You have to spend money to make money. It’s an old adage with a new twist.
With globalization and rising emerging markets reshaping the nature of competition and trade, success often requires foreign investment.
Todd Evans, EDC director of corporate research, says evidence shows that Canadian businesses that wisely invest abroad – through joint ventures, wholly owned subsidiaries and other influential means – reap benefits for themselves and Canada.
“Foreign investment isn’t about exporting jobs and capital. It’s about Canadian companies making strategic decisions to grow their business in a global context. It’s about making Canadian companies stronger and able to compete globally and domestically.”
He says businesses with a larger global view and footprint tend to “stay around longer, pay higher wages and be more productive.”
Mr. Evans says Canadian Direct Investment Abroad (CDIA) that exceeds a 10 per cent equity stake – “the point at which you have an influence in a business” – is part of an integrative trade model.
“Formerly, people thought about building something in Canada and exporting it. Now you are sourcing globally, working with foreign affiliates, bringing Canadian supply into the foreign market, and selling goods from that foreign base into other markets.”
Trade data suggests the approach works. Sales by Canadian (majority-owned) foreign affiliates are now greater than exports from Canada. “This has been a trend since 2009. Canadians are producing and selling more outside of Canada than they are exporting from Canada.” Foreign affiliate sales indirectly support a range of activities in Canada, such as product development, marketing, accounting, management services and higher value-added manufacturing.
In 2009, Canadian foreign affiliate sales were $456.2 billion Cdn. “The same year, exports of goods and services were $403 billion. Although exports have bounced back from this recession low, we believe foreign affiliate sales have kept ahead of, or at least on par with, export sales. Today, we expect foreign affiliate sales are about $525 billion.”
While sectors in which Canadian companies have a longstanding global presence – such as finance (banking and insurance), energy, mining and forestry – still account for 77 per cent of CDIA, Mr. Evans says other sectors are gaining, including consumer goods and services, agriculture and food, construction, real estate and transportation equipment. “Larger companies still do most of the investing in foreign markets, but we also see a growing number of smaller companies using foreign investing to grow their business.”
Smaller suppliers, machinery and equipment operators, and engineering firms in the energy and mining sectors are among those setting up operations in foreign markets. Manufacturers too are investing abroad, he says, often in a bid to follow large customers overseas.
Those that are expanding offshore are increasingly looking beyond the U.S.
Mr. Evans says while the bulk (41 per cent in 2010) of CDIA is still in the U.S. market, “the U.S. share has been declining. Recent years have seen a growing share of Canadian investment into a diverse mix of countries like Australia, Chile, Brazil, Ireland, Hungary, Germany, the UK, Hong Kong and China. In 2011, almost a third of CDIA flows went into emerging markets.”
According to Mr. Evans, this trend is important to Canada and our future potential. “It really is about breaking into new markets, often by focusing on a segment of the supply chain. A lot of benefits flow from these sorts of investments.”
For starters, there is the potential to reduce a company’s overall costs and hedge against the impact of a strong Canadian dollar by realizing efficiency and productivity gains. Beyond providing new sources of goods, technologies and labour, investing in the world’s fastest growing markets brings other advantages too. “Whether it’s Brazil, China or elsewhere, the same business opportunities might not exist in Canada. You have to find them.”
For many companies, investing in a foreign market does not displace investment in Canada, but rather it serves to complement their domestic Canadian operations. “We cannot assume that the same investment opportunity is always available in Canada – most times, that is just not the case.”
Mr. Evans offers another sound rationale for investing abroad. “Canadians face competitors domestically too; you can bet that many of them are foreign companies.”
Of course, entering a foreign market isn’t without its challenges and risks.
“Even in large, developed markets you always have to consider the political and regulatory climates. In emerging markets, you have to pay even more attention,” says Mr. Evans, noting, for example, that it’s important to consider central bank policies. “What are the rules and regulations for taking money out of the country?”