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C-11 Cooperation for a Strategic Foreign Direct Investment Policy: Preliminary Findings Toronto, Ontario October 5, 201

C-11 Cooperation for a Strategic Foreign Direct Investment Policy: Preliminary Findings Toronto, Ontario October 5, 2011 Louis Theriault Director, Forecasting and Analysis. Document current research related to the economic impact of cities Identify principal trends related to city economies

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C-11 Cooperation for a Strategic Foreign Direct Investment Policy: Preliminary Findings Toronto, Ontario October 5, 201

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  1. C-11 Cooperation for a Strategic Foreign Direct Investment Policy: Preliminary Findings Toronto, Ontario October 5, 2011 Louis Theriault Director, Forecasting and Analysis

  2. Document current research related to the economic impact of cities Identify principal trends related to city economies Identify city impact on Canada’s ability to attract FDI Develop recommendations to serve as input for the development of a C-11 strategic FDI attraction policy Study Objectives

  3. FDI is the acquisition by residents of one country of real assets (as opposed to financial assets) in another country In Canada, define as at least 10 per cent voting equity These assets can be existing assets or represent new investment FDI can be inward—foreigners investing in Canada FDI can be outward—Canadians investing abroad What is FDI

  4. Gravity relationships (geographic proximity and cultural similarity) Macroeconomic conditions (market size, exchange rate, per capita income) Industry characteristics Institutional infrastructure (socio-political stability, legal protection, government efficiency) Physical infrastructure (transportation, electricity and telecommunications) Determinants of FDI

  5. Openness to foreign investment (investment restrictions, investment promotion agencies) Openness to international trade Financial markets (interest rates) Labour markets (unit labour costs) Innovation (R&D intensity) Corporate tax rates Determinants of FDI (cont’d)

  6. Removes the discipline imposed on managers of Canadian firms that accompanies the threat of takeover by large foreign companies Limitations on investment constrain the amount of capital available within the Canadian economy, thus raising the cost of capital Reduces spillover benefits from foreign companies Adverse Effects of Restricting FDI

  7. Growth in trade Capital formation Job creation Increased tax revenues Technology transfer/spillovers Horizontal: same sector Vertical: different sectors vertically related Economic Benefits of FDI

  8. Spillovers occur through five mechanisms: Demonstration/imitation Exports Labour mobility Competition Backward and forward linkages SpilloversChannels of Transmission

  9. Inward FDI flows grew by an annual average rate of 6.6 per cent from 1971 to 2010 Outward FDI flows grew by an even stronger 9.8 per cent per year, so Canada is now a net outward investor As a share of GDP, inward FDI flows bottomed out in the mid-1980s and now stands at 2.9 per cent, up from 2.4 per cent in 1970 FDI Trends in Canada

  10. Canada’s trend share of global inward FDI flows has fallen from 16 per cent in 1970 to just 3 per cent in 2010 Trend Inward FDI Performance Index has fallen over time, But still remains above 1, meaning Canada attracts more inward FDI than its economic size would warrant Trend Inward FDI Performance Index is below 1 in the United States FDI Trends in Canada

  11. The Economic Importance of Cities

  12. Cities’ Share of Canadian GDP Montreal, Toronto, and Vancouver (1987-10) Source: The Conference Board of Canada.

  13. Cities’ Share of Canadian GDP C-11 (1987-10) Source: The Conference Board of Canada.

  14. Cities’ Share of Canadian GDP27 CMAs (1987-10) Source: The Conference Board of Canada.

  15. Cities’ share of national economic activity likely will continue to increase However, the importance of cities is more than the sum of their GDP When one of Canada’s large city-regions prospers, the other communities located in the same province benefit from important spillover effects Strategic investment is a key tool to maximize this benefit Hub Cities

  16. Choosing Hub CitiesReal GDP Per Capita (2010) Source: The Conference Board of Canada.

  17. Choosing Hub CitiesReal GDP Per Capita (2010) Source: The Conference Board of Canada.

  18. Choosing Hub CitiesReal GDP Per Capita (2010) Source: The Conference Board of Canada.

  19. Economic Importance of CitiesShare of Provincial GDP (2010) Source: The Conference Board of Canada. .

  20. Economic Importance of CitiesShare of Provincial GDP (2010) Source: The Conference Board of Canada. .

  21. The Convergence HypothesisA Textbook Case

  22. Pan-Canadian ConvergenceResults Source: The Conference Board of Canada.

  23. Atlantic Region ConvergenceResults Source: The Conference Board of Canada.

  24. Quebec ConvergenceResults Source: The Conference Board of Canada.

  25. Ontario ConvergenceResults Source: The Conference Board of Canada.

  26. Western Canada ConvergenceResults Source: The Conference Board of Canada.

  27. Western Canada ConvergenceResults Source: The Conference Board of Canada.

  28. Unemployment RatesCanadian Provinces Sources: Statistics Canada The Conference Board of Canada.

  29. Unemployment RatesOntario CMAs Sources: Statistics Canada The Conference Board of Canada.

  30. FDI and Cities

  31. There is a statistically significant link between R&D intensity and inward FDI One of the attractions of locating in a research-intensive region is to benefit from the fruits of its R&D activities Innovation requires three types of inputs: Human resources Capital resources Knowledge FDI and Innovation

  32. Cities are more conducive to innovative activity because they are more populous, which means they offer: More developed markets for the specialized inputs used in innovation (economies of scale) The proximity that gives innovators greater opportunities to learn from one another (knowledge spillovers) FDI and Innovation

  33. Patent ActivityPatents per 10,000 persons (1993-09) Source: USPTO.

  34. Studies also suggest that regions rich in information and communications technology infrastructure attract more inward FDI The benefits of ICT investment include Reduced transport costs Reduced transaction costs Improved marketing information Increased efficiency of industrial production ICT investment is essential to remain competitive within the increasingly information-oriented global economy FDI and ICT

  35. ICT EmploymentEmployment per 10,000 persons (1996-10) Source: Statistics Canada.

  36. Empirical studies also show that immigration leads FDI When people migrate from one country to another, they bring with them a social network connected to their native country Through these social networks, some of the barriers to international investment may be lowered FDI and Immigration

  37. C-11 ImmigrationShare of Canadian Total (1987-10) Source: Statistics Canada.

  38. FDI in C-11 (preliminary estimates)Share of Canadian total (1999-10) Source: The Conference Board of Canada.

  39. FDI in C-11(preliminary estimates) FDI Performance Index (1999-10) Source: The Conference Board of Canada.

  40. Maintain legal and regulatory regimes that protect property rights, create transparent rules of law, and minimize regulation Implement macroeconomic policies that encourage real economic growth with low inflation Invest in transportation and communication infrastructure Invest in education and worker training programs Best Practices to Attract FDIUncontroversial

  41. Cut corporate tax rates Weaken or eliminate regulatory review processes applying to foreign investors Offer financial subsidies to prospective foreign investors Eliminate limitations on foreign ownership levels in sensitive industrial sectors Best Practices to Attract FDIControversial

  42. FDI promotion works best when it overcomes information asymmetries IPAs need to be sufficiently independent from governments, giving the agency greater credibility with investors and flexibility IPAs also need strong links to public and private stakeholders FDI Attraction Policy

  43. For major investment projects, government ministers at the highest level need to be onboard to create policy certainty The IPA must be strong enough to influence decisions Investment promotion needs to be coordinated at the national and regional levels FDI Attraction Policy

  44. FDI has a key role to play in enhancing growth and productivity C-11 cooperation to attract FDI could lead to superior results for Its members The surrounding communities of its members Canada as a whole This research will provide An understanding of the importance of economic hubs in Canada Highlight the C-11 contribution to FDI national trends Summary

  45. Implications will be drawn on potential FDI priority areas by Identifying strengths, weaknesses and growth opportunities Reinforcing the need for reducing interprovincial trade barriers limiting spillover benefits Enhancing the public education role of the C-11 This is an input in the development of a strategic FDI attraction policy involving The C-11 economic development authorities And other public sector partners with a FDI attraction mandate Summary (cont’d)

  46. The Conference Board of Canada Visit us at: www.conferenceboard.ca

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