Canada is a trading nation and its prosperity depends to a large degree on trade and investment. Canada exports 43% of its GDP and more than a third of Canadian jobs are tied to international trade. Canada's trade is mainly with developed countries and the Export Development Corporation (EDC) has played a major role in helping Canadian exporters finance and insure their operations in those markets. Official development assistance institutions, such as the Canadian International Development Agency (CIDA), have also played an important indirect role in helping Canada expand its trade and investment in developing countries.
However, a review of the tools at the disposal of Canadian companies in pursuing new business opportunities in the risky markets of developing countries shows that firms from Canada are at a disadvantage. Their competitors in foreign countries may have the opportunity to use a national development finance institution (DFI).
DFIs are specialized financial institutions created to facilitate private sector investment in developing and transition economies.1 Their mandate is to: (a) encourage outward foreign direct investment (FDI) that fosters long-term co-operation with companies in developing countries; and (b) open up new markets and increase business opportunities for domestic firms.
Should Canadian DFI, or similar type of institution, be created to meet the needs of Canadian exporters?
Rapid Growth in Foreign Direct Investment
Foreign direct investment has become the main source of capital for developing countries. The 1990s saw global capital flows grow from some US$200 billion in 1990 to US$1.1 trillion in 2000. Emerging economies attract about one third of the foreign direct investment flows, much of it to the large nations of Asia and Latin America. While official development assistance for infrastructure projects decreased from US$45 billion in 1990 to US$32.7 billion in 1998, foreign direct investment in infrastructure increased over six-fold from US$24.5 billion to US$155 billion over the same period.2
In a report prepared for CIDA, Consulting and Audit Canada found that Canadian firms have been reluctant to take full advantage of the many newly available international private sector investment opportunities, especially in developing and transition countries.3 This is the case even though Canadian industry has been recognized as having world-class project development expertise.
A stronger foreign presence of Canadian firms through foreign direct investment in developing countries would result in increased exports and significant economic benefits for Canada that may include high skill jobs, subcontracting opportunities, technological innovation, increased tax revenues and foreign exchange earnings.
Most industrialized countries have used their DFIs as vehicles to address the financing challenges and risk mitigation needs of foreign direct investment projects in emerging economies. As a result, firms from those countries have access to an additional business tool that Canadian firms do not have.
1 There are two basic types of DFIs: (i) Multilateral DFIs such as the International Finance Corporation (IFC); and (ii) bilateral DFIs established by national governments. This article focuses on bilateral DFIs.
2 Department of Foreign Affairs and International Trade, Consultations Report, "IFI Bidding – Success Factors and Support Needs," May 2001
3 Consulting and Audit Canada (CAC), "A Canadian Development Finance Institution – Rational, Funding and Organization," March 2000