Are Canadian Industrial Investors Defecting Abroad?
The well-documented exit of foreign investors from Canada1 is being compounded by a corresponding exit of Canadian investors : the latter seem to increasingly prefer foreign grounds.
Inward and outward flows of foreign direct investment in Canada – 2008-2017 Base 100 (2008=100)
Source : United Nations Conference on Trade and Development : Data on Foreign Direct Investment.
Reading: The graph illustrates the evolution of the net flows* of foreign direct investment. Following the 2009 crisis, the net flow of Canadian investment abroad shows an upward trend to regain pre-crisis levels. The net flow of foreign investment in Canada has been steadily declining since 2013 and has reached the level of the financial crisis.
* Net flows are the difference between investments and divestitures of foreign companies in Canada (net inflows) or by Canadian companies abroad (net outflows).
Should we worry ? Are these only capital movements with little direct impact on productive capacities ? Will Canadian investment abroad stabilize at the “standard” level from before the financial crisis, or is it a step towards a real relocation of industrial projects abroad, to the detriment of Canada ?
Nothing alarming … at first glance
It is useful here to distinguish between heavy investment on the one hand and footloose investment on the other. Once settled, the former is linked over the medium- and long-term to a local factor of production (e.g., access to natural resources). The latter, more associated with light and medium manufacturing is more likely to a) invest in new production capacities in national markets and jurisdictions offering the best conditions in terms of production costs, regulation and taxation; and b) relocate these capacities based on the variations of these conditions.
Overall, out of US $5 billion in Canadian-based industrial investment projects abroad in 2017-20182, less than 25% of this value3 is related to light and medium manufacturing. These mobile investments are concentrated in transportation equipment and related activities, such as aerospace (e.g., Magellan, Flying Colours), automotive (e.g., Magna), or other rolling stock (e.g., BPR, Camso).
Conversely, more than 75% of the value of Canadian industrial investment projects abroad4 is associated with natural resource sectors, including:
mines (e.g., zinc, gold, niobium),
hydrocarbons (e.g., methanol),
forest products (e.g., lumber), and
renewable energy projects (more than 400 MW in new projects, especially in the solar field).
The local presence of resources abroad is, of course, a critical location factor, and certainly explains in large part the choice of Canadian investors.
Tax and environmental regulations: race to the bottom ?
Although fixed once investment is completed, heavy investment is mobile at the time of the locational decision. In this respect, environmental requirements may well put Canada at a disadvantage. Indeed, Canadian investors in natural resources have been significantly active in Turkey, Congo, Indonesia and other countries with lower environmental standards5. The issue arises even with Canada’s southern neighbour, which has attracted more than half of the value of Canadian industrial investment in the resource sectors abroad6. Part of this choice of site is no doubt attributable to the US tax reform, and it is hoped that the new tax incentives announced by the Canadian government in November 2018 will lessen the lure of the new US tax rates. But will these tax incentives be sufficient in the context of widespread and rapid environmental deregulation in the United States7 ?
In this race to the bottom, what will be the next step ? For now, Canadian investors are far from having thrown in the towel on the investment climate in Canada, as evidenced by the approximately $50 billion CDN8 of industrial projects announced in Canada since the beginning of 2017.