If a Canadian company owns all or part of a business in a foreign country, it is engaging in Canadian direct investment abroad, or CDIA.
Such firms are not necessarily large businesses—many small to medium-sized Canadian enterprises (SMEs) are discovering that investing abroad can have many benefits, including:
- Getting better access to foreign markets
- Increasing sales and market share
- Serving customers better
- Joining new global and regional supply chains
- Gaining access to new technologies and resources
- Reducing vulnerability to downturns both in Canada and internationally
Investing abroad: the basics
There’s no one-size-fits-all approach to CDIA, but in general it includes some or all of the following steps.
A word of caution first, though: foreign investing is complicated, so you should always obtain assistance from reputable experts throughout the process.
Consulting professionals in your target market is especially important, since they will be familiar with local investment, legal and tax requirements and can help you avoid expensive mistakes.
1. Decide whether CDIA is for you:
CDIA may or may not be a good bet for your business even if you’re already exporting. Ask yourself questions such as: Does it fit my international business strategy? Do I have the resources to set it up and sustain it? Does its potential outweigh the risks involved? If the investment isn’t a good idea, now is the time to find out.
2. Find the best market:
If you’re already doing business in a particular market, investing there may be the logical next step. If you’re looking to invest in a new market, research it very carefully and, as mentioned earlier, consult local experts about its foreign investment climate. Some countries encourage incoming investment but others can be less hospitable.
3. Choose your investment approach:
Three of the most common approaches to CDIA are as follows:
- You set up a foreign affiliate by establishing a new business in your target market. Depending on your company, this could be as modest as a small sales office or as ambitious as a full-scale manufacturing plant. Regardless of size, the affiliate is wholly owned by your Canadian firm but operates as a local company with respect to regulations, laws and taxes.
- You acquire a foreign business. To do this, your company invests in the foreign firm by purchasing its shares and/or assets. To qualify as CDIA, however, the investment has to be large enough to give you significant influence over the foreign company’s activities. If you acquire 100 percent of the foreign company, of course, you have complete control over its operations, and have effectively acquired a wholly owned affiliate without building it from the ground up.
- In a merger, you establish or already have an affiliate in the target market. You then combine that business and a local company into a new firm that owns the resources of both companies. Both the original businesses disappear and your new firm continues as their successor. As with an acquisition, the new business functions as a wholly owned affiliate of your Canadian parent company.
4. Choose your investment and carry out due diligence:
At this point, you decide where to put your money—into an affiliate, for example, or into merging with or acquiring a local company. Before going ahead, though, you absolutely carry out due diligence. This can range from financial and credit checks to looking at local foreign-investment rules. Again, professional help will be indispensable.
5. Make your investment:
This is where you sign contracts and pay out money. The importance of getting the contract right can’t be over-emphasized, since it will help you avoid difficulties that can range from language issues to tax problems.
You should also be aware that the way contracts are negotiated in North America or Western Europe can be very different from the way it’s done in other cultures.
For both these reasons, you’ll need trusted local counsel to help you manage the process successfully.
6. Protect your investment:
Whenever you have assets in another country, you’re implicitly accepting some level of risk. You can reduce this by careful planning and scrupulous due diligence, but there may still be residual hazards that are out of your control. You can protect yourself against them by using various types of insurance, which can cover risks ranging from expropriation to breach of contract.
Have you ever invested abroad? In which markets did you invest, and what was your experience? Share below!