North-of-the-border sizzle. US investment in Canada is booming - but flow goes both ways

Investment across the Canadian-American border is booming - both ways. Canadians have long been aware of the high level of foreign ownership of companies within their country, most of it from the United States. Another $7.5 billion, a record amount, was invested by foreigners in Canada last year, up from $3.4 billion in 1985.

This year the amount invested could be even greater, with about $4 billion invested in the first half.

``It looks like an absolutely splendid year,'' says Paul Labb'e, president of Investment Canada, a government agency in charge of promoting foreign investment in Canada and reviewing a limited number of foreign investments.

Less well known either in Canada or the US is the flood of Canadian investment in the US in recent years.

``This new trend has received little attention, even though it could have significant consequences for the Canadian-US relationship,'' notes Alan M. Rugman in a new study done for the Canadian-American Committee.

Indeed, he estimates that Canadian investment in the US could equal American investment in Canada in five years.

Canadian outward investment started to accelerate in the mid-1970s. Since 1978, it has averaged about $3.5 billion a year. In 1981 and 1985, Canadian companies spent more than $5 billion acquiring assets in other countries.

Most of that money has gone to the US - more than 65 percent of it in 1984. The book value of Canada's direct investment in the US climbed from $5.5 billion in 1975 to $35 billion in 1985. The average annual increase over that decade was about 20 percent. By now, more than 527,600 workers in the US are employed by Canadian-owned companies, topped only by British-owned companies which employ 628,000 Americans.

Again looking at book value (the amount originally spent on an enterprise - not its market or replacement value), the Canadian investment in the US comes to about 60 percent of the $63 billion Americans have invested in Canada over the years. Mr. Rugman figures if market value is considered, that percentage is undoubtedly too large. Since American investments in Canada have generally been in place longer than vice versa, they are probably worth considerably more today.

A study of the Canadian economy by Prudential-Bache Securities attributes the growing emergence of Canada as an exporter of business capital partly to ``maturation of its economy.'' But clearly other factors are also at work, ``not least the siren attraction of the US marketplace.''

The Canadian investment also points to the ever-increasing integration of the North American economy.

That trend could be hastened if the current talks aimed at creating free trade between the two nations are successful. Canada, however, suspended these negotiations Wednesday, claiming the US had not moved on a Canadian demand for a mechanism to settle trade disputes outside the normal US trade procedures. The deadline for reaching a deal is Oct. 5.

Even if the negotiations fail, the flow of investment across the long Canadian-American border should continue if not accelerate. If trade barriers remain, Canadian companies may feel even more compelled to establish a direct presence in the US.

Mr. Labb'e believes the rapid increase in Canadian investment abroad reflects the new dynamics of Canadian companies. With a market of only 25 million customers at home and sometimes running up against limits of market concentration set by antitrust laws, Canadian firms are looking abroad for expansion.

``The reality is, the business world is going global,'' Labb'e says. ``Canadians recognize that.''

For the head of Investment Canada, the inflow of foreign money into Canada is particularly good news. A law creating his agency was one of the first acts of the government of Prime Minister Brian Mulroney after it was elected to office three years ago this month.

Under the previous Liberal government, many foreign investors doubted their welcome in Canada. The government of Prime Minister Pierre Trudeau set up the Foreign Investment Review Agency (FIRA) to approve or disapprove individual foreign investments in Canada. It also introduced the National Energy Policy to stimulate greater Canadian ownership in the oil and gas industry.

After the deep recession of 1982 raised unemployment to high levels in Canada, FIRA was pretty well defanged. The Trudeau regime no longer wanted to turn down job-creating foreign investments.

Nonetheless, FIRA's reputation as an ogre stood firm among many foreign investors.

The Conservative strategy of creating a new agency - Investment Canada - with a new name and fewer powers, plus the repeal of the National Energy Policy, at last appears to be paying off in a better image for Canada in financial circles abroad.

``Canada does belong with the international elite,'' notes the Prudential-Bache study.

A Swiss group that ranks the competitiveness of nations, E.M.F. Foundation, last year ranked Canada as No. 6 (after Japan, the US, Switzerland, West Germany, and Denmark) among the 22 nations belonging to the Organization for Economic Cooperation and Development.

``This resource-rich country - with a huge, affluent, and accessible market at its doorstep - harbors great potential,'' the group's report said.

Canada's investment rules are an issue in the Canadian-American free-trade talks. The US wants Canada to further relax its rules on foreign investment. A Canadian source, after noting that the US has more regulation of foreign investment than most realize, hints Canada would be willing to make some changes.

Investment Canada does not review foreign investment in new business establishments in Canada. But it does look at the acquisition by foreigners of Canadian companies whose assets exceed $5 million. Or, if the foreign owner of a Canadian business with assets exceeding $50 million sells out to another foreign owner, the deal is subject to review by Investment Canada. That agency could order the takeover firm to divest its Canadian subsidiary.

Those asset numbers could be increased, the source suggested. Or Canada could drop the provision for changes in foreign ownership.

Canada also imposes limits on foreign investment in the ``cultural'' industries - print or broadcast media, publishing, printing, video, and movie distribution. These limits have been especially troublesome to the American negotiators.

Canadian officials are less flexible on this point. They argue that the American media already dominate Canadian newsstands, bookstores, and the airwaves. Still, they see room for concessions.

Only about 15 percent of total foreign investments have been subject to review, notes Investment Canada's Labb'e. And none of the investments reviewed have so far been rejected.

One test case coming up could be the offer of British Gas PLC to buy a 51 percent interest in Bow Valley Industries Ltd., a Calgary-based international oil and gas company. Executives of the two companies have recently been seeking approval for the C$1.37 billion (US$1 billion) sale from Bow Valley shareholders.

But the Mulroney government's policy has been that foreigners could acquire ailing but not sound Canadian oil and gas companies. Canadians have particularly resented the dominance of foreign companies in Canada's oil and gas industry. Thus it would be politically risky to reverse the Canadian ownership gains won during the existence of the National Energy Policy.

At the moment, Canadians own about 47 percent of their oil and gas industry. If the creditors of troubled Dome Petroleum Ltd. approve its purchase by Chicago-based Amoco Corporation, that percentage of Canadian ownership would fall to about 42 percent. The purchase of Bow Valley would lower it further.

Although US investors are by far the largest foreign holders of Canadian businesses, they are being joined increasingly by Asians. Japanese and South Korean automobile manufacturers have invested some C$1.4 billion in Canada so far, compared with C$4.12 billion in the US.

Hong Kong investors have been active too. Li Ka-shing, a shipping, real estate, and finance magnate, last spring bought 43 percent of Husky Oil Ltd., Canada's 12th-largest oil producer. (He avoided Investment Canada review because of his minority interest, even though a son, a landed immigrant in Canada, bought an additional 8 percent.) Earlier, the Hongkong Bank of Canada took over the Bank of British Columbia.

Labbe holds that, along with healthy economic growth, Mulroney government policies are part of the Canadian appeal. These include reducing the budget deficit, deregulation, privatization of government companies, income tax reform, and the welcome given foreign investment.