This piece is one of a series of high-profile Canadians commenting on the Canadian Chamber of Commerce's Top 10 reasons Canadian competitiveness is dropping.
David Emerson has seen foreign investment from all sides. He held top jobs at Canfor Corp., Canadian Western Bank and the British Columbia Trade Development Corp. During four years as a Member of Parliament for Vancouver Kingsway for both the Liberals and the Conservatives, he held the International Trade portfolio, among others, where he helped pound out a deal on softwood lumber. Mr. Emerson is now a partner with Vancouver-based private equity firm CAI. He spoke to us about the challenges of attracting more foreign investment to Canada.
Why is attracting foreign investment to Canada so important?
Trade and competitiveness are about being a major player in global networks, so if you’re going to be part of those networks, you really do need to have a multi-country investment footprint. And if you look at where the growth is occurring, a lot of it has been in developing market economies. We’ve got to invest there, but we can’t invest unless we’re prepared to have some reciprocation and investment here. And that comes with all kinds of complications, because the very economies where the growth is occurring are economies that, in many cases, are what you’d call state capitalist economies, like China, with tremendous amounts of state ownership and intervention. Just as an aside, when I did a review of the space and aerospace sectors last year, one of the issues I was struck by was the performance of foreign-owned companies operating in Canada. I’ve got to tell you that their performance in terms of research and development and the strengthening of the Canadian competitive position was really quite breathtaking. It’s important to recognize that foreign investment is not necessarily a hollowing out of the Canadian economy. Yes, there are issues around head offices and the corporate nervous system, but there is also a very positive upside.
Source: Statistics Canada
What makes us a desirable place for foreign investors?
We’re a very stable economy. We’ve had a strong economic performance in the last five or 10 years. Natural resources are obviously a critical attraction, because developing economies need the commodities that Canada has in abundance to continue their climb up the developmental curve. We are benefiting quite substantially from that, and that creates huge opportunities for countries to invest here. But it has implications for other sectors, if we don’t manage it properly.
And what are those implications?
Well, there’s been this great debate about Dutch disease in Canada, which has in some ways been wrong-headed. It has implied that natural resource exports and major investments in natural resources and their effect on the exchange rate is hurting the competitiveness of non-resource sectors in the economy. But I think the issue is much bigger than that. Yes, there is an exchange-rate impact. But if you don’t manage your natural resources properly, you get into labour-market bottlenecks that create labour-cost inflation. You get cost inflation on construction materials, which drives up the cost of capital generally. So you get a whole constellation of impacts that affect the non-natural resources economy. And I think governments in Canada have not been particularly astute in the way we manage natural resource revenues.
In what way?
One of the issues I’ve written about recently is our tendency to take our natural resource revenue – which is really a long-term asset belonging to future generations of Canadians, as well as ourselves – and monetize it. We’ve been using that money to fund the operating expenses of government. And that creates some really serious problems, because it starts to build in fiscal instability, since those revenues are cyclically unstable and subject to the ups and downs of global commodities. And it creates a situation in which you’re selling assets to basically pay for groceries.
What should we be doing with that money?