Implications of Foreign Direct Investment
on the Canadian Food and Beverage
June 05, 2002
During the last decade Canada became the seventh
largest importer and exporter country in the world.
After the second world war, trade of processed food was
almost non existent
From 1970’s-1990’s, the value of world trade in
processed foods grew from $38 billion to $256 billion, an
annual rate of growth of almost 10% (Henderson et. al.
Countries around the world are encouraging FDI by
subsides or lower taxes schemes.
During the last two decades, worldwide production by
foreign affiliates has been growing faster than exports in
a ratio of 3:1.
Canada’s inward FDI is mainly focused on the
aeronautical, automotive and computer industry,
however by 1995 over 20% of the Canadian F&B&T
industry was controlled by foreign investors.
Cooperative controlled industries have also been
restructuring through public investments (foreign and
Implications of FDI in host economies
FDI may have the following implications in host
1. Technology innovation or transfer.
2. Increase in R&D activities.
3. Increased demand of labour.
4. Increased real income and consumption.
5. Increased exports or imports
6. Non-uniform distribution of benefits
Previous empirical work
Title/Author Objectives Findings
Do domestic firms benefit from To evaluate if foreign equity participation is - FDI gains captured by joint
direct foreign investment? correlated with plant productivity (“own ventures.
Evidence from Venezuela plant effect”). - No positive effects on
To evaluate if spillovers from joint ventures to domestic industry
Bryan J. Aitken, Ann E. Harrison. plants with no foreign investment.
Who benefits from FDI in the UK? To investigate any productivity or wage gap - Low but positive benefits on
between foreign and domestic firms in productivity of domestic firms
Sourafel Girma, David Greenway, the UK and if the presence of foreign compared with foreign
Katharine Wakelin firms in a sector raises the productivity affiliates
(2001) of domestic firms.
Are there positive spillovers from To test for spillovers in the Moroccan - FDI has no positive effect on
direct foreign investment? manufacturing sector, by testing if industry growth for domestic
Evidence from panel data for foreign presence accelerated firms, only on foreign firms
Morocco. productivity growth in domestic firms
during the 1980’s.
Previous empirical work
Multinational firms, competition, To evaluate the effects of FDI on domestic - In Canada and Australia the
and productivity in host- owned firms competing with foreign private sector did not benefit
country markets subsidiaries. (A study for Canada and directly from FDI gains
Australia). depend on spillover of
R. Caves To evaluate the effect of FDI on technical productivity generated by
(1974) efficiency in domestic firms (gains obtained multinationals
by technology transfer).
FDI and “spillover” efficiency To evaluate the existence of indirect economic - Labour productivity in
benefits in Canadian benefits of FDI for manufacturing Canadian manufacturing
manufacturing industries industries in Canada, comparing industry is related to the
domestically owned plants versus plants degree of foreign ownership
S. Globerman with several degrees of foreign ownership.
R&D, interindustry and international To evaluate the relationship between total factor - Positive and significant
technology spillovers and the productivity (TFP)growth and R&D relationship of foreign and
total factor productivity growth expenditures of Canadian manufacturing domestic R&D expenditure
of manufacturing industries in industries in the presence of interindustry on Canadian manufacturing
Canada and international spillovers of technology. industry
Petr Hanel (2000)
To evaluate the effects of FDI on productivity growth and
The Canadian food, beverage and Tobacco
The Canadian dairy processing and grain
Current Empirical Analysis
To evaluate if the results obtained by Hanel (2000)
about technological spillovers on the Canadian
manufacturing industry are consistent when evaluated
at a disaggregated level.
Hanel (2000) found positive and significant
relationships of foreign and domestic R&D expenditure
on productivity in the Canadian manufacturing industry.
Share of domestic and foreign ownership
“Chemical and F&B&T industries”
Chem ical industry, share of foreign and F&B&T industry, share of foreign ownership
dom estic ow nership
m illion C$
1988 1989 1990 1991 1992 1993 1994 1988 1989 1990 1991 1992 1993 1994
foreign ow nership Year
domestic ow nership foreign ow nership domestic ow nership
What is TFP?
A measure of overall efficiency gains
Measures the ability of an economy to obtain increasing
amounts of real output from given levels of all factor
Indicator of the rate at which an economy can provide its
citizens with improved living standards
Two sources of productivity growth:
1. Technological innovation
2. Benefits from increased skill levels
Spillovers estimated using R&D expenditures.
Assume that int’l spillovers are a function of
production by foreign-owned firms in Canada and
the R&D intensity performed by foreign affiliates and
the host country.
Due to high level of foreign control, foreign
subsidiaries are an important source of technology.
Canadian subsidiaries owned by foreign countries
have access to R&D knowledge stock.
1. KLEMS database
2. Annual R&D survey
3. CALURA report
1. STAN databank
2. ANBERD databank
3. The role of multinationals in OECD economies
TFP% jt 1 2(OWN ) jt 1 3( FOR) jt 1 M jt
•TFP% Is the annual rate of growth of total factor
•OWNj Is the total R&D/sales ratio performed by
•FORj Is the proxy for direct foreign spillovers used
by industry j.
•Mj Is the error term which is normally distributed
Proxy for foreign R&D spillovers
The FDI R&D spillover proxy FORj is the stock of foreign knowledge available
to Canadian industry j defined as the weighted sum of R&D/sales executed
by industry j k in Canada
FORj k ( R & D jk / Q jk )C jk
The weights are sales in Canada by subsidiaries belonging to foreign firms of
country (K) and Qj are total sales of industry j in Canada.
C jk Q jk c / Qj
The effect of technology spillovers on TFP growth
TFP%= p1 + p2(OWN)jt-1 + p3 (FOR)jt-1 + Mjt
Industry Intercept p1 OWN FOR Adj. R2
Manufacturing .0004 .132* .126* .346
F&B&T -.32 141.41* 67.70* .2378
Chemical -.21 31.67* .1451 .2203
For the F&B&T industry (1975-1995), relations between the domestic
and international variables and TFP growth were found to be non-
statistically significant, the domestic and foreign R&D intensities for
this industry are close to zero how ever, for the F&B&T industry,
when evaluated for the period (1980-1995), relations between the
domestic and international R&D variables and TFP growth were
found to be statistically significant.
With respect to the chemical industry, the domestic R&D spillover
variable is positive and statistically significant in explaining TFP.
Results suggest that the impact of FDI through foreign technology
spillovers is not uniform across disaggregated sectors.
Results also suggest that the impact of FDI on productivity has not
been constant over the last thirty years.