Canadian firms' poor record of investment stretches back 40 years: report

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This article was published 29/4/2011 (3006 days ago), so information in it may no longer be current.

OTTAWA - The Conference Board has issued a stinging indictment on how little Canadian firms invest in making themselves more productive.

Under-investment in new equipment and machinery has been a problem stretching back at least 40 years, and Canadians have paid a heavy price, the think-tank says.

The Conference Board is not the first to point out that Canada lags behind many advanced economies in terms of productivity improvements.

But the new analysis released early Friday shows how long the practice has been going on and finds an almost perfect correlation between low investment and low productivity.

On average, Canada's investment in machinery and equipment as a share of gross domestic product was the second lowest among peer countries in the 1970s, 1980s and 1990s. Only France was worse.

While, investment picked up in the 2000s in response to the loonie's burgeoning purchasing power, it still leaves Canada 11th among a group of 16 peer countries that include the U.S., Japan, Australia and about a dozen European nations.

Canada ranks 12th among its peer group in productivity.

More specifically, the report argues that the paucity of investment in information and communications, including computers, has been Canada's principal downfall. It says investment in communications technology is critical to a business' operations in today's market, given the profusion of Internet and broadband networks and the growing use of smartphones.

"On the surface, Canada seems to be doing well (economically)," says chief economist Glen Hodgson.

"But let's not get too hung up about what's happened over the last four quarters or even a few years. Look at the 25 year pattern and that clearly has shown up in terms of real income ... where Canada has fallen behind (the U.S.)."

Low productivity was also a reason the loonie was low throughout much of the 1980s and 1990s, Hodgson says.

One reason Canada has done relatively well in recent years, he says, is because it has lucked into an extended period of hyper-demand and prices for commodities that Canada has in abundance. Even so, the economy should be performing better, a point that has also been made by Bank of Canada governor Mark Carney.

The central banker has pin-pointed low productivity as the main culprit for why it expects the economy to grow at a relatively tame two per cent or so once it completes its backfill from the recession.

The Conference Board report comes at a time when the issue of corporate taxes is a key demarcation point among the parties in the election campaign, with the Conservatives favouring lower taxes to boost investment and the opposition parties calling for the rate to be hiked.

Labour economists such as Jim Stanford and Erin Weir, as well as the Canadian Centre for Policy Alternatives, have published charts showing investments did not increase as combined federal-provincial corporate tax rates slid from about 42 per cent at the turn of the century to the current 28 per cent.

As well, governments eliminated the capital tax, and introduced investment-inducing benefits, such as tax write-offs and the elimination of import duties on machinery and equipment.

The perceived lack of payoff for the many carrots thrown at firms has frustrated policy makers. Finance Minister Jim Flaherty has on several occasions urged firms to play their part.

"We need the private sector to continue to step up, start to invest ... to help create more jobs than we've seen in Canada, more investment in machinery and equipment," he said in response to a poor exports data last fall.

Hodgson says the issue of why Canadian firms have lagged behind for such a long time is complex, but he believes most business decisions are rational.

"It's not a question of blame. We had a whole combination of things from a weak dollar to some barriers like capital taxes, so under the circumstances it was rational not to go out and invest, when you could still compete with the dollar at 70 or 75 cents (US)," he explained.

Those circumstances have come full circle, he adds, and he believes businesses will alter their behaviour as well.

"We've seen some evidence of a change, but it's early days. You change a tax policy and it's going to take a while before you see any consequence in terms of investment behaviour."