For the period 2001-2007, Canada ranked only 25th among 98 countries in its openness to world markets as measured by cross-border investment flows as a percentage of GDP. For inbound investment flows alone, it ranked 47th. Canada should look to dismantle barriers to both inbound and outbound foreign investment to increase business exposure to global competition.international policy, foreign direct investment, direct investment abroad

Jack Mintz

Matt Krzepkowski

English

Research Papers in Economics

e-brief
Squeaky Hinges: Widening the Door 
to Canadian Cross-border Investment
By Matt Krzepkowski and Jack Mintz
While foreign direct investment has been a controversial issue in Canada, the reality is that Canada’s openness to world
capital flows, both inbound and outbound, is not impressive by world standards. This lack-lustre performance is
problematic considering the net benefits derived from greater access to global capital and technology markets.
Emotions on the issue run high. Sharp increases in the number and size of mergers and acquisitions by foreign
investors, like those involving Falconbridge, Inco, Alcan and Cognos, have raised fears of Canadian industry being
hollowed-out by foreign corporations operating in their own interests and against those of Canadians. These fears, in
2007, led to calls for then-Industry-Minister Jim Prentice to consider blocking more cross-border acquisitions, to
which he responded by launching a Competition Policy Review Panel. 
What are the smart policy responses for Canada? To consider that question, this e-brief examines the broader
context of investment flows, which suggests Canada should, in fact, be concerned about low levels of both inbound and
outbound investment.
While inbound investment into Canada sharply picked up in the first half of 2007 (exceeding outbound investment
flows), this matched worldwide trends. Measured by the International Monetary Fund, net inflows into Canada have only
deviated considerably from the trends of 30 OECD countries twice (Figure 1):
1once during the technology boom of
1999-2000 and again more recently as commodity prices boomed. Those are the only times that Canada has been a net
capital importer since 1995. 
More broadly, over the period 2001-2007, Canada ranked only 25th among 98 countries in its openness to world
capital markets as measured by the sum of inbound and outbound foreign direct investment in relation to its size as an
economy. Countries like the United Kingdom, Spain and France have been more open to international capital markets
than has Canada.
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November 27, 2008
 For the period 2001-2007, Canada ranked only 25th among 98 countries in its
openness to world markets as measured by cross-border investment flows as
a percentage of GDP. For inbound investment flows alone, it ranked 47th.
 In failing to be more open, Canada loses out on managerial and technological
expertise, increased human capital and productivity, and higher wages.
 Canada should look to dismantle barriers to both inbound and outbound foreign
investment to increase business exposure to global competition.
1 Direct investment abroad (net outflows) and foreign direct investment (net inflows) in the reporting economy represent the change
in the assets owned by investors in a country as cross-border investments. Direct investment includes equity capital, reinvested
earnings, other capital and financial derivatives associated with various inter-company transactions between affiliated enterprises that
are at least 10 percent owned by the parent. Excluded are flows of direct investment capital for exceptional financing such as debt-
for-equity swaps. See International Monetary Fund, International Financial Statistics (August 2008) and the International Monetary
Fund’s Balance of Payments Manual (Fifth edition 1993).Too much FDI does not seem to be Canada’s problem, especially now when credit markets are making it more difficult for
businesses to acquire funds for investment.
Why Inbound and Outbound Investment Flows Are Important
The economic cost to Canada in failing to be more open to world economic capital flows is significant: we lose out on managerial
and technological expertise imported here, as well as the income that comes from Canadian businesses succeeding abroad. 
Allowing international investments into Canada also has a positive effect on the Canadian economy. Foreign companies bring
in technological advancements from international R&D markets, increasing human capital and productivity, and leading to higher
wages. These technologies and innovations may also spill over to domestic firms, increasing their productivity. Foreign-controlled
companies in Canada are often more productive than Canadian-controlled companies (see Guillemette and Mintz 2004, and
Statistics Canada 2008), and foreign-controlled subsidiaries are more active in trade than domestic firms, with higher imports and
exports relative to sales. True, Canadians worry that foreign companies are less sensitive to Canadian concerns, contributing less
to communities, for example, but little evidence exists to support such claims.
The overall advantages of open trade in capital markets should push Canada to consider lowering, rather than raising,
barriers to integration with the rest of the world. Business tax reductions and regulatory relaxation in economies such as
Luxembourg, Hong Kong, the Netherlands, and the United Kingdom have increased FDI inflows and outflows, leading to higher
economic growth rates (Li and Liu 2005).
INDEPENDENT REASONED RELEVANT
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OECD (30 countries) G7 (7 countries) Canada United States
Figure 1. Ratio of FDI Inflows to GDP for Selected Countries and Country Groups
Sources: FDI flows: International Monetary Fund, International Financial Statistics, August 2008; GDP: United Nations Statistics Division, United Nations Common 
Database, May 2008.2 All merger and acquisition statistics from Crosbie & Company Inc., various years.
Canada’s Exposure to World Capital Markets Not Extraordinary
Despite a recent influx of investment in 2006 and 2007, Canada still ranks 47th out of 98 industrialized and developing countries
when measuring FDI inflows as a share of GDP, with the average over the 2001-2007 period being 3.7 percent of GDP (Table 1).
While Canada’s average FDI inflow has increased from our 1994-2000 average of 3.4 percent, other countries have made bigger
gains, and Canada has fallen from 37th rank. On the positive side, Canada has shown more strength in FDI net outflows, and from
2001 to 2007 was consistently above the OECD average (Figure 2). Canada’s average over the period 2001-2007 was 3.9 percent, 
a slight increase from the 3.7 percent in the 1994-2000 period. Canada’s rank held steady at 13th among 98 major countries.
For this study, we calculate the sum of inflows and outflows as a share of GDP to measure how ‘open’ a country is to
international capital flows. Under this specification, Canada ranks 25th out of 98 major countries based on results for 2001-2007.
Despite Canada outperforming many nations in 2007, its rank has still fallen seven spots since the 1994-2000 period.
It appears that the events in 2006 and 2007 were more of a spike than the sign of a new trend, with the inflow of capital as
well as the size and number of transactions falling dramatically after a peak in the second quarter of 2007. During the second
quarter, a record $166 billion in transactions took place, while in the third quarter this value dropped to $91 billion (with the
acquisition of Alcan Inc. by Rio Tinto Group accounting for $40 billion).
2This decline has carried into 2008, with total
transactions amounting to $24.3 billion in the first quarter, and only seven transactions over $1 billion, compared to 13 in the 
first quarter of 2007. Since the potential benefits of foreign investment in Canada have not diminished, Canada should ensure 
that it is a more attractive destination.
INDEPENDENT REASONED RELEVANT
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OECD (30 countries) G7 (7 countries) Canada United States
Figure 2. Ratio of FDI Outflows to GDP for Selected Countries and Country Groups
Sources: FDI flows: International Monetary Fund, International Financial Statistics, August 2008; GDP: United Nations Statistics Division, United Nations Common 
Database, May 2008.| 4 e-brief
INDEPENDENT REASONED RELEVANT
1 Luxembourg
a 334.7 1 374.9 1 709.6 0
2 Iceland 10.8 7 26.2 2 36.9 60
3 China, Hong Kong Special 
Administrative Region
b 17.7 2 16.5 3 34.2 0
4 Singapore 14.9 4 7.9 7 22.8 0
5 Belgium
a 11.3 5 10.5 4 21.9 -4
6 Hungary 10.8 6 7.7 8 18.5 6
7 Netherlands 6.8 20 9.4 6 16.3 0
8 Bulgaria 15.0 3 0.3 55 15.3 35
9 Switzerland 4.2 35 9.8 5 14.0 4
10 Ireland 5.3 27 7.1 9 12.4 -1
11 Kazakhstan 10.0 10 0.3 54 10.3 11
12 United Kingdom 5.1 30 5.1 13 10.2 -6
13 Georgia 10.1 8 0.0 92 10.1 15
14 Lesotho 10.0 9 0.0 90 10.0 -7
15 Jordan 9.7 11 0.2 64 9.9 44
16 Sweden 4.2 37 5.5 11 9.7 -8
17 Spain 3.6 48 6.0 10 9.6 6
18 France 3.7 46 5.3 12 9.0 1
19 Chile 6.8 19 2.0 25 8.9 -4
20 Jamaica 7.4 14 1.0 33 8.4 10
21 Israel 4.5 33 3.6 16 8.1 29
22 Croatia 7.0 17 1.0 35 7.9 19
23 Slovakia 7.6 13 0.3 56 7.9 34
24 Trinidad and Tobago 8.2 12 -0.3 97 7.9 -15
25 Canada 3.7 47 3.9 14 7.5 -7
26 Czech Republic 7.0 18 0.5 47 7.4 1
27 Congo 7.2 16 0.1 69 7.3 -10
28 Belize 7.2 15 0.1 84 7.3 12
29 Aruba 6.5 21 0.1 74 6.6 -3
30 Republic of Moldova 6.4 22 0.1 80 6.5 13
31 Austria 2.9 60 3.5 17 6.5 21
32 Cambodia 6.3 23 0.2 65 6.5 -7
33 Romania 6.2 24 0.1 82 6.3 28
34 Portugal 3.3 52 3.0 19 6.3 2
35 Botswana 4.5 32 1.7 27 6.3 41
36 Malaysia 3.3 50 2.8 20 6.1 -17
37 Latvia 5.4 26 0.7 44 6.1 -8
38 Finland 3.2 55 2.7 21 5.8 -25
39 Cape Verde 5.7 25 0.1 79 5.8 -5
40 Colombia 4.4 34 1.0 31 5.5 11
41 Fiji 5.2 28 0.1 66 5.4 -14
42 Denmark 2.2 66 3.1 18 5.3 -30
43 Ukraine 5.1 29 0.1 67 5.3 38
44 Norway 1.3 81 3.8 15 5.1 -20
45 Slovenia 3.0 57 1.9 26 4.9 39
46 Russian Federation 2.6 62 2.3 22 4.9 30
47 Poland 4.0 40 0.8 38 4.8 -2
48 Lithuania 4.0 39 0.7 43 4.7 -1
49 The former Yugoslav Republic of Macedonia 4.6 31 0.0 89 4.6 20
50 Kyrgyzstan 3.8 44 0.8 39 4.6 -14
51 Thailand 4.1 38 0.4 52 4.5 -1
Rank
by FDI
Sum  
Country or Area Name FDI Inflows
(% of GDP)
Rank by
Inflows
FDI
Outflows
(% of GDP)
Rank by
Outflows
Sum of Inflows
and Outflows
(% of GDP)
Change
in Rank
Table 1: Country Ranking by the Ratio of Foreign Direct Investment Net Inflows and Net
Outflows as a Percentage of GDP (Averaged over 2001–2007 for 98 Countries)52 Tunisia 4.2 36 0.2 61 4.4 12
53 China 3.9 41 0.4 50 4.3 -20
54 Costa Rica 3.9 42 0.3 58 4.1 -5
55 Uruguay 3.8 43 0.1 76 3.9 29
56 Brazil 3.0 56 0.9 36 3.9 -2
57 Mali 3.7 45 0.1 71 3.9 17
58 Mexico 3.2 54 0.6 46 3.8 -13
59 Australia 2.1 68 1.7 29 3.8 -1
60 Germany 1.4 78 2.2 23 3.7 -28
61 Peru 3.4 49 0.1 70 3.6 -25
62 Italy 1.4 79 2.1 24 3.5 21
63 Bolivia 3.2 53 0.0 87 3.3 -46
64 El Salvador 3.0 58 0.1 68 3.1 -9
65 Egypt 2.9 59 0.1 78 3.0 16
66 United States 1.3 82 1.7 28 2.9 -21
67 Togo 3.3 51 -0.4 98 2.9 2
68 Turkey 2.6 64 0.3 59 2.8 24
69 New Zealand 2.8 61 0.1 83 2.8 -34
70 Morocco 2.6 63 0.2 60 2.8 24
71 Netherlands Antilles 2.0 69 0.7 42 2.7 20
72 Argentina 2.1 67 0.4 51 2.5 -31
73 Venezuela 1.4 80 1.0 32 2.4 -33
74 Cameroon 2.3 65 0.0 86 2.4 12
75 Philippines 1.6 75 0.6 45 2.2 -14
76 South Africa 1.9 71 0.3 57 2.2 -9
77 Libyan Arab Jamahiriya 1.7 73 0.5 48 2.2 20
78 Solomon Islands 1.8 72 0.2 63 2.0 -23
79 Pakistan 1.9 70 0.1 85 2.0 6
80 Indonesia 0.7 93 1.2 30 1.9 7
81 Greece 1.0 91 0.7 41 1.6 -11
82 Mauritius 1.2 85 0.3 53 1.6 -21
83 India 1.1 88 0.4 49 1.6 6
84 Korea, Republic of 0.6 96 0.8 40 1.4 -12
85 Belarus 1.6 74 -0.2 93 1.4 -7
86 Sri Lanka 1.3 83 0.1 73 1.4 -7
87 Swaziland 1.5 76 -0.3 94 1.3 -65
88 Benin 1.3 84 0.0 88 1.3 -15
89 Gabon 1.5 77 -0.3 96 1.2 10
90 Paraguay 1.1 87 0.1 77 1.2 -27
91 Senegal 1.0 90 0.2 62 1.2 -20
92 Barbados 1.0 89 0.1 72 1.2 -4
93 Japan 0.2 97 1.0 34 1.1 -1
94 Niger 0.9 92 0.1 75 0.9 -1
95 Namibia 1.2 86 -0.3 95 0.9 -35
96 Kuwait 0.0 98 0.8 37 0.9 0
97 Kenya 0.7 95 0.1 81 0.7 -4
98 Bangladesh 0.7 94 0.0 91 0.7 -4
Table 1: Country Ranking by the Ratio of Foreign Direct Investment Net Inflows and Net
Outflows as a Percentage of GDP (Averaged over 2001–2007 for 98 Countries)
INDEPENDENT REASONED RELEVANT
e-brief / 5
Rank
by FDI
Sum  
Country or Area Name FDI Inflows
(% of GDP)
Rank by
Inflows
FDI
Outflows
(% of GDP)
Rank by
Outflows
Sum of Inflows
and Outflows
(% of GDP)
Change
in Rank
Sources of data:
FDI flows: International Monetary Fund, International Financial Statistics, August 2008;
GDP: United Nations Statistics Division, United Nations Common Database, May 2008.
Notes: 
a. The averages for Luxembourg and Belgium are over the period of 2002-2007. Prior to 2002, the combined FDI inflows and outflows were reported for these countries. The
Belgium-Luxembourg combined averages over 2001-2007 for FDI inflows, outflows, and sum of inflows and outflows are equal to 38.2%, 41.3%, and 38.2% of GDP, respectively. 
b. Hong Kong is China's Special Administrative Region. INDEPENDENT REASONED RELEVANT
/ 6 e-brief
Policy Changes are Necessary
The recent report by the Competition Policy Review Panel (2008) made a number of important recommendations to improve
Canada’s competitiveness. Overall, it supported the view that Canada should look to dismantle barriers to both inbound and
outbound foreign direct investment to increase business exposure to global competition. Policy innovations would include
removing limitations on ownership in transportation, communications and finance. Less government ownership of business
enterprises would also reduce barriers to investment in these sectors. Tax policies, such as high withholding taxes on dividend
payments to non-residents negotiated under bilateral treaties, make Canada less open to outbound or inbound FDI, and these
could be lowered or eliminated. 
The guiding principle behind these policy recommendations is straightforward – Canada should treat domestic
businesses the same, regardless of the sector in which they operate, and treat all businesses operating in Canada identically,
irrespective of ownership. Canada’s domestic tax and competition laws should be applied fairly to both domestic and foreign
corporations to ensure unbiased competition and equitable taxation, enabling the economy to reap the full benefits of access
to international markets.References:
Competition Policy Review Panel. 2008. Compete To Win. Industry Canada.
Guillemette, Yvan, and Jack M. Mintz. 2004. “A Capital Story – Exploding Myths Around Foreign Direct Investment in Canada.”
Commentary 201, Toronto: C. D. Howe Institute, Toronto.
X. Li and Xiaming Liu. 2005. “Foreign Direct Investment and economic growth: An increasingly endogenous relationship.” World
Development 33 (3): 393-407.
Statistics Canada. 2008. “Foreign Control in the Canadian Economy.” Daily, July 10, Ottawa.
This e-brief is a publication of the C.D. Howe Institute.
Matt Krzepkowski is a graduate student in economics and Jack Mintz is the Palmer Chair in Public Policy at the University of Calgary and 
a Fellow-in-Residence at the C.D. Howe Institute.
For more information contact Jack Mintz at 403-210-6112.
This e-brief is available at www.cdhowe.org.
Permission is granted to reprint this text if the content is not altered and proper attribution is provided.
INDEPENDENT REASONED RELEVANT
e-brief / 7

Squeaky Hinges: Widening the Door to Canadian Cross-border Investment

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