Corporate Canada is not being hollowed out by foreign takeovers, according to a Conference Board of Canada report presented today at a conference in Toronto.

“Overall, in the long term there has not been much change in ownership,” said Michael Bloom, co-author of the report, at today’s presentation. He noted that foreign control in corporate Canada remains at a stable 30% — well below the peak levels hit in the 1970s. “There is no long-term trend toward greater foreign ownership of the economy,” Bloom concluded.

Foreign direct investment is a vital part of Canadian economic growth, according to Finance Minister Jim Flaherty. “Nothing stimulates the economy better than access to foreign markets,” he said in a speech at the conference. Flaherty noted that the federal government’s recent changes to business tax structures are aimed at “letting business breathe in Canada so that we can attract foreign direct investment — so Canadian business can move forward into a global economy.”

In 2006, Canada saw its highest recorded increase in foreign direct investment (FDI) in six years — $448.9 billion, up 10.1% since 2005. The Conference Board found a real lack of data on the issue, and noted today that much of the recent debate has been fuelled by feeling rather than fact.

The commodities boom coupled with low cost of capital have made acquisitions more attractive globally — and a disproportionate amount of this M&A activity has been in Canada.

The fear of hollowing out spread when “iconic” Canadian companies such as Inco, Falconbridge, Hudson’s Bay Co. and Alcan were bought out by foreign firms.

The Conference Board’s report is interested in determining how the Canadian economy is affected by all these takeovers. Overall, the report found that shareholders benefit positively from the takeovers, and that other areas of business such as operations, capital, people and community involvement are generally affected in a — mildly — positive way. It’s governance and senior management that lose out when a company is bought out, according to the Board’s research. “These findings explain why those who focus on governance and senior management equate M&As with “hollowing out,” whereas those who take a broader view do not,” said the Conference Board.

The report, entitled “Hollowing Out” —Myth and Reality: Corporate Takeovers in and Age of Transformation,” reads: “Canadians should care about corporate takeovers, but not for the reasons typically advanced by ‘hollowing out’ exponents.”

Dominic D’Alessandro, president and CEO of Manulife Financial is one such exponent. He’s been a public advocate for using policy to protect certain sectors of the Canadian economy from takeover. As well, nowadays D’Alessandro figures bank consolidation might be a good idea.

“I was against bank mergers when they were first proposed in 1998, because I didn’t think they were in the country’s interest,” he said, during a CEO discussion panel at the conference. “I’ve changed my mind now because I think the industry has evolved.” He cites the emergence of insurance industry as a viable banking alternative in Canada as one of the most influential changes. “Increasingly, the products that we offer resemble what the banks offer and vice versa,” adding that perhaps Canada’s small population can’t sustain the ten or 11 companies now providing banking services, thus making mergers a viable option.

The federal government is not interested in advancing the cause of deregulating to allow bank’s to join forces. “Bank mergers are not a priority for our government,” Flaherty said during a press conference.

Overall, the Conference Board’s report warns that governments should think very carefully about any FDI policy changes. “On balance, we believe that policy changes that restrict foreign investment could have negative ramifications for Canada,” said Anne Golden, president and CEO of the Conference Board, in a release. The report concludes that any restrictions on FDI should be limited to state-owned enterprises in cases where national security concerns apply.

As well, the report suggests, governments should look into relaxing ownership restrictions on a sector-by-sector basis, rather than making blanket policies.

“Mergers and acquisitions are a positive part of the process of competition for capital and corporate control,” said Golden. “Instead of attempting to create global corporate “champions”, the federal government should continue to concentrate on establishing conditions for all Canadian companies to prosper, and consider relaxing foreign ownership and operational restrictions in protected sectors.”

@page_break@The results of the federal government’s Competition Policy Review Panel, chaired by Red Wilson, are expected at the end of June. The panel is examining the government’s investment and competition policies.