06-01 Dollars South

Dollars love being loved. And when a Republican administration under President Trump reduces corporate taxes, dollars parked around the world head home to where they are loved.
Here we are talking about surplus funds held by global companies, whether US- owned or not. Companies with hundreds of lawyers and money-managers direct billions sitting in bank accounts around the world. Money is transferred from one form of investment to another and between banks in dozens of different countries. Smart and competent financial officers make billions of dollars a day playing what they call the short-term money-market.
Now we come to investment flows designed to transfer technology, create jobs, build facilities and strengthen markets. This kind of investment is usually made by wholly-owned subsidiaries of foreign companies. The term used is FDI or foreign direct investment.
And Canadian dollars also loved being loved, and they moved to the US in record amounts in 2017. Lower taxes and fewer regulations.
And if you love looking at national statistics, the big FDIs in the US come first from British companies, then Canadian, then Japanese and then German. Few would believe that about 7 million US jobs are related to FDIs.
So when you hear politicians talk about competitiveness, they are usually talking about attracting foreign investment, and all the economic activity linked to that investment.
And investment spending gives you a much bigger “bang for the buck” than consumption spending. It is always great politics giving voters a tax cut, but more action comes from corporate investment than consumer spending.
I was always a personal admirer of President Obama of the US, but I could never understand the zeal of his administration for regulating so many parts of the economy. So it is not a surprise that deregulation and corporate tax cuts under the Trump administration are drawing Canadian investment capital to the US.
The US secret is the size of its market. I have spent many winters in California and have been amazed by the number of competitive companies that do not even need to sell outside of California. Exporting to them is selling to New York state. It’s that monster California market.
During my teaching years, trying to get students to understand the basics of business finance, it was always easier to work with small firm examples with numbers that a student could understand. And here’s one.
Our little e-learning company called Vubiz Ltd made a $200K investment in the US to create a marketing and sales operation in southern California, just like a larger firm would do to provide sales and service support to its US customers.
Then, within a short period of time, you confirm what you expected, that a lot more US prospects will buy from you with local sales and service facilities. Before long, it is obvious that only a quarter of your US sales are being made direct from Canada and three-quarters from your US subsidiary. This is "business foreign investing 101".
We will always have to deal with the reality that Canada will be about 20% less competitive than the US. And it explains why an 80 cent Canadian dollar relative to the US is normal.
But it does not mean individual companies cannot be just as competitive as US companies even though half of their sales are in the US market. And don’t look for national competitiveness with the dominant role of US subsidiaries operating in Canada.
They make a significant contribution to our economy, but they will never make us globally competitive because they are only subsidiaries. Their role in the global economy is determined by their head office. Our politicians don’t like to tell us this reality.