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Opening Doors to the World
Canada's International Market Access Priorities 2003
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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 outward foreign direct investment has increased more than
10-fold over the past two decades, from US$568 billion in 1982 to US$6.6 trillion in 2001.
Canada is an active player in this global economy. The stock of Canadian direct investment abroad (CDIA) increased
nearly fourfold from $98.4 billion in 1990 to $389.4 billion in 2001. Over the same period, the stock of foreign direct
investment in Canada more than doubled, from $130.9 billion to $320.9 billion. Since 1996, the stock of Canadian direct
investment abroad has surpassed the stock of foreign direct investment in Canada.
Outward investment by Canadian firms generates domestic economic activity and stimulates exports of Canadian goods
and services. For many Canadian firms, 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. These firms understand
that higher levels of investment in foreign markets are often linked to higher levels of import penetration in those
markets. In fact, the OECD has found that each dollar of outward foreign direct investment is associated with some
two dollars of additional exports.
In 2001, 51% ($198.4 billion) of Canadian direct investment abroad was located in the United States. A further 20%
of CDIA ($76.5 billion) was based in the European Union. Other major Canadian investment locations include the Caribbean,
Latin America and Japan. In line with global trends, developing countries are becoming increasingly important destinations
for CDIA. In 1990, 13% ($13.1 billion) of Canada's outward investment was in non-OECD developing countries. By 2001,
that proportion had increased to approximately 23% ($87.7 billion).
With 40% of the total stock of CDIA in 2001, the finance and insurance sector continued to be the largest sector
for CDIA. In 2001, significant amounts of CDIA were in the energy and metallic minerals and the machinery and
transportation equipment industries, bringing their proportion of the total stock of CDIA to 19% and 5%, respectively.
Outward investment in the metals and minerals sector results in higher domestic sales of machinery and equipment,
as well as increased sales of engineering, architectural and environmental services. Electronics and communications
also emerged as an important sector for outward Canadian investment in recent years, accounting for 13% of the total
in 2001.
The benefits of investment flows are now well recognized, and countries compete aggressively to attract inward
investment. Inward foreign direct investment in Canada is an important source of jobs and economic growth. Foreign
direct investment provides capital, new ideas, new technologies and innovative business practices.
In 2001, the United States accounted for $215 billion or 66.9% of foreign direct investment in Canada. The European
Union represented $76.3 billion or 23.8% of total foreign direct investment in this country. Other significant investors
included Japan ($8.3 billion) and Hong Kong ($4.3 billion). In 2001, the major recipient sectors for foreign direct
investment flows into Canada were energy, metallic minerals, machinery and transportation equipment, followed by finance
and insurance, food, beverage and tobacco, chemicals and electronics.
Investment rules play an important role in protecting and facilitating the foreign investment activities of
Canadian firms. Canada is a medium-sized economy, whose 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 and ensure that national policies will not be unduly changed or
applied in a discriminatory manner. 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). For more information, please visit the
EDC Web site .
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,
Central and 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.
Canada has a relatively open investment regime, which compares well internationally. Under the Investment Canada Act,
a notice or an application for review must be filed for all acquisitions of existing Canadian businesses or establishments
of new Canadian businesses. Reviewable transactions are approved by the minister responsible for the Act, once that
minister is satisfied that the investment is likely to be of net benefit to Canada. Direct acquisitions of Canadian
businesses with assets of $5 million or more are reviewable. Indirect acquisitions are also subject to review if the
assets of the Canadian business are at least $50 million or if the assets are between $5 million and $50 million and
represent more than 50% of all assets being acquired.
Direct acquisitions by WTO members are subject to a higher review threshold, which was $218 million in 2002.
This amount is adjusted annually based on changes in nominal gross domestic product. However, direct and indirect
acquisitions by WTO members in designated restricted sectors are subject to the lower review thresholds that apply
to non-WTO members, as described above. These restricted sectors are transportation, financial services, culture and
uranium.
In the area of financial services, Canada does not maintain foreign ownership restrictions for banks.
Acquisitions of Canadian banks are linked to the new size-based ownership regime, which came into force in October
2001. Under the new rules, no single person (Canadian or foreign) may acquire more than 20% of the voting shares or
30% of the non-voting shares in a large bank (i.e. a bank with equity of $5 billion or more). For medium-sized banks
(i.e. banks with equity between $1 billion and $5 billion), individual shareholdings are allowed up to 65%, provided
that at least 35% of voting shares are listed and traded on a recognized exchange and are widely held.
Small banks (i.e. banks with equity of less than $1 billion) have no ownership restrictions other than a
"fit and proper" test.
The Investment Canada Web site provides guidelines on the application of the Act.
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 investment treaties are used extensively by trading nations as instruments to protect their foreign
investments abroad. More than 2,000 such agreements are in place worldwide. Since 1989, Canada has concluded 22
bilateral foreign investment protection and promotion agreements (FIPAs), bringing into force a framework of
legally binding rules to protect Canada's foreign investments in specific countries. Canada's FIPAs provide
assurances to Canadian enterprises that rules governing their investment will remain bound by certain standards
of fairness and predictability, thereby reducing the risks and costs associated with those investments, mainly
in emerging economies. A complete list of Canada's FIPAs can be found at the
Department of Foreign Affairs and
International Trade's Web site.
As part of the North American Free Trade Agreement, Canada negotiated a comprehensive investment chapter with the
United States and Mexico. The NAFTA investment chapter was the basis for the investment provisions in the Canada–Chile
Free Trade Agreement and most of Canada's FIPAs. Investment negotiations with other countries in Latin America and
the Caribbean are an integral aspect of the ongoing free trade initiatives with the Central America Four (CA4) and
the Free Trade Area of the Americas. We also foresee the inclusion of investment provisions in any possible free
trade agreements with the Caribbean Community and Common Market (CARICOM), the Andean Community countries and the
Dominican Republic. Investment negotiations are also being conducted in the context of negotiations toward a free
trade agreement with Singapore.
At the November 2001 WTO Ministerial Conference in Doha, ministers agreed to launch investment negotiations after
the next WTO Ministerial conditional upon an agreement on negotiating modalities. In 2002, Canada submitted papers to
the WTO Working Group on the Relationship between Trade and Investment (WGTI) on six of the seven elements identified
for clarification in paragraph 22 of the Doha Declaration (i.e. scope and definitions, non-discrimination, modalities
for pre-establishment commitments based on a GATS-type positive list approach, development provisions, exceptions and
balance-of-payments safeguards, consultations, and the settlement of disputes between members). A paper on transparency
will be submitted in 2003. Canada will continue, through its work in the WGTI, to advance members' understanding of the
benefits of such a multilateral framework for international investment and for economic growth and development.
Consistent with all of our free trade agreements, Canada will ensure that any multilateral framework will safeguard
Canada's right to regulate in the public interest.
At Doha, there was a sense among some developing and least-developed countries that they required further time
and technical assistance to understand the implications of multilateral investment rules for their national development
objectives. Canada firmly believes that all WTO members should participate fully in the negotiation of any multilateral
framework on investment and be enabled to take on the resulting rights and obligations of any such framework. To that end,
Canada has participated actively in technical assistance and capacity-building activities organized by the WTO, the
United Nations Conference on Trade and Development (UNCTAD) and other appropriate organizations, in recognition of the
importance ministers placed on such assistance in the Doha mandate.
The World Trade Organization also incorporates a number of investment-related rules in its existing agreements.
The Agreement on Trade-Related Investment Measures (TRIMs) will, when completely phased in, prohibit a number of
performance requirements, such as trade-balancing requirements, domestic sourcing and export restrictions applicable
to goods industries.
Canada is also involved in regional investment discussions with Pacific Rim countries through the Asia-Pacific Economic
Cooperation forum. Through a program of voluntary individual action plans (IAPs) guided by non-binding investment
principles, APEC economies work to liberalize their investment regimes by removing restrictions on market access and
strengthening their legislation to protect foreign investment. In May 2002, Canada participated in the APEC Workshop
on Bilateral and Regional Investment Rules/Agreements. One of the aims of this workshop was to further the process of
liberalizing investment regimes in APEC member economies by examining best policy practices in investment protection
and exploring the possible expansion of APEC's network of investment agreements. The final report can be viewed at the
APEC Web site.
The government expects Canadian companies to carry out their operations in a socially and environmentally responsible
manner, at home and abroad. To this end, we strongly encourage Canadian companies to adhere to standards of corporate
social responsibility such as the OECD Guidelines for Multinational Enterprises (MNEs).
The OECD Guidelines are a government-endorsed framework of voluntary standards and principles for responsible
business conduct. They provide recommendations to multinational enterprises on issues such as environmental protection,
respect for core labour standards, anti-corruption and respect for human rights. In Canada, the guidelines apply to
multinational enterprises operating within our borders and to the overseas operations of Canadian companies.
The government has established a National Contact Point (an interdepartmental committee) to work closely with
business and other stakeholders to raise awareness of the guidelines and assist in the resolution of issues. The
guidelines and other international standards and best practices, such as the UN Global Compact and Tripartite
Declaration of the International Labour Organization, provide corporations with a common frame of reference for
responsible business practices. This is particularly important in countries where governance structures are weak.
In addition to improving corporate reputation and competitive advantage, responsible business practices can help
to strengthen the basis of mutual confidence between businesses and the societies in which they operate and improve
the foreign investment climate.
Further information is available from Canada's National Contact Point for the OECD Guidelines
for MNEs Web site or the
Department of Foreign Affairs and International
Trade CSR Web site.
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