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Opportunities Abound in the Americas

Free trade and economic stability arecreating new channels for foreign direct investment in the Western Hemisphere.

Dec/Jan 07
Foreign direct investment (FDI) in the Americas is dominated by three countries: the United States, Canada, and Mexico. All three are stable nations that are economically linked by the North American Free-Trade Agreement (NAFTA) - creating a market of about 450 million people with a combined GDP of nearly US$15 trillion. NAFTA also eliminates tariffs, facilitates border crossings, protects intellectual property, and certifies goods and products. By setting up operations in these countries, investors open up lucrative product-delivery channels to one of the wealthiest customer bases in the world.

The United States is the unquestioned leader in FDI in the Americas, both as an investor in other countries and as the recipient of foreign investment. In 2005, the U.S. was fifth in the world with 450 FDI projects; in comparison, Canada had 180 and Mexico 113.

According to the 2005 Foreign Direct Investment Confidence Index by business consulting firm A.T. Kearney, in 2004, "the United States was the largest FDI recipient in the world, capturing $96 billion - a strong rebound from the $56.8 billion received in 2003."

At the same time, Latin America continues to enjoy an economic rebound, which is attracting more foreign investment. The Kearney report states that "FDI inflows to Latin America increased after four years of declines - reaching $68.9 billion in 2004 up from $48 billion in 2003," much of that being driven by the manufacturing and natural resource sectors.

Canada
Companies want to invest in regions that have pro-business governments, low business costs, and stable economies. That's why Canada has witnessed a substantial growth in FDI - about CAN$416 billion in 2005, more than 6.5 times more than in 1980.

The United States is Canada's largest source of foreign investment. In 2005, the U.S. share of FDI in Canada was 64.1 percent, followed by the United Kingdom, France, and the Netherlands. Many FDI projects are in knowledge-based manufacturing sectors such as electronics, communications, and chemicals.

One reason Canada is booming is because it has the lowest business costs in the G8. In KPMG's 2006 Competitive Alternatives, Canada's costs were the lowest in the study. This is the sixth consecutive time KPMG has ranked Canada as the lowest-cost G8 country in which to do business, especially in growing sectors such as biotechnology, medical devices, pharmaceuticals, electronics, automotive, precision manufacturing, and back-office/call centers.

Leading global companies with multiple FDI projects in Canada are DaimlerChrysler, Imperial Oil, Shell, and Toyota, which reflect the growing importance of the automotive and energy sectors. In 2005, nearly 20 percent of FDI in Canada was in energy.

• Biotechnology: According to Ernst & Young, Québec and Ontario are two of the top-ranked regions in North America for biotech, with the cities of Montreal and Toronto the largest biotech clusters in Canada. Toronto is home to more than 100 life sciences companies, including global giants like Aventis Pasteur, Eli Lilly, GlaxoSmithKline, and AstraZeneca. Another hotspot is the Sherbrooke region in Québec, where startups conduct R&D and product commercialization at the180-acre Sherbrooke Biomedical Park.

Ottawa, the Canadian capital, is a rapidly growing life sciences cluster. With more than 40 government and university-based research institutes and 100 life-science companies based there, the cluster is growing about 15 percent annually. Key players are Adherex Technologies, Gamma-Dynacare Medical Laboratories, and Ottawa Life Sciences Technology Park.

"Ottawa is fortunate to have not only a wealth of talented researchers and scientists, but a supportive infrastructure which facilitates growth of both emerging companies and the sector as a whole," says Bill Dickie, president and CEO of Liponex. "The combination of academic institutions, research-oriented healthcare system, and the government through the NRC provide the local life science community with the support needed to grow and flourish."

• Energy: The global surge in prices for metals, oil, and gas have made Canada's natural resources more attractive to foreign investors. Investments are on the rise in the western provinces, which have large resources of oil, gas, metals, and diamonds. Some deposits that were previously difficult to extract, such as vast fields of oil sands, are now closer to commercialization because of new technologies. Recently, Husky Energy (owned by Chinese parent Hutchison Whampoa) invested $500 million in the Tucker Oil Sands project in Alberta, which is producing about 30,000 barrels of crude oil per day.

"Alberta's proven oil sands reserves of 174 billion barrels are a source of long-term, secure, and stable energy supplies," says Clint Dunford, the province's Economic Development Minister. "With an anticipated bitumen output of three million barrels a day by 2020, Alberta continues to investigate opportunities for investment and collaboration in oil sands projects."

The Mackenzie Delta Producers Group (Imperial Oil Resources, Conoco Canada, Shell Canada, ExxonMobil Canada) is studying the possibility of purchasing the Mackenzie Valley Natural Gas Pipeline Project for about $8 billion. The project will develop onshore natural-gas fields in the Mackenzie Delta and transport the gas to Canadian and U.S. markets.

BHP Billiton Diamonds (Australia) is a major player in Canada and recently announced plans to invest $280 million in the new Koala underground project at the EKATI Diamond Mine near Wekweti, Northwest Territories. Reserves are estimated at about 10 million carats of diamonds. A number of international companies are continuing aggressive diamond exploration programs in the region.

• Automotive: Ontario has long been the heart of the Canadian automotive industry. Impressed by the province's infrastructure, technically skilled labor pool, ideal location, and incentives, the big automotive companies continue to invest there.

Honda Canada is planning to build a new CAN$154 million manufacturing plant in Alliston, Ontario, that will produce about 200,000 four-cylinder engines every year. Another manufacturer, Toyota Boshoku Canada, announced in July 2006 its intent to construct a CAN$65 million automotive interior manufacturing plant in Woodstock, which will create 330 new jobs.

"We worked very hard to bring the new Toyota plant to Woodstock and now we're seeing the wider benefits come into play," says Joseph Cordiano, Canada's Economic Development and Trade Minister. "Parts suppliers like Toyota Boshoku are creating more high-value jobs and helping Ontario build North America's most productive and efficient auto industry."

Mexico
FDI has been steadily increasing in Mexico, a result of strengthening markets (especially manufacturing), recent bilateral economic agreements in Europe and Asia, better global competitiveness, and a pro-business climate. In the Kearney report, Mexico jumped from 22nd in 2004 to 16th in 2005.

According to the United Nations, Mexico received more foreign direct investment in 2005 than any other country in Latin America and the Caribbean region. The U.N. Economic Commission for Latin America and the Caribbean (ECLAC) stated that Mexico received about $17 billion in FDI in 2005, much of it going to the manufacturing sector and maquiladora assembly plants.

The Kearney report states that "Japanese investors rank Mexico their fifth-most attractive market, up from below the top 25 last year. The Japan-Mexico Economic Prosperity Agreement (EPA), effective in April 2005, offers Japanese companies new opportunities in Mexico."

Much of the maquiladora sector in Mexico is anchored by large American companies. High-tech manufacturing/assembly plants produce heavy machinery and transportation equipment, auto parts, televisions, ICT equipment, electronics, chemicals, plastics, and rubber. Leading multinational investors in Mexico are Con-Way Transportation Services, Menlo Worldwide, DaimlerChrysler, and Canplats Resources.

According to the Kearney report, "The maquiladora sector is helping Mexico's FDI inflows rebound. Mexican FDI inflows jumped from $12.8 billion in 2004 to $17.9 billion in 2005. The economic recovery in the maquiladora sector, supported by U.S. demand for imports, helped spur a return of manufacturing investors."

Even though American companies still lead the pack, more Asian firms are setting up maquiladora assembly plants. In 2005, their share of business was 37 percent, up from only 8.6 percent in 2000 - in part the result of new free-trade agreements. In contrast, the U.S. share of the Mexican maquiladora sector has dropped from 90 percent in 2000 to 56 percent in 2005.

A.T. Kearney's research indicates that in 2005, heavy and light manufacturers ranked Mexico eighth and sixth, respectively (up from 15th and 21st in 2004). Many of the big automakers and suppliers in Mexico such as Lear, Visteon, General Motors, Ford, DaimlerChrysler, Toyota, Honda, and Nissan are expanding their manufacturing plants. Since January 2004, Volkswagen and Ford have announced more than $3 billion in multiyear investments. Electronics investors ranked the country fourth, up from 21st a year earlier. Throughout 2005, leading electronics manufacturers, including Motorola, acquired facilities and land along the U.S. border, suggesting a continuing FDI improvement in the maquiladora sector.

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