Suppose a new country is discovered where money literally grows on trees, with golden leaves containing small gold deposits. However, extracting the gold requires ladders, saws, chippers, trucks, roads, smelters, and other equipment. Since the country is uninhabited, all this investment must be financed by foreigners from established nations.
Initially, the new country experiences large inflows of foreign capital. Some of this capital may be used to build ports and railways to facilitate gold transport. As harvesting progresses, the country generates GDP, profits, and incomes. People originally drawn by tree-mining discover other profitable activities. Value-added multiplies, GDP grows, and residents become wealthier, prompting them to start saving.
What do they do with their savings? They invest more domestically but also look abroad. Perhaps the money-tree business becomes less profitable due to increased competition and depletion of the best trees. Or they may seek diversification. Thus, they invest in industries in the old countries.
Cross-border investment now flows in both directions. Eventually, the new country may become so wealthy that the overall investment flow reverses, with it sending more capital to old countries annually than it receives. The day may come when the stock of new country capital in old countries exceeds what old countries own in the new country.
This parable mirrors Canadian economic growth. Initially, Canada was a land of great opportunity but scarce capital. Capital flowed in, opportunity was realized, the country became rich, and eventually began investing abroad. The traditional pattern of capital inflows flipped in the 1990s, with Canada now having more overseas direct investment than foreigners have in Canada.
Nevertheless, Canadians continue to worry. In the 1970s, fears centered on excessive foreign investment controlling the economy. Today, the concern is that Canadians are investing too much abroad. Conservatives refer to the $1 trillion in investment leaving Canada between 2015 and 2024 as the largest capital exodus in Canadian history. However, UN data suggests the net outflow was US$327.4 billion, and Canada's net asset position in 2024 was C$970 billion, with Canadians owning C$2.47 trillion abroad versus foreigners owning C$1.50 trillion in Canada.
