Foreign Investment Restrictions as Industrial Policy: The Case of Canadian Telecommunications

We assess the economic harms that would accrue if Canada were to adopt asymmetric rules of foreign ownership for incumbent carriers and entrants. We explain the current Canadian regulatory climate surrounding foreign investment in Canadian telecommunications. Competition in the telecommunications industry is generally robust, which suggests that rules aimed at favouring entrants are not necessary. Moreover, Canadian entrants are equally capable of attracting foreign capital as Canadian incumbents, which suggests that foreign investment rules aimed at favouring entrants are especially unwise.\nNext, we review the U.S. attempt to stimulate competition in local telecommunications markets through an analogous form of asymmetrical regulation. Despite the best of intentions, United States regulators have not been able to stimulate meaningful local competition through such asymmetrical regulation. Moreover, the resultant easy access to capital created wasteful invest- ment by the entrants. Second, licensing restrictions on foreign carriers in the U.S. reflect another form of asym- metric regulation because they apply only to wireless licenses, not wireline operations. This licensing process confers substantial discretionary authority on the FCC, which has allowed the process to become highly politicized. Finally, asymmetric rules for broadband services have cemented the position of cable modem providers vis-à-vis DSL providers.\nThe U.S. experience highlights several issues that may be relevant for Industry Canada as it assesses the effect of changes in foreign ownership rules on competition in telecommunications. In particular, the investment of more than $40 billion by entrants in the U.S. local telecommunications markets has been almost com- pletely squandered. This asymmetric regulation did not succeed in attracting entrants that would have a measur- able effect on the retail price of telecommunications services. Given the nature of demand for and supply of telecommunications services, competition is more likely to develop across different platforms — cable, wireline, and wireless — not among small niche players lured into the marketplace by regulators.\nWith the lessons of the U.S. regulatory experience in mind, we review two specific Canadian proposals regarding foreign investment rules: tiering and licensing. We conclude that a tiering approach would harm com- petition and infrastructure investment because it would reduce the incentives of incumbent carriers to invest in network upgrades or new services, and potentially aggra- vate the problem of excess capacity that plagues the telecommunications industry. A licensing approach for foreign investment restrictions should also be rejected. Licensing would impose a further layer of regulation on the marketplace, reduce foreign investment, and expose foreign carriers to political pressures. The Canadian agencies should not follow their southern neighbours down the road to despair.

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