Canada's Foreign Direct Investment Dependency Problem

Abstract

Sustained economic growth from Foreign Direct Investment (FDI) is an economic strategy susceptible to volatility. This leaves economies that are relatively dependent upon FDI inflow, such as the Canadian economy, especially vulnerable to volatility shocks. FDI has seen a tremendous rise in global acceptance due to the extensively studied and accepted economic growth benefits it can offer a nation. However, literature studying the methods by which FDI can be detrimental to economic growth and the factors which impact this, are sparse. This paper will expand on the literature regarding Canadian FDI inward flow by closely analyzing Canada’s dependence on FDI and the risks associated with it, as well as its degree of correlation with global volatility. Analyzing the standard deviation of Canadian FDI inward flow during periods of economic uncertainty reveals that, relative to the G7, Canada’s FDI inflow is volatile. Using a Granger causality test and cross-correlation analysis to determine if VIX levels serve as a predictor of Canadian FDI inflow, it becomes clear that the Canadian economy is markedly susceptible to global economic shocks.