Foreign investors say Canada has a competitiveness problem

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Appeared in the National Post, September 7, 2018
Foreign investors say Canada has a competitiveness problem

Recently, many business managers and economists have publically expressed concern about a deteriorating environment for corporate investment in Canada. Federal Finance Minister Bill Morneau has rejected these concerns, notwithstanding data showing that capital investment growth has slowed dramatically in the past few years.

Perhaps the most informative “vote” on the competitiveness of Canada’s private sector is the behaviour of foreign investors. Domestic investors exhibit a well-known bias toward investing in their home countries. Foreign investors, however, are more inclined to identify and evaluate candidate investment locations in a more balanced manner.

Furthermore, foreign investors engaged in “direct investment” generally own majority or full ownership shares in the Canadian businesses in which they invest. Since direct investors are involved in the management of the foreign assets they acquire, they are likely to be more aware of business conditions on the ground compared to passive portfolio investors.

Hence, inflows of foreign direct investment or FDI—investments made by firms or individuals in one country into business interests located in another country—serve as a valuable indicator of the attractiveness of a country as a location to do business. In this regard, the evidence is clear— Canada is a relatively unattractive location.

For example, if we compare FDI inflows to Canada to FDI inflows to all developed countries, as represented by the OECD, Canada’s recent performance is quite poor. Specifically, from 2005 to 2014, inflows of FDI to Canada averaged around 6.2 per cent of FDI inflows to all developed countries, compared to only 3.1 per cent from 2015 to 2017. Things look even worse if we compare Canada to the United States alone. From 2005 to 2014, inflows of FDI to Canada averaged 24.2 per cent of FDI inflows to the U.S. compared to a mere 8.5 per cent (or almost two-thirds less) from 2015 to 2017.

While it’s true FDI inflows to Canada were still positive over the period 2015 to 2017, several industrial sectors including mining, oil and gas extraction and manufacturing experienced disinvestment by foreigners. The disinvestment was offset by increased FDI in sectors such as wholesaling and finance and insurance.

It’s also true that inflows of FDI to Canada decreased substantially (both absolutely and relative to other developed countries) during the recession of 2009/2010. However, Canada’s performance relative to the U.S. was substantially stronger during this period than in the 2015 to 2017 period. In addition, FDI in Canada increased from 2009 to 2010, whereas it consistently decreased over the three years from 2015 to 2017. Indeed, the inflow of FDI to Canada in 2017 was lower than in any other year from 2005 to 2017 other than in 2009.

So how did this happen? Why is Canada no longer an attractive place to do business?

While many factors contribute to a country’s business climate, public policy—including at the federal level—plays a key role. Since taking office in 2015, the Trudeau government has raised taxes on upper earners, created mass uncertainty with its mandated carbon-pricing scheme, and run up huge budget deficits (raising the spectre of future tax increases). This contrasts with recent U.S. government initiatives to reduce the corporate tax rate and eliminate numerous costly business regulations.

Consequently, as indicated by the investment behaviour of foreign corporations that do the bulk of direct investing, Canada has become a relatively unattractive location for business investment. Capital investment—that is, money spent by businesses to acquire or maintain land, buildings, equipment, etc.—is critically important to increases in labour productivity, higher wages and improvements in living standards for Canadians.

As such, by refusing to acknowledge the major economic problem unfolding on its watch—dwindling investment due to a poor business climate—the Trudeau government, including Finance Minister Morneau, is failing Canadians.

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