Canadian companies are increasingly relying on international investment and foreign affiliate networks to grow their businesses, but that doesn’t mean they’re taking business and employment out of Canada. Indeed, a full 85 per cent of companies surveyed recently by Export Development Canada (EDC) said that their foreign affiliate activity had a positive, or neutral, impact on the number of people they employ in Canada. The goal in establishing foreign affiliates is to augment their domestic operations and, in fact, the foreign affiliates almost always do provide benefits for Canada in terms of domestic employment and wages. A full 69 per cent of respondents stated their domestic operations were “important” or “very important” to supporting their foreign operations.
So notes EDC’s groundbreaking Foreign Footprints survey of 546 companies that sought to find out what the trend toward foreign affiliates meant for the Canadian economy and the competiveness of Canadian companies.
The key findings, according to EDC economist Todd Evans, were, first, getting a better understanding of the large and growing amount of foreign activity in which Canadians are involved and the growth they’re seeing as a result.
“This is not unique to Canada,” Evans was quick to point out. “For some other major OECD countries, their foreign affiliates have even more presence globally than Canada.”
Second, he said, is that these Canadian companies are investing globally as a strategic business decision and not one that takes business out of Canada. “In other words, we’re not shifting everything to some market elsewhere,” he said.
And finally, these investments provide benefits for Canada’s overall prosperity because companies with a larger global footprint pay higher wages and have stronger employment growth in Canada. A deeper global presence also boosts their competitiveness.
The sheer breadth of the foreign affiliate market was a significant finding.
“We like to describe it as a whole other Canadian economy outside of the Canadian borders,” he said, and noted that the catch-all term “foreign affiliate” refers to companies with foreign operations — it could be a sales office of 20 people in another country, or it could be large-scale mining or manufacturing operation.
A couple decades ago, he said, the argument that companies moving some operations outside of Canada were simply doing so to manufacture more cheaply and were therefore outsourcing jobs may have had some validity, but those fears are no long borne out.
“We can assuage fears that Canadian companies that set up foreign affiliates are exporting jobs and capital out of the country,” Evans said. “Going back 15 to 20 years, there may have been some credence to that argument, but now, it’s all about having a global strategy and their domestic operations are tied very closely with their foreign affiliates.”
He said Canadians can no longer look at foreign and domestic activity as being mutually exclusive because they’re closely interconnected. “When you see a Canadian company growing its foreign operations in today’s environment, odds are that they’re also growing their domestic operations.”
And, the jobs being created in those beefed-up Canadian operations are far more valuable in terms of salaries and expertise than any jobs that may have been exported, added Jennifer Topping, market research lead for EDC’s strategy and transformation team and the survey’s researcher. “The calibre of employee these companies can have in Canada is more skilled than those in the foreign affiliate.”
Evans points to auto-parts makers such as Martinrea, Linomar and Magna. High-tech service companies such as OpenText and CGI are also good examples.
“They have all been growing their international footprint over the last several years,” he said. “But these guys have also grown their Canadian operations significantly. If these companies weren’t becoming more competitive globally, growing that international footprint, getting that edge, odds are that they wouldn’t be growing their domestic operations either.”
The survey backed this up — 92 per cent or respondents said their company was more competitive because of their foreign affiliates.
Evans said the Canadian market simply isn’t always big enough to allow some companies to get the critical mass they need to expand, hire new people and pay better wages.
“We see going global as a strategy Canadian companies can use to grow their business and, at the end of the day, it comes down to also improving the broader Canadian economy and our standard of living.”
The research, which builds on a May 2015 EDC report featured as a chapter in the Institute for Research on Public Policy’s paper, showed that borders are becoming less important from a business point of view. Traditionally, the establishment of foreign affiliates would have been done mostly by larger companies, but that global strategy is moving to smaller companies, too.
“The literature calls them micro-multinationals,” Evans said. “Technology has helped push them along over the years and improvements in transportation technology and improved market access have really helped facilitate that, too.”
The survey also found that while the U.S. will remain an important market for Canadian foreign affiliate activity, its growth will be rooted in Asia and other emerging markets. Just under a third of respondents (29 per cent) said they will establish new foreign affiliates within the next five years and among those, 54 per cent said they’ll open new operations in Asia, with India and China receiving most of that new investment.
Those already operating in emerging markets reported that they grew 267 per cent between 1999 and 2012 while sales in the U.S. and other OECD countries grew by just 23 per cent and 61 per cent respectively over the same period.
“Obviously, the U.S. will remain a significant factor,” Evans said. “The number of Canadian companies going to the U.S. shows that. But a lot of the growth is, and will be, in the emerging markets.”
In the survey, Canadians identified markets for expanding their future foreign affiliate operations: China was No. 1, then India and U.S. were tied for No. 2. Brazil was No. 3, with Australia and Mexico in the running as well.
“It’s a good mix between emerging markets and well-established existing markets,” Evans said. “And we’re seeing a much more diverse range of activities in terms of foreign affiliates. You think of China as manufacturing, but now we’re seeing more companies going into being part of the value chain that serves Chinese customers in a broader range of activities, including many types of services. We’re seeing that in India as well.”
Evans said growth is still in traditional markets, such as mining and oil and gas, but more and more, it’s shifting and broadening.
“We’re seeing good growth on the services side — in exports and where investments are going. Foreign affiliates are the realization of those investments.”
Topping pointed out that 76 per cent of the companies surveyed also said that in the next five years, their foreign affiliate sales are expected to grow.
“That’s a real opportunity for other exporters who are interested in taking the next step,” Topping said. “And for those who are having trouble getting to a specific market from Canada itself. If you can invest in a foreign affiliate, you could potentially grow your global business that way.”