Economics
2016-03-30
Introduction
This paper is devoted to the economic system of Canada and necessary preconditions for its further development. As we know, investments always play an important role in order to develop the country’s economy. There are two main types of investments: portfolio and foreign direct investments. The first type is considered as investing in a set of different securities in order to get profit. The totality of the securities makes portfolio. This portfolio allows getting such characteristics, when different securities are combined, which cannot be obtained when investing in separate financial instruments. Assets of portfolio usually include bonds of state and municipal loans, promissory notes, stocks, bonds of credit and financial companies.
Another type is foreign direct investments. The criterion of 10% or more ownership of shares is adopted to assign to the investments of the direct type in the world practice (shares in the authorized capital). Portfolio investment is respectively less than 10% ownership of shares.
Canada is post-industrial country with a developed stock market (Le Page, 2012). This country has a large investment attractiveness. The international movement of capital has a significant impact on the country’s place in the system of international economic relations. The most profitable industries of Canada are mining, oil and gas, technology, real estate and some others. The most important advantages of Canada economy are the following:
the costs of business in this country are lower than in the US in 7,8-15% (depending on the industry); at the same time, the economy of Canada is strongly influenced by the US (Loeppky, 2014);
the country has the developed and world-class technology infrastructure;
there are relatively low taxes on income: Canada occupies the sixth place in the table of corporate taxes among “Big Seven” countries.
In this case, economy of Canada is quite attractive for foreign direct investments. The last ones have played a great role in Canadian development since the last quarter of the twentieth century. Nowadays, the country’s government also develops portfolio investment sector in the interests of national security and increasing the public welfare. Thus, thesis statement of this paper is that portfolio investments can be considered as the necessary precondition for Canadian economic development in long-term perspective. Some sectors of the Canadian economy have certain restrictions on the access of foreign direct investments, leaving a niche for portfolio investments.
Thesis Statement
Different countries are still interested to invest in Canadian enterprises. There are specific organizations in Canada (Invest in Canada, Export Development Canada), the activity of which aims to attraction, promotion and further accumulation of foreign investments in the country. At the same time, the government of Canada is interested in strengthening the national capital position in the domestic market and controlling activity of Canadian corporations. In this case, portfolio investments are more suitable for further country’s development.
Specification of an Economic Model
Foreign investors and especially American TNCs have played a major role in shaping the modern structure of the Canadian economy, and continues to be an important factor in the economic development of the country. In recent years, there is a tendency to a certain weakening of the dependence of the Canadian economy by foreign capital. At the same time, TNCs share from Asia-Pacific increases and the US share of FDI stock in Canada is reduced. However, the US still accounts for more than half of Canada’s accumulated foreign direct investments.
A sharp rise in interest of foreign investors in Canadian resource assets causes a new wave of mergers and acquisitions involving foreign corporations. It has the Government of Canada to more clearly formulate positions on fundamental issues related to foreign direct investment regulation. In this case, portfolio investments take more priority and government aims to limit foreign direct investments in some sectors of the economy. In my opinion, such approach can prevent the national economy from negative impacts of foreign direct investments and can significantly increase the nation’s capital position in the domestic market, primarily, in the mining sector.
It should be noted that the securities portfolio is a standalone product on the developed stock market and that its sale of all or portions can satisfy all needs of investors, when they invest funds in the stock market. The certain investment quality is usually sold on the market at a predetermined ratio risk/return that can be improved in the process of portfolio management.
Portfolio investments can be considered as more suitable for ordinal investors. The content of the investment portfolio may change, that is, some securities may replace the other. As often, the investors put their money in various businesses and projects in order to secure a real and stable investment income. There are certain principles of the securities portfolio: the security of investments; the stability of income; the liquidity of investments. Such investments can positively affect the nation's capital and increase the activity of Canadian corporations abroad.
Evidence and Analysis
This part of the paper shows the analysis of factors, statistical data and other information, which support the proposed hypothesis.
Nowadays, the complex of economic and political issues, which are related to foreign investment, is in the focus of Canada’s government, businesses, experts and the public. On the one hand, the importance of foreign investment for economic growth and its quality is not being questioned. On the other hand, increased control of foreign corporations over national economy can be a serious issue, because the centers, which make principal economic decisions, move outside the countries, where these decisions are implemented.
A number of factors gives special urgency on the penetration of foreign capital into the national economy of Canada and determines the specificity of modern processes in this area. Firstly, the weight of transnational corporations in the global economy grows rapidly. According to the statistical data of UNCTAD, TNCs accounted for a quarter of world GDP in 2010 (UNCTAD, 2016). The foreign affiliates of TNCs generated around 10% of world GDP and they were the third of the world’s export (2010). The process of mergers and acquisitions (including cross-border) actively occurs in Canada that can increase the economic and political power of certain transnational corporations.
Secondly, the influence of sovereign funds and state TNC is enhanced in the international capital movement. It can affect the politicization level of the foreign investment issue. According to the statistical data of UNCTAD, there are at least 650 state multinationals and around 8.5 thousand of their foreign affiliates. They controlled around 11% of foreign direct investments in 2010 (Statistics Canada, 2015).
Third, the direction of cross-border capital flows changes. The developed countries lose their share in foreign direct investments from year to year. In other words, the role of the developed countries such as capital exporters decreases rapidly, and they are increasingly becoming a recipient of direct investment of TNCs in developing countries. The government of Canada is extremely worrying about increased foreign direct investments of the Asia-Pacific region to the mining sector.
Fourth, blurred control centers, dual headquarters, international board of directors and senior management are no longer the exception to the rule and claim to be the new norm. At the same time, it may adversely affect the economy of Canada.
In the context of foreign investments, Canada is a special case among the major developed countries of the world because foreign capital has played an important role in the formation of the Canadian economy as well as further its development. Canada has become a major exporter of investment since that time (especially in areas such as banking, insurance, mining and infrastructure projects). Nowadays, the issues related to cross-border movement of capital, are very acute in Canada.
The statistic data (table 1) in the context of foreign direct investments show that foreign portfolio investments are significantly greater than foreign direct investments (Government of Canada. Statistics., 2015).
As we can see, foreign portfolio investments were a half times more than foreign direct investments in 2014. The compound annual growth rate of foreign portfolio investments is 12.10% for the period 2010-2014. The indicator for foreign direct investments is 9.95% for the same period.
Despite the fact that Canada’s financial sector remains in first place in absolute indicators of attracting foreign direct investment, the presence of foreign capital is traditionally slightly in this area. It should be noted that the Canadian government restricts the acquisition of shares by foreign investors in the interests of national security. It concerns such sectors as the banking sector, the media, transport, public utilities and other industries. These restrictions vary widely depending on the industry and the particular enterprise and can be used for group of non-resident shareholders as well as for each investor individually.
It should be noted that limitations can be applied to all foreign investors on acquisition of Canadian businesses in the following areas:
production of uranium (including companies that have a stake in the mining and uranium enrichment);
financial services;
transport services;
cultural sphere (falls under the competence of the Ministry of Canadian Heritage).
The issuer of shares and authorized transfer agent are in charge of compliance with the restrictions on foreign ownership of Canadian capital. The transfer agent can refuse to register the shares in the name of non-residents in the case of exceeding the limits as a result of the deal to buy the company’s shares.
Anyway, state agencies consider the question of whether the investment is “net benefit” for Canada or not. The following factors are the most important:
impact on the level of economic activity in Canada: its employment, the level of resource recycling, the use of parts and components produced in Canada, the perspectives for the export of products from Canada;
importance of the Canadian labor force in the acquire new enterprises;
influence of investment in productivity, efficiency, technological development, innovation and expansion of the products range in Canada;
influence of investment on competition within the relevant industry;
compatibility of the investment with national policies in the field of economy, industry and culture;
the contribution of investment in improving the competitiveness of Canada in the global market.
Conclusion
In conclusion one can say that Canada is characterized by the quite strong economy with high investment attractiveness. Canada is a country in which many countries prefer to invest. The main trading partner and investor in Canada is the US. The countries of the European Union are no less important investors in Canada. It should be noted that Japan lost its position as one of the main investors of Canada during last years. The main sectors, which are the most attractive for investors, are electricity, mining, transportation equipment, insurance, manufacturing of wood and paper products and retail services. These industries of Canada are the most favorable for investments. In this case, the government of Canada must pay more attention to the possible negative impact of foreign direct investments in the country’s economy (preferably, in the mining sector). Thus, portfolio investments are the most appropriate for the further Canadian development.
References
Government of Canada. Statistics.,. (2015). Canada's international investment position. Statcan.gc.ca. Retrieved 30 March 2016, from http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/econ08-eng.htm
Le Page D,. (2012). Social Economy: Communities, Economies and Solidarity in Atlantic Canada. Canadian Journal Of Nonprofit And Social Economy Research, 3(2).
Loeppky R,. (2014). Canada, Health and Historical Political Economy. Journal Of Australian Political Economy, 73.
Statistics Canada,. (2015). The Daily — Foreign direct investment, 2014. Statcan.gc.ca. Retrieved 30 March 2016, from http://www.statcan.gc.ca/daily-quotidien/150424/dq150424a-eng.htm
UNCTAD,. (2016). World Investment Report 2015: Reforming International Investment Governance. Unctad.org. Retrieved 30 March 2016, from http://unctad.org/en/Pages/DIAE/World%20Investment%20Report/World_Investment_Report.aspx
