Concerns about Canada’s lagging productivity have reached a fever pitch, and rightly so. A failure by Canadian businesses to innovate will have far-reaching implications for their long-term competitiveness, productivity, and contribution to economic growth. Without continuous innovation and investment, Canadian firms will be less able to capitalize on emerging technologies and market opportunities, which will limit their ability to adapt to changing consumer preferences and further erode their growth and competitiveness over time.
Take R&D investment trends in Canada’s manufacturing sector, which accounts for the second-highest share of the country’s gross domestic product (GDP).
In 2021, manufacturing firms contributed 25% of total business expenditure on R&D and represented 29% of all R&D-performing firms in Canada. And yet, Canada had 1,789 fewer manufacturing firms performing R&D in 2021 compared to 2014, and there has been little real growth in R&D spending within the sector. Expressed as a share of GDP, business expenditures on R&D in Canada are now roughly half the U.S. level and declining. Meanwhile, manufacturing sales have remained essentially flat over the last two decades, indicating that insufficient investment is crippling the sector’s growth potential.
While leading global manufacturers are investing heavily in automation, robotics and AI, Canadian manufacturers lag far behind. According to the International Federation of Robotics, Canada ranks 17th in the world in robotic density, a measure of the number of installed robots per 10,000 employees. As of 2022, Canada’s rate of 198 robots per 10,000 employees is well short of global leaders such as South Korea (1,012 robots), Singapore (730 units), and Germany (415 units).
So, why aren’t Canadian businesses making vital investments to boost their productivity and competitiveness?
The DEEP Centre’s recent consultation with forty Canadian manufacturing CEOs identified three critical factors: risk-averse organizational cultures, a lack of technology-related managerial competencies, and Canada’s high immigration rates.
The composition and structure of Canada’s manufacturing sector provide a starting point for understanding the shortage of investment in advanced technologies like robotics and AI. Canada lacks global manufacturing powerhouses and innovation leaders like NVIDIA, Samsung and Siemens. Instead, most Canadian manufacturers are small and medium-sized businesses (SMEs). Over 60% of these SMEs are family-owned businesses, where stability and profitability take precedence over building generational wealth through disruptive innovation. When traditional manufacturers invest in R&D, they prioritize conservative and incremental projects that deliver short-term ROIs. Too often, this means executives set aside costlier, longer-term investments in modernizing operations, especially those they can’t readily finance with positive cash flows.
Management perspectives on technology, innovation, risk, and workforce development also significantly impact the rate at which traditional manufacturing businesses invest in automation. Several executives consulted for our study noted that their management teams needed stronger technical backgrounds to appreciate the benefits and limitations of advanced technologies. Others highlighted the need for higher comfort levels with managing the organizational and process changes such investments entail.
Labour market conditions in Canada also figure prominently in discussions about technology adoption, with executives claiming that high rates of immigration and less acute labour shortages compared to the U.S. have dampened investments in productivity-enhancing technologies. Competitors in the United States have responded to the extreme scarcity of skilled labour by turning to automation to fill the gaps in workforce availability. By contrast, Canadian executives say they are struggling to make a compelling business case given Canada’s influx of low-wage labour and the high costs of automating legacy production lines.
Some executives blame the prevailing economic conditions for a lack of investment. For example, Canadian manufacturers are coping with rising wages, interest rates, and energy costs. With less free cash flow, business owners often delay new investments when they ought to be seeking out new efficiencies more aggressively.
What might convince Canadian manufacturing SMEs to invest in AI, robotics, and other game-changing technologies?
Financial incentives, including tax credits and low-cost loans for capital investments, could lessen the economic burden of modernizing legacy operations. Already, Canada provides generous tax credits and subsidies for R&D. However, executives point out that federal programs such as the Industrial Research Assistance Program (IRAP) offer support for hiring engineers and scientists but not necessarily for the expensive equipment such employees use.
Manufacturing executives say the financial commitments required to modernize production processes are significant and far outstrip the people costs. These costs include the upfront capital investment for acquiring and integrating advanced technologies such as automation, robotics, artificial intelligence, and data analytics. Other examples include capital-intensive investments to upgrade manufacturing facilities to meet modern standards, enhance energy efficiency, and comply with environmental regulations.
Changing the innovation culture of traditional manufacturers is another vital but arguably more intractable challenge. Companies that invest regularly and significantly in innovation emphasize the role of company owners and senior executives in creating an innovation-focused culture and sanctioning the requisite investments in people, technologies, and infrastructure. Companies struggling with innovation identified risk aversion as a significant impediment to investment or said they lacked the right skills and capabilities to evaluate and implement new technologies.
Investments in training, workforce development, and technical assistance could help mature SMEs acquire the skills and confidence to invest in productivity and competitiveness. However, such efforts will fall short if business owners prioritize conservative and incremental advances over the more radical retooling required to catch up to global competitors and boost innovation-led sales growth.
Canada’s manufacturing sector needs leaders who will make bold and continuous investments in market-leading innovation, leaders who see risk-taking as the price of entry into lucrative markets. In short, manufacturers must embrace the idea that disruptive innovation can unlock new avenues for growth, competitiveness, and sustainability in a rapidly evolving global marketplace.
As one forward-thinking executive said, “We want to be a technology leader, and I think we have succeeded in taking that on. If we were just in a commodity market, we wouldn’t be very successful, and it would be hard to justify keeping the company in Canada. You have to put in the engineering time and differentiate. That’s what’s made us successful.”