Do Bilateral Investment Treaties Increase Canadian Direct Investment Abroad? An Economic Analysis of Canada's Investment Policy

Abstract

Globalization is opening up new markets for trade and investment. Yet, varying regulatory regimes between states and weak institutions threaten the ability of Canadian firms to safely invest abroad. Foreign Protection Investment Agreements (FIPAs) is Canada’s response to this dilemma. These treaties create binding international law that establishes a stable investment environment between two nations, allowing Canadian companies to better integrate globally through what is known as Canadian direct investment abroad (CDIA). But, as Canada aggressively negotiates FIPAs, their influence on CDIA remains unclear. Using a fixed-effects regression to analyze three separate data sets, this paper provides quantitative evidence that FIPAs increase CDIA between Canada and signatory states. The results show an estimated $1.9 to $3.5 billion increase in CDIA across two of the three regressions for every FIPA ratified. Although these results are significant, the estimated increase in CDIA was less than one percent of total CDIA in 2014. Three separate regressions were conducted: 1) The baseline analysis utilizes panel data from 98 countries between 1987 and 2014; 2) The second analysis utilizes panel data from 86 countries between 1995 and 2013; 3) The third analysis excludes countries where Canada has free trade agreements and utilizes panel data from 93 countries between 1987 and 2014. Six independent variables (Gross domestic product, gross domestic product growth rate, gross domestic product per capita, inflation, exports as a percentage of gross domestic product, and the existence of a FIPA), were included to determined if they influence levels of CDIA. Then, the implications that these results have on Canada’s foreign investment policy framework is discussed. Two distinct issues were found with the current language of FIPAs that may hinder their effectiveness, and thus explain the regression results. First, governments are wary of ratifying FIPAs because of vague interpretations of what constitutes “fair and equitable treatment.” Second, the process surrounding tribunals lack specificity, which may create unwarranted claims against states. The recommendation to remedy these issues is: 1) Canada’s future FIPA approach should be modeled off the Canadian-European Union Trade Agreement (CETA) investment chapter, which adds new provisions to protect a states right to regulate and specifically outlines the arbitration process. In addition, since a single FIPA only marginally increases CDIA, it is recommended that: 2) Canada pursue negotiations to ratify multilateral agreements on investment (MAI) that could standardize investment law across regions, open up multiple markets to Canadian firms and simplify the process; 3) Canada identifies outdated FIPAs and renegotiates terms to bring them up to the investment standards laid out in CETA.