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Canada

Canada: a Dynamic, Competitive Economy— Open for Global Business

2

Canada's economic fundamentals andrelative cost advantages provide afirst-rate business environment. Canada provides:

Excellent economic fundamentals

Report Card

Overall government budget in surplus.

Low inflation and low interest rates.

Easy access to marketsGeography and NAFTA provide easyaccess to the world's most prosperousmarket.

A cost-competitive businessenvironment

Large stock of skilled workers; low start-up costs; competitive tax system(particularly for R&D); strong technologicalenvironment; positive business climate.

An excellent place to live

Superb overall quality of life.

Excellent economic fundamentals

Easy access to markets

A cost-competitive business environment

An excellent place to live and work

Excellent economic fundamentalsExcellent economic fundamentals

Canada Provides:

3Canada 3

Canada’s strong fiscal situation

C

• Canada's fiscal situation has turned around dramatically:

- In 1994, Canada’s deficit (as a percentage of GDP) was 6.7%, the third highest in the G-7.

- However, by 1997, Canada became the first G-7 country to post a surplus in the 1990s, and is the only G-7 nation expected by the OECD to post two straight financial surpluses from 2002 to 2003.

- Federal government spending (as a % of GDP) reached a 50-year low in the 2000-01 fiscal year, the key source of the Canadian fiscal turnaround.

* Includes federal, provincial/state and local ** ProjectionsSource: OECD Economic Outlook, June 2002

Total Government Surplus*

The Institute for Management Development ranked Canada as the best fiscally managed country in the G-7 in 2000

Federal Budgetary BalancePublic Accounts Basis

Canada 4

Source: Finance Canada

0.0

-3.0

-6.0

% of GDP

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-200

0

2000

-01

2001

-02

Surplus

Deficit

+

Federal Program SpendingPublic Accounts Basis

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-89

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

10

12

14

16

% of GDPProjected

1994

1995

1996

1997

1998

1999

2000

2001

2002

**

2003

**

02468

10

-2-4-6-8

% o

f G

DP

Canada

A Strong Fiscal Surplus

5

• Canada had the highest general government surplus as a percentage of GDP in the G-7 in 2001. The OECD expects Canada to be the only G-7 country with fiscal surpluses in 2002 and 2003.

Total G-7 Government Fiscal Balance (% of GDP)2001-2003

Source: OECD Economic Outlook, June 2002

20022001

2003

Canad

a

France

Germ

any

Italy

Japan

U.K.

U.S.

0

2

4

-2

-4

-6

-8

-10

Canada

Low Inflation and Low Interest Rates

6

• Canada’s targeted inflation rate is locked between 1% to 3%.

- Over the past five years, Canadian inflation averaged 1.9%

Sources: Statistics Canada and the Federal Reserve Bank of St. Louis

Inflation

Long-Term Interest Rates

1994

1995

1996

1997

1998

1999

2000

2001

0

1

2

3

4

Ye

ar-

Ov

er-

Ye

ar

% C

ha

ng

e

• Canada's excellent fiscal situation and low inflation are reflected in low domestic interest rates.

Source: Bank of Canada, Government long-term bond. U.S. Treasury, Constant Maturity long-term bond.

Last data points plotted: Canada – August 2, 2002; U.S. – August 12, 2002

1994 1995 1996 1997 1998 1999 2000 2001 20023

5

8

10

%

Canada

A Growing Domestic Economy

7

• Canada’s GDP grew at an annual rate of 6.0% in the first quarter, similar to U.S. growth but much stronger than growth in other G-7 countries.

- The OECD and IMF both forecast Canada to lead the G-7 in economic growth in 2002 and 2003.

Real GDP Growth Projections 2002-2003 (%)

20032002

2.5

1.4

2.02.3

1.4

0.9

-1.0

3.6

3.02.8

3.4

2.92.7

0.8

U.S.Can

ada

France

Italy

Germ

any

U.K.

Japan

0

2

4

20032002

3.2

1.4

1.9

2.5

1.5

0.7

-0.7

4.0

3.02.8

3.5

2.82.5

0.3

U.S.

Canad

a

France

Italy

Germ

any

U.K.

Japan

0

2

4

Source: International Monetary Fund, May 2002

Source: OECD Economic Outlook, June 2002


Canada

Canada Provides:

8





Canada

Streamlined Border Flows

9

• Since the enactment of the North American Free Trade Agreement (NAFTA) in 1994, Canada provides long-term assured access to the North American market — nearly 400 million people with a combined GDP of over $9.4 trillion ($U.S.).

• In addition to eliminating tariffs, NAFTA provides procedures for:

- border facilitation;- movement of personnel;- investment and intellectual property

protection; and- product certification.

• The North American market is serviced through a well integrated transportation system which is among world’s best.

- Automated permit ports, transponder identification systems and joint processing centres are being tested and deployed.

Source: Transport Canada and Statistics Canada, 2001

Annual Transborder Crossings -Total Number of Trucks and Canada-US Air Passengers Entering Canada

Truck

Air

80 82 84 86 88 90 92 94 96 98 20000

5

10

15

20

Canada

Smarter Borders

10

• Efficient border crossing was restored within a week of the tragic events of Sept 11th

–today, border wait times average less than 10 minutes

• In December, Canada and the USA signed a declaration to build a Smart Border for the 21st Century to accommodate the growth in trade and commerce

–initiatives focus on improving existing border processes through the use of new technologies and infrastructure

• The December Budget also allocated $1.6 billion over the next five years for border initiatives

Canada

…and Short Distances to Markets

11

Calgary Regina

Halifax

Los Angeles

Denver

New York

Boston

Philadelphia

Washington

BaltimoreDetroitChicagoCleveland

St. Louis Pittsburgh

Milwaukee

Houston

Atlanta

Vancouver

Toronto

Montréal

Seattle

Miami

Mexico City

San Francisco

Winnipeg

300 mi

600 mi Charlottetown

St. John's

Edmonton

VictoriaOttawa

Windsor

QuébecFredericton

Increase in TransborderRoutes Since Open Skies

89

144

Feb. 1995 Feb.2002

Source: Transport Canada

Direct Scheduled flights only.

• Almost half of the U.S. population lives within a 10 hour drive of Toronto, and over 60 percent within a two hour flight.

• Business travel between Canada and the U.S. has increased considerably since the inception of the “Open Skies*” Agreement (February, 1995)

• Direct air service between major cities in Canada and the U.S. has nearly doubled in 6 years.*Under “Open Skies” Canadian Air Carriers gained unlimited rights to establish routes from any point in Canada to any point in the United States. Similarly, U.S. carriers also gained unlimited access to the Canadian market (with a phase in period for up to three years)

1995 1996 1997 1998 1999 20000

100

200

300

400

500

600

700

800$ Billions

Canada - U.S. Trade

$700 Billion

Source: Statistics Canada

Canada

Canada Is by Far the Largest U.S. Trading Partner

12

• Canada and the U.S. have the world’s largest trade partnership, with two-way trade amounting to $700 billion in 2000. In fact, this averages to more than $1.3 million dollars a minute in trade.

• Between 1995 and 2000, trade between Canada and the U.S. grew at a compound average annual rate of 10.4%.

• The U.S. trades more with Canada than with any other country - the U.S. trades more with Canada than with all of the countries of the E.U. combined!

Canada20.3%

Mexico12.4%

Japan10.6%

China5.8%

Germany4.4%

All Others46.5%

Distribution of U.S. Trade* — 2000

* Merchandise tradeSource: World Trade Atlas

Canada

Canada Welcomes Foreign Investment


2001

13

• Foreign direct investment in Canada has more than doubled since 1990.

• Increasingly more investment goes to knowledge-based industries in high-tech manufacturing and services sectors.

• The U.S. is the dominant source of foreign capital.

- In 2001, the U.S. share of foreign direct investment (FDI) in Canada was 67%.

Wood & Paper

Energy & Metallic Minerals

Finance & Insurance

Services & Retail

Other

Machinery & Transportation

$321 Billion

Distribution of Foreign Direct Investmentby Industry

1990

$131 Billion

Distribution of Foreign Direct Investmentby Region/Country

U.S. 67.0%

E.U. 23.8%

Japan 2.6%

Other 6.6%


2001

$340 Billion

Canada 14

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 20000

50

100

150

200

250

300

350$ Billions

Canada - U.S. Direct Investment Stock

United States57.4%

U.K. 7.5%

France 5.5%

Netherlands 3.5%

Barbados 3.3%

Japan 2.4%

All Others 20.4%



Distribution of Canadian Total Direct Investment Stock

• Canada and the U.S. have one of the world’s largest direct investment partnerships, with the stock of investment between the two countries totaling $340 billion in 2000.

• Between 1990 and 2000, U.S. foreign direct investment in Canada grew at an average annual rate of 6.9%.

• Over this period, Canadian direct investment abroad grew at an average annual rate of 8.2%.

The United States is Canada’s Largest Source of FDI


Canada

Canada Provides:

15



An excellent place to live and work


Superior Quality Workforce

Canada

• The overall skill level of Canada's workforce ranks high among competing countries.

• According to the World Competitiveness Yearbook, Canada has the highest percentage of individuals achieving at least college or university education.

* Percentage of the population that has attained at least tertiary education among 49 countries considered in the World Competitiveness Yearbook, 2002.

16

0

10

20

30

40

50

Canada

Japan

U.S.

France

U.K.

Germany

Italy

In

de

x (

%)

1st2nd

3rd12th

18th

25th

40th

Higher Education Achievement* World Rank

An Excellent Post Secondary System

Canada

• 1998 U.S. Gourman report scored 10 Canadian electrical engineering programs in the top 22, and 18 in the top 40

• Canada’s 67 universities and colleges produce more than 25,000 graduates per year in math, engineering and pure and applied sciences

17

Institution Score U.S. Cdn. Rank Rank

M.I.T. 4.92 1Stanford 4.91 2Berkeley 4.88 3Illinois 4.86 4Toronto 4.86 1UCLA 4.82 5McGill 4.82 2Cornell 4.81 6U.B.C. 4.81 3McMaster 4.80 4Purdue 4.79 7Southern California 4.77 8Princeton 4.76 9Michigan 4.75 10Carnegie Mellon 4.74 11Polytechnic-Brooklyn 4.73 12Queen’s 4.72 5Alberta 4.72 6Calgary 4.71 7Polytechnique, Mtl. 4.70 8Saskatchewan 4.70 9Manitoba 4.70 10

RANKING OF ELECTRICAL ENGINEERINGUNIVERSITY PROGRAMS

Canada

Skilled Management

18

* Standing among 75 countries. Index based on the availability of Management education in first-class business schools. Source: Global Competitiveness Report, 2001-2002

Management Education* World Rank

U.S.

France

Canad

aU.K

Germ

any

Japan

Italy

Ind

ex

1st2nd 4th 6th 21st

31st49th

• Canada ranks third among the G-7 and fourth overall in a 75-country study of locally available Management education in first-class business schools.

- Eight Canadian business schools are ranked among the top 100 Management Schools in the world according to a January 2001 survey by the Financial Times (UK).

Canada

Low Labour Costs

Occupational Wages — Knowledge Workers, 1999

* Canadian data have been converted to full-year assuming a 52-week work year. ** Purchasing power parity for 1999*** date for computer programmers based on average for 1997, 1998, 1999Source: IC calculations based on Statistics Canada Labour Force Survey and U.S. Bureau of Labour Statistics Occupational Employment and Wage Estimates

19

• According to the U.S. Bureau of Labor Statistics, labour costs in Canadian manufacturing (wage and non-wage) are the lowest in the G-7.

• Occupational wages are also lower in Canada for knowledge workers. * Figures are for 1999. Source: U.S. Bureau of Labor Statistics

8186 86

94100

109

140

Canada U.K. Italy France U.S. Japan Germany

$U.S

. pe

r h

ou

r

Cost of Labour — Manufacturing*

Life Science Professionals

Physical Science Professionals

Computer Programmers***

Electrical and Electronic Engineers

Chief Executives

$49,469

$52,423

$54,960

$62,309

$101,240

Full-time, full-year wages* ($U.S. PPP**)

$42,097

$46,348

$36,467

$48,945

$59,608

U.S.=100

Canada

Plenty of Natural Resources

* Measured in terms of thousands U.S.$ per capita. Standing among 92 countries.Source: World Bank, 1997

20

• Canada is extremely well endowed with natural resources.

• Canada ranks 3rd in the world in natural resource endowments, well ahead of other G-7 countries.

Natural Resource Endowments —World Rank*

Canad

aU.S

.

France

U.K.

Germ

any

Italy

Japan

3rd

8th

20th45th 50th 59th 72nd

Ind

ex

* Includes: crude fertilizers and crude minerals; metalliferous ores and metal scrap; iron and steel; and non-ferrous metals.Source: World Competitiveness Yearbook, 2002.

-150

-100

-50

0

50

100

150

U.S

. $

7th

26th 28th 29th33rd 36th

42nd

Per Capita Trade Balance —Non-Energy Raw Materials*

• Canada is the only G-7 country with a per capita trade surplus in non-energy raw materials.

Canada 21

A Tax Advantage for Firms to Expand in Canada

Corporate Income Tax Rates including capital tax equivalents

44.9%

41.5%

38.6%

35.6% 34.6%

40.0%

46.6%

2000 2001 2002 2003 2004 2005

Source: Finance Canada, December 2001

• Canadian locations compare well internationally in terms of statutory corporate income tax rates.

• The federal government and some provinces have announced sharp cuts in corporate taxes, to take effect over a five-year period.

• The Economic Statement and Budget Update accelerated the pace of this tax relief.

• By 2005, firms in Canada will have a 5.0% corporate income tax rate advantage over U.S. firms (including capital tax).

Canada

Low Employee Benefits

22

• Among the G-7, Canada has the lowest overall labour costs, including benefits.

• Lower medical insurance premiums are an important reason for this.

Employee Benefits* as a % of wages

G-7 Comparison,

•Average for 12 operations Source: KPMG Management Consulting, 2002

0

20

40

60

80

Germ

any

France Ita

ly

Japan

U.KU.S

.A

Canad

a

Other Benefits Statutory

Canada

Quality Health Care at Low Cost

23

• Canada's health care system is among the best and the cheapest in the industrialized countries:

- Employer-paid health benefits as a percentage of workers' gross pay in Canada are about 22 percent of that in the U.S.

(2.1% compared with 9.6%).

2.1

9.6

% of Gross Annual Payroll

0.6

0.7

0.7

0.1

8.0

0.7

0.5

0.4

Hospital, surgical, medical and major medical insurance premiums*

Short term disability, sickness or accident insurance and long term disability or wage continuation

Dental insurance premiums

Other (vision care, physical and mental fitness, etc.)

Employer-Sponsored Health BenefitsCanada and the U.S.

* U.S. value includes payments for retired employees

Source: Employee Benefits, 1995, prepared by the Research Centre, Economic Policy Division , The U.S. Chamber of Commerce and KMPG, Employee Benefits Cost Survey, 1996. Adapted from KPMG report on Corporate Taxation and Employee Benefit Cost Guide for Large Service Firms, prepared for the ICT Branch, Industry Canada, March 2000

Total

Canada

Low R&D Costs

24

•Canada offers the most favorable tax treatment for R&D among the G-7:

-Canada’s combined federal and provincial tax credits reduce the after-tax cost of $100 of R&D expenditures to as low as $44.

- In Canada, eligible costs include: capital equipment, overhead, process R&D, salaries, and materials.

•These tax-based incentives permit firms to significantly reduce R&D costs through direct investment or sub-contracting in Canada.

Relative Competitiveness ofR&D Tax System

Canada 0.70

Korea

U.S.

France

U.-K.

Japan

Mexico

Italy

Germany

0.88

0.89

0.91

0.92

0.97

1.00

1.01

1.02

1.03

1.05

Australia

Sweden

The B-index represents a ratio of the after-tax cost of a $1 expenditure on R&D divided by 1 less the corporate tax rate. A lower B-index indicates a more competitive R&D tax system Source: Conference Board of Canada, November 1999.

Canada

Low Energy Costs and Rates

25

• Canada has abundant oil, gas, coal and hydro-electric resources.

• Electricity costs for industrial users are significantly lower in Canada.

Source: KPMG Management Consulting, 2002

Average Electricity Rates

Canada

France

U.K.

Germany

U.S.

Italy

Japan

G-7 Comparison

Average Electricity Costs

Canada

France

U.K.

Germany

U.S.

Italy

Japan

G-7 Comparison

0 50 100 150 200 250 300 350 400

0 2 4 6 8 10 12 14

US cents per kWh (12 operations)

$US (12 operations)

Canada

Low Costs for Construction, Land, Office Lease

Source: KPMG Management Consulting, 2002

26

Construction Costs

Land Costs

• Canadian office lease costs are highly attractive. Lease costs include office space plus operating, utility, tax and insurance costs.

Office Lease Costs

ItalyCanadaFrance

U.S.U.K.

Germany

Japan

G-7 Comparison,Index: U.S. = 100

France

U.S.Canada

Italy

U.K.

GermanyJapan


Italy

France

Germany

Canada

U.K.

U.S.Japan


+1828

0 50 100 150 200 250 300 350

0 100 200 300 400 500

0 50 100 150 200

Canada

First-Class Technological Infrastructure

27

• Canada's technological infrastructure is second only to the U.S. among the G-7 — we rank above or very close to the U.S. in terms of:

- internet users and internet hosts- computers per capita

• Building a universal, competitive, leading edge "Information Highway" is a government priority.

* Standing among 49 countries. Index based on 20 characteristics including investment in telecommunications, computers in use, computer power, internet connections, number of telephone lines, cost of telephone calls and use of robotics. Source: World Competitiveness Yearbook, 2002

Technological Infrastructure*World Rank1st

5th

12th

22nd17th

32nd

25th

CanadaU.S. U.K. JapanGermany ItalyFrance

Ind

ex

Canada

First in Internet and Wireless Affordability

28

• Canada ranks first among the G-7 in terms of wireless communications costs and second in terms of internet access charges.

Internet Access Charges* – 2000

93.10

59.8356.1649.22

41.7235.8335.40

France U.K

.

Germ

any

JapanIta

lyU.S.

Canad

a

U.S. $

Bas

ed o

n P

PP

s P

eak

Rat

e 40

hrs

.

On

lin

e/M

on

th

* PSTN fixed charges include monthly rental fee and additional monthly charges related to discount plans, if applicable. Includes 40 one-hour calls. In France, ISP and PSTN usage charges are bundled and included under the ISP.Source: OECD, http://www.oecd.org/dsti/sti/it/com/

0.360.36

0.320.310.29

0.18

0.09

BostonParisLondonBerlinTokyoRomeToronto

Wireless Communication CostsPrice per minute, 1999 in U.S. $ PPP

Source: Yankee Group, Wireless/Mobile Communications Global Report, Volume 3, No. 16, May 1999

Canada

First in Telephone Affordability

29

1566

1443

1215

1076

1067

1177

745

Italy

U.S.

Germany

France

U.K.

Japan

Canada

Annual Business Telephone Charges U.S. $ PPP

Source: OECD Communications Outlook 2001

466

440

433

360

355

349

286

Italy

France

Germany

U.K.

Japan

U.S.

Canada

Annual Residential Telephone Charges U.S. $ PPP

Source: OECD Communications Outlook 2001

• Business telephone charges are lower in Canada than in any other G-7 country.

Canada

Sound Financial Institutions

30

• According to Moody’s Financial Strength ratings, Canadian Banks rank 1st among the G-7 in terms of their intrinsic credit worthiness.

E E+ D D+ C C+ B

Japan

France

Italy

Germany

U.K.

U.S.

Canada

Average Bank Financial-Strength Rating

B= strong intrinsic financial strength C= good D= adequate E= very weak

Source: The Economist, March 2000

Canada 31

Positive Business Climate

•Canada understands the importance of its business community and has created an environment to encourage its success.

Source: The Economist (EIU), August 24th, 2001

Business Environment of Top TenCountries, Rank in 2001-2005

Wo

rld

Ra

nk

1st 2nd 3rd

4th 5th 6th

7th

10th9th8th

Canada

Solid Microeconomic Policies

32

• According to The Economist, Canada ranks 2nd among 21 countries in a Lehman Brothers study pertaining to the effectiveness of microeconomic or structural policies.

• These rankings are based on three micro-policy categories:

• policies that increase an economy’s long-term potential growth rate. For example, spending on education and R&D.

• policies that affect labour market performance or reduce the lowest rate of unemployment at which inflation is stable (NAIRU).

• policies that increase product market competition.

Economic Health* Index of structural policies, 0=worst, 10=best

3 4 5 6 7

Netherlands

Finland

Ireland

Switzerland

Sweden

Australia

UK

New Zealand

Canada

USA

Source: The Economist, March 17th, 2001*Based on a study of 21 countries.

Canada

Less Paperwork for New Businesses

33

•Canada makes it easier to set up a new business, with less paperwork than any other country.

•Canada is the most efficient place to pull together worldwide research or production teams.

Total Number of Business Start-up Procedures*

Source: The World Bank and Harvard University,taken from The Globe and Mail, November 14, 2000

*Procedures divided into five major categories: Safety & Health, Environment, Taxes, Labour, and Screening.

0 2 4 6 8

Norway

Israel

Denmark

Finland

Ireland

Sweden

USA

New Zealand

Australia

Canada

Canada

Forward-Looking Framework Policies

34

• The economic policies of the government of Canada are focused on making Canada a world leader in the global knowledge-based economy of the 21st century. Commitments include:

- Making Canada the most connected Government to its citizens by 2004.

- Making high-speed broadband access available to Canadians in all communities by 2005.

- Becoming one of the top five countries for research and development by 2010.

- Shaping a "National System of Innovation“; and

- Providing marketplace frameworks/services benchmarked against the best in the world.

Government Policies/Programs Aimed at Building the Knowledge Infrastructure

21st Century Chairs for Research Excellence

Networks of Centres of Excellence

Canadian Foundation for Innovation

Canadian Institute for Health Research

Telecommunications Policy

Technology Partnerships Canada

Granting councils (NSERC, MRC, SSHRC)

Communications Research Centre

Industrial Research Assistance Programme (NRC)

Co-operative sectoral research programs (PAPRICAN)

Canadian Network for the Advancement of Research, Industry and Education (CANARIE)

SR&ED (Scientific Research & Experimental Development) tax credit for private sector research and development

Leading edge information systems: Strategis; CISTI (NRC); Cdn. Technology Network; Sector Competitive Frameworks

Canada Provides:





Canada 35

Canada

…and a Safe and Just Society

36

• Canada tops the G-7 as a safe place to live and conduct business.

• Canada also ranks well in providing equal opportunities for individuals.

* Race, gender, family background does not pose a handicap for competitiveness. Rank among 49 countries considered in the 2002 World Competitiveness Yearbook Source: IMD

* Confidence that person and property is protected. Rank among 49 countries considered in the 2002 World Competitiveness Yearbook. Source: IMD

Security* — World Rank

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Canad

aU.S

.

Germ

any

Japan

U.K.

Italy

France

Ind

ex

39th37th

31st

17th12th11th6th

Equal Opportunity* —World Rank

4.0

5.0

6.0

7.0

8.0

Ind

ex

44th41st

31st27th26th22nd

6th

Canada Offers Much

Canada 37

• Canada's economic fundamentals are excellent — government policies are geared toward competitiveness.

• Canada provides assured access to the world's richest economy, in addition to having a large and growing domestic market of its own.

• Canada provides a cost-competitive and future-oriented environment for business:

- quality, productive workers;- a competitive tax system;- prime locations for R&D activities;- abundant energy at low prices; and- an excellent infrastructure.

• Canada is an outstanding place to live, invest and do business.