The Short Report: August 28 - Solving Canada's Productivity Crisis

Canada’s productivity problem is now an “emergency – it’s time to break the glass.” That’s how Carolyn Rogers, senior deputy governor of the Bank of Canada, described in April the country’s ongoing decline in productivity. So what is to be done? How does Canada fix its productivity crisis? Research Money has been closely tracking and covering this issue. For this week’s retrospective issue of Innovation This Week, here are 10 of our Short Report stories since the start of the year on Canada’s productivity emergency. They highlight perspectives and suggested solutions from: Polytechnics Canada; the Fraser Institute; Bennett Jones; RBC Economics and Thought Leadership; the Information Technology and Innovation Foundation; the Conference Board of Canada; the Bank of Canada; and Statistics Canada.

Polytechnic institutions’ applied research generates strong return on investment and can play a crucial role in improving Canada’s productivity

August 14, 2024

Every dollar invested in polytechnic applied research generates a return on investment from a low estimate of $8.09 to a high of $18.49, says a report by Polytechnics Canada.

As a result of applied research collaborations, 51 percent of project partners reported increased R&D capability, 48 percent achieved improved competitiveness, and 12 percent said they created new jobs, according to the report, done in collaboration with Toronto-based Prism Economics and Analysis.

Additionally, there are other social benefits that accrue such as reductions in waste or carbon emissions and improvements in public well-being that are difficult to quantify in monetary terms, but which support an estimate closer to the upper boundary.

“Applied research plays a crucial role in generating the overall return to research investments. In the absence of applied research, there are no gains in productivity nor improvements in living standards,” the report says.

More than 85 percent of applied research partners are small or mid-sized organizations – a group that under-invests compared with other jurisdictions and faces unique barriers to investing in R&D, according to the report. Among the barriers identified are a shortage of technical staff, lack of facilities, capital constraints and regulatory burden.

“Closing the innovation gap among SMEs must be an important part of a broader strategy to accelerate innovation,” the report says.

The report notes that since 2017-18, funding for applied research in Canada’s polytechnics has been inconsistent, making it difficult to sustain innovation activity and retain research staff. “In light of Canada’s productivity challenge and the particular problem of lower rates of innovation among SMEs, this approach should be reconsidered.”

Polytechnics Canada is the voice of leading research-intensive, publicly supported polytechnics and institutes of technology.

The report, which used multiple databases including a special tabulation prepared by the Natural Sciences and Engineering Research Council of Canada (NSERC) estimates the return on investment from  the applied research carried out by the 13 leading, publicly assisted polytechnics and institutes of technology represented by Polytechnics Canada. The report includes several case studies.

Polytechnics engage in some 4,000 applied research projects each year. Between 2014-15 and 2021-22, the number of projects undertaken annually more than doubled.

Roughly 85 percent of the private sector partners in these projects are SMEs and they define the purpose of the research.

Approximately 20 percent to 25 percent of total research costs are contributed by private sector partners who also, in many cases, provide additional in-kind contributions. “The applied research of the polytechnics can therefore be described as demand-driven.”

The applied research carried out by polytechnics makes a distinct and important contribution to addressing Canada’s productivity challenge among SMEs, the report says.

For many SMEs, working with private consultancies on R&D projects or using private laboratory or testing facilities is too costly.

Collaborating with universities can be impractical owing to the extended timelines, the scale required and the inability to protect intellectual property. University researchers must be free to publish results – a requirement often incompatible with the IP needs of companies, but especially SMEs. Studies show that SMEs are more likely to rely on security protocols and non-disclosure agreements than patent protection.

Polytechnics accommodate the short timelines that characterize the R&D needs of many SMEs, the report says. They are also able to work with small and micro-enterprises since scale is not a constraint.

Because polytechnics allow IP to reside with the partnering company, a major impediment to collaboration with private sector partners is avoided. The polytechnics have historically developed close connections to regional businesses.

“For all of these reasons, the polytechnics are uniquely positioned to build the R&D capacity of Canada’s SME sector and produce direct and meaningful rates of return on research investment.”

The report says the economic benefits of polytechnic collaboration with non-governmental partners is apparent in the results reported to NSERC by project partners:

• 51 percent stated that their collaboration increased their R&D capability.
• 48 percent indicated improved competitiveness.
• 26 percent gained access to new markets, including export markets.
• 21 percent reported increased productivity.
• 14 percent reported that their collaboration assisted in attracting new investment.
• 13 per cent described improved access to specialized skills or hard-to-reach workers.
• 12 per cent created new jobs.

By supporting exporters and building export capacity, applied research partnerships directly contribute both to improved export performance and increased R&D investment, the report notes.

Partner completion reports gathered by NSERC and reviewed for the report suggest intent to continue or extend collaboration with a polytechnic, many at their own cost. “This implies that applied research encourages private sector investment by addressing risk factors.”

These results illustrate in concrete terms the implications of the macro-economic estimates of the return on investment to polytechnic applied research, according to the report. Among the 30 projects profiled are research projects that:

• enabled small businesses to grow their market share, including for export.
• supported automation, extended equipment life and de-risked the adoption of new technologies and software.
• optimized environmental systems, leading to greater energy efficiency and diverting materials from landfill.
• improved environmental systems, including those affecting forests, soil, water, animals and food.
• Optimized the design and delivery of social programs.

“With additional support, polytechnics have the potential to significantly increase their contribution to Canada’s applied research ecosystem and increase the rate of innovation and productivity growth in the Canadian economy,” the report says. “The return on such an investment will be substantial.” Polytechnics Canada

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Canada’s deteriorating GDP growth per person among 30 advanced economies will worsen without immediate policy action: study

August 7, 2024

Canada had the third-lowest growth in GDP per person from 2014 to 2022 among 30 advanced economies, according to a new study published by the Fraser Institute.

“In terms of GDP per person, a broad measure of living standards, Canada’s performance has weakened substantially in recent years,” study co-author Alex Whalen, director of the Fraser Institute’s Atlantic Canada Prosperity Initiative, said in a statement.

The independent public policy think examined Canada’s historic and projected GDP per capita growth compared to similar OECD countries.

The study found that from 2002 to 2014, Canadian income growth as measured by GDP per person roughly kept pace with the rest of the OECD, but from 2014 to 2022 Canada’s growth rate stagnated.

In 2002, Canada’s GDP per capita was higher than the OECD average by US$3,141. By 2022, it had fallen well below the OECD average by US$231.

Canada lost ground compared with key allies and trading partners such as the U.S., U.K., New Zealand, and Australia between 2014 and 2022.

For example, Canadian GDP per person in 2014 was $44,710 (80.4 percent of the US total of $55,605), but by 2022, Canada was only at $46,035 versus $63,685 in the U.S.

In other words, the gap had grown from $10,895 to $17,649 by 2022 (all measures in inflation-adjusted US dollars).

Canada’s average 0.6-percent growth rate from 2002 to 2022 tied the country with Austria and Japan, and was approximately half that of the growth rate in the U.K. and Australia, and one-third of the growth rate in the U.S.

“Canada has been experiencing a collapse in investment, low productivity growth, and a large and growing government sector, all of which contribute to reduced growth in living standards compared to our peer countries in the OECD,” said study co-author Lawrence Schembri, a senior fellow with the Fraser Institute.

The third co-author of the study is Milagro Palacios, director for the Addington Centre for Management at the Fraser Institute.

Looking forward to 2060, Canada’s projected average annual growth rate for GDP per capita (0.78 percent) is the lowest among 30 OECD countries, according to the study.

Canada’s GDP per capita (after adjusting by inflation), which exceeded the OECD average by US$3,141 in 2002 and was roughly equivalent to the OECD average in 2022, is projected to fall below the OECD average by US$8,617 in 2060.

Canada once had a standard of living well above the OECD average as measured by GDP per capita, but “this lead has been squandered in recent years,” the study said.

According to the study, the root cause of Canada’s declining long-term growth in GDP per capita – both recent and projected – is very low or negative growth in labour productivity reflecting weak investment in physical and human capital per worker.

This weak trend growth in both physical and human capital per worker is driven by “dismal investment trends” in both human and especially physical (non-residential) capital growth, trends in immigration, and subdued technological innovation and adoption that increases the efficiency of labour, the study noted.

“Closing the gap with the OECD will require bold and comprehensive policy changes, given Canada’s dismal outlook,” the study said. “A return to even historical norms, let alone fully closing the GDP with the OECD, would be a massive challenge.”

The study said a few of the actions that should be undertaken immediately are: boosting productivity through reduced regulation and barriers to international and interprovincial trade (including improved labour mobility); encouraging innovation and entrepreneurship; tax reform aimed at improved tax competitiveness; and a stronger investment climate; and reducing the size of government. Fraser Institute

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Canada’s overriding economic policy goal must be stronger growth in productivity: Bennett Jones report

June 26, 2024

The overriding goal of economic policy for Canada must be stronger growth in productivity, according to an economic outlook report by Bennett Jones.

“It is by giving productivity enhancing investment absolute priority that Canadians may continue in the future to have the income – and governments the revenue – to buy desired private and public goods and services, and to advance other critical pursuits,” the report says.

Raising the share of GDP allocated to saving and investment today and in the medium term implies that a reduced share is available for current consumption, the report says.

“For households, this means increasing saving in some form as a share of current income. For businesses, it entails the reinvestment in productive capital of a greater share of earnings. For governments, it means allocating proportionately more resources to public investment that can generate a future stream of income, rather than enhancing current transfers.”

Since 2006, the year before the onset of the Global Financial Crisis, real GDP per capita in Canada has grown at an average annual rate of 0.4 per cent, well below the average of 1.6 per cent of the prior years, according to the report.

Cumulatively, since 2006, our real income has grown by a disappointing 5.4 per cent. On the trend of the prior 30 years, it would have risen by 35 per cent.

Canada is not alone in having experienced a slowdown of growth; the phenomenon is worldwide, the report notes. However, other developed economies performed substantially better.

From 2006 to 2023, real GDP per capita rose by 10.4 per cent in Japan, 11.8 per cent in the euro area, 19.6 per cent in Australia, and 21.4 per cent in the U.S.. The U.K., at 7.9 per cent, is closest to Canada’s 5.4 per cent.

In addition to demographic and labour market changes, the major factor explaining the slowdown in GDP-per-capita growth is weaker productivity growth, Bennett Jones' report says.

GDP per hour worked in the business sector in Canada in Q1 2024 was 10.9 per cent greater than in 2006. Based on the earlier trend, it would have been 28.9 per cent greater.

The slower productivity growth in the economy, in turn, is explained by lesser capital deepening – that is, lesser increases of capital (such as structures, and machinery and equipment per unit of labour), the report says.

Importantly, both before and after the Global Financial Crisis, there was little contribution to productivity growth from better use of capital and labour – what economists call multifactor productivity, a rough proxy for innovation.

Per worker, Canada invests more in non-residential structures – for example, energy infrastructure – than most other developed economies, although substantially less than Australia.

In contrast, Canada’s economy invests materially less per worker in machinery and equipment and intellectual property products than most peer economies, and far less than the U.S.

 For example – unlike in the U.S. – Canada’s businesses, in aggregate, did not ramp up investment in information and communications technology (including software) through the period of recovery from COVID.

“To restore stronger growth in GDP per capita and to improve standards of living, our economy needs to invest more per worker and to innovate faster in the use of capital, technology and labour.”

Globally, and in Canada, the policy signals affecting the energy transition and the digital transformation of our economies, two critical drivers of new investment, are uncertain, the report says.

On energy and climate, while the direction is clear, policy is running ahead of markets: private investment is not matching what would be required to meet policy goals and commitments. By contrast, as regards digital technology and AI, policy is trying to catch up to markets.

A Canadian strategy that is laser-focused on productivity growth must have a medium-term horizon, the report says. It must give direction, predictability, consistency and coherence to the actions of government, and thus provide clear signals to investors.

“Investments in energy and resource infrastructure, as well as in research and development and innovation, require a consistent policy framework that extends well beyond any political cycle.”

Details of that framework will evolve, in particular to respond to global developments, but there must be solid medium-term policy principles and anchors, according to the report.

“There is a role for every level of government in establishing the policy framework to raise Canada’s productivity growth, and there should be both collaboration and accountability.”

The federal government has powerful levers, and it can exert national leadership. Yet, provinces, territories and local governments, and in some cases Indigenous governments, are on the front lines of policy development and especially delivery in key domains, and there must be some alignment of strategy, plans and actions, the report says.

It notes there are two domains where provinces have the lead and where decisive action could accelerate the building of a clean, productive economy. These domains are:

• Expansion and decarbonization of the electricity grid. Under most estimates, a clean economy by 2050 requires doubling or more the capacity of Canada's electricity system, including clean generation and transmission. Given long lead times to plan and execute investments, and the massive scale of the enterprise, the signals to public and private investors must be very clear. The federal government has introduced some policy instruments to support the effort. “Provinces must drive planning and execution as a matter of priority.”
• Industrial carbon pricing. It is the part of the carbon-pricing system that is expected to make the largest contribution to emissions reductions. Yet, the provincial systems are disconnected, even where the federal backstop applies. It is entirely within the authority of provinces to collaborate toward a harmonized and integrated system that would facilitate compliance, allow the trading of credits across the country, incentivize investment, and help achieve emissions reductions at the lowest cost.

Moving the needle will take time, and it will require a coherent and complementary set of actions by federal and provincial governments working together with businesses, the report says.

“Overall, both business strategy and government policy must converge toward raising output per worker and GDP per capita. If, alternatively, this goal is subsidiary to all other important pursuits, then we will be dividing a static or shrinking pie and likely falling further behind other nations.” Bennett Jones

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Solutions available to fix Canada’s declining economic growth and productivity: RBC report

June 12, 2024

Canada has fallen behind most major economies since 2000 but governments, businesses, unions and industry groups can take actions to increase growth and productivity, according to a report by RBC Economics and Thought Leadership.

At the turn of the century, the economic output of the average Canadian was on par with Australia. Today, Australians are almost 10 per cent more productive, while their economy has grown 50 per cent per person faster than Canada’s over the quarter century, the report says.

Canada is 30 per cent less productive than the U.S., and closer to lower-income states like Alabama in terms of economic performance than tech-rich California or New York.

Canada has fallen from the 6^th most productive economy in the Organisation for Economic Co-operation and Development in 1970 to the 18^th as of 2022.

The productivity gap with the U.S. stands at about $20,000 per person a year, putting Canadians’ wages roughly eight per cent below their U.S. counterparts, according to the report.

The gap has been even more taxing for capital. Anyone who invested $1,000 in Canada’s main stock index in 2000 would have $4,400 today. The same investment in the U.S. S&P 500 index would be worth $6,000 – a more than 35-per-cent difference.

Canada’s relatively low productivity – the amount of production and income generated per hour worked in the economy – has been held back by a shortfall in investment, especially outside of real estate, construction and public services like hospitals, the report says.

“As a result, we’ve not been able to capitalize on the immigration boom that has added seven million people – most of them working-age and well-educated – since the turn of the century, and that offset the retirement wave of baby boomers.”

The deindustrialization of many parts of Canada has cut into the country’s overall prosperity, the report says. Manufacturing is half what it was to the economy in 2000, while mining has also shrunk. Oil and natural gas investment levels remain far below what they were a decade ago.

Administrative burdens across multiple levels of government have created inefficiencies and increased internal trade barriers, according to the report. Infrastructure chokepoints and red tape make international trade more difficult than it should be.

The International Monetary Fund has estimated that internal trade barriers (for example, regulatory differences across regions, paperwork requirements for businesses in multiple jurisdictions, and certification differences that limit labour mobility) cost the equivalent of a 20 per cent average tariff between provinces. By comparison, the effective tariff rate collected on international imports from abroad in Canada is less than one per cent.

In 2020, Canada ranked 188^th out of 208 economies tracked by the World Bank on the number of days businesses spent dealing with construction permits for new projects. That is three times longer than time spent in the U.S.

Canada’s turnaround times at ports are among the longest in the world, with a median of two and a half days, ranking 103^rd out of 113 countries tracked by the World Bank in 2023. Canada also ranks poorly on “ease of exporting” in global rankings by the World Bank, largely due to high documentation and paperwork costs.

Even the mobility of skilled workers – hard enough given Canada’s geographic expanse – can be limited by the way provinces, industries and professional groups try to control labour supplies, the report says. “Those issues all contribute to lower Canadian business investment and with that, lower growth.”

Canadian businesses invest substantially less than in the U.S. – about half as much per worker in aggregate. For example, businesses have invested a substantially smaller share of GDP in the manufacturing sector in Canada than in the U.S. over the last decade.

The contribution to productivity growth from capital investment in Canada since the 2008-09 financial crisis has been less than half the average over the decade before.

“The issue does not appear to be a lack of available funding. Central banks have pushed interest rates higher, but businesses are still sitting on a large cash stockpile worth almost a third of GDP.”

Moreover, the report says, in recent economic cycles, a growing share of savings and investment has flowed to real estate and construction which, while needed and beneficial for many reasons, are both relatively inefficient and can hold back the overall productive growth of an economy. Such investment doesn’t do as much for economy growth as investing in machinery and intellectual property.

Investment in residential structures accounts for twice the share of GDP in Canada (six per cent) than in the U.S. (three per cent). Businesses in Canada invest more in nonresidential structures and less in intellectual property products.

Canada invests about 40 per cent less than the U.S. (as a share of GDP) in intellectual property products (IPP) overall – with a larger weighting towards mining exploration activity. Canada's manufacturing sector invests  just a quarter of what the U.S. invests in IPP relative to the industry’s GDP footprint.

Canada’s small businesses, which account for 98 per cent of total businesses, historically have been less productive. “Many policies have favoured small businesses over growth companies and large enterprises, which, in turn, limits our overall productivity growth.”

Agriculture is where Canada shines in terms of technological innovation, the report says. “No industry in Canada has seen more disruptive technological advancement over the last century (or two) than food production.”

Those advances have led to massive productivity gains – even in recent decades. Agricultural production per farm acre in 2016 was three and a half times the level in 1941. Per-worker production gains have been even stronger. Output per agricultural worker is about 12 times what it was in 1941.

Other sectors, however, have become less productive. Canada’s large public sector education and health care industries are less productive than in the U.S. by 70 per cent and 50 per cent, respectively. They account for one-fifth of the total economy productivity gap despite only accounting for 14 per cent of the economy.

The share of the Canadian workforce with completed post-secondary education has increased from 41 per cent in 1990 to 70 per cent in 2023, but growth in measured productivity from labour composition (skill upgrading as measured by increases in the experience and education composition of the workforce) has been running at about half its pace in the 1990s.

Canadian corporate tax rates are still comparable to other advanced economies. But taking into account the tax on company dividends at the personal income tax level, the total tax on distributed profits from Canadian companies is the highest in the G7, according to the OECD.

At the same time, while foreign direct investment in Canada has remained firm, investment by Canadians abroad has grown substantially, leading to a large net outflow of investment.

The investments abroad are valuable. Canada’s stock of net assets held abroad has increased to about $1.7 trillion (57 per cent of GDP) – but they are adding to productivity growth outside of Canada, rather than within.

The solutions to these challenges are clear and attainable and don’t require many trade-offs, the report says. The most compelling options for governments, businesses, union and industry groups include:

• Cutting red tape and reducing internal trade barriers. This doesn’t have to mean lowering standards but rather improving consistency and rules across jurisdictions to make project approval times and costs more predictable.
• Better utilization of immigrant skills. All population and workforce growth is going to come from immigration, and we need a better system to match education and skills with jobs.
• Improving tax competitiveness. Canada’s tax competitiveness has been slipping. Our level of taxation overall is lower than other more productive economies, but broader reforms to reduce complexity and the cost of tax compliance could help to attract more investment.
• Adopting new technologies. “Smarter” investments like artificial intelligence can help but adoption rates are low in Canada. Making it easier to invest in new technologies is critical to maintaining global competitiveness.
• Capitalizing on a highly educated workforce. Canada’s highly educated workforce is uniquely positioned to benefit from a global shift to a more services-based economy. Canada needs to ensure investments in education are generating a return.

Canada’s productivity problems could take years, if not decades, to fix, the report says. “But if action isn’t taken to address why people are working more and producing less – resulting in lower wages – then the growing discontent among workers and businesses could set the economy back even further than where we are today.” RBC

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Canada needs a productivity commission – but not like Australia’s, think-tank says

May 15, 2024

Canada should establish a productivity commission to address the country’s lagging productivity. But it shouldn’t emulate Australia’s model as some – including former finance minister Bill Morneau – have suggested, according to the Information Technology and Innovation Foundation (ITIF), a Washington, D.C.-based policy think tank.

Australia’s productivity commission model is driven by an “orthodox neoclassical economics doctrine” that largely ignores the real drivers of national productivity: firm structure, behavior and technology, Robert Atkinson, president of ITIF), wrote in a commentary.

Mainstream neoclassical economists, especially in Anglosphere economies, study the overall economy, markets, and prices, “but by and large ignore the processes by which entrepreneurs, firms and industries boost productivity,” he said.

Any Canadian productivity commission should be staffed and governed not by economists, but by “productionists,” Atkinson argued.

Productionists have a deep understanding of firm, industry and technology dynamics. Some countries, such as Finland, Israel, Korea, Singapore, Sweden and Taiwan, rely more on productionists for productivity and innovation policy guidance, he said.

“Canada needs to the do the same.” Economists will still need to still play the lead role in overall macroeconomic policy, but solving Canada’s productivity crisis requires productionists to lead the conversation and bring new disciplines to the table, Atkinson said.

In response in part to lagging productivity, the Australian government formed its productivity commission in 1998. While it has done considerable analysis of the state of Australian productivity, it has done surprisingly little work to understand how to actually get organizations to boost productivity, Atkinson said.

Instead, the commission’s focus has been on related but tangential issues like tariffs, income inequality, public transport pricing, SME growth, education, retirement policy, rental housing availability, tourism policy, and increasingly social policy and redistribution issues.

In large part, this is because most of the commission’s leadership and staff have a background in traditional economics, which largely ignores enterprise issues and increasingly focuses on redistribution and fairness rather than growth, Atkinson said.

He maintained that economists largely leave questions of productivity to the market and provide little usable advice to policymakers in search of an effective productivity strategy, other than to support broad inputs into firms (e.g., more years of schooling) or ensure proper framework conditions (smart regulation, lower taxes, etc.).

Atkinson cited Canadian economist Don Drummond, the Stauffer-Dunning Fellow in the School of Policy Studies at Queen’s University, who argues that a “research agenda with a focus on firm behavior from a micro approach is needed to obtain a deeper understanding of Canada’s terrible productivity record and to develop actions to boost productivity growth.”

Atkinson also quotes Nobel Prize winner Edmund Phelps, who wrote that “standard economics offers no inkling of what policy initiatives might solve the stagnation of productivity and wages . . . Their models were conceived to show how short-term fiscal interventions could shave off peaks and troughs of a short cycle around a rising trend path – not to address a sea change in dynamism bringing stagnation.”

A productionist approach is grounded in understanding that productivity is less about markets and more about organizations and systems – in particular, about how organizations develop and utilize technology and work organization to drive productivity. 

Productionists hail from a variety of disciplines, including business administration, urban and regional planning, engineering, public policy and even economics. The key is less about what their degree is in, and more about their theories, methods, and knowledge, Atkinson said.

“By establishing a productionist-focused productivity commission, Canada could be a global policy leader, while also taking a key first step to revive its lagging productivity growth,” he said.

Roy Green,  emeritus professor and special innovation advisor at the University of Technology Sydney, in another commentary for the ITIF’s recently launched Ottawa-based Centre for Canadian Innovation and Competitiveness, pointed out that both Canada's and Australia’s share of advanced industry output, compared with the advanced industry output of the global economy, has declined, based on the ITIF’s Hamilton Index.

R&D spending is relatively low in both countries, at around 1.7 per cent of GDP, compared with an OECD average of 2.8 per cent and with R&D leaders like Korea, Israel and Switzerland approaching five per cent.

“And the hollowing-out of manufacturing capability, which drives the research and skills ecosystems of most developed economies, has worsened an already poor record for converting ideas into new products and processes," Green said.

On the Australian Productivity Commission’s watch, “productivity growth in Australia over the last two decades is at its lowest for years, with accompanying real wage stagnation,” he noted. 

Nor is the Commission averse to subsidies, provided they suit its version of comparative advantage, which privileges the export of unprocessed raw materials over more complex, value-adding activities, he said.

 For example, Australia’s diesel fuel tax rebate, which is accessed predominantly by a handful of international mining companies, costs the taxpayer $7.9 billion a year – more than half the entire Commonwealth spend on research and innovation, Green said.

Australia’s federal government is led by Prime Minister Anthony Albanese of the Australian Labour Party.

Green said the Albanese government’s Future Made in Australia initiative is the first step in a coordinated “whole of government” approach to enabling competitive advantage in a new, higher value adding growth market for entrepreneurial Australian firms.

The initiative will require close collaboration by industry with research and education institutions, which can and do play a major part in lifting innovation and enterprise capability, Green said. “This approach also calls for a central institutional focus in the design and implementation of a mission-led industrial strategy, with national missions validated by regular technology foresighting.”

Examples of such a focus include Vinnova in Sweden and InnovateUK, whose impact may be enhanced by a tripartite structure involving both industry and unions.

There is also scope in both Canada and Australia for a more ambitious approach to public procurement, skills upgrading and the development of place-based innovation ecosystems, Green said. The design of these ecosystems can draw upon international experience, in particular the German Fraunhofer Institutes, UK High Value Manufacturing Catapults and the Manufacturing USA Institutes.

Said Green: “There is now broad recognition around the world that government must play an active role in building a more competitive and dynamic knowledge-driven economy, particularly with increasingly interconnected productivity and climate challenges.” ITIF

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Canada trailing its peers on innovation, productivity and economic competitiveness: report

May 1, 2024

Canada lags behind its peers in key indicators of innovation, productivity and economic competitiveness, according to a new report by the Centre for Canadian Innovation and Competitiveness, a newly formed Ottawa-based affiliate of the Information Technology and Innovation Foundation (ITIF), a Washington, D.C.-based think tank.

The Centre benchmarked Canada on indicators such as business and government expenditures on research and development, intellectual property creation, education and skills, technology adoption, labor productivity, and advanced-industry market shares.

The Centre then compared Canada’s relative performance on those indicators to a peer group including the United States, the United Kingdom, Germany, China, South Korea, Australia, and Poland.

“Canada lags behind its peers on key innovation indicators. Its productivity performance has been dismal and its competitive position in advance industries is weak,” ITIF founder president Robert D. Atkinson, who co-authored the report, said in a statement.

“There is no silver bullet that will address Canada’s challenges in innovation, productivity and competitiveness Nor will it suffice to simply focus on macroeconomic factors like tax rates, infrastructure, and education,” he said.

“Instead, policymakers must develop a clear understanding of the underlying factors that drive innovation, productivity and competitiveness, and then tailor strategies to improve Canada’s performance in specific industries and technologies.”

The Centre examined more than three dozen indicators of innovation, productivity and competitiveness in Canada’s economy. Among the report’s findings:

• Canada lags peer competitors on key innovation indicators, particularly in the areas of research and development, intellectual property and innovation outcomes.

“Canada has seen particularly poor performance in business expenditures on R&D, with firms drastically underspending on R&D investments compared with other countries even after adjusting for GDP as well as firm size.” Canada is essentially tied for last with Australia and Polar among the comparator counties in business spending on R&D.

• Canada’s productivity performance has been dismal. For comparison, U.S. labour productivity growth was 160 per cent faster than Canada’s from 2002 to 2020 – and America’s growth in that period was actually low in historical terms.

“It is clear that one reason for lagging productivity performance is lagging investment in new capital equipment (machinery, equipment, software, computers, etc.).” Within Canada, machinery and equipment expenditures as a share of total consumption expenditures peaked in the mid-2000s at around 6.2 per cent and have since fallen to almost 4 per cent in 2023.

• From industry to industry, Canadian labour productivity growth is quite divergent, with some sectors growing substantially and others actually declining.
• Canada’s competitive position in advanced industries is weak, as its global market shares have fallen dramatically over the last 25 years. The country now has 42 per cent less advanced-industry output as a share of its economy than the global average.
• Canada’s crisis cannot be adequately understood or addressed by looking only at broad macro factors such as tax rates, infrastructure, and education. Policymakers must develop economic strategies focusing on firm, sector and technology levels.

Canada’s economic stagnation “poses a significant threat to Canada as an aging population increasingly exerts a drag on economic growth and as lower relative living standards increase outmigration of knowledge workers to America,” the report says.

Canada’s proximity to the U.S. market provides opportunities to Canadian companies, but it also is a “black hole” gravitational pull that attracts Canadian talent, intellectual property and companies, according to the report.

“Moreover, Canada’s foreign branch plant firms, built behind a 100-year tariff wall, create industrial capability that might not otherwise have emerged, but that also means limited research and development and exports.”

To address the problems with innovation, productivity and competitiveness, the report says more could be done to encourage universities to play a stronger role in supporting private sector innovation.

On average, U.S. university technology transfer offices supported patent applications at almost twice the rate that Canadian ones did in 2012, and that disparity grew to three times in the ensuing decade, according to the report.

Canada has one of the highest rates of investment in R&D by the higher-education/postsecondary sector, the report notes. It says Canada’s relative performance in university technology commercialization and startups should be much higher than it is compared with other nations, given this level of funding.

Yet, in the absence of a robust technology transfer system and pathways to commercialization, R&D from the higher education sector is unable to provide significant economic benefits to firms and the broader economy in the same way that business R&D can, the report says. “ Simply having the “ingredient” of R&D performed at universities is not adequate to grow a globally competitive technology economy.”

The Scientific Research and Experimental Development tax credit could be redesigned to be a spur to R&D increases, the report suggests.

The SR&ED program “and overall corporate tax regime heavily favour small to medium-sized firms, thereby disincentivizing Canadian firms from reaching the size necessary to take advantage of returns to scale on R&D,” the report says.

Canadian policymakers could stop looking to Europe as a regulatory model for emerging technologies and instead look to the U.S. for ways to grow a globally vibrant technology economy, the report says.

Also, more could be done to create a Canadian single market, rather than a market of 10 provinces. “Ottawa could adopt a robust, sectoral-based productivity strategy,” the report says. And more could be done to place innovation, productivity and competitiveness renewal at the centre of Canadian politics, for all the political parties.

On a positive note, the report says Canada is growing the number of artificial intelligence jobs at a faster rate than any company. “This portends real opportunities for the Canadian economy, especially if it can continue to support AI research and not put in place a regulatory system that limits AI innovation and use.”

Canada also is deploying AI at roughly the same rate as most of the comparator countries, apart from China, according to the report.

Also, Canada spends the third-most in the world on software amongst comparator countries, “indicating that firm-level investments into software do not appear to be the major culprit behind Canada’s perennial corporate investment gap.”

The report outlines 10 principles to guide policymakers’ efforts to improve Canadian innovation, productivity and competitiveness:

1. Reject “silver bullet” solutions.
2. Move past the idea that national economies can succeed on just basic economic ingredients, such as effective trade agreements, good universities, the rule of law, educated workers, good broadband, etc.

Canada is alone among countries where an increase in skilled workers doesn’t support technological change in the economy, and “that skilled workers were allocated mainly to the Skilled Non-Market Services” (e.g., health care, higher education, government, etc.).

1. Think in terms of specific industries and technologies, not markets and the overall economy. “An effective national productivity policy needs to be based on an analysis of individual industries and, when appropriate, broader production systems.”
2. Look to “productionists” for advice on innovation, productivity and competitiveness.

Mainstream economists, who study the overall economy, markets and prices, aren’t the best positioned to provide the kind of advice needed to solve Canada’s innovation, productivity and competitiveness problems, the study says. Canada needs to look to productionists for guidance – analysts who have a deep understanding of firm, industry and technology dynamics.

1. Focus less on industrial recruitment and more on supporting companies already in Canada.

A core of Canada’s growth strategy appears to be spending enormous resources, including financial, on “incentivizing” multinational corporations to build factories in the country, the study says. Instead, it says, Canadian policy “should be more focused on helping firms in Canada, regardless of where they are headquartered, become more competitive, productive, and innovative.”

1. The only way to avoid the gravitational pull of the U.S. is for Canada to make its own.

“Canada’s innovation strategy should seek to build up innovation assets in a few key regions,” to create world-class technology hubs. To succeed, Canadian hubs will need to specialize and focus on key niche areas where the country can attain global distinctiveness, the study says.

1. See big and medium-sized businesses as beautiful.

Canadian firms with more than 500 employees pay their workers on average 44 percent more than do small firms, and large businesses create more jobs, the study says. Larger Canadian firms are also much more likely to adopt a range of information technologies in their production processes. Large firms invest more in R&D than small firms. And large technology firms employ a higher share of non-technology workers than do smaller ones, something that is key because not everyone has the capabilities or interest to be an engineer.

Canada should seek to build more middle-sized) firms, as Germany has, as these have the heft to not only better compete globally but also remain independent and Canadian headquartered, the study says.

1. Embrace North American integration, not

Foreign investment in Canada brings jobs, valuable human capital development, and investment, the study notes. “Canada should seek to find areas for deeper integration with the U.S. economy, including in policy.”

1. Reject the precautionary principle and embrace the innovation principle.

If Canada wants to turn around its IPC performance, it needs stop looking to Europe’s embracing the “precautionary principle” for guidance and instead take a time-out on new technology regulatory interventions, focusing instead on technology promotion. “For example, rather than ask how to regulate AI, policymakers should be asking how to promote AI.”

1. Make innovation, productivity and competitiveness a top priority.

The study says if Canada is to effectively address its innovation, productivity and competitiveness (IPC) challenges, it will have to start with value changes and building a narrative across government, companies, universities, and the media around the need for focus on IPC progress. “Until that happens, progress is likely to be incremental and halting.”

“Pundits, economists and Canadians across the country are waking up to the fact that the economic status quo will lead to a less prosperous Canada,” said Lawrence Zhang, the Centre’s head of policy and co-author of the report. “Public and private sector leaders should take advantage of the growing consensus and use this momentum to make bold economic reforms.” ITIF

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Canada has “lost its way” on innovation, says Conference Board of Canada report

April 17, 2024

Canada has lost its way on innovation and the country’s “innovation paradox” is greater than ever, according to a Conference Board of Canada (CBoC) report card on Canada’s innovation performance.

 Canada scores an overall C on the CBoC’s 2024 Innovation Report Card, ranking 15^th among 20 countries. Of the 21 innovation indicators, Canada scores below average on 14 of the indicators.

In what’s known as Canada’s innovation paradox, the country does well at building its innovation capacity, but fails to keep up with its peers in innovation activity or see innovation-based economic results, the report says.

The Organisation for Economic Co-operation and Development predicts Canada will be the worst performing advanced-economy member country over the next four decades as measured by real GDP per capita.

The report card gives Canada a “D” grade for government expenditure on R&D, which has been declining for decades. “Canada heavily underperforms in technology adoption that includes robotic deployment, high-tech exports, and mobile app development.”

Canada is third-last among global corporate R&D investors. Canadian business R&D hs been declining for nearly 20 years, falling by one-third over this period.

This is likely due to multiple, interdependent factors such as lack of competition, industry composition, lack of investment capital, current mix of government programs, complacency, and risk aversion, the report says.

While Canada’s largest companies’ R&D spending has stagnated for the last decade, average spending for companies in peer nations is rising. Large corporate R&D centres could develop global technologies and Canadian intellectual property, create domestic supply chains, and attract skilled professionals, researchers and innovators, the report notes.

But it says that the lack of large Canadian anchor firms that rank in the top 2,500 global companies hurts our innovation ecosystem.

Canadian manufacturing companies are not adopting automation and advanced technologies at the same degree as their counterparts in peer nations. Even though Canada is a leader in AI research and training, for example, the country is at the bottom among peer countries on AI/ML (machine learning) adoption rates by companies.

Canada’s Competitive Industrial Performance (CIP) ranked above average in the 1990s and the 2000s, but the country’s position has worsened for over 20 years in a row, the CBoC report says. CIP is an index of the ability to produce and export manufactured goods competitively.

Historically, Canada is below average on exporting domestically manufactured high-tech goods. Also, while the average of its peers has risen over time, Canada has largely stagnated. “A stagnation of high-tech exports, relative to the size of Canada’s manufactured exports, implies we are unable to produce or innovate in emerging technology domains as much as our peers.”

Canada’s patent performance ranks near the very bottom, just above Italy,  according to the report. While the average patent performance of peer nations continuously increases, Canada’s is worsening.

Canada performs better on venture capital investment as a percentage of GDP – receiving a “C” grade in the report card. Accounting for the size of economies, Canada ranks third behind Israel and the United States which have 3.6 and 2.3 times more financing.

Although VC levels are healthier in Canada than in Europe, Canadian firms face a relative disadvantage. This is due to their close proximity to competitors and greater access to capital in the U.S. which can compel Canadian firms to move south of the border, the report says.

Also on the positive side, Canada’ s higher education R&D is at a stable, above average level compared with peers. But low business receptor capacity for higher education research means that Canadian ideas and talent will often go outside of Canada.

Canada ranks highly in educating its population, receiving a “B” grade in producing highly qualified personnel. However, a concern is that these graduates do not remain in Canada, drawn by higher wages or greater opportunities outside the country, according to the report.

“Creating a thriving innovation ecosystem of companies for STEM graduates to stay in Canada, and attracting highly qualified personal from abroad, should be a priority to ensure this ranking translates into domestic innovation-based economic growth.”

Entrepreneurialism is where Canada ranks strongest compared with its peers, receiving an “A” grade. Canada has more individuals than any other peer nation who are either emerging entrepreneurs or owner-managers of new businesses.

Given Canada’s overall poor grades, the country has a dire need for change across multiple facets of the economy – cultural, governmental, industrial and technological – to reverse its lagging performance, according to the report.

It notes that Canada is a “risk-adverse innovation culture.” Overcoming the country’s pervasive fear of failure and low levels of business R&D will allow Canada to tap into the nation’s thriving entrepreneurial spirit, the report adds.

A high proportion of adults believe there are startup opportunities, and they have necessary entrepreneurial skills, but nearly half of these individuals are deterred from taking action by a fear of failure. “Canadians are afraid to fail, therefore they don’t act on their bold ideas.”

Canada’s inability to speed up innovation-based economic growth isn’t just a business risk, the report says. It is also a prelude to reduced international leadership potential, less availability of quality jobs, and a subsequent decline in citizens’ living standards. “Failing to reverse this trend will put what we hold dear as Canadians at risk.”

Canada’s healthcare system, infrastructure, competitiveness, education, and position in the world all hinge on taking action – “in some cases drastic action” – to reverse the country’s slide to the bottom, the report says.

The report makes several recommendations to improve Canada’s innovation performance:

1. Improve productivity by adopting new technologies to enhance innovation-driven growth.
2. Make intellectual property and research and development the key drivers of commercial success by improving funding and programs.
3. Expand the venture capital landscape to provide the financial backbone for startups and innovative projects.
4. Support advanced manufacturing in Canada to rejuvenate our manufacturing sector.
5. Inject a competitive spirit within the business ecosystem by adopting new competition legislation.
6. Encourage new businesses by lowering risk and providing deep support for innovators.
7. Reinforce our strengths in higher education and research by fostering entrepreneurial opportunities. CBoC

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Canada has a productivity “emergency” that needs fixing, says Bank of Canada’s senior deputy governor

April 3, 2024

Canada’s ongoing decline in productivity is now an “emergency, says Carolyn Rogers, senior deputy governor of the Bank of Canada. “I’m saying that it’s an emergency – it’s time to break the glass,” she said in a speech to the Halifax Partnership, the Halifax Regional Municipality’s economic development organization.

 In 1984, the Canadian economy was producing 88 per cent of the value generated by the U.S. economy per hour, Rogers said. By 2022, Canadian productivity had fallen to just 71 per cent of that of the U.S.. Over this same period, Canada also fell behind its G7 peers, with only Italy seeing a larger decline in productivity relative to the U.S.

When people measure productivity in an economy, they’re looking either at its level – how much value an economy is producing for every hour worked – or at the growth rate of that productivity, she said “Canada has been struggling on both measures for a while.”

Increasing productivity means finding ways for people to create more value during the time they’re at work, Rogers said. “This is a goal to aim for, not something to fear.”

There are two basic strategies for increasing productivity, she said. One is to have the economy focus more on the industries that add greater value than less-productive activities. The other strategy is to keep doing the jobs we’re doing but do them more efficiently.

Improving productivity doesn’t mean shutting down whole sections of the economy and telling workers they have to go learn new sets of skills, Rogers said. It means paying attention to where the future high-value industries are coming from. “We need to ensure that the right incentives are in place to allow companies in these industries to grow and thrive. And they need the right supports, such as access to markets and financing.”

The first area for improvement is in labour composition, or the skills workers bring to the job, she said. For existing workers, improvement means having access to training and reskilling programs. For new entrants to the workforce, “we’re counting on colleges, universities and apprenticeship programs to prepare students for current and future jobs.”

The second key area relates to multifactor productivity. Small and medium-sized companies tend to lack the economies of scale that allow larger firms to become more productive, Rogers said. “And Canada has proportionally more of these smaller firms than many other economies do. Removing disincentives to growth is always a good idea.”

But the biggest area of concern is lack of business competition in Canada, she said.  Competition drives companies to become more productive by innovating and by finding ways to be more efficient. “In doing so, competition can make the whole economy more productive.”

Canada’s economy features many sectors where companies face limited levels of competition, whether from firms in other provinces, foreign rivals or new entrants, Rogers noted. If firms have high profits, high margins and limited competition, they may not feel as much pressure to invest, she said.

 “When you compare Canada’s recent productivity record with that of other countries, what really sticks out is how much we lag on investment in machinery, equipment and, importantly, intellectual property,” Rogers said.

The global economy continues to change rapidly, and in many sectors, it’s not machinery and equipment that are key – it’s investment in intellectual property, she said. Increasingly, companies need to own or have the rights to patents that will allow them to compete by adopting productivity-boosting processes.

Rogers said another challenge for companies may be a lack of policy certainty. In some cases, incentives or regulatory approaches can change from year to year. “We have also heard from companies that are naturally wary of a regulatory approval process that can be both lengthy and unpredictable.”

Higher productivity should be everyone’s goal because it’s how we build a better economy for everyone, Rogers said. “When a business gives workers better tools and better training, those workers can produce more. That, in turn, means more revenue for the business, which allows it to absorb rising costs, including higher wages, without having to raise prices.” Bank of Canada

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Canada’s productivity decline linked to lower rates of innovation and fixed capital investment at country’s largest companies

February 28, 2024

Research shows that investment in fixed capital and increases in capital intensity have been the most important contributors to the growth in labour productivity in Canada since 1980. But business investment in fixed capital has been weak in Canada since the mid-2000s (around the time of the 2007-08 financial crisis) and is also much lower than in other advanced countries, according to a study by Statistics Canada.

StatsCan’s databases show that business investment in Canada experienced high growth from 1990 to 2006. After 2006, the “investment intensity” – the ratio of investment to net capital stock and investment per worker – declined over time, with a large decrease after 2014 and the collapse of oil and gas prices. As a result of this investment slowdown, growth in labour productivity declined in Canada during this period, says the study, “Investment Slowdown in Canada After the Mid-2000s: The Role of Competition and Intangibles,” by Wulong Gu of Stats Canada’s analytical studies branch.

StatsCan found that investment per worker declined by $628.80 from 2006 to 2021 in Canadian firms, representing a 20-per-cent decline from an investment of $3,573 per worker in 2006. Large and medium-sized firms accounted for 90 per cent of the overall decline in investment per worker from 2006 to 2021.

In Canada, labour productivity growth was relatively high in the 1990s and early 2000s. This can be traced to the implementation of the Canada-U.S. Free Trade Agreement in 1989 and the spread of information and communications technologies after the mid-1990s, StatsCan’s study says. However, annual labour productivity growth in the business sector declined from 1.7 per cent in the period from 1990 to 2006, to 0.9 per cent in the period from 2006 to 2021. Along with this decline in labour productivity growth was a decline in capital investment intensity.

The decline in investment per worker after 2006 was greater among large and medium-sized firms and among foreign-controlled firms, compared with small firms and domestic controlled firms.

The weakness in capital investment after 2006 coincided with a change in the mix of investment toward investment in intangible assets, and the shift toward intangibles was more pronounced among large and foreign-controlled firms, StatsCan’s study notes. Specifically, it says, the productivity slowdown after 2000 was attributable to (1) slower rates of innovation at Canada’s top firms; (2) a decline in the rate of innovation diffusion from Canada’s top firms to other firms; and (3) a decline in resource reallocation among firms (i.e. slower creative destruction and business dynamism). “But much of the slowdown in productivity growth was caused by the slower rates of innovation at the top firms.”

The 2006 to 2021 period of weak capital investment was also one of digital transformation and increase in the role of intangible assets, such as intellectual property, data and brand equity, in many advanced countries. Studies show that the intangibles have increased their importance over time. Investment in intangibles is often as important as investment in tangible assets for growth in labour productivity in the U.S., StatsCan’s study says.

For Canada, one study found that investment in intangibles assets rose much faster than investment in tangible assets in the business sector for Canada. The share of intangible assets in total fixed assets in the balance sheets of Canadian firms increased from 6.3 per cent to 17.3 per cent from 2000 to 2021.

Large and medium-sized firms increased their share of intangibles in total assets more than small firms, StatsCan’s study says. “That is, the relatively large decline in investment per worker in large and medium-sized firms coincided with this greater shift toward intangibles in these firms compared with small firms.” Foreign-controlled firms increased their share of intangibles more than domestic-controlled firms; at the same time, the decline in investment per worker was relatively larger in foreign-controlled firms than the decline in domestic-controlled firms.

After 2006, an increase in industry concentration and a decline in entry rates of new firms also had a negative effect on investment in fixed capital assets, and this effect was relatively larger among small firms, StatsCan’s study says. In other words, a decline in competition reduces investment, while competition promotes investment among firms, especially among small firms. Several studies have shown that declining competition and the increasing importance of intangibles are related to weak investment in fixed tangible assets during this period, the study says.

Study author Wulong Gu says his study found that the slowdown in Canada in fixed capital investment after the mid-2000s is partly explained by declining competition and a shift toward intangibles that are not yet captured in the investment estimates. Future analysis should focus on the sources of Canada’s lower investment, compared with other countries, and examine whether the difference in competition and the pace of the shift toward intangible knowledge capital between Canada and other advanced countries contributed to this investment gap in Canada, Gu said. Statistics Canada

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