Competitive Offence is Best Defence Against Hollowing Out, Business Leaders Say

October 12, 2007

Lower corporate taxes, larger Canadian companies and an efficient Canada-United States border are the best ways for Canada to attract more head-office jobs amid a global wave of mergers and acquisitions, say Canada’s top chief executives and entrepreneurs.

The Canadian Council of Chief Executives (CCCE) has concluded a six-month review of the rising pace of global consolidation in many industries, a trend that has sparked fears in some quarters of a potential “hollowing out” of the country’s head offices. The review included a survey of member chief executives, a roundtable in New York with key players in global markets and an extensive discussion at the CCCE Autumn Members’ Meeting in Montreal on October 2.

The clearest message to emerge from the CCCE review is that the best defence is a good offence. “This is not an issue that we can address by building walls. Rather, we must concentrate on making Canada a better place from which to do business around the world,” said CCCE Chief Executive and President Thomas d’Aquino.

The CCCE review identified three critical factors for making Canada more attractive as a home base for international enterprises. “First, taxes matter. Lower corporate tax rates are the single most effective way to attract more head-office jobs,” Mr. d’Aquino said.

“Second, scale matters. Canada’s competition policy must provide more room for mergers to create stronger national champions if we want more global headquarters. And third, access to the United States matters. People as well as goods must be able to move easily across our shared border if we want companies to choose Canadian communities as their base for managing operations, serving customers and dealing with investors across North America and globally.”

CCCE members, heading 150 of Canada’s largest enterprises across all sectors of the economy and all regions of the country, said other factors come into play when investment decisions move from the national level to choices between individual communities.

The total corporate and personal tax burden has the most significant impact when choosing where to set up high-level operations, but communities also need to offer a good supply of people with solid business and management skills as well as efficient connections for business travel, both domestic and international.  “The top three drivers of head-office activities boil down to low taxes, skilled people and good airports,” Mr. d’Aquino said.

He added that a wide range of other factors, ranging from respect for the rule of law, social attitudes and diversity to cultural amenities and the environment, also have a significant influence on corporate decisions about where to set up shop and on the personal choices of highly skilled individuals about where they want to live and work.*

The CCCE review also suggests that the federal government is on the right track in taking a cautious approach to potential changes to the rules governing foreign investment, whether in creating new barriers or reducing existing ones in sectors such as financial services and telecommunications.

“We know that Canada’s success depends on our commitment to an open economy that encourages the free flow of goods, people and investment across borders. At the same time, we have to recognize the intense competitive challenge that Canadian businesses face as they grow internationally and the need to ensure a level playing field within rapidly evolving global markets,” Mr. d’Aquino said.

The CCCE survey did show broad backing for government action on two specific issues, with four out of five CEOs supporting new rules for review of takeovers by foreign state-controlled corporations and seven out of ten favouring additional review on the basis of national security concerns.

“Our work on the mergers and acquisitions issue suggests that the federal government’s competitiveness strategy should emphasize three policy priorities as it launches a new session of Parliament next week,” said Mr. d’Aquino. “Canada needs significant tax cuts for people and business. We need a thoughtful and thorough review of competition policy and foreign investment rules. And we must redouble efforts to strengthen our relationship with the United States in order to keep our shared border open and efficient.”

The government already has set in motion processes for addressing these issues. This summer, it appointed aCompetition Policy Review Panel headed by Lynton (Red) Wilson that is due to report by June 2008. At their August Summit in Montebello, Quebec, the Leaders of Canada, the United States and Mexico endorsed the ongoing work of the North American Competitiveness Council, which includes recommendations for investment in infrastructure at key border crossings, more efficient and secure border processes and greater cooperation on regulatory issues. And on the tax front, the 2007 federal budget announced plans to appoint a panel on Canada’s international tax competitiveness.

“The essential ingredients are already included in the federal competitiveness agenda. The key question is how far the government and opposition parties are prepared to go in recognizing the critical importance of using corporate tax policy to create a compelling case for companies to set up and build global businesses from bases in Canadian communities,” Mr. d’Aquino concluded.

Founded in 1976, the CCCE is committed to helping make Canada the best place in the world in which to live, to work, to invest and to grow.  Member CEOs of the Council lead companies that collectively administer $3.5 trillion in assets, have annual revenues of $800 billion, and are responsible for the vast majority of Canada’s exports, investment, research and development, and training.

In addition to Mr. d’Aquino, the members of the CCCE’s Executive Committee are:  Chair, Gordon M. Nixon, President and Chief Executive Officer, Royal Bank of Canada; Honorary Chair Richard L. George, President and Chief Executive Officer of Suncor Energy Inc.; and Vice Chairs Dominic D’Alessandro, Paul Desmarais, Jr., Jacques Lamarre, Hartley T. Richardson and Annette Verschuren, the chief executives respectively of Manulife Financial, Power Corporation of Canada, SNC-Lavalin Group Inc., James Richardson & Sons, Limited and The Home Depot Canada.

*The importance of social and cultural factors was a major finding of the CCCE’s Canada Global Leadership Initiative, launched in 1999. It also was a key theme of the 2001 book Northern Edge: How Canadians Can Triumph in the Global Economy, co-authored by Mr. d’Aquino and CCCE Executive Vice President David Stewart-Patterson. The continuing relevance of such factors was recognized in the CCCE’s 2006 competitiveness strategy, From Bronze to Gold, and was confirmed by the CCCE’s 2007 survey.