Canada was an attractive destination for foreign direct investment when its population was growing fast and foreign companies faced important trade barriers in the Canadian market. However, with slower population growth and trade liberalization, Canada's attraction for foreign investors seeking to expand their markets has diminished, particularly in the goods sectors. Canada retains its attraction in some commercial service sectors where inward FDI is permitted, such as in wholesale and retail trade and in business services. Even here, however, Canada's small market base limits its attraction as a destination for market-seeking investment- a fact backed up during the interviews for this project. For example, an executive of a U.S. multinational retailer said the company had invested in Canada in the 1990s but quickly reached its market potential. As a result, it focused on larger potential markets when making subsequent investment decisions.
The Canada-U.S. Free Trade Agreement (FTA) and North American Free Trade Agreement (NAFTA) have not made Canada an important investment destination for non-American companies wishing to service the North American market,4 despite the predictions of free trade proponents. During our survey and interviews, however, many executives of foreign corporations voiced strong support for the FTA/NAFTA, stating that rescinding the agreements would seriously damage Canada as an investment destination. Nevertheless, they were critical of the problems and irritants that frequently appear in the Canada-U.S. trade relationship and of the failure to manage this relationship successfully. Several of the executives interviewed noted that the FTA/NAFTA seems to be "trumped" whenever it runs up against American protectionist pressures. They pointed to the use of "buy American" policies at the sub-national level and the protectionist tone of Congress. Several executives expressed concern about an incipient public backlash in the United States over investments in Canada that move jobs out of the home country. Call centres were seen as a particular flashpoint. On the whole, therefore, while executives favoured the FTA/NAFTA in principle, they felt the agreements had not provided the security of access promised when they were negotiated.
Canada's share of the global stock of inward FDI since these trade agreements came into effect has fallen considerably. Furthermore, Canada's share of the North American stock of inward FDI has fallen by almost half since the signing of the FTA/NAFTA, while the U.S. share has grown substantially. (See Chart 5.) Some of the foreign company executives interviewed mentioned that, given the small size of the Canadian market, it is more cost-effective to access it from the United States than to set up operations in Canada. In addition, less than 10 per cent of foreign company executives surveyed considered Canada a favourable place from which to access foreign markets.
It could be argued that Canada's share of global inward FDI is equivalent to its share of the global economy and, therefore, its share was too high before. This argument might have merit if the multinational enterprises' only motivation for investing abroad was market access. However, as mentioned above, there are two other corporate motives for foreign direct investment that must be considered.