Foreign Direct Investment in Canada Term Paper

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This investment would become the most prevalent in the period after World War 2 British economic power declined and the U.S. became predominant ("Our History").

While in the paper industry U.S. FDI was not as prevalent till the 20th century after the Second World War, in the recovery and processing of minerals this occurred in the late 19th and early 20th century as gold, nickel, zinc and other nonferrous metals. This created a mining industry in which U.S. And a lesser amount of British capital soon played roles. Goldwas extracted first by individuals then by large-scale, capital-intensive methods. Established American mining companies set up Canadian branches to carry on this type of prospecting activity such as furnishing skills and capital as well as experience.

From the first, base-metal deposits were exploited in the main by companies that were established and controlled by U.S. mining firms. In the 1920s, U.S. companies in other industries began to operate sub-branches in Canada on a large scale. Manufacturing companies set up branches to serve the Canadian market. In this way they avoided high freight costs and import duties. In addition, U.S.-owned Canadian plants benefited from the fact that products manufactured in Canada were admitted with preferential tariff rates to other British Empire countries (Cranstone, pp. 5-12).

Needless to say the 1929 Black Friday stock market crash and the resulting Great Depression put a brake on practically all forms of FDI that lasted throughout the Second World War. The increasing population of Canada and its growing affluence made the Canadian market highly attractive to U.S. firms. More manufacturers of consumer products set up branches, as did retail and financial firms and suppliers of equipment and services required by business firms. After World War II, the trend was reversed (ibid, pp. 12-13).

Goods and services that were produced in the Canadian branch plants of U.S. corporations might have been provided by Canadian-owned enterprises. However, U.S. companies had the huge advantage of far greater capital and experience as well as strongly established and valuable contacts. U.S.-owned factories in the Canadian resource industries had completely reliable markets since parent plants in the U.S. bought all of their products. Many U.S.-manufactured goods were already very well-known in Canada.

Canadian branch plants tended to buy equipment and materials from their U.S. parent corporations the U.S. firms that regularly supplied the parent companies. Canadian-owned firms simply could not compete effectively against the American-owned branch plants that had these advantages. This set of arrangements carried on well into the 1990s as the American and international corporate efforts led to what has been called "deep integration" of the U.S., Canadian and Mexican economies in the age of globalization (Campbell and Finn, pp. 9-10).

The Transition to GATT and NAFTA and International Capital

The presence of giant, foreign and internationally-owned companies has made it difficult for the government to stabilize the Canadian economy. This has continued into the twenty-first century with the establishment of the General Agreement on Tariffs and Trade (GATT) and the North American Trade Agreement (NAFTA).

Despite criticisms that have been heaped upon GATT and NAFTA, between 1993 and 1997, real trade between Canada and the U.S. increased by more than 50%. In this same period, Central Canadian exports to the Southwest and Rocky Mountain regions of the U.S. As well as Eastern Canadian exports to the Southeast of the America increased collectively by in excess of 110%. In contrast to this, real imports from Eastern Canada to the Great Lakes, Plains, and Southeast regions of the U.S. were actually far lower in 1997 than they were in 1993. Additionally real Canadian exports to the country of Mexico increased in excess of 46% over this period. Those from section of Western Canada rose in excess of 90%. Those from section of Eastern Canada rose by less than a paltry 1% (Wall, p. 1).

Canadian trade in the 1980s constituted about l6% of all U.S. exports and imports. Canadian shares rose considerably by 1985. They then stayed there in the following years. Then, in 1998, Canadian goods accounted for a huge 22.7% of U.S. exports as well as 18.8% of American imports. Thus, there was a noticeable increase in U.S. trade with Canada, although the rapid growth in share was concentrated in the early 1980s.

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From the Canadian vantage point, trade with Mexico was relatively unimportant prior to NAFTA, accounting for only around a half a percent of Canadian exports and 1.5% of Canadian imports. Canadian exports to Mexico almost doubled from 1990 to l998 and this share was relatively constant while Canadian imports from Mexico increased from around 1.2% in 1990 to about 2.5% by 1998. Thus without a doubt, free trade has been a success in Canada's favor as well as its American and Mexican counterparts and has increased the flow of FDI not only into Canada but has also spurred Canadian investments in the U.S. And Mexico as well (Krueger, p. 8).

Certainly, America looms large in Canadian trading patterns by any estimation. The United States already accounted for 61% of Canada's foreign exports in 1980 alone. That share rose to 75% by 1990 and then reached 86.5% by 1998. On the import side, the share of Canadian imports originating in the U.S. has remained fairly steady at around two-thirds of the total. Thus, Canadian exports to the U.S. seem to have gained share for Canada, whereas Canada does not appear to have imported proportionately more from the U.S. after NAFTA (Ibid, pp. 8-9).

Since 1993, FDI in Canada has risen by 54%. It reached $218 billion in 1998. NAFTA has increased Canada's attractiveness as a magnet for FDI while also providing additional opportunities for Canadian citizens to invest in the other NAFTA economies. NAFTA ensures a greater certainty as well as stability for investment decisions by promoting fair, transparent and nondiscriminatory treatment by Canada of investments and investors. Capital investment has also improved markedly under NAFTA. Job growth has boomed and high-tech knowledge transfers have happened to Canada's benefit. Some 68% of Canada's total FDI comes from the investment of Canada's NAFTA partners.

This points to the United States in particular which remains the largest destination for Canadian FDI. This has not just resulted in the inflow of FDI to Canada. It has created investment opportunities for Canadians overseas as well. In 1998 alone, the stock of Canada's investments in the U.S. reached $126 billion. This was up 23% over 1997 and 86% during the first five years of NAFTA. These investments have been economically all across the board in Canada's favor and have hugely benefitted the country in a win-win fashion ("Foreign Affairs and International Trade Canada"). Certainly, NAFTA has not cost Canada in terms of jobs and standard of living, but has enhanced these significantly for the average Canadian and has made it possible for them to realize and join in the benefits of globalization that NAFTA has afforded Canada since NAFTA's inauguration in 1993.

Conclusion

To recap, in this short essay, the author has examined to what extent foreign direct investment was a necessary precondition for Canadian economic historical development. The author supported his opinion that direct investment was a necessary precondition for economic development as a colony and later as a sovereign state. As was noted, France's reality as a continental power that was less dependent upon maritime trade and this made her colonies less of an economic than a military and religious imperative. Indeed, the period of the beginning British ascendance was laid down with the establishment of the Hudson Bay Company came at the same time that the British East India Company, the British Africa Company and the Dutch East India Companies were laying the cornerstones of modern corporate capitalism. In essence, the British Hudson Bay company constituted not just foreign direct investment in Canada, but one of the first four examples of it on the planet in the modern sense of the word. The pattern of British FDI set the pattern for the U.S. And later globalist model for FDI in Canada.

All in all, Canada has gained tremendously from FDI. It has tremendously boosted both Canadian exports and logically has contributed much to Canada's strong position vis a vis the United States and so many other countries during the global recession. It has been this way since Canada's beginnings as a colony and will continue this way into the foreseeable future in our globalized world.

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