FDI erosion weakens Canada’s productivity growth

Canada’s share of FDI has dropped significantly in recent decades, which is one of the reasons labour productivity numbers are weak, says the Conference Board of Canada.

April 14, 2011   by PLANT STAFF

OTTAWA: Canada may still be attracting slightly more than its fair share of foreign direct investment (FDI), but its share has dropped significantly in recent decades, which is one of the reasons labour productivity growth is weak, says the Conference Board of Canada.

The Ottawa-based research group’s How Canada Performs benchmarking analysis reveals Canada’s share of global FDI relative to its share of global GDP is still greater than one, meaning we’re getting more investment from abroad than our economic size warrants.

But the data shows inward investment flows dropped to 3% in 2009 from 16% in 1970, while the US share rose from 8% in 1970 to 29% in 1986, before falling to 12% in 2009. China’s share of global inward FDI flows grew from almost zero in 1970 to 11% in 2009.

“The fact that Canada’s ranking is slipping is an issue, because inward FDI boosts productivity by providing access to new technology, business and manufacturing processes and management know-how. As well, inward FDI helps to foster a more competitive and innovative business environment,” said Louis Thériault, director of the Conference Board’s International Trade and Investment Centre.

“The low Canadian dollar helped to maintain our international competitiveness, in spite of weak productivity growth,” he said. “Now that the loonie is at par with the US dollar, Canada needs investment to make its firms more productive.”

The Conference Board’s analysis found a positive relationship between inward FDI stock as a share of GDP and labour productivity among 17 countries. In 1980, Canada had the second-highest share of inward FDI stock relative to GDP. In 2009 it was ranked tenth.

The How Canada Performs website presents data and analysis on Canada’s performance compared to 16 peer countries in six performance categories: Economy, Innovation, Environment, Education and Skills, Health, and Society.

The Conference Board says Canada’s economy grade is expected to stay in the middle of the pack, with a high C and in ninth place this year, down from a low B and tenth place in 2010.

A drop from sixth place in 2009 to ninth this year is not because Canada’s economy is doing worse: in fact, the Conference Board says performance has improved in seven of the eight indicators. It’s because the economic improvement of its peers is even stronger.

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