Further Opportunities
Investment Frequently Asked Questions
Why is international
investment important?
A new global economy has emerged, an economy based on the more
intangible output of services firms and dependent to a much greater
extent on international capital flows. One fundamental characteristic
of this new economy is that it relies more and more on the creation,
purchase and transfer of capital and knowledge.
As Canada moves into a new century, Canadian businesses have discovered
that if they are to prosper, they must compete in the international
knowledge-based economy. Canadians are responding to this challenge.
Canadian exports have surged. However, Canadian companies not only
have markets in other countries, they may also have production (or
other) facilities established abroad through international investment.
Increasingly, many of their suppliers and investors, both in Canada
and abroad, may be foreign. International investment is becoming
an even more important part of the "business toolkit"
needed to succeed in today's economy.
Indeed, investment is important to the whole Canadian economy
and overall domestic economic growth.
What is Foreign Direct
Investment (FDI)?
Foreign direct investment (FDI) is the capital that a foreign
company puts into a new facility or an existing facility in the
expectation of profitable return. A foreign auto maker, for instance,
may decide to build a new plant or expand one of its existing plants
in Canada. To do so, it invests in the construction or expansion
of the plant. This creates temporary construction jobs plus permanent,
highly specialized jobs. The company invests in Canada in the expectation
of marketing its product domestically or abroad. Its investment
in turn generates benefits to the community through increased trade
opportunities, the introduction of new technologies, job creation,
the payment of taxes and the purchase of goods and services locally.
This is FDI in action.
- Foreign direct investment (FDI) is an important source
of jobs - especially high skilled jobs.
According to the World Investment Report, 1995, 11 percent
of all jobs in Canada, in 1994, are directly attributable to
FDI.
- Foreign investment is an important source of economic
growth.
The Industry Canada and Foreign Affairs and International
Trade study also suggested that if Canada's share of world
investment capital had increased by 1 percent, over the last
ten years, it would have lead to an increase of between 10 and
15 percent in the country's Gross Domestic Product, the
value of goods and services produced in a year.
- Foreign investment is also an important source of technology.
Considering the high costs of research and development, international
investment, often as international alliances, is a critical
way Canadian firms can access the leading edge technologies.
- The economic contribution of foreign firms to Canada's
economy is substantial.
The sales of companies controlled abroad account for nearly
30 percent of all corporate sales in Canada. In many technology-intensive
industries - electrical and electrical products, for example
- over half of all Canadian sales come from internationally-controlled
firms.
- Foreign investment is an important source of management
expertise.
A foreign investor will often bring new international marketing
strategies, increased strategic resources and new perspectives
on management of people and technology that enhance the ability
of the existing company to compete and raise the overall level
of productivity of the economy.
- Foreign investment provides much needed additional
capital that would otherwise not be available.
- The positive effects of these investments often spill-over
to benefit domestic firms.
Domestic producers and suppliers benefit from foreign investment
as they often provide goods and services to the new facility.
Also, as employees trained in the new processes and exposed
to new management styles change employment, they take their
knowledge and skills with them, thus providing their new employer
with a the benefit of their experiences.
- Finally, foreign investment is an important element
of our phenomenal success in international trade.
International firms produce not just for the domestic market
but for their international affiliates, which often means they
are ahead of Canadian firms in the export race. This is especially
significant as many business sectors shift from production aimed
at the domestic market to production for the export market.
Investment and trade linkages go hand in hand. The 50 largest
Canadian-owned multinationals in the U.S. and U.S. subsidiaries
in Canada account for 90 percent of all two-way FDI and well
over 70 percent of all bilateral trade.
It is also important to remember that foreign investors do not
simply take the money and run. Commonly, they reinvest a large proportion
of profits, about 30 percent in Canada, contributing to a higher
growth rate and a rise in living standards.
What is Canadian
Direct Investment Abroad (CDIA)?
Canadian direct investment abroad (CDIA) plays a special role
for a country like Canada. Companies increasingly use outward investment
(through mergers, acquisition, partnerships, joint ventures, strategic
alliances or new investments) to strengthen their operations, penetrate
new markets and acquire new technologies, resources and skills.
Such investment abroad brings concrete benefits to Canada in terms
of research and development (R&D) activities, growth and export
opportunities leading to job creation back home in Canada.
The following illustration reinforces this point: Having successfully
built up an export market for its products in Chile, a Canadian
company might consider building a production facility there to enable
it to expand its marketing effort into other South American countries
and into Latin America. Such investment brings benefits to the Canadian
company, and therefore to Canada, in ways which would likely not
be achieved through simply exporting goods. Closeness to your market
and the ability to respond to changing customer requirements, as
well as local goodwill, are vital to success. Evidence suggests
that this type of investment does not result in an "export
of jobs" but rather results in increased sales and production
from home facilities.
Canadian investment abroad contributes to a more competitive and
dynamic economy at home.
- The growth, productivity and profits of Canadian firms
involved in global markets has been superior to the performance
of domestically-oriented firms.
The higher profits enjoyed by the Canadian firms that invest
in foreign markets has been attributed to their increased efficiency.
In part, this is due to their ability to exploit economies of
scale and scope.
- Income from Canada's outward foreign direct investment
increased sharply with the increase in outward FDI.
Direct investment income averaged $6 billion between 1990
and 1996, almost $2 billion more than between 1985-1989, helping
to improve our standard of living.
- The growth of Canadian investment abroad leads to an
increase in exports, which directly affect Canada's economic
health.
Exports account for more than one third of our Gross Domestic
Product. Exports are the path to future growth and continued
competitiveness in the global marketplace.
- Investment abroad offers better access to foreign skills
and foreign technologies for the Canadian high-technology industries.
It also increases research and development in Canada, which
in turn leads to innovation, expanded market potential, and
better employment opportunities for highly-educated workers.
- The spill over effect can benefit companies that are
not themselves investing abroad.
They may directly or indirectly benefit from the introduction
of new skills, management techniques and technology acquired
by Canadian firms that have already moved into foreign markets.
Clearly, foreign investment is critical to Canada's future
linking Canadian companies, consumers and workers to the new knowledge
based global economy. It enhances Canada's competitiveness by
revitalizing domestic industry and increasing the flow of goods
and services between Canada and its trading partners. Foreign investment
not only produces jobs, but introduces new technology, new management
techniques and new market access. The benefits of foreign investment
are vital to our future success.
Why do we need Investment
Agreements and International Rules on Investment?
Investment rules play an important role in protecting and facilitating
the foreign investment activities of Canadian firms. Canada is a
medium-sized economy, thus its 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 through assurances that
national policies will not be unduly changed or applied in a discriminatory
manner.
Typically, efforts in this area are focussed on improving the
conditions under which investments are made and include the following
key principles:
- transparency - provision of open reporting and publishing of
national investment measures/rules and relevant regulatory changes
so that investors can have a clear understanding of the "rules
of the game";
- national and most favoured-nation treatment - non-discrimination
of foreign investors and their investments in host countries (with
provision for excluding sensitive sectors) ;
- protection for investments - investments and investors should
be protected by ensuring fair and equitable treatment, compensation
in the event of expropriation and free cross-border transfer of
funds;
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).
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, 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.
Who benefits from
foreign investment?
In each year in the first half of this decade, on average, $8.4
billion of investment has flowed into Canada -- about three-quarters
of it from the United States. Much of it went toward buying Canadian
companies. A debate has rekindled: do we want this money?
Investment capital travels the world looking for the best opportunities.
Governments the world over compete aggressively to attract it. But
in Canada, some critics believe foreign investment means lost jobs
and a net outflow of capital. They complain that foreign investment
buys existing Canadian businesses, rather than establish new enterprises.
These arguments have changed little in a quarter century. But
in the meantime, Canada and the world economy have changed profoundly.
Certainly Canada's role in the international flows of investment
has changed.
First, we are no longer one of the world's preferred destinations
for investment capital. Between 1986 and 1995, our share of global
investment stock fell by half. We lost 6 percent of our share of
North American bound investment; the US and Mexico increased theirs.
Second, Canadians are investing abroad as never before. Outward
foreign investments averaged $9 billion per year from 1990 to 1996
-- a 50 percent increase from 1983-1989. In 1997, Canadians invested
$4.1 billion to acquire foreign companies.
In 1985, Canadians' stock of foreign investment was only two-thirds
of what foreigners had invested in our country. But by 1996, our
stock in outward foreign investment almost equalled inward investment
stock in Canada. That year, our stock in foreign investment abroad
was $10.2 billion.
What would happen if Canadians kept their money at home? Would
we be better off if Canadians invested in Canada, and removed the
welcome mat for foreign investors?
The answer is an unqualified no. A look at some of the benefits
that foreign investors have brought with their capital shows that,
in this new global economy, foreign investment gives a competitive
edge -- both to those who make the investment, and those who receive
it.
Outward Orientation. Foreign controlled firms
tend to be outward oriented. In turn, they make the Canadian companies
they deal with more aware of international opportunities.
Whether measured by sales growth, asset growth, capital productivity,
intensity of research and development, or the average rate of return
on assets, outward oriented firms perform better than firms focused
only on Canadian markets.
Market Access. Foreigners used to invest in Canada
to gain access to our markets, protected as they were by tariff
walls. Today, with free trade, offshore companies consider Canada
as an entry point to North American markets. These companies, their
managers and employees, and their suppliers must focus outward and
look to market opportunities beyond Canada's borders.
Mitsui Home Co. Ltd invested in a lumber-sorting and remanufacturing
plant in Langley, BC to process the company's requirements for
the Japanese market. The company has invested $18 million at the
site to remain competitive and to penetrate the North American market.
Access to capital. Foreign investment provides
much needed additional capital that would otherwise not be available.
Stora Forest Industries Limited, a subsidiary of Sweden's
STORA Group, is investing $650 million to construct a specialty
paper plant in Point Tupper, Nova Scotia. The plant will expand
the company's production capacity and produce paper currently
not produced in North America. The investment will ensure paper
production at Point Tupper for decades to come. The new paper line
is expected to employ up to 800 construction workers.
Technology Transfer. Foreign investment helps
Canadian firms access innovative technologies.
The Wang family of Hong Kong bought Standard Knitting Ltd of Winnipeg
in 1990. They invested over $8 million to upgrade computer technology,
and within five years, won a Canada Export Award and increased the
number of jobs from 112 to 295.
In Bécancour, Quebec, Petresa Canada Inc produces components
used to make detergents. It uses a new process that is the proprietary
technology of Petroquímica Española, the parent company.
The company, which employs 60 people, plans to continue penetrating
North American markets before increasing exports to other countries.
Research and development. Foreign investment
often focuses on research and development opportunities in Canada
because of low costs and a solid R&D infrastructure and quality
of the research.
The Montreal R&D facilities of Ericsson Communications Inc,
have received over $375 million over the last five years from its
parent company, Ericsson of Sweden. The Montreal subsidiary has
obtained three successive world mandates in R&D. The company
employs over 800 engineers, recruited primarily from Canadian universities.
In nearby Kirkland, Merck Frosst spent over $70 million to build
a major research facility, with a world product mandate to develop
therapies for inflammatory and respiratory diseases. The company
has averaged more than $50 million a year on R&D in Canada,
and employs over 1,100 full time and 200 temporary employees. Its
co-op program brings 50 to 100 students to its lab at any given
time.
Corporate strategy. The strategy of many transnational
companies is to locate specific projects in a particular country,
and give the subsidiary there a regional or global mandate for what
it produces. This enables companies to specialize based on the opportunities
found in Canada.
The process can be seen in the acquisition of Toronto's Connaught
Laboratories by transnational Pasteur Mérieux -- the world's
largest vaccine manufacturer, and a world leader in vaccine research.
Last June, the French parent company announced it would invest $350
million over ten years in a new cancer vaccine project in Canada.
It gave the Canadian subsidiary the world product mandate for the
development, manufacture and export of any products derived from
the cancer vaccine research initiative. Number of new jobs: between
250 and 300, mostly in R&D.
Spin-off benefits. The Pasteur-Mérieux
investment is making Canada a world leader in cancer vaccine research.
It strengthens our R&D capabilities, and provides new career
opportunities across the country. The initiative is expected eventually
to involve some 60 organizations across Canada, including universities,
clinical research centres, cancer institutes and agencies, provincial
research facilities, and Canadian biopharmaceutical companies.
Another example of spin-off benefits to Canadian firms comes from
the decision by Gist-brocades/Bio-Intermediair to build its first
North American facility in Montreal with an investment of $40 million.
The number of Canadians hired by the company will increase from
55 to 80, but perhaps even more important will be the impact of
the facility on other biotechnology companies in the region. The
Netherlands company has become a world leader in manufacturing under
the current Good Manufacturing Practices (cGMP) conditions required
for clinical trials. The Montreal facility is one of the very few
of its kind in the world, and Canadian biopharmaceutical firms no
longer have to go abroad to manufacture biological products to meet
the cGMP conditions. The transnational company thereby becomes an
incubator for the Canadian biopharmaceutical industry.
Jobs. From the examples above, it is clear that
foreign investment creates jobs in Canada. In fact, a tenth of all
jobs in Canada depend directly on foreign investment. The total
impact on jobs is much higher because of the spillover effects of
this investment on capital formation, trade flows, competition,
and technical progress.
A sustained $1 billion in foreign investment would raise Canada's
Gross Domestic Product by about $4.5 billion and create about 45,000
new jobs over five years.
Foreign investment is critical to Canada's future. It links
Canadian companies, consumers and workers to the new knowledge based
global economy. It enhances Canada's competitiveness by revitalizing
domestic industry and increasing the flow of goods and services
between Canada and its trading partners. Foreign investment not
only produces jobs, but introduces new technology, new management
techniques and new market access.
We should also not lose sight of the fact that we too are expanding
our investments abroad, which also means more competitive Canadian
firms repatriating capital and knowledge back to Canada. As an open
economy, internationally agreed upon rules governing these investments
are in Canada's interest - both to ensure that Canadian firms
are operating in a secure international environment, and to signify
that, by and large, international firms are indeed subject to non-discriminatory
national laws and regulations here at home.
In the future, transnational corporations will be even more important
to Canada's economic circumstances. We want more investment.
It's good for Canada and Canadians.
- Hon. John Manley
Former Minister of Industry
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