Article
Foreign Direct Investment: A Lever to Address the Productivity Challenge in the Greater Montréal Area
Prepared for: Montréal International
September 2024
Quebec’s economic growth has slowed considerably since interest rates began to rise in 2022. This trend contrasts with the significant growth in employment, which has resulted in a decline in labour productivity. Foreign Direct Investment (FDI) plays a crucial role in improving labour productivity. Foreign companies that invest in the province often bring advanced technologies, more efficient management practices, and specialized knowledge. These elements can stimulate innovation, improve production processes, and increase overall productivity.
Following the economic upheaval of 2020 caused by the pandemic, Quebec's economy recovered in 2021 and 2022. However, Quebec experienced a significant decline in GDP growth in 2023. Last year, real GDP, in 2017 dollars, increased by only 0.2% after growing by 6.6% in 2021 and 2.8% in 2022. Employment, on the other hand, saw stronger growth than GDP over the past two years. Employment increased by 3.1% and 2.3% in 2022 and 2023 respectively.
Although GDP has slowly increased, labour productivity, which is measured by dividing GDP by employment, has not followed the same trend. In fact, Quebec's labour productivity is one of the lowest in Canada. The decline in labour productivity in Quebec is partially attributable to the fact that employment has grown faster than GDP. Furthermore, according to a study conducted by HEC Montréal, the low growth in productivity in Quebec is also attributable to the stagnation of capital investments aimed at improving production equipment and buildings, as well as the low generation of intellectual property products. 1
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https://cpp.hec.ca/wp-content/uploads/2024/03/PP-2023-01.pdf
Furthermore, the Montréal Census Metropolitan Area has the lowest labour productivity among all the major Canadian. According to a study conducted by the Institut du Québec, Montréal ranks last among fifteen major cities in North America in terms of GDP per capita and labour productivity. 2,3
One way to improve productivity is to attract Foreign Direct Investment (FDI). Take, for example, a foreign manufacturing company that decides to set up a plant in Quebec. This company can introduce cutting-edge machinery and equipment, as well as innovative production methods. Quebec workers who interact with these technologies and benefit from associated training can acquire new skills and improve their productivity. Moreover, the foreign company can foster collaboration with local stakeholders, which can lead to knowledge transfers and stimulate innovation within Quebec’s ecosystem.
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2 https://institutduquebec.ca/wp-content/uploads/2023/10/IDQ-CCMM-MI-102023-COMPARERMONTREAL5EDITION.pdf
3 The cities studied in the analysis conducted by the Institut du Québec are the following: Montréal, Vancouver, Toronto, Phoenix, Saint-Louis, Charlotte, Pittsburgh, Denver, Minneapolis, Philadelphia, San Diego, Boston, Seattle, San Francisco.
4 https://www.jstor.org/stable/26536408 et https://www.ons.gov.uk/economy/economicoutputandproductivity/productivitymeasures/articles/foreigndirectinvestmentandlabourproductivityamicrodataperspective/2012to2015#main-points
It is therefore crucial to encourage the attraction of quality FDI in Quebec. This can be achieved by offering a business-friendly environment, reducing regulatory hurdles, and providing attractive tax incentives. By attracting innovative and technologically advanced foreign companies, Quebec can benefit from their expertise and their ability to boost labour productivity.
In Quebec, in addition to the low corporate tax rate and other direct incentive programs, the following tax incentives are also offered:
R&D tax credits
- Tax holiday for researchers and foreign experts
- Tax credit for the production of multimedia titles
- Tax credit for the development of e-business
- Tax credit for investment and innovation
- Tax holiday for large investment projects
- Incentive deduction for the commercialization of innovations
- Tax credit to promote employment in Gaspésie and certain maritime regions of Quebec
Source(s): Investissement Québec
In recent years, Quebec has successfully attracted several significant foreign investments. For example, Northvolt announced that it will build a $7 billion electric vehicle battery factory in Quebec, the largest private manufacturing investment in the province's history. The following graph highlights the increase in FDI that Quebec has experienced in recent years.
There has been a decrease in FDI in recent years in the Montréal Census Metropolitan Area, but the level remains high compared to the pre-pandemic period.
In terms of the distribution of FDI by key sector in Montréal, cleantech and environmental services, life sciences and health technologies, and cybersecurity and IT services saw the largest foreign investments in 2023. 7
These investments should enable the province and Montreal to achieve significant productivity gains in the coming years.
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7 https://www.montrealinternational.com/app/uploads/2024/04/bilan2023-fr.pdf
However, it is important to emphasize that FDI should not be considered a standalone solution for improving labour productivity. It must be complemented by local initiatives aimed at enhancing workers' skills, promoting research and development, and encouraging the adoption of advanced technologies by Quebec companies.
Through the Economic Development Fund, The Government of Quebec has already supported several economic development projects within the province. The Government of Quebec has also implemented several initiatives to promote innovation and workforce development within the province. Here are a few examples:
- The Quebec Green Hydrogen and Bioenergy Strategy, which has the purpose of accelerating the production, distribution and use of green hydrogen and bioenergy;
- The innovation zones project to provide Quebec with business opportunities in emerging industries;
- The Stratégie québécoise de développement de la filière batterie, which proposes to exploit and process minerals in Quebec to manufacture battery components, produce commercial electric vehicles, and develop battery recycling in Quebec; and
- The Commission des partenaires du marché du travail (CPMT), which aims to ensure alignment between the training offered, the skills of the workforce, and the needs of the labour market.
In conclusion, to address the challenges related to labour productivity in Quebec, it is essential to combine FDI efforts with local initiatives. By leveraging the benefits that foreign companies can bring, while strengthening local skills and innovation, Quebec can enhance its labour productivity and maintain its competitiveness on the global economic stage.
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8 https://www.quebec.ca/gouvernement/politiques-orientations/strategie-hydrogene-vert-bioenergies
9 https://www.quebec.ca/nouvelles/actualites/details/zones-dinnovation-quebec-au-coeur-du-programme-de-developpement-economique-du-quebec-41650
10 https://www.quebec.ca/gouvernement/ministere/economie/publications/developpement-filiere-batterie/a-propos
11 https://www.cpmt.gouv.qc.ca/la-cpmt-et-ses-partenaires/la-cpmt/la-cpmt-en-bref/#c4184
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