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Opening Doors to the World:
Canada's International Market Access Priorities 2000
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3. Investment
Foreign investment flows worldwide have grown rapidly in recent years and have figured prominently in the trend toward global economic integration. The global stock of foreign direct investment (FDI) has increased more than six-fold over the past two decades, from US$524 billion in 1980 to US$3.5 trillion in 1997.
Canada is an active player in this global economy. Canadian direct investment abroad (CDIA) has more than tripled from $74 billion in 1987 to $240 billion in 1998. Over the same period, foreign direct investment in Canada has doubled, from $106 billion in 1987 to $217 billion. Since 1996, the stock of CDIA has surpassed the stock of FDI in Canada.
Canadian Direct Investment Abroad
Outward investment by Canadian firms generates domestic economic activity and stimulates exports of Canadian goods and services. Through foreign investment, firms seek a host country that affords the greatest opportunity for competitiveness and economic success. Studies indicate that between 30 percent and 40 percent of international trade for manufactured goods is undertaken between parent firms and their foreign subsidiaries (intra-firm trade). Low levels of import penetration into foreign markets are often linked to low levels of investment by reason of investment rules favouring domestic investors.
The extensive international business activity of Canadian firms reflects the realities of an increasingly integrated world market and the need for Canadian business to participate in that integration if they are to remain competitive. Investment abroad is an essential element of business strategy, particularly in high-growth markets where a physical presence is often a prerequisite for effective access.
In 1998, 53 percent ($126 billion) of CDIA was located in the United States. A further 19 percent of CDIA ($46 billion) was based in the European Union. Other major Canadian investment locations include Barbados ($14.3 billion), Bahamas ($6.1 billion), Bermuda ($4.7 billion), Chile ($4.2 billion), Japan ($3.2 billion) and Hong Kong ($2.9 billion). Similar to global trends, developing countries are becoming increasingly important destinations for CDIA. In 1988, 14 percent of Canada's outward investment went to developing countries. By 1998, that percentage had increased to approximately 24 percent ($58 billion).
The finance and insurance sector accounted for approximately 33 percent of CDIA in 1998; the energy and metallic minerals areas accounted for 23 percent; services and retailing for 11 percent; and the remainder was widely diversified in other industrial sectors. Outward investment by Canadian firms generates domestic economic activity and stimulates exports of Canadian goods and services. For example, outward investment in the metals and minerals sector results in domestic sales of machinery and equipment, as well as of engineering, architectural and environmental services.
Foreign Direct Investment in Canada
The benefits of investment flows are now well-recognized, and countries compete aggressively to attract inward investment. Inward FDI in Canada is an important source of jobs and economic growth. FDI provides capital, new ideas, new technologies and innovative business practices.
In 1998, the United States accounted for $147 billion or 68 percent of FDI in Canada (down from a high of 75 percent in 1985). The European Union represented $45 billion or 19 percent of FDI in Canada. Other significant investors included Japan ($8.1 billion), Hong Kong ($3.4 billion), Caribbean countries ($2.8 billion) and Bermuda ($1.7 billion). FDI in Canada was well-diversified across industrial sectors. Major recipient sectors included finance (19 percent), energy and metals (18 percent), machinery and transportation equipment (14 percent), services and retailing (10 percent) and wood and paper (8 percent). The remaining 31 percent was widely diversified across other sectors.
Canada's International Investment Agenda
Investment rules play an important role in protecting and facilitating the foreign investment activities of Canadian firms. Formally agreed international rules, through integrated trade agreements or investment treaties, can be particularly important for smaller economies like Canada, which do not have the same leverage as larger players such as the United States and the European Union. Investment rules such as those within the NAFTA and Foreign Investment Protection Agreements (FIPAs) inform Canadian investors about the rules of the game in foreign markets through basic commitments to transparency and predictability, thus promoting clear procedures, fewer delays and greater consistency in legal and policy regimes. Rules offer a greater measure of security for investors through assurances that national policies will not be unduly changed or applied in a discriminatory manner. Rules also provide a measure of enhanced market access and a basis for future liberalization initiatives.
Recent work undertaken by the business community indicates that Canadian firms continue to encounter investment barriers abroad. These barriers relate to 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. Foreign investors are in no way exempt from the domestic laws of the country playing host to their investment, including, for example, domestic competition laws or regulations relating to health, labour or the environment. Similarly, foreign investors in Canada are required to obey the same Canadian laws that Canada's own domestic investors must obey.
Canada has a relatively open investment regime which compares well internationally. Larger foreign investment transactions, and those in certain sensitive sectors such as culture, are reviewed by Industry Canada to ensure that they are of net benefit. Remaining investment restrictions in Canada lie largely in the services sector, for example, financial services, telecommunications and transportation. Canada has long been a supporter of a rules-based (rather than power-based) approach to international trade and investment, with the objective of bringing the investment regimes in other countries to Canada's level of openness.
Bilateral Initiatives
Canada has negotiated 26 FIPAs since the beginning of the program in 1989, and is currently pursuing negotiations with several important commercial partners, including China, Russia, Brazil, India and Colombia. FIPAs are bilateral, reciprocal agreements designed to protect and promote Canada's foreign investments abroad, particularly in developing economies, through a framework of legally-binding rights and obligations. Canadian companies tend to have greater concerns about investment in developing countries where barriers tend to be more prevalent and less transparent and remedies are not readily available.
Canada's FIPAs serve to provide assurances to investors that the rules governing investment will remain bound by certain standards of fairness and predictability. FIPAs can help Canadian enterprises gain an optimum level of investment, lower their political risks and reduce many of the costs associated with making investments in emerging economies. Bilateral investment treaties such as FIPAs are used extensively worldwide; there are currently more than 1,600 such agreements.
Regional Initiatives
As part of the NAFTA, Canada negotiated a comprehensive investment agreement with the United States and Mexico. The NAFTA investment chapter was the basis for the investment provisions in the Canada-Chile Free Trade Agreement (CCFTA) and most of Canada's FIPAs. Since September 1998, Canada has been working with its trade and investment partners in this hemisphere to develop a fair and transparent legal framework to promote investment in the Americas in the context of the FTAA initiative.
Canada is also involved in regional investment discussions with Pacific Rim countries through APEC. Through a program of voluntary individual action plans guided by non-binding investment principles (NBIPs), APEC economies work to liberalize their investment regimes by removing restrictions on market access and strengthening their legislation to protect foreign investment.
The World Trade Organization
At the 1996 WTO Singapore Ministerial Conference, ministers established an educative work program on investment with a mandate to investigate the relationship between trade and investment. The WTO Working Group on Trade and Investment has provided a forum for balanced discussion between developed and developing countries on international investment and the possibility of developing rules in the WTO framework. It investigated existing investment rules in the WTO and in regional and bilateral agreements to identify whether these rules should be augmented or adjusted. WTO Members have reached the general conclusion that international investment has a positive impact on growth and development.
In the lead-up to the WTO Ministerial Conference in Seattle, a number of countries, led by the EU, had proposed that investment be included in the agenda for a new round of WTO negotiations. These proposals suggested a modest framework for negotiations and clearly differentiated from the previous initiative for an OECD Multilateral Agreement on Investment. Discussions at the Seattle conference were suspended, and next steps are still under consideration.
Over the past year, the Government has undertaken extensive consultations with a broad cross-section of domestic stakeholders to inform them of the proposed WTO investment agenda and to seek their views. Over 1,100 representatives from the provinces, business, academia, as well as human rights, environment and labour organizations were invited to participate in roundtables, which were held in 11 cities across Canada. A report on the results of the discussions has been placed on DFAIT website (www.dfait-maeci.gc.ca/tna-nac). The Government is committed to continuing the process of dialogue and feedback with stakeholders.
The WTO also incorporates a number of investment-related rules in its existing agreements. The Agreement on Trade Related Investment Measures (TRIMs) prohibits a number of performance requirements, such as trade-balancing requirements, domestic sourcing and export restrictions applicable to goods industries. The GATS provides for the "right of establishment", which accords service providers the right to enter another market by establishing a commercial presence in sectors in which countries have made commitments. The GATS also includes commitments by countries to accord non-discriminatory treatment to specified service industries where WTO Members have undertaken commitments. The GATS does not include investment protection provisions (i.e. the right to compensation in case of an expropriation) or investor-state dispute settlement. Certain investment-related obligations, notably the right of commercial presence for service suppliers, will be addressed in the context of negotiations mandated under the GATS.
Irrespective of the course of action that is chosen on investment, the Government is committed to safeguarding Canada's right to regulate and promote fundamental Canadian values in strategic sectors such as health, education, culture and environmental protection.
Investor Responsibility/Codes of Conduct
It is recognized that businesses have a responsibility to conduct their operations as good corporate citizens. Canada is party to the OECD Guidelines for Multinational Enterprises, a set of voluntary standards of conduct recommended by Member governments regarding the operations of these enterprises in OECD markets. The guidelines are currently subject to a review within the OECD Committee on International Investment and Multinational Enterprises (CIME), which is expected to be completed by June 2000. A number of Canadian companies have also signed onto the International Code of Ethics for Canadian Business, which outlines principles on community participation and environmental protection, business conduct and employees' health and safety.
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