Paul Wells directs our attention to a piece by Roger Martin – of U of T's Rotman School of Management – in the Globe and Mail:
The time is now – right now – for the Canadian government to step up to the plate and use the Investment Canada Act review provisions to demonstrate that, like the leaders of Canada's great global companies, it has graduated from scout status to being a full partner in global competitiveness.
It is a crying shame that dreadful management has destroyed a great Canadian company in Nortel. But that doesn't mean that as some kind of bizarre penance we have to help a major global competitor of RIM acquire important Canadian-made intellectual property assets that it can, and will, use against Canadian interests.
I can't get past that last sentence: it betrays a fundamental misunderstanding about what Canadian interests are. Yes, certain Canadian firms may find themselves in a more difficult position – but then again, if ownership of Nortel's assets were crucial to survival, there's an obvious remedy: pay the full market price for them.
I can't think of any reason why we should care about the nationality of
the person who owns those patents. Seriously: who cares? Apart from
the warm fuzzies ("It's ours!") and indulging in unseemly bits of
xenophobia ("No outsiders!"), there isn't much in the way of a concrete
reason to have a preference. Moreover, arguments based on the fact that public funds were used to subsidise Nortel should be dismissed out of hand: that money is a sunk cost. When you do a cost-benefit analysis, you always ignore sunk costs.
Martin's argument explains much
of our current problems when it comes to productivity. Here we have a
case of intellectual assets that have been produced by Canadians, and
their owners are expected to accept less than full market price. Why?
Because no Canadian investor thinks that they're worth what foreigners are
willing to spend.
Right there, we see why no Canadian in
their right mind would spend much time or effort doing R&D:
they know that the best price they can ever get is one offered by other
Canadians. And this price is always going to be lower than what other
innovators in other countries can expect to receive.
Worse,
this also means that Canadian bidders can knowingly low-ball when they make their offers for
Canadian-born intellectual property. Why didn't RIM outbid Ericcson?
Because they know that they could bid low, invoke patriotism and still get
the assets at a discount?
If we want Canadian firms to start thinking that R&D and innovation are things of value, perhaps we should disabuse them of the notion that they can be had on the cheap.
Worthwhile Canadian Initiative 
My understanding was that Ericsson was forced to substantially up their initial bid once RIM entered the fray. To me that’s a signal that the market isn’t working efficiently.
If there is one company that can use an asset and gain $100 million from it, they will get it for $1 unless some other player bids. Say RIM can gain $20 million from the asset, Ericsson will bid $21 million and reap a huge windfall. Given the how Nortel employee pension plans and shareholder value has been wiped out, I wouldn’t discourage intervention that brings the bid price closer to actual value of the asset. RIM can’t credibly bid $40 million for the asset in hopes of driving the price up and harming Ericsson because Ericsson knows they will take a large loss.
Ericsson’s quick bid adjustment signals to me that we’re closer to the above situation than pure xenophobic tendencies. And I know, if positions we reversed and RIM was bidding on assets of that Nordic darling, the situation would be completely different.
Yeah, the fuss really makes no sense. And what about Nortel’s creditors? I bet there are lots of Canadians waiting in line to see whats going to be left when they finish picking over the corpse. Don’t their interests count for anything?
The complainers also fundamentally misunderstands the nature of intellectual property. Firstly, the technology will soon be obsolete. It’s not the current generation you want to worry about, it’s the next. Secondly, patents and specifications and technical drawings and computer code are useless without the people who understand them. Ericsson can’t simply take the IP and dump it on a bunch of engineers in Sweden who have never seen it before and have any realistic hope that they will do anything useful with it in a time frame acceptable to a tech company. The much more likely scenario is that Ericcson will take the team at Nortel that developed the technology and plunk it down in the research facility overlooking the scenic Decarie trench in Montreal. The jobs will most likely remain in Canada, as will the technology.
Or better yet why not open source all of nortel’s assets. Everybody loves free. But seriously, Ericsson doesn’t have Canadians working for it? It doesn’t have a R&D presence in Canada? Should we tell Ericsson to take a hike, we don’t need their stinking Kroner.
Whats wrong with having a bunch of Swedes or Swedish trained Canadian mgmt coming here to whip a Canadian laggard into shape? I could care less who is paying my salary and I don’t think the Nortel employees care either.
We seriously need more info on this, because my understanding was that Nortel was NOT selling the underlying intellectual property, but only the unit itself. (I’m not clear why the unit had any value this way, but that is the way it was described.)
Nortel was being excluded because it wanted to bid on the whole thing – IP assets included. There is thus a reasonable suggestion that the current owners are trying to turn Nortel into a patent troll – no R&D, just go licence and sue based on the existing patents. This is a poor solution, as the patents are not available to be built upon as an internal asset, the way the old Nortel and other companies have done.
As to the “sunk cost”? This isn’t a project – there is strong case that having paid all that money, Canadian taxpayers have a partial ownership interest in the assets. If a company outside of the “Canadian taxpayers” wants the assets, why don’t they have to pay back the current owners? Why are Canadian taxpayers obliged to throw away their current ownership rights? If you had paid for 90% of a car, you’re not going to be very happy when the dealer does a sunk cost analysis and decides he can sell the car for full price to someone else.
Finally, you don’t even thouch one of the key points – that if this was somewhere else, other countries would do exactly this — ensure that ownership of the assets stayed inside their borders. All the nice economic ideas about how to handle this are meaningless if we’re the only country that subscribes to them. We’d be the only team playing by that set of rules.
On sunk costs:
There is a poker saying, “Don’t throw good money after bad.” Once you have put money into the pot, you should no longer regard it as belonging to you. It is just part of the pot. Trying to save what is no longer yours leads to bad decisions. Is that not like sunk costs? Trying to recoup them is not a good idea.
Chris S argues that subsidy should confer ownership rights. Maybe so, but that is not the current law, is it?
While the poker adage is rational, as is ignoring sunk costs, it bothered me for some time, not because of loss aversion, but because doing so treats each situation independently. Similar situations arise time and again, and the question of the management of limited resources comes to the fore. Attempting to maximize the expected payoff in each situation ignores resource management.
I have come to believe that the correct approach is not to maximize payoffs, but to maximize return on investment. Under that view, sunk costs are part of investment. That does not mean that they should not be ignored once paid, but it does alter the odds on paying them in the first place, and it affects subsequent transactions. Always paying full market price is unlikely to be good resource management, is it?