13 April 2014

How to solve the "Canadian Productivity Puzzle"

Consider this. Canada has a very attractive investment climate:
  • the cost of capital is quite low
  • inflation is also at low levels
  • even at current exchange rates, the Canadian dollar is still at a much stronger level than a decade before, thus making imports of needed capital goods so much cheaper
  • the current Conservative government has worked to decrease levels of corporate taxation
  • depreciation allowances on new equipment are among the most generous in the world
  • incentives for spending on research and development are also attractive
  • free trade agreements are in place with many of our large trading partners, and more are in the pipeline
But why is our productivity lagging?
  • it has hardly changed at all from the early 1970s
  •  there is strong evidence that Canadian businesses do not adopt best business practices with the enthusiasm shown by their foreign counterparts
  • even when they do invest, they do not even get 80% of the consequential rise in productivity that similar US firms achieve
There are various reasons for why this is happening, as noted in a 2010 report from TD Bank:
  •  many Canadian industries are shielded from the effects of competition that outsiders face
  • there is a reluctance to invest in levels of education demanded of employees by their foreign counterparts
  • there is similar reluctance to select available talent brought in by recent immigrants
  • incentives appear to be concentrated on the type of inputs, as opposed to desired outcomes (the Small Business Deduction is a good example of this, as it discourages business from expanding to a more desirable size to take advantage of economies of scale)
  • there is little effort to develop and protect intellectual property rights that may arise from R&D that has been undertaken
  • we must not ignore the excessively risk-averse attitudes Canadian business leaders have historically exhibited
When expressed like this, the solutions would appear to be obvious, but the last factor (in my personal experience) is the most destructive. I have helped to turn several enterprises around through improving how they achieved things, only to see such improvements reversed through subsequent changes in management that wanted to return things to circumstances they were more comfortable with (usually to disastrous results). Nevertheless, the outcomes that are necessary for Canadian business to thrive must still be actively sought, and such efforts are, to not surprise, easy to achieve. As always, I am ready to help.

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