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Archived — Research Summaries: Working Paper 2008-01: Foreign Direct Investment Trends: A Canadian Perspective

by Ram Acharya and Someshwar Rao

Multinational enterprises are playing an increasing role in the world economy by globalizing all aspects of their economic activity. The stocks of global inward and outward foreign direct investment (FDI) have increased by about 16-fold in the last 25 years, reaching over US$10 trillion in 2005. Canada too has actively participated in the corporate globalisation process. Canada is a major exporter and importer of FDI, and, more importantly, a net exporter of capital. Like other advanced economies, Canada too is currently in the rising phase of another large FDI cycle, which as usual, is dominated by cross-border mergers and acquisitions, driven by low interest rates, rising stock market prices and increased participation by private equity. In this phase, like others before, Canadian companies are being acquired by foreign firms, and Canadian companies are acquiring foreign companies in Canada and abroad. There is little empirical evidence of hollowing-out in Canada in terms of movement out of Canada of key corporate headquarter functions. Available research in Canada and other countries suggests that the long-term economic benefits from FDI, including cross-border mergers and acquisitions, outweigh any possible short-term economic adjustment difficulties in host countries, provided they have a competitive business climate and flexible and dynamic factor and product markets.

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