated by two additional considerations.
Firstly, the Competitive Practices Tribunal is envisaged as an inde-
pendent body, free from the direct control of Parliament and the
provincial authorities where the largest firms are located. A Tribu-
nal which actively engaged in a merger process to restructure speci-
fic industries, even where economic theory would so recommend,
would be likely to incur the wrath of politicians at both the federal
and provincial level. The same result might occur if the Tribunal
prevented mergers which promoted provincial interests but at the
expense of the national welfare. Secondly, even if industrial policies
governing corporate mergers were articulated, the Review Agency
and the Tribunal would still function as quasi-legislative bodies by
the precedents of their own decisions. There seems little doubt that
this process of “rule making” by doing is unavoidable since even
specific guidelines still require a certain degree of administrative
discretion. In another context Professor Low”‘3 has discussed the
paradox of “procompetitive effects”, following Samuelson’s analysis
of the “paradox of thrift”.132 If everyone saves, no one will save
because overall income declines. In competition policy, cases which
are decided in the same way by general rules result in a situation
that, while each case decided on its own may give a defensible, pro-
competitive result, the net overall result may actually be anti-com-
petitive. “A thousand mergers may each be clearly anti-competitive;
banning all those mergers may be anti-competitive in its effect on
the capital market, the mobility of assets, and so forth.”‘-3 This
paradox of procompetitive effects illustrates the need for discretion
1 31 Low, supra, f.n.113, 397.
132 Samuelson, Economics, International Ed. (1968).
133 Low, supra, f.n.113, 485.
McGILL LAW JOURNAL
[Vol. 20
even where the criteria to be applied are much more specific than
those provided for the Review Agency and the Tribunal.
One possible remedy to this conflict of goals is to establish a
specific policy on industrial reorganization, possibly formulated by
federal and provincial representatives. The policy would be directed
towards the restructuring of certain areas of the economy where
rationalization and market reorganization are required. This alter-
native would remove from the Competition Bill the main responsi-
bility for mergers directed towards large scale reorganization in
industries which display the worst features of sub-optimal scales,
such as the refrigerator industry, cited by the Watkins Report. This
approach might take the form of Britain’s Industrial Reorganization
Corporation Act, 1 96 6.1.4 The IRC had as its purpose the following:
(a) to promote or assist in the reorganization or development
of any industry; or
(b) if so requested by the Secretary of State, to establish or
develop, or promote or assist the establishment or develop-
ment of, any industrial enterprise.
After two years of operation, the industrial reorganization func-
tion of the IRC was supplemented by passage of the Industrial Ex-
pansion Act, 1968,13i because the former did not initiate the major
changes envisaged by its supporters. As one critic noted, the IRC
“has only (1) offered informal advice and (2) in its most signi-
ficant moves, promoted mergers between major electrical, com-
puter and nuclear instrument companies”. 86 The Industrial Expan-
sion Act provides the means of directly involving government finan-
cial support in a reorganization effort, particularly
in specific
sectors chosen by policy makers. In Canada, this model could have
some parallels in the use of the Canada Development Corporation
as a complementary
rationalization,
although only within parameters established by commercial poli-
cy.1 37 Furthermore, it might help to sort out the ambiguous and
conflicting commercial goals imposed on the Competition Act and
the Review Agency. The purposes of these bodies should constantly
be shaped by a general industrial strategy and their operational
criteria weighted towards this general goal.
instrument of industrial
1 14-15 Eliz. II (1966) c.50.
135 16-17 Eliz. II (1968) c.32.
130 Caves, et al., Britain’s Economic Prospects (1968), 388n.
137For discussion, see Couzin, supra, f.n.7, 434 et seq.
1974]
THE GRAY REPORT
A Foreign Investment Council
The main function of the Review Agency outlined in both Bill
C-201 and Bill C-132 is to screen certain foreign investment deci-
sions. Yet the Gray Report recommended the following additional
functions:
(a) to advise the government on foreign investment policy;
(b) to perform an advisory or consultative function in relation
to foreign investment implications of other government
policies and programmes;
(c) to gather information necessary for purposes of identifying
foreign control and effectively negotiating with foreign
investors;
(d) to conduct investigations on matters relating to foreign
investment policy, industries or practices at the request
of the minister responsible for its activities.138
Both the Watkins Report and the Wahn Report recommended
the creation of a special agency whose work would be similar to
these functions. 13 9 The obvious rationale for such work is to make
information gathering and analysis a continuous process, in con-
trast to the ad hoc policy approach featured to date, highlighted by
intermittent task force studies surreptitiously brought to the public
through the back door.
Several possibilities are open to the government. The resources
of government departments are available for the Review Agency’s
work. There is also some likelihood of the appointment of a small
staff of researchers responsible to the Commissioner. It remains
open to doubt, however, whether either of these alternatives is
sufficient to carry out the advisory functions envisaged by the Gray
Report. Indeed there is a danger that the use of the same staff for
the advisory and research functions as for the day to day adminis-
tration of the screening mechanism would endanger the successful
work of both, a familiar bureaucratic malaise known as the dis-
placement of goals. 40
A more satisfactory solution, based on the historical experience
of regulatory agencies in the United States and on the literature of
138The Gray Report, supra, f.n.3, 453.
39 The Watkins Report, supra, f.nA, 395; Eleventh Report of the Standing
Committee on External Affairs and National Defence Respecting Canada-U.S.
Relations (1970).
14 0 For an analysis of this goal displacement problem in organizations, see
March and Simon, supra, f.n.47.
McGILL LAW JOURNAL
[Vol. 20
decision-making and bureaucracy, is the creation of a body empow-
ered to act as an advisory agency on the long-run policy implica-
tions of foreign investment. Such a body might be called the Foreign
Investment Council. Its main purposes would be directed not so
much to the short-range problems which face the Review Agency,
as to strategic decision-making for foreign investment analysis and
industrial and commercial policy. By systematically gathering data
on a continuous basis, by undertaking or delegating intensive stu-
dies of specific subject areas and by reviewing government policy
in a number of separate departments, a Foreign Investment Coun-
cil could act as an intelligence unit for the economy.141
One model for Canadian policy-making in foreign investment is
Japan’s experience with its Foreign Investment Council. The Japa-
nese model is interesting not only because Japan has been success-
at policing foreign
ful –
investment, but also because it illustrates the judicious combination
of administrative agility and efficient data collection and analysis.
too successful in the eyes of some critics –
Japanese legislation on foreign investment began with the For-
eign Exchange and Foreign Control Law enacted in 1949 to regulate
foreign transactions. 142 A year later Japan passed the Foreign Invest-
ment Law to screen foreign investment and “to create a sound basis
for investment of foreign capital” which would allow self-sufficien-
cy and a balanced growth of the economy.143 This law provided
for the establishment of a Foreign Investment Council, which was
to be an advisory body on foreign investment to the Minister of
Finance. In the first phase of its existence, the FIC rigorously screen-
ed all new foreign investment. By 1966, with the resurgence of the
economy and Japan’s entry into the Organization for Economic Co-
operation and Development, a new phase of liberalization began.”
In 1967 the FIC was reorganized to consist of a blue ribbon com-
mittee under the Minister of Finance, but the members were chosen
entirely from the private sector. A special advisory body of recog-
nized legal and economic experts was created to work with the Coun-
cil to study particular issues and gather relevant data on foreign
141Intelligence is used in the sense that the meaning and implication of
data (information) is as important as the data itself. Too often data is availa-
ble but not used or not understood. See Wilensky, Organizational Intelligence
(1967).
142 Kobayashi, “Foreign Investment In Japan” in Maule and Litvak, Foreign
Investment: The Experience of Host Countries (1970); Kawakarni, Foreign
Investment Regulation in Japan, Unpublished Thesis, Harvard Law School,
(1969).
143 Kobayashi, supra, f.n.142, 134-135.
1974]
THE GRAY REPORT
investment. In 1967 the Council held a series of hearings on capital
liberalization, and made a report to the Minister on June 2, 1967.
The report outlined a general policy on foreign investment, a series
of specific recommendations on phasing in liberalization over time
and a list of guidelines for foreign-controlled firms in Japan. Such
firms should:
(1) Seek coexistence and prosperity with Japanese enterprises
through joint ventures on an equal partnership basis.
(2) Avoid concentration of investment in specific industries.
(3) Avoid suppressing small enterprises when entering into
industries characterized by small firms.
(4) Cooperate voluntarily with the Japanese effort to maintain
proper industrial order.
(5) Avoid entering into unduly restrictive arrangements with
parent companies abroad, and not resort to unreasonable
restrictions concerning transactions or to unfair compe-
tition.
(6) Take positive steps towards developing Japanese technolo-
gy, and not hamper the efforts of Japanese industries to
develop their own technology.
(7) Contribute to the improvement of the nation’s balance of
payments through exports and other means.
(8) Appoint Japanese to the board of directors and top man-
agement positions and make shares of company stock availa-
ble to the public.
(9) Avoid closures of plants, mass dismissal and unnecessary
confusion in employment and wage practices by paying
due regard to the prevailing Japanese practices.
(10) Conform to the government economic policy.145
These guidelines amount to a comprehensive package of rules
which apply to all foreign corporations in Japan. Obviously there
are certain cultural factors which reinforce the administrative
implementation of these guidelines. However, the advisory capacity
of the Council and the highly effective but stringent disclosure laws
on companies in Japan are features which merit a great deal of
study and possible imitation for a Canadian foreign investment
council. More resources for statistical analysis, as well as an improved
144 Ibid.
145 Yoshino, “Japan As Host To The International Corporation”, in Kindle-
berger, supra, f.n.14, 361.
McGILL LAW JOURNAL
[Vol. 20
statistical information system
implemented by Statistics Cana-
da would go a long way to closing the knowledge gap about foreign
investment in Canada, if policy makers are serious about impro-
vising the decision-making process.14
It might be argued that the Economic Council of Canda would
be a better vehicle for foreign investment analysis. However, the
record of performance of this body remains a matter of dispute, and
on foreign investment its silence borders on being deafening. This is
not to suggest that the Economic Council has no role to play. On
the contrary, most of the issues discussed in this paper deal with
economic regulation or defensive economic planning as a reaction
to the behaviour of foreign firms. Much more needs to be said about
aggressive strategies for growth –
capital development, entrepre-
neurship, business and legal education, productivity and corporate
structure, business-government relations, export agencies, etc. –
a
range of issues which are the basis of any coherent industrial strate-
gy. The function a Foreign Investment Council can best serve is to
provide a coherent annual report on the activities of foreign-con-
trolled firms in relation to the Canadian-controlled sectors, the key
structural changes, and the economic trends such changes imply.
Moreover, the Council could provide a set of recommendations on
a continuous basis for policy or legislative action.
In any case, it must be recognised that better tools to gather
and analyse statistical information are the sine qua non of both the
Review Agency and the Competitive Practices Tribunal. The criteria
laid down for both bodies, to be meaningful in any operational sense,
require a knowledge of corporate activity and industry averages,
as well as of Canadian-controlled and foreign-controlled firms. That
the information for this is not presently available is perhaps the
greatest oversight in Bill C-132 and Bill C-256.
Conclusion
Few countries in the world have done so little about the level
of foreign investment within their borders as Canada. For more
than a century, government policy has consisted of little more than
ad hoc decisions tied to the framework of the National Policy. There
could hardly be a better formula to attract huge amounts of foreign
investment. But as Canada moves into the last quarter of the twen-
tieth century, the world economy and the national economic inter-
140 This is an important assumption, especially in the Canadian context. For
a general analysis, see Dror, Public Policy Re-examined (1965).
1974]
THE GRAY REPORT
ests of the member states are undergoing profound changes. The
old ideological labels of socialism and free enterprise, of laissez-faire
and government ownership mean little in a world of international
oligopoly, giant multinationals, and instant communications. More-
over, the economic muscle of the largest economy, that of the United
States, is now challenged by the resurgent strength of Europe and
Japan. Various competing “models” of economic planning, in which
government takes an activist, interventionist stance, not only in the
Keynsian stabilizing role but in entrepreneurial endeavours, open
the way for new possibilities for the mixed economy.
This paper has reviewed the foreign investment debate in Cana-
da, tracing its development from 1957 to the present, in light of
the startling growth of the multinational enterprise. In examining
the MNE, emphasis has been placed on its logic of development, its
search for market superiority, and the means of maintaining mar-
ket control once it is achieved. Once it is recognised that market
imperfections are at the basis of MNE development, it follows that
policies of social control which fail to correct or ameliorate such
imperfections do not come to grips with the reality of these large
corporations. It is in this context that the Review Agency must be
judged. As documented in scores of books and articles, the Canadian
economy is highly concentrated, but at the same time retains too
many sub-optimal size plants. Government policies foster the
growth and permanence of this situation by a blend of tax and tariff
measures which are less than likely to bring out the maximum
benefits of foreign investment. In the narrower context of the admin-
istrative and legal framework, the Review Agency, like the Com-
petitive Practices Tribunal, must operate with a high degree of
discretion and subjective evaluation. The criteria laid down by
statute are vague and possibly contradictory; but to suggest that
they can be otherwise is to ignore the monopolistic revolution in
economic theory and the economic and social power of the MNE.
The absence of the economic data needed to apply the criteria com-
missioned for the Review Agency makes improved disclosure laws
and better techniques of economic data analysis a prerequisite of any
regulatory screening mechanism. So great is the need for more data
and the continuous interpretation of aggregate and sectoral changes,
that the establishment of a particular body dealing with this
function is proposed. A body such as a Foreign Investment Council
would serve as a clearing house for continuous foreign investment
analysis, including the study of federal and provincial initiatives
and policies adopted in other countries; and for the assessment of
existing legislation. In this way, the government would only be
MvGILL LAW JOURNAL
[Vol. 20
doing what the large MNE has done consistently well: analyzing its
own performance in the light of desired and actual results.
The Review Agency is not the final word on foreign investment.
In a most fundamental way, the Gray Report has exposed the need
for new policies, and it now seems that a majority of Canadians
agree. 147 To date, the legal community has not involved itself in the
foreign investment debate, possibly because lawyers have been con-
tent to accept the familiar economic surrogate-entrepreneur model
of the firm as descriptive of the MNE. Hopefully, the Gray Report
and the appearance of legislation based on its proposals will stimu-
late active legal scholarship directed to the challenges and problems
created by the MNE.
Similarly, the Report may spur the lethargy of the public
policy process itself. For too long the loudest voice on foreign
ownership in Canada has been the crushing silence of the politi-
cians. Whether they will act in the future to provide the public with
a real engine of policy-information and analysis is the great ques-
tion. If they do, then it is perhaps possible that Canadians at last
will be able to exert some influence in their own affairs.
147A public opinion poll in February 1972 showed that 69 per cent of all
Canadians favoured the establishment of a screening agency. Even in the
Maritimes the poll found 66 per cent in favour, and only 15 per cent against.
In the West, 75 per cent were in favour, and 16 per cent against. Toronto Star,
February 16, 1972. Polls such as this one seem to indicate that when informa-
tion about foreign investment is available, the public supports government
policy initiatives.
