Foreign Direct Investment (FDI) good or bad?

http://www.thestar.com/FederalElection/article/498030

Today, Prime Minister Stephen Harper pledged to open up for more foreign investment if Conservatives wins the upcoming election. Certainly, both trade proponents and opponents immediately jump on to comment. Stephen Harper believes that more FDI will benefit Canada and create more jobs. Opponents, on the other hand, condemn such move is “selling off” Canada.

One fact to consider is that thanks to our previous and current governments’ fiscal discipline, Canada has been running a surplus budget for the past few years. At the same time, domestic savings outpaced the actual amount of domestic investment. Macroeconomist will tell you that domestic savings is equal to domestic investment and net capital outflow. If we have more domestic savings than investment, that means our net capital outflow, defined by outflow of direct investment subtracted by inflow of direct investment, must be positive. That means we are sending money out to invest in other countries.

From a business standpoint, as long as a project yields positive return, then it is a good investment. It does not matter where the investment is. So if there is an attractive investment opportunity overseas, firms will invest. Does that mean Canadian firms investing overseas will necessarily consolidate back-office jobs over there to Canada and create more Canadian jobs? Not really, right? Because it depends on what kind of investment a firm is undertaking. If it is an offshoring investment, then we probably will not see Canadian jobs created here. On the other hand, if it is buying up a coal mine in South America, then we can probably expect some Canadian engineers will be sent there. So if we can’t say a foreign investment by a Canadian firm is good or bad without looking at what the investment is, how can we say that FDI by foreign firms in Canada must be good or bad?

The fact that Canadian firms choose to invest abroad, as reflected by our trade data, suggests per macroeconomic theory of comparative advantage that it is more profitable for these firms to invest aborad. So if the money has gone abroad, where do we get money to finance our domestic projects? One source is the government, which we all know how well will that go. The other source is FDI. One thing to note is that it doesn’t matter who finance these projects as long as they are profitable in the long run. It is not so ideal if it is a hostile takeover, which is bound to eliminate jobs. However, that is the nature of competition and that may happen even we only have domestic competition. Overall, FDI brings in tangible capital and intangible know-hows that are good for our economy by raising productivity.

So are we selling off our national assets? Nationalism and protectionism aside, the biggest disadvantage is losing control at the firm level. The government can still exert control through regulations. Profits will have to be shared with the new owners but our governments do not lose the tax revenue. Even though some jobs will be eliminated, some will be created. FDI that makes a Canadian firms subsidiaries and hence eliminates back-office jobs will create job opportunities in the finance sectors. Some will win, some will lose. That is the nature of our changing economy.