Jack Mintz: Canada has lost $225 billion in foreign investment since 2016 – Financial Post

Article content

According to the OECD, Canada was the third largest recipient of foreign direct investment (FDI) inflows in the first three quarters of 2023 (at US$42 billion), behind only the United States and Brazil. Does that mean Canada is doing well attracting capital, as the federal government has argued? Not really. Not if you consider outflows, too.

Canada has always relied heavily on FDI inflows to grow our economy. At times, we have been uneasy about foreign takeovers of major Canadian companies. But we have benefited from the new technology, management and jobs FDI usually brings. The highest inflow in the past decade and a half (US$69.4 billion) was in 2014 and it was more than any other country received that year except the U.S. and China. The worst year was 2017 when we received only US$22.8 billion and placed 17th of 45 countries. (Note that these numbers are not inflation-adjusted.)

Article content

Article content

FDI numbers jump around for good reason. Statistical agencies add up the equity and debt used by non-residents to buy Canadian assets and also include the reinvested profits of foreign-owned companies operating here (exchange rate impacts on earnings are excluded). So the numbers include lumpy greenfield investments in newly constructed plants that may take several years to build. And a big acquisition in one year may make the following year’s numbers look low by comparison.

Foreign investment can be measured as an inflow (acquisitions net of dispositions coming into Canada) or an outflow (Canadian money invested elsewhere). Net FDI — let’s call it the FDI balance — is inflows minus outflows. In the first three quarters of 2023, Canada did attract US$42 billion of inflows, which is about 4.5 per cent of GDP. But Canadians put their money elsewhere to the tune of US$56.5 billion (six per cent of GDP), resulting in a balance of negative US$14.5 billion (about 1.5 per cent of GDP).

In fact, Canada has been a net exporter of capital in this way since the mid-1990s. We tend to assume exporting capital is only bad. But investments made abroad do eventually lead to the repatriation of profits back to Canada. And when Canadian companies go global, their presence in foreign markets may enable them to export more from their Canadian operations (not that only exports are good: imports are too!).

Article content

Article content

That is the hope, at least. The late Martin Feldstein of Harvard, who chaired Ronald Reagan’s Council of Economic Advisers, always argued that every dollar Americans invested abroad was one less dollar invested Stateside, resulting in less U.S. income and fewer jobs. If Canadians are investing abroad because Canada is no longer a competitive place to invest, we should worry about our negative FDI balance.

That balance has been growing more negative over the years. Even during the Harper years of 2010-15, though our resource sector was strong, our FDI balance was negative US$7.4 billion, meaning we were a net capital exporter. But during the Trudeau years of 2016-2022, FDI inflows fell 15 per cent while outflows rose 16 per cent. The negative FDI balance was -US$23.9 billion per year, three times higher than in Harper’s final five years. From 2016 through 2022 close to $225 billion in capital was lost as more direct investment left the country than came here.

At best, therefore, the glass is only half full. We’re attracting more FDI inflows than many other countries but we are losing even more than that to other parts of the world. One effect of this net outflow is to lower the value of the loonie. That may help us export but it means import prices rise, stoking inflation at home.

Article content

On average, world investment flows are down in recent years. From 2013-17, global FDI inflows averaged 3.2 per cent of world GDP.  In the following five years, they fell in half — to 1.6 per cent of GDP.  The worst year was actually 2022 (not the COVID years of 2020 and 2021) when they were just 1.2 per cent of world GDP as governments pursued their “friend-shoring” strategies in wake of security concerns. Many people assume reduced globalization is a good thing but it’s actually a cause for concern.

The most dramatic reduction in FDI was in Luxembourg, where new transparency laws led to a half-trillion U.S. dollar loss of inbound FDI in 2022, reversing huge inflows prior to 2020. Ireland, the fastest growing OECD country since 1990, saw its FDI inflows collapse in 2021 and 2022 (except for greenfield investments) after it bowed to OECD pressure to increase its corporate income tax rate from 12.5 to 15 per cent. Aggressive East-West de-coupling is also beginning to show as FDI inflows into China plummeted from US$180 billion in 2022 to just US$15 billion in the first three quarters of 2023. As for Russia, its FDI inflows were negative 0.7 per cent of GDP in 2022 due to dispositions by foreign investors in 2022.

Although one year’s FDI numbers don’t prove much of anything what we want to avoid is a continuing loss of investment interest from abroad. Yes, foreign capital can be replaced by domestic capital. But if foreigners don’t see interesting investments here, Canadian investors probably won’t, either.

Article content