5 Ways Foreign Direct Investment Strengthens Canadian Businesses
Most Canadians share an inaccurate, out-of-date view of how businesses grow and succeed in international markets. Gone are the days where businesses manufactured products in Canada and shipped them internationally; now companies must extend beyond borders and become part of an integrated international value chain.
Traditional trade measurements fail to recognize is the effect that foreign direct investment (FDI) plays. Foreign affiliate sales (revenue generated by Canadian companies in international markets) grew by 187% between 2004 and 2013, signaling that there may be more potential in foreign investments than producing domestically and then exporting.
A new report released by Export Development Canada (EDC) reports on the effectiveness that foreign direct investment has had on Canadian companies. The report, which is the result of a survey of 546 Canadian companies, confirms that investment in foreign markets supports business’ growth domestically.
How Foreign Direct Investment Improves International Competitiveness
While many companies in Canada rely heavily or exclusively on exports for their revenue, there are many markets around the world that are inaccessible without local partnerships or affiliates.
As a result, Canadian companies are finding greater success through investing in foreign affiliates, international partnerships, or acquisitions as a main driver of strategic growth, diversification, and international competitiveness.
“Foreign affiliates allow Canadian companies to compete more effectively through global value chain networks, a critical platform if they are to take advantage of the explosive growth in consumer revolutions happening in emerging markets.”
– Peter Hall, VP and Chief Economist at EDC
As companies develop greater international operations, new jobs and economic development is generated domestically to support of this international work.
5 Ways Foreign Direct Investment Stimulates the Canadian Economy
Export Development Canada’s ‘Foreign Footprints’ report sheds greater light on the impacts Canadian Foreign Direct Investment (FDI) has on the economy. The following five points uncover why these investments are so important for Canadian businesses to remain competitive:
1. Foreign operations enhance Canada’s workforce and help us focus on value-added services
There are two definitive labour-related benefits of FDI, the first being that companies are able to employ more Canadian workers. In fact, 85% of businesses with a foreign affiliate were able to hire more Canadians. While these companies may be directing investment to international markets, the funds ultimately create more jobs domestically through the expansion of companies’ core operations.
Most of domestic growth that is stimulated through FDI comes through value-added services that are better accomplished in Canada than abroad. Business development, marketing, research and development, and engineering are all value-added services that predominantly stay in Canada despite investments flowing to other countries.
2. Foreign affiliates help boost domestic wages
Additionally, the report found that foreign investment actually helps to boost the wages of Canadian employees. Nearly 30% of businesses surveyed reported that they wages they provided domestically were higher because of foreign operations.
This could be for many reasons, such as the increase of value-added services Canadians may provide. Also, as opposed to exporting, Canadian companies can leverage lower wage rates internationally which supports higher domestic wages.
3. Foreign investments help Canadian businesses become more competitive
Establishing a foreign affiliate network has strong impacts on business competitiveness. Over 80% of businesses surveyed by EDC state that they have increased sales, increased market share, and grew their customer base by investing internationally.
4. Foreign affiliates drive revenue growth
Foreign investment has received a negative reputation because most believe it’s a strategy to cut costs, however EDC’s survey reveals that most businesses invest to grow profits and access new markets. Establishing new foreign markets is a strategy aimed at optimizing global operations, not evading the costs of doing business in Canada.
5. International affiliations will help Canada to diversify among global markets
Although the United States is Canada’s top trading partner and is likely to continue being the top business destination for Canadian companies, it’s important that Canadian firms diversify and reduce their dependence on one market.
Asia and Europe are emerging as strong strategic markets for Canadian businesses to operate in, and many Canadian businesses are set to develop those markets in the coming years. In fact, 8 of the top 20 emerging markets for Canadian businesses are located in Asia. Companies should be looking in these regions, not just the United States, when determining where to invest.
Canadian Government Funding Programs Supporting Export Market Development
Small and mid-sized enterprises (SMEs) growing into new markets may be eligible for a range of Canadian government funding programs. Export market development grants provide a critical source of investment for businesses growing into new markets, and the additional investment encourages successful market entry.
CanExport is designed to help businesses develop new markets through increased brand exposure. It supports trade show sponsorship and other marketing activities in under-developed export markets. Up to 50% of project costs may be provided to a maximum $50,000 in Canadian government grants.
Export Market Access (EMA) is a similar program to CanExport, however it is only available to small and mid-sized businesses in Ontario. The program provides up to 50% of project expenses to a maximum $50,000 in Ontario government grants for marketing and market development in international markets. Applicants may use this fund to cover the cost of international travel, trade shows and marketing costs, and even permits bidding on foreign projects.
Going Global Innovation (GGI) supports international collaborations focused on technology research, development, and commercialization. Canadian government grants may provide up to 75% of project costs to a maximum $75,000 to travel to foreign markets and meet with potential R&D partners.
If you’re the owner or an executive for a Canadian small business and would like to learn more about funding opportunities for foreign market development, contact a Canadian Government Funding Planner.