Economy

Scroll over 17 countries in this map to view the 2008 Inward FDI Performance Index for each country.

FDI is typically considered to be a lagging indicator of the investment environment in that once a given project is decided upon it typically takes some time for the funds to be delivered. Therefore, examining data on FDI inflows in a given year generally does not portray the full picture on investor sentiment in that particular year. Nonetheless, given the magnitude of the financial crisis that emerged in 2007, the impact on FDI inflows is already reflected in the 2008 data.

The capacity and desire of companies to invest has weakened because of:

• reduced access to financial resources
• falling corporate profits
• business perceptions of low returns on investment in a recessionary environment
• heightened risk

In 2008, global FDI inflows declined by 20 per cent from the previous year. The fall in global FDI is expected to be even more pronounced in 2009.

The impact of the crisis on FDI inflows has varied by region and country. Developed countries were hit first and hardest, but the impact has been spreading to developing and transition countries. The United Nations Conference on Trade and Development (UNCTAD)—the organization dealing with trade, investment, and development issues for the United Nations—notes that “for developing and transition economies, the worst is yet to come.” ¹

The drop in FDI inflows was larger in the 17 comparator countries than in the rest of the world. The 17 countries, which accounted for 48 per cent of global FDI inflows in 2008, attracted 41 per cent less FDI in 2008. The rest of the world saw FDI inflows fall by 15 per cent.

With the exception of Australia, all comparator countries experienced a decline in inward FDI. The drop was particularly significant in Finland (–174 per cent), Ireland (–120 per cent), and Norway (–117 per cent). Canada’s FDI inflows fell by 58 per cent in 2008. Direct investment into Canada in 2008 was less than half of the 2007 level. According to Statistics Canada, foreign acquisitions of Canadian firms in 2008 were down substantially after two years of strong activity that had reflected increased global consolidation in the energy and metallic minerals sector. ²

The Inward FDI Performance Index captures a country’s relative success in attracting global FDI. If a country’s share of global inward FDI matches its relative share in global GDP, the country’s Inward FDI Performance Index is equal to one. A value greater than one indicates a larger share of FDI relative to GDP; a value less than one indicates a smaller share of FDI relative to GDP. A negative value means foreign investors disinvested in that period. The index is calculated using three-year averages to offset annual fluctuations in the data.

The International Monetary Fund defines foreign direct investment as an investment that allows an investor to have a significant voice in the management of an enterprise operating outside the investor’s own country. The phrase “significant voice” usually means ownership of 10 per cent or more of the ordinary shares or voting power (for an incorporated enterprise) or the equivalent (for an unincorporated enterprise). This may involve either creating an entirely new enterprise—a so-called greenfield investment—or, more typically, changing the ownership of existing enterprises, via mergers and acquisitions. Other types of financial transactions between related enterprises, such as reinvesting the earnings of the FDI enterprise, are also defined as FDI.

Ten countries among the peer countries, including Canada, have an Inward FDI Performance Index that is greater than one, meaning that all these countries attract more inward FDI than their economic size would warrant. Canada attracted 3.2 per cent of the world’s FDI in 2008 and accounted for 1.9 per cent of world GDP. Although this is impressive, Canada is lagging behind the top global performers. Relative to its peer countries, Canada gets a “C” grade in the most recent period.

Seven countries—the U.S., Germany, Japan, Italy, Norway, Ireland, and Finland—have an Inward FDI Performance Index that is less than one. These countries are not attracting their global share of FDI. For example, the U.S. index is 0.7 because the country accounts for 21 per cent of the world’s GDP yet attracts only 15 per cent of the world’s FDI into its country.

Since 2004, Ireland has ranked poorly on the Inward FDI Performance Index. Investment money has been flowing out of the country, partly as a result of a U.S. tax amnesty that allowed U.S. companies with overseas operations to repatriate profits and pay 5.35 per cent in corporation tax rather than the full rate of 35 per cent.

With trade liberalization and the rise of global supply chains, FDI has increasingly become a much sought-after means of generating wealth and stimulating trade. This is fundamentally changing the way we look at trade and investment, and the relationships between them. Traditional international trade theory saw FDI as “trade substitution,” a way to avoid tariff barriers, such as by setting up branch plants. The new paradigm—that of “integrative trade”—recognizes that inward FDI enhances a country’s ability to expand production, resulting in more economic activity, more jobs, and income gains. Countries now compete to attract FDI inflows.

FDI is becoming a key driver of global economic growth. FDI activity has increased around the world, outpacing growth in production and in international trade. Since 1990, global GDP has increased by an average of 5.5 per cent per year, and exports by 8.7 per cent. Meanwhile, the flow of FDI worldwide has grown by 13 per cent per year.

Countries compete to attract FDI because it has been well documented that FDI inflows can have a positive effect on productivity. FDI encourages the diffusion of technology management know-how, as well as more efficient resource allocation. Subsidiaries acquire new knowledge and technologies from their international parent. Domestic firms that interact with these subsidiaries also benefit from these transfers of technology and knowledge. Ultimately, FDI leads to higher productivity, improved quality of products, and increased competitiveness. Studies show that foreign-controlled firms, on average, are 10 to 20 per cent more productive than domestically controlled firms because of their superior technological and managerial know-how.

Inward FDI also increases the pool of investment capital. Rather than replacing domestic investment, FDI supplements capital shortfall and helps to develop home capital markets by creating additional export possibilities.

Finally, inward FDI increases revenues for government both directly, through taxes paid by foreign investors, and indirectly, through additional employment income taxes and sales taxes generated by increased consumer spending.

To better understand the benefits of inward FDI:

“Making Connections: The New World of Integrative Trade and Canada,” in Performance and Potential 2005-06: The World and Canada: Trends Reshaping Our Future, Ottawa: The Conference Board of Canada, 2005.

The Benefits of Foreign Direct Investment: How Investment in Both Directions Drives Our Economy, Ottawa: The Conference Board of Canada, March 2006.

Since the 1970s, Canada’s ranking on foreign direct investment inflows has been slipping. In the 1970s, Canada scored an “A” on its ability to attract FDI. This dropped to a “B” in the 1980s, further to a “C” in the 1990s, and finally to a disappointing “D” average in the current decade.

Canada’s share of global inward FDI stock fell from 5.8 per cent in 1990 to 3.4 per cent in 2007.

To better understand Canada’s declining FDI performance:

Trends in Foreign Direct Investment and Mergers and Acquisitions: International and Canadian Performance and Implications, Ottawa: The Conference Board of Canada, 2008.

The U.S. is the largest recipient of global FDI. This is not surprising, since it is reasonable to assume that the larger the economy—as measured by GDP—the more FDI it should be garnering. Economic size is not the only factor influencing FDI investment, however. Other factors include the business climate, the availability of natural resources, economic and political stability, infrastructure quality, and the education and skills of the population.

The Inward FDI Performance Index thus takes the size of the economy into account and then assesses how successful a country is in attracting its global share. After adjusting for GDP, it is immediately apparent that the U.S. attracts less FDI inflows than its size warrants. Our southern neighbour earned a “D” average on the Inward FDI Performance Index in the 1970s, 1990s, and 2000s, and a “C” in the 1980s.

Canada has lost some of its lustre on all three of the main factors that affect FDI investment decisions: 

• access to markets 
• access to resources 
• opportunities to gain operational efficiencies

Investment to obtain Canadian market access has declined because the Canadian market is relatively small and the North American Free Trade Agreement has not attracted the predicted investments to Canada. 

Canada receives a higher share of its FDI in the primary resource sector than other countries do. And although the global proportion of investment in the resource sector decreased substantially between 1983 and 2000, this share has rebounded in recent years. But those now looking to invest in the sector find that Canada’s natural resources are more costly to explore and to exploit than they were in the past, while resources in other countries have simultaneously become cheaper and easier to access.

Multinational enterprises looking for operational efficiencies are dissuaded by Canada’s low productivity relative to its peers. Canada’s low productivity reflects its lower capital intensity as well as a lack of sufficient investment in research and development (R&D) and other areas that would foster innovation. Although Canada has a highly skilled workforce, it needs more engineers, scientists, and technicians to compete for investment. Canada has neither the low cost of production of developing countries nor the scale of production of large economies like the United States.

Another factor—regulatory barriers to foreign investment—is often cited as a reason for low inward FDI into Canada. According to the Organisation for Economic Co-operation and Development (OECD), Canada has among the world’s most restrictive regulatory barriers to foreign investment. However, a recent Conference Board report notes that the OECD rankings take into account overt, explicit foreign investment screening requirements, while ignoring opaque barriers such as political interference and state-owned enterprises.³ When both implicit and explicit barriers to FDI are considered, Canada is no less restrictive than France, Germany, and Italy—which appear less open to FDI than their OECD rankings suggest.

But although Canada’s FDI regime is more transparent, it is still a confusing mix of protectionism and openness that seem to work at cross purposes. Policy makers must bring greater coherence to this regime or risk putting Canada at a competitive disadvantage to jurisdictions with clear FDI objectives.

Get more information on why Canada is losing ground on inward FDI:

Open for Business? Canada’s Foreign Direct Investment Challenge, Ottawa: The Conference Board of Canada, 2004.

Foreign Investment Review Regimes: How Canada Stacks Up, Ottawa: The Conference Board of Canada, 2008.

Adopt a More Strategic Approach to International Trade, Ottawa: The Conference Board of Canada, 2007.

If We Can Fix It Here, We Can Make It Anywhere: Effective Policies at Home to Boost Canada’s Global Success, Ottawa: The Conference Board of Canada, 2007.

The U.S. remains the world’s most favoured FDI destination country, yet its popularity has diminished in recent decades. In 1990, the U.S. held 20.3 per cent of global inward FDI stock. This share fell to 13.8 per cent in 2007. China’s share of global FDI stock grew from 1.1 per cent in 1990 to 2.2 per cent in 2007, while transition economies increased their share from 0.1 per cent in 1990 to 2.7 per cent in 2007.

Canada has recently experienced a resurgence in foreign corporate takeovers of Canadian companies that has eclipsed the previous record set in the late 1990s. These takeovers, which have brought foreign corporate ownership to heights not seen since the 1970s, have reignited rhetoric—that has made front-page news headlines—about the potential “hollowing out” of corporate Canada.

Many of the Canadian companies taken over during the recent spate of acquisitions are not only large, they are also iconic. Canadians feel that these corporations—such as Inco, Falconbridge, Hudson’s Bay Company, and Alcan Aluminum—are an integral part of Canadian society. In the case of companies in the energy and mining sectors, the concern is compounded by the fear that Canada will lose control of its non-renewable resources wealth. Many fear Alberta’s oil sands will be next on the hit list.

FDI coming into Canada thus continues to be viewed with suspicion, a sign of economic weakness and loss of control. Much of the reason for this suspicion is historical: FDI was traditionally seen as a substitute for exports to that market—a means of getting around trade barriers to enter, and potentially dominate, a foreign market.

Following an intensive study on the perceived “hollowing out” of corporate Canada, however, The Conference Board of Canada concluded that the benefits of FDI outweigh its drawbacks. The study looked at the effects of foreign takeovers on shareholders, governance, management, capital spending, operations, employment, and community involvement. The Conference Board found that “hollowing out”—or negative corporate takeover effects—are most present in corporate governance, followed by management. The effects in other areas were mostly neutral. In other words, most takeovers result in only modest effects that do not add up to “hollowing out.”

Read more about whether Canada is being “hollowed out”: 

“Hollowing Out”—Myth and Reality: Corporate Takeovers in an Age of Transformation, Ottawa: The Conference Board of Canada, 2008.

Is Corporate Canada Being Hollowed Out? It All Depends Where You Are, Ottawa: The Conference Board of Canada, 2007.

Canada’s energy and minerals industry continues to attract the most foreign investment, although it briefly dropped to the number-two spot in the second half of the 1990s. Finance and insurance industries are in second place, with 19 per cent of all foreign investment in Canada.

Foreign direct investment in Canada is dominated by the U.S. and Europe. In 2008, the U.S. accounted for 58 per cent and Europe for 30 per cent. The top three European countries investing in Canada in 2008 were the U.K., the Netherlands, and France.

¹ UNCTAD, “Global FDI in Decline Due to the Financial Crisis, and a Further Drop Expected,” UNCTAD Investment Brief, Number 1, 2009.

² Statistics Canada, Canada’s Balance of International Payment, Fourth Quarter 2008, Catalogue 67-001x.

³ Andrea Mandel-Campbell, Foreign Investment Review Regimes: How Canada Stacks Up, (Ottawa: The Conference Board of Canada, 2008).

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Income Per Capita	Unemployment Rate
GDP Growth	Employment Growth
Labour Productivity Growth	Inward FDI Performance Index
Inflation	Outward FDI Performance Index