Tuesday, May 22, 2012

Canada Seeks to Diversify its Financial Future

The Globe and Mail: Canadian Firms Should Focus on Latin America: UN Envoy
HuffPost: Welcome to the G-Zero Era
Reuters: Foreign Direct Investment in Canada Rose in 2011
Stats Canada: Foreign Direct Investment, 2011
WSJ: Resource-Rich Canada Looks to China for Growth

In a time of financial uncertainty, Canada seeks to reduce its dependence on the United States by broadening its sources and recipients of foreign direct investment. Foreign direct investment involves financial investment in physical assets abroad, such as a manufacturing plant or a financial management company, through either purchasing or starting a new company in a foreign country.

Ever since the United States became Canada’s largest source of investment financing in the early 1920’s, Canada has made many efforts to reduce its dependency on its southern neighbor. However, these efforts have not been successful. This is mainly due to Canada’s close proximity to one of the world’s largest economies, the United States, as well as the North American Free Trade Agreement, which makes access to the U.S. market easier as trade barriers (such as tariffs) are relaxed. As a result of its dependency on the United States, Canada’s financial success rose and fell along with the United States.

As a result of the recent crises, however, the United States has seen its financial stability and supremacy reduced. The financial crisis of 2008, caused by the subprime mortgage crash and followed by the European sovereign debt crisis, has led to a negative shift in global perceptions of U.S. financial viability. In effect, the financial crises have hardened the resolve of many countries to avoid placing their entire financial future in the hands of the United States and Europe so that they can have more control over their own success and stability. These countries, including Canada, have been encouraged to take advantage of the current financial climate by seeking broader investment opportunities amongst a wider variety of countries.

Due to the perceived reduction in U.S. financial supremacy, financial diversification efforts within Canada to expand sources and recipients of foreign direct investment have seen greater success. Canada’s investments in the United States have followed a downward trend for several years, currently accounting for only 40.3% of Canada’s total investments abroad. The region receiving the largest increase of investment from Canada is the Caribbean, with Barbados alone accounting for 7.8% of all of Canada’s foreign investment. Similar increases in Canadian investments were seen in Asia and the Pacific Rim. Along with these successes in the Caribbean and Asia, there are calls for stronger financial ties with Latin America, which only received 1.5% of Canadian exports last year. The push for greater investment in this region would allow Canadian companies to take advantage of the proximity and diversity of resources found in Latin America.

Canada has also increased its efforts to attract foreign investment from other countries. Since the year 2000, the U.S. share of total direct investment in Canada has fallen annually. According to data released by Statistics Canada, while foreign direct investment in Canada from the United States increased in the past year by 2.4%, the overall share of investments from the United States continued its pattern of gradual reduction, falling from 64.4% of total direct investment in Canada in 2001 to 53.7% in 2011. This trend has been accompanied by a steep increase in investments from Asia. For instance, investments from Asia accounted for 11.4% of total direct investment in 2011, compared to a mere 4.5% in 2001. A large portion of investment from Asia has come from China, which invested merely $219 million in Canada in 2001 but increased this figure to $10.9 billion in 2011. Much of this investment focused on the mining sector, but also included real estate and manufacturing.

Canada is finally seeing success in its efforts to reduce financial dependency on the United States. Although, this success has come on the declining financial dominance of the United States brought on by the recent financial crises; Canada continues to seek growth.

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