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?”
For smaller companies, risks can be even more pronounced. “If you are putting a significant amount of capital on the line, you have to do so in a thoughtful, targeted and focused manner that is in keeping with your strategy. Protecting intellectual property can be another issue, especially when sharing technology with a foreign partner.”
Despite such red flags, Mr. Evans is convinced that investing overseas is as much about survival as it is potential success. “Part of it is about expansion into foreign markets.
But part of it is also about protecting your interests at home too.”
CASE STUDY 1: CANADA MENTALS
Expansion helps B.C. manufacturer navigate economic challenges
John Mitchell has a message for small and medium-sized Canadian manufacturers: “To survive in Canada, you have to invest abroad.”
In 2003, he found himself staring down some hard realities: a rising Canadian dollar was rapidly eroding his profits and his biggest customers were demanding lower prices.
It was a wakeup call for the president and CEO of Delta, B.C.-based Canada Metals, which had earned a dominant share of the recreational boating industry’s zinc anode market by serving customers including Yamaha and Mercury Marine.
An analysis revealed that uncompetitive labour rates and a limited market focus further threatened Canada Metals’ future. “We decided to focus on opportunities in lower-cost emerging markets. Further, we would look at global expansion,” says Mr. Mitchell.
After evaluating several possible locations for an offshore manufacturing facility, Mr. Mitchell says China stood out.
It was 2004, and “China had opened up to wholly owned foreign entities. They presented us with a seven-year tax holiday, assistance getting through red tape and other help. These people were motivated,” he says.
Still, establishing the facility wasn’t easy. “I have a lot more grey hair. There were a lot of cultural idiosyncrasies and rules and regulations to learn,” says Mr. Mitchell. “But we felt if we could bring down our cost and maintain our quality, we could compete globally.
“We accomplished that, and this allowed us to expand sales into Europe and South America.”
As a result, Canada Metals has doubled its revenue, grown beyond its original customer base and added new product lines, including its proprietary Martyr brand zinc anodes. Its sales in China are robust and growing. And the company recently added operations in Italy and New Zealand to its group.
In Canada, “where I used to have a lot of labourers, I now have quality technicians, engineers, and sales and marketing staff,” says Mr. Mitchell of the head office, which employs 85 people. “Had I not expanded, I would have been out of business.”
CASE STUDY 2: TOON BOOM ANIMATION
Animation software maker a picture of success
Were it not for its determined expansion efforts, Montreal-based Toon Boom Animation might today be little more than a one-product business. Instead, it’s a global success with rising prospects.
By 2000, the company, which makes animation software for the education, TV and film industries, had established a worldwide presence that included relationships with studios in Hollywood, Europe, China and elsewhere.
Company president and CEO Joan Vogelesang says, “We think of the world as our oyster.”
Inspired, in part, by Toon Boom’s game-changing investments in India that began 12 years ago, Ms. Vogelesang is chasing opportunities in South America, the Middle East and the Caribbean, among other markets.
Through a chance encounter with India-based film distributor Dhiren Shah in 2000, Ms. Vogelesang learned about India’s rising middle class and its virtually non-existent animation industry.
“At the time, India’s TV and film industry was built around Bollywood and Live Action. We expected demand for cartoon content in feature films and TV would rise.”
She says it took nearly a year and a half – and about a million dollars invested – before Toon Boom saw any returns. Over that time, Ms. Vogelesang and others met with studios, government officials and entrepreneurs, including Mr. Shah, who saw the potential to build a new industry. Eventually, those efforts paid royally.
By 2008, India’s animation market was valued at $494 million. Today, it’s worth over $1 billion, and Toon Boom is a major player.
Toon Boom has since launched a simplified version of its technology now used as a dynamic learning tool in a growing number of classrooms. “We are already in thousands of schools in the U.S.”
While encouraging Canadian SMEs to explore global opportunities, Ms. Vogelesang cautions, “You have to protect your IP. And you can’t just hand your business off to a distributor or to a junior. You have to invest in strong, ethical relationships. And you need to have the faith and confidence that your investments will pay in the long run.”
For more information, visit edc.ca.