Canada is at the forefront of innovation, leadership, and technology — from our sound economic fundamentals and favorable tax regime to highly skilled workers, dynamic industry clusters, and the lowest business costs in the G-7, Canada is an ideal place to do business. This overview article takes a look at some of the reasons why investors are flocking to Canada and how the new political leadership's commitment to strengthening the business climate will contribute further to Canada's ascent as one of the world's most innovative and competitive nations. It also takes a look at what safeguards have been put in place to ensure the security of our borders, while facilitating the legitimate flow of people and goods between the two greatest trading partners in the world. These themes are also developed in the three feature articles, which take a closer look at Canada's Centers of Excellence, tax credits for R&D, and border initiatives.

Economic Strides
Canada's economy turned a corner in the mid-1990s and never looked back. It has since become one of the top performers in the world. Between 1993 and 2002, Canada recorded five consecutive budget surpluses, erased a C$42 billion deficit, paid down more than C$36 billion in debt, boosted health care, and enacted the largest tax cuts in Canadian history. Canada is the only G-7 country expected to run a budgetary surplus this year. This is just the sort of environment in which businesses thrive. In fact, the Economist Intelligence Unit recently ranked Canada first in its global business rankings. What does that mean? Only that Canada is recognized as the best country in the world in which to conduct business over the next five years.
     And that's not just when times are good — its diversified economy and government initiatives have helped Canada weather economic slowdowns better than other major countries. In 2002, for the first time in 20 years, Canada outperformed the United States — during the economic downturn Canada staged a stronger recovery than any other G-7 country, with real GDP growth of 3.3 percent.
     Canada's real GDP growth averaged 3.8 percent per year from 1996 to 2002 — the best performance in the G-7. Moreover, forecasters such as the Organization for Economic Cooperation and Development predict that Canada and the United States will co-lead the G-7 in terms of output and employment growth in 2004 and 2005.
     Productivity performance has also improved, which has led to an increase in the standard of living of all Canadians. In fact, over the 1997–2002 period, real GDP per capita grew by 3.1 percent on average — again the best performance of any G-7 country.

New Leadership
Canada recently welcomed a new leader, Prime Minister Paul Martin. Martin served as Finance Minister under former Prime Minister Jean Chrétien and delivered the first balanced budget in fiscal 1997–1998. His guidance will continue to support the initiatives that have led to Canada's ascent as a world leader.
     "There's no doubt we're going to be an activist government," the prime minister notes. "Whether you're talking about health care, education, or the environment — there are tremendous opportunities for us to strengthen the fabric of our nation."
     Martin is committed to sound financial management, including reducing the national debt ratio to 25 percent of Canada's overall economic output, continuing to lower taxes, improving the ability to quickly respond to a changing international economic scene, and a better relationship with the United States.

Pro-Business Tax Climate
Canada's tax regime continues to get better. In 2000, the government announced plans to reduce taxes by C$100 billion over five years — the largest tax cut in Canadian history. Capital gains taxes have also been reduced — in fact, Canada's top rate on capital gains is lower than the typical top rate in the United States. By 2005, businesses in Canada will have almost a 4.5 percent corporate income tax advantage over U.S. firms. Canada's capital tax will be reduced in stages over a period of five years, with complete elimination by 2008. These advantages, when combined with the most generous R&D tax credits in the G-7, create a highly competitive tax system.
     Other changes to the tax system encourage entrepreneurship and innovation through better tax treatment of employee stock options and tax-free rollovers. By 2005, federal personal income taxes will be reduced by an average of 21 percent (27 percent for families with children).

Lowest Business Costs in the G-7
Canada has been proven to be the most cost-effective G-7 country in which to do business. An international study by KPMG in 2002 compared the costs of doing business across the G-7 countries (plus Austria and the Netherlands), and, for the third time, ranked Canada number one as the most cost-competitive country. The study concluded that Canada enjoys a substantial and constant advantage over the United States in all industries, particularly those requiring skilled workers. Notwithstanding the recent appreciation of the Canadian dollar, it is expected that Canada will remain the most affordable place to do business in the G-7 in 2004 and years ahead.
     In a location study by A.T. Kearney focusing on offshore business processing, Canada scored second overall (behind India and ahead of Mexico) as an offshore prospect, based on three factors: cost, environment, and labor. Canada ranked first in the environment category, which looked at factors such as political and economic risk, infrastructure, cultural compatibility, proximity, and intellectual-property protection.

Education Initiatives
Prime Minister Paul Martin has reinforced Canada's commitment to investing in human capital. A higher percentage of GDP is spent on education in Canada than in any other G-7 country. 's why it's no surprise that Canada ranks first in the world for the highest percentage of individuals achieving a college or university education (2003 World Competitiveness Yearbook). Canada also has the highest rate of computer literacy of any G-7 country and ranked third overall in an 80-country study for management education available through first-class business schools.
     Canada remains steadfast in its efforts to give all Canadians affordable access to higher education. Nearly C$1 billion has been allocated over five years to create 2,000 research chairs in Canadian universities that will attract the finest teaching and research talent. The federal government has committed to increasing the number of master's and Ph.D. students at Canadian universities by an average of 5 percent per year. To help accomplish this, C$105 million will be donated to the Canada Graduate Scholarships program.

Research and Development
Canada is committed to being one of the most innovative nations in the world. Since 1999, it has increased annual funding for research and innovation from C$400 million to C$2.1 billion. By 2005, the total cumulative funding invested for research and innovation will reach C$11 billion. The goal is challenging but definitely attainable — to become one of the top-five countries in R&D performance by 2010.
     Leading the way are Canada's Networks of Centers of Excellence (NCE), which are the subject of one of our feature articles (see page 13). Funded by Industry Canada and three federal agencies, including the Canadian Institutes of Health Research, the centers undertake peer-reviewed research programs at Canadian universities. In addition to groundbreaking discoveries, the NCE create unique, multidisciplinary partnerships among universities, industry, and government. This networking connects cutting-edge research, industrial know-how, and strategic investment. In 2002–2003, more than 1,000 governmental and private-sector entities were involved in NCE programs.
     Canada's R&D tax program — one of the most generous in the world — helps create this investment climate. Incentives include immediate full write-offs for all expenditures in R&D capital equipment. Canada's Scientific Research and Experimental Development program provides about C$460 million annually in tax credits for biotech companies.
     R&D leaders include the biotechnology and medical-devices industry clusters. Canada is second in the world for the number of biotech companies and third for biotech revenues. Key sectors are health, agriculture, food processing, environment, bioinformatics, and aquaculture. Almost C$500 million was invested in biotech by the federal government in 2001–2002. The medical-devices industry generated more than $3 billion in sales in 2000. According to KPMG, in 2002 the Canadian medical-devices industry had one of the lowest overall annual costs in the G-7.

Canada and the United States
Canada and the United States share what has been the ''s largest and most comprehensive trading relationship for almost half a century. Their intertwined economies support more than two million jobs in each country.
     This growing economic interdependence benefits both countries in an era of global change. Two-way trade between Canada and the United States was valued at US$488 billion in 2002 — almost US$1 million per minute — which is more than the United States trades with all the countries of the EU combined. With NAFTA, the consumer market has a base of 400 million people and produces a combined GDP of more than US$11.4 trillion.
     Secure and efficient border crossings between Canada and the United States are the lifeline of this economic growth. More trade flows between Windsor, Ontario, and Detroit, Mich., than through any other border crossing in the world. Trucks carry approximately 80 percent of Canada's trade with the United States — one truck crosses the Canada-U.S. border every 2.5 seconds. As we celebrate the tenth anniversary of NAFTA, it is timely to reflect on the significance of this free trade, and how new border challenges have created the impetus for even more effective cooperation.
     Since the signing of the "Smart Border" Declaration and 30-point Action Plan in December 2001, the security and efficiency of the border have been vastly improved. Another of our feature articles (see page 37) takes a look at the progress achieved in transforming the border.

Initiatives that are under way include:
     • NEXUS (dedicated "fast lanes" for preapproved and low-risk travelers)
     • FAST (expedited clearance processes for preauthorized shipments)
     • Joint teams of customs and enforcement officials at key ports of entry
     • New US$400 million border infrastructure fund for improving major border crossings

Record Investment Flows
These important and necessary measures are being put in place to safeguard and strengthen the most integrated and complex economic relationship in the world. In 2001, a record US$25 billion in new direct investment flowed into Canada from the United States. The total U.S. stock in Canada at the end of the year amounted to US$139 billion. The United States is by far the largest foreign source of capital in Canada, accounting for 67 percent of the total stock. This represents 10 percent of all U.S. direct investment abroad.
     In 2001, Canadian investors spent almost $17 billion to acquire or establish businesses in the United States — more than any other country. Half of all Canadian direct investment abroad is in the United States. At the end of 2001, Canada had an accumulated total of US$109 billion invested there, 8 percent of all foreign direct investment in the United States.
     The longstanding partnership between Canada and the United States is not just based on commerce — both countries share political and environmental goals as well, dating back to the American Civil War. Both countries fought side by side in World War I and II and are cooperating today in the war on terrorism. They also share the stewardship of the Great Lakes, a diverse environment that accounts for 20 percent of the world's fresh-water supply. The result of this long history of working together is the creation of bonds that are nearly impossible to break — in good times or bad.

The Future
Global order is changing. In 20 years the United States likely will not stand alone as it does today in the order of nations. Canada has never before had a greater opportunity to advance itself as a world leader. To do so it continues to strengthen its social foundations, build its New Economy, streamline government, and collaborate creatively with both established and emerging nations.
     "In this last decade, Canada's progress has been more than impressive," says Prime Minister Paul Martin. "We can make the great nation that is Canada still greater in the twenty-first century. In these next few years Canada can make history — and provide a new prosperity, security, and opportunity for all."