Why is investment from US Multinationals important to Canada?
The United States is a primary source of foreign direct investment for Canada. The continuing attraction of foreign direct investment is considered crucial to Canada's future economic performance.
What has been happening
During the last fifty years, US foreign direct investment growth in Canada has been, in a word, slow!
Consider that the stock of US foreign direct investment in Canada in 1966 was 18 times larger than that in the Netherlands and three times larger than that in the United Kingdom. But in 2008, US foreign direct investment in Canada was only half as large as that in the United Kingdom and the Netherlands. Why is this?
- Is it because Canada has been unable to lure dynamic new investment?
- Is it because US multinationals with long-term operations in Canada are in activities that simply grow more slowly?
As it turns out, both are true. Relative to Europe, Canada has a smaller presence in service sectors with "new" industries, and a much higher proportion in manufacturing, where growth has tended to be slower than in other industries. (Although Canada's resource-based industries have seen a large growth in assets for more than a decade, these industries remain relatively small in terms of US multinational presence.)
Interestingly as well, US affiliates in Canada that conduct research and development, and/or are export-oriented, tend to grow faster than other US affiliates. Unfortunately, Canada has been less successful than Europe in luring research and development from US multinationals and US multinational export-oriented activities.
Notably, post-2001 was a period of particularly slower growth not only for pre-existing Canadian affiliates, but also in US multinationals choosing to locate new affiliates in Canada. After 2001, US multinationals were significantly more likely to locate a new investment in both Europe and the BRICS – which suggests that the border thickening associated with 9/11 has had continuing effects upon US multinationals corporations investment in Canada.
So what will the Future hold?
- Will the denouement of the recent global crisis reverse matters for Canada vis-à-vis its attraction of US multinationals corporations FDI (insofar as the Canadian economy has been relatively less scathed than that in the US and those in Europe)?
- What will help make Canada more attractive to US multinationals in the "new" industries in the service sector, or in terms of hosting more R&D related and export-oriented activities?