Frequently Asked Questions
- Why is international investment important?
- What is Foreign Direct Investment (FDI)?
- What is Canadian Direct Investment Abroad (CDIA)?
- Why do we need Investment Agreements and International Rules on Investment?
- Who benefits from foreign investment?
A new global economy has emerged, an economy based on the more intangible output of services firms and dependent to a much greater extent on international capital flows. One fundamental characteristic of this new economy is that it relies more and more on the creation, purchase and transfer of capital and knowledge.
As Canada moves into a new century, Canadian businesses have discovered that if they are to prosper, they must compete in the international knowledge-based economy. Canadians are responding to this challenge. Canadian exports have surged. However, Canadian companies not only have markets in other countries, they may also have production (or other) facilities established abroad through international investment. Increasingly, many of their suppliers and investors, both in Canada and abroad, may be foreign. International investment is becoming an even more important part of the "business toolkit" needed to succeed in today's economy.
Indeed, investment is important to the whole Canadian economy and overall domestic economic growth.
Foreign direct investment (FDI) is the capital that a foreign company puts into a new facility or an existing facility in the expectation of profitable return. A foreign auto maker, for instance, may decide to build a new plant or expand one of its existing plants in Canada. To do so, it invests in the construction or expansion of the plant. This creates temporary construction jobs plus permanent, highly specialized jobs. The company invests in Canada in the expectation of marketing its product domestically or abroad. Its investment in turn generates benefits to the community through increased trade opportunities, the introduction of new technologies, job creation, the payment of taxes and the purchase of goods and services locally. This is FDI in action.
- Foreign direct investment (FDI) is an important source of jobs - especially high skilled jobs.
According to the World Investment Report, 1995, 11 percent of all jobs in Canada, in 1994, are directly attributable to FDI.
- Foreign investment is an important source of economic growth.
The Industry Canada and Foreign Affairs and International Trade study also suggested that if Canada's share of world investment capital had increased by 1 percent, over the last ten years, it would have lead to an increase of between 10 and 15 percent in the country's Gross Domestic Product, the value of goods and services produced in a year.
- Foreign investment is also an important source of technology.
Considering the high costs of research and development, international investment, often as international alliances, is a critical way Canadian firms can access the leading edge technologies.
- The economic contribution of foreign firms to Canada's economy is substantial.
The sales of companies controlled abroad account for nearly 30 percent of all corporate sales in Canada. In many technology-intensive industries - electrical and electrical products, for example - over half of all Canadian sales come from internationally-controlled firms.
- Foreign investment is an important source of management expertise.
A foreign investor will often bring new international marketing strategies, increased strategic resources and new perspectives on management of people and technology that enhance the ability of the existing company to compete and raise the overall level of productivity of the economy.
- Foreign investment provides much needed additional capital that would otherwise not be available.
- The positive effects of these investments often spill-over to benefit domestic firms.
Domestic producers and suppliers benefit from foreign investment as they often provide goods and services to the new facility. Also, as employees trained in the new processes and exposed to new management styles change employment, they take their knowledge and skills with them, thus providing their new employer with a the benefit of their experiences.
- Finally, foreign investment is an important element of our phenomenal success in international trade.
International firms produce not just for the domestic market but for their international affiliates, which often means they are ahead of Canadian firms in the export race. This is especially significant as many business sectors shift from production aimed at the domestic market to production for the export market. Investment and trade linkages go hand in hand. The 50 largest Canadian-owned multinationals in the U.S. and U.S. subsidiaries in Canada account for 90 percent of all two-way FDI and well over 70 percent of all bilateral trade.
It is also important to remember that foreign investors do not simply take the money and run. Commonly, they reinvest a large proportion of profits, about 30 percent in Canada, contributing to a higher growth rate and a rise in living standards.
Canadian direct investment abroad (CDIA) plays a special role for a country like Canada. Companies increasingly use outward investment (through mergers, acquisition, partnerships, joint ventures, strategic alliances or new investments) to strengthen their operations, penetrate new markets and acquire new technologies, resources and skills. Such investment abroad brings concrete benefits to Canada in terms of research and development (R&D) activities, growth and export opportunities leading to job creation back home in Canada.
The following illustration reinforces this point: Having successfully built up an export market for its products in Chile, a Canadian company might consider building a production facility there to enable it to expand its marketing effort into other South American countries and into Latin America. Such investment brings benefits to the Canadian company, and therefore to Canada, in ways which would likely not be achieved through simply exporting goods. Closeness to your market and the ability to respond to changing customer requirements, as well as local goodwill, are vital to success. Evidence suggests that this type of investment does not result in an "export of jobs" but rather results in increased sales and production from home facilities.
Canadian investment abroad contributes to a more competitive and dynamic economy at home.
- The growth, productivity and profits of Canadian firms involved in global markets has been superior to the performance of domestically-oriented firms.
The higher profits enjoyed by the Canadian firms that invest in foreign markets has been attributed to their increased efficiency. In part, this is due to their ability to exploit economies of scale and scope.
- Income from Canada's outward foreign direct investment increased sharply with the increase in outward FDI.
Direct investment income averaged $6 billion between 1990 and 1996, almost $2 billion more than between 1985-1989, helping to improve our standard of living.
- The growth of Canadian investment abroad leads to an increase in exports, which directly affect Canada's economic health.
Exports account for more than one third of our Gross Domestic Product. Exports are the path to future growth and continued competitiveness in the global marketplace.
- Investment abroad offers better access to foreign skills and foreign technologies for the Canadian high-technology industries.
It also increases research and development in Canada, which in turn leads to innovation, expanded market potential, and better employment opportunities for highly-educated workers.
- The spill over effect can benefit companies that are not themselves investing abroad.
They may directly or indirectly benefit from the introduction of new skills, management techniques and technology acquired by Canadian firms that have already moved into foreign markets.
Clearly, foreign investment is critical to Canada's future linking Canadian companies, consumers and workers to the new knowledge based global economy. It enhances Canada's competitiveness by revitalizing domestic industry and increasing the flow of goods and services between Canada and its trading partners. Foreign investment not only produces jobs, but introduces new technology, new management techniques and new market access. The benefits of foreign investment are vital to our future success.
Investment rules play an important role in protecting and facilitating the foreign investment activities of Canadian firms. Canada is a medium-sized economy, thus its current and future prosperity depends on open markets, a stable trading environment and a fair and impartial means of settling trade disputes. Investment rules offer a greater measure of security for Canadian investors through assurances that national policies will not be unduly changed or applied in a discriminatory manner.
Typically, efforts in this area are focussed on improving the conditions under which investments are made and include the following key principles:
- transparency - provision of open reporting and publishing of national investment measures/rules and relevant regulatory changes so that investors can have a clear understanding of the "rules of the game";
- national and most favoured-nation treatment - non-discrimination of foreign investors and their investments in host countries (with provision for excluding sensitive sectors) ;
- protection for investments - investments and investors should be protected by ensuring fair and equitable treatment, compensation in the event of expropriation and free cross-border transfer of funds;
Canadian firms can also mitigate their exposure when making foreign investments in risky regions by purchasing political risk insurance. Political risk insurance is available from commercial insurers, as well as from Export Development Canada (EDC).
Canadian firms continue to encounter investment barriers abroad, including investment prohibitions, restrictions on the scope of business activity, performance requirements, investment authorizations, residency requirements and restrictions on the movement of business people. Difficulties tend to be most frequently raised with respect to Africa, South America, China and Russia.
Investment agreements do not restrict a country's ability to regulate in the public interest. Foreign investors in Canada (and Canadian investors in foreign markets) must abide by the domestic laws of the host country and obey the same rules as nationals. For example, investors are not exempt from domestic competition laws or local regulations relating to health, labour or the environment.
In each year in the first half of this decade, on average, $8.4 billion of investment has flowed into Canada -- about three-quarters of it from the United States. Much of it went toward buying Canadian companies. A debate has rekindled: do we want this money?
Investment capital travels the world looking for the best opportunities. Governments the world over compete aggressively to attract it. But in Canada, some critics believe foreign investment means lost jobs and a net outflow of capital. They complain that foreign investment buys existing Canadian businesses, rather than establish new enterprises.
These arguments have changed little in a quarter century. But in the meantime, Canada and the world economy have changed profoundly. Certainly Canada's role in the international flows of investment has changed.
First, we are no longer one of the world's preferred destinations for investment capital. Between 1986 and 1995, our share of global investment stock fell by half. We lost 6 percent of our share of North American bound investment; the US and Mexico increased theirs.
Second, Canadians are investing abroad as never before. Outward foreign investments averaged $9 billion per year from 1990 to 1996 -- a 50 percent increase from 1983-1989. In 1997, Canadians invested $4.1 billion to acquire foreign companies.
In 1985, Canadians' stock of foreign investment was only two-thirds of what foreigners had invested in our country. But by 1996, our stock in outward foreign investment almost equalled inward investment stock in Canada. That year, our stock in foreign investment abroad was $10.2 billion.
What would happen if Canadians kept their money at home? Would we be better off if Canadians invested in Canada, and removed the welcome mat for foreign investors?
The answer is an unqualified no. A look at some of the benefits that foreign investors have brought with their capital shows that, in this new global economy, foreign investment gives a competitive edge -- both to those who make the investment, and those who receive it.
Outward Orientation. Foreign controlled firms tend to be outward oriented. In turn, they make the Canadian companies they deal with more aware of international opportunities.
Whether measured by sales growth, asset growth, capital productivity, intensity of research and development, or the average rate of return on assets, outward oriented firms perform better than firms focused only on Canadian markets.
Market Access. Foreigners used to invest in Canada to gain access to our markets, protected as they were by tariff walls. Today, with free trade, offshore companies consider Canada as an entry point to North American markets. These companies, their managers and employees, and their suppliers must focus outward and look to market opportunities beyond Canada's borders.
Mitsui Home Co. Ltd invested in a lumber-sorting and remanufacturing plant in Langley, BC to process the company's requirements for the Japanese market. The company has invested $18 million at the site to remain competitive and to penetrate the North American market.
Access to capital. Foreign investment provides much needed additional capital that would otherwise not be available.
Stora Forest Industries Limited, a subsidiary of Sweden's STORA Group, is investing $650 million to construct a specialty paper plant in Point Tupper, Nova Scotia. The plant will expand the company's production capacity and produce paper currently not produced in North America. The investment will ensure paper production at Point Tupper for decades to come. The new paper line is expected to employ up to 800 construction workers.
Technology Transfer. Foreign investment helps Canadian firms access innovative technologies.
The Wang family of Hong Kong bought Standard Knitting Ltd of Winnipeg in 1990. They invested over $8 million to upgrade computer technology, and within five years, won a Canada Export Award and increased the number of jobs from 112 to 295.
In Bécancour, Quebec, Petresa Canada Inc produces components used to make detergents. It uses a new process that is the proprietary technology of Petroquímica Española, the parent company. The company, which employs 60 people, plans to continue penetrating North American markets before increasing exports to other countries.
Research and development. Foreign investment often focuses on research and development opportunities in Canada because of low costs and a solid R&D infrastructure and quality of the research.
The Montreal R&D facilities of Ericsson Communications Inc, have received over $375 million over the last five years from its parent company, Ericsson of Sweden. The Montreal subsidiary has obtained three successive world mandates in R&D. The company employs over 800 engineers, recruited primarily from Canadian universities.
In nearby Kirkland, Merck Frosst spent over $70 million to build a major research facility, with a world product mandate to develop therapies for inflammatory and respiratory diseases. The company has averaged more than $50 million a year on R&D in Canada, and employs over 1,100 full time and 200 temporary employees. Its co-op program brings 50 to 100 students to its lab at any given time.
Corporate strategy. The strategy of many transnational companies is to locate specific projects in a particular country, and give the subsidiary there a regional or global mandate for what it produces. This enables companies to specialize based on the opportunities found in Canada.
The process can be seen in the acquisition of Toronto's Connaught Laboratories by transnational Pasteur Mérieux -- the world's largest vaccine manufacturer, and a world leader in vaccine research. Last June, the French parent company announced it would invest $350 million over ten years in a new cancer vaccine project in Canada. It gave the Canadian subsidiary the world product mandate for the development, manufacture and export of any products derived from the cancer vaccine research initiative. Number of new jobs: between 250 and 300, mostly in R&D.
Spin-off benefits. The Pasteur-Mérieux investment is making Canada a world leader in cancer vaccine research. It strengthens our R&D capabilities, and provides new career opportunities across the country. The initiative is expected eventually to involve some 60 organizations across Canada, including universities, clinical research centres, cancer institutes and agencies, provincial research facilities, and Canadian biopharmaceutical companies.
Another example of spin-off benefits to Canadian firms comes from the decision by Gist-brocades/Bio-Intermediair to build its first North American facility in Montreal with an investment of $40 million. The number of Canadians hired by the company will increase from 55 to 80, but perhaps even more important will be the impact of the facility on other biotechnology companies in the region. The Netherlands company has become a world leader in manufacturing under the current Good Manufacturing Practices (cGMP) conditions required for clinical trials. The Montreal facility is one of the very few of its kind in the world, and Canadian biopharmaceutical firms no longer have to go abroad to manufacture biological products to meet the cGMP conditions. The transnational company thereby becomes an incubator for the Canadian biopharmaceutical industry.
Jobs. From the examples above, it is clear that foreign investment creates jobs in Canada. In fact, a tenth of all jobs in Canada depend directly on foreign investment. The total impact on jobs is much higher because of the spillover effects of this investment on capital formation, trade flows, competition, and technical progress.
A sustained $1 billion in foreign investment would raise Canada's Gross Domestic Product by about $4.5 billion and create about 45,000 new jobs over five years.
Foreign investment is critical to Canada's future. It links Canadian companies, consumers and workers to the new knowledge based global economy. It enhances Canada's competitiveness by revitalizing domestic industry and increasing the flow of goods and services between Canada and its trading partners. Foreign investment not only produces jobs, but introduces new technology, new management techniques and new market access.
We should also not lose sight of the fact that we too are expanding our investments abroad, which also means more competitive Canadian firms repatriating capital and knowledge back to Canada. As an open economy, internationally agreed upon rules governing these investments are in Canada's interest - both to ensure that Canadian firms are operating in a secure international environment, and to signify that, by and large, international firms are indeed subject to non-discriminatory national laws and regulations here at home.
In the future, transnational corporations will be even more important to Canada's economic circumstances. We want more investment. It's good for Canada and Canadians.
- Hon. John Manley
Former Minister of Industry
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