Canadian dairy regulations as a driver of foreign direct investment: the case of Saputo

Across North America dairy processors are facing financial difficulties, yet a Canadian processor continues to grow through acquisitions of its competitors. This company, Saputo, grew up in a highly regulated marketplace where input raw milk supplies are restricted, input prices are inflated and imports of final product are restricted. This study asks if the Canadian system of dairy supply management prodded and assisted Saputo into making acquisitions at home and abroad. An empirical model estimates the probability of Saputo making acquisitions as a function of factors influenced by supply management and control variables accounting for Saputo’s financial performance. The results indicate that cash flows, which may be increased by regulatory rents, and a measure of restrictiveness of the Canadian milk supply, both are statistically significant positive determinants of the probability that Saputo will make an acquisition. On average over the estimation period removing the Canadian supply managed regime would reduce the probability of acquisitions by 7%. The implication is that the Canadian system is losing investment and employment opportunities by retaining its restrictive regulatory system.