TORONTO -- For the past generation one of the most emotional issues in Canadian politics has been the extent of U.S. ownership of Canadian businesses. Canadian nationalists rail about their "branch plant" economy and warn that this country is in danger of becoming a "banana republic."
What has been largely unnoticed here is the extent to which Canadian firms have become key players among the flocks of foreign investors descending on the United States. Canadian firms now employ more than 527,000 U.S. workers, which is more than double the number employed by U.S. affiliates of Japanese companies and second only in size to the labor force of British-owned businesses in the United States.
In the Washington area, for example, Canadian controlled companies with big checking accounts have in recent years bought movie theaters, optical companies and major real estate properties. An affiliate of Bell Canada, the largest telephone operating company here, produces switching equipment for Washington-based C&P Telephone Cos. The 42,000 workers employed by Northern Telecom, Bell Canada's communications equipment manufacturer, are divided equally between Canada and the United States.
Peter Hermant, a director of the Toronto Board of Trade and president of a large Canadian optical company gave a one-word answer -- "growth" -- when asked why his firm has bought several outlets in the United States, including two facilities in Arlington. The Canadian population of 25 million is too small for manufacturers to expand and achieve the economies of scale they need to become internationally competitive, he said.
Most of the Canadian investment in the United States has been in real estate and manufacturing although there have been inroads in retail and publishing. The big players tend to be huge Canadian conglomerates such as Seagram's, forester MacMillan-Bloedel and brewer John Labatt.
The Toronto-headquartered Thomson newspaper chain, long a player in the United States, enlarged its empire last year by paying $250 million for an Ohio-based math textbook publishing house and buying the Cumberland Times in Maryland, which raised the number of newspapers it owns in the United States to 96. But there are newcomers to the game. Two Toronto jewelers forked over $550 million to purchase the Dallas-based Zale Corp., which has 300 jewelry stores in the United States. For $4.3 billion, Canadian real estate developer Robert Campeau got ownership of the Allied Stores retail chain, which included Garfinckel's, Brooks Brothers, Miller and Rhoades and Ann Taylor shops among its subsidiaries. Toronto-based entrepreneur Garth Drabinsky, who already owns scores of movie houses in Washington and New York City, purchased with partners a chain of theaters in Richmond for $10 million.
Alan M. Rugman, a University of Toronto economist, contends in a study for the Toronto-based C.D. Howe Institute research organization that if trends continue, the level of direct Canadian investment in the United States could equal U.S. investment in Canada in five years. Rugman's study charts a dramatic reversal in investment flows between Canada and the United States that has occurred over the last decade. In 1975, Canadians firms had only about $5.5 billion invested in the United States, about one-fifth of the amount U.S. companies had invested in Canada. By 1985, Canadian investment in the United States had risen to about $27 billion, which was about three-fifths of the amount U.S. firms had invested in Canada.
Rugman and U.S. Commerce Department analysts attribute the trends to several factors. On the one hand, there was some disinvestment by U.S. firms after Canadian governments adopted in the 1970s stringent government policies, much disliked by U.S. businesses, to curb foreign investment, particularly in the energy field. Prime Minister Brian Mulroney rolled back most of those restraints when he came to power three years ago, although he retained barriers to U.S. takeover of Canadian companies regarded as "sensitive cultural industries" such as newspapers, magazines, television stations and publishing houses.
Another factor contributing to the apparent reversal in investment flows appears to be the fact that government protections of Canadian businesses as well as weak antitrust laws allowed some of them to grow into behemoths.
Ironically, Canadian investors responding to recent surveys have said that in addition to a desire to grow and tap the huge American market,they have opened operations in the United States to get under the heightening protectionist wall there.
There are also generous tax advantages to operating in both countries. Rugman described in his study one complex scheme reaping big tax breaks. This legal practice, which was probably never envisioned by tax policymakers in either country, is known as "the double dip" and involves moving corporate borrowings to the United States by way of a financial subsidiary in an offshore tax haven.
Despite the financial inroads of Canadian firms into the United States, anxiety over U.S. economic influence here remains high. U.S. companies employ more than 900,000 Canadians in their affiliates here even though investment flows have begun to reverse. As U.S. and Canadian trade representatives attempt to negotiate a deal to remove tariff and other barriers to trade, Canadian nationalists warn that greater economic integration will lead to Canada being absorbed into the United States.
Canadian brewers who enjoy a protected market are among the most vigorous, opponents, though three of them -- Molson, Moosehead and Labatt's -- are among the top 10 sellers of beers in the United States. Labatt's also paid $152 million for a Birmingham food company last year.
Another leading opponent of the trade initiative is the The Toronto Star newspaper, which argues constantly against relaxing restrictions or bars to foreign ownership of cultural industries, which includes protections for the newspaper industry.
The Star regularly cautions that open borders economically could ultimately mean the loss of Canda's "unique cultural identity." They do not remark, however, on the impact on U.S. culture of the high-profile presence in the United States of products of one of the newspaper's affiliated companies that publishes Harlequin romance novels