Canada attracted record foreign investment in 2025 while simultaneously maintaining ownership restrictions that cost the economy C$10 billion annually in foregone productivity. Both of those facts belong in the same analysis.
In 2025, foreign direct investment into Canada reached C$96.8 billion, the highest annual inflow since 2007 and the second-best year on record.1 Canada ranks second in the G20 for FDI stock as a share of GDP, second on the Kearney FDI Confidence Index behind only the United States, and holds the lowest marginal effective tax rate on new business investment in the G7 at 13.0%, far below the American rate of 19.7%.2 The macroeconomic conditions for attracting capital are, by objective measures, excellent. And yet the dominant narrative in Canadian investment policy circles for the past decade has been one of underperformance, capital flight, and productivity stagnation. Both things are true, and reconciling them is the core task of any serious analysis of Canada as an investment destination.
The record 2025 inflow was driven primarily by merger and acquisition activity, with the United Kingdom emerging as a notably larger source, accounting for 12% of total inward FDI and acting as what TD Economics described as the swing factor for the year's strong result.1 This is a useful signal: capital from post-Brexit Britain seeking stable, rule-of-law jurisdictions with competitive tax structures is finding Canada. That logic, stable governance plus competitive taxation plus trade agreement access, is precisely the narrative Canada should be amplifying to a broader set of investor origins. The Kearney finding that Canada's high-quality infrastructure and economic performance are the top drivers of investor motivation confirms this: investors know why they are choosing Canada, and it is not despite Canada's fundamentals but because of them.
The complicating factor is outward investment. Canadian direct investment abroad fell sharply in 2025 to C$79.4 billion, well below 2024's C$123 billion and the lowest level since 2020.1 The pullback was concentrated in Canada-US flows, where trade policy uncertainty reduced long-term capital investment decisions. Canadian investors effectively paused their US expansion strategies while American investors continued investing in Canada, producing a net FDI position that flatters Canada in the short term but masks the broader anxiety about continental economic integration that characterizes this moment. When the trade environment stabilizes, that paused outward investment will resume. The question is whether Canada has used the interval to deepen non-US investment relationships, or simply waited.
The structural constraint on Canadian FDI is well-documented in the academic literature and largely absent from government communications. Walid Hejazi and Daniel Trefler's analysis, the most rigorous available on this question, finds that Canada's restrictive FDI policies in several sectors cost the economy approximately C$10 billion annually in foregone productivity gains.3 The mechanism is not subtle: foreign-owned firms that enter restricted sectors bring technology, management practices, and global supply chain access that domestically-owned firms in those sectors do not have. When restriction prevents entry, Canadian firms in those sectors face less competitive pressure to adopt these practices, and productivity stagnates accordingly. The sectors most affected are telecommunications, airlines, and financial services, all of which are subject to foreign ownership restrictions that most comparable economies have reduced or eliminated.
Fraser Institute research by Steven Globerman covering the full 1990 to 2024 period documents a troubling long-run pattern: Canada's share of total inward FDI to OECD countries declined substantially after 2015, even as absolute inflows remained healthy by historical standards.4 This means Canada has been attracting more capital than before in absolute terms, but less than its share of global FDI relative to comparator economies. Australia, with a similar resource-weighted economy, has consistently outperformed Canada on this measure. The implication is that Canada's record 2025 result reflects exceptional circumstances, specifically the UK swing factor and M&A timing, rather than a structural improvement in Canada's competitive position for internationally mobile capital.
The Indo-Pacific dimension of Canadian FDI is both the most important structural opportunity and the most underreported story in this space. British Columbia captured 37% of Canada's Indo-Pacific foreign direct investment in 2024, totalling C$7.1 billion and leading all provinces, driven primarily by critical minerals investments.5 CEPA with India, which entered into force in April 2026, and CPTPP access create preferential frameworks that should be systematically used to attract Japanese, South Korean, and Indian capital into Canadian processing and manufacturing capacity. The logic for these investors is compelling: clean Canadian electricity for energy-intensive processing, proximity to North American markets via CUSMA, and political stability that their domestic markets cannot always guarantee.
The Indigenous dimension of FDI in Canada is not separate from the investment attraction story. It is increasingly central to it. Resource sector FDI, which accounts for a significant portion of Indo-Pacific and European investment in Canada, flows to projects on or near Indigenous territories. Investors who have internalized the governance landscape, who understand that projects with genuine Indigenous equity partnerships and consent have stronger legal standing, more stable social licences, and better long-run project economics, are already structuring investments accordingly. The growth of Indigenous equity ownership models in Canadian resource development, from Cedar LNG to Eskay Creek to the Ring of Fire discussions, creates a new category of investable infrastructure that blends Indigenous governance authority with international capital. That intersection deserves dedicated tracking in Canadian investment intelligence.
The geography of Canadian FDI is shifting in ways that matter strategically. The United States has historically dominated as both the source and destination of Canadian cross-border investment, reflecting deep continental integration. That dominance is being partially displaced, not by any deliberate policy shift, but by the uncertainty that American trade policy created in 2025 and the active diversification push from the Canadian government and business community that followed.
The United States remained the largest single source of inward FDI to Canada in 2025, but its share is no longer overwhelming. The UK's emergence at 12% of total inward FDI reflects a structural story about British capital seeking rule-of-law jurisdictions post-Brexit, a story that has multiple more chapters. British institutional investors, private equity, and strategic corporate acquirers are familiar with Commonwealth legal frameworks, comfortable with Canadian regulatory environments, and increasingly attracted by the energy and critical minerals sectors where Canada's position is unique among English-speaking economies. CETA provides the EU dimension of this same story, though EU-origin FDI into Canada has historically lagged the UK despite the trade agreement framework.
The Indo-Pacific is the most strategically important emerging source of inward FDI, and the least systematically captured in Canada's FDI attraction infrastructure. Japanese trading houses and energy companies have invested in Canadian LNG and critical minerals for decades, but the strategic significance of those investments has increased sharply since LNG Canada's first cargo departed Kitimat in June 2025. South Korean companies, which operate in the same energy security context as Japan, are the next logical institutional investors in Canadian LNG and critical minerals processing. Indian capital, mobilized by CEPA and by India's own critical minerals strategy, will be newer but potentially very large in scale as India's industrial policy requires the kind of diversified mineral supply that only Canada and Australia can provide at the necessary scale.
The sectoral composition of inward FDI matters as much as its origin. M&A-driven FDI, which dominated 2025 results, recycles existing Canadian assets between owners. It does not necessarily create new productive capacity, new jobs, or new technology transfer. Greenfield FDI, which creates new plants, facilities, and supply chains in Canada, is the category that generates the strongest economic multipliers and the most durable employment. Canada's record 2025 result should be disaggregated by this distinction before conclusions are drawn. The Volkswagen battery facility in St. Thomas and the Stellantis-LG plant in Windsor are greenfield investments of precisely the kind that Hejazi's research identifies as productivity-enhancing. More of those and fewer leveraged buyouts of existing assets is the right composition target for Canadian FDI policy.
The Investment Canada Act review process, which screens large foreign investments for national security implications, has become simultaneously more active and more transparent in recent years. The Act's application to critical minerals acquisitions, particularly those involving state-linked acquirers from China, has been a source of signal to global capital markets about Canada's seriousness about supply chain security. The complementary risk is that the Act's application becomes unpredictable enough to deter legitimate allied-country investment. Calibrating that balance correctly, deterring adversarial acquisitions while welcoming allied capital without unnecessary friction, is the central operational challenge in Canadian FDI governance.
Hejazi and Trefler's research is the most important piece of work on this question and it deserves more attention than it receives in policy discussions. Their core finding is that Canada's foreign ownership restrictions in telecommunications, airlines, and financial services generate an annual productivity cost of approximately C$10 billion. The mechanism is straightforward and the evidence is robust across multiple estimation approaches.
When foreign-owned firms enter a sector, they bring technology, management practices, global supply chain relationships, and competitive intensity. Domestic incumbents facing foreign competition must improve their own productivity to survive, or accept declining market share. This competitive pressure is the primary channel through which trade and investment openness drives economy-wide productivity growth. When foreign ownership restrictions prevent this entry, domestic incumbents operate without that pressure. The sector's productivity stagnates. The workers, capital, and intellectual resources in that sector produce less output per unit of input than they would in a more open competitive environment.
Canada's telecommunications sector is the clearest example. Bell, Telus, and Rogers operate in a market with meaningful foreign ownership restrictions. The result, consistently documented in OECD comparisons, is among the highest mobile and broadband prices in the developed world relative to income, alongside below-average network performance metrics. Every Canadian household and business that pays elevated telecommunications costs is indirectly subsidizing a restriction policy whose primary beneficiary is incumbent shareholders. The economic cost is diffuse and invisible in the way that concentrated regulation always is: no single household feels a productivity-reducing restriction, but collectively the economy is smaller and less competitive than it would be without it.
The government's limited telecoms liberalization in recent years, specifically allowing foreign ownership of small carriers, has not materially changed the competitive dynamics of the sector. The C$10 billion estimate may therefore understate current costs if the structural conditions that Hejazi and Trefler identified have not changed. A full review of foreign ownership restrictions across sectors, with the explicit goal of quantifying the productivity cost of maintaining each restriction and comparing it to any legitimate national interest rationale, would be the most economically productive single research and policy initiative available to the current government.