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Canada: Better Living, Better Investment

Canada: Better Living, Better Investment

Canada is in many ways the ideal place to do business. It’s stable, dependable, friendly, and the workforce is highly educated.

And while its population may be relatively small, the sheer scope of its geographical breadth and wealth of natural resources, ensure the nation that sits atop the North American continent punches well above its demographic weight.

Both Forbes and Bloomberg recently declared the United States’ northern neighbor “The best country in the G-20 to do business.” They were not being biased – facts back up this assertion. According to the prestigious KMPG Competitive Alternatives 2012 report, Canada boasts the lowest costs of doing business among all G-7 countries in R&D-intensive sectors.  Furthermore, it has the G-7’s lowest tax rates overall for new business investment and the second lowest corporate tax rate in that elite group of countries. It carries the G-7s lowest ratio of net debt to GDP. And the World Economic Forum declared its banking system to be the world’s soundest for the sixth consecutive year. Perhaps it should come as no surprise that the nation’s quality of life is rated the highest in the G-7 by the Organization for Economic Co-operation (OECD), based on a variety of indicators including housing, income, jobs, environment, education and health.

As the world’s eleventh largest economy, Canada’s location hits a geographically sweet spot. From a north-south perspective, sharing a border with the United States and its massive market, and through which it can tap the large and growing market of Mexico via the NAFTA free trade agreement. Together, the three nations contribute economic output of $19 trillion each year. Looking east and west, Canada’s ports also provide travel times as much as two days shorter for ships traversing the Atlantic and Pacific Oceans than the United States’ deepwater ports. Moreover, 17 of the nation’s 20 major cities are within a 90-minute drive of the United States border.

This would seem to be an embarrassment of riches. Yet, Canada’s winning streak shows no signs of letting up. To take one key sector as an example, Canada’s geography has blessed it with immense reserves of natural resources, with the number of projects valued at $1 billion exceeding 100 so far announced for the period of 2012-2020. Canadian resource-related projects already announced or in the pipeline for 2012-2020 account for $350 billion. Canada is also home to one of the world’s largest clean energy sectors. The nation harnesses everything from solar rays and wind to moving water via hydropower and the tides, and even biomass.

This is good news. “As the world’s appetite for energy, food and raw materials continues to expand, Canadians are fortunate indeed to be in a position to help meet the demand,” Hartley T. Richardson, Chair of the Canadian Council of Chief Executives says in an officially released report. “But the commodities boom is not the only – nor even the most important – reason for Canada’s recent economic resilience. Sound public policy played an even bigger role.”

As Richardson suggests, alongside natural riches, Canada is blessed with considerable political and economic stability through its robust parliamentary democratic political system, and its equally stable – and praised – financial system. Not to mention abundant professional human resources, a top notch education system, excellent transportation links, technological prowess, strong intellectual property protection, openness to skilled immigrants and transparency in official dealings. The nation is also home to thriving agri-food, automotive, financial and medical services, bio-pharmaceutical sectors, with regional hubs of innovation from its east to west coasts.

These factors have given Canada an edge that has helped it cope even during the ongoing global economic malaise. In fact, Canada’s economy has performed relatively well when compared to the most developed countries. According to the OECD, Canada led all G-7 countries in economic growth over the past decade (2003-2012) and is projected to have one of the strongest rates of growth among G-7 economies between 2013 and 2015.Furthermore, Canada has been widely heralded for having weathered and recovered quickly from the global economic turmoil of recent years, having recouped more than all of the output and jobs lost during the recession

It comes as no surprise that Chinese foreign direct investment (FDI) to Canada have skyrocketed in recent years. Chinese FDI   stock in Canada soared from a meager $113 million in 2004 to $12.0 billion by 2012 – a more than one hundred fold increase. 

To be sure, Canada is not alone. As The Economist put it in an article last October, “Has China arrived at its Rockefeller Centre moment?” The question is referring to Japan’s heady expansion during the 1980s when the Mitsubishi Estate Company snatched up the Rockefeller Centre in Manhattan.

This reference was appropriate. Last December, an article in The International Business Times posed a similarly poignant question in its headline which reads: “Vancouver’s Skyrocketing Housing Prices: Are Mainland Chinese Investors To Blame?” Apparently, Vancouver now carries the dubious distinction of having the highest real estate prices in North America and the second highest in the world after Hong Kong. On the city’s affluent west side, the average detached home now costs a whopping US$2 million, up 35 percent in just the past five years. On the city’s east side houses go for an average of C$850,000.

While these soaring real estate prices in Vancouver are largely the result of wealthy individual investors, according to the Ministry of Commerce’s FDI Statistical Bulletin for 2010, some 3,600 Chinese companies are now doing brisk business in 130 countries. The Heritage Foundation further estimated the total value of China’s total direct overseas investments and contracts in three key sectors: energy (US$284.5 billion), metals (US$98.5 billion) and technology (US$13.5 billion). Its real estate dealings in 2012 reached US$48.7 billion.

According to China’s Minister of Finance, China’s total outward FDI in 2012 amounted to US$87.8 billion; Chinese outward FDI expected to continue surging an additional 20-30 percent annually over the next five years, according to PriceWaterhouseCoopers China. According to a recent survey by the Asia Pacific Foundation of Canada, a think tank, Canada is the ninth most popular FDI destination for Chinese investors, with six percent of Chinese firms opting to invest in Canada. Given these predictions and based on trends in recent years, Canada’s slice of the Chinese FDI pie is bound to keep growing.

Companies like Chinese IT giant Huawei cashed in on one of Canada’s thriving industries: information technology. From its booming video game development trade – world’s third largest such workforce, and growing 17 percent through this year, according to Invest in Canada’s 2013-2014 edition – to its strong suits in enterprise application software –  Canada spent $3.6 billion on health IT in 2010. Public-funding initiatives such as Canada Health Infoway and the Canadian Innovation Commercialization Program, as well as many similar initiatives at the provincial level, have helped bolster the country’s health IT industry.

Huawei’s entry point into this sector was through conducting R&D on Next Generation Network (NGN) wireless data transfer technology. Alongside doubling the size of its wireless-communications research facility in Kanata, Ontario, Huawei launched a center for researching cloud computing with Carleton University.

Besides IT, innovative hubs focused on the clean tech, automotive, aerospace, agri-food, life sciences and medical device industries, among many others, also dot the country. Quality is not the only factor either. Canada can be cost effective too. Michael Worry, CEO of Nuvation Engineering told the media, “When it comes to the kind of advanced engineering we do to build high-end products never built before, we’ve discovered that Canada is actually more cost-effective than China.”

In practical terms, advanced engineering is readily seen in the aerospace and automotive sectors, which are both doing brisk business in Canada. The aerospace industry grew by 46 percent between 2002 and 2010, at which point its revenues hit $21 billion. Japan’s Mitsubishi Heavy Industries’ subsidiary, MHI Aerospace, opened a production facility outside Toronto in 2012 “We selected Toronto because it provided us with the highly skilled workers we need – many of them from around the world, which is also an asset – a facility that fit the bill and proximity to our client. This is the first trial for MHI Aerospace outside Japan in more than two decades and we’ve demonstrated manufacturing quality and efficiency,” MHI Aerospace President Haruhiko Machiyama was quoted as saying in Invest in Canada – 2013-2014 Edition. Global aerospace giants Boeing, and GE, among many others, also have a large presence in Canada. Could Chinese aerospace firms do the same?

The same can be said of the automotive industry. Canada’s history with automobile production is long – stretching back more than 100 years – and today the industry accounts for 16 percent of all automobile production in the North American continent. A whopping $3 billion of capital was invested in the sector annually from 2002 to 2011. Automotive giants from Europe, Japan and the United States have a large footprint in Canada.

It doesn’t stop at production either. With $460 million being pumped into R&D efforts during the same period, high praise has been offered to efforts in the R&D of the emerging electric and hybrid car market. Of note, Invest in Canada – 2013-2014 Edition mentions Dr. Ali Emadi at McMaster University whose research is making a splash in this field. This is an under tapped area for Chinese investors.

Another area ripe with FDI potential is the life sciences sector. When it comes to life sciences – an umbrella term that contains biopharmaceutical terrain as well as the development and manufacturing of medical devices – Ontario and Quebec are the nation’s two main strongholds. According to official data, some 40,000 employees work at more than 300 life sciences companies in these two provinces alone. Global heavy hitters Merck, Pfizer and Novartis have significant investments in Ontario and Quebec as well.

Owing to geography, perhaps it should come as no surprise that agri-food is Canada’s largest manufacturing sector. All told, 297,000 people work to generate $97.3 billion worth of agri-food shipments, from grains and oils to supplements, probiotics and various fine foods. Of interest to China – with its burgeoning middle class demand for consumer products from abroad – Canada sent a hefty amount of processed food and beverages to China, along with the United States, Japan and Mexico. Altogether, the nation exported $24.3 billion worth of processed items in 2012.

Canada falls within the top three countries worldwide in production of lentils, peas, linseed, mustard seed, oats and rapeseed, according to the UN’s Food and Agriculture Organization. Further, innovative R&D is regularly taking place in Canadian laboratory’s dedicated to formulating the next healthy thing. Canola oil was actually made in Canada – literally – and its name means Canadian oil, low acid. Today the rapeseed-derived oil brings the nation’s economy $15 billion annually.

Something that may interest Chinese investors looking for a culinary gold mine: Canadian production of specialty foods like foie gras, kimchi, prosciutto ham and soybeans used to create tofu is on the rise, with new immigrants often behind the facilities built to make such items.

It would seem that there is no end in sight in terms of the potential areas awaiting Chinese FDI. But recent developments have imposed ceilings in a few key areas. For one, the “tens of thousands of millionaire ‘investor-class’ migrants from China have entered Canada simply by loaning C$800,000 ($750,000) apiece in cash to the local provincial government – interest-free for five years,” writes the International Business Times. But this practice came to an end in 2010 following a backlash of criticism and complaints.

More recently, Business Week reported that the Canadian government said it would reject out of hand any attempted takeover of BlackBerry by Chinese computer giant Lenovo due to the fact that BlackBerry is intimately tied up with the government, which would pose potential security concerns. A report in The Globe and Mail confirmed the same.

End of last year, Canadian Prime Minister Stephen Harper reiterated his commitment to “constructive nationalism” – first voiced in December 2012 – to curtail the buying of strategic assets and oil sands businesses by state-owned companies, with a focus on China. Last December, Harper likened the task of developing the world’s third largest oil reserves to the building of the Great Wall, Bloomberg reported. A related report in the South China Morning Post suggested that this policy would precipitate a rush by private Chinese firms.

While these developments may seem like bumps in the road for Chinese investors with their eyes on Canada, the nation’s infrastructure, stability and openness to new immigrants will likely ensure that Chinese investment in Canada will continue to expand.

Perhaps the most significant gear in this well-oiled business machine is Canada’s rock solid financial system. Moody’s consistently ranks its banking system as the most stable worldwide, saying: “Canada’s financial capital has enjoyed a rapid expansion in recent years and is increasingly being recognized as a centre of global banking. Toronto’s international profile will continue to rise through the next decade…” Moody’s Analytics and Fitch and Standard & Poor’s all give Canada top credit ratings. Not one Canadian bank or insurer failed during the global financial crisis of 2007-2008, and the government hopes to return to a budget surplus by 2015-2016.

Crisis aside, by 2020 Toronto could overtake London in terms of the number of workers employed in the financial services industry, according to Moody’s Analytics. As of 2012, 700,000 people were directly employed by the nation’s finance industry, which accounted for $102.5 billion in GDP that year. As a financial center, Toronto ranks fourth in North America and tenth worldwide. Toronto’s bourse is North America’s third largest and the world’s seventh. Reflecting Canada’s strengths, Toronto’s stock exchange leads the world in mining-related listings and has a strong showing in energy and the life sciences.

Beyond Toronto, Vancouver is a venture capital, insurance and wealth management powerhouse; Montreal thrives on banking, insurance, and securities and financial IT; and Calgary is a hub for financing energy and resource projects. Barclays, BNP Paribas, Citigroup, Citco, Deutsche Bank, Mitsubishi UFJ, Morgan Stanley, ING Bank, and Korea Exchange Bank are just a few of the foreign financial organizations that have either established or expanded their dealings in Canada since 2008.

Similarly, Chinese financial institutions have not failed to notice Canada’s rising financial star. When China Investment Corporation first chose to venture overseas, it bypassed more predictable choices like New York and London, and opted instead to open up shop in Toronto.

Commenting on this decision, China Investment Corporation President Gao Xiqing told Invest in Canada, “There are countries with comparable economic characteristics to Canada, but with a lot less friendly environment. In our dealing with the Canadian government, various parts of the government, with the business people, we feel that it’s a lot more congenial to our investments.”

During his visit to China last October, Canadian Governor General David Johnston told China Daily in Shanghai, "Canada is amongst the most open jurisdictions in the world for foreign investment, and that will continue to be the case. So of course Chinese investment will be highly welcome.”

By Jonathan DeHart

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