Foreign Direct Investment (FDI) inflows to the G20 economies, the 20 major economies representing about 85% of global GPD, were down by 34% between 2022 and 2023. During the same period, however, FDI in Canada increased by 8.7%, reaching $50 billion from a prior year's total of $46 billion. Canada climbed to the third top destination for FDI inflows in 2023, after only the United States and Brazil (OECD, 2023 FDI in Figures, April 2024), partly due to the drop in FDI inflows into countries like China.
Canada has traditionally been known for its stable political climate and robust economic environment, making it an attractive destination for foreign investors, ranking in the top three in Kearny’s FDI Confidence Index for the last five years. While this sentiment largely holds true today, the country is facing challenges that could cause concern for future economic prospects. Urgent actions are needed by the political class, the business community and the general public to remain a prime FDI destination.
Positive Signs for Canada’s FDI Outlook
Advanced Manufacturing: The advanced manufacturing sector in Canada saw the highest increase in FDI in 2023, particularly in food, paper, and transportation equipment manufacturing. This sector remains a critical employment and export pillar of the Canadian economy, driving significant foreign investment.
EV Sector: The EV sector has seen substantial growth in the Ontario and Quebec provinces. These regions are positioning themselves as key players in the EV supply chain, crucial for the future of the automotive industry and Canada's transition to green energy. EV growth includes new greenfield projects and the conversion of legacy facilities for new EV platforms and programs. Projects in this industry are also starting to trickle into the Atlantic provinces, attracting the attention of companies considering establishing new operations there.
Clean Energy: Long known for its oil and gas industry, Alberta is also home to clean energy initiatives. The province's focus on hydrogen production and carbon sequestration aligns with global trends toward sustainable energy and decarbonization. A notable FDI project related to this field is in Edmonton, where the first global full-scale carbon capture and storage facility in the cement industry is under development at the Heidelberg Materials plant. On the other side of the country, projects such as green hydrogen production at the Port of Belledune in New Brunswick also highlight the national push towards clean technology.
Canada climbed to the third top destination for FDI inflows in 2023, after only the United States and Brazil...partly due to the drop in FDI inflows into countries like China.
Factors Driving FDI in Canada
Political and Economic Stability: Canada’s reputation as “boringly stable” politically and economically is a notable draw for investors looking for a safe bet.
Immigration Policies: Canada has been successful in attracting skilled labor through its flexible immigration system, which is crucial for supporting FDI. Despite a growing sentiment in the population to reduce immigration levels that spiked rapidly upward following a pause during the pandemic, immigration remains a key driver of the country’s economic growth. Importantly, no major political party in power in Canada has opposed immigration in their rhetoric, though program and headcount adjustments are an ongoing topic of debate.
Trade Agreements: Canada is the only G7 economy – the seven largest advanced economies in the world – with comprehensive free trade access to all G7 and European Union countries, with its 15 trade agreements covering roughly 60% of the world’s GDP. These agreements facilitate investment flows and offer strategic advantages for companies looking to invest in Canada.
Areas to Keep on the Radar
Economic Performance: Canada’s economy is expected to underperform the global average, with high household debt and slowing economic growth (CEIC Data), which will impact FDI targeting domestic consumption.
Canada is the only G7 economy...with comprehensive free trade access to all G7 and European Union countries, with its 15 trade agreements covering roughly 60% of the world’s GDP.
Productivity and Innovation: At 0.7%, Canada’s productivity growth between 2013 and 2022 was below the G7 average of 0.9%, which is already a concern compared to the previous two decades of 1.6% productivity gains. Since 2019, Canada’s productivity has declined (-0.15%), placing it fifth among the G7 countries. For comparison, the U.S. has experienced 6.1% productivity growth during the same period.
Housing and Cost of Living: The average home price in Canada is 20% higher than in the US, despite having a median income 10% lower than in the U.S. The rapid rise of housing costs has affected all communities across Canada, from urban areas to suburban, rural and very remote communities. It’s a concern for all households, as well as the companies that must manage salary expectations.
Site Readiness and Permitting: The quality and readiness of sites can vary dramatically and be a deciding factor when selecting between provinces, states, and countries. Canadian economic development organizations need a portfolio of development-ready sites with comprehensive, clear information about qualities and challenges. Newmark has advised the Province of Ontario in selecting municipalities to support industrial site readiness, which has led to billions of dollars in new FDI.
The advanced manufacturing sector in Canada saw the highest increase in FDI in 2023, particularly in food, paper, and transportation equipment manufacturing.
Labor Shortages: While flexible immigration policies help, there’s still a need for more skilled workers in various sectors, which is accentuated by an aging population. Companies need assurances that they can find the talent they need to succeed. Ontario’s newly announced $190M investment in a Skills Development Fund is one example of the government attempting to tackle labor shortages, as is Quebec’s 2023 program that will direct similar amounts of money to training in the construction trades.
Takeaways
Canada's FDI landscape is undergoing significant changes, with both challenges and opportunities on the horizon. While the country continues to attract substantial investment in key sectors such as EVs and clean energy, recent global trends indicate a growing concern among investors about the broader economic environment.
To continue to drive economic growth and maintain its position as a prime destination for FDI, Canada must enhance site readiness, ensure a skilled labor force, address housing shortages and foster a more attractive policy environment for diverse investments.
