Macro-Economic Effects of Inward and Outward FDI in Canada

AbstractUsing a detailed data on 27 Canadian NAICS industries over the period 1999–2015, we estimate a small macro-econometric model for assessing the macro-economic impacts of inward and outward foreign direct investment (FDI) in Canada. The estimated coefficients of the model in turn are used to simulate the medium to longer-term macro-economic impacts of a 10 percent increase in the two FDI stocks in Canada. The simulation results show a significant positive impact of the two FDI stocks on investment, innovation, trade flows, employment creation and real GDP. The economic impacts of inward FDI on real GDP and employment, however, are significantly bigger than the outward FDI impacts. A sustained 10% increase in the two FDI stocks would raise Canada’s real GDP in the medium term by 1.2% per year.