Global Integration
How Canada Performs
The purpose of integrating into global markets is not only about attracting more customers from around the world. Countries that interact well with the global economy are able to tap into an expanded pool of resources—human, technological, and capital—that foster relationships and encourage innovation thereby improving productivity and economic growth.
In this dimension of our How Canada Performs economy report card, we look at four indicators of how Canada’s economy integrates with the rest of the world: inward and outward foreign investment, and backward and forward integration in global supply chains.
Key findings
- Canada is ranked eighth among the 16 peer countries in our ranking for its backward participation in global supply chains, receiving a C grade.
- Canada’s backward participation increased between 2010 and 2020.
- Benefits of being integrated in international supply chains include more efficient sourcing of inputs, enhanced access to global knowledge and capital, and opportunities for market expansion, which collectively help improve productivity, long-term GDP growth, and incomes.
- However, recent geopolitical events suggest Canadian businesses may need to be more selective about who they integrate with.
Canada is integrated into the global economy in two ways
A country’s integration into the global economy is closely linked to its participation in global supply chains (GSCs). Canada participates in GSCs in two ways:
- by importing foreign inputs to produce goods and services that Canada then exports (i.e., backward GSC participation);
- by exporting Canadian-made goods and services to other countries that then use those goods and services as inputs into their own processes to produce goods and services for export (i.e., forward GSC participation).
These indicators reflect how deeply a country is embedded in global production and trade networks.
Canada’s backward participation earns it a C
Backward participation in GSCs varies widely across the peer countries.
Canada scores a C, with foreign value-added content making up nearly 23 per cent of Canada’s total value of exports in 2020.1 Canada’s share is higher than eight of its peers, including the U.S. (7.5 per cent). Ireland leads in terms of its use of foreign inputs in the production of its exports due to the large number of foreign multinational companies operating there.
Why backward participation in GSCs matters
It increases productivity
Backward participation in GSCs increases productivity by enabling firms to specialize in activities where they have a comparative advantage. Importing higher-quality, cost-effective inputs from foreign firms boosts the efficiency of domestic production, thereby supporting productivity growth—a critical component of Canada’s long-term growth.
It supports innovation
Backward participation in GSCs provides domestic firms with better access to information. Knowledge flows help underpin mechanisms for industrial upgrading, rapid learning, and innovation.
Backward participation has increased in most peer countries
Over the 25-year period from 1995 to 2020, the peer-country average in backward participation increased by 4.8 percentage points. The largest increases were in Ireland (14.5 percentage points) and Denmark (10.2 percentage points). Four peer countries reduced their backward participation: Australia, Canada, the U.K., and the United States.
But the decline for Canada occurred between 1998 and 2010. Between 2010 and 2020, Canada’ backward participation increased by 2.1 percentage points.
Canada’s backward participation is mostly with the U.S.
In 2020, nearly 23 per cent of the value of Canada’s exports was made up of foreign value-added content that Canada had imported. Of that amount, almost 50 per cent came from the United States.
But the U.S. is becoming less important as a source of value-added inputs in Canadian exports. The share coming from Japan also dropped. The share sourced from China increased from 1.1 per cent in 1995 to 10.3 per cent in 2020. The shares from Mexico and Germany also increased, but not as dramatically.
Ongoing debate on sourcing strategies
Recent global events, including the COVID-19 pandemic and geopolitical tensions, have intensified the debate over the merits of local versus international sourcing.
Although some advocate for reduced dependence on international supply networks, the predominant economic view supports the benefits of global supply chains. They include more efficient sourcing of inputs, enhanced access to global knowledge and capital, and opportunities for market expansion, which collectively contribute to improved productivity, long-term GDP growth, and incomes.2 However, in light of recent events, Canadian businesses may need to be more selective about who they integrate with.
- Grades are awarded based on a methodology where the best-performing country is guaranteed an A and the worst-performing country is guaranteed a D.
- Theo Smid, “Pandemic and Security Shocks Shake Global Value Chains,” Atradius Collections, May 24, 2022.
Key findings
- Canada ranks sixth among the 16 peer countries in our ranking of inward foreign direct investment (FDI) stock as a share of GDP.
- Inward FDI leads to higher productivity, improved quality of products, and increased competitiveness.
- The sources of Canada’s inward FDI have become more geographically diverse.
Canada earned a C grade in inward FDI
In 2023, Canada’s inward foreign direct investment (FDI) stock was 79 per cent of GDP, positioning it sixth among its peers and earning a D grade.1
This rating reflects the exceptionally high performance of outliers the Netherlands and Ireland. The Netherlands achieves strong inward FDI thanks to its attractive investment climate, educated labour force, good physical and digital infrastructure, and stable tax policy. Ireland is a highly open economy from an FDI perspective. Ireland’s A grade in inward FDI is primarily driven by the multinational companies operating in the country. These companies deeply integrate Ireland into global supply chains (GSCs), contributing considerably to Irish productivity, innovation, and employment.
Global companies invested C$62.3 billion in Canada in 2023.2 Most investments came from global companies already operating here, reinforcing their long-term commitment to the Canadian market.3
Canada’s inward FDI stock as a share of GDP in 2023 was 24 percentage points higher than it was in 2005.
What is FDI?
FDI is a category of investment that refers to the investment by an investor, corporation, or government that establishes a lasting interest in an enterprise in another country. The term “lasting interest” means the direct or indirect ownership of 10 per cent or more of the voting power.
FDI includes both greenfield investment (i.e., a parent company in one country establishes a subsidiary in a different country) and brownfield investment (i.e., a company in one country invests in an existing enterprise in another country).
It is important to note that the FDI data are based on the first destination. For example, a Chinese company may channel funds through a subsidiary in Bermuda, but the investment is ultimately destined for Mexico. The investment would be allocated to Bermuda in the FDI data and not to Mexico, the ultimate destination.
The inward FDI stock indicator used in How Canada Performs measures the total investment levels (as a share of GDP) that has moved into a country over time.
Why inward FDI matters
Canada’s top inward FDI source is the United States
The U.S. remains the primary source of inward FDI for Canada, accounting for 45.4 per cent of the total in 2023. The Netherlands and U.K. follow. China accounts for 1.8 per cent of Canada’s inward stock.
Canada’s inward FDI sources have become more geographically diverse but remain primarily developed economies. Between 2000 and 2023, North America’s share of Canada’ inward FDI stock fell from 60.8 per cent to 45.7 per cent and countries in Asia and Oceania increased their share from 4.5 per cent to 11.8 per cent. Africa and South and Central America each accounted for less than 1 per cent.
The focus of investment has shifted
Over 80 per cent of foreign investment flows into five Canadian industries. In 2023, the largest share of Canada’s inward FDI stock was in the management of companies and enterprises industry (33.0 per cent), followed by manufacturing (17.4 per cent), finance and insurance (11.3 per cent), mining and oil and gas extraction (11.1 per cent), and wholesale trade (9.4 per cent).
Since 2000, there has been a notable shift from FDI going into the manufacturing industry to FDI going into the management of companies and enterprises industry. It represents a shift from investing directly in Canada to investing indirectly through financial vehicles. The share of foreign investment in manufacturing dropped dramatically from 43.5 per cent in 2000 to 17.4 per cent in 2023, with significant declines in specific sub-sectors like beverages and tobacco products, computer and electronic products, paper, and transportation equipment.
Canada’s inward FDI stock grew slower than its outward
Historically, Canada’s outward and inward FDI stocks as a share of GDP paralleled each other until 2012. Since then, outward FDI has accelerated, creating a significant divergence that reached 51 percentage points in 2023.
- Grades are awarded based on a methodology where the best-performing country is guaranteed an A and the worst-performing country is guaranteed a D.
- Statistics Canada, Table 36-10-0473-01, Balance of international payments, flows of Canadian direct investment abroad and foreign direct investment in Canada, by selected countries (x 1,000,000), accessed June 10, 2024.
- Invest in Canada, “Invest in Canada: FDI Report 2022,” 2022, accessed April 16, 2024.
Key findings
- Canada is 15th among the 16 peer countries in our ranking of forward participation in global supply chains, receiving a D grade.
- From 1995 to 2020, Canada’s forward participation increased by 3.2 percentage points.
- Forward participation in global supply chains opens new markets for domestic firms and creates opportunities for knowledge transfers, helping underpin industrial upgrading, rapid learning, and innovation.
Canada is integrated into the global economy in two ways
A country’s integration into the global economy is closely linked to its participation in global supply chains (GSCs). Canada participates in GSCs in two ways:
- by importing foreign inputs to produce goods and services that Canada then exports (i.e., backward GSC participation);
- by exporting Canadian-made goods and services to other countries that then use those goods and services as inputs into their own processes to produce goods and services for export (i.e., forward GSC participation)
These indicators tell us how much a country is connected to GSCs for its production and foreign trade.
Canada is near the bottom in forward participation
Economies with the lowest forward participation are Switzerland, Denmark, Canada, and Ireland, which all score D grades.1
Canada ranks second to last among its peers. In 2020, only 13.3 per cent of the value of Canada’s exports were used as inputs by other countries to produce goods and services for export.
Norway leads this metric, with a forward participation ratio of 33.4 per cent, underscoring the substantial benefits of leveraging natural resources in global supply chains.
Why forward participation in GSCs matters
It increases productivity
By specializing in areas of comparative advantage, Canadian firms can boost efficiency and productivity, paving the way for sustainable long-term growth.
It supports innovation
Forward participation in GSCs opens new markets for domestic firms and creates opportunities to transfer knowledge, helping to underpin industrial upgrading, rapid learning, and innovation.
Forward participation has increased for all peers
From 1995 to 2020, the average forward participation among the 16 peer countries rose by 5.6 percentage points, with significant increases observed in the U.S., Norway, the Netherlands, and the United Kingdom. The U.S. increased its forward participation by 8.7 percentage points while Canada’s increased by only 3.2 percentage points.
The U.S. is the largest user of Canadian inputs
The U.S. was the largest consumer of Canadian inputs in 2020, accounting for 33.8 per cent of the Canadian value-added exports used as inputs abroad. In second place was China, accounting for 6.8 per cent. From 1995 to 2020, the U.S. share decreased by 9.7 percentage points, while China’s share increased by 5.8 percentage points.
- Grades are awarded based on a methodology where the best-performing country is guaranteed an A and the worst-performing country is guaranteed a D.
Key findings
- Canada ranks fourth among the 16 peer countries in our ranking of outward foreign direct investment (FDI) stock as a share of GDP.
- Increased outward FDI positively impacts trade flows, foreign sales, domestic investment, innovation, productivity, employment, and GDP.
- Manufacturing’s share in Canadian outward FDI has decreased significantly.
Canada earned a D grade in outward FDI
Canada ranks fourth among its peers in outward FDI stock as a share of GDP, standing at 131 per cent, which resulted in a D grade.1
Canada’s D grade is largely because of the extraordinary performance of the Netherlands. The Netherlands’ strong outward FDI consists mostly of investments abroad that foreign multinationals own via having set up a holding company in the Netherlands as their European business hub.
From 2005 to 2023, Canada’s outward FDI stock as a share of GDP surged by 72 percentage points. In 2023, Canada invested C$110 billion internationally, reinforcing the role of FDI in integrating Canadian firms into global supply chains, thus enhancing their efficiency and competitiveness.
What is FDI?
FDI is a category of investment that refers to the investment by an investor, corporation, or government that establishes a lasting interest in an enterprise in another country. The term “lasting interest” means the direct or indirect ownership of 10 per cent or more of the voting power.
FDI includes both greenfield investment (i.e., a parent company in one country establishes a subsidiary in a different country) and brownfield investment (i.e., a company in one country invests in an existing enterprise in another country).
It is important to note that the FDI data are based on the first destination. For example, a Canadian company may channel funds through a subsidiary in Bermuda, but the investment is ultimately destined for Brazil. The Canadian investment would be allocated to Bermuda in the FDI data and not to Brazil, the ultimate destination.
The outward FDI stock indicator used in How Canada Performs measures the total investment levels (as a share of GDP) that has moved out of a country into other countries over time.
Why outward FDI matters
Canada’s top destination for outward FDI remains the U.S.
The distribution of Canada’s outward FDI has remained relatively stable over the past two decades, underscoring long-term strategic international relationships. The U.S. remains the primary destination for Canadian outward FDI, accounting for nearly 50 per cent of the total in 2023. Other significant destinations include Bermuda (6.3 per cent) and the U.K. (5.6 per cent). Caribbean countries together account for 14.8 per cent of Canada’s outward FDI. Over 70 per cent of that total is in two industries: finance and insurance (42 per cent) and management of companies (30 per cent). This means that Canadian investment in the Caribbean countries, and possibly to some extent in Luxembourg, are primarily going to offshore financial centres even though they are typically destined for other countries. It is a shift from investing directly in another country to investing indirectly through an offshore financial centre.
Canadian FDI share in manufacturing declined dramatically
The top five industries collectively accounted for nearly 80 per cent of Canada’s total outward FDI stock in 2023. The finance and insurance industry dominated Canada’s outward FDI, representing nearly one-third of the total. In second place was the management of companies and enterprises, increasing its share from 6.3 per cent in 2000 to 22.3 per cent in 2023. Conversely, the manufacturing industry experienced a sharp decline, with its share plummeting from 31.9 per cent in 2000 to just 5.9 per cent in 2023. The most substantial decreases within manufacturing were observed in the primary metal products sector and the computer and electronic products sector.
Canada’s share of outward FDI stock grew more quickly than its inward share
Historically, Canada’s outward and inward FDI stocks as a share of GDP paralleled each other until 2012. Since then, outward FDI has accelerated, creating a significant divergence that reached 51 percentage points in 2023.
- Grades are awarded based on a methodology where the best-performing country is guaranteed an A and the worst-performing country is guaranteed a D.
- Global Affairs Canada, State of Trade 2021 – A Closer Look at Foreign Direct Investment (FDI) (Ottawa: Government of Canada, 2021).
- Naveen Rai, Lena Suchanek, and Maria Bernier, “Does Outward Foreign Investment Matter for Canadian Productivity? Evidence From Greenfield Investments,” Staff Working Paper 2018-31, Bank of Canada, July 2018.
- Someshwar Rao and Qi Zhang, “Macro-Economic Effects of Inward and Outward FDI in Canada,” Transnational Corporations Review 11, no. 1 (2019): 80–96. Cited in Global Affairs Canada, State of Trade 2021 – A Closer Look at Foreign Direct Investment (FDI) (Ottawa: Government of Canada, 2021).
- Global Affairs Canada, State of Trade 2021 – A Closer Look at Foreign Direct Investment (FDI) (Ottawa: Government of Canada, 2021).