Statistics Canada’s announcement last month that Canada attracted $96.8 billion in foreign direct investment (FDI) in 2025 — the biggest FDI inflow since 2007 — sounded like good news. The prime minister was quick to cite it as evidence of investor confidence in the Canadian economy. Others might point to the fall in Canadian direct investment abroad, from $123 billion in 2024 to $79.4 billion in 2025, as evidence Canadians are deciding to keep their capital at home.
But there’s investment and then there’s investment. Much foreign investment consists of foreigners buying already existing Canadian assets. That’s good news in a way: it indicates they see opportunities in Canada. But the investment that matters for our productivity — the investment that has been so weak for a decade that our living standards are falling — is spending on new capital, such as infrastructure, machinery, equipment and intellectual property, that equips Canadian workers to do their jobs. Without this capital investment that creates new assets, we can take little comfort from the FDI flows that often simply reassign the ownership of existing assets. Nearly half of last year’s inflow came through mergers and acquisitions of existing Canadian businesses, well above the historical norm of around one-third. That’s not new capital creation.
The number the prime minister and all Canadians should focus on is domestic capital investment: the structures, physical tools, knowledge and software that complement labour to produce goods and services. Adjusted for inflation and growth in the labour force, business investment in all major types of non-residential capital is down since its 2014 peak. Investment in non-residential structures per worker is down 32 per cent from its peak a decade ago. Machinery and equipment investment per worker is 29 per cent lower. Even investment in intellectual property — which is booming in the United States — is three per cent below its high.
In total, non-residential business investment per worker is nearly a quarter below its 2014 peak. Over the past decade, investment in new capital has lagged the rate at which existing capital wears out and goes obsolete. That means our capital stock per worker is actually declining.
The prospects for a turnaround in 2026 appear weak. Current StatCan investment projections show total non-residential capital spending across all industries rising by less than two per cent in real terms. Strip out government capital programs, which are important but don’t get the same cost-benefit scrutiny private projects do, and the picture is even more subdued. More than half of all sectors are planning to scale back their capital expenditures. At the same time, firms are signalling reductions in their workforces, a trend already beginning to show in the latest employment data. Federal commitments such as the Major Projects Office and subsidies for specific sectors have not yet produced a measurable private-sector response. Weak capital expenditure growth today means weaker productive capacity, lower output per worker and diminished real wages tomorrow. This is the channel through which Canada’s long-running productivity underperformance gets locked in, year after year.
There are rays of hope, however, including from the silver lining that higher fossil fuel prices because of the Middle East war are raising the value of Canada’s most important exports. Canada enters the CUSMA review year with an economy that, despite a soft finish, grew in the past year — something many of us thought unlikely at the beginning of 2025. Household consumption has held up despite credit stresses, while the government’s infrastructure commitments do seem to signal its intent to strengthen long-run productive capacity. Export diversification is also trending in the right direction.
But the FDI headline is not really a harbinger of hope. Foreign acquisitions of existing Canadian assets mainly inform us about the appeal of a weaker Canadian dollar, strategic positioning ahead of CUSMA review, or simply the opportunistic acquisition of undervalued assets in an uncertain environment. But so long as per-worker business investment continues to be so weak Canadians will not enjoy productivity growth and durable wage gains.
Although optimism about the FDI numbers is understandable in a challenging political moment, the indicator that really counts is, not cross-border flows, but the amounts that businesses are committing in domestic capital that will augment Canadian workers’ efforts, and make us more productive, more competitive and richer. Until that turns around, Canada’s investment crisis is deepening, whatever the FDI numbers may say.
Mawakina Bafale is a research officer at the C.D. Howe Institute, where Peter MacKenzie is a senior policy analyst and William Robson is president emeritus and fellow in residence.