Wednesday, October 12, 2011

Manna from Heaven – Foreign Direct Investment?



FDI has been, since I trained as an economist, the best form of investment that a country could hope to obtain.  Money invested for the long term that will result in job growth and revenues increases – even it turns out when the FDI is in the form of buying already existing companies it appears.

There is no doubt that Canada has a problem because the greatest bulk of foreign investments into Canada is either TSX60 companies or sovereign t-bills or bonds – highly liquid investments that can exit at the first sign of trouble (or better opportunity elsewhere).  Over the past 30 months (in fact shortly after the financial crisis) investors have looked at Canada favourably, its banks seem solid, and well capitalized, the housing market seems to be doing ok (in fact better than ok, it’s on fire!) which has resulted in more than $100 billion a year in investments (about 8% of GDP). We know that the Bank of Canada is concerned with all this "hot money", and how to minimize the risk it represents to the country (the economy and the currency).

Right now for Canada media the manna is Chinese since they are” sitting on billions of dollars” that is looking for a home to invest.  Hearsay is that in Africa in particular Chinese have been aggressive investors – although compared to America, which annually invests in excess of $300 billion abroad, the Chinese efforts have been small ($70 billion in 2010 – ranked #4 in the world).  The Canadian reality is that for Chinese looking for steady markets Canada has certain advantage, but is maybe not a very important consideration.  The reality of China’s massive investments into Africa (Senegal in particular) would seem to indicate that political (and economic) turmoil is not a critical consideration.

It remains, and hence the beginning of the commentary, that China has looked at many assets in Western Canada – in the oil and gas field in particular (Daylight Energy is the latest TSE:DAY).  However, as a method of “locking-in” resources for China the Canadian market is a poor substitute for poor and easily “influenced” countries in Africa – there is currently only two (full) pipeline (Vancouver & Prince Rupert) going from the oil rich Alberta to the BC coast. 

In fact, of Canada $560 billion in direct foreign investment, China accounts for only 2.7% -- a tiny participation that can easily grow from its current low base.  However, Canada doesn’t offer “resource security” since it would be almost impossible for China to export its production (as in a colony situation) back to China.  The analogy, as far as Canada is concerned is false – as such Canada will remain dependent on its historic “primary” source of FDI – United States of America.  

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