Protectionist sentiment in investment-recipient states is a perennial roadblock to international collaboration in research and development (R&D). The Investment Monitor 2022 (IM) report, recently released by the Asia Pacific Foundation of Canada, draws alongside this roadblock, finding that foreign direct investment (FDI) in R&D between Canada and the economies of the Asia Pacific region accounted for less than five per cent of total inward and outward investment flows between 2003 and 2021. This relatively small proportion of FDI taken up by R&D appears to be driven by the desire of companies to promote domestic capacities in R&D.
Ultimately, the economic and security rationale for keeping R&D at home limits opportunities for international collaboration – and represents missed opportunities for Canada to help solve global problems. In the case of Canada’s FDI with Asia, however, we do see emergent opportunities for R&D collaboration between international firms that would arise from a supportive R&D environment for foreign investment.
Preference for greenfield FDI in R&D
According to the IM report’s findings, Canadian investors generally prefer establishing new factories, plants and offices – known as greenfield investment – rather than merging or acquiring (M&A) local R&D companies when investing in Asia Pacific economies. Similarly, Asian investors in Canada prefer greenfield investment over M&A. The data from the IM report shows that between 2003 and 2021, 60 per cent of Asia Pacific investments in Canada’s R&D industry were in greenfield projects. The percentage is even higher for Canadian R&D investment in Asia Pacific economies – about 96 per cent. This is not surprising, given that investment-recipient countries are protective of domestic firms producing advanced R&D products.
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Technology transfer, or the unwanted movement of intellectual property from one country to another that can result from M&A-type deals, has led to tighter investment-screening regulations in developed countries, including Canada and the U.S. The U.S. was among the first countries to expand investment-screening regulations on critical industries with the adoption of the Foreign Investment Risk Review Modernization Act (FIRRMA) in 2018. Under FIRRMA, the U.S. created the critical technology pilot program to ensure that foreign companies do not get access to sensitive technology and thus benefit from domestic R&D efforts. In March 2021, Canada released its updated national security review of investments guidelines, which highlight the importance of screening foreign investment to ensure that this does not lead to the “transfer of sensitive technology or know-how outside of Canada.” While countries emphasize the importance of protecting sensitive R&D and technology from foreign investment, R&D collaboration remains important for foreign investors because it allows the sharing of innovative technologies that can improve production processes and final products.
Canada’s support for R&D and FDI
Despite the increasingly protectionist stance toward FDI in R&D taken by states to reduce technology transfer, the Canadian government has made a concerted effort to promote R&D collaboration between domestic and foreign companies. The global innovation clusters initiative (formerly known as the innovation superclusters Initiative) launched in 2017 exemplifies the interest of the Canadian federal government in promoting R&D. To date, Ottawa has invested more than $1 billion in the global innovation clusters initiative with hubs in provinces across the country. While the project’s primary goal is to grow Canada’s global competitiveness in R&D, the ability to develop a supercluster largely relies on the province’s centrality to global networks of innovation. Supercluster development, therefore, requires the participation and collaboration of international companies, research universities and non-profit organizations.
As domestic capacity in Canada’s R&D expands, mainly because of the federal government’s investment in R&D capacity-building as part of the supercluster initiative, Canada will become a more attractive destination for foreign direct investment in research and development, and a source of outward FDI in R&D. The innovation clusters are expected to attract FDI in digital technology, protein industries, advanced manufacturing, artificial intelligence and ocean technology. Foreign companies, including those based in the Asia Pacific, such as Fujitsu Intelligence Technology, are already becoming integrated into these clusters. With a robust start-up business ecosystem, local expertise and well-established research institutions, Fujitsu’s artificial intelligence lab has benefited from locating in Vancouver, the hub of Canada’s digital technology supercluster. While Fujitsu has brought its innovative technology to Vancouver, the Japanese multinational company has expressed a keen interest in contributing to the port city’s growing R&D ecosystem. In this case, greenfield investment triumphed, spurring links between domestic and foreign companies in pursuit of complex solutions to global problems.
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FDI between Canada and the Asia Pacific increased during the pandemic
Although the global economy has contracted in the past two years leading to the fall in global FDI, the IM report finds that Canada-Asia Pacific investment in R&D increased during the pandemic. Between 2019 and 2021, Canadian investment in Asia’s R&D sector was up by more than $100 million, while Asian R&D investment in Canada increased by more than $676 million. Based on preliminary data for the first two fiscal quarters of 2022, FDI in R&D between Canada and Asia has already exceeded $500 million. The majority of this value, it should be noted, was raised by a single deal by the Canada Pension Plan Investment Board, which invested around $562 million in Indian tech company VerSe Innovation.
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The drive to find sustainable, innovative solutions to global challenges, including climate change and economic inequality, will require a further expansion of partnerships with companies developing these solutions globally. Therefore, we can expect to see international R&D investment continue to expand in the coming years.
Growing domestic R&D capacity
Despite the recent policies adopted by Canada to tighten investment-screening regulations in the technology sector, the IM report finds that Asian investment in Canada’s R&D has increased at the same time as these regulations were being put in place. The increase in investment shows that Asian investors are interested in tapping into Canada’s developing R&D ecosystem and collaborating with local companies to develop advanced R&D capacities.
Governments interested in growing their R&D capacity in today’s global economy can attract foreign investors by implementing domestic initiatives, including strong intellectual property protections and R&D funding, to facilitate and accelerate R&D spending and collaboration. By fostering an environment that gives foreign businesses the opportunity to partner with local universities and domestic companies to combine their areas of expertise, the Canadian government can further bolster Canada’s global R&D presence.