Diversification in Action: Canadian Companies to Increase Asian Investments

June 4, 2010

With the United States and EU stuck in a weak recovery, Canadian companies are looking to non-traditional markets for new opportunities, especially in Asia. According to the Asia Pacific Foundation of Canada’s 2010 investment intentions survey, 64% of respondents expect to increase their Asian investments over the next 12 months. Another 32% said they would maintain their level of investment in Asia and 4% said they did not know either way. Not a single company said it planned to decrease its Asian investment.

The sharpest increase in planned investment was for India, which went from 8% in 2005 to 13% in 2010. Long seen as an unwelcome environment for foreign investment and as a difficult country in which to do business, India’s economic reforms and stellar growth are gradually becoming known in Canada. A parade of visits by provincial and federal government leaders and by captains of industry over the last few years is at last translating into business deals, including Canadian foreign direct investment in India.

China remains the top destination for investment, with 19.2% of respondents expressing their intention to increase investment in the middle kingdom. Hong Kong, which was listed as a separate option, was the choice of 4%.

Canadian investment in Asia goes well beyond the resource sector. For example, CCL Industries Inc., a Toronto-based company that provides specialty packaging and labeling solutions for the consumer products and healthcare industries, has greenfield plants in Ho Chi Minh City, Vietnam; Pune, India; and Tianjin, China.

Canasia Power Corp., a specialist in the development of major power plants and related electrical infrastructure facilities, has announced joint ventures in the Indian cities of Noida and Ahmedabad to provide solar energy systems. And Minaean International Corporation, a Vancouver-based developer of quick-build light gauge steel technologies, is building bus shelters, gas station kiosks, and temporary shelters in Bangalore, Lavasa and New Delhi.

The enthusiasm for Asian investment does not come as a surprise. The majority of surveyed firms reported revenue and profit increases from their Asian operations – as a share of total revenues and profits – over the last two years. This finding is consistent with the broader macroeconomic picture in 2008-2009, which shows that Asian economies were far less affected by the global recession than were industrialized economies. Indeed, China and India recorded growth rates of 8.7% and 6.7% in 2009, and China alone accounted for nearly half of global growth in the last two years.

Perhaps the most interesting feature of Canadian corporate interest in Asia is that it is driven by a desire to service rapidly growing domestic markets. Fully 55% of respondents said their activities in Asia were aimed at servicing the Asian market compared to only 17% who were looking to service the Canadian market and 10% to service the US market. While “outsourcing” for low-cost labour may have motivated outward investment in the last decade, the new driver of investment is clearly domestic economic growth in Asia.

For a growing number of companies, the challenge is not to find cheaper ways into the US market, but to find alternatives to a sluggish US economy. It is also about the need to develop business in emerging markets to be globally competitive. As an extreme example, the biggest Canadian forestry company currently (by market capitalization) doesn’t own any forests in Canada! Sino-Forest Corporation is the leading commercial forest plantations operator in China and recently expanded its wood products engineering and research in Guangzhou and Jiangsu.

Canadian firms are also investing in water treatment and waste management, education services, software development, and much more – targeted at domestic Asian markets. Most of these overseas investments retain their high-value head office operations in Canada, and many also generate upstream and downstream economic benefits for domestic suppliers and clients.

The traditional wariness of many Canadians to outward investment is dissipating, perhaps because of the increasing recognition of globalized business and the importance of emerging markets. The Foundation’s 2010 national opinion poll found that 65% of respondents agree with the proposition that the Government of Canada should promote greater Canadian investment in Asia. In the aftermath of a global financial crisis that is shifting economic and political weight away from industrialized countries, the need for Canadian companies to truly go global – in investment as well as in trade – is more essential than ever.