Explaining Canada's Changing FDI Patterns

Abstract

This paper is motivated by the following question: Why are Canadian multinational enterprises (MNEs) expanding so rapidly abroad (especially outside North America) and foreign MNEs locating in Canada less often? To answer this question, we explain trade and FDI patterns simultaneously, employing the standard gravity model to explain the former and an augmented gravity model to explain the latter. The augmentation takes into account elements of the Heckscher-Ohlin theory, new growth theories, public policy, and institutions. Our evidence for Canada and 29 trading partners from 1970 to 1998 measures the roles that each of these theories have in explaining Canada's FDI. We provide new or different results on the impact on FDI of exchange rate movements and volatility, financial market liquidity, R&D performance, institutional quality, and policies directed towards FDI. We also provide strong evidence of complementarity between trade and FDI.