Canadian FDI in a post COVID-19 world: have we reached the tipping point?

Abstract

The highly contagious COVID-19 virus spread across the world in a matter of months, beginning in the second half of 2019 and being declared a global pandemic by March, 2020. To limit its continued spread, large parts of economies around the world were shut down, including in Canada and the USA. These actions resulted in levels of unemployment and contractions in GDP not seen since the Great Depression. Superimposed on these truly extraordinary events have been global supply challenges which manifested themselves in an inability of governments to procure critical medical equipment, which exacerbated the health care crisis, increased protectionist sentiments, and led to new protectionist legalisation across many countries. Furthermore, the COVID-19 shock will reinforce trends that were already present globally to shorten supply chains and slow FDI growth, serving as an important tipping point that should encourage governments to consider policies to mitigate the impact of such changes on host economies. This paper considers how these economic, financial, and legislative developments will likely impact FDI patterns for years to come.

Keywords:

• FDI
• COVID-19
• crisis
• Canada
• economic impact

Acknowledgements

We would like to thank Teodora Cosac, three anonymous referees, and a discussant at the Post COVID-19 Foreign Direct Investment Chinese & Asian Economy Conference held online, 26 September 2020 for comments and suggestions. Views in the paper are our own and do not represent, in any way, views of Innovation, Science, and Economic Development Canada or the Government of Canada.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Since 1961, there have only been three periods for which Canada has experienced negative GDP growth: in 1982 (2.9%), 1991 (2.1%), and 2009 (-2.93%). https://www150.statcan.gc.ca/n1/pub/11-402-x/2010000/chap/econo/econo-eng.htm. The economic contraction of 2020 would constitute the fourth period of negative GDP growth since 1961.

2 Romer reconciles the high rates of growth experienced during the recovery during the Depression with this conventional view by demonstrating that the “the declines in real output in the early 1930s, and again in 1938, were so large that it took many years of unprecedented growth to undo them and return real output to normal levels.” (Romer, 1992).

3 See James (2010) for a brief discussion of the lessons from the Great Depression. https://www.ft.com/content/4ac86302-f895-11de-beb8-00144feab49a

4 “As the coronavirus spread across the globe, the U.S. economy was in its 128th month of expansion—the longest in our recorded history—and was generally in a strong position.” Speech by Jerome Powell, Chair of the US Federal Reserve, October 6, 2020. https://www.federalreserve.gov/newsevents/speech/powell20201006a.htm

5 https://www.cnbc.com/2020/11/11/stock-market-futures-open-to-close-news.html

6 https://www.jpmorgan.com/global/research/2020-covid19-recession-recovery

7 https://www.fda.gov/vaccines-blood-biologics/vaccines/emergency-use-authorization-vaccines-explained

8 https://www.cbc.ca/news/politics/tasker-vaccine-briefing-logistical-challenges-1.5817577

9 It is important to note that FDI stocks are reported on a historical cost basis. There have been attempts to revalue FDI stocks from its historical cost basis to a market valuation where an additional term is added to Equation (1)(1) $${\text{FDI}}_{\mathrm{t}}={\text{FDI}}_{\mathrm{t}-1}+{\left(\text{retained earnings}\right)}_{\mathrm{t}}+{\left(\text{net flows of FDI}\right)}_{\mathrm{t}}$$(1) , namely plus any price appreciation or depreciation in FDI during the period. Statistics Canada has worked to create market value positions, see Note to Readers at the link below. The analysis undertaken in the current paper uses FDI stocks measured on a historical cost basis. <https://www150.statcan.gc.ca/n1/daily-quotidien/190424/dq190424a-eng.htm>

10 For additional thoughts on these changing views, consider the May 21 2020 Globe and Mail Article, “Five Eyes allies urged to lessen dependence on China”, https://www.theglobeandmail.com/politics/article-fives-eyes-allies-urged-to-lessen-dependence-on-china/

11 Note that FDI flow data are not available for Canada at the industry level. Hence we use FDI stock data.

12 FDI stock levels are reported in Appendix A.

13 https://www.foreignaffairs.com/articles/united-states/2020-04-28/covid-19-could-bring-down-trading-system

14 These results were the subject of a Globe and Mail op-ed, reproduced in Appendix B. To quote from that op-ed “Restrictions on foreign entry have cost the Canadian economy a whopping 137,400 jobs. Or, for those who prefer dollar figures, they cost Canadian wage earners $10-billion each and every year. The restrictions also slow down productivity growth, creating a drag on the economy.”

15 https://www.debevoise.com/insights/publications/2020/03/coronavirus-impact-on-foreign-investment-in-china

Additional information

Notes on contributors

Walid Hejazi

Walid Hejazi is an Associate Professor at the Rotman School of Management. He is currently working on a series of studies which shed light on the determinants of firm-level productivity, particularly with respect to their international activities. He has testified extensively before parliamentary and senate committees relating to FDI and trade policy development.

Jianmin Tang

Jianmin Tang is a senior economist at Innovation, Science and Economic Development Canada (ISED). He conducts and disseminates economic research and policy analysis in areas under the mandate of ISED in support of policy development. His current research interest is in productivity and foreign direct investment.