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Implications of Foreign Direct Investment on the Canadian Food and Beverage Industry

Implications of Foreign Direct Investment on the Canadian Food and Beverage Industry. Jorge Mendez-Manzanilla June 05, 2002. Background. During the last decade Canada became the seventh largest importer and exporter country in the world.

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Implications of Foreign Direct Investment on the Canadian Food and Beverage Industry

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  1. Implications of Foreign Direct Investment on the Canadian Food and Beverage Industry Jorge Mendez-Manzanilla June 05, 2002

  2. Background • 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. 1996) • Countries around the world are encouraging FDI by subsides or lower taxes schemes.

  3. Background • 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 domestic).

  4. Implications of FDI in host economies • FDI may have the following implications in host economies: • Technology innovation or transfer. • Increase in R&D activities. • Increased demand of labour. • Increased real income and consumption. • Increased exports or imports • Non-uniform distribution of benefits

  5. Previous empirical work

  6. Previous empirical work

  7. Objective • To evaluate the effects of FDI on productivity growth and trade in: • The Canadian food, beverage and Tobacco Industry. • The Canadian dairy processing and grain handling industries.

  8. 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.

  9. Share of domestic and foreign ownership “Chemical and F&B&T industries”

  10. 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 inputs • Indicator of the rate at which an economy can provide its citizens with improved living standards • Two sources of productivity growth: • Technological innovation • Benefits from increased skill levels

  11. Study approach • 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.

  12. Data sources • Statistics Canada: • KLEMS database • Annual R&D survey • CALURA report • OECD • STAN databank • ANBERD databank • The role of multinationals in OECD economies

  13. The model • Where: • TFP% Is the annual rate of growth of total factor productivity • OWNj Is the total R&D/sales ratio performed by industry j • FORj Is the proxy for direct foreign spillovers used by industry j. • Mj Is the error term which is normally distributed

  14. 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 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.

  15. The effect of technology spillovers on TFP growth TFP%= p1 + p2(OWN)jt-1 + p3 (FOR)jt-1 + Mjt

  16. Conclusion 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.

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