Charles Sousa, minister of Finance of the province of Ontario, in an interview with Global Finance late last year, noted that Ontario received more FDI than California, Texas and New York and is now the top destination in North America by dollar value. “Companies are looking to us not for the subsidies, but for the competitive tax climate” that Ontario offers, he said.
Unlike the US’s southern states, which are enjoying a revival of manufacturing investments, Canada took in less FDI for manufacturing, while mining and oil investments went up—reflecting an ongoing trend. CAI Global vice president and partner Marc Beauchamp notes that Canada’s share of FDI for manufacturing went from 39% in 1990 to 29% in 2012. “Quebec and Ontario are the two most important provinces in term of manufacturing, so this trend affects their FDI, [especially] their greenfield FDI.”
Canada should be competing with the southern US states only for manufacturing investments that fit with its workforce environment, says Beauchamp. Energy costs are one differentiating factor (they are generally lower in the South), but not the only one. “Electricity rates will only play an important role in a select few projects—such as aluminium foundries—that use a substantial amount [of electricity]. The availability and cost of the workforce, on the other hand, are usually top preoccupations for manufacturers contemplating a new greenfield investment project.”
Although Canada and the US are often grouped together as similar economies, Silverman says there are major differences in the countries’ political and business environments. “Canada’s workforce is better suited for investments requiring a small but highly skilled workforce, compared to an investment project requiring a large number of lower-skilled production workers.”
While FDI levels into North America have not yet returned to pre-crisis levels, it’s clear that confidence in the region is returning. According to the executives questioned for AT Kearney’s 2014 Foreign Direct Investment Confidence Index, Canada ranks third as the location where investors are most likely to direct their foreign investment dollars. The US not only maintains its first-place position from last year but also increases the lead it had in the 2013 study.
The arrival of bilateral free-trade megadeals, such as the Transatlantic Trade and Investment Partnership, will increase competition for North American inward investment, and the states and provinces are advised to carefully position themselves in the marketplace rather than rely on incentives to tempt inward investment. “From the standpoint of companies looking to make an investment decision,” concludes Steele, “they desperately want to be in the right place to be able to support that business long-term. Incentives are purely gravy.”