5.3.3 Foreign Investment

Foreign direct investment is the act of investing directly in production in another country either by buying a company there or establishing new operations of an existing business. Foreign direct investment occurs when corporations acquire (buy) one company or when two companies merge (join to become one). Acquisitions are far more common than mergers are.

In the past, foreign investment meant building factories or branch plants by the company in the country where it is trying to do business. As you read in the lesson on transnationals, the reason for this is so the corporation does not have to pay tariffs on the goods it produces. Before the North America Free Trade Agreement, many branch plants of US companies were located in Canada. For example, all the major US automobile companies had branch plants in Canada.

Now, those same companies have specialized production between Canada and the United States. The factories in Canada produce parts of the cars that are assembled in the US and vice-versa. Sometimes, a factory in either country will produce just one car that is sold in both the US and Canada.

The chart provides some statistics about Canadian direct investment. Foreign investment has been increasing steadily in Canada.

A large percentage of Canadian resources and Canadian companies are owned by foreign corporations. Estimates are that more than 50% of the petroleum and gas industry and more than 50% of all manufacturing in Canada is foreign-owned and foreign-controlled.

Foreign ownership occurs everywhere. For example, the United States government has a deficit of about $900 billion each year. A deficit is the result of spending more than is earned. A deficit means that Americans and their government must borrow money. Because they have so much debt, they need foreign investment.