1

Mario Ste-MarieA/Assistant Deputy Minister

Investment, Science & TechnologyInternational Trade Canada

October 18, 2005

Panel Discussion on Transatlantic Investment

Experiences:The Impact of EU Enlargement and

Canada as a Gateway to North America

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Key issues for discussion

Explore recent Canadian Direct Investment trends in the Enlarged EU in the context of global developments

Highlight major advantages of Canada as North America’s gateway for businesses from the EU

3

Patterns of International and Canadian Direct

Investment in the European Union

4

EU is increasingly important as a destination of global FDI

Global Inward FDI Stock by Geographic Area (%)

Others

Asia & Oceania

Latin America

EuropeanUnion

NorthAmerica

Source: IPS compilations based on data from UNCTAD

In recent years, the EU has made substantial gains in attracting FDI, largely at the expense of North America.

42% 42%38%

45%

26% 29%

25%20%

14%16%

22% 19%

8%7% 9% 8%

10% 6% 6% 7%

0%

20%

40%

60%

80%

100%

1980 1990 2000 2004

EU (15) EU (15) EU (25) EU (25)

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Large developed EU economies attract most of inward FDI

Share of EU Inward FDI Stock by Member State (%), 2004

* EU 10 New Member StatesSource: IPS compilations based on data from UNCTAD

Mostly large and developed EU economies account for the bulk of inward FDI stock in the EU.

The 10 New Member States (NMS) in the Enlarged EU together held under 6% of the EU’s total FDI stock in 2004.

Poland, Hungary and the Czech Republic are the dominant destinations of international FDI in the NMS (77%)

1.4%

1.6%

1.6%

2.4%

4.1%

5.5%

5.7%

5.7%

8.6%

8.7%

10.7%

11.0%

13.3%

19.2%

0.7% Greece

Finland

Austria

Portugal

Denmark

Sweden

Italy

Ireland

EU NMS*

Spain

Germany

Netherlands

Belg. & Lux

France

United Kingdom

Distribution (%) ofInward FDI Stock in EU 10

New Member States (NMS), 2004

Poland26.7%

Hungary26.3%

Czech Republic24.6% Slovakia (6.3%)

Estonia (4.1%)

Cyprus (3.5%)

Lithuania (2.8%)Slovenia (2.2%)

Latvia (2.0%)

Malta (1.5%)

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Low FDI per capita in NMS suggests strong potential to attract FDI

Source: IPS compilations based on data from UNCTAD

EU1583.6%

10NMS16.4%

EU population distribution

(2003)

1,439 1,4401,897 2,162 2,334

4,0094,345

4,920

6,3167,091

8,781

1,351

FDI per capita by country ($)

(2003)

Per capital FDI in NMS is substantially below the levels achieved in the EU-15 countries, on average.

Potential for NMS to attract FDI from within Europe in the near future is very promising, especially for cost competitiveness reasons

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Canada is the third largest non-EU investor in the region

Source: IPS compilations based on data from EUROSTAT

Distribution of Inward FDI Stock in the EU from Extra-EU Investing Countries

2002 (%)

0.4%

1.3%

1.3%

1.3%

2.5%

5.2%

6.2%

13.0%

54.2%

0.4%Russian Federation

South Africa

Australia

Hong Kong (CN)

Singapore

Norway

Japan

Canada

Switzerland

United States

The bulk (about 70%) of investment in the EU originates from within the member countries.

In 2004, Canada was the 3rd largest foreign direct investor in the EU among non-EU investors, following the United States and Switzerland

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21% 21%27%

61%50% 44%

0%

20%

40%

60%

80%

100%

1990 2000 2004

EU is also an increasingly important destination of Canadian Direct Investment Abroad (CDIA), largely in traditional markets

0.2%

0.5%

0.6%

0.9%

1.2%

1.4%

1.9%

3.9%

7.4%

8.5%

8.8%

9.2%

17.4%

37.3%

0.2%Denmark

Greece

Portugal

Austria

Luxembourg

Italy

Spain

Sweden

Belgium

Germany

Hungary

France

Netherlands

Ireland

United Kindom

Distribution of CDIA Stockby geographic Area (%)

EU

US

Others

Source: IPS compilations based on data from Statistic Canada

Distribution of CDIA Stock in the EU-25by country, Top 15

2004 (%) EU has been attracting an increasingly larger share of CDIA since 2000, largely at the expense of the traditionally important U.S. market (21% to 27%)

U.K. and Ireland have attracted over one-half of Canada’s direct investment in the EU.

Hungary is the only significant destination of CDIA among the three major NMS (Poland, Hungary and Czech Republic).

29%29%18%

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CDIA is the dominant mode for accessing the EU market

34

71

AffiliateSales

Exports

366

192

AffiliateSales

Exports

Sales of Foreign Affiliates of Canadian MNEs versus Canadian Exports:

EU versus the U.S., 2003 ($Billion)

European Union

United States

Source: IPS compilations based on data from Statistics Canada

Investment is preferred to trade as a commercial strategy for delivering Canadian goods and services to the EU.

In contrast, trade dominates investment as a means of serving the U.S. market.

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Key Points

Marked shift in global FDI to EU since 2000, largely going to developed EU-15

The NMS, most notably Poland, Hungary and Czech Republic, have made impressive gains in attracting FDI

Trend is likely to accelerate as more developed European economies look to invest in NMS to improve cost competitiveness

Canada is the third largest investor in EU among non-EU countries with CDIA diversifying from the U.S. to the EU and other regions since 1990

Although most CDIA in EU is still headed to “Old Europe”, Hungary has attracted a significant share of CDIA – more understanding of this phenomenon is needed

Investment in EU is the preferred mode by Canadian businesses serving the EU market

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Canada:

A Gateway to North America for the European Union

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Canada enjoys strong trade and Investment linkages with the United States

2-way trade in goods and services = CAN$680 billion in 2004.

Averages over CAN$1.3 million dollars a minute in trade.

Canada and the U.S. investment stock between the two countries totaling CAN$432 billion in 2004.

The U.S. trades more with Canada than with all of the countries of the E.U. combined!

Canada - U.S. Trade in Goods & Services($CAN Billions)

U.S. to Canada

Canada to U.S.

0

200

400

600

800

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Canada - U.S. Direct Investment Stock($CAN Billions)

U.S. to Canada

Canada to U.S.

0

100

200

300

400

500

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

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U.S. is the major export destination of Canada-based EU firms

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83

83

87

88

89

91

93

95

0 20 40 60 80 100

Australia

Netherlands

New Zealand

France

United Kingdom

Sweden

United States

Japan

Germany

Percentage of Canadian Exports to the U.S. by Country of Control of Exporting Firms, 2002 (%)

Source: IPS compilations based on data from Statistics Canada

EU-controlled firms in Canada account for almost a quarter of Canadian merchandise exports to the U.S. by foreign companies.

The overwhelming proportion of exports (95%) by German-controlled firms and more than 80% of exports by other major EU-controlled firms in Canada are destined for the U.S. market.

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Why Do EU Firms Invest in Canada?

Canada offers a First Rate Business Environment: Easy Access to Markets

• Geography and NAFTA provide easy access to the world’s most prosperous market

Excellent Economic Fundamentals

• Overall government budget in surplus

• Low inflation and low interest rates

A Cost-Competitive Business Environment

• Low overall business costs

• Competitive tax system (particularly for R&D)

An Energetic and Welcoming Infrastructure

• Ease in establishing a new business

• The world’s best-educated workforce

• Strong technological environment

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Smarter BordersSmarter Borders

January 1994 – North America Free Trade Agreement establishes world’s largest free trade area giving Canada direct access to over 400 million people with a combined GDP of over US$11.4 trillion.

A secure flow of goods and people at the border is a key priority for both Canada and the United States.

December 2001- Canada and the USA signed a declaration to build a Smart Border for the 21st Century to accommodate the growth in trade and commerce

March 2005 – Security and Prosperity Partnership for North America calls for common border security and improved regulatory cooperation and collaborative energy and transportation infrastructure.

Canada - US Border: Secure and Efficient

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Canada’s Sectors Offer EU Companies Canada’s Sectors Offer EU Companies Considerable Potential for Growth:Considerable Potential for Growth:

Information and Technology 32 000 ICT firms; work force of 545 000, 38% university degrees

Medical Devices 22, 000 employees $2 B in exports in 2003 Strengths – cardiovascular/radiation therapy equipment/medical imaging

Automotive a North American integrated auto industry; 8th largest in the world; employs half a million workers

Energy - Natural Resources Oil and gas Wind energy

Canadian Growth SectorsCanadian Growth Sectors

A

B

C

D

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Conclusion

Canadian and EU companies share the same preferred commercial strategy to access each others markets:

To serve the EU, Canadian companies are investing in the EU

To serve North America, EU companies invest in Canada as the gateway to North America

TIEA has the potential to improve prospects for investors in both directions (regulatory cooperation and investment)

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Mario Ste-MarieA/Assistant Deputy Minister

Investment, Science & TechnologyInternational Trade Canada

111 Sussex DriveOttawa, Ontario

K1A 0G2www.investincanada.com

Mario.Ste-Marie@international.gc.ca