Canadian companies continue to buck the trend seen in the United States to shift production of goods and services destined for the domestic market to low-cost economies in Asia.

The latest Asian Investment Intentions Survey, undertaken by the Asia Pacific Foundation of Canada, found that the target market of the majority of Canadian companies that are planning additional investment in Asia is the region itself. Only 10% are considering further investment in Asia to maintain their competitiveness in North America, unchanged from the level in last year’s survey.

The focus on growing Asian markets, rather than on outsourcing, is confirmed by the 63% of companies that reported their current activities in Asia are aimed at supplying Asian customers. Only 15% are operating in Asia to supply the Canadian market, up only slightly from last year’s level.

Commenting on the survey results, APF Canada President and Co-CEO Yuen Pau Woo said, “Overall, companies are very bullish on Asian investment. The 85% of respondents expecting to boost their Asian holdings substantially or moderately in the next five years is the highest in the eight years the Foundation has undertaken the survey. Most of these, 69%, expect to add to their investment during the next 12 months, the same level as last year. Not one of the companies surveyed expected that they would reduce their Asian activities over the next five years.”

The results of the survey are considered especially reliable as companies participating in the survey already have a physical presence — factories or sales offices — in at least one Asian country and are well-informed on economic prospects in the region.

The importance of China to Canadian companies operating in Asia shows up in the responses to several questions. Just under 21% of all the operations of companies surveyed are in China (31% if Hong Kong is included), and 20% of additional investments are likely to be in that country (27% if Hong Kong is included). All these figures are down a little from last year’s results, but are far ahead of those for any other market or region. India, Pakistan and Sri Lanka as a region are next most favoured as geographic targets for new investment with 11%, unchanged from the level in the 2006 survey.

One interesting finding is that 58% of the Asia-focused companies surveyed reported that they had a formal strategy for increasing business with China. This is well above the 42% of companies based in Canada, but doing business with China, that reported having a formal China strategy in a survey carried out last year jointly by APF Canada and Canadian Manufacturers & Exporters.

The largest proportion of likely new investment will go into facilities, either new plant and equipment or expansion of existing facilities. However, the likely takeover of — or merger with — other companies is on the rise again, with 33% of respondents favouring this path to growth, reversing a declining trend that set in after a spurt in Canadian mergers and acquisitions in Asia around the turn of the millennium.

The survey is based on the Foundation’s unique database of Canadian corporations — Canadian Companies Doing Business in Asia — that have a physical presence in Asia Pacific. It was carried out in January and February this year with a response rate of 18% from the 524 companies that received the survey. The comparison is with a similar survey carried out a little over a year earlier.

This year’s survey was carried out before last week’s Federal budget which announced the elimination of the tax deductibility of interest on borrowings for overseas investments which could affect the offshore investment plans of some Canadian companies.