FDI – Do As You Would Be Done By

Mrs Doasyouwouldbedoneby is a character in Charles Kingsley’s fairytale,The Waterbabies, as is Mrs Bedonebyasyoudid. The former suggests that good things happen to those who treat others the way they would like to be treated; the latter provides a warning. This is a focus missing from the current discussion of foreign direct investment and Canada. This investment has two components, investment in Canada (FDI), and investment by Canadian firms abroad (CDIA). In the neighbouring arena of trade policy, discussion concerns exports as well as imports. Trade negotiations and agreements, such as the WTO, NAFTA and bilateral agreements, deal with the conditions for each country’s exports as well as imports. When debate turns to foreign investment policy, the focus becomes inward to the exclusion of outward investment, as though what Canada does regarding inward investment has little or no impact on CDIA.

Stocks and flows

The stock of CDIA is currently $684 bn, while the stock of FDI in Canada is $607bn. These result from investment flows from previous years including earnings reinvested by firms which are already foreign owned either in Canada, or by Canadian owned firms abroad. The annual inward and outward flows of FDI fluctuate yearly. For 2000 to 2009,

“Outward FDI flows were $66.4 billion in 2000, gradually declined to $32.1 billion in 2003, rebounded to $82.9 billion in 2008 before slumping to $46.3 billion in 2009. Inward FDI flows were $99.2 billion in 2000, tumbled to negative $0.6 billion in 2004, reached a peak of $116.4 billion in 2007 before falling back to $47.7 billion in 2008 and to $22.1 billion in 2009.”  Source: Statistics Canada.

Often, FDI flows into Canada have exceeded CDIA, but in some recent years the opposite has occurred. At present, the stock of Canadian FDI in China is $4.5bn and Chinese investment in Canada $10bn (a Chinese source quotes $20bn – this may be due to the inclusion of portfolio as well as direct investment).

FIPAs  

Canada has Foreign Investment Protection Agreements (FIPAs) with a number of countries. These do for investment what bilateral and other trade agreements do for trade, namely state the conditions under which inward and outward investment occur, and how disputes will be settled.

FIPAs tend to be signed with countries where Canadian investors may not get a fair deal from the judicial system in the foreign country. Thus there is no FIPA with the UK, although there is something similar to a FIPA embedded in the NAFTA with the US and Mexico. Canada has 24 FIPAs in effect, the earliest being signed with the former USSR in 1991; 7 FIPAs have negotiations concluded, one of which is with Mali; and in 13 cases there are ongoing negotiations, such as with Burkina Faso and Mongolia.

Canadian firms do invest in risky countries where there is no FIPA, and a former graduate student of mine found that many firms with investments abroad were unaware of the existence of FIPAs and had invested anyway. (This may be the strongest argument for not signing further FIPAs.) The firms made these investments in the absence of a FIPA, and that is the case for the $4.5bn Canadian investment already in China and the $10bn Chinese investment in Canada. Would the inward and outward flows have been greater with a Canada-China FIPA? Possibly, but we will never know.

To argue that Canada should not sign a FIPA with another country because that country does things domestically and internationally that we don’t like, suggests to me that Canada should withdraw from UN membership and from many other bilateral and multilateral agreements, and should cancel diplomatic representation with certain countries. When a Canadian travels to risky countries, the exchange of diplomats means that Canadians have a better chance of being treated fairly, than if there is no representation. A FIPA has the same effect for investors.

China is now a member of the WTO, a multilateral agreement with a dispute resolution mechanism. The country wants to and has already become a force in the international economic community. Involving countries in international agreements is more not less likely to get them to play by the rules of the game agreed to by an increasing number of nations. If Canada wants to diversify its economic relations away from North America, as it has repeatedly tried to do, with limited success, then it needs to engage China and other Asian countries.

Arguing against negotiating a FIPA is like refusing to have a flu shot because there is a small probability that you will contract flu, while there is a much higher probability that protection will be provided. Arguing for a debate on the proposal is reasonable, but to my knowledge was not done for the existing 24 FIPAs signed by Canada.

Note:

“The global stock of outward foreign direct investment (FDI) has experienced phenomenal growth over the past two decades, increasing more than tenfold from US$600.2 billion in 1982 to US$9.7 trillion in 2004. Throughout most of this period, FDI has been growing faster than trade, contributing significantly to global economic integration…. Since 1990, the stock of Canadian direct investment abroad (CDIA) has more than quadrupled from $98.4 billion to $465.1 billion in 2005.” Source: Statistics Canada.

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