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Archived - 5. Promoting Canadian Direct Investment Abroad

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As a small, open economy, Canada's prosperity is premised on its success as a trading nation. Total exports currently account for 36.4 percent of our GDP (2006).45

Canada is also dependent on international investment as a source of growth. As stated earlier, the stock of inward FDI in Canada was 30.4 percent of GDP in 2006, one of the highest ratios among developed countries.46 Canadian direct investment abroad (CDIA) is even higher at about 35.4 percent of GDP.

Data indicate that globalization is being heavily driven by investment flows, which have increased at three times the rate of global GDP and double the rate of trade flows.47 This reverses the traditional paradigm of trade creating investment opportunities: in the global era, direct investment abroad appears to be a key factor in stimulating increased trade.

Much of Canada's foreign investment is situated in the United States, representing 42.7 percent of the total.48 This is not surprising, given our shared geography as well as the integrative effects of the original Canada-U.S. Free Trade Agreement and NAFTA over the past 20 years. The second largest recipient of CDIA is the United Kingdom (11.3 percent) where Canada has longstanding historical ties. Following the U.S. and the U.K., CDIA is dispersed among Caribbean countries, France, Ireland and the Netherlands.49 (Figure 10)

CDIA is quite low in rapidly developing markets like China, India and Brazil. For example, Canadians invest more than four times as much in Barbados (7.3 percent) as they do in Brazil (1.6 percent). Indeed, Canadian investment in the relatively small Caribbean economies of Barbados, Bermuda and the Cayman Islands represents 12 percent of total CDIA, while CDIA in large, emerging economies like China, India and Brazil accounts for less than 5 percent.50

In terms of outward investment strategies, Canadian investors in recent years have been relatively less active than investors from other nations in making foreign acquisitions. Canada's M&A investments abroad accounted for only 31 percent of average outward FDI between 2001 and 2006, and averaged only 16 percent of outward FDI between 2005 and 2006. Rather than participating in foreign M&As, CDIA has primarily occurred through other investment flows.

The sectoral composition of CDIA reveals a concentration in financial services (44.1 percent) followed by energy and metallic and minerals (23.2 percent) and services and retailing (13.0 percent).51 (Figure 11) This composition is broadly reflective of traditional Canadian corporate strengths.

The emerging picture of CDIA therefore is one of steady growth but with concentration in relatively few geographic locations and in few sectors. Recent changes in Canada's exchange rate may introduce new opportunities. A key issue for Canada's economic future relates to success in the scope and reach of Canadian enterprises and investors in the global economy.

Formal Barriers

Over the past two decades, barriers to direct investment have been reduced in many host countries. The reduction in barriers is owing in part to trade and investment agreements, but in larger measure to unilateral policy changes that nations have made to attract FDI.

The World Trade Organization (WTO) has few investment undertakings, focussing largely on measures that prohibit members from imposing performance requirements such as employment or export targets on foreign investors. The scope of the General Agreement on Trade in Services (GATS) includes investment in services industries. However, efforts to add investment per se to the WTO negotiating agenda in the current Doha Round of international trade negotiations were abandoned in 2003.

At the OECD, all member countries have committed to publish discriminatory investment measures, but there is at present no mechanism to enforce this practice.

The Canada-U.S. Free Trade Agreement and NAFTA go beyond WTO undertakings to effectively prohibit any new direct investment restrictions (other than in a few industries) while preserving Canada's right to review large direct takeovers under the ICA. Further, key features of the myriad bilateral trade and investment agreements being negotiated by Canada and other countries are aimed at protecting and promoting foreign investment through legally binding rights and obligations.52 However, these agreements vary greatly in both scope and content.

Thus, while nondiscriminatory treatment of investors is a crucial driver of globalization, the institutionalization of this effort has been challenging.

Informal Barriers

Concerns have been expressed about the informal or noninstitutional barriers to international investment erected by national governments. By their very nature, such barriers are difficult to identify and evaluate; however, there are various measures employed to prevent foreign investors from acquiring significant stakes in domestic firms. Such practices may entail government efforts to effect mergers of national firms to prevent a foreign takeover, governments holding so-called "golden shares" in firms that allow them to outvote other investors and thereby prevent foreign takeovers, using informal arrangements among owners acting under government influence or encouragement, or imposing overly stringent regulations to restrict outside investment in certain firms and industry sectors. Such barriers raise questions of reciprocity in market-based economies that function according to the rule of law.

Canadian Outward Investment Policy

Historically, Canadian public policy has been focussed on promoting exports of goods and services. Like our major competitors, we deploy a network of trade commissioners in foreign posts to assist Canadian companies to penetrate foreign markets. In recent years, investment counsellors have been added to a number of key posts, but their main focus has been on promoting foreign investment in Canada. There has been no specific mandate to promote CDIA, although the government's new Global Commerce Strategy has identified the importance of increasing both inward and outward flows of investment to enhance future Canadian competitiveness and productivity.

The role of Export Development Canada (EDC) and the Canadian Commercial Corporation (CCC) has been to assist in the financing of Canadian exports, particularly for large infrastructure projects and major procurements. EDC has a limited number of CDIA financing initiatives. New regulatory changes will enhance EDC's ability to invest in private equity and venture capital funds to help Canadian companies expand and grow their businesses internationally, particularly in emerging markets.

It has been suggested that Canadian efforts in support of CDIA have been piecemeal. New business models centred on global value chains place a premium on business engagement internationally, whether in the form of investment (both inward and outward), innovation linkages or traditional exports. Competitive pressures on firms to invest abroad are increasing.

PROMOTING CANADIAN DIRECT INVESTMENT ABROAD – QUESTIONS

  1. What barriers, either formal or informal, do Canadian firms face when seeking to make investments and acquisitions abroad?
  2. How should the government adapt its policies to promote increased Canadian direct investment and acquisitions abroad? What measures have been adopted by other countries that are relevant to Canada?
  3. Are there policies or approaches that would be useful in addressing the particular challenges faced by small and medium-sized enterprises as they seek to become global competitors and participants in global value chains?
  4. What impact does a higher-value Canadian dollar have on CDIA?