OTTAWA, May 15, 2012 /CNW/ - Outward foreign direct investment (FDI) by Canadian multinational firms does not take away from investment at home - it may even encourage more of the latter. A Conference Board of Canada study concludes there is no firm-based evidence that Canadian multinational corporations (MNCs) reduce their domestic investment when they invest abroad.
"Outward foreign direct investment is a contentious policy issue in most developed economies. Public concerns have existed for decades and may have increased in recent years, particularly when MNCs are perceived to be "offshoring" production to emerging economies," said Steven Globerman, author of report for the Conference Board's International Trade and Investment Centre (ITIC) (http://www.conferenceboard.ca/ITIC/default.aspx).
"From the evidence presented in this study, outward FDI and domestic capital investment are more likely to be complementary, rather than substitutes. If anything, outward FDI appears to encourage domestic capital investment."
The report, Canadian Outward Foreign Direct Investment and Its Implications for the Canadian Economy (http://www.conferenceboard.ca/e-library/abstract.aspx?did=4812), examines whether economies would be "better off" if firms invested less in other countries.
The study is based on a review of the economic literature and analysis of a sample of 22 Canadian multinational corporations. Companies are matched by line of business and total revenue, but the firms differed in foreign assets as a percentage of their total assets (outward FDI intensities).
The research identified two strategic motives for companies to undertake outward FDI - expanding the market for the firm's products, and acquiring material resources or other inputs into their production processes.
Critics of outward FDI argue that it lowers capital investment by domestic firms, especially with the perceived increase in offshore production, whereby MNCs relocate some or all of their value chain activities from home countries to foreign affiliates.
However, the analysis indicates that domestic capital investment generally was not a good substitute for outward FDI. When developing new markets or expanding existing markets were the primary motive, firms preferred outward FDI because it allowed them to locate closer to the market they sought to enter.
The findings suggest that public policies to discourage the growth of Canadian multinationals' outward FDI will not encourage significant investment in Canada. There is evidence that firms with higher outward FDI intensities enjoy greater sales growth. Furthermore, the study found a positive relationship between sales growth and headquarters expansion in the home country.
"From the evidence presented in this study, outward FDI and domestic capital investment are more likely to be complements than substitutes. That is, if anything, outward FDI appears to encourage domestic capital investment," said Globerman, Kaiser Professor of International Business and Director of the Center for International Business at Western Washington University.
This is his second report for the ITIC; he previously co-authored Best Policy Practices for Promoting Inward and Outward Foreign Direct Investment (http://www.conferenceboard.ca/e-library/abstract.aspx?did=3834) in 2010.
Prof. Globerman's reports add to a series of ITIC publications that reinforce the importance of foreign direct investment to the Canadian economy. These include: Direct Investment Abroad: A Strategic Tool for Canada (2011), Trends in Foreign Direct Investment and Mergers and Acquisitions: International and Canadian Performance and Implications (2008), "Hollowing Out"—Myth and Reality: Corporate Takeovers in an Age of Transformation (2008), and The Benefits of Foreign Direct Investment: How Investment in Both Directions Drives Our Economy (2006).
All reports are publicly available at the Conference Board's e-library (www.e-library.ca) or at the ITIC website. Made up of organizations representing both the public and private sector, ITIC helps Canadian leaders better understand what global economic dynamics—such as global and regional supply chains, barriers to trade, U.S. policies, or tighter border security—could mean for public policies and business strategies.
For further information:
Brent Dowdall, Media Relations, Tel.: 613- 526-3090 ext. 448