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July 26, 2018 – Canada’s performance in attracting foreign direct investment (FDI) faces serious headwinds, according to a new report from the C.D. Howe Institute. In “Foreign Direct Investment in Canada – The Case for Further Openness and Transparency” author Daniel Schwanen makes a case for more open and transparent foreign investment rules in Canada.

Net flows of FDI into Canada are showing a worrisome trend, dropping sharply as a share of world FDI since 2014 and even, in 2017, falling behind net FDI flows into Australia, a smaller resource-based economy, and those into Mexico, another country affected by NAFTA uncertainty. Uncertainty over the fate of NAFTA and access to the US market – and recently enacted US corporate tax reform – are weighing on otherwise strong investment intentions in Canada generally for 2018.

“Canada’s share of global foreign direct investment has been on a noticeable downward trend and has recently been buffeted by severe negative economic and political forces,” Schwanen says.  “It raises questions about the purpose of maintaining barriers to foreign direct investment at a time of economic uncertainty.”

One widely cited measure of the extent of barriers to FDI in any one country is the OECD’s FDI restrictiveness index. Canada ranks very low in terms of openness on this index relative to its peer countries. Canada’s low ranking is mainly due to its scores for continued foreign equity restrictions across a number of sectors, and its screening and approval procedures for FDI. In most sectors, Canada’s formal barriers are surpassed only by those of New Zealand, Mexico, China and Russia

Specifically, barriers to foreign investments include redundant screening mechanisms for foreign acquisitions above a certain threshold that require the investor to show a “net benefit” to Canada, and restrictions on equity investment in Canadian sectors or companies.

There are a number of ways in which Canada could address these restrictions. Key recommendations in the report include:

  • When a particular proposed investment is not in the national interest and must be rejected, it is incumbent upon the government to declare so.
  • When the government refuses an investment, it should explain its reasons for rejecting the investment on principled grounds.
  • In the same vein, Canada’s remaining restrictions on share ownership in an industry or company should be eliminated, retaining only those that are necessary to achieving clear public policy objectives and do not discriminate among investors.

“The Canadian government is openly seeking to attract FDI to boost the country’s economic competitiveness,” Schwanen concludes. “At the same time, it maintains provisions that are significantly more restrictive toward FDI than those of Canada’s main competitors. Canada needs to open its doors to investment.”

Click here for the full report.

The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.

For more information, please contact: Daniel Schwanen, Vice President of Research, or Maria Mikey, Communications Coordinator, C.D. Howe Institute at 416-865-1904 or mmikey@cdhowe.org