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Canada's share of foreign investment slipping
JANET McFARLAND
Globe and Mail
18:02 EST Tuesday, Jan 26, 2010

Canada has been losing its attractiveness as a destination for foreign investment compared with other countries and is in no danger of being “hollowed out” by takeovers, a new report argues.

While some of Canada's best-known companies have been targets of foreign buyers in recent years, the country's overall share of global foreign investment has been falling for decades, harming prosperity by slowing the transfer of new technologies, said a study issued Tuesday by the Montreal-based Institute for Research on Public Policy.

Walid Hejazi, an economics professor at the University of Toronto and author of the study, said foreign investment overall has expanded throughout the world in recent decades, but Canada's proportionate share of it has “fallen precipitously.” In 1970, Canada received 15.7 per cent of total foreign direct investment worldwide, but just 3.4 per cent in 2007.

As a proportion of gross domestic product, foreign direct investment in Canada was at virtually the same level in 2008 as it was in 1970, the report notes.

In the meantime, Canadian investment abroad has “exploded” over the past 30 years, and Canadian companies now own more foreign operations than foreign companies own in Canada.

“These trends ... seem to be lost on those who continue to argue that the Canadian economy is being inexorably taken over by foreign interests,” the report said.

Until the market downturn in 2008, Canada faced a raging debate about the large number of iconic companies being acquired by foreign buyers, including Alcan Inc.., Inco Ltd. and Hudson's Bay Co.

The fears have begun to reappear in recent months as foreign investors have shown new interest in the energy sector and especially in Canada's oil sands companies. Harvest Energy Trust was bought last year by Korea National Oil Corp., while PetroChina International Investment Co. announced a plan in August to buy a majority stake in two projects owned by Athabasca Oil Sands Corp.

Mr. Hejazi said he anticipates more deals will happen in the energy sector as oil prices recover, but his study urges policy makers to avoid “counterproductive” restrictions on investment.

Much of the decline of foreign direct investment in Canada took place in the wake of the Canada-U.S. free trade agreement in 1989, in part because firms did not need to operate Canadian-based businesses to sell competitively into Canada's market, the study said.

Mr. Hejazi said the debate around foreign investment has been “framed around two caricatures”: One is that outward investment by Canadian companies causes job losses; and the other, that inward investment by foreign companies leads to excessive foreign control of Canada's economy. Instead, the study argues foreign takeovers help Canada's prosperity.

“Foreign firms operating in Canada are more innovative, more productive and pay higher wages than their Canadian counterparts,” he said. “More importantly, they import significant amounts of technology, and the benefits of those technologies spill over to firms here at home.”

The report also says foreign investment has not reduced head office activity in Canada, suggesting foreign companies have opted to keep management close to their foreign operations.

The study said outward investment by Canadian companies has also spurred growth by giving companies a “beachhead” for market expansion and creating demand for value-added head office activities such as engineering and design.