Over the years and for various reasons, Japanese investment in Canada has declined. But at the same time, the motives of Japanese investors began to change, as did the types of industries in which they had traditionally invested. A new appreciation for Canada’s educated workforce and a new commitment by political leaders promise to make the commercial relationship between the two countries as strong as it once was.

The authors thank Takehiko Isobe for the use of a portion of his data. The financial assistance of the Social Sciences & Humanities Research Council (Grant # R1484A26) is also gratefully acknowledged. This article is condensed with the permission of the Asia Pacific Foundation of Canada. The full version of the article appears in the Foundation’s Asia-in-Canada Series.

Canada’s commercial relationship with Japan has declined significantly in recent years. By his recent visit to Japan, however, Prime Minister Martin signalled that Canada is interested in strengthening economic ties between the two countries. Within this diplomatic process, Japanese Prime Minister Junichiro Koizumi agreed with Prime Minister Martin to establish the Canada-Japan Economic Framework, an initiative to study how to promote the bilateral economic relationship.

An initial step in promoting and expanding the economic relationship between Canada and Japan is to develop an improved understanding of its history and current status, and the nature of the economic ties, with a specific focus on the organizations that drive them. In this article our objective is to update and enhance readers’ knowledge of Japanese foreign direct investment in Canada. Our analysis is based on an extensive survey of the important characteristics of the Japanese parent firms that have invested in Canada. This provides information on the essential characteristics of their Canadian subsidiaries, including the changing investment motives that underpinned the establishment of these ventures.

Trends in Japanese global investment

Although Japan’s rate of foreign direct investment slowed once its “bubble economy” deflated, it is still a major presence in the global economy. Yet Canada’s share of Japan’s foreign direct investment is falling and has been in decline since the 1960s. Canada is now about the 15th largest recipient of Japanese foreign direct investment, behind the United Kingdom, Australia, Brazil, and others. Historically, the focus of Japan’s foreign direct investment has been the United States. Indeed, the U.S. remains a major destination for Japanese foreign direct investment; yet, over the last decade, China has superseded the U.S. to become Japan’s primary investment target. This shift has occurred as Japanese companies globalized their operations to lower production costs (e.g., labour) and position themselves to achieve early-mover advantages in the world’s biggest market. What is also significant is that the share of Japanese foreign direct investment in virtually all countries aside from China has experienced a significant downturn. This suggests that Canadians (and others) may not necessarily have been complacent, or worse, derelict, as suggested by some commentators. Instead, it appears that major international economic shifts have been in progress. Canada’s previous privileged position as a natural destination for foreign investment is becoming increasingly challenged by other countries that can offer significant locational advantages as firms try to improve the price-to-quality ratio demanded by consumers.

Since China has virtually unassailable advantages in the cost of labour as well as in the sheer volume and concentration of emerging customers, Canada may be well served by focusing on assets that accentuate this country’s strengths. These include an educated workforce, abundant natural resources, world class telecommunications capabilities, a high quality transportation infrastructure, and easy access to the U.S.-the world’s richest market.

The characteristics of Japanese firms in Canada

The Japanese firms that invest in Canada tend to be extremely large, diversified, multinational corporations. They have average revenue of $12.2 billion (U.S) and $12.6 billion in assets, yielding an average operating income of $330 million (All figures in this article are expressed in U.S. dollars). Some examples are the sports equipment manufacturer, Shimano Inc., which established facilities in Peterborough, Ontario in 1983, and the car parts manufacturer, NHK Spring Co., which established General Seating of Canada Ltd., in Woodstock, Ontario in 1989. Some of the Japanese firms that have invested in Canada are among the largest corporations in the world, with market values of as much as $156 billion and up to 140,000 employees worldwide (e.g., Toshiba, Honda and NEC).

Japanese parent firms that have invested in Canada are also significantly diversified. On average, they are active in 17 different industries, with some involved in as many as 149. Further, some of these firms have almost 600 foreign subsidiaries in 57 countries, although the average is 16 nations. One example of the latter is the Nikon Corporation, which set up its Canadian ophthalmic division, Nikon Optical Canada, in Montreal in 1989, and a second ophthalmic laboratory in Vancouver, in 1999.

The parent corporations are focused mostly on Asia, which accounts for 42% of their foreign ventures, on average. Further, they are about equally invested in Europe and North America (23% and 24%, respectively), with only a small investment in South America (5%). In general, the Japanese firms that invest in Canada are successful companies that are active in a wide range of markets and in a large number of countries. Clearly, they are sophisticated organizations that are very familiar with investing and operating in international settings.

Industry types of Japanese firms in Canada

The vast majority (84%) of the parent firms that invest in Canada stated that their primary business is manufacturing, followed by those in the wholesale trade (10%), and only then by firms primarily involved in natural resources (3%). Many of the trading companies are well known internationally for the depth and breadth of their involvement in a variety of businesses around the globe (e.g., Mitsui, Sumitomo, Tomen, Marubeni, Nissho Iwai, Mitsubishi). While many of the manufacturers with Canadian subsidiaries are famous (e.g., Kobe Steel Ltd., Asahi Glass Co., Toyo Tire & Rubber Co., etc.) a great many large Japanese firms that have direct investments in Canada are not very well known to Canadians. Some examples are Shin-Etsu Chemical Co., Fujisawa Pharmaceutical Co., and Furukawa Electric Co.

The primary business of 19% of the Japanese firms invested in Canada is in the “Industrial and Commercial Machinery” sector (e.g., Nachi-Fujikoshi Corp.). Seventeen percent are in the “Electronic and Other Electrical Equipment” sector (e.g., Ushio Inc.), 8% are in the “Measuring, Analyzing, and Controlling Instruments” industry (e.g., Sokkia Co.) and another 8% are involved in “Chemicals and allied products” (e.g., Sakata Inc.). In contrast, only 12% stated that “Transportation Equipment” is their primary business (e.g., Kubota Corp.). Thus, Canada has attracted a wide range of firms from various industries. Since one of Canada’s goals is to diversify its economy to smooth the impact of individual industrial cycles, it seems that one of the building blocks, a diverse set of resident firms, is in place.

Types of Canadian industries

Japanese foreign direct investment in Canada remains largely in the wholesale trading sector, with about 54% of Japanese subsidiaries involved primarily in the wholesale trade of durable and nondurable goods. Further, 33% of Japanese foreign direct investment is currently in manufacturing, while 6% is in the financial services industry. About 6% of Japanese foreign direct investment was directed towards the transportation equipment industry. However, almost 13% of Japanese foreign direct investment in Canada was in various other manufacturing activities including chemicals, rubber, industrial machinery, and electronics.

It is often stated that the majority of firms that invest in Canada are interested primarily in gaining access to two things: natural resources and the Canada-U.S. automotive industry. But rather than the perceived, single-minded focus on cars and coal, Japanese investment in Canada appears to have been spread among a variety of manufacturing activities, including chemicals and machinery. While these firms may still count the automotive industry as a major customer, they nonetheless represent foreign investments in various processes and products that increase the diversity of the Canadian economy in general. Some examples include DDM Plastics Co., established as a joint venture between Suzuki Motor and Mitsui & Co., in Tillsonburg, Ontario in 1989, Titan Steel & Wire Co., established by Kobe Steel in Surrey, BC in 1966, and Dynetek Industries Ltd., founded by Mitsubishi Rayon and Mitsubishi Trading in Calgary, Alberta in 1998.

An analysis of the current stock of Japanese foreign direct investment, however, masks important investment trends that appear to be currently under way. While most Japanese investment in the Canadian economy between 1960-1980 was in the wholesale trade, there has been a shift in more recent years, with more Japanese investment increasingly directed towards the manufacturing sector.

In fact, the manufacturing sector is becoming increasingly important, rising from 24% of all Japanese foreign direct investment in Canada in the 1960s to 51% of new investment in the 1990s. In contrast, Japanese foreign direct investment in wholesale trade has declined from a high of 72% of ventures in the 1960s, to 32% by the end of the 1990s. While Japanese trading companies may have been the primary players in Japanese international trade through to the 1980s, our data suggest that they appear to be playing a more limited role in the 1990s and beyond. This may be, as suggested by others, because many Japanese firms have developed their own in-house sales and transportation logistics capabilities which, in the past, they relied on the trading companies to supply. Further, whereas Japanese ventures in natural resources have remained relatively stable over the past 40 years at about 4% of the total, Japanese foreign direct investments in services and in the financial services sector have increased significantly.

Aside from the types of industry, it is also of interest to note the type of legal entity. The majority of operations today are wholly-owned facilities. Only 28% of the ventures established in the 1990s were joint ventures, compared to 22% and 25%, respectively, in the 1970s and 1980s. Further, our most recent data suggest that in 2003 only about 20% of the Japanese ventures in Canada included a Canadian partner. Thus, the vast majority of Japanese joint ventures in Canada are partnerships between two or more Japanese partners with no direct Canadian ownership.

Why do Japanese firms invest abroad?

One element of investment behaviour that is rarely examined is the underlying considerations that lead specific firms into foreign markets. Japanese foreign direct investment motives vary according to industries. Since Canada is rich in natural resources, it comes as no surprise that a great many Japanese firms in Canada indicated that access to these resources was important in their location decision.

Whereas Japanese firms that invested in natural resources indicated that access to labour was not important at all, 57% of manufacturers, 29% of wholesale traders, and 14% of service firms stated that labour quality was a key consideration in their decision to locate in Canada. For example, the ceramic manufacturer, Noritake Co., indicated that a primary reason they established Noritake Canada Ltd. was to gain access to a pool of qualified people. This implies that Canada’s educated and skilled workforce is attractive, not only for foreign manufacturers, but also for Japanese services companies such as Listel, the hotel operator. Also with respect to manufacturers, all respondents stated that a positive and supportive relationship with the host governments, whether at the federal, provincial, or municipal level, all played a significant role in their investment decision. Further, while 83% of Japanese foreign direct investment in manufacturing is designed to export at least part of the total production to Japan, wholesale trading firms indicated that their focus is on facilitating the movement of goods along local and regional networks of suppliers and customers. Finally, a consideration in Japanese foreign direct investment in the financial services sector appears to be overwhelmingly based on developments in global finance, whether positive (e.g., to be in a position to collect information and do product planning) or negative (e.g., volatile exchange markets).

Thus, Japanese firms take a variety of elements into consideration when establishing and directing investment in Canada. It is also clear that these motives vary across industries given the differing pressures on firms to have access to resources, skills, and markets.

While it is important to determine the current motives for Japanese foreign direct investment in Canada, examining how these motives have evolved historically can shed new light on the character of foreign direct investment in Canada.

Changing Canadian views on foreign direct investment

Traditionally, firms invest abroad to achieve production-factor cost improvements through cheaper labour and abundant raw materials. While this explanation holds true for various countries, including China, for example, it does not provide a satisfying rationale for entry into Canada. While Canada is certainly rich in natural resources, the Japanese firms surveyed did not indicate that this factor was the most important reason for their entry into Canada. Further, while an abundance of natural resources may have been a strong, initial factor in Japanese foreign direct investment, it is clear that other considerations have influenced Japanese investors.

In the last 40 years, the official Canadian position on foreign direct investment has evolved considerably. In 1972, for example, the Gray Report suggested that Canadians must hold shares in all foreign firms located in Canada. These recommendations became a policy that required foreign investors to take a minority position in joint ventures. This protectionism, embodied in the Foreign Investment Review Agency (FIRA) and the National Energy Program (NEP), gave way to a new pro-investment mindset, exemplified by the creation of Investment Canada.

Whereas the FIRA and NEP were obstacles to foreign direct investment, the re-appraisal and subsequent modification of the official Canadian position on foreign direct investment caused many foreign firms to re-evaluate the potential of investing in Canada. With the subsequent establishment of the North American Free Trade Agreement (NAFTA) and its promise of guaranteed access to U.S. and Mexican markets, foreign direct investment in Canada grew. In line with the change in Canada’s official position, Japanese motives also evolved. This aspect of foreign direct investment has not been previously examined.

Behind the changing motives for Japanese foreign direct investment

The purposes and motives of Japanese ventures in Canada vary with the year the ventures were established. Over the years, access to qualified labour began to take on an increasingly important role. Only 14% of operations established in the 1960s reported that access to labour was a key consideration. In contrast, 43% of firms that began in the 1990s reported that labour was a major factor in the investment decision. Combined with their increased investment in manufacturing, it seems that Japanese investors are becoming more sensitive to the availability of skilled labour to work in increasingly complex operations. This suggests that Canada must continue to focus on improving the essential technical skills of its citizens, to make them capable of surviving and thriving in demanding manufacturing environments.

Japanese firms that invested in Canada also reported that their primary interest was in integrating the Canadian operation into a global production network. None of the firms that were established in the 1960s indicated that this was a consideration. In contrast, 54% of the Japanese firms that commenced operations in the 1990s indicated that integrating the Canadian operation into a global production network was a significant consideration. Included in this set of firms are many of the Japanese-Canadian plants in the automotive sector, such as Musashi Auto Parts Canada Inc., in Arthur, Ontario, Yachiyo of Ontario Inc., in Barrie, Ontario, and Quality Safety Systems Co., in Tecumseh, Ontario. This trend suggests that Canadians need to be increasingly aware of the needs and wants of foreign investors as they attempt to piece together multi-country operations to compete in the international marketplace.

Only a small proportion of firms (14%) established in the 1990s indicated that their intention to export to a third country (i.e., not Japan) was a key consideration in their decision to invest in Canada. In contrast, 43% of ventures established only a decade earlier indicated that Canada was a staging point for third-country exports. However, in comparison to earlier years, Japanese investors today appear to be increasingly concerned with exporting their products to Japan. For example, 33% of firms established in the 1980s indicated that Japan was a critical export market; this figure rises to 50% of the firms that commenced operations in the 1990s. Some examples of firms that were designed to focus on the Japanese market are Oji Paper Co.’s two Canadian operations, Kanzaki Paper Canada Inc., in BC and Avenor Maritimes Inc., in New Brunswick.

Ventures established in the 1980s appear to have been more concerned about product planning and information gathering. In fact, 60% of Japanese investments in Canada in the 1980s were concerned with product planning and 50% with information collection — figures that drop to 20% and 24%, respectively, for ventures established in the 1990s. One possible explanation for these findings is that the 1980s were years of turmoil in Canadian foreign investment policy. The FIRA and the NEP were in place, and both required a great deal of nuanced understanding. In addition, the Canada-U.S. Free Trade Agreement, and later NAFTA, was being actively discussed and developed and this too created uncertainty and demanded explanations for complex discussions. In such an environment, the Japanese response of establishing operations with a greater focus on information gathering and product planning seems to have been a logical response.

None of the operations established in the 1990s indicated that one of their primary investment purposes was meant to be a response to trade friction. In contrast, an overwhelming majority (86%) of Japanese firms established in the 1980s indicated that a key motive was to mitigate trade problems. It is also noteworthy that trade frictions were again part of the investment calculus by 2001.

Among the key benefits generally attributed to foreign direct investment in Canada, especially Japanese investment, are knowledge transfer and skills development. Indeed, the current theoretical view of the nature of multinational corporations is that knowledge, innovation, and best practices move not only from headquarters to the subsidiaries but also to the foreign operations themselves. Thus, the Japanese operations in Canada that are part of large multinational firms, place Canada in a knowledge-sharing network of operations that is shaping the products and services of the future. Moreover, Japanese foreign investment yields the essential benefit of employment, as described in the following section.

Employment by Japanese operations in Canada

The average Japanese-owned operation in Canada is a sizeable organization. As might be expected, investments in natural resources tend to be the largest, with 413 employees on average. Some well-known examples are the iron ore operations in eastern Canada and the coal mines in the western provinces. Manufacturing plants are also significant ventures, employing an average of 231 employees (e.g., Kubota Metal Corp in Orillia, Ontario), with some operations employing over 2,500 people (e.g., Toyota Motor’s plant in Cambridge, Ontario and CAMI Automotive’s operations in Ingersoll, Ontario). Similarly, trade, finance, and services are all substantial operations, employing an average of about 51, 37, 158 people, respectively.

It is also important to note that while some observers have noted that jobs are disappearing despite economic growth, our data show that employment in Japanese operations in Canada has remained relatively unchanged over time. That is, these operations did not appear to get smaller or leaner between 1992 and 2001.

A rice-paper ceiling

Conventional wisdom holds that Japanese firms use large numbers of expatriates and are reluctant to allow local nationals a significant role in subsidiary management. Japanese firms have been criticized for their unwillingness to capitalize on the diversity in their international managerial ranks. It has been suggested that a “rice-paper ceiling” in Japanese firms restricts local managers from advancement opportunities and involvement in corporate-level decision making. The average use of expatriates is about 2 employees per venture; these people are generally senior executives and engineers who are responsible for overseeing the Canadian operation, as well as communicating with headquarters. In certain manufacturing plants, the levels of expatriate managers are quite high, with as many as 16 Japanese expatriates.

Notwithstanding the high levels of expatriates in some Japanese operations in Canada, our data indicate that the average number of expatriates in management has been falling steadily over the last several decades. Between 1960 and 2000, the number of expatriates used to staff these operations was gradually being reduced. This trend may have been the result of a shortage of willing Japanese executives to live abroad, or it may be because it is expensive to maintain Japanese or other expatriates — a particularly significant consideration in a cost — conscious business environment. On the other hand, it may also be that Canadians have shown themselves to be qualified and capable of taking on the responsibility of managing the Canadian operations of foreign companies. In any case, it underscores the continued demand of foreign investors for skilled Canadians and the opportunities for Canadians to benefit from foreign investment.

Given that the direction of Japanese investment varies over the years by industry, it is also important to determine whether the trend in expatriate staffing holds only for certain industries and for certain time periods. However, our data indicate that expatriate staffing levels in Japanese operations in Canada have been falling significantly in virtually all industries since 1986.

The lone exception to this overall trend is in the service industry. In this case, we see that the number of expatriates has remained fairly steady between 1992 and 2001 and, in fact, has more recently risen to historically high levels. One explanation for the difference between the service and the other industries is that services require greater personal involvement and tacit knowledge of the ways in which value is created. Thus, to effectively manage these service operations, higher levels of expatriates might be necessary given that these people have been steeped in the culture and have in-depth knowledge of the nature of the services to be performed. Nonetheless, given the expatriate staffing trends evident across industries and over time, it may be reasonable to assume that Japanese service ventures will see more Canadians in senior management roles in the near future.

Observers of Canada’s economic relationship with Japan have noted that Japanese foreign direct investment has been declining. This is a worrying situation, given that the success of Canada’s open economy depends in part on foreign investment to help spur growth and to create jobs. Japan, in particular, is important to Canada’s economic health, given that it is both a major, global source of investment funds as well as a source of cutting-edge technologies, products, processes, and practices that are transferred to Canada through these direct investments.

Given the importance of Japan to Canada, it is essential to understand the investment trends and the motives that underpin them. We need to become more aware, for example, of who these Japanese firms are and why they are investing in Canada. Perhaps more importantly, we need to improve our understanding of why certain Japanese firms decided not to invest in Canada.

In general, our data suggest that the Japanese firms that invest in Canada tend to be highly successful, diverse, sophisticated organizations. These parent firms range across a variety of industries and they invest in a great number of sectors of the Canadian economy. Further, the data indicate that the manufacturing industry is increasingly becoming the target of Japanese investment in Canada. These ventures have been established not only to participate directly in the transportation equipment sector, but also in a variety of other sectors including electronics and chemicals. As such, they add to the stability of the Canadian economy by adding to the diversity of Canada’s production and employment base.

Our data also indicated that the investment motives of Japanese firms in Canada are many and nuanced. Motives vary by industry and they have evolved over time, just as the Canadian perspective on foreign investment has evolved. Among the points raised by our data is that the Japanese are aware of and, in fact sensitive to, the efforts of government officials at all levels. Clearly, Canadian policy and its representatives play a significant role in addressing the needs and assuaging the concerns of current and potential Japanese investors.

As part of our effort to develop a much more nuanced understanding of the needs and wants of actual and potential Japanese investors, we must also improve our knowledge of the types of expertise that Japanese firms seek when evaluating sites for direct investment. Given that expatriate employees are difficult to find and expensive to maintain, it is apparent that Japanese firms in Canada would willingly make way for qualified Canadians who have the technical and, perhaps equally importantly, the cultural knowledge, to thrive in the unique environment of a Japanese-style workplace. This would require not only technical training in the types of processes and products that the Japanese are interested in locating abroad (e.g., automobile, plastics, and chemical technologies), but also an enhanced appreciation of the Japanese approach to business, one that goes well beyond simple characterizations of social customs and traditions. Through this effort, perhaps Canada can reclaim its place as a preferred site for Japanese investment, benefiting from the creation of new, diverse jobs that are often skilled and high paying — the sorts of jobs that many Canadians seek.

Methodological appendix

The primary source of data used in this study was a series of surveys conducted between 1992-2003 of Japanese firms with operations in Canada. The survey results were published by Kaigai Shinshutsu Kigyou Souran, a publication of Toyo Keizai Shinposha. The surveys, sent to the subsidiaries by their parent firms, were completed by the subsidiary general managers. The survey included basic questions regarding the subsidiary location, industry, annual revenue, capital investment, and investment purpose. This survey information was then augmented with industry and corporate details from Datastream and Compustat.

Scholars have established that Toyo Keizai’s surveys account for nearly all cases of Japanese foreign direct investment for parent firms that responded to the survey. While the survey accounts for virtually all ventures of individual parent firms, it does not account for every investment made in Canada by Japanese firms. Nonetheless, for parent firms included in the survey, it yields an accurate picture of those firms’ foreign investments.