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February 14, 2014

The dollar’s value isn’t our main problem.

While much is being made of the recent drop in value of the Canadian dollar, notably the breathing room it will give Canadian manufacturers, the roots of Canada’s acute economic challenges are most likely non-dollar related.

We’re in the midst of a couple research projects that are increasingly making it clear that Canada performs dismally on metrics related to research and development spending and productivity, and as Warren’s post last week noted, it’s getting worse. A recent IMF analysis of the Canadian economy similarly points to Canada’s weak productivity performance as one of the primary drivers of our economic underperformance.

Three years ago I penned a piece on Canada’s productivity, noting that it measured about 75% of American levels. The primary explanation for this relative weakness has been that Canadian firms invest only 80% of what their American counterparts do into ICT.  And despite an impressive corporate profit scorecard, I concluded that piece by noting that “this poor short-term investment strategy might translate into a long-term hollowing out of our economy beyond the top-tier and natural resources.”

Updated figures released early in 2013 from Statistics Canada underscore this data, noting that Canada had zero growth in multi-factor productivity over the period of 1980-2011. Data from a recent (U.S.) National Science Board report supports this, showing Canada’s labour productivity growth lagging all comparative economies.

Fast forward to 2014 and it’s increasingly clear to me that this is one of, if not, most significant driver of the economic challenge facing Canadian policy makers.

Warren and I have spent the last several months digging into data on Canada’s R&D performance and the results are absolutely dismal. Canada lags all of its peers in gross R&D spending and has seen these numbers decline over the past 8 years. Canadian firms simply don’t pull their weight on long-term investments. And given the role of innovation and productivity enhancement in economic growth, the failure to do so is at the heart of a gradual weakening across both resource and non-resource related sectors of the economy.

In a comparative analysis we’re doing for a group of government clients, it has also become quite clear that Canada’s non-resource sector fails to produce the quantity of private-sector leaders that other comparable economies do. We’re in the midst of digging into the reasons for this and have far more questions than answers.

Is this related to our unwillingness to invest in research and technology? But if so, given that profits amongst Canada’s corporate sector have been strong (notwithstanding a significant post-2009 decline), why aren’t firms re-investing in growth and productivity? Is the mix of R&D incentives we employ to stimulate investment ineffective or misaligned? Does, as Jim Balsillie argues, a weak system of intellectual property rights dampen innovation and R&D?  Is our failure to invest in early childhood education, or insufficient ongoing training, dampening our growth? And, not to dismiss the role of the dollar, does it play a role in dampening external demand and/or weakening investment?

These are amongst the core questions at the heart of a couple of research projects we’re working on and, so we’d like to think, are central to crafting a national competitiveness strategy that ensures that Canadian firms and the governments that help facilitate their success are doing so with strong evidence to help them.

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