Canadian Foreign Direct Investment: Recent Patterns and Interpretation

Summary

• Foreign Direct Investment (FDI) is a prominent feature of globalization. It occurs when an investor resident in one country acquires management control of an enterprise located in another country.
• FDI inflows improve the efficiency of the host economy, and increases in those inflows suggest that the host economy is a relatively attractive location for international investment.
• FDI outflows are less straightforward to interpret. Efficient multinational companies can increase their revenues and profits by expanding into foreign markets, and increases in outward FDI can therefore signal a healthy investment environment in the home country. However, it might also reflect a deteriorating environment for capital investment at home from which companies are exporting capital investment.
• One reasonable interpretation of available data is that increasing rates of inward and outward FDI identify a relatively favourable domestic environment for capital investment. Conversely, decreasing rates of inward FDI accompanied by increasing rates of outward FDI identify a deteriorating environment.
• An examination of inward and outward FDI flows for Canada from 1990 through 2017 shows that inward FDI flows to Canada relative to other developed countries declined substantially from 2015 to 2017, while outward FDI flows from Canada increased relative to other developed countries over that period.
• This data supports a conclusion that the Canadian economy has become a less attractive location for capital investment in recent years relative to other developed economies.