Investment in Canada, Essay Example

Industry

The targeted Canadian industry for the purpose of investment is Finance and Insurance industry. Like many other developed countries, Canadian services sector has also been expanding at the expense of manufacturing sector. Business services sector is the second largest services sector in Canada by number of people employed. Finance industry is also one of those industries that attract foreign direct investment from US companies. Canada also enjoys one of the highest median household incomes among developed countries thus, there are ample growth opportunities in the already huge financial services sector.

Market Structure

Canadian financial sector is intensely competitive, mirroring the characteristics of oligopolistic market structure in which there are few major financial institutions in their respective sectors, controlling the major share of their markets and the rest operate on regional levels. The largest players achieve cost minimization through economies of scale and do have the ability to enjoy premiums on their services owing to their reputation. Some of the largest and most prominent local financial and insurance companies include Royal Bank of Canada, Bank of Nova Scotia, Manulife Financial, Dominion of Canada General Insurance Company, The Great-West Life Assurance Company, Toronto Dominion Bank, and Bank of Montreal etc.

Goods in the Industry

Finance and Insurance sector is service based sector that provides numerous financial and insurance products in almost every category such as investments, financial planning, life insurance, health insurance, savings accounts, and so on.

Geographical Location

Finance and insurance sector is largely concentrated in major urban cities such as Toronto which is also the country’s financial capital, Montreal, and Vancouver.

Government Role

Unlike US and many other developed nations, Canadian public sector finances are strong. The federal government recorded a surplus of C$13.8 billion for the fiscal year 2007/08 and the officials expected a breakeven or surplus for many years in the future (The Economist Intelligence Unit, 2008, Pg. 11). But the string of 11 consecutive annual budget surpluses ended in the fiscal year 2009 when the government showed a small deficit equivalent to 0.2% of GDP (The PRS Group, 2010, Pg. U-1). A World Economic Forum report released in September this year ranked Canada’s banking system as the world’s soundest for the third consecutive time (Canadian Bankers Association, 9 September, 2010).

GDP Level and Growth

Whereas US real GDP is expected to grow by 1.6% in 2011, Canadian GDP is expected to grow at a slightly improved rate of 1.9% (The Economist Intelligence Unit Ltd, 2010, Pg. 8) which confirms the strong economic and trade relationships between the two countries. Statistics Canada publishes GDP at basic prices by industry and for reporting purposes it includes finance and insurance in a group of related industries. This group together is referred to as the FIRE and Management sectors. According to Statistics Canada GDP in the combined FIRE and Management sectors increased from C$181.9 billion in 1999 to C$247.0 billion in 2008. The increase in GDP reported between 1999 and 2008 represented a compound annual rate of 3.1%. Between 2007 and 2008, the total value-added of the FIRE and Management sectors increased by 2.7% (Statistics Canada, 2010).

Industry Performance

Financial Performance

Banks represent the largest portion of the Canadian financial services sector. They owned C$1.257 trillion in assets or 55% of the sector’s total assets in 2003 (Department of Finance Canada, 2005). During the same year, banks earned an average return on equity (ROE) of 14.6%, the credit union sector earned almost 12%, and the life and health insurers earned about 13%. Banks also earned approximately 46% of the sectors total revenues.

Labor Productivity

According to Statistics Canada labor productivity in the FIRE and Management sectors increased 3.2% per year on average between 1999 and 2008. In comparison, labor productivity for the Canadian Economy increased 2.4% per year. Over the most recent year, labor productivity in the FIRE and Management sectors increased 2.0% as compared to a 0.5% increase for the Canadian Economy. This clearly demonstrates that labor productivity in the financial services sector has consistently outpaced national average over the long term and thus, it is safe to expect the trend to continue in the near future (Statistics Canada, 2010).

Employment

State of Employment in the Industry

The average workweek in Canada is 40 hours like US, with five eight-hour workdays but due to industry expansion and rising demand for financial services, volume of hours rose by 2.2% in 2007 as compared to 1.5% in 2006 (The Economist Intelligence Unit, 2008, Pg. 79). Like most other developed nations, Canadian services industry employers more labor than the manufacturing sector. Business services industry that also includes financial services is the second largest employer in the service sector after retail, employing over 10% of Canada’s total workforce.

Employment Trend

Global management services firm Manpower reports in the latest Manpower Employment Outlook Survey (MEOS) for the year 2010 that of the 10 surveyed industry sectors, employers in the finance, insurance, and real estate sector and the wholesale and retail trade sector are the most hopeful about adding staff (Going Global, 2010, Pg. 21).

Similarly, Robert Half Technology IT Hiring Index and Skills Report reports that financial services is one of the top growth industries for the IT sector (Going Global, 2010, Pg. 22). According to Robert Half, despite relatively high unemployment levels there continues to be a strong demand for finance and accounting professionals. The Robert Half survey finds among industries in Canada, executives in the business services and retailsectors are most optimistic about hiring near-term.

Labor Compensation

Average annual salaries including overtime in large companies in finance and insurance sector was C$51,901 (The Economist Intelligence Unit, 2008, Pg. 79). A recent report by Conference Board of Canada, “Compensation Planning Outlook 2010: Cautious Optimism on the Road to Recovery,” mentions that finance and administrative occupations average C$20.89 per hour (Going Global, 2010, Pg. 20).

International Trade

The six largest Canadian banks earned 33% of their net income from foreign sources in 2003 while 58% of the life and health insurance sector’s premium income came from foreign sources (Department of Finance Canada, 2005).

Direct Foreign Investments

USA is Canada’s largest trading partner. Canada’s finance and insurance sector was among those that enjoyed the highest foreign investment in 2007 (The Economist Intelligence Unit, 2008, Pg. 5).

Conclusion

Most of the developed nations have been transitioning to services intensive economy from manufacturing intensive economy and Canada is no exception. The country enjoys one of the soundest financial services sector in the world and its financial services sector not only employs the second largest proportion of Canada’s total workforce but also benefits from above national average labor productivity and one of the lowest debt levels among developed nations. One another benefit of investing in Canada’s financial services sector is the rising income levels that will only further increase the demand of already expanding financial services sector.

Thus, it is a ripe time to invest in Canada’s financial sector. Unlike manufacturing, services sector are not faced with the threat of outsourcing, at least for many years to come because services require human interaction and process standardization is not possible in services sector to the extent it is possible in manufacturing sector. Thus, it is no surprise that services sectors such as retail and financial services sector are the two largest sectors by workforce employment in Canada. The demand for financial services sector currently exceeds the financial services supply this is why Canada has been adopting immigration friendly policies to attract skilled labor. This also supports the expected growth of Canadian financial services sector for many years to come. Moreover, Canada was also quicker than US to rebound from the financial crisis and it’s no wonder that Canada’s Minister of Finance, Jim Flaherty was awarded the title of “Finance Minister of the Year for 2009” by EuroMoney Magazine.

References

Canadian Bankers Association. (September 9, 2010). Good news for all Canadians: World Economic Forum again ranks Canada’s banks as the world’s soundest. Retrieved November 27, 2010, from Canadian Bankers Association (CBA): http://www.cba.ca/en/media-room/65-news-releases/536-good-news-for-all-canadians-world-economic-forum-again-ranks-canadas-banks-as-the-worlds-soundest-

Department of Finance Canada. (June 2005). The Canadian Financial Services Sector. Retrieved November 27, 2010, from Department of Finance Canada: The six largest banks generated 33 per cent of their net income from foreign sources in 2003, while 58 per cent of the life and health insurance sector’s premium income was derived from foreign sources

Going Global. (2010). Going Global Career & Employment Resource Guide for Canada. Canada Career Guide , pp. 1-158.

Statistics Canada. (2010). Gross Domestic Product (GDP): Finance and Insurance (NAICS 52). Retrieved November 27, 2010, from Industry Canada: http://www.ic.gc.ca/cis-sic/cis-sic.nsf/IDE/cis-sic52vlae.html

Statistics Canada. (2010). Labour Productivity: Finance and Insurance (NAICS 52). Retrieved November 27, 2010, from Industry Canada: http://www.ic.gc.ca/cis-sic/cis-sic.nsf/IDE/cis-sic52proe.html

The Economist Intelligence Unit Ltd. (2008). Country Commerce: Canada. 1-97.

The Economist Intelligence Unit Ltd. (May 2010). Country Report: Canada. pp. 6-9.

The PRS Group. (2010). Canada. Political Risk Yearbook: Canada Country Report , U-1 – 20.