Economics are one of those things that many people simply choose not to be bothered with. Often the information is dry and boring, and the core data that you really need to see can be hard to find, and hidden in a lot of other unnecessary metrics.
But let’s face it, for better or worse the vast majority of the world works on capitalism, and that means two things: 1) nothing happens without money – the world basically runs on it; and 2) to get money you have to compete, and you have to win.
Economics is really the study of how money works, and is very helpful in determining who’s winning, who’s losing, and how that’s likely to impact your family.
Net Foreign Direct Investment – An Important Metric
One of the major economic metrics that has a direct bearing on your economic security going forward is Net Foreign Direct Investment. This may sound really complicated, but it’s not.
Direct investment occurs when a company directly invests in a business. So it doesn’t include buying stocks or bonds, or other securities. Foreign direct investment (FDI), then, is a measure of how much money is being invested by non-Canadian entities into businesses in Canada.
Of course, having foreigners invest in Canadian businesses is a great thing. Those businesses will pay taxes, they’ll provide jobs for Canadians, and those Canadian workers will also pay taxes. It’s good for the company, good for the workers, and good for the various levels of government. Everybody wins.
This being the case, governments just love to brag about the FDI numbers that are generated on their watch. FDI is such a good-news story, that any time there is an increase in the number, news articles are written and politicians line up to take credit. We saw this recently with a bump to Canada’s FDI in the second quarter of 2019. It jumped to $14-billion (USD), and everyone jumped on the story.
In 1999, economist Robert E. Lipsey had this to say about the importance of Foreign Direct Investment:
International flows of capital perform a variety of functions in the world economy. For example, they permit levels of domestic investment in a country to exceed the country’s level of saving. That has been the case for the United States for the past fifteen years and for most of the past twenty-five years. For rapidly growing economies, such as the United States and Argentina in the nineteenth century, inflows of foreign investment permit faster growth, or growth with less sacrifice of current consumption, than could otherwise take place.
The Other Side of Foreign Direct Investment – Outflows
What’s described above are the inflows side of FDI. Everyone loves inflows. What you don’t hear about so much are FDI outflows. Nobody likes to talk about those.
An FDI outflow occurs when a Canadian entity decides that it’s going to invest its money in a business outside of Canada. Rather than do business here, and hire people here, they’d rather do their thing elsewhere. FDI outflows essentially result in a loss of business activity, employment opportunity, and tax revenue for Canada and Canadians.
To get a fair picture of Canada’s global business competitiveness, FDI inflows and outflows have to be looked at together. When you subtract outflows from inflows, what you are left with is a Net FDI number. When that number is positive, it means more investments were brought to Canada than left, and when it is negative, the opposite is true.
A great example of FDI outflow is the recent departure of a number of Canadian energy firms to the United States. These companies pulled up stakes (many from Calgary) and moved to places like Houston. And they took their job openings and tax contributions with them. These companies are being actively courted by U.S. states and cities (as this article demonstrates), as they recognize the value that FDI inflows can bring.
So, How Bad Are We?
The chart below demonstrates Canada’s Net FDI as compared to the U.S., since 2005. To keep it fair, the chart expresses the net flow as a percentage of GDP.
Looking at the chart, we can see how the U.S. and Canada were largely competitive up until about 2014. Since then, there has been a clear deterioration in our performance in comparison. Note as well that, despite the improvement in numbers in 2018, Net FDI remains negative.
2019 is being heralded as a much-improved year for FDI inflows. However, based on the numbers I have seen, it would appear that outflows are running much, much higher. I give little weight to quarter-by-quarter numbers, as the time frame is simply too short and too subject to revision to be meaningful. We’ll have to wait until the end of the year to see how things pan out.
Why Should You Care?
The reality of life is that all money comes from business. Businesses pay corporate taxes, and they hire employees who earn wages and pay personal taxes. Without business, the total income to individuals would be $0, and the total tax revenue of government would be the same.
At the end of the day, the truth is that it’s businesses that provide the necessary tax revenue to pay for the comprehensive government programs that Canadians cherish.
Understanding this, it’s important to be confident that the place you live in is a reasonably attractive one for business. With the advent of globalization, if businesses do not feel they can successfully operate in your community, they will simply go elsewhere. In short, those beneficial FDI inflows will dry up, and the outflows will increase.
As a final thought, don’t let anyone tell you that answers to complex issues can be solved by simply making things more onerous for business. On the face of it, that may seem a quick and painless way to solve problems. Over the long term, however, the results may be economically devastating.
Important Disclaimer:The information above is for general informational purposes only and does not in any way constitute an offer for the purchase or sale of any security and is not intended to be considered comprehensive or personalized financial or investment advice. themoneygeek.info assumes no responsibility for the use or application of this information. Always consult a tax, investment, or other appropriate professional before adopting any new financial strategies.
I am an accredited Financial Planner with 23 years of experience in the financial services industry. During the course of my career I completed hundreds of financial plans and recommended and sold hundreds of millions of dollars of investment products. I believe that financial independence is a goal anyone can aspire to and I am passionate about helping others to live life on their own terms.