Us Foreign Direct Investment into Canada after the Free Trade Agreement

Nearly ten years have elapsed since the introduction of the Canada-US Free Trade Agreement (FTA). At the time the agreement was negotiated concern was expressed that the reduction of tariff barriers would remove the incentive for much US foreign direct investment (FDI) into Canada. This paper provides empirical evidence to show that US foreign direct investment into Canada has continued to grow in the period since the signing of the FTA. While both US imports into Canada as well as US FDI into Canada have increased in relative terms since the FTA, imports are shown to have increased at a faster rate. This paper also analyses the effect of the FTA on FDI in terms of industrial sectors. Evidence is presented here to show that the proportion of total US FDI in the manufacturing sectors has increased since the FTA, but the proportion of US FDI in the resources sectors has actually decreased. This finding contradicts one of the views held in the lead-up to the signing of the FTA, that the agreement would lead to the US investing primarily in resource industries and depleting Canada's manufacturing base. Finally, in a detailed analysis of different industry sectors, this paper provides evidence that the sectors where US foreign direct investment has increased over time are the sectors where US firms had a relatively large proportion of total Canadian investment to start with. This finding is consistent with the view in the literature that agglomeration effects have an important impact on foreign direct investment.