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Submission from: Commissioner of Competition, Competition Bureau

The following questions and answers are published in the language used by the individual or organization who contributed this formal submission during Phase 1 of the review of the Revised Foreign Investment Policy in Book Publishing and Distribution.

1. Part VII of the discussion paper presents the following options regarding the Revised Foreign Investment Policy in Book Publishing and Distribution. Which options, in your view, would be the most beneficial? Please explain your choice.

[No text submitted]

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2. Are Canadian-owned businesses more inclined to support the creation, distribution, and/or sale of books by Canadian authors? Why or why not?

[No text submitted]

3. Does the presence of foreign companies in the book industry currently benefit Canadians and the Canadian book industry? Please explain your view.

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4. What would be the impact, either positive or negative, for Canadians, authors, and the book industry, of opening the market to foreign firms not already operating in Canada? Please explain in the context of:

a) Book publishing:

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b) Book distribution:

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c) Book retail:

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5. Are there particular types of businesses within the publishing, distribution or retail sectors of the book industry (e.g. educational publishing or online retail) that require distinct treatment under the policy?

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6. Foreign investment policies exist for the periodical publishing and film distribution industries, as well as for the book industry. Do these existing policies suggest models that could be beneficial to Canadians and to the book industry?

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7. Are there any new or emerging issues in the book industry, including those mentioned in the discussion paper, that are not sufficiently addressed by the current policy? If so, how should a modernized policy respond to these?

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8. The existing policy specifies the kinds of net benefit undertakings that may be sought from foreign investors in cases of indirect acquisitions, such as commitments to promote Canadian authors; to support the infrastructure of the book distribution system; to improve access to the company's Canadian marketing and distribution infrastructure; and to engage in education and research. Are there ways in which these undertakings should be modernized to better reflect the current book industry environment?

[No text submitted]

9. What types of commitments, including those mentioned in the discussion paper, do you think have been/would be the most beneficial to Canada and the Canadian book industry?

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What are the impacts of investor commitments related to the marketing of Canadian books, retention of Canadian staff, and sponsorship of industry initiatives and events?

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Is it beneficial to the Canadian book industry and to Canadians to require that investors commit either to expanding or restricting the scope of their businesses? If so, under what circumstances?

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10. Are there any ways in which foreign investment in the book industry, or changes to the foreign investment policy, might have a particular impact on publishers, distributors, or retailers who either work with official language communities in minority situations or are members of these communities? Please explain.

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11. Please provide any additional comments you have on the question of foreign investment in the book industry in Canada.

I. Summary

The Commissioner of Competition ("Commissioner") is pleased to provide the following submission in response to the Canadian Heritage Discussion Paper, "Investing in the Future of Canadian Books: Review of the Revised Foreign Investment Policy in Book Publishing and Distribution" ("Discussion Paper"). (1)

The Commissioner heads the Competition Bureau ("Bureau"), an independent law enforcement agency that contributes to the prosperity of Canadians by protecting and promoting competitive markets, and is responsible for the administration and enforcement of the Competition Act. (2)

The Competition Act is designed to achieve certain identified objectives including, among other things, maintaining and encouraging competition in Canada in order to promote the efficiency and adaptability of the Canadian economy. In keeping with this mandate, this submission provides a competition perspective on the issue of foreign investment and ownership restrictions.

As discussed below, the Bureau believes that competition principles should be an important consideration in examining the continued imposition of foreign investment and ownership restrictions in Canadian markets.

As outlined in the Discussion Paper, the review being undertaken by Canadian Heritage "seeks to determine whether, given changes that have occurred in the book industry environment since the policy was introduced in 1985 and revised in 1992, the Revised Foreign Investment Policy in Book Publishing and Distribution continues:

o To provide opportunity for healthy competition in the book publishing, distribution and retail industries; and o To contribute to the broader government objective of ensuring that Canadian cultural content is created and accessible in Canada and abroad." (3)

For the purpose of this submission, the Bureau's comments are limited to the impact of foreign investment and ownership restrictions on competition, and the benefits that could be realized through the relaxation or removal of foreign investment and ownership restrictions, particularly in the book retail sector.

Further, while the current review is limited to foreign investment and ownership restrictions in book publishing and distribution, the Bureau notes that similar restrictions

are contained in foreign investment policies for other cultural industries, including film distribution, and encourages a review of these policies to ensure that they continue to advance their objectives while restricting competition as minimally as possible.

II. Emphasis on Competition Principles

The Bureau emphasizes the importance of competition principles in examining investment restrictions in Canadian markets. As described in the Bureau's submission to the Competition Policy Review Panel, "[it] is well established that the economic consequences of Canada's sectoral-specific policies restricting foreign investment have significant negative implications for the productivity of the industry and the economic performance of the economy as a whole." (4)

Foreign investment is an important source for the exchange of new technologies, management practices and sector-specific knowledge between countries. This, in turn, intensifies domestic competitive pressures by spurring domestic rivals to adopt best practices and state-of-the-art technologies.

The Bureau frequently considers the issue of investment restrictions in various sectors of Canada's economy, either as a factor material in the course of its enforcement activities under the Competition Act or in its role as an advocate for competition before various legislative and regulatory bodies.

When undertaking any competitive effects analysis under the Competition Act, the Bureau considers not only evidence of concentration or market share, but also other quantitative and qualitative factors that may have a bearing on the nature of competition in the market under examination. Among these factors, the most important is generally considered to be the nature and extent of barriers to entry into a market for prospective competitors.

Barriers to entry shelter existing firms from competition by impeding or preventing entry into the market by competing firms. Barriers can take many forms, ranging from regulatory restrictions to sunk costs that cannot be recovered. Among these different types of barriers, regulatory restrictions are the sole factor for which direct responsibility rests with government.

While they may be in place to promote other legitimate policy goals, there can be no doubt that sectoral investment regimes and ownership restrictions can constitute significant barriers to entry to many markets in Canada and, as such, stifle competitive intensity that could otherwise lead to greater innovation and, in turn, productivity. Such barriers also limit options for Canadian-based companies seeking new sources of investment capital or alternative purchasers, and can increase the cost of capital for businesses competing in these markets. By reducing the intensity of competition, these restrictions may increase costs for the businesses supplied by Canadian-based companies, impacting on their competitiveness, and, in turn, increase costs for consumers for all affected products up and down the chain of supply.

Investment restrictions have been identified as significant barriers to entry by the Bureau in merger reviews in various important industries in Canada. As part of its advocacy function, the Bureau has, over time, urged the Government to consider relaxing or removing ownership restrictions as a means of increasing opportunities for new, foreign-based entry, (5) and spurring competitive intensity in our markets.

As a general principle, removal of foreign ownership restrictions improves investment and competition in the relevant market. By opening up competing sources of capital, removal of foreign ownership restrictions would introduce a broader base from which new and emerging entrants could seek critical capital investment. At the same time, by facilitating access to capital to a broader range of competitors and potential competitors, the elimination of foreign ownership restrictions would place added pressure on incumbent companies to employ innovative technologies, and to invest so as to develop innovative and low-cost products and services for Canadian consumers.

Foreign ownership restrictions limit all competitors' access to foreign capital. However, the associated impact can be particularly significant for new entrants that must build their operations in competition against incumbent companies with established Canadian networks and cash flows. Even if, after foreign ownership restrictions are removed, incumbent companies were to maintain their respective market shares, the presence of an increased threat of entry or takeover would provide added incentives for incumbents to provide innovative and competitively-priced service offerings.

III. A Competition Perspective on Foreign Investment and Ownership Restrictions in Book Retail

As noted in the Discussion Paper, "[i]n Canada, the business of bookselling is highly concentrated. ... The result of concentration in book retail has been twofold. First, it has meant that Canadian publishers have increasingly limited options for bringing their books to Canadians, particularly in the English-language sector. Additionally, because large retailers tend to focus their promotional efforts on titles most likely to generate a high volume of sales, the amount of shelf space devoted to the full diversity of Canadian- authored titles available to Canadians is reduced." (6) The Discussion Paper concludes that "a market that is more open to new entrants might be more successful at maintaining healthy competitive behaviour among participants." (7)

Given the above, it is in the retail sector that the benefits of relaxed or removed foreign investment restrictions could be most visible in terms of improving the conditions to encourage entry into Canada by new competitors. The benefits of improving the conditions for greater entry in the retail sector of the book industry include improved competition, lower prices for books, and the creation of additional avenues through which Canadian authors could increase their exposure internationally.

We recognize that, like the consideration of foreign investment and ownership restrictions in other sectors of the economy, such as telecommunications or airlines, consideration of foreign investment and ownership restrictions with respect to the book industry entails public policy considerations that are distinct from pure considerations of competition and, as such, beyond the scope of the Bureau's mandate under the Competition Act.

The Bureau does not assert that competition should take precedence over the cultural and social policy objectives of the Revised Foreign Investment Policy in Book Publishing and Distribution, or, indeed, other policy goals carefully identified by the Government as more pressing than competitive market considerations. Rather, the Bureau suggests that close attention be paid to exploring the right balance in accommodating these different legitimate policy objectives.

Within this context, and recognizing the decisions that have been made as to the importance of maintaining Canadian cultural content, as reflected by current Investment Canada Act requirements, the Bureau strongly supports that cultural protection regulations should be developed so as to refrain from imposing unnecessary or unintended limitations on competition and investment in the book retail sector. Such regulations should be revised such that the cultural consideration is protected while not interfering more than absolutely necessary with competitive forces.

Concerns are sometimes expressed that the removal of foreign investment and ownership restrictions would lead to anti-competitive mergers in book distribution and/or retail sectors, and that the growth of a large cultural enterprise has the potential to damage Canada's long-term competitive, as well as cultural, interests if left unregulated and unchecked. (8)

While the Bureau is not in a position to provide guidance on cultural interests, it questions, and encourages further testing of, the presumption that Canadian-owned or controlled entities are best equipped to preserve Canadian cultural content through the publication, distribution and sale of Canadian-authored books.

As to competitive interests, in this regard, it is important to note that Canada has among the most modern competition law regimes in the world, which can readily and effectively address any genuine competitive concerns (as distinct from, for example, protectionist concerns) that could follow liberalization of access to capital. The merger provisions of the Competition Act were also significantly enhanced as a result of amendments in 2009 to ensure that the Bureau has the procedural tools necessary to conduct its work and enforce if necessary.

The Bureau is well-positioned to provide expert analysis of the competitive implications of merger transactions and business practices that raise potential competition issues, and to take corrective action, if necessary, to protect Canadians from any substantial lessening of competition. As such, arguments that removing foreign ownership restrictions would ultimately prove to be anti-competitive or that the sector requires a specific competition regime are without foundation. To suggest otherwise is to confuse the two very distinct policy considerations of competition and cultural protection. To ensure the latter considerations are not falsely cited and relied upon to maintain merely protectionist measures, the assessment of what can be justified in the name of cultural protection should be carefully conducted with a clear acknowledgement of the consequences for the competing public goal of promoting the benefits of competitive markets, including lower prices for consumers.

IV. Recommendation

The Competition Bureau recognizes that there are a number of evolving factors in the book publishing, distribution and retail industries that necessarily impact on the policy options available to government, and that there are competing policy goals to the value of competition that the government must consider. Acknowledging that context, the Bureau recommends that, to the extent possible, given the Government's cultural policy objectives, foreign investment and ownership restrictions in the book industry, and particularly in the book retail sector, should be relaxed or removed to provide a broader array of capital options in the market, to improve the conditions for entry of new competitors, and to apply pressure on incumbents to invest and innovate for the benefit of Canadian businesses and consumers.

Notes

1. Available at http://www.pch.gc.ca/DAMAssetPub/DAM-livres-books/STAGING/texte-text/discusspaper_ 1279033118003_eng.pdf (hereinafter "Discussion Paper").
2. R.S.C. 1985, c. C-34.
3. Discussion Paper, supra note 1 at p. 2-3.
4. Submission to the Competition Policy Review Panel by the Commissioner of Competition, Competition Bureau (January 11, 2008) at p. 11, available online at: http://www.ic.gc.ca/eic/site/cprpgepmc. nsf/vwapj/commissioner_competition_bureau.pdf/$FILE/commissioner_competition_bureau.pdf.
5. Generally, the Bureau's advocacy approach to foreign ownership restrictions has revolved around the following questions: (1) what was the original public policy objective for restricting foreign investment; (2) is the rationale still relevant; (3) if so, what is the cost/benefit of maintaining such restrictions; and (4) are there alternative means of attaining the public policy objectives, such as regulation that, for example, is less restrictive of competition?
6. Ibid. at p. 17.
7. Ibid. at p. 18.
8. See, for example, the submission of The Literary Press Group of Canada and The Association of Canadian Publishers to the Competition Policy Review Panel (11 January 2008) at p. 10, available online at: http://www.ic.gc.ca/eic/site/cprp-gepmc.nsf/vwapj/LPG_ACP.pdf/$file/LPG_ACP.pdf.


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