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Foreign direct investment in the Canadian economy

Published: November 15, 2023
Updated: November 15, 2023
Article

In an era of globalized economies, foreign direct investment (FDI) plays a vital role in shaping international business landscapes. The term FDI is typically used to describe the decision made by a company, often referred to as a multinational entity (MNE) to invest a substantial stake in a company from a foreign country.  

These investments often consist of either establishing business operations or acquiring business assets in a foreign country, such as ownership or controlling interest in a given company. Unfortunately, all too often FDI is undeservedly associated with a negative connotation. Domestic audiences and governments sound the alarm against FDI due to political matters that undermine the true economic benefits of FDI. These political aspects often arise when the host country is financially unstable and thus unlikely to strike favorable terms. 

However, empirical evidence shows that this is not the case in Canada. Foreign direct investment in Canada brings many economic benefits to fruition which makes FDI a source of economic prosperity for all agents involved, especially the host nation.

From a Canadian standpoint, this article explores the optimistic outlook on FDI and delves into the myriad benefits it brings to the economy.

The benefits

FDI plays a key role in the development and growth of economies since it fosters international economic integration and expands economic opportunities1. Despite the economic advantages associated with FDI, there is an existing view that FDI entails some negative side effects due to comparative advantages. However, when analyzing the theory and empirical evidence in Canada, FDI provides an abundance of economic opportunities for the Canadian economy. 

The benefits of MNEs are well documented and include the following characteristics: 

  1. Foreign-based MNEs are more innovative and productive. As a result, allowing them into a given country to invest in areas where capital is lacking in efficiency, will only lead to increases in productivity for the host country.
  2. MNEs are more export oriented. As the world becomes increasingly globalized, exports will account for more of the world’s gross domestic product (GDP). Allowing MNEs into a given country will serve to maximize this global export network.
  3. Allowing foreign MNEs into a host country enables the transfer of the latest technologies. This will make the host country more technologically sophisticated than if the FDI did not take place.
  4. FDI stimulates domestic competition, offers higher wages, connects Canadian industries to global value chains (GVCs), provides indirect spillovers (i.e., technology know-how, management practices), and adds capital to the economy. In some sectors of the economy, FDI induces the domestic industry to become more efficient. This entails the domestic industry to adapt to become more efficient by increasing competition and improvement of resource management. It also fosters a productive environment by enabling the host company to garner more efficient technologies and outcomes from foreign knowledge and know-how.

A Canadian perspective2 

In Canada, these benefits have been statistically proven.
Foreign-controlled MNEs in Canada account for:

50%
of merchandise exports
37%
of R&D business expenditures
33%
of manufacturing jobs
29%
of operating revenues
19%
of corporate assets
12%
of jobs

Additionally, in comparison to domestically controlled enterprises, foreign-controlled MNEs manufacturing in Canada were on average:

  • 119% more productive.
  • 147% more capital intensive.
  • Paid 32% higher wages.

The evidence presented above demonstrates the true effect of FDI on the Canadian economy and can be extended within the global context. Canada’s commitment to attracting and facilitating FDI should continue to be promoted in order to retain the positive impacts it has on the Canadian economy. 

Connect with a BDO advisor

Fearing FDI without understanding the true benefits it derives is a misleading guiding principle with forgone economic consequences. From a Canadian perspective, FDI should be embraced while ensuring that systems and institutions are correctly established, overall fostering an environment where both parties benefit from the outcome.

To learn more about foreign direct investment in Canada or if you require guidance on navigating this dynamic landscape,
contact our experienced tax leaders.

Jamal Hejazi
Director, Transfer Pricing Tax Services
613-690-2987

LinkedIn
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1  Hayes, A. (2023, March 27). Direct foreign investment (FDI): What it is, types, and examples. Investopedia. https://www.investopedia.com/terms/f/fdi.asp

2 Hejazi, W. Foreign Direct Investment. PowerPoint. University of Toronto.

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