Innovations in cloud computing and AI are being hailed as productivity miracles. Yet productivity at Canadian firms is declining.
As Canadian Affairs reported Wednesday, a new report co-authored by former Bank of Canada governor David Dodge urges Canadian firms to invest more in research and development (R&D) to boost innovation, which would make Canada more competitive in the global market and raise living standards at home.
Canadian firms spend $30 billion less than their OECD counterparts on research and development, according to Dodge and his colleagues at Toronto law firm Bennett Jones LLP.
But low R&D investment isn’t the only factor affecting Canadian firm productivity. Experts contend that remote work, ‘productivity theatre’, small company size, poor access to capital and slow technology adoption are other factors making Canadian firms less productive.
A report from economist Charles Plant published by the C.D. Howe Institute in August argues that the Canadian government actually spends too much on programs related to R&D and innovation “and not enough on the lack of resources, experience and talent for commercialization. This underweighting is keeping our firms smaller and growing slower.”
“Essentially, the issue is a lack of managerial know-how.”
Productivity theatre
At the start of the pandemic — when remote work became widespread — Canadian productivity shot up, according to Statistics Canada.
“Labour hours fell by more than output during the shutdown as high-skill industries were more likely able to operate remotely,” says Mark Rempel, an assistant professor of economics at the University of Toronto.
In other words, the people who were able to work were on average more productive than workers who couldn’t work due to pandemic restrictions, such as restaurant or daycare workers.
But Canada’s labour productivity has been falling ever since Q2 2020, and is now below 2017 levels, despite many workers continuing to work remotely.
The jury is still out on the full effects of virtual work on productivity, Rempel says.
“On the one hand, flexibility in household responsibilities allowed some to be more productive. But especially for young people, training at the beginning of their career gets inhibited because no one is around to mentor or support them,” he said.
The tools essential for remote work can also inhibit productivity.
Whether it’s Slack, email or notes in a Google Doc, the number of interactions between remote workers has risen dramatically, according to Ann Gomez, president of Clear Concept Inc, a Toronto consultancy.
The feeling of needing to instantly respond or even just check those alerts has meant workers aren’t as concentrated, Gomez says.
“People keep alerts on. They keep email open on a second screen. They might have Teams open on a third. And so when they’re constantly bombarded with communications, the ability to engage in deep, concentrated work goes down,” Gomez says.
A 2023 study of 1,000 US-based full-time employees found that 43 per cent of workers spend an average of 10 hours a week on “productivity theatre,” a concept defined by prioritizing performative work over more valuable tasks.
“Performative work refers to activities that mostly create the appearance of busily generating product and value rather than contributing to meaningful business results,” says Visier, the American analytics company that produced the study.
The most common form of productivity theatre reported by survey respondents was responding to a colleague as soon as possible, even when not necessary.
“In an average work week, our findings show that close to half of an organization is spending 1.25 days participating in work that ‘shows up,’ rather than work they deemed meaningful,” the study said.
And while communication has gone up between team members, there’s been a decrease in spontaneous co-operation with people in the broader organization, Gomez says.
“We need in-person time when I can see someone from a different team walking down the hall and tell them what I’m working on, and that person can say ‘Oh, let me send you someone to help with that’,” Gomez said.
“Those cross-organizational, serendipitous encounters are really important for driving innovation within a company.”
Gomez says people are also trying to do too much at once, often on special projects and initiatives.
“In this competitive world where we’re trying to bounce back from the pandemic, we’re trying to keep up with other countries and do more. But less is more. People are spreading themselves too thin and diluting their efforts.”
Too small
Another crucial factor behind Canada’s lagging productivity figures, economists say, is that Canadian companies are too small.
“Firms of smaller scale tend to export and invest less than their larger counterparts,” says TD Bank economist Marc Ercolao in a July 2023 research bulletin.
Among OECD countries, Canada has the fewest number of manufacturing companies with more than 250 employees, says Plant. The OECD is a group of 38 leading economies.
Collective efforts can only go so far in making small companies more productive, Plant says.
“Federal government policy has focused on innovation leading to productivity. However, what if the equation is slightly different, that firm size leads to innovation which leads to productivity?”
Access to capital, markets and personnel are some of the key factors in determining whether firms can scale, Plant says.
An average Canadian firm in the beginning of its life receives 24 per cent less funding than the average American firm, according to The Narwhal Project, an organization run by Plant that helps emerging technology companies obtain capital to fund their growth.
And there hasn’t been a single year in the last six in which Canadian venture capitalists have provided more than 50 per cent of the funding to Canadian companies, Plant’s C.D. Howe report says. In 2021, it fell to just 28 per cent.
Adam Silverman, 25, grew up in Toronto and is one of the co-founders of AgentOps.ai, a tech startup that builds virtual, AI-powered assistants.
He wanted to bring as many Canadian investors on as possible during their first round of funding this year, but “the risk appetite simply is not the same as down south.”
“The valuations in the United States are better. The network of support is better. In the long term, you want people who have the capital, especially when you’re going into later stages of funding,” Silverman said.
Only 22 per cent of Canadian companies that raise less than $1 million have US-based investors, Plant says. But by the time they reach a Series B — the second round of private funding — more than 50 per cent have US-based investors.
When it comes to access to personnel, the smartest people are all in San Francisco or New York, Silverman says, and that’s why he set up shop there.
“A lot of the top AI talent is in San Francisco. They have deeper connections to industries that we’re trying to target specifically, like finance, and that made it a super advantageous place.”
Jacob Beckerman, also 25 and also from Toronto, is now the CEO of Macro, an AI-powered document reader. Macro has a Canadian subsidiary, but Beckerman chose New York for the company headquarters.
“There’s a culture here [in New York] that’s hard to recreate. When people say they’re trying to recreate Silicon Valley in Toronto or Riyadh, I think that’s a hard thing to transplant,” he said.
Technology adoption
Macro is all about cutting down on the worst part of someone’s job, Beckerman says.
“One of the core operations in law firms is to compare different versions of documents, and that’s an insane amount of drudgery with the legacy tools from the 1990s and 2000s they had. So we partnered with them to make this more efficient,” Beckerman said.
Macro is used by 12 of the top 50 law firms in the US, and users report a threefold increase in their speed to review and edit documents, Beckerman says.
Canadian firms have been slower to adopt AI technology, in Silverman’s experience. All the clients he is working with right now are US-based.
By the end of 2021, only 3.7 per cent of Canadian firms said they had adopted AI in any way, according to Dais, a think tank at Toronto Metropolitan University.
And larger firms — which Canada has fewer of — are more likely to adopt new technology. Twenty per cent of Canadian firms with 100 or more employees have reported using AI, while only three per cent of the country’s smallest firms have reported adopting it.
Canadian firms simply aren’t adopting technology or producing innovative solutions at the same rate, says Benjamin Bergen, president of the Canadian Council of Innovators.
Sometimes, Beckerman’s Canadian employees still have to go to a bank in person, an antiquated and inefficient errand from his vantage point.
“Our American banking is done through a startup bank named Mercury. It’s super easy to set up an account. The user interface is amazing. But [our employee] in Toronto has to go to the bank in person because there’s one [task] they can only do if he shows up with his passport.”
Regulation to protect large banks in Canada has prevented innovative competitors from entering the market, Bergen says.
“Big [Canadian] banks are struggling to figure out how to do what fintechs around the world are doing. And at some point, consumers are going to demand the same modern technology.”
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