Foreign direct investment: Ontario’s not-so-secret appeal

When a latter-day corporate alchemist named Hunt Ramsbottom, the CEO of a Los Angeles-based company called Rentech, was looking for a place to locate a plant designed to transform wood chips into jet fuel – hence his status as a 21st-century alchemist – he chose a site in northern Ontario for the $675-million investment. As such, Mr. Ramsbottom was joining a thundering herd of foreign investors who have made Canada’s largest province the second-biggest North American destination for “direct foreign investment” in absolute money terms. Ontario is second (after the state of California) but first on a per-capita basis, according to the influential fDi Intelligence Index, published by the Financial Times of London.

Mind you, as Ontario’s energetic and influential minister of economic development and trade, Sandra Pupatello, is quick to point out, an important addendum must be attached to this impressive statistic. “California may have a slight edge in dollar terms but we best them on the number of jobs created. There, we definitely are Number One.” (Take that, ex-governor Schwarzenegger and incumbent governor Jerry Brown.) And to further reinforce the notion that Ontario is punching way above its weight in attracting foreign capital, Toronto was the second-largest destination city in North America for FDI after New York City, which is a significantly larger metropolitan centre.

So why is the economy of Canada’s lynchpin province so appealing to overseas investors? If you ask Minister Pupatello, she becomes almost “evangelical” on the subject. “Well, for starters, it is not just the amount of money being invested, it is the type of investments being made,” she notes. “They’re the kind that can benefit from the advantages this province can offer.” In other words, they’re the high-tech, high value-added jobs that jurisdictions around the world covet but which Ontario appears to be capturing. As Minister Pupatello observes, “If a company is looking for a low-wage, low-end environment, we’re not going to bother chasing them because that is not us.”

Selling the “Ontario Advantage” has been job number one for the minister and the people at the Ministry of Economic Development and Trade and, to man and woman, they make a very compelling pitch. “In a North American context, Ontario has the most diversified economic base on the continent,” notes John Mitsopulos, Director of Direct Marketing and Lead Generation at the ministry. “There’s not an American state or a Canadian province that has a comparable economic infrastructure. All the major industry grouping are here, from automotive to parts to IT to life sciences to financial services.”

With these large, mature and sophisticated “clusters” come both supply chains and skilled workers that are extremely attractive to outside investors. When either big pharma, or one of the major global banks, or a major “Big Six” overseas automaker is considering making an investment in Ontario, they know they’re not starting from scratch.

As important, however, is a social, political and economic environment that makes doing business here efficient, economical and cost effective. Clearly, Minister Pupatello delights in enumerating these Ontario ‘advantages.’ “The province has a highly skilled work force with 63 per cent of its workers possessing a post-secondary education, compared to around 40 per cent in the USA.” Then there’s the fact that government – as opposed to the private sector – incurs much of the health care costs. “Health care is treble the cost in the US without delivering anywhere near the same benefits.” And let’s not forget Ontario’s increasingly attractive tax regime. “Our combined corporate tax rate [both federal and provincial] is now 25 per cent compared to, say, New York State, where it is 39.9 per cent, which is a significant difference, and we have also eliminated the capital tax so companies investing in new equipment benefit.”

From Ms. Pupatello’s perspective, tax policy is clearly a leading indicator of the general business environment a company can expect to find coming into a new jurisdiction. And by that metric, Ontario excels. “We have a better corporate tax regime than any American state we compete against. We best them all.” So, if you combine low taxes with lower health care costs, the cost structure for foreigners setting up shop in the province makes for rather a compelling case.

Still, having a tax rate that is a hundred of basis points lower than it US competitors is arguably “not” the single greatest arrow in the province’s sales pitch quiver. That may be the quality of our educational system that, in turn, produces an immensely talented and productive work force. “Overseas investors are usually very impressed with the quality and productivity of Ontario workers who also tend to be more loyal than in other jurisdictions,” says Peter Craig, Manager of the Science, Technology & Services Branch, at the ministry. “They stay at jobs longer and as a consequence the turnover rate is much lower.”

Central to the explanation for Ontario’s skilled and productive workers is the excellence of the public education system. “Ontario’s testing scores in math, science and reading skills are off the charts,” notes Minister Pupatello. “We stand up favourably against any jurisdiction in the world.” (And she might have added way ahead of any jurisdiction in the US.). More foreign delegations visit our Ministry of Education than any education ministry, anywhere in the world. “It’s the benchmark, globally, for excellence in public education.”

So, the checklist explaining Ontario’s success at attracting FDI is impressive: easy access to the biggest market in the world in the US; a diverse economic base here at home; an attractive tax regime; well-educated and skilled workers created and sustained by a superb public education system; the enviable quality of life. Still, Sandra Pupatello thinks there is one final explanation for the province’s success: the effectiveness with which her team at the ministry has executed a new more focused strategy for attracting outside investment capital. “Essentially we replaced a scattershot approach with one which is more laser-like and targeted.”

What ensued was a strategy that focused on certain key sectors – advanced manufacturing, IT, health sciences, financial services, and so on – that line up nicely with strategic assets such as dynamic clusters of world class high-tech high value-added industries, skilled workers and an enviable quality of life. That is the “value prop” Ontario offers foreign investors. That and certain government programs like the Strategic Jobs Investment Fund, which offers assistance to companies making a minimum $10-million investment in innovative companies, in certain targeted sectors, which generate a minimum of 50 jobs.

Based on the Financial Times fDi Intelligence Index, the overall strategy seems to be paying big dividends. Chrysler/Fiat is investing $27 million in a new casting plant in Etobicoke, GM is making a massive investment at its CAMI plant in Woodstock, and don’t forget that wood-to-jet-fuel plant in White River in northern Ontario, among others.

Such investments have helped Ontario weather the global recession with relative aplomb. And that fact is something that gives Sandra Pupatello particular satisfaction. “Just on the jobs front, we are 114 per cent ahead of where we were pre-recession compared to 20 per cent in the US,” she notes. “I can’t help but think our American neighbours must we wondering, ‘What is going on up there? ‘What’s the secret?’”

And, she might have added, ‘Whatever it is, can we have some of it, too?’