How important are head offices?

While having head offices based in Canada is a point of pride, it’s not always crucial for strategic economic growth

By John Banigan

One of the recurring themes in the ongoing national conversation about Canada’s place in the world is concern about Canadian-based and Canadian-owned head offices. The fierce political debate in the 1980s about the Canada-U.S. Free Trade Agreement (FTA), and subsequently the North American Free Trade Agreement (NAFTA), was whether Canadian companies could survive in the absence of protective tariffs. Looking back, much of this anxiety proved to be unnecessary and even staunch nationalists could declare FTA/NAFTA to be, on balance, an unqualified success for Canada. Some firms disappeared and many were forced to modernize and rationalize their operations but overall the economy prospered.

Our collective national insecurity lingers and the media continue to lament foreign takeovers of Canadian icons. Many industries are consolidating in the face of new competitive pressures from low-cost producers like China and India. The newspaper headline writers label this phenomenon “the hollowing out of corporate Canada.” In their minds, head offices — particularly Canadian-owned head offices — are very important to the Canadian economy.

Many economists and business people agree. Apart from national and regional pride, head offices tend to bring significant direct and indirect benefits to their host communities. Head offices employ highly skilled and well-paid Canadians in fields such as accounting, financial management, law, advertising, purchasing, logistics and information technology, as well as the executive cadre of firms. They also represent important local spin-offs for real estate, financial services, printing, support services, etc. Head offices also tend to support local cultural, charitable, sports and philanthropic activities. Quality jobs such as those in research and development activities are frequently conducted in head office locations.

But what’s really happening?

If you worked for companies such as MacMillan Bloedel, Seagram, Shoppers Drug Mart, John Labatt, Newbridge, Dofasco, Inco or Falconbridge, you would likely agree that a hollowing out of corporate Canada is underway. If you live in Vancouver, Winnipeg, Montreal or Halifax, you may also agree. Those well-known Canadian companies have been taken over and those Canadian cities have experienced declines in head office employment, according to a report released by The Conference Board of Canada in March, Is corporate Canada being hollowed out?

The Conference Board quotes a recent Statistics Canada study that indicates the number of head offices in Canada actually increased from 1999 to 2005 by 100 to 4,161 and total head office employment increased by 11%. Head office employment grew in Calgary, Toronto and Ottawa and growth occurred in both foreign- and domestically-controlled firms.

The pace of merger and acquisition activity in Canada was at record high levels in the first three quarters of 2006, the highest since 2000 during the high technology bubble. According to a Crosbie and Company report of November 22, 2006, 1,430 transactions occurred during that period valued at $187 billion. Canadians are both buyers and sellers of companies and that mix depends upon whether foreign ownership increases or decreases.

While the personal dislocations for those employees and communities affected are real, our dynamic market-based economy makes continuous adjustments to changing conditions and the cycle of corporate life and death, growth and contraction continues. Canadian employees of foreign-owned companies, which acquired previously independent Canadian companies, have had to adjust to new corporate cultures. But in many cases, these employees have more secure employment and enhanced career prospects under the new ownership.

Are Canadian-owned head offices better corporate citizens?

One of the myths in the emotional hollowing-out debate is that Canadian ownership tends to align better with Canadian national interests. But research doesn’t bear this out.

In partnership with the Social Sciences and Humanities Research Council, the Conference Board of Canada engaged in original research on the performance and impact of multinational companies in Canada. The study, called the Canada Project, concluded that many foreign-owned subsidiaries operating in Canada have become strategic leaders in their company’s global network.

The study also concluded two contrasting types of Canadian-owned multinationals exist. The first comprises Canadian companies focused primarily on the domestic market and performing little research and development. The second type of Canadian company has a global focus and a research-intensive philo-sophy. This latter type reports significant organizational capabilities, links with educational institutions and is at the forefront of management development practices.

A study by Statistics Canada in June 2005¹ concluded that foreign-controlled firms typically have higher levels of head office employment than domestically-controlled firms and are more likely to create a separate head office and hire more head office employees.

The role of foreign direct investment

In light of the pressure on Canadian-owned firms in our dynamic economy, foreign direct investment is of vital importance to replenish the pool of head office or equivalent “white collar” functions. Canada’s track record in this domain is mixed.

According to a 2004 Industry Canada study, the accumulated stock of foreign direct investment increased to billion in 2003, increasing only $9 billion in that year compared to $33 billion in 2002. Sixty per cent of the inflow was from the U.S. and it is concentrated in the resource sectors.

While foreign direct investment slowed in all G7 countries except France in 2003, Canada’s share of global foreign direct investment declined to 3% in 2003 compared to 4.6% a decade earlier. Similarly, Canada’s share of North American-bound foreign direct investment decreased to 13% in 2003, down from 17% in 1993.

On the other hand, Canada’s stock of outbound foreign direct investment grew by $31 billion in 2003, albeit a lower rate than the previous year. Canada is a net exporter of foreign direct investment with a stock of $399 billion, of which 40% is in the U.S.

Outsourcing head office functions   

An additional dimension of the head office issue is the recent phenomenon of outsourcing, facilitated by information and communications technology. This means some of the benefits to Canada of head office functions can migrate elsewhere. But it’s also an excellent opportunity for Canadian professional service providers to export.

Canada’s merchandise trade surplus is offset by a chronic deficit in trade in services, which increased to almost $11 billion in 2003, from $7 billion a year earlier.  Canada ranks last in the G7 in terms of the importance of exports of services despite world-class competencies. The United Kingdom is the G7 leader in exports of services as a percentage of total exports, being 31% of total exports and growing. The U.S. is slightly lower and over twice the Canadian percentage.

If the tangible benefits associated with head offices are in large part the professional services that are derived, then Canadian professional capabilities can be exploited through exporting to foreign-based head offices as well as depending upon head offices located in Canada.    

John M. Banigan is vice-president of Tactix Government Consulting Inc. He is a former ADM Industry at Industry Canada.

¹ Foreign Multinational and Head Office Employment in Canadian Manufacturing Firms, JR Baldwin & WM Brown, Statistics Canada, June 2005, page 7.

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