While Ottawa aims to attract foreign capital and Finance Minister Chrystia Freeland recently touted this year’s foreign direct investment (FDI) performance in Canada, issues still exist as productivity has nosedived and the business and regulatory environment has for some time been blamed for not being conducive for investment.
“Because of our economic plan, Canada is now a global investment destination of choice,” Ms. Freeland told the House of Commons on Nov. 21 when she unveiled the government’s fall economic statement.
“In the first half of this year, Canada received the third-most foreign direct investment of any country in the entire world—and more investment per capita than any of our G7 allies,” she said.
Jack Mintz, president’s fellow at the University of Calgary’s School of Public Policy, says a longer-term examination of the facts is in order and would indicate otherwise.
“Private sector investment stays weak, and the fiscal update, if you notice, did not try to talk about per capita GDP [gross domestic product]. And productivity only comes up when doing a 50-year forecast. There is not a great record here,” Mr. Mintz told The Epoch Times on Nov. 27.
“I have no idea what is in the economic plan outside of high migration, carbon subsidies, etc.”
In addition, annual FDI inflows to Canada can be volatile, as seen in reporting from the United Nations Conference on Trade and Development. Quarterly FDI inflows reported by Statistics Canada can also be volatile.
Statistics Canada data shows that the first half of 2023 was not an overperformance when compared to at least the prior four half-year periods in terms of FDI inflows.
The economic statistic Ms. Freeland touted could easily be skewed by one major event in the short term.
Finance Canada did not respond to The Epoch Times when asked what specifically in Canada’s “economic plan” Ms. Freeland was referring to that is now making Canada a “global investment destination of choice.”
But Ottawa is trying to lure investment away from the United States and has committed to extending billions in subsidies to Volkswagen and Stellantis to manufacture electric vehicle batteries. Liberal MP Charles Sousa said on Nov. 27 that the deals enable FDI in Canada.
Organisation of Economic Cooperation and Development (OECD) data shows that Canada received US$29 billion in FDI in the first half of 2023, with only the United States and Brazil getting more.
Mr. Mintz, however, said that the FDI Canada receives as a share of GDP isn’t very strong and that high inflation makes comparisons across countries less meaningful.
“To me, one should not just look at one year, because a single takeover can have a big impact in just one year. Much better to look at trends for a period like 5 to 10 years. And correcting for the size of the economy is important. Canada does not look that great,” he said.
“There is a practice in acquisition markets—buy low and sell high. Canada is good because we are so low.”
Understanding FDI
Mr. Mintz explained that FDI is primarily a measure of mergers and acquisitions and that it is not the same as real investment like in factories, machinery, inventory, and land.“Buying a company is just changing ownership—does not mean new investment is taking place,” Mr. Mintz said.
The idea behind FDI is that the foreign investor seeks a lasting interest in and a significant degree of influence over an enterprise in another country.
But there are other benefits to attracting FDI.
“Our analysis finds that the entry of multinational corporations in foreign countries often directly benefits domestic firms. In advanced economies, increased competition from foreign firms spurs domestic enterprises to be more productive,” according to an April International Monetary Fund (IMF) blog post.
Even as Canada seeks to attract foreign capital to supplement domestic private and public investments, the OECD has long been urging Canada to reconsider its restrictions on FDI.
“Barriers to foreign direct investment via foreign ownership restrictions continue to be high in Canada relative to those in other OECD countries,” according to the OECD’s 2023 economic survey of Canada.
The OECD singled out Canada’s telecommunications and aviation sectors in this regard. Ownership and board composition must be at least 80 percent Canadian for telecom operators with more than a 10 percent market share, the OECD pointed out.
“These issues have been underscored in previous surveys but no action has been taken since 2018. A renewed push for reform is overdue,” the OECD said.
More Investment Needed
In analyzing FDI flows, the IMF said that over the last decade, geopolitical alignment has become a bigger factor driving FDI as opposed to geographic proximity. The IMF added that if the trend continues, “FDI may become even more concentrated within blocs of aligned countries.”The Bank of Canada, in its October monetary policy report, published projections indicating that it doesn’t expect business investment to contribute anything to economic growth until 2025. The central bank said business investment is supported by the recovery in foreign demand, but the weight of interest rate hikes are slowing down business investment spending.
Philip Cross, a former chief economic analyst with Statistics Canada, said in a March commentary for Financial Post that Canada’s chronic weak economic growth stems from lacklustre business investment and exports, both of which have receded since 2015.
He noted a prevailing “anti-corporate” environment that blames businesses for high inflation, and added that since 2015, business investment has fallen 17.6 percent.
Canada was one of the major sources of foreign investment abroad (US$55.4 billion) in the first six months of 2023, according to the OECD. Regarding large deals affecting the numbers, the OECD made note of the US$16.3 billion purchase of Bank of the West by BMO in February.
Statistics Canada publishes an annual FDI report, and the trend for the first half of 2023 is consistent with that of recent years where the growth of Canadian direct investment abroad has been outpacing the growth of inbound FDI to Canada.
