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Market access, resources draw foreign investment to Canada

Foreign affiliates are responsible for a large share of Canadian exports and new data suggests their motivations for locating in Canada vary across industries.

The Office of the Chief Economist has produced an analysis on trade involving foreign affiliates (FA)—that is, majority foreign-owned companies operating in Canada. The analysis, entitled: Learning from Trading: What Motivates Foreign Affiliates in Canada , follows the recent development and release of FA trade data by Statistics Canada. The piece focuses on merchandise trade in goods-producing industries, where a large share of FA trade is conducted. The primary measure of analysis is the share of revenue derived from exports, the export to revenue ratio. The full piece can be found in the Office of the Chief Economist’s recently‑released report on Canada’s State of Trade: Trade and Investment Update–2018.

* The petroleum and coal products industry predominantly sells its products to distributors and wholesalers classified under a different industry, and as a result its low export to revenue ratio should be interpreted with caution.

The analysis produced three key findings. For one, FA tend to be more export-oriented than Canadian firms in general; while FA control 17.2 percent of all corporate assets in the Canadian economy, they generate 47.9 percent of all exports, and have a higher export to revenue ratio (26.3 percent) than the Canadian economy does as a whole (16.3 percent). The analysis also found virtually no difference between the export to revenue ratios of FA (45.4 percent) and of all firms (46.0 percent) in Canada’s manufacturing industry. In other words, foreign manufacturing firms locating in Canada export as much to the U.S. market as do domestic firms.

However, as a third key finding, the analysis also points to differences within subsectors of the manufacturing industry. FA operating in industries such as primary metal and mineral manufacturing have export to revenue ratios that exceed the industry average, whereas FA operating in industries such as machinery and equipment have export to revenue ratios that are well below the industry average.

The results of the analysis suggest that FA investment may be motivated by both direct and indirect market access. Evidence for direct market access can be seen in the machinery and equipment industry, where most of FA revenues are derived from sales in Canada’s domestic market. Evidence from other industries where the export to revenue  ratios of FA are larger than the aggregate—such as primary metal and mineral manufacturing—suggests that FA also invest in Canada for access to the U.S. market or access to resources.

The bottom line: FA in certain industries are drawn to Canada for access to the domestic market, while others are drawn to Canada for the access it provides to both the U.S, market and to resources. These findings reinforce the importance of free trade agreements in facilitating investment and stimulating the growth of global value chains.

View the Office of the Chief Economist’s report, Canada’s State of Trade: Trade and Investment Update–2018.

Submitted by the Office of the Chief Economist

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