What is Nationalization?
Nationalization is the process in which a country or a state takes control of a specific company or industry. With nationalization, control that once resided within a corporation now lies with the government.
When companies that were once part of the private sector are transformed into a public good, it is often contentious and met with opposition. The income that once belonged to shareholders now belongs to the government. In most cases, ownership extends to managerial and directorial control as well.
- Nationalization is the process by which private companies become owned and controlled by the government.
- It often happens in developing countries when governments wish to seize control of a profitable industry in order to create a sizable income stream for those in power.
- Nationalization happens in developed countries as well in the form of private-public partnerships.
How It Works
The nationalization process often happens in smaller countries when governments wish to seize control of a profitable industry in order to create a sizable income stream for those in power. It allows for a larger cut of the profits than simple taxation does in an industry that may be central to the economy, such as the energy sector.
Larger countries also employ nationalization with hybrid approaches that see the government exist in a partnership of sorts with private industry. It is done in large part within countries where governments are not elected, and there are no term limits to their rule.
Nationalization in Canada: Trans-Mountain Pipeline
In Canada, Kinder Morgan, a major North American energy infrastructure company, attempted to expand an oil pipeline that ran from Canada’s interior to its shores. The pipeline expansion is intended in order to boost oil exports to countries in Asia, where consumption was expected to rise.
The potential environmental impact of the construction of the pipeline caused many regulatory delays and triggered protests throughout Canada. It encountered regionalized obstacles and suffered numerous delays along the way. The government of Canada then decided to buy the pipeline, in effect nationalizing it, to expedite and ensure its construction.
The logic of the Canadian government was that the construction of the pipeline would be beneficial to the Canadian economy over the long term, and thus was of interest for the government to own. The project is highly controversial but is a good example of a type of nationalization.
Below is a simplified graphic on the flow of how a business can become nationalized by certain governments. It starts with the creation of the idea, which is then developed into a company that is then nationalized to belong to the federal government. The government then controls the further development and implementation of the idea.
Calls for Nationalization in the United States: Medicare for All
In the United States, there are calls to nationalize medical care in some regards. The end goal is to create a system where, through their taxes, everyone is granted the right to free and public healthcare. It would ensure that care is given to those in need and especially those who cannot afford it.
The free healthcare initiative is often met by large opposition whenever there is an election cycle, as many in the United States believe that the nationalization of healthcare will stifle innovation and reduce the quality of care. Healthcare in the United States exists as one of the largest ongoing arguments weighing the pros and cons of nationalizing a service so pivotal to the wellbeing of many.
Opposition Against Nationalization: Competition and the Free Market
Nationalization can also reduce competition in the marketplace. If the government controls the entire oil sector, then the private industry can’t enter the market and introduce competition and innovation. It can cause prices to remain high and the nationalized industry to remain uncompetitive against exporters from other countries.
In the short term, such a move could provide a larger revenue stream for the government but can also cause the industry to become uncompetitive and falter over the long term.
CFI is the official provider of the Certified Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.
To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below: