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Canada's State of Trade: Trade and Investment Update – 2009

VI. Overview of Canada's Investment Performance

Global Direct Investment Inflows

Global capital markets have played a critical role in the rise of globalization over the last few decades, and total cross-border flows have risen dramatically in both the developing and developed worlds (Figure 6-1). Of these flows, the rise in foreign direct investment (FDI) is particularly important as it more directly impacts the real economy. The world stock of FDI has increased dramatically —over 19 fold between 1982 and 2007—to reach US$15.2 trillion. This increase in direct investment is linked to the growth of multinational enterprises (now estimated at 64,000), their foreign affiliates (which are estimated to employ 81.6 million workers), and the rise of global value chains.

Figure 6-1
Global capital inflows (direct, portfolio, and other)

Global capital inflows - Text Alternative

Data: IMF. Includes direct investment, portfolio investment, other investment flows (includes bank loans and deposits), reserve assets

In 2008, FDI flows remained strong but fell from the record performance of 2007. Between 2004 and 2007, global FDI flows more than doubled as a result of strong global economic growth, increases in corporate profits, higher stock prices, growth in private equity and hedge funds, and the increasing role of state investment agencies in emerging economies.

The global economic crisis which took hold with force in the second half of 2008 has reversed these drivers (with the exception of state investment agencies), generating slower world growth in 2008 (and a forecasted contraction in 2009), tight credit conditions, plunging profits and stock prices, and increased the difficulty in assessing risk. These factors have reduced both the ability of firms to invest internationally and their willingness to do so. Corporate and industry restructuring as well as lower asset prices will provide some new opportunities for FDI flows in 2009 amid otherwise weak flows, but like other aspects of the world economy, the speed and the degree to which global FDI flows will revive over the next several years depends on the strength of the overall global economic recovery.

Global FDI inflows fell by 21.0 percent in 2008 to US$1.45 trillion (Table 6-1, Figure 6-2). This decline was caused by lower inflows in developed economies, which fell 32.7 percent to US$840.1 billion, whereas inflows to developing economies managed to squeeze out positive growth of 3.6 percent with inflows reaching $US517.7 billion. The BRIC economies as a group led growth among developing and emerging economies, posting a combined increase of US$38.9 billion (up 20.1 percent). Among the types of flows, mergers and acquisitions (M&As) led the worldwide decline, falling 27.7 percent. Despite this drop, cross border M&As continue to dominate world FDI flows (Figure 6-3).

Table 6-1
Global FDI Inflows for Selected Regions and Economies, 2004-2008 (US$)
 200420052006200720082008 Annual GrowthShare of World Inflows
1 Since data for Canada is not available from UNCTAD for 2008, these data are from Statistics Canada, converted to US$ using the end of year exchange rate.
Developed Economies$403,700,000,000$611,300,000,000$940,900,000,000$1247,600,000,000$840,100,000,000-32.7%58.0%
United States$135,800,000,000$104,800,000,000$236,700,000,000$232,800,000,000$220,000,000,000-5.5%15.2%
E.U. (27)$214,300,000,000$498,400,000,000$562,400,000,000$804,300,000,000$557,400,000,000-30.7%38.5%
United Kingdom$56,000,000,000$177,900,000,000$148,200,000,000$224,000,000,000$109,400,000,000-51.2%7.5%
Czech Republic$5,000,000,000$11,700,000,000$6,000,000,000$9,100,000,000$11,400,000,00025.3%0.8%
Emerging and Developing Economies$283,600,000,000$316,400,000,000$413,000,000,000$499,700,000,000$517,700,000,0003.6%35.7%
Asia and Oceania$171,200,000,000$210,600,000,000$274,300,000,000$320,500,000,000$313,500,000,000-2.2%21.6%
Hong Kong$34,000,000,000$33,600,000,000$45,100,000,000$59,900,000,000$60,700,000,0001.3%4.2%
Latin America and the Caribbean$94,400,000,000$76,400,000,000$92,900,000,000$126,300,000,000$142,300,000,00012.7%9.8%
South Africa$800,000,000$6,600,000,000-$500,000,000$5,700,000,000$12,000,000,000110.8%0.8%
SE Europe and the CIS$30,400,000,000$31,000,000,000$57,200,000,000$85,900,000,000$91,300,000,0006.2%6.3%
Russian Federation$15,400,000,000$12,900,000,000$32,400,000,000$52,500,000,000$61,700,000,00017.6%4.3%

Source: UNCTAD World Investment Report 2008 and Press Release on Global Investment January 2009

Note: That growth rates may appear different from UNCTAD investment release due to rounding.

Figure 6-2
Global FDI Inflows

Global FDI Inflows - Text Alternative


Figure 6-3
Mergers and acquisitions share of Global FDI inflows (2008)

Mergers and acquisitions share of Global FDI inflows - Text Alternative


Among developed countries, inflows to the EU fell particularly sharply, by 30.7 percent to US$557.4 billion. The drop was led by the larger European economies: a 48.9 percent drop in Germany to US$26.0 billion, a 51.2 percent drop in the UK to US$109.4 billion, and a 94.3 percent fall in Italy to just US$2.3 billion. The United States remained the largest single country destination for FDI inflows and experienced the smallest drop among the G7, down 5.5 percent to US$220.0 billion. Japan experienced a sharp 22.7 percent contraction to US$17.4 billion.

Canada experienced a sharp decline in FDI inflows over 2007 levels, down 65.8 percent to US$40.2 billion. Two factors compounded the effect of the financial crisis on FDI inflows into Canada. First, there were record inflows in 2007 (US$117.7 billion, equivalent to 9.4 percent of total inflows in the developed world for that year) driven by a series of large cross-border M&As. Second, the depreciation of the Canadian dollar accentuated the decline in U.S. dollar terms. Despite this, Canada's inflows in 2008 were 2.8 percent of global inflows, roughly equivalent to our share of world GDP.

Overall inflows into Asia and Oceania29 were down 2.2 percent to US$313.5 billion. Inflows into South, East and South-East Asia grew at slower pace in 2008 than in 2007, rising by just US$8.3 billion to US$256.1 billion (up 3.3 percent). There was strong growth in inflows into India (up 59.6 percent to US$36.7 billion) and China (up 10.7 percent to US$92.4 billion), which was the fourth-largest recipient of inflows. These increases were partially offset by a large decline in inflows to Singapore which were down 57.2 percent to US$10.3 billion, and smaller drops in other countries such as Indonesia (down 21.3 percent) and Thailand (down 4.4 percent). Flows into West Asia30 declined by 21.3 percent to US$56.3 billion.

FDI inflows to Latin America and the Caribbean rose to their highest recorded level at US$142.3 billion, up 12.7 percent. Inflows into Brazil were up 20.5 percent to US$41.7 billion, up 22.8 percent in Chile to US$17.8 billion, but down 16.2 percent in Mexico to US$20.7 billion.

Africa was the other region posting record inflows—up 16.8 percent to US$61.9 billion—continuing a strong upward trend over the last five years (inflows into Africa for 2007 were revised significantly upward from US$35.6 billion to$US53.0 billion). South Africa posted a large increase of 110.8 percent rising to US$12.0 billion, while declines were seen in both Egypt (-5.6 percent to US$10.9 billion) and Morocco (-7.0 percent to US$2.4 billion).

FDI inflows into countries in South-East Europe and the Commonwealth of Independent States grew 6.2 percent to US$91.3 billion. Two-thirds of the flows were into Russia, which rose 17.6 percent to US$61.7 billion.

Global Direct Investment Outflows

Direct investment outflows during 2005-07 continued to be dominated by developed countries, but the share of outflows from developing countries has increased (Figure 6-4). EU countries dominated outflows during this period (56.9 percent of total outflows). The U.S. had a 13.1 percent share, just above the share of the developing world excluding China at 12.3 percent. Despite perceptions of a rapid increase in Chinese direct investment abroad, over this period China averaged only a 1.3 percent share of outward flows, although flows from China were on the rise. Canada averaged a 2.9 percent share, slightly above our share of the world economy.

Figure 6-4
Global direct investment outflows (2005-2007 average shares)

Global direct investment outflows - Text Alternative

Data: UNCTAD, WIR 2008.

Canadian Performance – FDI Stocks31

FDI provides benefits to Canadian firms through the transfer of knowledge, technology and skills, and increased trade related to the investment, all of which contribute to productivity growth and competitiveness. FDI is also one of the ways in which Canadian companies can integrate into global value chains.

Canada has experienced significant growth in both inward and outward stocks of FDI over the last 25 years, although our share of world inflows declined over this period. Inward investment picked up significantly between 2004 and 2007 as a result of a jump in cross-border M&As, strong economic growth, and investment in the resource sector, before slowing in 2008.

Canada's inward FDI stock in 2008 rose just 2.8 percent from $491.3 billion to $504.9 billion (Table 6-2 and Figure 6-5). This is a large slowdown from the 12.0 percent increase in 2007 and 10.3 percent increase in 2006. The flat performance reflects the almost zero growth (0.3 percent) in U.S.-held stock, as U.S. investors hold the majority of the direct investment stock in Canada. The investment stock for the rest of the world excluding the U.S. grew by 6.4 percent, increasing the diversity of foreign investors in Canada.

The stock of Canadian direct invest abroad (CDIA) surged in 2008, jumping in value by 23.6 percent ($121.8 billion) to $637.3 billion (Table 6-4 and Figure 6-5). The rise in the value of CDIA in Canadian dollar terms was primarily the result of the depreciation of the Canadian dollar versus other currencies (68.0 percent of the increase). However, even without the changes in exchange rates the stock of CDIA grew by $39 billion, a substantial increase. Total CDIA has grown dramatically over the last five years, rising 54.6 percent in value since 2003.

Figure 6-5
Canada’s Inward and Outward Stocks of FDI

Canada’s Inward and Outward Stocks of FDI - Text Alternative

Data: Statistics Canada.

Canada's net direct investment position, which is the difference between Canadian direct investment abroad and FDI in Canada, widened dramatically to $132.4 billion in 2008, up from $24.2 billion in 2007. 2008 marked the twelfth consecutive year that Canadian direct investment abroad has exceeded inward foreign direct investment, making Canada a net exporter of capital since the mid-1990s. 2008 also marks the first year that Canada's direct investment in the United States outstripped U.S. direct investment into Canada (Canada's net direct investment position with the U.S. was positive at $17.1 billion in 2008, compared with a deficit of $62.1 billion in 2007).

Regional and Sectoral Shares in the Stock of Canada's inward FDI

Investors from the United States continued to hold the majority of Canada's FDI stock, with a 58.2 percent share at $293.6 billion (Table 6-2, Figure 6-6). The year 2008 was very weak in terms of investment from the U.S., with the U.S. stock of FDI recording growth of less than $1 billion, the weakest year for investment from the U.S. for at least twenty years. This continues a longer-term trend of a declining U.S. share of direct investment in Canada, which averaged 66.0 percent in the 1990s and 62.3 percent so far this decade. This share has shifted towards investors from South and Central America, Asia and Oceania, and Africa, which combined now have over a 10 percent share of Canada's inward FDI. Over the 2000s Europe's share also increased from an average share of 25.3 percent in the 1990s to an average of 29.8 percent.

Table 6-2
Stock of Foreign Direct Investment in Canada by Region
 2003200720082003 Share2008 Share2008 Annual Growth2003-2008 Annual Growth1
1 Compound average annual growth rate
North America and Caribbean$242,300,000,000$298,000,000,000$299,000,000,00064.9%59.2%0.4%4.3%
South and Central America$1,100,000,000$11,500,000,000$12,100,000,0000.3%2.4%5.1%61.8%
Top-10 Sources
United States$238,100,000,000$292,700,000,000$293,600,000,00063.7%58.2%0.3%4.3%
United Kingdom$26,000,000,000$52,400,000,000$54,400,000,0007.0%10.8%3.8%15.9%
United Arab Emiratesn.a.$3,300,000,000$5,200,000,000n.a.1.0%59.7%n.a.
Emerging Economies

Data: Statistics Canada, stocks.

Note: Shares and growth were calculated using raw data, and might not be reproduced with the data in the table, due to rounding.

Figure 6-6
Shares of the Stock of FDI in Canada (2008)

Shares of the Stock of FDI in Canada - Text Alternative

Data: Statistics Canada.

In 2008, the stock of FDI from Europe increased by 4.9 percent to $152.4 billion. European countries accounted for 6 of the top ten sources of direct investment into Canada in 2008 and 30.2 percent of Canada's total inward stock. The investment stock from the United Kingdom, the second largest source of FDI into Canada, grew by 3.8 percent to $54.4 billion. The stock of FDI from the Netherlands continued to rise, up 10.6 percent to $33.9 billion. The value of investments from France increased by 8.7 percent to $18.5 billion, although this was little more than half the value of French investments in Canada in 2003. Investment from Germany continued to lag behind other large European economies, growing by 2.3 percent to $9.4 billion.

FDI from South and Central America continued to grow in 2008 albeit at a slower pace than in recent years, rising 5.1 percent to $12.1 billion. FDI from this region has risen from just $1.1 billion five years ago. This growth is almost entirely attributable to investment from Brazil, which has 98.8 percent of the region's stock of FDI in Canada. Much of Brazil's growth occurred in 2006 as a result of large M&As like the purchase of Inco by CVRD. Brazil remains in seventh place among all investors in Canada, ahead of all other BRIC and developing countries.

Investments from Asia and Oceania continued to grow strongly in 2008, up 14.7 percent, raising the total stock from the region to $40.0 billion, (or 7.9 percent of the total inward stock). The largest investment stock from this region remains that of Japan at 32.5 percent of the total Asia/Oceania stock in 2008, although Japan's share has fallen from 55.3 percent in 2003, and its stock declined 4.6 percent in 2008 to $13.0 billion. Investment from the United Arab Emirates (UAE) has increased from negligible levels in 2003 to $5.2 billion in 2008, vaulting the UAE into tenth place among foreign investors in Canada. Chinese investments have also grown substantially, up 31.3 percent in 2008, although China's overall share remains small at just 0.5 percent ($2.8 billion). Investment from India jumped 137.7 percent in 2008, but stands at just $1.0 billion, up from $430 million.

The stock of FDI from African countries fell 19.7 percent to $1.4 billion in 2008. While representing a small share of Canada's total inward investment, this is almost double the amount invested in 2003 and over ten times larger than the $114 million invested in 2000.

Inward direct investment in 2008 continued to rise at a strong pace in energy related sectors (see Table 6-3). The investment stock in petroleum and coal manufacturing was up 15.4 percent to $24.0 billion, and FDI in oil and gas extraction and support was up 7.2 percent to $76.6 billion, and now has a 15.2 percent share of the inward FDI stock, up from just 7.2 percent in 2000. The mining sector also grew strongly at 16.1 percent to $24.8 billion, and has averaged a staggering 37.2 percent compound annual average growth rate since 2003.

Table 6-3
Stock of Foreign Direct Investment in Canada by Selected Industry
 200720082008 Share2008 Annual Growth2003-2008 Annual Growth1
1 Compound average annual growth rate
Primary Metal$32,100,000,000$30,400,000,0006.0%-5.3%40.1%
Transport Equipment$26,200,000,000$19,900,000,0003.9%-24.1%-4.8%
Petroleum and coal$20,800,000,000$24,000,000,0004.8%15.4%11.7%
Paper and Wood products$14,000,000,000$13,800,000,0002.7%-1.7%-0.3%
Mining and Oil and Gas extraction$92,800,000,000$101,400,000,00020.1%9.2%17.0%
Oil and Gas extraction and support$71,500,000,000$76,600,000,00015.2%7.2%13.2%
Finance and Insurance$58,700,000,000$60,400,000,00012.0%3.0%5.8%
Management of Companies$59,900,000,000$60,800,000,00012.0%1.4%2.4%
Information and communication technologies (ICT)$17,200,000,000$20,100,000,0004.0%17.1%-2.8%
All Industries$491,300,000,000$504,900,000,000100.0%2.8%6.2%

Data: Statistics Canada, stocks

Note: Shares and growth were calculated using raw data, and might not be reproduced with the data in the table, due to rounding.

Investment in manufacturing declined by 2.0 percent in 2008 to $174.5 billion, a 34.6 percent share of total inward FDI, down substantially from its 48.4 percent share in 2000. The stock of investment in the manufacturing of transport equipment led the decline in 2008, dropping 24.1 percent to $19.9 billion. Chemical manufacturing was a bright spot for the manufacturing sector with an increase of 9.9 percent to $25.0 billion. The value of the stock of FDI in the Information and Communications Technologies (ICT) sector jumped 17.1 percent to $20.1 billion, after declining in 2007.

Regional and Sectoral Shares in the Stock of CDIA

The U.S. remains the most important destination for Canadian direct investment abroad, surging 34.8 percent ($80.2 billion) in 2008 to $310.7 billion (Table 6-4, Figure 6-7). Nearly two thirds of this was the result of currency effects ($52.5 billion), but even without the change in the exchange rate the growth of CDIA in the U.S. would have been strong at $27.6 billion. This increased the U.S. share of CDIA to 48.8 percent, up from 44.7 percent in 2007, partially reversing the trend of greater diversity in CDIA.

Table 6-4
Stock of Canadian Direct Investment Abroad by Region
 2003200720082003 Share2008 Share2008 Annual Growth2003-2008 Annual Growth1
1 Compound average annual growth rate
North America and Caribbean$232,200,000,000$315,800,000,000$421,300,000,00056.3%66.1%33.4%12.7%
South and Central America$20,300,000,000$21,800,000,000$24,800,000,0004.9%3.9%13.7%4.1%
Top-10 Destinations
United States$169,600,000,000$230,600,000,000$310,700,000,00041.1%48.8%34.8%12.9%
United Kingdom$43,900,000,000$59,200,000,000$54,000,000,00010.7%8.5%-8.9%4.2%
Cayman Islands$12,500,000,000$16,700,000,000$19,200,000,0003.0%3.0%14.9%9.0%
Emerging Economies

Data: Statistics Canada, stocks

Figure 6-7
Shares in CDIA (2008)

Compound average annual growth rate - Text Alternative

Data: Statistics Canada.

The value of CDIA in Europe increased by 6.1 percent in 2008 to $150.9 billion, although Europe's share of CDIA has slipped significantly from 30.2 percent in 2003 to 23.7 percent in 2008. CDIA in the United Kingdom, the largest destination for CDIA in Europe, fell 8.9 percent to $54.0 billion. CDIA in Ireland grew 7.1 percent to $20.5 billion, and jumped 23.4 percent in France to $18.7 billion. These three account for $93.2 billion, or nearly 62 percent of Europe's total CDIA.

Canada's direct investment in South and Central America posted strong growth of 13.7 percent in 2008, reaching a total stock of $24.8 billion, with most investment concentrated in Brazil (up 3.5 percent to $9.2 billion) and Chile (up 9.7 percent to $6.4 billion).

Canada's direct investment in Asia and Oceania posted the second strongest regional growth rate after North America, increasing 16.8 percent to $36.2 billion in 2008. CDIA to Hong Kong led growth (up 40.0 percent to $6.0 billion) as well as China (up 37.3 percent) to $3.6 billion. CDIA in Australia, the largest recipient of Canadian investment in the region, was virtually flat, rising just 1.4 percent to $7.1 billion. The distribution of investment across the region is widespread, with 9 countries having over $1 billion each in Canadian investment.

The stock of Canada's direct investment in African countries fell by 12.4 percent in 2008 to $4.0 billion, although CDIA in the region is still up by 81.2 percent since 2003.

In 2008, CDIA continued to shift away from the goods sector and towards the services sector (Table 6-5). The largest sector for CDIA, finance and insurance industries, saw a $93.4 billion or 57.2 percent increase in value in 2008 to $256.9 billion, and is responsible for over three-quarters of the total increase in CDIA in 2008, and 59.0 percent of the increase in the U.S. Some of this increase may be the result of liquidity issues of Canadian owned foreign affiliates32. The finance and insurance industries' share of total CDIA has risen to 40.3 percent, up from 28.4 percent in 2000.

Table 6-5
Stock of Canadian Direct Investment Abroad by Selected Industry
 200720082008 Share2008 Annual Growth2003-2008 Annual Growth1
1 Compound average annual growth rate
Mining and Oil and Gas extraction$78,800,000,000$94,000,000,00014.8%19.4%12.2%
Oil and Gas extraction and support$58,100,000,000$67,600,000,00010.6%16.4%17.3%
Finance and Insurance$163,400,000,000$256,900,000,00040.3%57.2%11.6%
Management of Companies$87,200,000,000$68,400,000,00010.7%-21.5%15.0%
Transport and warehousing$15,100,000,000$17,100,000,0002.7%13.3%2.0%
Information and cultural industries$14,600,000,000$21,000,000,0003.3%43.4%-5.0%
Information and communication technologies$15,900,000,000$18,300,000,0002.9%14.7%-6.1%
All industries$515,400,000,000$637,300,000,000100.0%23.6%9.1%

Data: Statistics Canada.

Note: Shares and growth were calculated using raw data, and might not be reproduced with the data in the table, due to rounding.

There was a 21.5 percent drop (-$18.7 billion) in the value of CDIA in the management of companies and enterprises sector to $68.4 billion. There was a large 43.4 percent jump in the value of CDIA in information and cultural industries, which rose to $21.0 billion.

Growth in the manufacturing sector was positive but below the all industry average at 13.2 percent, raising the value of the total stock to $116.8 billion. The share of CDIA in manufacturing fell to 18.3 percent in 2008, down dramatically from 31.9 percent in 2000.

29. UNCTAD country aggregates are used to report global inflows.

30. West Asia includes the Middle East and Turkey

31. This section focuses on investment stocks, rather than flows which are more volatile. The UNCTAD data used in the previous section is only available for flows for 2008 at the time of writing. Note that changes in the stocks of FDI are not equivalent to investment flows as the value of investment stocks are also impacted by currency fluctuations and changes in the value of existing investments.

32. Statistics Canada, Canada's Balance of International Payments, Q4 2008.