Why Still Choose Canada?
It has been stated time and time again that Canada is a great location for foreign direct investment and acquisitions. The three primary reasons are due to its market access, business environment and its educated and diverse labour force. Of the aforementioned reasons, market access is what initially attracts foreign investors to acquire a Canadian company or to expand into Canada.
Canada’s market access advantage is heavily due to its trade agreement under the North American Free Trade Agreement (NAFTA) which eases business trading between Canada, the United States, and Mexico. Furthermore, the current Canadian government is finalizing, the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) which, when combined with NAFTA, accounts for $37 trillion USD in GDP of the various economies. The latter totals half of the world’s output for goods and services which will be available for trade with Canada. The addition of the TPP would add another 10% of the world GDP under trade agreements with Canada. Should the statistics be correct, Canada is bound to experience greater GDP growth due to the elevated trade flows, in turn resulting in an attractive corporate environment due to its market trade access.
Since the election of President Trump, Canada’s clear market access advantage has left many with uncertainty going forward. With the NAFTA partners entering negotiations, many speculate that it can result in multiple changes. Those changes may particularly impact agribusiness and forestry of which the latter can be severely affected by certain modifications. In fact, the beef industry in Canada relies on U.S. consumption for over 70% of its export sales while it has been stated that softwood lumber may experience quotas with regards to shipments entering the United States via Canada. Further specific industry negotiation details can be found in the article entitled “If Canada were the Big Winner in the NAFTA Negotiation”.
With the first few rounds of negotiations completed, no clear signs of a U.S. departure nor any major changes have occurred to NAFTA. According to the Canadian Manufacturers & Exporters Association, the first few negotiations showed an openness to renegotiate terms by the U.S. rather than wanting to leave NAFTA. This proves to be positive for Canada and Mexico. No one truly knows what could occur should the United States pull out of NAFTA. However, it can be assumed that many companies may decide to establish a physical presence in the U.S. in order to have access to its market. This could negatively affect FDI and acquisitions in Canada, while mildly affecting Mexico since they still will have extremely competitive wages.
Although market access is one of the primary benefits to investing in Canada, there are other key reasons why companies choose to reinvest or invest in Canada versus relocating facilities to the US. The quality of labour in Canada is quite elevated. In comparison to the United States, 59% of Canada’s population has a college degree in comparison to 46% in the USA. Furthermore, as presented in the illustration below, several important factors affecting quality of life depicts advantages favouring Canada to its neighbor south of the border. Such advantages include: employment rate, home ownership rate, average vacation days, and the average life expectancy rate.
The Index of Economic Freedom is a measurement tool which measures a country’s rule of law (property rights, government integrity, judicial effectiveness), government size (government spending, tax burden, fiscal health), regulatory efficiency (business freedom, labour freedom, monetary freedom), and open markets (trade freedom, investment freedom, financial freedom). According to the 2017 Index of Economic Freedom, Canada ranks 7th while the United States ranks 17th and Mexico 70th, demonstrating another favourable reason supporting foreign corporate investment in Canada.
In 2017, Canada remains a favourable destination for foreign direct investors. According to a study conducted by KPMG, Canada currently has the lowest business costs among the G7 countries with a 14.6% cost advantage over the United States. In comparison to the United States, Canada’s average business costs are even lower in knowledge-based areas including 27.7% in Research & Development Services and 26% in Digital Services.
Although Canada does possess several individualistic advantages, it is a stronger country with the presence of NAFTA. As mentioned previously, Canada currently has trade agreements with 50% of the world’s GDP, and if we include the TPP, the total GDP under trade partnership is brought to 60%. Free-trade agreements combined with Canada’s highly educated workforce, business environment, and elevated economic freedom index score strengthens Canada’s potential to continuously attract foreign investors and expansion projects.
With the negotiations to span the remainder of 2017, CAI will be following it closely in order to better educate our business partners and clients on how they could be affected.
|Vito A. Italia, MBA, Consultant, The CAI Global Group Inc.
Since joining the company in 2015, Vito has worked on investment projects and site selection mandates of all sizes and has been an instrumental resource for the economic development strategic positioning and attraction studies. Prior to joining CAI, Vito has over 5 years of financial service experience split between Scotia Capital and PricewaterhouseCoopers.