Canada’s Investment Crisis Requires Policy Attention

Economic Note showing how Canada is struggling to attract the kind of investment we need to raise our standard of living

Appendix

Related Content

Canada’s investment crisis is a vicious cycle of capital and talent exiting: Economic report (The Hub, June 9, 2026)	Interview (in French) with Emmanuelle B. Faubert (La croisée, ICI Radio-Canada, June 9, 2026)

This Economic Note was prepared by Charles Lammam, Senior Fellow at the MEI, in collaboration with Emmanuelle B. Faubert, Economist at the MEI. The MEI’s Taxation Series aims to shine a light on the fiscal policies of governments and to study their effect on economic growth and the standard of living of citizens.

Canada is facing an investment crisis.(1) This Economic Note draws on various data to document two dimensions of that crisis: Within Canada’s borders, firms are investing less in machinery, equipment, and technology; and, on net, capital is flowing out of the country.

There are significant economic consequences to declining domestic investment. Workers have access to fewer tools and are less productive, their wages don’t grow as fast, and ultimately living standards are adversely affected. Addressing these challenges will require improving the policy conditions that influence how much capital is deployed, and where. These conditions include Canada’s taxation, regulation, and competition regimes.

Capital Leaving the Country on Net

Canada’s stock of foreign direct investment (FDI), the accumulated total value of assets that foreign companies own in Canada versus what Canadian companies own abroad, points to a significant and widening imbalance. While the two series tracked relatively closely from 2007 to 2014, a marked divergence emerged after that period (see Figure 1a).

In 2014, the stock of Canadian direct investment abroad was $845.2 billion in nominal dollars, while the stock of foreign investment in Canada was $744.7 billion.(2) Canadian investment abroad therefore exceeded inward investment by $100.5 billion, or roughly 14% of the inward stock. By 2025 (the latest year of available data), Canadian direct investment abroad had surged to $2.4 trillion, while foreign investment in Canada had grown to $1.6 trillion. The difference had increased to $828.4 billion,(3) more than half the entire inward stock and ironically close to the government’s target for new investment into Canada.(4)

Some economists may view net outward investment as a sign of strength, reflecting globally competitive Canadian firms and pension funds deploying capital where returns are highest. But it also raises a question policymakers cannot ignore: Why are returns consistently perceived to be higher elsewhere? When Canada’s major pension funds and corporate champions deploy capital in the United States and other countries at this scale, it signals something about domestic investment conditions. The prime minister’s investment pitch in his now famous Davos speech claiming “Canada has what the world wants” is laudable, but it fights a current that has been flowing against Canada for many years.(5)

The annual flows of FDI tell a story similar to the stocks.(6) Since 2014, net FDI outflows have consistently outpaced inflows (see Figure 1b). Between 2014 and 2024, outflows averaged 4.1% of GDP, much higher than the inflows, which averaged 2.4%.

Earlier this year, Statistics Canada released new annual FDI flow data for 2025, reporting that foreign direct investment in Canada had reached $96.8 billion.(7) On a nominal basis (before adjusting for inflation or the size of the economy) this is the largest annual FDI inflow since 2007, which registered $125.5 billion.(8) Prime Minister Carney was quick to cite the figure as evidence of investor confidence.(9)

These comparisons are somewhat misleading since the economy more than doubled in nominal size since 2007.(10) In 2007, FDI inflows of $125.5 billion represented approximately 8.0% of Canada’s GDP (see Figure 1b).(11) In 2025, however, the latest figure represents roughly 2.9%. Proportionally, Canada’s FDI intensity in 2025 is less than half what it was at the benchmark year of 2007. Moreover, the 2025 figure is approximately half the inflation-adjusted value of the 2007 FDI inflow, which is $184.7 billion in 2025 dollars.(12)

48% of Canadian founders who raised over $1 million in 2024 were based in the U.S. versus only 32% based in Canada.

It is notable that FDI inflows in 2025 exceeded outflows for the first time in a decade. This reversal, however, is not driven by a surge in foreign confidence, but by a sharp decline in Canadian outward investment, likely reflecting “Buy Canadian” and anti-American sentiments in light of U.S. tariff threats. Relative to GDP, inward FDI in 2025 was almost equal to the percentage in 2024, but outward FDI dropped by over two-fifths.

The composition of the 2025 inflows raises further questions. At $43.6 billion, roughly 47% came through mergers and acquisitions of existing Canadian businesses, well above the historical norm of approximately one-third. As a recent analysis observed,(13) mergers and acquisitions-driven FDI mainly reassigns ownership of existing assets rather than creating new productive capacity.

The exodus of capital extends to entrepreneurship. Leaders Fund research analyzed nearly 3,000 venture-backed startups founded by Canadians between 2015 and 2024. The research found that 48% of Canadian founders who raised over $1 million in 2024 were based in the U.S. versus only 32% based in Canada.(14) In 2016, just 19% were based in the U.S. and 75% in Canada.

Canadian Firms Investing Less in Machinery, Equipment and Technology

The business sector capital stock, i.e., the total value of physical and intellectual assets available for production, including buildings, machinery, equipment, and intellectual property, points to a worrying decline in productive capacity.

Between 2014 and 2024, total non-residential capital stock (measured in constant 2017 prices) grew by just 10.3% over the entire decade (see Appendix Figure 1),(15) while the population increased 16.4% and inflation-adjusted GDP increased 21.1%.(16)

Breaking out a component of the total non-residential capital stock shows an alarming result. The stock of machinery and equipment – the physical tools, robots, and assembly lines that drive productivity – declined by 3.3%, dropping from $418.8 billion to $404.8 billion. Canadian businesses today operate with less machinery and equipment than they did a decade ago, and that is before adjusting for a growing population or economy. Over the decade, investment in machinery and equipment lagged the rate at which existing capital wears out and goes obsolete (i.e., depreciation).

Canadian workers are falling behind their counterparts in the United Kingdom, the Euro area, and the broader OECD.

The metric that most directly affects workers’ paycheques is annual business investment per worker.(17) The reliable path to higher wages is higher productivity, and higher productivity requires more and better capital per worker. In Canada, the opposite is happening. Since peaking in 2014 at approximately $20,900 per worker (in 2017 dollars), business investment per worker fell to roughly $17,600 by 2024 (see Appendix Figure 2). In fact, business investment per worker in Canada has dropped to just 55 cents for every dollar invested in American workers. For machinery and equipment – the tools workers actually use – Canadian workers receive only 41 cents on the dollar.(18)

A turnaround in annual business investment in 2026 does not appear likely. Statistics Canada’s capital spending intentions survey shows total non-residential capital spending across all industries rising by 3.7% nominally, but by less than 2% after adjusting for inflation, with many sectors planning to scale back capital expenditures.(19) Investment in machinery and equipment is expected to decline by 0.6% in nominal terms.

The business investment gap becomes starker in international comparison.(20) As Canada’s inflation-adjusted business investment per worker fell 16% from 2014 to 2024, the United States saw investment per worker rise by more than 26% over the same period (see Figure 2). In other words, Canadian businesses have been shedding productive capacity while their American counterparts have been building it. Canadian workers are also falling behind their counterparts in the United Kingdom, the Euro area, and the broader OECD.

Canada fares no better among G7 and other peer countries.(21) Based on the five-year average up to 2024, just 15% of its gross value-added is invested in non-residential assets,(22) compared with 18% in the United States, 18.7% in Australia, and 21.8% in Japan (see Appendix Figure 3a). Just 4.1% of gross value-added is invested in machinery and equipment, well below the United States at 6.7%, and leaders Japan and Italy at over 8% (see Appendix Figure 3b). In intellectual property products, 3.4% of gross value-added is invested, roughly half the American rate of 6.6% (see Appendix Figure 3c).

The innovation numbers reinforce this picture. According to the Council of Canadian Academies, Canada’s business expenditure on research and development (R&D) as a share of GDP fell from about 77% of the OECD average in 2000 to just 57% in 2023.(23) Business R&D spending as a share of GDP sits at just 1.1% in 2024, well below the OECD average of 2.0% (see Appendix Figure 4).(24) To put this in perspective, a single American company, Amazon,(25) now spends nearly three times more on R&D than the entire Canadian business sector combined.(26)

The venture capital trend over time is equally concerning. After hitting a peak during the pandemic boom, venture capital investment as a share of GDP has been declining, falling by more than half from nearly 0.5% in 2021 to 0.2% in 2024 (see Appendix Figure 5).(27)

Conclusion

These two problems, of capital leaving the country on net and of firms investing less in productivity-enhancing equipment and technology at home, are interconnected and mutually reinforcing. When domestic investment conditions deteriorate, capital seeks better returns abroad, further weakening domestic productive capacity. When businesses chronically underinvest, the consequences compound. Workers have fewer and older tools, productivity stagnates, and wage growth is slower than it otherwise would be.

A single American company, Amazon, now spends nearly three times more on R&D than the entire Canadian business sector combined.

Over time, this dynamic becomes a vicious cycle: weak returns discourage further investment, locking in the very underperformance that drives capital elsewhere. Without a reversal, the gap between Canadian workers’ productivity and that of their international peers will continue to widen, and with it, the gap in wages and living standards.

The structural trends underlying Canada’s investment crisis are deep, broad, and consequential for the country’s long-term prosperity. They will not be resolved by ambitious targets alone. Until policymakers confront the conditions that drive capital abroad and discourage investment at home, these trends will continue to compound and Canadian living standards will fall further behind other countries. Reversing these trends will demand a hard look at the tax, regulatory, and competitive conditions that shape investment decisions in Canada.