UPDATED: 2/11/14 6:04 pm ET
OTTAWA (Bloomberg) -- Canada is increasing its funding for automakers by $500 million ($453 million) in a bid to attract investment from Chrysler and other companies as the country's domestic auto industry reels from global competition and declining output.
The government will bolster its Automotive Innovation Fund over two years, adding to the C$316 million ($284 million) invested in six projects since 2008, according to the budget released Tuesday by Finance Minister Jim Flaherty.
The fund, which provides repayable contributions to automakers for large-scale research and development projects, has attracted private-sector investments of as much as C$2.3 billion ($2.1 billion), budget documents show.
The fresh incentives come as Chrysler is reported to be considering at least a C$2.3 billion ($2.1 billion) investment in its Windsor, Ontario, minivan plant and has asked the federal and Ontario governments for subsidies.
Canada's auto industry is shrinking, with Mexico expected to surpass Canada as the biggest exporter of cars to the United States in 2015, according to consultant IHS Automotive.
"The government and Ontario are actively engaged in discussions with Chrysler," Jayson Myers, chief executive officer of Canadian Manufacturers and Exporters, said at the budget lockup in Ottawa. "This is a signal the federal government has money to bring to the table."
Shawn Morgan, a spokeswoman for Chrysler, declined to comment on the potential investment. Sergio Marchionne, CEO of Chrysler, will give the keynote speech at the Canadian International Auto Show in Toronto on Thursday.
Chrysler is asking for contributions of at least 20 percent, or C$460 million ($414 million), from both levels of government to upgrade the minivan plant and for new research and development, the National Post reported on Feb. 7, citing people it didn't identify.
The new funding "will support private sector investment in the long-term competitiveness of the Canadian automotive sector and create and sustain jobs and economic growth," the government said in its budget.
The money adds to Canada's investment in the car industry, where it holds a 6.9 percent stake in General Motors. The federal and Ontario governments are the second-largest shareholders in Detroit-based GM, with a stake valued at about C$3.84 billion ($3.5 billion).
Canada has maintained its holding even after the U.S. government sold its GM shares.
The auto industry represented 10 percent of manufacturing gross domestic product and 14 percent of total merchandise exports in 2012 and employs more than 115,000, according to the budget.
The industry has been struggling to attract investment after the Canadian dollar rose above par with its U.S. counterpart in the wake of the financial crisis, and auto companies directed investment to cheaper locations in the U.S. south and emerging markets.
The Canadian dollar has fallen to four-year lows over the past year to about 90 U.S. cents. By 2015, U.S. sales of autos from Mexico may climb to 1.9 million units, topping Canada's 1.87 million, Lexington, Mass.-based IHS has estimated.
Auto subsidies aren't generally favored by economists because they distort trade patterns, said Avery Shenfeld, chief economist at CIBC World Markets.
"There's a lot of it in this sector and the aerospace sector," he said. "However unpalatable, we're forced to fight fire with fire."