Why Do Canadian Firms Invest and Operate Abroad? Implications for Canadian Exports

Canadian foreign direct investment and sales of Canadian multinational firms’ operations abroad, particularly in the manufacturing industry and in the United States, have accelerated sharply over the past decade. At the same time, although foreign demand has accelerated following the Great Recession, Canadian exports have failed to rebound as strongly as historical correlation would suggest. If part of Canadian firms’ investment abroad over the past decade was intended to replace their Canadian production and exports, it could help to explain recent export weakness. This paper investigates these issues in the Canadian forest products industry and the motor vehicle parts manufacturing industry, using a case study approach. Specifically, we examine 15 large, Canadian, publicly traded firms, dominant in each of these industries, over the period 2000-13. We triangulate (i) financial statement data and (ii) public statements about decisions to invest abroad with (iii) macroeconomic data on the activity of Canadian foreign affiliates, focusing on investments in the United States and Mexico. We find that over this period, the companies in the study increasingly chose to invest abroad, leading to a shift in relative operational capacity from Canada to locations abroad. Motives behind this trend include market-seeking objectives, as well as relative cost factors and strategic asset seeking abroad. This shift in the location of production capacity may, at least for the industries and the time period studied, help to explain the weakness in Canadian merchandise exports over the past years, since these firms increasingly choose to serve foreign demand through their operations abroad, rather than exclusively through exports.