Economists have warned about Canada’s slowing productivity growth for decades. A new report by Toronto law firm Bennett Jones, co-authored by former Bank of Canada governor David Dodge, urges a shift in private and public sector spending to address it.
“The investment share of our GDP must increase, and as a consequence, the consumption share must fall. Canada must correct a record of poor investment, innovation and productivity growth,” the authors say.
Indeed, Canada’s labour productivity — a measure of real gross domestic product produced per hour worked — has fallen for the last 12 of 13 quarters.
Canadian firms also lag behind their peers in research and development investment (R&D), a key factor in boosting productivity growth. Canadian firms spent 1.6 per cent of GDP on R&D in 2022, less than half what American firms spend.
Without research and development investment — and the innovation it produces — we remain stuck with outdated and less efficient processes, explains Mark Rempel, an assistant professor of economics at the University of Toronto.
“Too little R&D spending slows the discovery of better ways of doing things, which directly translates to slower productivity growth.”
Intangible assets
Slow productivity growth occurs in countries that haven’t recognized how the intangible economy has changed the way prosperity is generated, says Benjamin Bergen, president of the Canadian Council of Innovators.
In the 2020s, intangible assets — such as patents, customer data or other intellectual property — reign supreme.
In 1973, the value of intangible assets accounted for 17 per cent of the value of the S&P 500, an index of 500 of America’s largest public companies. In 2020, that figure had risen to 90 per cent, according to Brand Finance, a global consulting firm.
But as of 2019, intangibles only accounted for 70 per cent of the value on the Toronto Stock Exchange, according to Public Policy Forum, a Canadian think tank.
In the global technological race that is accelerating, Canada is “taking its foot off the gas,” the Bennett Jones report says.
“Developments that have hurt our performance over the last 15 to 20 years include the demise of Nortel, the downfall of Blackberry, the retreat of big pharma and, more recently, the restructuring of Bombardier.”
What’s key for Bergen is that Canadian industrial policy engages the “trifecta” of academic, government and the private sectors.
Canadian universities are leaders in many innovative technologies such as AI, but Canadian firms aren’t capitalizing on this potential, the report says.
“We like declaring ourselves global leaders and inventors in many fields yet let others lead the commercialization of technology.”
‘Outcome-driven organization’
In the 2022 budget, Finance Minister Chrystia Freeland unveiled the government’s solution: another new agency.
The Canada Innovation Corporation, funded to the tune of $2.6 billion over the next four years, will be tasked with providing grants and guidance to innovative projects. It will pick these projects for their potential to create and retain intellectual property in Canada and compete globally.
In February, Freeland and Minister of Innovation, Science and Industry Francois-Phillippe Champagne released a long-awaited blueprint for the corporation. They insist it won’t be just “another funding agency” but rather an “outcome-driven organization.”
The corporation is a state effort to develop key industries by supporting homegrown companies, Bergen says. This contrasts with Canada’s massive subsidies to foreign companies like Volkswagen and Stellantis.
Rempel agrees it is a step in the right direction.
“R&D and innovation is an area where the free market on its own can get things wrong, by not taking into account various social impacts and knock-on effects that come from new technologies.”
The Canadian government has many foreign examples of successful, modern industrial policy it could be emulating, Bergen says.
“South Korea didn’t go from rice paddies to semi-conductors overnight. That was a strategy. It was planning by their government to focus on that area.”
The 2022 budget provided an example of how the Canada Innovation Corporation will operate. If a small life-science firm were to learn of a Canadian university’s new class of life-saving therapeutics, the corporation could provide the financing the firm needs to commercialize and export the therapeutics.
The Bennett Jones report acknowledges the potential of this approach. “The new corporation, once operational, may address some gaps, but there needs to be an integrated strategy and collaboration with the private sector to change the game,” it says.
The blueprint lays out the right kind of project, Bergen agrees. But it’s all about execution. Another similar federal project called the Innovation Superclusters Initiative, which was launched in 2017, has not generated the results he was hoping for.
“The lack of understanding of how the innovation economy works, as demonstrated by the superclusters, makes me concerned that the [corporation] will repeat the same failures,” he said.
Immigration in part to blame
From the 1990s onwards, Canada’s productivity growth has declined “chronically” relative to the US, the Bennett Jones report says. So has Canadian GDP per capita growth, a key quality of life and productivity indicator. Since Q1 2020, GDP per capita has been declining at an annual rate of 0.5 per cent, while the US has seen 1.6 per cent growth, according to Statistics Canada and the US Bureau of Economic Analysis.
Dodge and his co-authors say changes to Canada’s immigration system are in part to blame.
“In the last years, we have altered an economic immigration system that stood as a model for the world. Specifically, we have shifted the selection of permanent immigrants from one determined principally by a transparent point system estimating future earnings and aiming to attract highly skilled workers to one accommodating multiple, discretionary programs to close short-term gaps in labour markets.”
Instead of investing in technology or research and development, Canadian firms are hiring more, because labour is cheap.
It’s not surprising that new immigrants aren’t as productive, says Mostafa Askari of the Institute for Fiscal Studies and Democracy.
“Over time, immigrants will become more productive and contribute. But in the short term, high immigration leads to lower labour productivity and GDP per capita.”
“We have to shift [away] from relying excessively on the expansion of the labour force and hours worked [in order] to grow the economy,” the report says.
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