Foreign Direct Investment in Canada

¶ … foreign direct investment was a necessary precondition for Canadian economic development. In the opinion of this author, foreign direct investment (FDI) was not only the necessary precondition for economic development, but also the necessary precondition for Canada's existence first as a British colony and later as a sovereign member of the British Commonwealth. The pattern of British FDI set the pattern for the U.S. And later the globalist model for FDI in Canada.

As will be noted, France's reality as a continental power that was less dependent upon maritime made her colonies less of an economic than as a military and religious imperative. Indeed, the period of the beginning British ascendance was laid down with the establishment of the Hudson Bay Company came at the same time that the British East India Company and Dutch East India Companies were laying the cornerstones of modern corporate capitalism. In essence, the British Hudson Bay company constituted not just foreign direct investment in Canada, but one of the first three examples of it on the planet.

The focus of this paper will be upon FDI as a formative element in the growth of the Canadian economy primarily in the form of the Multinational Entity (ME) as opposed to the free-standing company (such as the Hudson Bay Company) which were the kick-starters of British Colonial investment. Therefore, the focus will be more upon the nineteenth and twentieth century periods of Canadian economic history.

This author's analysis flies headlong in opposition to the standard knee-jerk reaction to NAFTA and FDI as a bad thing for Canada and an assault upon Canadian sovereignty. Indeed, as we will show in the historical model and case study of FDI presented in this essay, quite the opposite is true. FDI has made Canada more sovereign, stronger and more prosperous than ever.

Mercantilism and the Colonial Economy in New France and Acadia

FDI was important to the French colonies in Canada as it would be for the British colonies later. Unfortunately for France, much of its policy failed to succeed.

The basis of economic theory in the time of the beginning of French colonial settlement in Canada revolved around mercantilism, which fueled the first foreign investment in Canada by the French government in the 1600's and well into the nineteenth century, people believed that the world's wealth was limited. Any nation could increase its power and prosperity only at the expense of another. States created colonies in order to consume the home manufactures of the mother country as well as to properly tap into and exploit the natural resources of the colony.

The French crown engaged in its seed investment in order to get New France's economy up and running until the colony was self-sufficient enough in its supplies of clothing, food and shelter. In addition, tanneries, fisheries and a shipbuilding industry were invested in and created in order that the colony could trade with the French West Indies. In both the French and British colonial periods, the fur trade provided a magnet for foreign incorporation and investment.

The drive to make New France self-sufficient fueled the programs of French statesman Jean-Baptiste Colbert. He and Louis IVth appointed Jean Talon as the first intendant in Canada (1665-72) to supervise the self-sufficiency campaign. Unfortunately, the campaign brought few successes. Ships were cheaper to build in France. Fewer craftspeople were available in the colony and labor was expensive there. Competition from Britain and Holland to supply the West Indies was cheaper because their costs were lower though such exchanges violated the law. Enforcement of mercantilist regulations was too difficult and costly to work. Due to this face, New France continued to rely almost exclusively upon the export of beaver while Acadia depended upon fishing. Even into the 18th century, furs were over 70% of Quebec's exports. The French colonies' timber resources were uneconomical to tap. All in all, Colbert's mercantilist policies were amongst the least successful of his programs for New France. While mercantilism promoted colonial trade (much of which with British and Spanish colonies was done illegally in foreign ships), it stunted other aspects of economic development that might otherwise have benefited the mother country (Crowley, pp.15-16).

Why was mercantilism a failure? In addition to factors inherent to the Americas that we have noted above, the British also experienced and overcame these same barriers later in Canada. The answer lay in the fact that France was a continental power and as such was less dependent upon maritime trade than England. English power tended to concentrate on the seaboard of North America which made these colonies into a more cohesive body. French power was spread over a much huger land mass.

In addition to her lessened emphasis upon maritime power, France's colonies had more importance in terms of military and religious terms. Hence, they were seen more as outposts than as functioning economic entities. The British were dependent upon maritime trade for her very survival. There fore, she fought harder for the colonies in the New World. This, in combination with her industrial growth helped her to overcome France in Canada (Easterbrook and Aitken, pp. 10-11).

The British Period and the Free Standing Company.

The famed Hudson Bay Company represented a formative step not just in foreign direct investment in Canada, but globally as well. While the Hudson Bay Company was not the only such company, it was the biggest and the first and set the prototype for those that followed it. Founded at about the same time as the much larger British East India Company that was to prove so powerful an engine for expansion of British power in Asia, Hudson Bay was to do so for the British Empire in Canada. The British Africa Company that trafficked in slaves also provided a model (Jones and Wren, p. 12).

The British Hudson Bay model was not unique. The British model of company set the pattern worldwide for the Empire. These free-standing companies usually had a small British head office in London and British capital will all of its assets invested abroad. The British were the most active users of the free standing model (Floud and McCloskey, p. 178).

While dependent upon foreign direct investment since the earliest days, it also set the prototype for Canada's primarily resource-based economy. While such trends were evident already in the earlier times of New France, this paradigm became more impressed and permanent during the period of British colonialism before and after the French and Indian War. Scholars have more recently begun to pay renewed attention to the economics of the British Empire in various countries. This includes Canada where they focus on the requirements of Britain's economy and they relate to the activities of imperial businesses.

Within this field, financial questions such as British FDI to the colonies of the empire provided a great and large field for Canadian business to play in first in the Empire and later in the British Commonwealth. In this critical period stretching from 1865 to 1914, the template was set for FDI import to Canada that stretched into the era of the dominance of Britain's successor, the United States of America. British FDI was inadequate to grow Canadian business at a proper rate. This caused Canadian business to seek out and American capital to seek out the Canadian market to fill the vacuum (Holland and Porter, pp. 86-87).

This entangling and later dominance of American capital made a permanent impression in Canada that plays itself out to this day.

Multinational Entities and the Transition to U.S. Corporate Dominance

Around the mid-nineteenth century problems occurred with such companies, the problems were graphically illustrated in the complete failure of the free standing model during the 1857 mutiny in India. For this and other reasons, the Multinational Entity began to triumph over the free-standing company. Certainly, with a larger and more expansive base of investment, disasters such as the 1857 mutiny would not strike the investor base as squarely (Floud and Deidre, 178-179).

The FDI efforts of British corporations were dominant in Canada until the twentieth century when the United States began to overtake it as the greatest source of FDI in Canada. One classic example was in the timber industry. In the U.S. rush to develop America into an industrial power in the 19th century, natural resources became depleted. This forced American industrial firms to seek out supplies elsewhere. To begin with, the first Canadian resource upon which Americans took most heavily was timber. These were not really branches of U.S. firms. The men who established and owned them eventually became Canadians. However, the investors were American.

The first significant branch plants were paper mills, built by U.S. papermakers to process newsprint for America's burgeoning newspaper industry where moguls such as William Randolph Hearst churned out their works of yellow journalism. The first of many was the Powell River Company which began operations in 1912 as the first newsprint mill in western Canada where it processed newsprint for publishers in both Vancouver and Seattle. This investment would become the most prevalent in the period after World War 2 British economic power declined and the U.S. became predominant ("Our History").

While in the paper industry U.S. FDI was not as prevalent till the 20th century after the Second World War, in the recovery and processing of minerals this occurred in the late 19th and early 20th century as gold, nickel, zinc and other nonferrous metals. This created a mining industry in which U.S. And a lesser amount of British capital soon played roles. Goldwas extracted first by individuals then by large-scale, capital-intensive methods. Established American mining companies set up Canadian branches to carry on this type of prospecting activity such as furnishing skills and capital as well as experience.

From the first, base-metal deposits were exploited in the main by companies that were established and controlled by U.S. mining firms. In the 1920s, U.S. companies in other industries began to operate sub-branches in Canada on a large scale. Manufacturing companies set up branches to serve the Canadian market. In this way they avoided high freight costs and import duties. In addition, U.S.-owned Canadian plants benefited from the fact that products manufactured in Canada were admitted with preferential tariff rates to other British Empire countries (Cranstone, pp. 5-12).

Needless to say the 1929 Black Friday stock market crash and the resulting Great Depression put a brake on practically all forms of FDI that lasted throughout the Second World War. The increasing population of Canada and its growing affluence made the Canadian market highly attractive to U.S. firms. More manufacturers of consumer products set up branches, as did retail and financial firms and suppliers of equipment and services required by business firms. After World War II, the trend was reversed (ibid, pp. 12-13).

Goods and services that were produced in the Canadian branch plants of U.S. corporations might have been provided by Canadian-owned enterprises. However, U.S. companies had the huge advantage of far greater capital and experience as well as strongly established and valuable contacts. U.S.-owned factories in the Canadian resource industries had completely reliable markets since parent plants in the U.S. bought all of their products. Many U.S.-manufactured goods were already very well-known in Canada.

Canadian branch plants tended to buy equipment and materials from their U.S. parent corporations the U.S. firms that regularly supplied the parent companies. Canadian-owned firms simply could not compete effectively against the American-owned branch plants that had these advantages. This set of arrangements carried on well into the 1990s as the American and international corporate efforts led to what has been called "deep integration" of the U.S., Canadian and Mexican economies in the age of globalization (Campbell and Finn, pp. 9-10).

The Transition to GATT and NAFTA and International Capital

The presence of giant, foreign and internationally-owned companies has made it difficult for the government to stabilize the Canadian economy. This has continued into the twenty-first century with the establishment of the General Agreement on Tariffs and Trade (GATT) and the North American Trade Agreement (NAFTA).

Despite criticisms that have been heaped upon GATT and NAFTA, between 1993 and 1997, real trade between Canada and the U.S. increased by more than 50%. In this same period, Central Canadian exports to the Southwest and Rocky Mountain regions of the U.S. As well as Eastern Canadian exports to the Southeast of the America increased collectively by in excess of 110%. In contrast to this, real imports from Eastern Canada to the Great Lakes, Plains, and Southeast regions of the U.S. were actually far lower in 1997 than they were in 1993. Additionally real Canadian exports to the country of Mexico increased in excess of 46% over this period. Those from section of Western Canada rose in excess of 90%. Those from section of Eastern Canada rose by less than a paltry 1% (Wall, p. 1).

Canadian trade in the 1980s constituted about l6% of all U.S. exports and imports. Canadian shares rose considerably by 1985. They then stayed there in the following years. Then, in 1998, Canadian goods accounted for a huge 22.7% of U.S. exports as well as 18.8% of American imports. Thus, there was a noticeable increase in U.S. trade with Canada, although the rapid growth in share was concentrated in the early 1980s. From the Canadian vantage point, trade with Mexico was relatively unimportant prior to NAFTA, accounting for only around a half a percent of Canadian exports and 1.5% of Canadian imports. Canadian exports to Mexico almost doubled from 1990 to l998 and this share was relatively constant while Canadian imports from Mexico increased from around 1.2% in 1990 to about 2.5% by 1998. Thus without a doubt, free trade has been a success in Canada's favor as well as its American and Mexican counterparts and has increased the flow of FDI not only into Canada but has also spurred Canadian investments in the U.S. And Mexico as well (Krueger, p. 8).