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by Keith Head and John Ries University of British Columbia, January 2004
This paper examines competition for three types of internationally mobile resources (IMRs) — financial, intellectual, and human capital. We operationalize these concepts as foreign direct investment (FDI), research and development (R&D) activity, and university-educated workers. The analysis identifies the potential benefits to Canada of attracting these resources and reviews the empirical evidence on these benefits. We also provide theoretical and empirical evidence on the determinants of the location choice of mobile resources. Our initial views on each resource are as follows:
The location decisions of FDI, R&D, and university-educated workers are jointly determined: success at attracting one resource draws more of each. These dynamics are self-reinforcing and can lead to industry clusters and a national competitive advantage in particular sectors. While the presence of these dynamics motivates policies to foster such clusters, the success of these policies remains highly uncertain. Government policies aimed at promoting clusters may be offset by the actions of rival governments and some locations may lack an intrinsic attractiveness to support a cluster. Low-cost campaigns to inform foreigners about Canada's attractive features probably make sense. What should be avoided are bidding wars in which Canada pays more to the investors it wins than their spillover benefits can justify.
Policy maker viewpoints have shifted substantially from the hostility and fear once directed towards foreign investors and immigrants. This is a good thing. We urge some caution at this point, so as to avoid overshooting in the other direction. Most of the benefits of locating in Canada appear to accrue to the IMRs themselves. Furthermore, most policies that make sense on their own merits will have the side effect of attracting more IMRs. More research is required before reaching final conclusions on the extent to which Canada should target scarce public resources specifically towards attracting internationally mobile resources.