c-11 cooperation for a strategic foreign direct investment policy: preliminary findings toronto, ...

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C-11 Cooperation for a Strategic Foreign Direct Investment Policy:

Preliminary Findings

Toronto, OntarioOctober 5, 2011

Louis Theriault

Director, Forecasting and Analysis


Study Objectives• Document current research related to the economic

impact of cities• Identify principal trends related to city economies• Identify city impact on Canada’s ability to attract

FDI• Develop recommendations to serve as input for the

development of a C-11 strategic FDI attraction policy


What is FDI• FDI is the acquisition by residents of one country

of real assets (as opposed to financial assets) in another country– In Canada, define as at least 10 per cent voting equity

• These assets can be existing assets or represent new investment

• FDI can be inward—foreigners investing in Canada

• FDI can be outward—Canadians investing abroad


Determinants of FDI• Gravity relationships (geographic proximity and

cultural similarity) • Macroeconomic conditions (market size, exchange

rate, per capita income)• Industry characteristics • Institutional infrastructure (socio-political stability,

legal protection, government efficiency)• Physical infrastructure (transportation, electricity

and telecommunications)


Determinants of FDI (cont’d)• Openness to foreign investment (investment

restrictions, investment promotion agencies)• Openness to international trade• Financial markets (interest rates)• Labour markets (unit labour costs)• Innovation (R&D intensity)• Corporate tax rates


Adverse Effects of Restricting FDI• Removes the discipline imposed on managers of

Canadian firms that accompanies the threat of takeover by large foreign companies

• Limitations on investment constrain the amount of capital available within the Canadian economy, thus raising the cost of capital

• Reduces spillover benefits from foreign companies


Economic Benefits of FDI• Growth in trade• Capital formation • Job creation• Increased tax revenues• Technology transfer/spillovers

– Horizontal: same sector– Vertical: different sectors vertically related


SpilloversChannels of Transmission

• Spillovers occur through five mechanisms:– Demonstration/imitation– Exports– Labour mobility– Competition– Backward and forward linkages


FDI Trends in Canada• Inward FDI flows grew by an annual average rate

of 6.6 per cent from 1971 to 2010• Outward FDI flows grew by an even stronger 9.8

per cent per year, so Canada is now a net outward investor

• As a share of GDP, inward FDI flows bottomed out in the mid-1980s and now stands at 2.9 per cent, up from 2.4 per cent in 1970


FDI Trends in Canada• Canada’s trend share of global inward FDI flows

has fallen from 16 per cent in 1970 to just 3 per cent in 2010

• Trend Inward FDI Performance Index has fallen over time, – But still remains above 1, meaning Canada attracts more

inward FDI than its economic size would warrant

• Trend Inward FDI Performance Index is below 1 in the United States


The Economic

Importance of Cities


Series1

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 1033.0

33.5

34.0

34.5

35.0

35.5

Cities’ Share of Canadian GDP Montreal, Toronto, and Vancouver (1987-10)

Source: The Conference Board of Canada.


Series1

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 1051.051.552.052.553.053.554.054.555.055.556.0

Cities’ Share of Canadian GDP C-11 (1987-10)



Series1

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 1065.0

65.5

66.0

66.5

67.0

67.5

68.0

Cities’ Share of Canadian GDP27 CMAs (1987-10)



Hub Cities• Cities’ share of national economic activity likely

will continue to increase• However, the importance of cities is more than the

sum of their GDP• When one of Canada’s large city-regions prospers,

the other communities located in the same province benefit from important spillover effects– Strategic investment is a key tool to maximize this

benefit


Series1

Choosing Hub CitiesReal GDP Per Capita (2010)


CMA Per Capita GDPCalgary $50,477

Edmonton $44,269

St. John’s $41,515

Kitchener-Waterloo-Cambridge $39,899

Toronto $38,610

Saskatoon $38,268

Ottawa-Gatineau $38,052

Regina $37,773

Oshawa $37,222


Series1



CMA Per Capita GDPHamilton $36,242

London $35,064

Vancouver $34,694

Winnipeg $34,124

Quebec $34,027

Victoria $33,512

Halifax $33,141

Greater Sudbury $32,982

Montreal $32,798


Series1



CMA Per Capita GDPWindsor $32,089

Trois-Rivières $31,830

Abbotsford-Mission $31,688

Kingston $31,680

St. Catharines-Niagara $31,544

Saint John $30,833

Thunder Bay $29,892

Sherbrooke $28,719

Saguenay $27,925


Series1

Economic Importance of CitiesShare of Provincial GDP (2010)

Province CMA(s) Share of Provincial GDP

Newfoundland and Labrador

St. John’s 45.3%

Nova Scotia Halifax 49.4%

Quebec Quebec City and Montreal 60.1%

Ontario Toronto- Kitchener-Waterloo-Cambridge

59.5%

Source: The Conference Board of Canada. .


Series1

Economic Importance of CitiesShare of Provincial GDP (2010)

Province CMA(s) Share of Provincial GDP

Manitoba Winnipeg 65.0%

Saskatchewan Regina and Saskatoon 46.3%

Alberta Calgary 35.2%

British Columbia Vancouver 53.9%

Source: The Conference Board of Canada. .


Series1

Leader Follower

Time

The Convergence HypothesisA Textbook Case


Series1

Pan-Canadian ConvergenceResults

Test Convergence Coefficient

Calgary vs. Other Provincial Leaders Yes -0.0004

Calgary vs. Other CMAs Yes -0.0009

Calgary vs. Rest of Canada Yes -0.0018



Series1

Atlantic Region ConvergenceResults


St. John’s vs. Rest of Newfoundland and Labrador

Yes -0.0015

Halifax vs. Rest of Nova Scotia Yes -0.0010

Halifax vs. Saint John Yes -0.0007

Halifax vs. Rest of Atlantic Canada Yes -0.0014



Series1

Quebec ConvergenceResults


Quebec vs. Other Quebec CMAs No 0.0021

Quebec vs. Rest of Quebec No 0.0010

Montreal vs. Other Quebec CMAs Yes -0.0008

Montreal vs. Rest of Quebec Yes -0.0019



Series1

Ontario ConvergenceResults


Ottawa vs. Other Ontario CMAs No 0.0026

Ottawa vs. Rest of Ontario No 0.0017

Kitchener & Toronto vs. Other Ontario CMAs

No 0.0002

Kitchener & Toronto vs. Rest of Ontario

Yes -0.0007



Series1

Western Canada ConvergenceResults


Winnipeg vs. Rest of Manitoba Yes -0.0004

Regina & Saskatoon vs. Rest of Saskatchewan

Yes -0.0007

Calgary vs. Edmonton Yes -0.0022



Series1

Western Canada ConvergenceResults


Calgary vs. Rest of Alberta Yes -0.0020

Vancouver vs. Victoria Yes -0.0010

Vancouver vs. Rest of British Columbia

Yes -0.0007



Series1

5.0 7.0 9.0 11.0 13.0 15.0 17.0 19.04.0

6.0

8.0

10.0

12.0

14.0

16.0

1987-1999

1999

-201

0

SKMB

AB

ON

BC

QC

NSNB

PE

NLCorrelation = 0.82

Unemployment RatesCanadian Provinces

Sources: Statistics Canada The Conference Board of Canada.


Series1

5.0 6.0 7.0 8.0 9.0 10.0 11.05.0

6.0

7.0

8.0

9.0

10.0

1987-1999

1999

-201

0

LDN

Correlation = 0.67

OSH

KNG

OTTHAM

KIT

THU STC

SUD

WND

TOR

RST

Unemployment RatesOntario CMAs

Sources: Statistics Canada The Conference Board of Canada.


FDI and Cities


FDI and Innovation• There is a statistically significant link between

R&D intensity and inward FDI• One of the attractions of locating in a research-

intensive region is to benefit from the fruits of its R&D activities

• Innovation requires three types of inputs:– Human resources– Capital resources– Knowledge


FDI and Innovation• Cities are more conducive to innovative activity

because they are more populous, which means they offer:– More developed markets for the specialized inputs used

in innovation (economies of scale)– The proximity that gives innovators greater

opportunities to learn from one another (knowledge spillovers)


Series1

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 090

5

10

15

20

25C-11 Canada Rest of Canada

Patent ActivityPatents per 10,000 persons (1993-09)

Source: USPTO.


FDI and ICT• Studies also suggest that regions rich in information and

communications technology infrastructure attract more inward FDI

• The benefits of ICT investment include – Reduced transport costs– Reduced transaction costs– Improved marketing information – Increased efficiency of industrial production

• ICT investment is essential to remain competitive within the increasingly information-oriented global economy


Series1

96 97 98 99 00 01 02 03 04 05 06 07 08 09 100.5

1.0

1.5

2.0

2.5

3.0

3.5C-11 Canada Rest of Canada

ICT EmploymentEmployment per 10,000 persons (1996-10)

Source: Statistics Canada.


FDI and Immigration• Empirical studies also show that immigration leads

FDI • When people migrate from one country to another,

they bring with them a social network connected to their native country

• Through these social networks, some of the barriers to international investment may be lowered


Series1

97 98 99 00 01 02 03 04 05 06 07 08 09 1083.083.584.084.585.085.586.086.587.087.588.0

C-11 ImmigrationShare of Canadian Total (1987-10)

Source: Statistics Canada.


Series1

99 00 01 02 03 04 05 06 07 08 09 105859606162636465666768

FDI in C-11 (preliminary estimates)Share of Canadian total (1999-10)



Series1

99 00 01 02 03 04 05 06 07 08 09 101.10

1.15

1.20

1.25

1.30

1.35

FDI in C-11 (preliminary estimates) FDI Performance Index (1999-10)



Best Practices to Attract FDIUncontroversial

• Maintain legal and regulatory regimes that protect property rights, create transparent rules of law, and minimize regulation

• Implement macroeconomic policies that encourage real economic growth with low inflation

• Invest in transportation and communication infrastructure

• Invest in education and worker training programs


Best Practices to Attract FDIControversial

• Cut corporate tax rates• Weaken or eliminate regulatory review processes

applying to foreign investors• Offer financial subsidies to prospective foreign

investors• Eliminate limitations on foreign ownership levels

in sensitive industrial sectors


FDI Attraction Policy• FDI promotion works best when it overcomes

information asymmetries• IPAs need to be sufficiently independent from

governments, giving the agency greater credibility with investors and flexibility

• IPAs also need strong links to public and private stakeholders


FDI Attraction Policy• For major investment projects, government

ministers at the highest level need to be onboard to create policy certainty

• The IPA must be strong enough to influence decisions

• Investment promotion needs to be coordinated at the national and regional levels


Summary• FDI has a key role to play in enhancing growth and

productivity• C-11 cooperation to attract FDI could lead to superior

results for – Its members– The surrounding communities of its members – Canada as a whole

• This research will provide – An understanding of the importance of economic hubs in

Canada– Highlight the C-11 contribution to FDI national trends


Summary (cont’d)• Implications will be drawn on potential FDI priority

areas by – Identifying strengths, weaknesses and growth opportunities– Reinforcing the need for reducing interprovincial trade

barriers limiting spillover benefits– Enhancing the public education role of the C-11

• This is an input in the development of a strategic FDI attraction policy involving – The C-11 economic development authorities– And other public sector partners with a FDI attraction

mandate


The Conference Board of Canada

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c-11 cooperation for a strategic foreign direct investment policy: preliminary findings toronto, ...

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