Foreign investment policies and capital flows in Canada: a sectoral analysis

This paper develops and estimates a statistical model of foreign investment flows in Canada in order to determine the degree to which Canadian foreign direct investment (FDI) policies affected these flows. Theoretical considerations suggest that host government policies directed at inward foreign investment (FDI) also influence outward direct investment (ODI), especially investment by affiliates of foreignowned companies. Our study documents the empirical importance of this relationship with respect to specific host government initiatives. A distinguishing feature of the study is that we estimate the effects of Canadian policies at the sectoral level. Specifically, we focus on three sectors: manufacturing, finance services, and energy. We utilize time-series data over the period 1950–1995 to specify and estimate the three sector-specific models. In so doing, we are able to compare the effects of sector-specific policies with those of policies that applied to all sectors. To this end, we develop a policy framework that suggests that general policies are less likely to deter FDI flows than are sector-specific policies. We do in fact find that public policies have (to some degree) been influential in determining capital flows, but the effects are not uniform. D 2002 Elsevier Science Inc. All rights reserved.