Foreign investment in Canada declines after NAFTA

Locating here no longer necessary to doing business

Fewer U.S.-based multinational companies are investing in Canada since it formed the North American Free Trade Agreement (NAFTA) with the U.S. and Mexico in 1994, say researchers at the University of Toronto.

“U.S. multinationals no longer need to locate in Canada to access its market,” says Walid Hejazi, business professor at U of T’s Rotman School of Management and co-author of the study published in the Journal of Business Research in November. “In the past, foreign multinational enterprises would locate in this country to avoid paying tariffs. Now that there is free trade within North America, these companies can locate near wealthier and more productive environments in America and simply export to Canada.”

Hejazi and co-author Professor Emeritus A.E. Safarian of the Rotman School examined the impact of NAFTA on its member countries and on other countries. They compared the gross domestic product (GDP) of the U.S. to 52 countries from 1970 to 2002 and also looked at the amount of U.S. foreign direct investment in these countries over the same period. The researchers found that Canada only receives 10 per cent of U.S. foreign investment whereas Europe receives more than half; this contrasts sharply to 40 years ago when Canada received the same amount of U.S. foreign investment as Europe. Canada also holds three per cent of the world’s GDP compared to Europe, which has more than 20 per cent. However, the U.S. trades about the same amount with Canada as it does with Europe. NAFTA also resulted in more trade by the U.S. with wealthy countries whereas much of the U.S. trade with developing countries has been replaced by less expensive imports from Mexico.

“The answer to this foreign direct investment dilemma is to improve Canada’s productivity performance and its investment environment. This is a difficult challenge, and one that has received the attention of both policy makers and academics,” says Hejazi. The study was funded by the Donner Foundation.