27, May 2026

In 2026 THECIS celebrates its 25th anniversary. To celebrate this, we are starting a 25th Anniversary Blog series to focus on topical issues of innovation and entrepreneurship.

Blog 108   Is the tide turning on capital investment in Canada?

Canada is facing a serious productivity problem, and a lack of business capital investment of often mentioned as one key contributing factor.  The graphic below – from a CD Howe Institute report, illustrates the real investment per available worker in Canada, the US and the OECD since 1991.

Oddly enough, since 1972 Canada’s gross fixed capital formation has mostly been higher than the US as a percentage of GDP This is shown in the graphic below, from a Fraser Institute report.

According to the OECD, Gross Fixed Capital Formation (GFCF) measures the value of acquisitions of new or existing fixed assets—such as machinery, buildings, and software—by businesses, governments, and households, minus disposals. It represents investment in long-term productive capacity rather than consumption.

 

So where has all that capital gone?  The answer is provided by another chart from the same Fraser institute report, below, showing the much higher spending on residential construction in Canada that the US. In the period 2014 – 2021 Canadian spending on dwellings was 84% higher than in the US, as a percentage of GDP.

A consequence of this is that much less capital is available for business investment.

So, if Canada isn’t spending enough wouldn’t foreign direct investment (FDI) fill the gap?

In 2025, Foreign Direct Investment in Canada was $96.8 Billion, the highest level since 2007 and an increase of 12% from the previous year.  This as largely due to Canada’s reputation for political stability. This approximately equal to 13% of the Gross Fixed Capital Formation in Canada in 2025. The US was the largest investor, followed by the UK, Japan, Germany and China.

 

However, almost half of the FDI – $43.6 billion – was due to mergers and acquisitions where foreigners bought Canadian companies, so this didn’t contribute to productive investment in Canada.  Whether this is a good thing or a bad thing is debatable. As pointed out in The Logic, if dividends flow to a foreign owner, it is a loss for Canada. However, foreign investment can sometimes help a Canadian company grow. If the foreign owner moves the company out of Canada that is a major loss

What’s new?

According to a survey by the Global Infrastructure Investor Association’s (GIIA), taken in January 2026, before the Iran situation, Canada ranked as the most attractive market for infrastructure investors globally, ahead of the US, Germany, Mexico and other countries. It is very likely that Canada is even more attractive now due to its natural resources.

According to analysis from the Royal Bank, over the past decade, Canada’s net outflow of investment exceeded $1 trillion, the most significant capital exodus in modern Canadian history. Canada now ranks last among G7 nations in investment in both machinery and equipment (M&E) and intellectual property (IP). Only about 30% of Canadian capital formation goes into these productivity-enhancing categories—half the U.S. share. As shown in the graph below, Canada’s direct investment abroad has greatly exceeded foreign direct investment, giving rise to the $1 trillion deficit.

However, they see an opportunity for reversing this trend and see potential for a $1.8 trillion investment opportunity over the next 10 years could make Canada the G7’s growth leader.  Major elements of this are:

  • Oil and gas – $705 billion
  • Electricity – $670 billion
  • Agriculture and food processing – $205 billion
  • Metals and minerals – $200 billion
  • Defence – $19 billion
  • Space – $12 billion

Conclusion.

The bad news is that Canada has the lowest spending on machinery and equipment in the G7 and over the last decade net outflow on investment exceeded foreign direct investment by $1 trillion.

The good news is that the tide appears to be turning, and Canada is seen as a very attractive place or foreign investors, and domestic policy is oriented strongly towards increased capital spending with creation of the Major Projects office and a sovereign wealth fund.  There is potential for Canada to be a growth leader in the G7 with capital spending of $1.8 trillion over the next decade.