Canadian Direct Investment in the United States: An Ohio Perspective

Abstract This analysis focuses on the direct investment behaviour of small Canadian manufacturing firms in the heavily industrialized state of Ohio. Hypotheses were developed regarding the push and pull factors in foreign direct investment in Ohio. Two types of analyses were conducted: a survey of Canadian firms and a logit regression on financial and locational characteristics of a set of Canadian manufacturing firms. The results suggest that the leading factors affecting the probability that a Canadian firm will invest in Ohio are the nature of the industry, the proximity of the parent firm, and the size of the firm. The implications of NAFTA are also discussed. Understanding the motivation for Canadian direct investment (CDI) has become an increasingly important issue with the passing of the Canada-United States Free Trade Agreement (CUSTA), and the recently negotiated North American Free Trade Agreement (NAFTA). Bucher (1991) notes that investment between the United States and Canada has increased since the passing of CUSTA, despite the theoretical belief that foreign direct investment (FDI) should drop with the removal of tariff barriers. This article tries to reconcile the contradiction between the theory and the reality of rising levels of CDI.1 Our primary focus is on CDI in Ohio. Little research has been done at the regional and state levels. FDI patterns differ among regions, with aggregated national data masking location-specific factors. For example, Ghandhi (1990) and Solocha, Soskin, and Kasoff (1990) found that small to medium-sized Canadian firms prefer to locate at or near the Canada-U.S. border. This contrasts with the national trend where FDI is pursued by medium to large-sized firms, regardless of location (Howenstine & Zeile, 1992). The fact that state and regional FDI trends differ from national trends, along with the changes occurring with respect to CUSTA and NAFTA, suggest that a better understanding of CDI near the Canada-U.S. border is required. Canada has been one of the largest sources of FDI in the United States (Solocha et al.,1990). It has the second largest share of ownership by employment (17%) of all inward FDI (Howenstine & Zeile, 1992). And, in recent decades, the flow of FDI into the United States has increased, with Canada being a major contributor. Rugman (1990) states that the ratio of Canadian FDI in the United States to U.S. FDI in Canada is increasing. In 1987 the ratio was .576; by 1993 it had risen to .684 because Canadian FDI in the United States grew at a faster rate than U.S. FDI in Canada. In 1993, Canada recorded the second highest level of FDI in the United States at $3.99 billion. This paper is organized as follows. In the next section we review the relevant literature on the determinants of FDI as a guide to identifying the determinants of CDI in Ohio. In the following section we develop hypotheses and test them using data obtained through a survey of Canadian-owned companies in Ohio and multivariate analysis on a cross section of Canadian-owned firms in Ohio. In the final section we draw conclusions and make suggestions for future research. Determinants of FDI and CDI The literature on the motivations for FDI in the United States can be divided into two parts: those attributing them to pull factors and those to push factors. Pull factors are characteristics of the United States and the U.S. market that attract FDI, while push factors are characteristics of Canada and the Canadian market that push FDI into the United States. Pull Factors2 Size of the U.S. Market Locating in the huge U.S. market is a common theme throughout the literature, and is considered one of the most important factors in determining FDI (see O'Sullivan, 1985; Rugman, 1990; Solocha et al., 1990; and Williams & Bunker, 1985). Canadian firms are confident that the large size of the U.S. market will expand their sales and promote company growth. …