Opportunities Missed: Canada losing ground on economy and innovation

by Anne Golden

Canada should be doing spectacularly well. After all, when they started the school of global competitiveness, Canada was placed in the gifted class. We have the advantages of huge natural resource wealth, skilled human capital, and free trade with the US, the most dynamic economy on earth. With the loonie at a 13-year high, we’re holding the resources trump card in an era of exploding commodity demand, and we enjoy relative safety in a world rife with risk.

So we might feel confident of a positive report card for Canada this year in the Conference Board’s annual Performance and Potential, which evaluates Canada’s performance vis-à-vis other leading industrial countries. But, in fact, the Conference Board’s assessment of things is on the sober side. For the ten years that the Board has been publishing Performance and Potential, we've been lamenting many of this country's policy directions and sounding the alarm over issues like rising health care costs and Canada's lagging productivity vis-à-vis the United States. Even though this country has, by and large, prospered economically in the past decade, the Conference Board believes that Canada has been missing huge opportunities to do better for its citizens. This year, I'm afraid, our message is much the same, but more urgent.

Our 2005-06 benchmarking report compares Canada's performance with 23 other leading countries in the Organization for Economic Cooperation and Development (OECD). We measure 110 separate indicators across six broad categories: economy, innovation, environment, education and skills, health and society. Think of it as the Olympics of national accomplishment. In each category, we single out the top 12 countries and send them to the medal round, where each is assigned a gold, silver or bronze ranking.

Reading the scorecard is a bit of a 'yin and yang' experience. On the good news side, Canada once again secured a top 12 placements in all six categories. Over the past four years, Canada has been a medallist in 23 out of 24 possible categories – a record matched only by Sweden, Finland and Switzerland. Canada is the only G7 country to deliver this level of consistent and balanced performance in providing citizens with the basic components of well-being: a sound economy, innovative business culture, clean environment, good health, advanced education and training, and strong social fabric.

This past year, however, Canada lost ground in four of these categories: economy, innovation, health, and society. In the economy category, from our 3rd place finish in 2003, we slipped to 6th last year, and now 12th. We’ve lost a lot of ground.

For Canada this means that even though we’re technically a member of the G7, we’re only in the G11 in terms of our relative status in the world economy, as measured by the purchasing power of our dollar.

Our finding is that the slippage is due mainly to relatively weak productivity growth. In 2004, business sector labour productivity in Canada grew by 1.1% – less than one-third the rate of the US. Within the OECD, Canada’s productivity growth is ranked 17th among 30 countries.

When it comes to explaining this weak productivity growth, the Conference Board’s analysis is, in my view, the most sophisticated. We identify 16 different factors that fall into three categories; think of them as three concentric circles.

The outer circle represents global factors, such as world commodity prices and political events, over which Canada has little control.

The second circle represents the national operating environment, and it includes such factors as our industrial structure, degree of urbanization, and degree of competition; it also includes the overall investment climate, which is affected by policies and regulations. Here we can certainly see indirect causes and effects on productivity.

Finally, the innermost circle represents factors at the firm or organization level, where a direct connection with productivity is apparent. At this level, one consistent contribution to Canada’s lagging productivity growth is our relatively low capital intensity, defined as the amount of capital stock per worker or hour worked – in other words, our low rate of investment in machinery and equipment. Another factor limiting productivity growth is Canada’s consistently weak record in embracing and achieving lifelong learning and innovation. For instance, we invest less in training than the US or European countries. We are also falling behind in our venture capital investments, which lag behind those of the US. Our business leaders tend to be risk-averse when it comes to investing in research and development, and turning ideas into commercial products.

Moreover, we are not competing effectively for global trade and investment. This is a disturbing result in an era of integrated global supply chains. On measures of international perceptions of Canada as an investment destination, our investment performance, and our openness to competition, our rankings are weak.

And in fact, our failure to attract a fair share of inbound foreign direct investment directly affects productivity, since global firms that invest in Canada are known to bring state-of-the-art technology, products, skills and access to markets, all of which increase competitiveness and spur productivity growth.

Last year Canada also slipped from 4th to 5th place on innovation. This is a major focus area for the Conference Board, because we view it as a cornerstone of Canada's future competitiveness.

In a high-wage economy like ours, innovation will be the primary route to improving our performance on productivity. Canada’s performance in this category does show some strengths and gains, but we need to improve at commercializing our discoveries and extracting value from our investment.

Our country’s flagging performance in the areas of economy and innovation contributes significantly to the Conference Board’s overall judgment that Canada is slipping to the back of the class. We’re stalling or losing ground in areas critical to our ability to compete globally. If any single message comes out of the reflection on ten years of Conference Board benchmarking, that's the one that resonates most strongly.

We simply must exert ourselves to achieve new breakthroughs. Getting serious about productivity growth, for instance, means rethinking current restrictions on foreign investment; doing away with interprovincial trade barriers; and speeding up the elimination of capital taxes.

We must embrace the innovation challenge on all fronts – people, research, financing and institutions – so that we can advance our commercialization activities for both goods and services. If we don't tackle these problems, and if we fail to make the requisite investments in education and skills training, and in our urban infrastructure, the result will be continued missed opportunities.

Our researchers and innovators are good, but getting new products and services to market has proven challenging across many industry sectors in Canada. In the end, commercialization is about increasing the number of global-best products and services that Canadian firms bring to market – whether in adapting our advanced auto manufacturing capability to new sectors; in producing clean technologies and integrated energy systems; or in expanding our markets for engineering consulting, in particular in infrastructure, where we already have global-best capability.

Getting those policies right is only part of a much larger undertaking the Conference Board is engaged in, called The Canada Project. It was started three years ago out of a sense, expressed by many Canadian leaders, that our country is drifting and unfocussed in facing the major challenges ahead of us. This fall, the Canada Project Compendium Report will lay out three years worth of research findings and policy recommendations, organized around three main themes – commodities, cities, and countries. The Canada Project aims at nothing less than mapping out a comprehensive agenda for sustainable prosperity in the decades ahead.

It’s difficult to make the case for a productivity agenda in this country, for several reasons. It is abstract and can be easily misunderstood, it conjures up perceptions of societal winners and losers, and it requires a long-term agenda when leaders have short-term political mandates.

As an historian by training, I believe that major change can occur only when the overall climate of opinion is conducive to that change. That’s why we need public dialogue and thought leadership to elevate that dialogue. It requires huge and sustained energy, but the stakes are high.


Anne Golden is president and chief executive officer of the Conference Board of Canada.