The Coronavirus Crevasse: Foreign Direct Investment in Canada and Around the Globe

As the coronavirus strengthened, increasing the flow of pathogens across international borders, appetite for global foreign direct investment subsided, weakening the movement of dollars crossing those very same borders.

Hence, if the 2008 global financial crisis represented a so called foreign direct investment (FDI) ‘trough’, the Covid-19 pandemic represented an investment crevasse, descending deep into the icy interior. The sheer scale of this economic fissure is illustrated by the fact that from 2019 to 2020 global FDI levels plummeted 42% from US$1.5tn to some US$859bn (UNCTAD 2021). Given that the level of global FDI in 2020 remained 30% below that experienced in the year following the 2008 crash, it is evident that the severity of the economic implications brought about by the pandemic remain truly unprecedented.

As with all global economic events, there are gaping disparities in the extent to which countries saw their FDI flows affected. For example, between 2019 and 2020 the US saw a 44% drop in FDI with cross-border merger and acquisition sales of US assets to foreign investors falling by over 40%. Moreover, while the EU27 witnessed a 71% decline in FDI from US$373bn to US$110bn, the UK saw a 57% decline over this same period, illustrating the prevalence of the risk-off sentiment (UNCTAD 2021).

Nonetheless, in contrast to the experience of Europe, the Americas, Oceania and developed economies within Asia, FDI inflows going to developing Asian economies actually increased by around 4% during the first year of the pandemic. Of particular note here was China, which was the greatest recipient of FDI last year, seeing growth of 6% to US$149bn – predominantly through investment into the technology, e-commerce and research and development industries. Indeed, China’s high-tech economic ecosystem saw FDI increase by 11% in 2020, while cross-border M&As rose by 54% (most of which was in the IT and pharmaceutical sector) (UNCTAD 2021).

Nevertheless, the focus of this article will be on FDI in relation to Canada, which despite being a popular destination for FDI, has seen inward flows being greatly hit by the tumultuous economic climate.

Canada is a highly attractive destination for business investment with the country accounting for the 13th largest FDI inflows across the globe and ranking 23rd highest on the World Bank’s Doing Business Report (World Bank Group 2020). For instance, between 2015-2019 Canada had the second greatest FDI stock to GDP ratio among G20 countries, with the main sources of investment coming from the United States, the Netherlands and the United Kingdom (which together accounted for 64.5% of Canada’s total FDI inflows (STATCAN 2021)). FDI inflows tend to be orientated towards Canada’s manufacturing, mining, hydrocarbons and finance and insurance industries. Furthermore, Canada’s access to the Canada-United States-Mexico Agreement (CUSMA) is also seen as highly lucrative to many foreign investors who can benefit from preferential access to a market with a combined GDP of over US$24 trillion, almost half-a-billion consumers and virtually tariff-free access to the US and Mexican economies (IMF 2021).

Toronto is the recognised focal point for FDI into Canada, with the city being the destination for some 10% of all US FDI projects anywhere in the world (Duggan 2021). Moreover, with Toronto ranking second amongst the Americas Cities of the Future, investors are increasingly seeing the long-term growth potential in the city – with the highest levels of investment being in the software, IT business services and financial services sector.

However, it’s not merely Toronto which commands the limelight. For example, of the Mid-Sized Americas Cities of the Future, Canada took home all podium places, with Mississauga, Hamilton and Quebec coming in first, second and third place respectively (Duggan 2021). Hence, the Swiss-based TNC, Roche Group’s US$500m investment project in Mississauga is indicative of the widespread investment appetite into Canada (UNCTAD 2020).

Nevertheless, as with much of the world, Canada was subject to the coronavirus investment crevasse. Last year FDI in Canada fell 34% to C$32bn (UNCTAD 2021) in 2020, with US based TNCs halving their investments into Canada (UNCTAD 2020). The hardest hit industries of mining, quarrying, and the manufacturing sector saw FDI drop some 70%.

The pandemic also saw the Federal Government pursue a course of enhancing the level of scrutiny on FDI inflows, indicative of states ‘battening down the hatches’ ahead of socio-economic storms. One of the mechanisms involved amending aspects of the Investment Canada Act (ICA), which was established by the Mulroney Administration in 1985 to govern and regulate inward FDI flows. As far as the Federal Government is concerned, the Act is a manifestation of the perpetual balancing act between wanting to remain attractive to foreign investment while protecting national political, social and economic interests.

For example, through the ICA, during the pandemic the federal Government reduced the ‘review threshold’ (above which foreign investors requires government approval), which now ranges from C$415m to C$1.565bn depending on the nature of the investment and the Ultimate or Immediate Investment Country. Additionally, in March 2021 the ICA listed four sectors of the economy that it considered critical to the stability and security of the nation and would hence require deeper levels of scrutiny vis-à-vis FDI, namely: (i) industries involving sensitive personal data; (ii) specified sensitive technology areas; (iii) critical minerals and (iv) investments by “state-owned or state-influenced” parties (UNCTAD 2021:111).

Historically, the degree of scrutiny which Canada applies to major FDI inflows has been high, with 962 FDI projects being selected for screening over a twelve-month period between April 2018 and March 2019. In contrast, in the twelve months of 2019, the United States and Germany screened just 231 and 163 projects respectively (UNCTAD 2021:111). Nevertheless, it is important to note that while the number of FDI projects screened in Canada remains high, the number of projects rejected is comparatively low with the county’s rejection rate being 0.21% as opposed to 0.43% in the US and 0.61% in Germany (UNCTAD 2021:115).

Hence, the pandemic has not only resulted in worldwide hesitation towards FDI, but the crisis has also created a landscape where countries are re-evaluating the significance of certain areas of their domestic economy, with some – such as Canada – increasing governmental scrutiny vis-à-vis FDI. Despite the plethora of challenges brought about by Covid-19, Canada’s economy has remained resilient with the OECD forecasting growth of 6.1% in 2021 and 3.8% in 2022 – and this will no doubt attract further FDI going forward. Moreover, global organisations are seeing particular value in cities such as Toronto and Mississauga, and the multilateral accesses that Canada offers. Nevertheless, Canada’s most recent inflation print hit 18-year highs of 4.4% in October and despite tapering its Quantitative Easing purchases down to C$3bn per week, it remains reluctant to raise interest rates above the current 0.25% level. Hence, prospective foreign direct investors will be closely following the state of the Canadian economy as it climbs out of the FDI covid crevasse.

Rory Glass

Duggan, J. 2021. ‘Americas Cities of the Future 2021/2022’. The Financial Times. London
Government of Canada. 2021. ‘Key Facts About Canada’s Competitiveness for Foreign Direct Investment’.
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IMF. 2021. World Economic Outlook 2021. International Monetary Fund
Smith, T. 2021. ‘Foreign Direct Investment in the UK Fell by 57% in 2020’. The Fintech Times.
STATCADN. 2021. ‘Foreign direct investment, 2020’. Statistics Canada.
UNCTAD. 2021. ‘World Investment Report’. United Nations Conference on Trade and Development. United Nations Publications. New York.
World Bank Group. 2020. ‘Doing Business in Canada’.