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The climate of mega-mergers and acquisitions that has characterized recent economic activity has re-ignited the debate that Canada's economy is being taken over by foreign interests or "hollowing out."

The Report on Business is launching a six-part series to look at this question. Despite all the evidence that hollowing out isn't occurring, many Canadians, including economists, have a gut feeling that the spate of foreign mega-takeovers is hurting us profoundly.

That paradox haunts Glen Hodgson, an economist for the Conference Board of Canada, who reads all the literature indicating that foreign takeovers and inward investment are a boon for the Canadian economy, bringing know-how, innovation and capital.

"The top-down numbers say we shouldn't be that worried," he says. The trouble is that, Sanofi Pasteur excepted, a lot of bottom-up experience tells a different story. In Montreal, for example, the exodus of head offices after the 1976 Parti Québécois election victory seriously diminished the city's economic importance. If takeovers continue to take out major Canadian companies, there is reason to fear a similar ripple effect. "I'm conflicted on this," Mr. Hodgson says.

Mr. Hodgson answered questions on this issue on Tuesday. Make sure to read the Hollow fears? series in the Report on Business or at globeandmail.com/business.

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Sasha Nagy, Business Features Editor, globeandmail.com writes: Dear Glen, Thanks for taking the time to discuss this timely subject with us. I found your comments in Saturday's opening feature in the Hollow Fears? series titled For Sale: Corporate Canada to be very interesting. Your comment "I'm conflicted on this," was particularly frank and honest. What has been the reaction from business leaders to your admission that this subject causes you some concern?

Glen Hodgson Business leaders are conflicted as well. Almost universally, they believe that Canada should not have barriers to foreign investment and that we should seek ways to engage more deeply with foreign-controlled firms. When it comes to their own sector, and indeed their own firm, they do want to be responsible members of the community and don't relish the idea of having to move head-office functions outside Canada.

A Tour de France, from Toronto writes: Hello and thank you for answering my questions. Foreign HQs are increasingly stacking their Canadian subsidiary with foreigners (i.e. through first-choice promotions to someone from home office), and I worry about the development of Canadian management & business talent as opportunities are shifted to foreigners. We are thus fast-becoming a country of *do-ers* rather than *decision-makers*. What do you think business leaders and government should do to ensure development of Canadian management talents? Thanks again.

Glen Hodgson: That is an interesting hypothesis, probably based upon your own experiences and/or those of colleagues. My own experiences are more mixed. There are companies where foreign nationals are in some key positions, but I've also seen many Canadian affiliates of global companies that are run more-or-less entirely by Canadians. Let's also remember that Canada is now a net outward foreign investor, which means that many more Canadians have a chance to gain global experience at a senior level within their own firm. I think what we need is more hard data based on detailed research. We are concluding a number of studies with academics that examine the structural changes of transnational corporations operating in Canada and will be assessing the results in the coming weeks and months.

Arthur Waldman, of Winnipeg writes: Perhaps the problem is we work in the wrong time frame. It is wise to recall a comment from Peerless Carpets at the time of NAFTA ....(nafta) will not mean we will relocate tomorrow to Mexico; what it will mean is that when our suppliers build new plants they will locate in Mexico and because material inputs are the biggest expense in our business we will have to move at least our new production and the jobs and investment related to it there as well. And they have. In fact the day after a take there is little change; we lose some amount of tax revenue then as some functions get changed over to head office we lose both tax revenue and input that reflects our national/regional interests. Over time the hollowing out occurs but as the term reflects it occurs internally until the outer shell just crumbles away.

Glen Hodgson: Arthur: I have actually coined a phrase that describes this process. We call it "integrative trade", where firms take advantage of all components of international trade — exports, imports used to produce exports, inbound foreign direct investment (FDI), outward FDI, sales from foreign affiliates established through outward FDI, services that are linked to goods, etc — in order to maintain their international competitiveness. Our Performance and Potential 2005-06 report describes and analyzes this phenomenon in some detail.

Don't assume that integrative trade is a negative for Canada — quite the opposite. Until the FTA, Canadian industry hid behind protective tariff barriers, which ironically, was one of the factors that led to such high foreign ownership of our manufacturing industry in the 1970s and 1980s. Protection from international competition also created less innovative and productive industries.

Integrative trade allows Canadian firms to ensure that they are able to adapt to international competition, which is critical for boosting their competitiveness and thriving internationally and at home. The issue therefore is how to help Canadian firms to restructure, and how to capture the largest possible share of benefits within Canada. And that's where the possible hollowing out of head office functions becomes important.

20/20 from Canada writes: 1) What percentage of foreign ownership and control is there in Canada right now? The only such information I've managed to stumble across was in a 2005 article that stated that foreigners controlled 'well over 30% [of corporate revenue] and increasing. As well, about 37% of our largest 500 corporations are already foreign-controlled.' Why isn't this information more readily available and where can we find it? 2) Nearly two-thirds (64%) of the annually-increasing FDI in Canada is from the US, while almost half (46%) of our annually-increasing investment abroad is to the U.S. If we combine this concentration of mutual investment with the fact that an extremely-concentrated 86% of our exports go to the U.S., at what point in all this do we become so integrated, so dependent, that we lose our economic sovereignty, and consequently our sovereignty? 3) The U.S. is about 10 times bigger than we are (9 times the population, 11 times the GDP). That means while we can match ever-increasing investments in each other on a dollar for dollar basis, taken to the extreme, when they own 100% of Canada, we would own only 10% of the USA. And long before that, when they own 51% of Canada (51% implying control), we would own only 5.1% of the USA. Are these top-down numbers not a concern, and if not, why not?

Glen Hodgson: There are a lot of numbers there, and some very political questions

We used to gather a great deal of data on foreign investment in Canada back in the 1970s, when two-thirds of Canada's manufacturing sector, and much of the resources sector, was foreign-owned — almost entirely American, too -- under the old branch-plant model. Part of the reason the data is not as quickly available today is because the global business paradigm has shifted, as I discussed in my previous response. Remember that Canadians now own more business assets abroad (through outbound FDI) than foreigners control in Canada, by a significant margin.

In fact, I would argue that when you look at the data from the top down, Canada has taken greater charge of its economic sovereignty. But at a local level, there is an issue whether Canada is retaining the most valuable and desirable business functions — the jobs that pay the best and have the best career prospects.

Sasha Nagy asks: Glen, what happens to this debate when it becomes political? Can you make a cultural argument that foreign takeovers do, in fact, hurt our sense of nation? Or, do you see the globalization of business creating a climate that cuts both ways? Do you feel that the sense of being Canadian will thrive no matter who owns a major corporation?

Glen Hodgson: A deep philosophical question, asked to an economist no less. This question applies to almost every nation on earth as readily as it applies to Canada. Political scientists and journalists, including those in the G&M, have written extensively about the apparent social contradictions under globalization. Even as freer movement of goods, capital and people are knitting us into a global economy, individuals seem to have a greater need to identify closely with some community that is theirs. This can be at a very local level like a club or association, within a city, or even a nation.

If this hypothesis is accurate, then many, many of us are trying to juggle the need to be part of a clearly identified local community — like being Canadian -- with the desire to have the riches that can be created through things like foreign investment and the search for improved competitiveness.

Nearly every country I have visited — and I'm up to almost 50 — has a strong sense of national pride and identification, even as nearly every successful country is trying to capture the fullest benefits possible under globalization.

Sasha Nagy: Thanks so much for your insights. Are there any closing comments that you care to share?

Glen Hodgson: Our extensive research speaks for itself, and your readers can access it on line at www.conferenceboard.ca . Personally I enjoyed the hour immensely — sure keeps you focused -- and want to thank my colleague Brent Dowdall, who was an invaluable sounding board for the responses.