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North-of-the-border sizzle. US investment in Canada is booming - but flow goes both ways

By David R. FrancisStaff writer of The Christian Science Monitor / September 25, 1987


Investment across the Canadian-American border is booming - both ways. Canadians have long been aware of the high level of foreign ownership of companies within their country, most of it from the United States. Another $7.5 billion, a record amount, was invested by foreigners in Canada last year, up from $3.4 billion in 1985.

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This year the amount invested could be even greater, with about $4 billion invested in the first half.

``It looks like an absolutely splendid year,'' says Paul Labb'e, president of Investment Canada, a government agency in charge of promoting foreign investment in Canada and reviewing a limited number of foreign investments.

Less well known either in Canada or the US is the flood of Canadian investment in the US in recent years.

``This new trend has received little attention, even though it could have significant consequences for the Canadian-US relationship,'' notes Alan M. Rugman in a new study done for the Canadian-American Committee.

Indeed, he estimates that Canadian investment in the US could equal American investment in Canada in five years.

Canadian outward investment started to accelerate in the mid-1970s. Since 1978, it has averaged about $3.5 billion a year. In 1981 and 1985, Canadian companies spent more than $5 billion acquiring assets in other countries.

Most of that money has gone to the US - more than 65 percent of it in 1984. The book value of Canada's direct investment in the US climbed from $5.5 billion in 1975 to $35 billion in 1985. The average annual increase over that decade was about 20 percent. By now, more than 527,600 workers in the US are employed by Canadian-owned companies, topped only by British-owned companies which employ 628,000 Americans.

Again looking at book value (the amount originally spent on an enterprise - not its market or replacement value), the Canadian investment in the US comes to about 60 percent of the $63 billion Americans have invested in Canada over the years. Mr. Rugman figures if market value is considered, that percentage is undoubtedly too large. Since American investments in Canada have generally been in place longer than vice versa, they are probably worth considerably more today.

A study of the Canadian economy by Prudential-Bache Securities attributes the growing emergence of Canada as an exporter of business capital partly to ``maturation of its economy.'' But clearly other factors are also at work, ``not least the siren attraction of the US marketplace.''

The Canadian investment also points to the ever-increasing integration of the North American economy.

That trend could be hastened if the current talks aimed at creating free trade between the two nations are successful. Canada, however, suspended these negotiations Wednesday, claiming the US had not moved on a Canadian demand for a mechanism to settle trade disputes outside the normal US trade procedures. The deadline for reaching a deal is Oct. 5.

Even if the negotiations fail, the flow of investment across the long Canadian-American border should continue if not accelerate. If trade barriers remain, Canadian companies may feel even more compelled to establish a direct presence in the US.

Mr. Labb'e believes the rapid increase in Canadian investment abroad reflects the new dynamics of Canadian companies. With a market of only 25 million customers at home and sometimes running up against limits of market concentration set by antitrust laws, Canadian firms are looking abroad for expansion.

``The reality is, the business world is going global,'' Labb'e says. ``Canadians recognize that.''

For the head of Investment Canada, the inflow of foreign money into Canada is particularly good news. A law creating his agency was one of the first acts of the government of Prime Minister Brian Mulroney after it was elected to office three years ago this month.

Under the previous Liberal government, many foreign investors doubted their welcome in Canada. The government of Prime Minister Pierre Trudeau set up the Foreign Investment Review Agency (FIRA) to approve or disapprove individual foreign investments in Canada. It also introduced the National Energy Policy to stimulate greater Canadian ownership in the oil and gas industry.

After the deep recession of 1982 raised unemployment to high levels in Canada, FIRA was pretty well defanged. The Trudeau regime no longer wanted to turn down job-creating foreign investments.