Foreign Direct Investment (FDI) has been a pivotal element in boosting the Canadian economy over the past year. From the COVID-19 pandemic, to drastic shifts in international job and talent markets, FDI can turn the tide of domestic and global economies. The economic value of FDI lies in the number of new jobs generated, either directly or indirectly, by a foreign corporation when they decide to expand to a new market. Although this is a primary benefit of FDI, the acquisition of foreign multinational enterprises (MNEs) also plays a significant role in strengthening a market’s ability to innovate. Foreign MNEs are a key component of regional innovation ecosystems, bringing knowledge, expertise, and technologies unfamiliar to domestic corporations.
The current state of Canada’s innovation economy
Innovation, put simply, is about making things better in ways that benefit everyone (Source). How do we extract economic value from knowledge? Or leverage the ingenuity and ideas of a multitude of actors, to develop new products, services, and processes? How do we make sure this will benefit everyone? Effectively, innovation creates new markets, increases productivity in existing industries, and employment opportunities through spin-off corporations – all of which positively contribute to economic well-being and growth.
Earlier this year, the Conference Board of Canada released a report on Canada’s innovation performance. The report concluded that Canada performs satisfactorily in innovation aptitude based on key indicators such as public R&D, business R&D, venture capital, patents, and more. However, Canada’s consistent underperformance is a result of “Canadian businesses historically having little competition and benefiting from high resource prices and generally good trade with the United States” (Source). This means that we’ve failed to aggressively invest in innovation. Echoing this sentiment, the latest Bloomberg Innovation Index in February 2021 ranked Canada’s innovation economy at #21, behind nations like the United States, China, and the United Kingdom (Source).
How FDI contributes to innovation
There is much debate on how best to enhance Canada’s innovative performance and develop a sustainable innovation economy, particularly at the regional level. In 2017, the federal government introduced its Innovation Superclusters Initiative, which aims to support ecosystems in five particular industries, as well as Innovative Solutions Canada (Source). While both initiatives are promising, a key piece missing from the puzzle is how FDI impacts and contributes to innovation.
In 2019, foreign MNEs represented 1 per cent of the total number of companies in Canada, but accounted for 41 per cent of intramural R&D expenditures, employed over one-third of R&D personnel, and were responsible for the majority of exports and imports of technological services in Canada’s corporate sector (Source). Although these companies take up a smaller share of our country’s economic structure, they represent significant players in innovation. Foreign MNEs have a multinational network that enables them to shift their R&D and innovation activities based on changing demand and cost conditions (Source).
Furthermore, these companies provide jobs for the demographic of young grads and experienced workers that have been severely impacted by this pandemic. In turn, the rise in employment provides critical tax revenues for our cities and municipalities, while generating significant spin-off opportunities for our small businesses and local communities.
Considerations to stimulate innovation
The pursuit of innovating is a complex process in a dynamic, multifaceted ecosystem, requiring access to information and technologies, adequate funding, supportive policies, and more. The big question remains: how do we stimulate innovation in Canada? The conversation needs to include the support of FDI and business R&D, as foreign MNEs have historically and consistently shown their dedicated interest in innovation.
International investment is a significant component of Canada’s economic growth that creates higher-paying jobs, expands trade, boosts productivity, provides access to new technologies, encourages innovation, and links Canadian firms to global supply chains. The Investment Attraction team at Toronto Global works with an expansive network with reach across all tiers of government entities, various business sectors, postsecondary institutions, industry associations, and partner organizations from around the world. Backed by the governments of Ontario and Canada and our municipal partners, Toronto Global has helped key companies enter the Toronto Regional market, including Twitter, Reddit, Netflix, DoorDash, Pinterest, Stripe, Infosys, HCL, and Wayfair.