Bt Investments Blog

By Walid Hejazi

T

he Canadian economy is heavily dependent on international trade and foreign direct investment. Both of these represent important channels by which Canada links into the global economy. Although the benefits of international trade are relatively well understood, the same cannot be said for foreign investment.

The purpose of a recent study I wrote for the IRPP was to address many of the myths around foreign direct investment (FDI). These myths about foreign investment must be addressed if Canada is to get maximum benefit from foreign investment, both in Canada and its substantial investments abroad.

First Myth: Canada is being hollowed out.

My research for the IRPP study documents the trends in foreign investment in Canada and demonstrates clearly that the pace at which Canadian companies are expanding abroad is faster than the rate at which foreign companies are buying into Canada. In fact, despite Canada’s ability to maintain its share of the global stock of outward FDI, its share of inward FDI has fallen (See graphic). That is, Canada has over the past three decades become less attractive as a location for foreign companies to invest. This evidence therefore complements the evidence of the Institute for Prosperity and Competitiveness which has shown that the number of Canadian companies that can be considered global leaders has not been falling, but rather has increased. In addition, Statistics Canada has shown that foreign takeovers have not resulted in a reduction in either the number of head offices in Canada nor in employment levels. Hence the assertion that corporate Canada is being hollowed out is a myth.

Second Myth: Canadian companies need restrictions on foreign investment to protect them from global foreign companies.

Canadian companies have in fact done incredibly well in the global economy. Despite Canada’s position as a significant host of foreign investment in 1970, we have become an important source economy for foreign investment. That is, Canadian businesses have expanded globally at a much faster rate than foreigners have expanded in Canada. In 1970, for every dollar of investment Canada had invested abroad, there were four dollars invested in Canada. Today, Canada has more investment in the global economy than there is foreign investment in Canada. Canadian companies, on this score, have done well and don’t need the government to restrict foreign investment.

Third Myth: Foreign investment in Canada has little benefit.

Foreign companies in Canada are more technology intensive than are Canadian companies as they are able to import much of the technology from their foreign parents. As a result, these foreign companies are more productive and pay higher salaries than their Canadian counterparts. Over time, this foreign technology spills over to Canadian companies, and results in an enhancement of productivity. Foreign companies also enhance competition which results in increased productivity across the board. Finally, Canada is a trading nation, and much of our productivity is based on international trade. As it turns out, foreign companies have higher trade intensities than do Canadian firms, and hence foreign investment in Canada stimulates productivity, capital formation, trade and hence employment.

Fourth Myth: Canadian direct investment abroad has little benefit.

This assertion is incorrect. As Canadian companies increase their investments abroad, the demand for head office functions in Canada increases in order to manage those foreign activities. Furthermore, investments abroad enhance market access for Canadian exports into those foreign markets, thus stimulating economic activity in Canada.

Fifth Myth: Restricting foreign investment will make Canada better off.

Restricting investment into Canada will remove market discipline to managers of Canadian companies. The threat of takeover by large foreign companies ensures that managers in Canada perform at an optimal level. Given the size of the Canadian economy, there often is not another Canadian company that can provide such discipline. Restricting foreign investment will also limit the amount of capital available in Canada and hence will result in increased costs of financing.  In addition, given Canada’s significant investments abroad, restricting foreign investment in Canada will expose Canadian assets abroad to protectionism by foreign governments who may retaliate.

The policy recommendations that come from this study are clear.  The best way for the Canadian government to protect domestic firms from takeover by foreign companies is not to protect them through legislation — such an approach would result in a reduction in the competitiveness of the Canadian economy, and would hurt Canadian employment and incomes. Rather, the best way to protect Canadian firms is to ensure that Canadian companies operate in an environment that allows them to be globally competitive. As a result, Canadian companies will be able to compete with global companies and at the same time create the maximum amount of prosperity for Canadians. In such an environment, we have nothing to fear from foreign investment.

Financial Post
Walid Hejazi is the author of the IRPP study “Dispelling Canadian Myths about Foreign Direct Investment.” He is a professor at the University of Toronto’s Rotman School of Management.

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www.pacificgateway.gc.ca/

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www.wd.gc.ca/eng/home.asp

Backgrounder

ASIA-PACIFIC GATEWAY AND CORRIDOR INITIATIVE

The Asia-Pacific Gateway and Corridor is a network of transportation infrastructure, including B.C.’s Lower Mainland and Prince Rupert ports; their principal road and rail connections stretching across Western Canada and south to the United States; key border crossings; and major Canadian airports.

The network serves all of Canada, and the Asia-Pacific Gateway and Corridor Initiative (APGCI) aims to take advantage of Canada’s strategic location at the crossroads between the North American marketplace and the booming economies of Asia.

On October 11, 2006, Prime Minister Harper announced the APGCI with an initial investment of
$591 million. A further commitment of $410 million was made in Budget 2007, bringing total federal funding for the Initiative to more than $1 billion.

The APGCI is a long-term effort, focusing on infrastructure, policy, governance and operational issues together in one multimodal, system-based, public-private strategy.

The Government of Canada’s contributions to APGCI projects will improve the transportation system by:

• increasing transportation capacity;
• reducing congestion at key locations for Asia-Pacific trade;
• improving connections between modes; and
• enhancing its efficiency, safety and security.

The Government of Canada’s investments will continue to promote increased investments by the private sector and other public-sector partners to ensure efficient and seamless connections between the various modes of transportation, and improve traffic flows for international cargo.

January 2010