Canada’s trade engagement today goes well beyond traditional flows of goods and services across borders. As global production networks expand, information technology evolves, and emerging economies assert their economic standing, the way companies engage in international trade has drastically changed. In Canada, an often-underappreciated aspect of international trade is the flow of our cross-border investment and the rise of Canada’s foreign affiliates.
Direct investment abroad involves the establishment of foreign business operations or the acquisition of foreign assets. This creates stable and long-lasting links between economies, strengthening international economic integration. At the same time, there exists a complementary relationship between international trade and investment—where having an international presence often helps create future trade opportunities.
So, why is Canadian direct investment abroad (CDIA) important for exporters to consider? At the firm-level, investment abroad provides access to global markets and allows companies to grow their international presence and business. CDIA also helps make many of the international aspects of trade easier for companies. In countries where exporters face import tariffs or where conducting international business is more difficult, for instance, investing in foreign affiliates can help firms gain a foothold in-market.
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Company-level empirical studies also confirm that enterprises that operate internationally tend to be more productive than domestic firms, as they learn to overcome the costs and challenges of doing business abroad.
For Canadian companies, the evidence not only shows that multinational companies tend to be more productive, innovative and research and development (R&D) intensive, but also pay higher wages and hire more skilled workers. These higher productivity firms also have positive catalytic effects across the domestic economy, including R&D spillovers and establishing access to foreign supply chain networks.
Beyond this, research also suggests that international investments help Canadian firms expand their reach beyond traditional markets. A 2016 study conducted by Export Development Canada (EDC) found that Canadian businesses rely heavily on investment as a way of reaching markets beyond North America.
More recently, a look at current data show that between 2011 and 2021, Canadian foreign affiliate sales (FAS) from South and Central America, Africa and Asia experienced a higher compound annual growth rate (CAGR) than FAS out of North America. For some of these emerging markets, such as India, the CAGR was as high as 22%. All this strengthens diversification arguments, where Canadian firms utilize their onshore platforms to supply and serve North American markets and leverage their foreign affiliate operations to feed into rapidly growing overseas value chains in Asia, Africa and beyond.
The outsized role played by CDIA and FAS in Canadian trade can’t be stressed enough. While only 0.2% of all Canadian enterprises have operations abroad or are classified as multinational enterprises, Canadian FAS were more than $1 trillion in 2021, the latest year for which data are available. Similarly, while only 3% of Canadian exporters engage in direct investment abroad, net CDIA flows stood at $120 billion in 2023. In fact, in the last decade for which data is available, both CDIA and FAS doubled in value, far outpacing the speed of Canada’s merchandise export growth.
The data also suggest that Canadian companies investing abroad tend to export services versus merchandise, helping to move Canada up the value-add ladder. In fact, around two-thirds of the growth in FAS in the last decade (2011-2021) came from service sector industries, such as finance and insurance and retail trade. Sales by foreign affiliates in the service sector far exceed traditional service exports. Similarly, more than three quarters of the total book value of all CDIA in the last decade (2013-2023) was from service-producing industries.
What’s more, Canadian exporters continue to show interest in expanding their foreign operations. EDC’s most recent Trade Confidence Index (TCI) survey found that 26% of respondents had planned new investments outside of Canada over the next six months, and 47% of those that already had some form of investment abroad, planned to increase their investments, continuing a post-pandemic trend of rising investment intentions. Additionally, close to two-thirds of respondents expected their FAS to increase in the next six months, showcasing the economic opportunities available to Canadian companies operating abroad.
The bottom line?
Canadian businesses are increasingly relying on outbound foreign investment to compete in international markets and diversify their businesses. Foreign affiliates are an important source of revenue and profits, reaping benefits for Canadian companies and the Canadian economy. As companies search for new ways to tap into international markets and supply chains, Canada’s shadow trade sector will play an increasingly important role.
To discover more insights and the latest trends on this important topic, check out our recent Sectors in focus report.
This week, special thanks to Prerna Sharma, senior economist in our Economic and Political Intelligence Centre.
As always, at EDC Economics, we value your feedback. If you have ideas for topics that you’d like us to explore, please email us at economics@edc.ca and we’ll do our best to cover them.
