an analysis of fdi in canada and alberta

An Analysis of FDI in Canada and Alberta

International Trade Policy Internship Report

for

Western Economic Diversification Canada

Liang Liang

Western Centre of Economic Research

April 8th, 2008

Western Centre for Economic Research April 2008

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Objectives

Several objectives have been determined for this report:

1. To conduct a literature review which highlights recent findings related to

Foreign Direct Investment (FDI).

2. To generate FDI data at the provincial level, including:

a) Reviewing current FDI information and exploring databases pertaining

to FDI in Canada and other countries,

b) Accessing Statistics Canada statistics,

c) Preparing and exploring relevant data from secondary or primary

sources,

d) Creating an FDI database, and

e) Developing a mechanism for maintaining the data base.

Overview

This report is divided into ten sections. It begins with an Introduction,

and is followed by Section 2, which presents definitions of FDI and an

explanation of the main Canadian and other data sources. Section 3 describes

recent international FDI trends. Section 4 focuses on Canadian FDI and its

distribution according to industry, while 5 introduces the specific difficulties of

apportioning FDI on a provincial level. Section 6 examines how the United States


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is able to obtain FDI data at the sub‐national or state level. Section 7 analyzes FDI

data collection in Canada. Section 8 provides insights on how FDI data can be

obtained at the provincial level, and, in the process, to review pertinent literature

on the dispersion of FDI within countries. Section 9 summarizes the findings, and

Section 10 concludes with final observations.

1. Introduction Trade is an important component of the global economy. It takes place

between countries or regions in a highly competitive atmosphere, and is subject

to the variations of the free market system. Trade is also influenced by social,

political, and geographical factors. As a result of its close association with the

United States, and prevalence of natural resources, Canada has gained respect in

the world trade arena. The relation between trade and investment in North

America has raised some interesting issues. Although trade is theoretically

predicted to be negatively correlated with Foreign Direct Investment, some

empirical work has furthered an opposite conclusion. A research proposal by Fan

(2005) investigated the relationship between Foreign Direct Investment and

trade. It was noted that several empirical studies at the country and cross‐

country levels, in both industrialized and developing countries, have shown that

trade and investment are complements rather than substitutes. It is apparent that

both trade and FDI can benefit the Canadian economy, and both provincial and

national aspects must be considered. This paper will analyze how Foreign Direct


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Investment can be viewed as an important source of productivity and

innovation.

Various studies have shown that FDI inflows have a significant

and positive effect on the Canadian economy. Since the Canadian economy is

heavily engaged in trade, it may be surmised that FDI is an important

contributor to exports. Based on International Financial Statistics, it was shown

that, in 2006, Canada’s total trade of goods and services amounted to 70.2% of the

GDP, while 36.4% of the GDP consisted of exports of good and services. Inward

FDI will also tend to affect the productivity and production cost of host

countries. Foreign investors often provide good technical and management skills

and new technology, which leads to greater productivity and profits. This can

benefit both the foreign firm and the host country, in the long run, which

heightens competition for foreign direct investment.

In Gera et al. (1999), the results of the working paper indicated that there

are numerous beneficial spillovers from Foreign Direct Investment. First, as with

other types of knowledge, the firm‐specific assets of multinational enterprises

(MNEs) may spill over to competing domestic firms. Second, knowledge and

technology could spill over from foreign firms to domestic firms, through the

training of labor and management. Third, MNEs can stimulate improvements in

quality and reliability of inputs provided by local suppliers. Finally, inward FDI

can also lead to increased competition and force less efficient domestic firms to


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innovate or to exit. The study also noted that inward FDI lowers production costs

and increases productivity in most Canadian industries. In fact, inward FDI

changes the structure of production, as industries adjust their demand for factor

inputs.

Another working paper by Tang & Rao (2001) found that foreign

controlled firms spend significantly more money on R&D, and are more active in

adopting advanced technology than Canadian‐controlled firms. So, it may be

observed that foreign‐controlled enterprises are more productive than Canadian‐

controlled firms. This also means that they will tend to pay higher wages and

salaries.

Outward FDI can also benefit the Canadian economy. A report by the

Conference Board of Canada (Thériault & Beckman, 2008) concluded that a

capital‐exporting country receives benefits in the form of repatriated profits,

intellectual property royalties, and similar payments. Further, by investing

abroad, multinational enterprises gain access to overseas markets, resources, and

opportunities, in order to exploit their competitive advantages to the fullest. The

knowledge gained is likely to strengthen the firm’s competitive advantage.


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2. Definitions and Data Sources

The definition of FDI is based on the concept of control, in that foreign

investors may exert influence on resources in a country. There is a distinction to

be made between control and the definition of ʺcommandʺ, in relation to the

actual degree of influence. A key difference is the percentage of equity

ownership held by foreign investors. The United Nations (UN) has adopted the

definition of FDI as an investment made to acquire lasting interest in enterprises

operating outside of the economy of the investor. Further, an investor must hold

at least 10 per cent of the equity ownership in order to be qualified as a foreign

direct investor.

The Organization for Economic Cooperation and Development (OECD)

uses a slightly different definition for FDI. It characterizes it as an incorporated

or unincorporated enterprise in which a single foreign investor owns 10 per cent

or more of the ordinary shares or voting power of an enterprise. Or, it may own

less than 10 per cent of the ordinary shares or voting power of an enterprise, but

still have an effective voice in the management of an enterprise (OECD, 1996).

Graham & Krugman (1995) have reported that the U.S. Department of Commerce

considers FDI to come into play when a single investor acquires a stake of 10 per

cent or more in a U.S. firm. (Foreign Direct Investment in the United States, 9)

The OECD and EUROSTAT have been collecting FDI data for OECD

countries, since 1993. UNCTAD’s Division of Investment, Technology, and


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Enterprise Development also collects country‐based data on FDI. As Canada is a

member of these two organizations, relevant country data from these sources are

available. The U.S. Department of Commerce collects data on FDI in the U.S.,

according to the parameters of its definition.

There are three data sources for FDI in Canada. The FDI definitions used

by these three sources also differ.

The first source is Statistics Canada. Its data are collected at the enterprise

level, and are based on “Canada’s international investment position”. The limit

is set at the point when a foreign investor owns at least 10 per cent of the equity

of an enterprise. FDI only measures the investment of the foreign investor, not

the value of the whole enterprise. This appears consistent with the UN or IMF

definition.

The second data source is the Corporation Returns Act (CRA). CRA data

measure the level of foreign control in the Canadian economy, and is termed to

be as such when foreign investors own 50 or more of the voting equity of a

corporation. CRA data measure the total assets of the foreign‐controlled

corporation, while Statistics Canada’s FDI data only measure the investment of

the foreign investor.

The third Canadian data source is collected by the Investment Review

Division of Industry Canada, as part of the Investment Canada Act. Under the

Investment Canada Act, the establishment of a new business in Canada or the


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acquisition of control of an existing Canadian business by a non‐Canadian must

be reported. The Foreign Investment Review provides information on the number

and value of the new investments by foreign residents. However, a report by the

Atlantic Province Economics Council (2000) suggests that the asset value data are

not comparable to the Statistics Canada’s estimates of the flow of FDI, because

the Investment Review data do not indicate the actual source of funds.

Burgess (2000) noted that Investment Canada’s definition of FDI differs

from the one used by Statistics Canada and most international agencies.

Canada’s International Investment Position statement defines direct investment

as the measure of toal equity, including reinvested earnings and long‐term

claims, and, from 1983 onwards, the short‐term claims of the investor in the

enterprise. It also requires that a direct investor must have ownership of at least

10 per cent of the equity in the enterprise. An enterprise consists of subsidiaries

(the direct investor owns more than 50 per cent), associates (the direct investor

owns 50 per cent or less), and the branches (wholly or jointly owned

unincorporated enterprises) (Canada’s International Investment Position, 1997,

p.20). Burgess stated that Investment Canada’s definition is broader, in that it

includes non‐resident investments financed within Canada, while Statistics

Canada’s definition of FDI does not. However, it is narrower in scope, as it only

includes new business operations and acquisitions, not expansions of existing


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foreign‐owned enterprises. Statistics Canada’s FDI parameters include all direct

investments financed from outside Canada.

To summary the FDI definitions it may constitute a single foreign investor

that owns less than 10 per cent of the ordinary shares or voting power of an

enterprise, but still has an effective voice in management of an enterprise. It may

occur when the investor owns 10 per cent or more of the ordinary shares or

voting power of an enterprise. Operationally Canada defines FDI by using the

second alternatives, which does correspond with the FDI definition used by the

UN and the OECD. Industry Canada uses 50% ownership for its data collection

on foreign takeover.

3. International Trends in FDI and M&A (Mergers and Acquisition) A trend in FDI can be represented by the value of FDI stock and by FDI

flows. According to UNCTAD, for associate and subsidiary enterprises, the FDI

stock is the value of the share of their capital and reserves (including retained

profits). This is attributable to the parent enterprise (total assets minus total

liabilities), plus the net indebtedness of the associate or subsidiary to the parent

firm. For branches, it is the value of fixed assets and the value of current assets

and investments, excluding amounts due from the parent, less liabilities to third

parties.

In addition, in terms of associates and subsidiaries, FDI flows consist of

the net sales of shares and loans (including non‐cash acquisitions made against


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equipment, manufacturing rights, and other items) to the parent company.

Added to this is the parent firm’s share of the affiliate’s reinvested earnings plus

total net intra‐company loans (short‐ and long‐term) provided by the parent

company. For branches, FDI flows consist of the increase in reinvested earnings

plus the net increase in funds received from the foreign direct investor.

UNCTAD also noted that FDI flows with a negative sign (reverse flows) indicate

that at least one of the components in the above definition is negative, and is not

offset by positive amounts of the remaining components. FDI may be further

classified as inward (Foreign Direct Investment in Canada) and

outward (Canadian Foreign Direct Investment abroad).

In the past two decades, global FDI has grown dramatically. From the

chart below, it is apparent that the world’s Inward FDI stock in 2006 was six

times greater than in 1990, and reached the level of US $12 trillion.

Figure 1

Source: the Conference Board of Canada in 2008

Based on statistics from the World Investment Report, the annual growth

rate of inward FDI stock during the period 1991‐2000 and the period 2003‐2006

was, respectively, 13.4% and 15.48%. The total global inward FDI stock reached

$11,999 billion, in 2006.

Following this trend, Canada’s inward FDI stock also increased.

However, the rate of increase was not on par with that of other developed

countries. In fact, Canada is considered to be “slipping relative to the world’s

leading economies” (The Conference Board of Canada, 2008). Its share of global

inward FDI stock has dropped to 3.2% in 2006, from 9.9% in 1980. Overall, the

U.S. share of the world’s inward FDI stock has been more stable than Canadaʹs,

over the past 26 years.


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Table 1

Source: the Conference Board of Canada, 2008

Another important foreign investment indicator, ratio of FDI stock/GDP,

has also reflected Canada’s recent struggle to catch up to other OECD countries

as a foreign investment recipient. The chart below shows that, by 2006, the

United Kingdom, Sweden, France, and Australia had surpassed Canada

in attracting inward FDI, relative to economic size.


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Table 2

Source: the Conference Board of Canada, 2008

Mergers and acquisitions are important components of FDI flows in a

year. This refers to buying or combining existing companies or assets. Greenfield

investment is related to the building of new factories.

Figure 2 Global Cross‐border M&A Activities, Value and Growth Rate, 1988‐

2006

Source: UNCTAD, World Investment Report, 2007.


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From the chart for Global Cross‐Border M&A Activities, it is evident that

there were large fluctuations in global cross‐border activities in the mid‐1990s,

with an increase of FDI flows. The global cross‐border M&A activities reached a

peak in 2000, but started to decline in 2001. A report by the Conference Board of

Canada (2008) explained the drop as a reflection of the telecom and dotcom

meltdown in 2001, which led to reduced M&A activities in these sectors. In 2003,

global M&A activities started to increase more substantially, in relation to the

increase of global FDI flows.

4. Canadian FDI Stock, FDI Flows and M&A’s Trend Table 3 Inward FDI stock in Canada from 1990 to 2006 (in billions)

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 130.932 135.234 137.918 141.493 154.594 168.167 182.126 194.277 219.389 252.563

2000 2001 2002 2003 2004 2005 2006

319.116 340.429 356.819 373.685 383.498 407.61 448.858 Available on CANSIM: tables 3760038

Figure 3

Inward FDI Stock in Canada from 1990 to 2006 (in billions)

050

100

150200250300350

400450500

1990 1992 1994 1996 1998 2000 2002 2004 2006

Source: CANSIM: tables 3760038

From the table above, it is apparent that from 1990 to 1999, inward FDI

stock in Canada increased by an average in excess of 10.3% annually. The growth

slowed after 1999. From 2000 to 2006, the average annual growth of inward FDI

stock in Canada was 6.776%. By the end of 2006, the total value of inward FDI

stock reached $448.9 billion. This was an increase of 10.1% from the end of 2005,

which was the fastest growth rate noted since 2000. Statistics Canada (2007)

explained that the increase resulted from acquisitions of major Canadian firms by

foreign investors and the effects of a weaker Canadian dollar, relative to

European currency. A special report by Industry Canada (1998) indicated

that the ratio of FDI stock/GDP in Canada increased to 21.3% in 1996, from a

value of 18.6% in 1985.


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Table 4 FDI inward flows in Canada from 1990 to 2006 (in billions)

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 21.501 18.825 23.108 23.13 30.833 36.537 36.804 41.683 58.242 79.056 2000 2001 2002 2003 2004 2005 2006

152.326 83.962 66.986 46.349 60.549 82.456 116.873 Available on CANSIM: tables 3760015

Figure 4

FDI Inward Flows in Canada from 1990 to 2006 (in billions)

0

20

40

60

80

100

120

140

160

1990 1992 1994 1996 1998 2000 2002 2004 2006

Source: CANSIM: tables 3760015


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From the diagram 4, it is shown that inward FDI flows have grown

rapidly since 1990. A peak of $152.326 billion was reached in 2000, the result

of increased acquisitions of major Canadian firms by foreign investors. By the

end of 2006, the inward FDI flow was $116.873 billion, which was 5.4 times the

value attained in 1990. By using the CPI index, the average annual inflation rate

was calculated to be 2.255% over seventeen years, which may be considered

moderate and stable. Even when taking the inflation rate account into

consideration, the overall real increase of inward FDI flows during that period of

time is clearly substantive.


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4.1. Canadian FDI Distribution over Industries Implementing data from Statistics Canada, a table has been provided to

show the distribution of inward FDI stock by industry sectors, from 1990 to 2006.

According to the table, the energy and metallic minerals industry received the

largest share of investment, which was 21.2% on average for 1990 to 2006. This

was followed by the financial and insurance industry at 19.7%, the machinery

and transportation equipment industry at 13.4%, and the chemicals, chemical

products, and textiles industry at10.6%. The service and retailing industry

accounted for approximately 8.9%. The rank of shares of FDI stock in industry

sectors in the period from 1990 to 2006 is relatively stable. The energy and

metallic minerals industry continued to decrease, from 24% in 1990 to 18% in

1998. However, after that, growth rates rose to a high of 28% by the end of 2006.

In the 1990s, the financial and insurance industry accounted for 19% of inward

FDI stock. Over the past five years (2002‐2006), the financial and insurance

industry grew only slightly. By the end of 2006, its share was 21% of Canadian

FDI stock. Another substantial portion of FDI in Canada is attributed to the

machinery and transportation equipment industry; it accounted for 14% of FDI in

the 1990s. Since 2003, this share decreased slightly, to 10% by the end of 2006.

The chemicals, chemical products, and textiles industry, and the service and

retailing industry, each accounted for 10.6% and 8.9%, respectively, during the

period of 1990 to 2006. The shares rose and declined slightly, by 2‐3%.


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5. Regional Distribution of FDI There is also an interest in and demand for separate estimates of FDI, by

province, in Canada. A foreign investor necessarily will be drawn to productive,

well‐populated areas of the country. Since there is some regional disparity,

investors have tended to target major cities which have established capital and

technical markets, and solid corporate infrastructure (Aliberti & Migreen,

2001). Ontario attracts almost 60% of investment, as it has an economically

vibrant capital (Toronto), and a proven manufacturing base. Alberta is drawing

more global interest, due to its oil sands and other energy holdings. Various

sources require information related to provinces, including government

departments (Industry Canada and the Department of Foreign Affairs and

International Trade), other provincial governments, and individuals and

companies in the private sector. However, collecting FDI data at the provincial

level is considerably more challenging than at the national level. Three Canadian

studies have analyzed aspects of distribution of FDI at the provincial level.

Bender (1999) summarized the first two studies. The author indicated that the

first study conducted by the IOFD (Industrial Organization and Finance

Division) of Statistics Canada concentrated on the provincial allocation of total

assets of foreign‐controlled corporations. The second study was completed by

Industry Canada and used provincial distribution of data on foreign investment,

as collected under the Investment Canada Act. Bender argued that these two


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studies both have major caveats, since the first one did not take into account the

intricacies of the data, and the second one used FDI data which is not comparable

to the foreign direct investment data collected by the BOP & FFD (Balance of

Payments and Financial Flows Division) of Statistics Canada. The author

conducted a new study in order to use multi‐allocators to examine the provincial

allocation of FDI. Accordingly, there appeared to be three major issues affecting

the quality of the provincial allocators. These included the identification of

transactors of direct investment, the consolidation of subsidiaries by the

reporting corporations, and the appropriateness of the provincial series (such as

taxable income and capital expenditures) for allocating direct investment

position data1.

Despite the limitations and difficulties discussed above, the existing data

provides insight into the nature of distribution of FDI at the provincial level.

Further studies by the Atlantic Province Economics Council (2002) and the

Industrial Organization and Finance Division reveal that, for the reference year

of 1994, there is a similar distribution of FDI, by province. Ontario accounted for

approximately 50‐60% of total FDI in Canada, with a combination of Quebec,

Alberta, and British Columbia accounting for a further 40%. The share of FDI in

1Christian Lajule comments that nothing has been done on this issue since Bender’s study. He also notes that it is really difficult to build FDI by Province since Statistics Canada collects financial data (share capital, inter-company debt, etc...) from head offices of companies in Canada. Many head offices are in Ontario and Statistics Canada has no equivalent financial information on specific establishments to allocate financial data by Province.


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Atlantic Canada was approximately 5%. However, the derived provincial

allocation indicators may not be sufficiently accurate for statistical purposes.

6. U.S FDI Statistics In the United States, the Department of Commerce (Bureau of Economics

Analysis) compiles its own database for Foreign Direct Investment. The database

has been built by incorporating annual survey information collected from foreign

investing companies. The International Investment and Trade in Services Survey

Act of 1976 have provided the legal authority to request this data. Failure to

submit the information, which may only be used for analytical or statistical

purposes, may result in penalties ranging from fines to imprisonment. The

detailed guide and various survey forms have been attached.

The BEA statistics are available from 1980 onward. The annual data

provide industry details of FDI inflows from each foreign country. In the first

category, capital flows without current‐cost adjustment are recorded. This

includes information on total capital without current‐cost adjustment, equity

capital, intercompany debt, and reinvested earnings without current‐cost

adjustment. In the second category, income without current‐cost adjustment and

net of withholding taxes are included for each country. The third category

outlines position on a historical‐cost basis for each foreign country. Quarterly

data on capital flows without current‐cost adjustment, income without current‐

cost adjustment, and net of withholding taxes are also available.


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The company‐based annual survey system enables the BEA to provide a

more detailed database and a larger sample size. This database enables

researchers to avoid problems associated in data collection, particularly when

analyzing and studying the regional distribution of FDI inflows. For example, the

information was used effectively in a study by the U.S. Department of Commerce

(1999) on regional patterns, in relation to the location of a foreign‐owned U.S.

manufacturing establishment.

7. Statistics Canada FDI data Collection In comparison, Statistics Canada FDI Inflows data are collected directly

from survey respondents, extracted from administrative files, and generated

from other Statistics Canada surveys and/or other sources. Based on the

description of Statistics Canada’s sampling process, approximately 6000 firms

receive the annual questionnaire. Quarterly data are collected from

approximately 900 firms which have very high levels of international

transactions. Monthly data are collected from a limited sample of slightly over

100 firms. It is also mandatory to respond to the Statistics Canada surveys, but

this is challenging to enforce. Since there is no specific law similar to the one

enacted in the US, it is more difficult for Statistics Canada to collect all of the

necessary detailed data and to analyze the distribution of FDI at the provincial

level.


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7.1 Determinants of Regional Distribution of FDI Another possible means of estimating regional distribution of FDI would

be to study the location determinants of FDI. Mirus & Scholnick (1999) noted that

access to important natural resources; special technologies, relevant skills, and

proximity to the market have a significant bearing on the location of FDI. They

also reported that, in reality, it is difficult to make these factors operational at a

regional level. Additional studies have been completed which investigate

location determinants in Canada and other countries around the world, as

indicated below.

8. Literature Review Using pooled time‐series and cross‐sectional data, Gerlowski et al.(1994)

adopted a random effect model to investigate the allocation of FDI in U.S. real

estate. The number of FDI in real estate (FDIRE) transactions in each state for

each period was used as dependent variable. Some economic influences, local tax

variables, and real property market‐effect variables were used as explanatory

factors. The authors discovered that large, developed, and active economies are

preferred by foreign investors. They also noted that a broad measure of the state

taxation variable is found to be negative and significant. In other words, taxation

is a deterrent to foreign investors.

Fox & Lee (1996) examined the effects of state economic development

policies in the U.S. on the attraction of foreign investment. The study showed


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that the number of new foreign firms located in each state was used to

represent dependent variables. Both political factors, such as indicators of tax

burden, institutional ideology, state policy and the national context, and

economic factors, including access to market, labor market conditions,

transportation infrastructure, and manufacturing density, were included as

explanatory variables. They found that state efforts, such as tax, spending, and

business policies affect the decisions made by foreign investors.

Another study conducted by Mirus & Scholnick (1999), investigated

geographic distribution of Canadian establishments in the U.S. It first noted that

Canadian FDI is mainly concentrated in five large states: Texas, California,

Illinois, New York, and Florida. It also estimated the impact of the tax burden,

unionization, and wage costs on FDI. It was found that wage rate has

significantly negative effects on Canadian investors’ decisions, while their tax

variable is not a significant location determinant for FDI.

Globerman & Shapiro (1999) studied the impact of Canadian government

policies on foreign direct investment. Foreign direct investment (FDI) and

outward direct investment (ODI) were used as dependent variables. Some

economic factors, including Canada’s GDP, exchange rates, relative costs, policy

factors (Free Trade Agreements including FTA and NAFTA), Autopact, and the

Foreign Investment Review Act were included as dummy variables. The authors

concluded that FTA and NAFTA had significantly increased levels of inward


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FDI; however, FIRA and the Autopact had no significant effects on foreign direct

investment in Canada.

Coughlin and Segev (2000) studied the location determinants of new,

foreign‐owned manufacturing plants in the U.S. The absolute number of new

plant transactions identified in the International Trade Administration

publications between 1989 and 1994 was used as dependent variable. Several

regional characteristic variables such as population, total personal income,

average wage rate, and others were used as independent variables. The authors

found that economic size, labor force quality, agglomeration and urbanization

economies, and transportation infrastructure positively affect the location of new

foreign‐owned plants, while unit labor costs and taxes deter new plants.

In the U.K., Kottaridi et al.(2004) indicated that cost factors (negative sign

for compensation of employees ) and agglomerative factors such as size of the

local market, good physical infrastructure, and R&D are the two most significant

regional factors which influence foreign investors’ decisions. They also suggested

that regions should continue to design their FDI attracting policies by taking into

consideration both costs and quality.

Another study investigated the location determinants of foreign firms in

Turkey (Berkoz & Turk, 2005). The city of Istanbul was used as the dependent

variable; infrastructure factors such as access to developed highways network,

number of international airports, labor factors, and some national policies were


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included as explanatory variables. The authors concluded that, at the provincial

level, infrastructure quality (especially communication infrastructure) is an

important element when attracting FDI to particular locations.

Pelegrín & Bolancé (2006) attempted to reveal the location determinants of

FDI in Spain. First they adopted a measure of FDI (gross effective foreign

investment) as dependent variable, as designated by the Spanish Department of

Trade and Investment. This was obtained by subtracting from the registered

value of gross foreign investment the acquisitions of shares by foreign investors

from other non‐ residents in Spain, and the multiple accounting of this same

operation caused by the restructuring of business groups in Spain. They used

regional characteristics believed to determine the choice of location, such as

market demand, labor market, manufacturing density, same industry activity,

concentration of services, and technical activity as explanatory variables. The

authors found that industries with a high level of linkages are attracted to

regions with high manufacturing activity. In addition, locations which

accumulate R&D activities attract high‐tech industries. One cost‐oriented

industry was found to not value agglomeration economies, being attracted

instead to regions with low salary levels.

Using data at the U.S. state‐level, Bobonis & Shatz (2006) employed a

partial stock‐adjustment model of real investment to describe the distribution of

FDI across the United States. In this model, FDI stock in state A from country B at


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time t is used as dependent variable. The lagged values of this variable, FDI stock

of adjacent‐state, are included as explanatory variables to demonstrate,

respectively, an own‐state agglomeration effect and an adjacent‐state, own‐

source‐country agglomeration effect. Labor market variables and state policy

variables are also used as explanatory variables. It was found that agglomeration

elasticity of investment is 0.11 to 0.15 with respect to same‐host‐country

investment, which was lower than previous estimates. It was also suggested that

targeted policies such as unitary taxation and state foreign offices influence

investment.

9. Discussion

Although the location determinants found in previous studies would

provide knowledge about factors affecting the geographic distribution of FDI,

and have policy implications for attracting FDI, a detailed and reliable database

for regional FDI analysis in the context of Canada’s provinces would still not be

available. In addition to searching for location determinants of FDI, this report

has attempted to investigate other useful secondary or primary sources in

Canada, in order to uncover FDI at the regional level. The Annual Survey of

Manufactures (ASM) and some regional investment records, such as the

Inventory of Major Alberta Projects, could be useful for studying the regional

distribution of FDI. The ASM is conducted by Industry Canada. According

to Trefler (2003), the ASM surveys approximately 35,000 Canadian


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manufacturing establishments; the data collected include output, employment,

hours worked, wages, value added, and destination of shipments by province,

and exports. Data covers the period of 1973‐1997, and continues on to 1999.

Trefler points out two features of the ASM that make it potentially useful

for the study of regional distribution of FDI. First, the ASM has its own

geographical code, the “Manufacturing Geographical Code” (MGC). By

consulting the MGC, it becomes possible to track the location of a manufacturing

establishment. Second, the ASM provides information on “Inter‐Corporate

Ownership” and “Country of Control (CNTL)”. However, the ASM is limited in

its usefulness for the purposes of this report, for the following two reasons. First,

although the country of control for manufacturing establishments is identifiable,

the amount of investment made by foreign investors is not collected by the ASM.

Therefore, quantified foreign investment information cannot be obtained from

this source. Second, the ASM only gathers information for Canadian

manufacturing establishments. Information on other industrial sectors, such as

the service and retailing industry, and the financial and insurance industries,

would not be included in the ASM.

The Inventory of Major Alberta Projects posted on the Government of

Alberta website reports on all of the major projects that are planned or underway

in Alberta. However, ownership and foreign investment information is not

included on the list.


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Due to the lack of information on the foreign ownership component

inherent in these databases and resources, FDI data could not be obtained from

them.

It may be concluded that owning a database for foreign direct investment

(like the database maintained by the U.S. Department of Commerce) would be an

ideal solution for furthering the study and analysis of regional FDI distribution.

This leads to the next stage of discussion, which is whether or not it would be

beneficial to implement a law similar to the U.S. International Investment and

Trade in Services Survey Act. That would ensure that sufficient FDI information

could be obtained in order to build a substantive database. The existing law, the

Investment Canada Act, only allows for the capture of a limited part of FDI

activities. The Investment Canada Act requires a permission report for large

takeovers of existing Canadian firm by foreign residents. The establishment of a

new business by non‐resident investors requires a permit from the local

government, but this does not have to be reported to Investment Canada. There

is a potential loss of data from this policy. For example, a $3 million merger

between a Canadian and Indian firm will be recorded by Investment Canada.

However, a substantially larger foreign‐based initiative may not be recorded by

Investment Canada and would not appear in any database. When there are gaps

in information, numerous cases of non‐reporting and inconsistent enforcement, it


29

is not possible to maintain a database as detailed and utilitarian as the one

managed by the U.S. Department of Commence,

To further investigate the question of whether or not we need to enact a

specific law in order to obtain a desired database, a benefit and cost analysis

would be required. Taking into account that the law is costly for foreign

investors and may discourage some from coming to Canada, it is my opinion that

the benefits of having such as a law, in order to obtain more comprehensive FDI

data, outweigh the cost.

10. Conclusion This report has reviewed the literature of recent findings in Foreign Direct

Investment (FDI) and discovered the databases pertaining to FDI in Canada and

in other countries. By discussing with Statistics Canada officials and other trade

experts further information on the possibility of obtaining FDI data at the

provincial level has been gained. This report also has explored how to obtain the

provincial distribution of FDI through secondary or primary sources. However,

we were unable to ascertain the “foreign investment percentage” due to legal,

regulatory and other barriers to obtaining this information, the lack of

information on the foreign ownership component in other databases, like the

ASM and the Economic Development Projects Database. The original objective of

developing a mechanism for maintaining an FDI‐by province data base could not

be fulfilled without arriving at such a database. Therefore one part of the third as


30

well as our fourth objective could not be achieved, although our report explored

and pointed out how such data are obtained by the U.S. Government.


31

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an analysis of fdi in canada and alberta

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