Foreign+Direct+Investment+in+Canada

Foreign Direct Investment (FDI) in Canada continues to be a contentious issue for many people. As noted in the Economist article, //Lie back and forget the Maple Leaf,// there is a general disagreement about the appropriate amount of FDI that is desirable. Most economists take the side that FDI should be increased while most of the population believes that there is already too much. The Economist takes the position that “contrary to the fears of many Canadians, foreign takeovers are a sign of economic success, not failure”  [|[1]]. This paper will show that this is in fact the case and FDI should continue to be encouraged in Canada by examining the theory both for and against FDI with examples from select Canadian companies and will conclude with a look at the importance of FDI on Canada's economy. In general, Canada has been following the world trend of increasing FDI. In 1985 the Federal government replaced the //Foreign Investment Review Act// with the //Investment Canada Act [|**[2**]]. //As stated by Industry Canada, i ts purpose is to “encourage investment in Canada by Canadians and non-Canadians that contributes to economic growth and employment opportunities and to provide for the review of significant investments in Canada by non-Canadians in order to ensure such benefit to Canada.” [|[3]] This act has marked a shift from a policy that restricts foreign investment to one that relatively welcomes it. Since this time, FDI in Canada has increased 367%, from $96.1 billion to $448.9 billion in 2006. [|[4]] However, the act also states that any proposed foreign takeover by a company from a WTO participating country worth more then $295 million must be reviewed by the industry minister to determine if it is of net benefit to Canada. If the home country does not participate in the WTO any direct takeover worth more than $5 million must be reviewed by Industry Canada [|[5]]. Compared with other countries, Canada attracts a fairly large amount of FDI, given its economic size. Canada’s economy accounts for only 1.7% of world GDP, yet it accounts for 3.3% of FDI. In comparison, the US economy accounts for 20% of world GDP, yet only 14% of FDI. [|[6]] However, despite these numbers, both the WTO and OECD state that Canada's FDI policies are too restrictive and are inhibiting growth. The OECD's annual //Going for Growth// report in 2007 said that Canada's restrictions on foreign investors are among the strictest of its 30 members. [|[7]] It stated that Canada is the worlds fifth largest goods trading nation and thus trade policy and foreign investment are of particular importance. The report urged Canada to reconsider its restrictions on FDI in order to help ensure that Canadians continue to enjoy one of the highest living standards in the world. [|[8]] In theory FDI has both advantages and disadvantages. One such advantage is the fact that FDI stimulates innovation. This innovation can take the form of either new management techniques or technology spillover. Competitiveness and productivity are typically higher in foreign firms than in domestic firms [|[9]]. This is due to the fact that foreign firms generally have a higher exposure to international business and competition, which forces them to either adapt their ways or go out of business. Therefore, the firms that have prospered are those that are now competing with Canada’s domestic firms. This is exactly the benefit that, in theory, FDI brings to domestic firms. It is hoped that the presence of these foreign firms will put pressure on Canadian firms to become more competitive by benchmarking and learning what makes other companies more productive. The theoretical outcome will be a more efficient system leading to reduced prices and better service as well as more competitive domestic based firms that are better able to compete on the world stage. An example of how local management can learn and improve from FDI is evidenced by the Canadian company, Giant Tiger. Wal-Mart is always under scrutiny because of its aggressive style that puts domestic retailers out of business worldwide. Giant Tiger has demonstrated that if domestic firms are willing to learn from their competition and adapt their strategies they can still compete. In the words of Giant Tiger founder Gordon Reid, "Wal-Mart has been no problem at all, obviously since we've grown so much," [|[10]] In fact, when War-Mart entered the Canadian market in 1994, privately owned Giant Tiger had 63 stores and $220 million annual sales. Since then, it has increased its sales to $1.3 trillion and now has 182 stores nationwide [|[11]]. Jeffrey York, Giant Tiger's president, stated that in anticipation of Wal-Mart coming to Canada, they studied Wal-Mart's strengths and weaknesses in the US. According to the Ottawa Citizen, "they came up with a five-year strategy to emphasize more fashion-wear, lower prices and increase their ability to "be nimble" or react quickly to changes, in preparation for the changes that it expected Wal-Mart would bring… Ironically, the competitive pressures that contributed to the disappearance of K-Mart, Woolco and others turned out to be a boon to Giant Tiger." [|[12]] Another way that FDI stimulates innovation is through increased R&D and technology spillover. The benefit comes from foreign owned firms demonstrating new technologies, providing technical assistance to their local suppliers and customers, training employees who may subsequently move to local firms, or just observing the new technology [|[13]]. A study entitled //Multinationals and the Canadian innovation process,// // found that 52% of foreign owned firms innovated, compared with just 27% of domestic owned firms with no foreign affiliation. // [|[14]] // Foreign owned firms also frequently have access to the R&D conducted by their parent companies, further increasing their ability to produce new technology. // //  The examples of technology spillover are everywhere and their importance can not be understated. In the food, beverage and tobacco industry, a recent study by the Universty of Alberta found that in the absence of FDI, domestic R&D was close to zero. Through their study, they have determined that there is a positive correlation between FDI and R&D, // [|[15]] //   which has led to the use of biotechnology producing higher yielding and more resilient seeds, new pesticides and fertilizers and the transformation from the family farm to the agri-food business. Other examples can be seen such as the innovation in PDA phones. Canadian based Research in Motion (RIM) first invented the Blackberry PDA, but a recent entrant to the market, Apple and its iPhone, have redefined the market through the use of touch screen technology. In response, RIM has announced the launch of its own touch screen phone, the Blackberry Storm. There exist many more examples of technology spillovers and the positive effects that it has on our society. //  Another advantage of FDI is that it creates jobs and consequently increases the corporate tax base, and the standard of living in the host country. A recent study by the Munich Personal RePEc Archive titled //Foreign Direct Investment and Economic Growth: Some Evidence From Across the World,// recently concluded that there is a positive correlation between increasing FDI and increasing per capita GDP. [|[16]] Currently, one in ten Canadian's jobs is attributed to FDI, more then twice the level in the US, Germany and Sweden. [|[17]] In addition, foreign owned firms generally pay comparatively higher wages then domestic firms, and employment levels are typically less susceptible to economic cycles. [|[18]]    An economic forecast prepared by Industry Canada and Foreign Affairs and International Trade estimates that each $1-billion increase in new inward investment to Canada can generate up to 45,000 jobs and $4.5 billion GDP over a five-year period. [|[19]] This report also noted that a significant proportion of the profits from these investments are invested back into Canada, contributing to a higher growth rate. Proponents of FDI also site the fact that the inflow of capital can improve a countries balance of payments. Much like a home or a business, a nation needs to balance its books and ensure that its debt, relative to GDP, does not become too large or else its obligation to repay its debt can become a serious burden. However, this is partially offset by the fact that the earnings of foreign owned firms can be repatriated to the home country (assuming that the host country does not restrict or prohibit this repatriation of funds). Also, running a defecit is not necessarily a negative as long as GDP increases accordingly. Therefore, the balance of payments should not be considered to be a strong argument for or against FDI. Arguments against FDI include the loss of sovereignty that the host country experiences, the `hollowing out`of corporate Canada, and the fact that many domestic companies are forced out of business by the new competition. The arguments about the loss of sovereignty and the `hollowing out`of corporate Canada are closely related, thus these points can be considered together. These arguments have gained steam recently due to a spat of high profile domestic acquisitons, including Alcan, Dofasco, Stelco, Algoma Steel, Falconbridge, AltaSteel, Westcoast Energy, Inco, Cognos, Prime West Energy, Four Seasons Hotels, MDS and many more. The Chronicle Herald states that the argument against FDI is that "the concern where companies are taken over, decision-making on future jobs and investment in Canada is transferred to foreign head offices, while Canadian head offices that once provided good jobs and create many opportunities for suppliers of business services are seriously downsized in their capacity" [|[20]]. This also leads to fears that foreign companies will exploit the host countries people and resources and the psychological effect of losing iconic Canadian firms to foreigners. Allan MaCgibbon, on behalf of Canadian accounting firm Deloit and Touche, has said that the loss to Canada "extends well beyond the companies being acquired. It also results in significant loss of business for their suppliers, a shift of important decision-making outside Canada and the loss of effective oversight and accountability to the Canadian marketplace... It is our experience that, when control of Canadian companies is acquired by foreign investors, there immediately follows a shift away from Canada in the company’s decision-making, highest-paying jobs and demand for professional services" [|[21]]  It is near impossible, however, to find any support for the argument of the hollowing out of corporate Canada. The argument seems to be supported by the claims of business leaders, who seemingly are either afraid of foreign competition or are basing their opinions on the observation of their immediate microenvironment and not looking how FDI has affected the macro environment. This argument is also supported by a segment of the population who desire the pride of Canadian ownership. Statistics Canada conducted a study to determine if Canada actually is losing head office jobs and they found that "  The effect of foreign takeovers has not been to reduce the number of head offices in Canada or head-office employment. As a result of foreign takeovers, more new head offices were created than lost in the post-1999 period, and employment in head offices was as high after the takeovers as it was before. " [|[22]]   As for the fears that foreign owned firms will exploit the host countries people and resources, proponents of FDI argue that if it were that simple even Canadian based companies would exploit the population and resources. They argue that all firms, not just foreign ones, seek to optimize profits, not the betterment of the nation. What keeps these companies from exploiting the public is a combination of Canadian laws and the expectations of the public. If a company wants to be profitable in Canada, it has to act in a socially responsible manner. All firms, both domestic and foreign owned, are subject to the same laws and expectations when they conduct business in Canada.  As for the pride of Canadian ownership, there are no solid facts that can support either side of this debate. However, looking at past acquisitions, it could be argued that there are generally no major changes. For example, when Tim Hortons was bought by American owned Wendys in 1995, little changed for the company. CBC published an article titled "  Truly Canadian  " in 2006 that explored this issue and concluded "Tim Hortons began in Canada, is named after an icon of Canadian hockey, and does the vast majority of its business in Canada. Its corporate headquarters are in Oakville, Ont., and its advertising has always played on its "Canadian-ness". [|[23]]  When discussing other major domestic takeovers they stated that "The targeted companies still have their operations in Canada; they still employ thousands of Canadians; they still sell their products and services to Canadians." [|[24]] Therefore, although the psychological effect of takeovers of iconic Canadian firms can not be completely discounted, it is a relatively minor point which is more then offset by the advantages of FDI. A stronger argument against FDI is that the sudden appearance of strong competition can force domestic companies out of business. In the previous example involving Wal-Mart, although Giant Tiger prospered when Wal-Mart entered Canada, K-Mart and Woolco were forced out of business. Manulife Financial CEO Dominic D'Alessandro is a strong supporter of this view. He claims that had it not been for the stringent Canadian regulations restricting the acquisition of insurance companies, Manulife Financial would surely have been taken over by a foreign company and prevented from becoming a highly successful global company headquartered in Canada. [|[25]] Again, such claims seem to be based on the potential for personal gain or loss or the bottom up observation of the microenvironment. In the case of Dominic D'Alessandro, his argument for protectionism falls apart when you consider that Manulife Financial has grown mainly because of acquisitions. One of his first acts as CEO was to announce expansion plans into China. [|[26]] The essence of this argument is offset by the argument in support of FDI that it puts pressure on domestic firms to innovate or go out of business. According to Canadian Business Online, " Coddling corporations and turning executives into homebodies afraid to venture outside their home turf is often considered the real reason Canadian companies are falling behind in the global economy ." [|[27]] This study has demonstrated that as per the Economists belief, foreign acquisitions are indeed a sign of success and not failure and should be embraced, not avoided. The arguments against FDI lack any supporting evidence and seem to be made either by those with something personal to gain by blocking FDI or by those acting out of emotion. When the evidence from multiple studies by the Canadian Government, OECD, and the WTO are considered, there is overwhelming support for FDI. As stated in the OECDs review called //Foreign Direct Investment for Development, Maximizing Benefits, Minimizng Costs,// " Foreign direct investment (FDI) is an integral part of an open and effective international economic system and a major catalyst to development. " [|[28]] It is clear that without FDI, Canada would not be as competitive, as technologically advanced or as economically successful.  __ Works Cited  __ Baldwin John, "Multinational Firms and the Innovation Process," __Statistics Canada, Mico Economic Analysis Division.__ 2000, 10 November 2008 . Castaldo Joe, "Is Canada Losing Control?," __Canadian Business Online.__ 2007, 14 November 2008 . Crane David, "Parties must address hollowing out of Canada's economy," __The Chronicle Herald.__ 2008, 13 November 2008 . Fan Emma Xiaoqin, "Technology Spillovers from Foregin Direct Investment – A Survey," __Asian Development Bank.__ 2002, 11 November 2008 . Ghatak, Anita, Halicioglu, "Foreign Direct Investment and Economic Growth: Some Evidence from Across the World," __Munich__ __Personal RePEc Archive.__ 2006, 8 November 2008 < http://mpra.ub.uni-muenchen.de/3563/1/MPRA_paper_3563.pdf >. Goff Kristen, "Canada's national Tiger," __The Ottawa Citizen.__ 2007, 12 November 2008 . Holden Michael, "The Foreign Direct Investment Review Process in Canada and Other Countries," __Library of Parliament, Parlimentary Information and Research Service,__ 2007, 13 November 2008 . McFeat Tom, "Truly 'Canadian?'," __CBC News.__ 2006, 14 November 2008 . Mendez-Manzanilla George, "Implications of Foreign Direct Investment on the Canadian Food and Beverage Industry," __University__ __of Alberta____.__ 2002, 9 November 2008 < www.coop.re.ualberta.ca/symposium_2002/Presentations/Jorge%20Mendez.ppt>. Murgatroyd Stephen, "Foreign Direct Investment in Canada," __Innovation, Change and Development,__ 2007, November 10 2008 <http://murgatroydinnov8.blogspot.com/2007/09/what-we-know-1.html>. "A prosperous Canada through global commerce," __Treasury Board of Canada Secretariat.__ 2007, 10 November 2008 <http://www.tbs-sct.gc.ca/reports-rapports/cp-rc/2006-2007/ann/ann17-eng.asp>. "Canada's International Market Access Report," __Foreign Affairs and International Trade Canada.__ 2008, 12 November 2008 <http://www.international.gc.ca/trade-agreements-accords-commerciaux/cimar-rcami/1999/1999_3.aspx?lang=en>. "Economic Policy Reforms, Gowing for Growth 2008," __Organization for Economic Co-operation and Development.__ 2008, 11 November 2008 <http://www.oecd.org/document/8/0,3343,en_2649_34325_37882632_1_1_1_37443,00.html>. "Economy, Inward Foreign Direct Investment (FDI) Performance Index," __The Conference Board of Canada,__ 2008, 9 November 2008 <http://sso.conferenceboard.ca/HCP/Details/Economy/Inward-FDI->.Performance.aspx "Foreign Direct Investment for Development, Maximizing Benefits, Minimizing Costs," __Organizatino for Economic Development and Co-operation.__ 2002, 15 November 2008 <http://www.oecd.org/dataoecd/47/51/1959815.pdf>. "Global Links: Multinationals in Canada: An overview of research at Statistics Canada," __Statistics Canada.__ 2007, 14 November 2008 <http://www.statcan.ca/english/research/11-622-MIE/2007014/summary-en.htm>. "Lie back and forget the Maple Leaf," __The Economist__ April 3, 2008. "Restrictions on foreign ownership in Canada – TP-14500E, Executive Summary," __Transport Canada.__ 2007, 13 November 2008 <http://www.tc.gc.ca/pol/en/report/research/tp14500e/summary.htm>. "Role of Foreign Direct Investment in Canada," __Investment Partnerships Canada, Policy and Analysis Group.__ 2008, 11 November 2008 <http://www.gtma.on.ca/documents/ROLEofForeignDirectInvestmentinCanada.pdf>.

[|[1]] "Lie back and forget the Maple Leaf," __The Economist__ April 3, 2008. [|[2]] "Restrictions on foreign ownership in Canada – TP-14500E, Executive Summary," __Transport Canada.__ 2007, 13 November 2008 <http://www.tc.gc.ca/pol/en/report/research/tp14500e/summary.htm>. [|[3]] IBID [|[4]] "A prosperous Canada through global commerce," __Treasury Board of Canada Secretariat.__ 2007, 10 November 2008 <http://www.tbs-sct.gc.ca/reports-rapports/cp-rc/2006-2007/ann/ann17-eng.asp>. [|[5]] Michael Holden, "The Foreign Direct Investment Review Process in Canada and Other Countries," __Library of Parliament, Parlimentary Information and Research Service,__ 2007, 13 November 2008 <http://www.parl.gc.ca/information/library/PRBpubs/prb0713-e.htm>. [|[6]] "Economy, Inward Foreign Direct Investment (FDI) Performance Index," __The Conference Board of Canada,__ 2008, 9 November 2008 <http://sso.conferenceboard.ca/HCP/Details/Economy/Inward-FDI->.Performance.aspx [|[7]] Stephen Murgatroyd, "Foreign Direct Investment in Canada," __Innovation, Change and Development,__ 2007, November 10 2008 <http://murgatroydinnov8.blogspot.com/2007/09/what-we-know-1.html>. [|[8]] "Economic Policy Reforms, Gowing for Growth 2008," __Organization for Economic Co-operation and Development.__ 2008, 11 November 2008 <http://www.oecd.org/document/8/0,3343,en_2649_34325_37882632_1_1_1_37443,00.html>. [|[9]] "Role of Foreign Direct Investment in Canada," __Investment Partnerships Canada, Policy and Analysis Group.__ 2008, 11 November 2008 <http://www.gtma.on.ca/documents/ROLEofForeignDirectInvestmentinCanada.pdf>. [|[10]] Kristen Goff, "Canada's national Tiger," __The Ottawa Citizen.__ 2007, 12 November 2008 <http://forum.skyscraperpage.com/showthread.php?t=77682&page=66>. [|[11]] Ibid [|[12]] Ibid [|[13]] Emma Xiaoqin Fan, "Technology Spillovers from Foregin Direct Investment – A Survey," __Asian Development Bank.__ 2002, 11 November 2008 <http://www.adb.org/Documents/ERD/Working_Papers/wp033.pdf>. [|[14]] John Baldwin, "Multinational Firms and the Innovation Process," __Statistics Canada, Mico Economic Analysis Division.__ 2000, 10 November 2008 <http://www.statcan.ca/Daily/English/000627/d000627a.htm>. [|[15]] George Mendez-Manzanilla, "Implications of Foreign Direct Investment on the Canadian Food and Beverage Industry," __University__ __of Alberta____.__ 2002, 9 November 2008 < <span style="color: black; font-family: 'Arial','sans-serif';">www.coop.re.ualberta.ca/symposium_2002/Presentations/Jorge%20Mendez.ppt>. [|[16]] Ghatak, Anita, Halicioglu, "Foreign Direct Investment and Economic Growth: Some Evidence from Across the World," __Munich__ __Personal RePEc Archive.__ 2006, 8 November 2008 < http://mpra.ub.uni-muenchen.de/3563/1/MPRA_paper_3563.pdf >. [|[17]] "Role of Foreign Direct Investment in Canada," __Investment Partnerships Canada, Policy and Analysis Group.__ 2008, 11 November 2008 <http://www.gtma.on.ca/documents/ROLEofForeignDirectInvestmentinCanada.pdf>. [|[18]] Ibid [|[19]] "Canada's International Market Access Report," __Foreign Affairs and International Trade Canada.__ 2008, 12 November 2008 <http://www.international.gc.ca/trade-agreements-accords-commerciaux/cimar-rcami/1999/1999_3.aspx?lang=en>. [|[20]] David Crane, "Parties must address hollowing out of Canada's economy," __The Chronicle Herald.__ 2008, 13 November 2008 <http://thechronicleherald.ca/Business/1077731.html>. [|[21]] Ibid [|[22]] "Global Links: Multinationals in Canada: An overview of research at Statistics Canada," __Statistics Canada.__ 2007, 14 November 2008 <http://www.statcan.ca/english/research/11-622-MIE/2007014/summary-en.htm>. [|[23]] Tom McFeat, "Truly 'Canadian?'," __CBC News.__ 2006, 14 November 2008 <http://www.cbc.ca/news/viewpoint/vp_mcfeat/20060825.html>. [|[24]] Ibid [|[25]] Crane, 14 November 2008. [|[26]] Joe Castaldo "Is Canada Losing Control?," __Canadian Business Online.__ 2007, 14 November 2008 <http://www.canadianbusiness.com/managing/strategy/article.jsp?content=20070521_85438_85438>. [|[27]] Ibid [|[28]] "Foreign Direct Investment for Development, Maximizing Benefits, Minimizing Costs," __Organizatino for Economic Development and Co-operation.__ 2002, 15 November 2008 <http://www.oecd.org/dataoecd/47/51/1959815.pdf>.

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