Foreign Direct Investment: The Canadian Experience

The Canadian economy has been a net recipient of foreign direct investment (FDI). The free-trade agreements (FTA and NAFTA) have had to attract more inward FDI. This study examines the determinants of foreign direct investment (FDI) between Canada and EU15, Brazil and Japan in the period 1995-2007. The purpose of this paper is to analyze the impact of variables, such as, market size, labour costs, trade openness and economic stability. The manuscript applies a static and dynamic panel data approach (Fixed Effects estimator and GMM system estimator). In contrast to previous studies, this paper used a dynamic panel data to solve the problems of serial correlation and endogeneity. The empirical results indicate that the market size, trade openness are significant factors to explain inward FDI to Canada. These results indicate that the FDI attracting will be influence by market size. The wage and taxes are also statistically significant. In other words, the macroeconomic stability influences the decision of foreign investors.