Canada has nothing to fear from foreign investment

The Montreal Gazette

February 04th, 2010
By Walid Hejazi

The Canadian economy is heavily dependent on international trade and foreign direct investment. Both of these represent important channels by which Canada links with 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 from 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. That is, Canada has, over the past three decades, become less attractive as a location for foreign companies to invest. This evidence complements that of the Institute for Prosperity and Competitiveness, which has shown that the number of Canadian companies that can be considered global leaders has not fallen, 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 $4 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 employment.

Fourth Myth: Canadian direct investment abroad has little benefit.

This assertion is incorrect. As Canadian companies continue to increase investments abroad, the demand for head office functions in Canada also increases 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 for managers of Canadian companies. The threat of takeover by large foreign companies ensures 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 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 that 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.

This article is a summary of a study done by Walid Hejazi for the Institute for Research on Public Policy.

The Montreal-based institute is an independent, national, non-profit organization whose mission is to offer insight and spark debate that will contribute to public policy decision-making in Canada.

Hejazi is a professor and academic director of international programs at the University of Toronto’s Rotman School of Management.