Foreign Direct Investment in Atlantic Canada

A new study by the Atlantic Provinces Economic Council (APEC) shows that Foreign direct investment (FDI) can play a positive role in Atlantic Canada by enhancing employment prospects and by contributing to economic and technological development. However, current policy may need to be re-focused to maximize the benefits of foreign investment. In particular, does more effort need to be devoted to increasing local supplier capacity and enhancing research and other linkages between foreign firms and local firms and research institutions, particularly in the offshore energy industry?

The Report, Foreign Direct Investment in Atlantic Canada, analyses the extent of FDI in Atlantic Canada, examines the determinants and impact of FDI at the sub-national level, and draws out the policy implications for the region.

Extent of FDI

FDI in Atlantic Canada likely amounts to no more than 5% of the national total, lower than the region's share of GDP (6%) or population (8%). The U.S. is the largest source of investment in the region, followed by the U.K. and other European countries. Foreign firms in the region are actively involved in resource industries, manufacturing, retail and in the services sector. Their operations range from small local offices to large plants and offshore installations.

Determinants of FDI

Studies of the determinants of FDI location suggest that the small size, low urbanization and peripheral location of the Atlantic provinces do not encourage FDI within the region. Development agencies must therefore continue to emphasize the region's location within the North American market, and ensure that there is an adequate transportation infrastructure and secure border access. Low labour and operating costs may be a positive attraction factor in labour intensive industries, but unit labour costs (i.e., labour costs adjusted for labour productivity) are likely more significant. For high technology industries, attraction policies and strategies need to emphasize the availability of skilled labour, local technological and research capacity, and industrial clustering.

Impact of FDI

Various studies indicate that FDI can play a positive role in Atlantic Canada's economic development by contributing to employment, output and productivity. While job creation may be a primary goal of FDI attraction in the region, the technological and productivity benefits of such a policy focus are likely to be modest.

Policies Towards FDI

The Atlantic Canada Opportunities Agency (ACOA), all four Atlantic provincial governments, and various sub-provincial agencies, are actively involved in investment promotion. The research literature identifies a number of issues that are important for economic development agencies in Atlantic Canada to consider:

Agencies must strike a balance between attracting new foreign investment and supporting existing domestic and foreign firms as the latter can be an important source of new jobs and investment.

Providing aftercare support to foreign firms to help embed them in the local economy can help ensure their retention and future expansion.

It may be easier to attract foreign firms that have already established operations elsewhere in Canada, as these firms are more familiar with the national business climate and culture.

Financial resources are not the only factor behind successful investment attraction. Coordination between different levels of government is important while having prepared sites can help win large-scale projects.

Backward linkages and technological spillovers can be enhanced through measures to provide information on local suppliers and to raise local quality and capacity. Such strategies may be particularly relevant for the offshore energy industry.

The Full Report, Executive Summary and Press Release are available on the APEC website. http://www.apec-econ.ca/index.htm