Archived — Research Summaries: Working Paper 2007-05: Canada and U.S. Outward FDI and Exports: Are China and India Special?

by Madanmohan Ghosh and Weimin Wang.

This paper studies Canadian and American experiences of foreign direct investment (FDI) and exports, particularly to China and India. Using cross-country time series data for the period 1989–2001, outward FDI and exports equations based on a version of the gravity model are separately estimated both for Canada and the United States (U.S.). Although casual examination of raw data may suggest that Canada is underperforming in its exports and FDI in China, results from the econometric model do not support this conclusion. The results do suggest, however, that Canada's FDI in India is lower than that predicted by the model.

While both Canadian and U.S. investors tend to invest more in large economies, the elasticity of FDI outflows with respect to GDP is higher for the U.S. compared to Canada. The degree of trade openness in the host countries and geographical distance between the source and host countries are found to significantly affect the flows of FDI and exports from both Canada and the U.S. Interestingly, while the econometric evidence that investors from the U.S. tend to invest more in the growing economies is quite strong, the evidence is weak in the case of Canada.

Although in-depth research is necessary to understand why Canadian investors are not very sensitive to host country economic growth, it is plausible that there are mismatches between those sectors in high growth locations, such as China and India, where investment opportunities are available and the areas in which Canadians have comparative advantage. For example, financial services and mining constitute a large share of Canadian FDI abroad but these sectors are yet to be fully opened to international investment in China and India. Also, the U.S. FDI base is more diversified and it may be better able to take advantage of the increased opportunities in fast growing countries such as China and India.

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