By Peter G. Hall, Vice-President and Chief Economist, Export Development Canada
Surfers agree that catching the right wave is part science, part art – and all-important. The same goes for economic waves. Even big ones can take us by surprise, and winning firms, industries and countries are the ones that correctly anticipate and position themselves to ride the best waves well. Many market-watchers are anticipating the wave of global business investment that usually accompanies a recovery. Is Canada well-positioned to capture the moment?
This time, reading the wave-motion is more challenging than usual. Normally, there are ample signs that the big one is coming along. Typically there is a rise in GDP growth that is followed with anywhere from a six month to a two-year lag in investment growth. That’s because there is normally a lot of spare capacity when the economy finally reboots. This time, the delayed recovery has created an investment reticence that has caused companies to use up that spare capacity first. Higher growth, seen in rising business orders, is creating a more immediate need for investment – the wave is likely to build very suddenly this time around. As such, what will the smart money be looking for in terms of suitable investment destinations?
At the outset, companies are concerned about locating in places that are generally good places to be. Canada consistently ranks among the top countries that have a good overall business and institutional environment. This has been enhanced during the crisis and post-crisis period by our fiscal and financial sector resilience, and by our ability to maintain superior domestic growth. While the rest of the world was languishing, Canada was attracting significant investment inflows.
But companies are looking for more than just a good place to be. Overall competitiveness is key, and on that count, Canada has come up short on a number of critical metrics. There is long-standing concern about Canada’s productivity record. The surge of the Canadian dollar over the past decade has put significant pressure on companies to adjust their processes just to maintain their competitive position. But there has been fallout. The auto sector in southwestern Ontario has failed to attract significant net new investments for quite a number of years now, creating concern about the long term future of assembly and auto parts manufacturing in the province.
Companies are also looking at a number of other factors. Availability of labour – particularly highly-skilled, productive labour – is well up there on the list. While Canada may not have an immediate problem here, there are looming shortfalls that potential investors – especially in more labour-intensive industries – may see as a concern. Energy costs are also important, especially in heavy industry. While Canada is energy-rich, the cost of delivered service is what is critical, and what industry will be watching. Also of concern is the availability of infrastructure. Canada’s challenges on this front were obvious to the world during last winter, when rail capacity constraints caused significant delays in international shipments of goods.
Potential investors are also looking with interest at the fiscal future of various candidate locations. High public deficits and/or debts usually mean that future tax liabilities are likely to rise. Well-managed jurisdictions are more attractive, in that future tax surprises are less likely. They are also more able to offer incentives for investors to locate and stay in their region. While corporate welfare is a somewhat thorny issue, it is a modern-day investment-attraction reality, and whether or not it runs cross-grain to ideology, it has become established as yet another key factor in creating a level playing field in the global commercial game.
Much more can be said on this issue, including resource endowment, how welcoming we are of investment, competing sectors within the country, and so on. Hopefully this serves as a useful list for consideration of this imminent development.
The bottom line?
Canada has huge potential and great planet-wide visibility as the global investment wave builds. In the time that it takes for the wave to crest, it will be important for companies, institutions and analysts to position ourselves to catch this one as best we possibly can.
This commentary is reprinted with permission from EDC. It is presented for informational purposes only. It is not intended to be a comprehensive or detailed statement on any subject and no representations or warranties, express or implied, are made as to its accuracy, timeliness or completeness. Nothing in this commentary is intended to provide financial, legal, accounting or tax advice nor should it be relied upon. Neither EDC nor the author is liable whatsoever for any loss or damage caused by, or resulting from, any use of or any inaccuracies, errors or omissions in the information provided.