Smashing the Myths of Investing Abroad

Frustration with the sluggish global economy is mounting. Voters are more restless than ever, leading to rancorous debates about who’s to blame. These are reviving myths about how the inter-national economy really works. Protectionist rhetoric seems to be reaching a feverish pitch, with outward corporate investment being viewed as the villain that’s hollowing out the domestic economy. Is this true, or have the debates got it all wrong?

Talk to the enterprises with investments abroad, and they tell a very different story. Trouble is, anecdotes aren’t completely convincing; they can be generally viewed with suspicion, or isolated as special cases. To get to the facts, EDC decided to survey Canadian firms that have invested abroad, asking them about their experiences. In the study authored by Daniel Koldyk, 546 firms responded to key questions about how they are operating their foreign affiliates. Their answers produced five key findings that cut through the main popular myths.

First, foreign affiliates strengthen Canadian employment and domestic operations. Most people think of outward investment as Ross Perot’s ‘giant sucking sound’, robbing jobs from the homeland. However, 85 per cent of Canadian firms said that their foreign investments either increased or had a neutral effect on their Canadian employment. In addition, 69 per cent said that their domestic operations were important or very important in supporting their foreign operations.

Second, foreign operations of Canadian firms are leading to higher pay for Canadian employees. That stands in stark contrast to popular images of armies of cheap foreign labour helping to slash domestic wages. In fact, almost all respondents to the survey said that foreign affiliates had a positive or neutral impact on Canadian compensation. The bulk of those polled – 60 per cent – said the effect was neutral, while almost one-third said that the effect on compensation was positive.

Third, foreign affiliate activity makes Canadian companies stronger. On ten key competitiveness measures – including sales, the customer base, profits, growth, market share, innovation, productivity – a majority of respondents cited positive or highly positive impacts from having foreign operations. The flipside of this is that without the foreign operations, these Canadian firms would be more vulnerable to foreign competition, and less able to sell globally.

Fourth, the main driver of foreign affiliate activity is not cost-cutting. It’s popular to think that it is, but the survey disagrees. While it is definitely an element of the decision to locate abroad, according to respondents, the main driver for establishing foreign operations is actually increased sales – both in the foreign market itself, and in other foreign markets that can be accessed through the offshore operation.

Fifth, foreign affiliates are helping Canadian firms diversify their client base and business models. True, the US will be our prime market for a long time to come, but growth is being heavily influenced by emerging markets. Of the 29 per cent of respondents that are planning to establish new foreign operations in the next five years, 54 per cent of these will be in Asia, with China and India grabbing the lion’s share of these. This is hardly a break with the past; since 1999, foreign affiliate sales by Canadian firms have grown 23 per cent in the US, while at the same time they surged by 267 per cent in emerging markets. In fact, total foreign affiliate sales in emerging markets have climbed to half of what they are in the US, and are greater than Canadian affiliates’ sales in other OECD countries.

Data have long since proven that the Canadian economy is far more diversified than most think. Studies usually stop at the goods and services that cross our borders into other markets. Today’s market combines that with increasingly important foreign affiliate sales, which are now almost as large in dollar terms as traditional trade. It’s a trend that successful Canadian exporting companies can’t ignore, a key to future success.

The bottom line?

Myths about modern international trade sell well, but they’re dead wrong. Leveraging international operations is good for Canadian firms and for the economy in general, and is enabling us to tap into the key sources of future growth.

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