Foreign Direct Investment as a Driver of Canada's Economy

Introduction: FDI as a Precondition for Canadian Development

Foreign direct investment (FDI) was not only a necessary precondition for Canadian economic development, but also a 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 United States, and later for the globalist model of FDI in Canada.

As will be noted, France's reality as a continental power — one less dependent upon maritime trade — made her colonies less of an economic imperative than a military and religious one. The period of early British ascendance was established with the founding of the Hudson Bay Company, which arose at the same time that the British East India Company and the Dutch East India Company 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 such investment on the planet.

The focus of this paper is 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 served as the kick-starter of British colonial investment. The focus is therefore directed more toward the nineteenth and twentieth century periods of Canadian economic history.

This analysis runs counter to the standard reaction that views NAFTA and FDI as harmful to Canada and an assault upon Canadian sovereignty. As the historical model and case study of FDI presented in this essay will show, 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 later be for the British colonies. Unfortunately for France, much of its policy in this regard failed to succeed.

The dominant economic theory at the time of early French colonial settlement in Canada was mercantilism, which fueled the first foreign investment in Canada by the French government. Well into the nineteenth century, thinkers believed that the world's wealth was finite. 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 and to exploit the natural resources of the colony.

The French crown engaged in seed investment 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 created so 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 XIV appointed Jean Talon as the first intendant in Canada (1665–72) to supervise the self-sufficiency campaign. Unfortunately, the campaign achieved few successes. Ships were cheaper to build in France. Fewer skilled craftspeople were available in the colony, and labor there was expensive. Competition from Britain and Holland to supply the West Indies was cheaper because their costs were lower, even though such exchanges violated mercantilist law. Enforcement of mercantilist regulations proved too difficult and costly. As a result, New France continued to rely almost exclusively upon the export of beaver pelts, while Acadia depended upon fishing. Even into the eighteenth century, furs accounted for over 70% of Quebec's exports. The French colonies' timber resources were uneconomical to tap. On the whole, Colbert's mercantilist policies were among the least successful of his programs for New France. While mercantilism promoted colonial trade — much of which, with British and Spanish colonies, was conducted 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? Beyond the factors inherent to the Americas noted above — which the British also encountered and later overcame — the answer lay in the fact that France was a continental power and therefore less dependent upon maritime trade than England. English power tended to concentrate on the North American seaboard, which made those colonies a more cohesive economic body. French power, by contrast, was spread across a far larger land mass.

In addition to its reduced emphasis upon maritime power, France viewed its colonies primarily in military and religious terms. They were seen more as outposts than as functioning economic entities. The British, dependent upon maritime trade for their very survival, fought harder for their New World colonies. This, combined with Britain's industrial growth, helped her to overcome France in Canada (Easterbrook and Aitken, pp. 10–11).

The British Period and the Free-Standing Company

The Hudson Bay Company represented a formative step not just in foreign direct investment in Canada, but globally as well. While it was not the only such company, it was the largest, the first, and set the prototype for those that followed. Founded at roughly the same time as the much larger British East India Company — which proved such a powerful engine for the expansion of British power in Asia — the Hudson Bay Company served a comparable role for the British Empire in Canada. The British Africa Company, which trafficked in slaves, also provided a model for the free-standing corporate form (Jones and Wren, p. 12).

The British Hudson Bay model was not unique; it set the pattern worldwide for British imperial enterprise. These free-standing companies typically had a small head office in London and British capital with all 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 from its earliest days, Canada's colonial economy also established the prototype for the country's primarily resource-based economy. Though such trends were already evident in New France, this paradigm became more deeply impressed during the period of British colonialism before and after the French and Indian War. Scholars have more recently renewed their attention to the economics of the British Empire across various countries, including Canada, focusing on Britain's economic requirements and their relation to the activities of imperial businesses.

Within this field, questions of British FDI to colonial territories provided a large arena for Canadian business to operate in — first within the Empire and later within the British Commonwealth. In the critical period stretching from 1865 to 1914, a template for FDI into Canada was established that persisted into the era of American dominance. British FDI proved insufficient to grow Canadian business at an adequate rate, which caused Canadian businesses to seek out American capital, and American capital to seek out the Canadian market, to fill the vacuum (Holland and Porter, pp. 86–87). This entanglement, and the later dominance, of American capital left a permanent impression on Canada that persists to this day.

Conclusion

To recap, this essay has examined the extent to which foreign direct investment was a necessary precondition for Canadian economic development. The author has supported the view that FDI was a necessary precondition for development both as a colony and later as a sovereign state. As was noted, France's reality as a continental power, less dependent upon maritime trade, made her colonies less of an economic than a military and religious imperative. The period of early British ascendance was established with the founding of the Hudson Bay Company, which arose at the same time that the British East India Company, the British Africa Company, and the Dutch East India Company 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 examples of such investment on the planet in the modern sense of the term. The pattern of British FDI then set the pattern for the United States and, subsequently, for the globalist model of FDI in Canada.

All in all, Canada has gained tremendously from FDI. It has boosted Canadian exports considerably and has contributed much to Canada's strong economic position relative to the United States and many other countries during periods of global recession. This has been the case since Canada's beginnings as a colony and will continue into the foreseeable future in an increasingly globalized world economy.