The good, the bad and the misunderstood
Everyone knows trade and investment are good for growth and jobs. But in this age of globalization and intensified competition, many people scratch their heads and wonder if one country’s investment might be another’s loss. After all, companies close down plants all the time, and with it often go the jobs and ability to trade.
So what does this all mean? Is it a zero sum game, or is it win-win? Are there any benefits to investment outflows? What kinds of jobs are created by the investments coming into the country? And if companies don’t make investments abroad, will they be able to compete?
Complicated questions, and lots of answers. With trade and investment barriers coming down across the globe, as they have for the last few decades, it means that the old walls can’t be put up to keep things the way they have always been. So companies need to be dynamic and ahead of the game. If not, someone else will steal their lunch. That’s always been the case in a competitive market. Today, that competitive market is global, not just national.
What else do we know? We know that investment into the country has always been good for jobs and incomes, but investment out of the country is a little harder to read in terms of benefits. Typically, there is some “pull” effect that increases exports. But if a lot of the purchases and sales are done in the countries where Canadian firms are investing, say in Asia or Africa, it may also mean that there is less benefit kept here at home. We can see that with global value chains, where Canadian companies are producing and selling goods overseas with foreign employees, purchasing cheaper supplies abroad for that production, and selling directly into those markets from closer range. That should lead to better performance for the firm.
But is that better performance achieved at the expense of “Canadian content,” meaning Canadian raw materials, labor, supplies, etc.? Sometimes yes … sometimes no. In some cases, all that activity actually provides Canadian firms with more resources to hire more Canadians to handle design, finance, administration, strategy, and other high-value activities. Not always, but often.
Other benefits include earnings repatriated back to Canada, or the share values of companies that may have appreciated due to those overseas earnings and future prospects. For smaller companies, increased earnings will increase their value, and make it easier to get financing. So there are benefits. Just that they are not always easy to identify or interpret from the outside looking in.
So where does Canada stand?
Each year, the United Nations Conference on Trade and Development (UNCTAD) produces a World Investment Report, which looks at how investment flows are moving. Based on the 2014 report, how has Canada done over the years?
Total FDI inflows averaged nearly $1.5 trillion globally in 2008-2013, roughly 2%-3% of global GDP. Total FDI outflows averaged $1.45 trillion globally in 2008-2013, roughly 2%-3% of global GDP.
Canada’s share of FDI inflows and outflows remains about 3%-4% of global totals. Europe, the US and Asia still dominate the market in both directions. Latin America is also a major destination for FDI, as are Japan and Australia
Investments into Canada have nearly returned to pre-2008/2009 levels (2010-2013 average was 97%), but CDIA is still only about 92% of earlier higher levels. Why? Lower investment in new or start-up operations (or “greenfield” investments) outside of Canada, but more interest in these ventures inside Canada.
Mergers and acquisitions account for about a third of global investment activity. In Canada, net purchases have averaged about $35 billion since 2007, but net sales in 2010-2013 were only about half of earlier levels. In 2013, large transactions involving Canadian companies included Nexen Inc. (acquired by China’s CNOOC Canada Holding), Sobeys’ acquisition of the UK-based Safeway’s Canadian operation, Royal Bank of Canada’s acquisition of the US-based Ally Credit operation in Canada, and a Canadian investor group’s acquisition of US-based retailer Nieman-Marcus.
So, what does this all mean?
Canada is a pretty steady destination for investment into the country, due to its resource base, comparatively high incomes, and relatively stable economy. While the recent oil price slump may cause some change in these patterns, Canada has generally held its own in attracting foreign investment.
However, where it has not performed as well lately, is in the outward investment side, raising the risk that Canadian businesses will find it harder to compete in global markets. While there will always be concerns at home about job losses and incomes when companies relocate or shift resources outside, the sluggishness of Canadian investment abroad may weaken prospects for those higher value jobs created at home, as well as the earnings that are repatriated back and share prices that result from improved prospects abroad. So a reinvigorated push into global markets is likely to be needed to make sure these prospects remain positive.
Michael Borish is a Senior Analyst with Export Development Canada’s (EDC) Corporate Research Department