If Canada is to improve its attractiveness as a destination for foreign direct investment, it must address concerns about its business environment. This includes the quality of local suppliers and employees, the state of Canada's infrastructure, and the regulatory and tax environment. Canada also needs to improve relations with the United States and negotiate improved access within existing trade agreements-NAFTA does not sufficiently guarantee market access because the United States has considerable discretion as a result of trade remedy laws.
| Canada could substantially increase its stock of FDI by adopting a regulatory regime similar to that of the United Kingdom. |
Canada's productivity performance must increase substantially for foreign investors to take notice. Suppliers will need to augment their investments in new technologies and in upgrading the skills of their workers. Governments can support these investments through tax incentives such as improving capital cost allowances and providing attractive income tax credits to employers and workers to offset training costs. The challenge for small and medium-sized enterprises is the downtime incurred when installing new equipment and providing the necessary training. Government financial support could help cover the costs of this downtime.
Our interviews with foreign investors revealed concerns about the quality of employees, suggesting that our pool of labour must become better skilled. While we have a large proportion of post-secondary graduates in the labour force, we also have a large proportion of workers who do not have the basic skills required to learn new tasks or use new equipment. That latter workforce group is the one that is most worrying for foreign investors. Addressing this issue will be extremely difficult because employers and workers alike often do not recognize these skill shortages. Governments will need to sensitize them to these problems and provide them with solutions. Measures could include public outreach programs, special basic skills training offered by public educational institutions and incentives to take the necessary training.
The poor state of Canada's infrastructure was viewed by many foreign investors surveyed as a major impediment to new foreign direct investment. If Canada is to increase inward foreign direct investment and remain competitive in North America and the global economy, it will need to invest large amounts of capital in modernizing the physical infrastructure of its urban regions, highways, airports, ports and borders.
The tax and regulatory environment must also be competitive in order to attract foreign direct investment. Canada's tax environment in recent years has improved, especially at the federal level and in key provinces. However, Ontario and Quebec plan to reverse this trend.1 Such steps could derail the positive perception that Canada was slowly building in the taxation area. According to a C.D. Howe study,2 the effective tax rate on capital for large companies in nine major industries will continue to be higher in Canada than in the United States, even when all tax rate changes announced by Canada's federal and provincial governments are implemented by 2008. The traditional variables of resource endowment, market size and agglomeration economics have always been recognized as the main factors in the flow of FDI. However, globalization, economic integration and falling trade barriers have reduced the significance of the traditional variables and made taxation more important in location and sourcing decisions.3
| Concerns over regulation are mostly about the cost of compliance. |
The positive impact of reducing or eliminating regulatory restrictions on FDI inflow cannot be stated too strongly, as demonstrated in an OECD study.4 Canada could increase the stock of inward FDI by 70 per cent by adopting an FDI regulatory regime similar to that of the United Kingdom, the least restrictive system among OECD countries. Canada could increase its stock of inward FDI by another 23 per cent if it reduced its product market regulations to the U.K. level.
Our survey results and interviews reveal that concerns over regulation are less about the level of standards than about the cost of compliance. Improvements need to be made in the administration of regulations so that they can be enforced at less cost to business while still meeting the public interest objectives. Greater federal and provincial efforts in these matters are required; the current federal government's "smart regulations" initiative may offer some recommendations for change in this direction. There would also be value in seeking greater co-operation and alignment of regulations and standards between jurisdictions-between the provinces, between the federal and provincial levels, and between Canada and the United States.5