That's the title of a nice survey for the Institute for Research on Public Policy by Walid Hejazi, available here. After being a hot-button topic for the past half-century or so (note to non-Canadians: yes, really), FDI has accumulated a thick crust of myths that could do with some dispelling:
The debate around foreign direct investment is too often framed around two caricatures: that outward FDI is synonymous with exporting Canadian jobs and inward FDI is synonymous with excessive foreign control of Canada’s economy.
From the abstract:
A dispassionate analysis of the evidence shows that the benefits of foreign investment far outweigh any real or imagined drawbacks. Foreign firms operating in Canada are more innovative and productive than their Canadian counterparts, and they pay higher wages. More importantly, they import significant amounts of technology from their parent companies, and the benefits of these technologies spill over to domestic firms. In addition, though the stock of inward FDI did increase somewhat as a share of GDP in the late 1990s, it has held steady since then at just over 30 percent — the same share as in 1970.
Worries about corporate takeovers and the “hollowing out” of high-value head office functions in Canada are also misplaced. Foreign takeovers have actually increased head office activities in Canada in recent years, because foreign firms typically find it to their advantage to keep such activities geographically close to their Canadian operations...
The debate about foreign investment in Canada ignores the fact that Canadian multinationals have quietly become major players in the global marketplace. Canadian direct investment abroad has exploded in the past 30 years, and Canadian firms now own more foreign operations (in terms of dollar value) than foreign companies own in Canada. Far from exporting jobs, this investment abroad serves primarily as a beachhead for market expansion, stimulating domestically produced exports and high value added head office activities such as engineering and design. Policies toward FDI should avoid counterproductive restrictions and focus on fostering a domestic economic environment that enhances the competitive posture of Canadian firms.
These are points that should be hauled out regularly when FDI is being discussed. But there is one part where things get murky:
As expected, domestic innovation and low corporate tax rates are shown to be important levers, but not in the ways that are commonly assumed. Domestic innovation and technology-oriented foreign investment are complements rather than substitutes (i.e., the former helps attract the latter). And low corporate tax rates in fact have little effect on the decision to invest in Canada, but they do help Canadian companies compete more effectively in foreign markets.
In the latter part of the paper, Walid* runs a regression with inward FDI on the left-hand side, and gets a negative (albeit insignificant) estimate for the corporate tax rate coefficient. This may seem to be a surprising result, since it is sometimes claimed that lower corporate tax rates will attract foreign FDI to Canada.
But that story isn't the one that I would tell. To the extent that foreign FDI is conducted by foreign multinationals, there's little reason to expect that domestic tax rates will affect inward FDI: the relevant tax rate for a foreign firm is that of its home country. Where lower tax rates would affect foreigners' decisions are at the level of the individual 'passive' investors who are looking for a place to send their savings without seeking a controlling interest. These flows are about an order of magnitude larger than those of FDI.
But aside from that, I see little to quibble about, and I encourage people who are interested in the role of FDI to read this study.
*We overlapped at U of T during our grad school years.