Canada and U.S. Outward FDI and Exports: Are China and India Special?

Abstract

Using cross-country time series data for the period 1989–2001 we analyze the Canadian and United States' outward FDI and export performances, particularly to China and India. Casual examination of data may suggest that Canada is underperforming in its exports and FDI to China, but results from our econometric model do not support that conclusion. We found that Canada's FDI in India is lower than that predicted by the model. Interestingly, while the evidence that investors from the United States tend to invest more in the growing economies is quite strong, it is weak in the case of Canada. Although in-depth research is necessary to understand these differences, it is plausible that there are mismatches between the areas where investment opportunities are available in the fastest-growing parts of the world such as China and India, and the areas in which Canadians have comparative advantage. For example, financial services and mining constitute a big share in Canadian FDI abroad but these sectors are yet to be opened up in China and India. The U.S. FDI base is more diversified and better able to take advantage of the increased opportunities in fast-growing countries such as China and India.