Canada’s Competitiveness -- Strengths and Challenges – Presentation to the Industry Canada / ITAC Whiteboard Session on Competitiveness Indicators, November 5, 2007 by Someshwar Rao Micro Economic Policy Analysis Branch Industry Canada November, 2007
1. What is Competitiveness
The concept of competitiveness
At micro level, a firm is said to be competitive if it is profitable and maintains or gains market share in a world of fair and free markets with intense domestic and international competition
Measures of competitiveness are often calculated at industry level as data on individual forms are proprietary
At macro level, according to OECD, a nation's competitiveness is “the degree to which a country can, under free and fair market conditions, produce goods and services which meet the test of international markets, while simultaneously maintain and expand the real incomes of its people over the long term”
The drivers of competitiveness
Productivity, which measures efficiency of resources used to produce goods and services, is the long-term driver of competitiveness
Only growth in productivity will allow firms to compete internationally and maintain and improve real income
New investments in education and skills, machinery and equipment (including ICTs), physical and technological infrastructure and innovation (including commercialization) will all contribute to improvements in productivity, competitiveness and prosperity
However, in the short run, cost structure (unit labour, capital and energy cost) and relative output price will have significant impact on firms trade and output performance and hence their ability to compete in international markets
Movements in exchange rates also will impact the cost structure and relative output price in the short- to medium-term
2. Canada’s Strengths
The Canadian economy has performed very well in the last ten years
Over the 1997-2006 period, Canada experienced the fastest growth in real GDP among G-7 countries.
Over the same period, Canada’s real GDP per capita grew at an average annual rate of 2.4%, the second best growth rate in the G7 countries.
Canada’s superior performance in employment growth largely contributed to the stronger growth in per capita real income.
Employment in Canada increased at 2.0% per year since 1997, compared to an average rate of 0.9% in other G-7 countries.
Canada was the only G-7 country with a government budget surplus during the 2000-2005 period.
Economic Growth in G-7 Countries, 1997-2006 Source: Statistics Canada, U.S. Bureau of Economic Analysis, U.S. Bureau of Labor Statistics, and OECD Economic Outlook, 2007. -0.3 0.5 1.3 1.1 0.9 1.0 2.0 Employment Growth 1.0 1.3 1.2 1.9 2.5 1.9 2.4 Real GDP per Capita Growth 1.0 1.4 1.2 2.3 2.7 3.0 3.4 Real GDP Growth Italy UK Japan Germany France U.S. Canada
Canada’s standard of living is among highest in OECD countries, …
A significant component of our quality of life is represented by our standard of living, our GDP per head.
Canada’s GDP per capita is 2 rd highest in the G-7, and 10 th among the wealthy OECD nations.
Canada’s living standard was 19 percent below the U.S. in 2005.
Global Perspective on “Living Standards” (Relative GDP per capita, 2005, U.S.=100) Source: OECD Productivity database, 2006 G-7 countries Other OECD countries
… as well as in terms of national income per capita
Canada’s GNP or income per capita is 2 rd place in the G-7, and 9 th among the wealthy OECD nations.
In 2005, Canada’s per capita GNP was about 21 percent below the U.S. level.
The GNP-based rank changed significantly from the GDP-based one for some countries. The biggest change in rankings is for Ireland, whose position falls from 4 th richest country in terms of GDP to only 8 th richest in terms of GNP.
Source: OECD estimates for 2005 and Penn World Tables Note: The data on GDP per capita in 2005 were converted to GNP per capita using the ratio of GNP to GDP in 2000. G-7 countries Other OECD countries Global Perspective on “Living Standards” (Relative G NP per capita, 2005, U.S.=100)
Macro-economic framework in Canada is sound and stable
Sound fiscal and monetary policies establish the foundation for Canadians to invest in physical, human and knowledge capital.
Low and stable inflation, coupled with sound fiscal policy lead to low interest rates and boost investment in innovation.
Canada has established a sound macro-economic framework.
The appreciation of the real exchange rate can also increase the motivation for investing in knowledge capital.
Squeezed margins from foreign sales can require firms to upgrade their products, services and production techniques.
Increased competition on domestic sales can provide the urge to firms to differentiate their products and undertake research and development.
Long-Term Bond Yields *Government 10 year bond yields Source: Statistics Canada
Openness* to trade in G-7 Countries and Australia
Canada’s trade policy is built on a series of successful bilateral and multilateral trade agreements making Canada a very outward oriented country.
Trade exposure and foreign direct investment stimulate competition and innovation, and increase productivity.
Sectors most liberalized under FTA/NAFTA experienced the greatest productivity gains in Canada.
Yet, C anada’s barriers to trade and investment remain higher than most other industrialized countries, particularly in some services industries like transportation, telecommunications and finance .
* Openness is defined as sum of merchandise exports plus merchandise imports divided by GDP and then multiplied by 100. Source: World Bank Note: The scale of the indicator is 0-6 from less to highly restrictive. Source: OECD, 2004, Product Market Regulation in OECD Countries, 1998 and 2003 (rev.). Barriers to Trade and Investment Canada’s trade policy supports access and exposure to world markets 0 100 200 300 400 Canada Germany France Italy U.K. Australia Japan 1990 1995 2004 US = 100
Product market regulations are among the lower side … Product Market Regulations
Marketplace framework policy establishes the market incentives for firms and individuals to invest in physical and human capital and to compete and innovate.
Product market regulations can reduce the potential gains of introducing new and innovative products and the incentives to invest in knowledge and to commercialize innovation.
Much of Canada’s higher product market regulations are the result of higher barriers to trade and foreign direct investment.
Note: The scale of indicators is 0-6 from least to most restrictive of competition Source: OECD Indicators of Product Market Regulation, 2003 (rev.)
… barriers to entrepreneurship are the lowest among G-7 economies … Barriers to Entrepreneurship
Barriers to entrepreneurship decrease market opportunities for firms and individuals to innovate and compete.
Barriers to entrepreneurship are decreasing in Canada and are the lowest compared to other G-7 countries.
Canada tops the G-7 in terms of low regulatory cost of business -- the least number of procedures and processing time.
Note: The scale of indicators is 0-6 from least to most restrictive of competition Source: OECD (2004), Indicators of Product Market Regulation, 1998-2003 (rev.) *High income OECD countries. Source: Doing Business in 2006 - The World Bank Group Days Required to Establish a New Business
… and labour market regulations are also among the least restrictive Employment Protection Legislation
Employment protection legislation tends to impede adjustments in the labour market.
The U.S., followed by the U.K. and Canada have the most liberal employment protection legislation
Other G7 economies have significantly more restrictive labour market regimes.
Still, a gap persists between Canada and the U.S.
According to the OECD, the employment protection legislation for permanent employees is more stringent in Canada than in U.S. and U.K. (regulations on procedural requirements; notice and severance pay; and the prevailing standards and penalties for “unfair” dismissals)
The same is true for temporary employment contracts (maximum number for successive renewals; maximum cumulated duration of the contracts; and allowed reasons for which a fixed-term contract can be offered).
Note: The scale of indicators is 0-6 from least to most restrictive of competition. Source: Nicoletti, Scarpetta & Boylaud, OECD Working Paper 226, (2000), Table A3.11.
3. Challenges Facing Canada
Canada lags several OECD countries in productivity level …
In 2005, Canada’s labour productivity, not labour utilization, was the main factor behind our lower living standard vis-à-vis the U.S.
Estimates vary, but most recent OECD calculations suggest a gap of 24 percent between Canada and the U.S.
Canada’s productivity level was 5 th out of G-7 countries in 2005.
Note: Labour utilization equals total hours worked per capita. Source: OECD Productivity database, 2006. The Sources of GDP per Capita with Respect to the United States, 2005 GDP per capita (U.S.=100) GDP per hour (U.S.=100) Effect of labour utilization (U.S.=0)
… and in trend productivity growth
Labour productivity and MFP growth have been lower in Canada than in many other advanced economies.
MFP performance has been worse than the productivity of labour suggesting overall poor efficiency gains in production, lagging technology adoption and sub-optimal production practices.
During 1985-2002, MFP in Canada grew at an annual average rate of 0.5 percent, compared to an average of 1.2 percent per year for Australia, France, Japan, Italy, UK, and U.S.
Multifactor Productivity in Selected OECD Countries (1985-2004, 1985=100) Note: MFP is based on harmonized price indexes for ICT capital goods. Source: OECD, Productivity Programme. Labour Productivity in Selected OECD Countries (1985-2004, 1985=100)
Productivity and working-age population are key sources of growth in living standards in Canada over the past two decades Sources of Income per capita growth in Canada: 1981-2006 (percent) Income is GNP corrected for terms of trade Working-age population: population 15 years and over. Source: Industry Canada computation based on data from Statistics Canada
Real income (GNP adjusted for terms of trade) per capita grew at an annual average rate of 2.1 percent over the period 1981 to 2006.
About 60 percent of that growth corresponds to improvements in labour productivity.
Multifactor productivity growth accounted for 33 percentage points (56 percent of the labour productivity growth). Physical capital deepening accounted for the remaining growth.
The improvement in terms of trade accounted for 17 percent of the increase in real income per capita. Most of the gain took place over the period 2002-2006.
The growth in the share of working-age population in total population and growth in employment rate accounted for 12 and 9 percent of the income per capita growth.
-2.8 Hours Worked per Worker 5.1 Net Foreign Income 100 Total 17.0 Terms of Trade 9.3 Employment Rate 11.8 Working-age Population 59.6 33.4 26.2 Labour productivity Multifactor productivity Capital deepening
Slower growth and aging of the population will reduce our capacity to grow … Growth of Working-Age Population and Labour Force, Canada, 1951-56 to 2016-21 Source: Statistics Canada
Demographic trends will reduce the growth of the working-age population (15-64) and of the labour force.
Starting around 2010, the falling share of the working-age population (wp/p) and declining participation rate (I/wp) will both make a negative contribution to the growth of our standard of living.
It means that Canada needs to depend more and more on productivity growth to raise our standard of living and our quality of life.
Source: Statistics Canada and projections using COPS demographic projections Components of Growth in GDP Per Ca pita
… and increased competitive pressures from globalization is adding to the urgency of improving our productivity performance
The globalization of trade and investment is accelerating – growth rates rose sharply in the 1990s with the emergence of China as an economic “powerhouse”.
Technology has been a key enabler and driver of globalization and of the offshoring of services to low cost countries.
Globalization will intensify further as trade and investment barriers continue to fall and communications become ever cheaper and easier.
Economies will continue to blend into an integrated world economy, with an increasingly global specialization and worldwide product supply chains.
*Data for 2004 are only available for a few countries. Trade = Imports + Exports Source: World Development Indicators (WDI) database World Bank U .S. India Canada Japan Commercial Services Trade as Percentage of GDP, 1990-2004* China Germany Source: World Bank Other Emerging Economies China Share in World Exports of Goods and Services India Other emerging economy includes Brazil, Hong Kong, Indonesia, Mexico, Korea, Malaysia, the Philippines and Thailand. It excludes Singapore, as the data for Singapore on exports of goods and services in this series were not available.
4. Canada under-invests in key areas
Canadian investment performance is weak in several areas
Adoption and diffusion of new technologies
Research and Development
Total expenditure in R&D
Business expenditure in R&D
Commercialization of new knowledge
Highly skilled labour
Proportion of highly skilled workers across industries
Output of highly skilled labour from universities
Canada lags many OECD countries in M&E investment
Physical capital deepening (capital per unit of labour input) contributes to improvements in labour productivity and living standards.
Physical capital deepening, especially M&E capital, is associated with the adoption and diffusion of new state-of-the-art technologies.
Canada’s M&E investment, as a percentage of GDP, was the lowest in the 1980s and the 1990s among the G-7 countries, and most other OECD countries.
Canada’s weak performance in M&E investment did not improve over the period of 2000-2004. Its M&E investment as a percentage of GDP was still the lowest among G-7 countries.
The M&E investment gap between Canada and the U.S. increased in the 1990s as well as during the 2000-2004 period.
Over the 2000-2004 period, Canada’s M&E investment, as percentage of GDP, was 8.2 percent, compared to 9.1 percent in the U.S.
Machinery and Equipment Investment as a Percentage of GDP (Percent) Source: OECD National Accounts 1980s 1990s 0 4 8 12 16 Iceland Greece Canada Ireland Finland Germany U.K. U.S. Mexico Sweden New Zealand Austria Netherlands Spain Denmark Turkey Italy France Australia Japan Korea 0 4 8 12 16 Iceland Greece Canada Germany U.S. Turkey Mexico Denmark Netherlands U.K. Austria Spain Ireland France Sweden Finland Italy Australia New Zealand Japan Korea 8.6% 7.8% 9.2% 7.6% Average % Average %
The Canada-U. S. M&E capital gap is large and increased in the 1990s…
The Canada-U.S. M&E capital intensity gap in the business sector increased from 39 percent in 1992 to 44 percent in 2004.
ICT contributed about 34 percent to the M&E capital gap in 2003.
The increase in the M&E capital gap was more dramatic in the manufacturing sector. It increased from around 21 percent in 1992 to over 46 percent in 2004.
ICT contributed about 24 percent to the M&E capital gap in 2003.
The differences in industrial structure in the two countries did not contribute significantly to the M&E capital gaps.
*M&E capital stock per worker (specific sector M&E investment PPP based). Data for other countries are not available. Source: Statistics Canada and U.S. Bureau of Economic Analysis Relative M&E Capital Intensity* in Canada, 1987-2004 U.S.=100 Business Sector Manufacturing Sector
… across most industries Relative M&E Capital Intensity in Canadian Industries, 1997 and 2004 (Capital stock per worker US = 1)
Canadian industries are generally less M&E capital intensive than their U.S. counterparts.
In 26 out of 29 industries, the M&E capital intensity in Canada was lower than in the U.S. in 2004.
The M&E capital gap increased in 19 industries between 1997 and 2004.
Source: Statistics Canada and U.S. Bureau of Economic Analysis
The importance of ICT in M&E capital increased across all industries ICT Capital Stock as a Percentage of Total M&E Capital Stock in Canada: 1987 and 2003 (per cent)
Between 1987and 2003, the share of ICT capital in total M&E capital increased in all industries, except transportation equipment and professional services.
ICT capital, as a percentage of total M&E capital, in the Canadian business sector increased from 14 percent in 1987 to 20 percent in 2003.
In general, ICTs are more important in service industries than in other industries.
Source: Statistics Canada and U.S. Bureau of Economic Analysis.
Canada also lags some OECD countries in ICT investment ICT Investment in Selected OECD Countries, 1985-2004 (As a Percentage of Non‑residential Gross Fixed Capital Formation, Total Economy)
ICT investment as a percentage of total investment rose rapidly in the 1990s in most developed countries.
In 2004, the share of ICT investment in Canada was higher than that in France, Germany, Italy or Japan, but lower than that in UK and the U.S.
* 2002 for Australia, Japan, New Zealand, Norway and Spain, 2004 for Canada, Germany, Korea and the United Kingdom, 2003 for all other countries. Note: Estimates of ICT investment are not yet fully standardised across countries, mainly due to differences in the capitalisation of software in different countries. See Ahmad (2003). Source : OECD, Productivity Database, March 2006.
R&D Expenditure as a Percentage of GDP in Canada, 1981-2004 (percent)
Investment in innovation leads to higher labour productivity and income growth.
Research indicates that Investment in innovation is important to countries at or close to the technology frontier such as Canada.
R & D expenditure is a widely used proxy for investment in innovations.
R & D investment is also thought to be important for firms to absorb advanced technologies from other countries.
R&D expenditures as a percentage of GDP increased over the past two decades.
Business R&D intensity increased from 0.6 percent in 1981 to 1.3 percent in 2001 and declined to 1.0 percent in 2004.
Gross R&D expenditures, including government and other non-business R&D activities, also trended up.
BERD: Business Expenditures on R&D GERD: Gross Expenditures on R&D. Source: OECD, Main Science and Technology Indicators, 2005-2 Canada’s R&D investments are increasing…
… but concentrated in a few industries BERD as a percentage of value added in Canada: 1987 and 2001 (percent) BERD: business expenditures on R&D. Source: OECD, ANBERD and STAN databases.
The improvement in R&D investment over the past two decades is concentrated in two industry groups:
machinery and equipment ; and
Why aren’t we seeing improvements all over the industry spectrum?
Canada performs relatively poorly on gross expenditure on R&D…
Canada spends less on R&D investment than other industrialized countries, despite a generous fiscal incentive -- the Scientific Research & Experimental Development (SR&ED) Tax Credit Program.
Canada ranked 12 th in the OECD in terms of gross expenditures on R&D (GERD) as a percent of GDP .
In particular, Canada trails the leader by more than 2 percentage points and lags the U.S by almost ¾ of a percentage point.
About 70 percent of the gap with the U.S. was due to lower R&D intensity at the industry level. The remainder was due to differences in the industry composition between the two countries.
GERD as a Percentage of GDP, Top OECD Countries, 2003 or nearest year. Source : OECD, Main Science and Technology Indicators, 2005-2,
… due to weak R&D investment by business…
Canada ranks 13 th in the OECD in terms of Business Expenditure on R&D.
Several reasons have been advanced to explain Canada’s lagging performance, including the impact of higher foreign ownership.
Official R&D data, which capture domestically-produced R&D spending only, may therefore underestimate investment in innovation by Canadian firms.
Recent work by Statistics Canada shows that when expenditures for foreign payments for R&D services and payments for royalties and license fees are included, the Canada-U.S. knowledge capital gap in 1999 was reduced to 0.40 percentage point from 0.92 percentage point.
BERD as a percentage of GDP, 2003 or nearest year* *2000 for Switzerland Source : OECD, Main Science and Technology Indicators, 2005/ /2,
Canada’s lagging R&D performance is also apparent when we benchmark our performance against other countries in the top five high tech sectors.
Although we lead in the office machinery and computer sector this sector makes up a relatively small share of Canada’s output.
Source: Aleb ab Iorwerth, Canada’s Low Business R&D Intensity: the Role of Industry Composition, Finance Canada Working Paper, 2005-03, March 2005. R&D Intensities of High-tech industries as a % of value added, 2002 … and in most high tech sectors …
… and government
We rank 15 th in the OECD in government spending on R&D, as a proportion of GDP, despite federal investment in R&D increasing 29% from 1997 to 2003.
But we do well in R&D performed by the Higher Education sector, where we lead the G-7.
Government-spending R&D as a percentage of GDP for 2003, selected countries Source : OECD, Main Science and Technology Indicators 2005-2
Canada has a generous tax support for R&D, but with less direct support Government Support for BERD
Canada’s government tax assistance including R&D tax credits is very generous by international standard.
But, it provides less direct support to business R&D.
Research intensive industries that have long lead times to commercialization (e.g., fuel cell, biotechnology) are unable to fully benefit from accelerated tax deductions and tax credits.
Firms in these sectors have gone to public capital markets or foreign partners, disqualifying themselves from access to the refundable tax credits.
Accelerated tax deductions and non-refundable tax credits only benefit taxable (profitable) enterprises.
Sweden Finland Japan United States Germany Denmark Total OECD France United Kingdom EU Netherlands Canada Italy 0 2 4 6 8 10 12 14 0 0.05 0.1 0.15 0.2 BERD % GDP % BERD Financed by Govt Tax Assistance* Source: Source: OECD MSTI Database 2003-2. Warda, Jacek, Extending Access to SR&ED Tax Credits, December 2003. *Tax assistance is represented by one less the b-index - higher numbers = higher tax benefits. Note: The B-index is equal to the after tax cost (ATC) of a 1$ of R&D expenditure divided by 1 less the corporate income tax (t): ATC/(1-t).
Canada is also weak in commercialization
The World Economic Forum ranks Canada 27th on “propensity to compete on the basis of unique products and processes”.
Exports of high-tech products as a percent of total manufacturing exports – commercialization in international markets – is well off the US pace.
Canada’s purchases of foreign intellectual property for further domestic development declined in the last decade to levels well behind both Germany and the UK.
* Introduced innovations new to Canada or the world. Source: Mohnen and Therrien, How Innovative are Canadian Firms Compared to Some European Firms? A Comparative Look at Innovation Surveys, Merit Research Memorandum, 2001-033, Maastricht, 2001. *Australia Data available until 2001. Source : National Science Foundation, Science and Engineering Indicators, 2006 . US = 100 High-Tech Exports (as % of Manufacturing Exports ) France Canada Ireland Spain Germany 0 10 20 30 40 50 60 Percent Innovators First Innovators* Share of Sales from New or Improved Products or Processes
Overall Canada has a low innovation performance despite favourable innovation framework conditions
Innovation performance of Canada (innovation activity and technology diffusion) ranked 10 th in a group of 27 OECD countries, whereas it ranked 3 rd in terms of overall innovation framework conditions (along with Finland and the U.S.).
The Spider-web indicates where framework conditions in Canada differ from the index values of the top 4 innovator countries (U.S., Finland, Sweden, and Switzerland).
Canada’s performance is particularly weak in public investment in R&D, and lags in research quality, sufficient knowledge workers, and conditions for technology diffusion.
This is an enigma that we have to solve. Despite the favorable conditions that we offer, we do not reap the projected benefits. Why?
Canada Vis-à-Vis Best-Practice Countries in Individual Policy Areas Source: OECD. 2004. Benchmarking Innovation Performance and Framework Conditions: Contribution from Denmark and Norway, DSTI/IND 2004/6. Paris.
Canada’s public infrastructure capital has trended down… Source: Industry Canada calculation based on data from Statistics Canada.
Research indicates a strong positive relationship between public investment in physical infrastructure capital, productivity and competitiveness.
Public investments in physical infrastructure support productive activities by business and government, movement of goods and services, and communications. In short, investments in physical infrastructure reduce operating costs of doing business in Canada and improve competitiveness.
But, Canada’s investments in public infrastructure did not keep pace with the economy.
The real public infrastructure capital stock/GDP ratio trended down over the period 1961-2005.
Similarly, public infrastructure capital stock per employed person fell from $15.5 thousands in 1977 to $12.4 thousands in 2005.
The real ratio of Public Infrastructure Capital Stock to GDP in Canada, 1961-2005 Real Public Infrastructure Capital Stock per Job in Canada (000$), 1961-2005
… also lags some other G-7 countries Source: The World Competitiveness Yearbook, 2003 Note: The rating scale ranges from 0 to 10, with 10 being “best”. The efficiency of distribution infrastructure, G7 countries, 2003 Maintenance and development of infrastructure, G7 countries, 2003
According to the World Competitiveness Forum, Canada’s performance lags behind France, Germany and the U.S. in maintaining and developing public infrastructure, but is superior to Japan, Italy and the U.K.
Canada also lags Germany, the U.S. and France in the efficient use of public infrastructure.
More than 80 percent foreign multinational executives surveyed indicated that the poor state of public infrastructure adversely affected Canada as a destination for foreign direct investment.
According to the Conference Board of Canada, infrastructure gap in Canada is estimated to be between $50 billion and $125 billion, 6 to 10 times the level of all current government infrastructure budgets combined.
The infrastructure needs are particularly acute in the west coast (B.C.), because of the rapid expansion of Canada’s commercial links with China and other Asian Pacific countries.
Source: The World Competitiveness Yearbook, 2003 Note: The rating scale ranges from 0 to 10, with 10 being “best”.
Canada’s labour force has become more educated… Percentage of the Population 25-64 with a University Degree or Above in Canada Source: Statistics Canada. Percentage of Hours Worked by Persons with University Degree or Above in Canadian Industries Source: Statistics Canada
Investment in human capital makes an important contribution to increasing our standard of living
Rising skill levels are an important source of productivity growth
An innovative economy requires a highly skilled workforce
The capacity to adopt advanced technology depends on the level of workforce skills
With increasing competition from emerging economies in global markets, Canada and other advanced economies will increasingly specialize in exports with high skills content
As workforce growth slows due to population aging, increased levels of skill will be required to maintain growth in standards of living.
Canadians are now more educated than before.
The share of the population aged 25-64 with at least university education increased from 14 percent in 1990 to 22 percent in 2004.
Skill levels have grown across all Canadian industries.
All industries except health services experienced an increase in the share of workers with at least university education from 1981 to 2003.
… making Canada one of the world’s most educated nations Percentage of Population 25-64 with Tertiary Qualification, 2003 Average Years of Education of 15-64 Year Olds Across Selected OECD Countries Source: OECD, Education at a Glance, 2005.
Canada has one of the highest capacities for supplying skilled labour. Among selected OECD countries
Canada ranks first in the proportion of the population with tertiary credentials.
Canada has the highest proportion of college and trades graduates, but trails the US and Norway in the proportion of university graduates.
Canada ranks second in terms of average years of education of the working age population.
From 1980 to 2000, wage premiums for male bachelor’s graduates relative to high school graduates rose from 30% to 52%. The bachelor’s degree premium for women rose from 51% to 61%.
Wage premiums increased slightly for other male post-secondary graduates, but not for other female post-secondary graduates.
These increases occurred in spite of rapid increase in the percentage of 25-34 year olds with a post-secondary credential.
Source: Boothby and Drewes (2006), Canadian Public Policy, XXXII(1), Table 6. Men 25-34: Percentage Wage Premium over High School (1980-2000) Women 25-34: Percentage Wage Premium over High School (1980-2000)
University education is important for scientists and engineers across industries
Professionals in natural and applied sciences are the driving force of technology development and technology adoption.
In the economy as a whole, about 60 percent of professionals in natural and applied science have a university education.
The percentage is much higher in mining, utilities, professional services, educational services, and manufacturing.
University Graduates as a Percentage of Employment in Natural and Applied Science Professions, by Industry, 2001 Source: Statistics Canada
But Canada’s performance in producing new HQP is weak…
University graduation rates benchmark the rate of production of skilled knowledge by universities. The inflow of university-educated youths into the Canadian labour force represents 28% of all entrants.
Canada lags many OECD countries including the UK and the U.S.
Canada has also fewer Ph.D. graduates than most other G-7 countries and Australia.
Canada’s lower university graduation rates and lower secondary completion rates mean that the average years of schooling that new school entrants are predicted to complete are lower in Canada than in many other OECD countries.
New PhD Graduates per Million Population, 2000 Source: Mario Cervantes, OECD Science and Technology Policy Division, "Trends in supply and demand for Human Resources in Science and Technology", Presentation at the Joint CNR-OECD Workshop. University Graduation Rates, 2000 Source: OECD, Education at a Glance, 2002.
… and Canada lags the U.S. across industries
On average, Canada has fewer workers with university education than the U.S.
In 2000, the share of hours worked by workers with university education was 16.3 percent in Canada compared to 26.7 percent in the U.S.
Canada’s weaker performance is seen in all industries except business services.
Hours Worked by Workers with at Least a University Degree, 2000 (percent of total hours worked) Source: Rao, Sharpe and Tang, 2004, “Productivity Growth in Service Industries: A Canadian Success Story,” Industry Canada Research Paper.
Canada is also showing weakness in retaining HQP Ratio of Outflow to Inflow From Permanent Migration Between Canada and the U.S.: Managerial and Selected Professional Occupations, 1990-1997 Share of Individuals with University Education in population aged 16 and over in 1990s Source: Statistics Canada Education quarterly review, May, 2000
Canada is losing highly skilled people to the United States.
Canadians who moved to the U.S. were better educated than both the Canadian-born population and recent immigrants to Canada.
49 percent of Canadian emigrants to the U.S. between 1994 and 1999 aged 16 and over had a university degree. This compares with 12 percent among Canadian-born people and 21 percent among immigrants to Canada who arrived during the 1990s.
Recent post-secondary graduates who moved to the US
Came disproportionately from higher level degrees, especially PhDs
Those who moved for work-related reasons cited higher salaries and greater availability of jobs in the U.S.
:1 :1 :1 :1 :1
Immigrants are highly educated but may lack the skills required by the Canadian economy Proportion of Population aged 25 to 44 with University Education, 2001 Census Average Earnings of Recent Immigrants and Canadian-Born Workers, 2000 Source:Statistics Canada, Daily October 8, 2003 Note: Recent Immigrants: those who arrived 1995-1999.
In 2001, 53 % of recent immigrants aged 25 to 44 had a university education compared to 23 % of Canadian-born.
Despite their higher level of educational attainment, recent immigrants with a university education earn 58.4 % less than their Canadian-born counterparts.
The earnings differential suggests that the skills contribution of university educated immigrants to the Canadian economy is less than that of Canadian-born university graduates.
This could occur because immigrants have lower levels of the skills needed in the Canadian economy or because their skills are not fully used.
Data from the 2003 literacy survey (IALSS) shows that despite immigrants’ high levels of schooling, their literacy skills are lower than those of the Canadian-born.
Source: From “The Changing Diversity of Canada: 2001 Census”, Statistics Canada. Recent Immigrants: those who arrived 1996-2000.
Canada also lags in training
The existing labour force can acquire skills through on-the-job training .
Canada’s labour force participates less in job-related training than in the U.S., the U.K., and many other countries .
Average hours per employee spent in training are also lower in Canada than for other countries .
Participation Rates for Workers 25-54 in Employer-Sponsored Job-Related Training Across Selected Countries Source: Employment Outlook, OECD, 1999: Chart 3.1.
5. Possible explanations of under-investment
Possible explanations include:
Output composition effects - scope (e.g., Canada is still a resource-based economy);
Scale (e.g., small Canadian market – size of firms);
Extent of competitive pressure (e.g., barriers to foreign competition);
Business skills and experience (e.g., less educated entrepreneurial and managerial workforce);
Quality of risk capital (e.g., venture capital); and
Incentives (e.g., taxes on capital).
Low investment in R&D may be partially explained by the structure of the Canadian economy
The Canadian economy is often described as a resource-based economy.
In 2004, natural resources and mining represented about 7 percent of value added GDP in the Canadian business sector and about 3 percent in the U.S.
Although the evidence suggests that the industrial composition of output is not important for explaining our gap in R&D performance, there are reasons to believe that our manufacturing sector is more “resource-oriented” than in most innovative economies; relying more on primary transformation of resources rather than secondary or tertiary transformations where innovation inputs and commercialization are more important.
The diversity of value-added activities in the Canadian business sector is more evenly distributed than in the US.
While diversity can mitigate the risks of industry-specific economic fluctuations, industrial diversification can also reflect a lack of specialization.
GDP share of natural resources industries in the business sector, 1987-2003 Diversity of industrial value-added of the business sector, 1997-2004 Source: Statistics Canada and Bureau of Economic Analysis (US).
Canadian firms are too small to compete abroad
Scale economies and specialization are often seen as drivers of industry productivity and firm competitiveness.
Manufacturing firms in the U.S. have, on average, twice the scale of Canadian firms.
In 2002, average shipments per firm across manufacturing industries were C$58 million in the U.S. compared to C$24 million in Canada.
Average shipment per manufacturing firm, 2002 (in 000’s) Source: IC calculations from Statistics Canada and U.S. Census Bureau data.
Canada has barriers to foreign competition…
Inward foreign direct investment brings both tangible and intangible capital to the host country and generates direct and indirect economic benefits.
An OECD study suggests that Canada has investment restrictions in a number of key service sectors that are much higher than average – and than in the U.S.
Canada’s foreign ownership restrictions are confined to a few sectors: notably electricity, transport, and telecommunications services.
The OECD has remarked that foreign ownership restrictions. particularly in the telecommunication sector, are burdensome for Canada and policy objectives should and can be achieved through other means, some of which already exist.
Note: The scale of the indicator is 0-1 from no to complete restriction. Source: OECD, 2003, Policies and International Integration: Influences on Trade and Foreign Direct Investment.. Foreign Direct Investment Restrictions by Industry, Canada and the U.S.
… and trails the U.S. on “Competitive Pressure” factors
Competition and rivalry forces firms to focus on productivity improvement and invest in physical capital, knowledge and human capital.
Competition is often less intense in Canada than in the US, particularly in service-producing industries that focus on the smaller Canadian market (Conference Board of Canada, 2004).
According to the Executive Opinion Survey of the World Economic Forum, Canada trails the U.S. in 17 of the 23 “Competitive Pressure” factors which measure the degree of rivalry that induce firms to invest in physical capital, knowledge and human capital.
Competitive Pressure Factors (Canada versus U.S.) Source: The Institute of Competitiveness and Prosperity, Realizing our prosperity potential, Third Annual Report, November 2004. (Exhibit 18, at p. 47).
Canadian production is increasingly concentrated
Canadian manufacturing firms are becoming larger in order to benefit from scale economies and improve their competitiveness in the global market.
On the other hand, increased Canadian concentration of domestic production can reduce the competitive intensity in domestic markets, which could be detrimental to innovation.
Production in Canada is more concentrated than in the U.S. in all manufacturing industries except for the Apparel industry.
4-Firm Concentration Ratio,* Manufacturing Industries *Combined production share of the four largest firms determined by the value of shipments. Source: Statistics Canada, Industrial Analysis Branch
Skilled managers and business professionals play a vital role in the overall efficiency of firms and markets.
Overall, Canadian business managers are less likely to be university graduates than their U.S. counterparts.
Twice as many managers in the U.S. are university graduates from business programs.
Could that explain in part why our firms are less innovative, perform less R&D, etc.?
Degrees (BA, MA, PhD) Conferred per Thousand Population (2002/03) Source: Rebalancing Priorities for Canada’s Prosperity, Institute for Competitiveness and Prosperity, 2006. Canadian business managers are less likely to be university graduates than their U.S. counterparts, especially from business programs
Canadian companies’ operations and strategies undervalue innovation, compared to those in most of other G-7 countries
The World Economic Forum ranks Canadian companies considerably lower in company operations and corporate strategies geared towards improving entrepreneurship and productivity.
In 2003-2004, Canada ranked 14 th among 101 countries in company operation and strategy– an integral part of business competitiveness.
More Canadian businesses are concerned with minimizing cost rather than raising revenues via the introduction of new products, services or production techniques into the market.
In 2001, less than 40% of establishments in Canada considered that developing new products or production techniques was relatively important, very important or crucial in their general business strategy while more than 50% thought that reducing labor and other operating cost were important.
Company Operations and Strategy Ranking* * The company operations and strategy index measures the extent to which company strategies and operating practices are oriented toward innovation versus other modes of competing. Canada lags most of its G-7 competitors on this measure. Source: World Economic Forum, Global Competitiveness Report, 2004-2005 General Business Strategy in Canada, 1999, 2001 Source: Employer portion of the Workplace and Employee Survey, Statistics Canada.
Effective corporate taxes on physical capital are high in Canada … Source: Mintz, Jack, et al, C.D. Howe Institute, e-brief , Attention G-7 Leaders: Investment Taxes Can Harm Your Nations’ Health. September 20, 2005. Effective Tax Rates on Capital for Large and Medium–Sized Corporations, Selected Countries, 2005 Average for Manufacturing and Service Industries (%)
The business tax regime can have a significant effect on investment in physical capital and the creation of knowledge and its commercialization.
Taxes impact productivity growth and output growth through their effects on savings and investment, entrepreneurship and risk taking, work effort, and net migration, particularly of skilled workers. Taxes can also influence decisions to upgrade skills.
Higher taxes on capital investment, an important factor determining the user cost of capital, discourage corporate and entrepreneurial investment in Canada.
Canada has one of the highest effective corporate tax rates on capital in the world.
In 2005, Canada’s tax rate on capital for large- and medium-sized firms was the second highest behind China.
Announced reductions in corporate taxes in Canada and the U.S. to date will not close the tax gap significantly.
… and pervasive across industries The Effective Corporate Tax Rates in Canada and the United States, 2002 Source: Chen and Mintz, 2003, How Canada’s Tax System Discourages Investment, C.D. Howe Institute Backgrounder.
Canadian effective tax rates on capital were above the U.S. levels for all non-resource sectors.
The rate gap with the US is primarily due to higher federal and provincial capital taxes in Canada, faster CCA rates in the US, and provincial sales taxes on business inputs.
Canada’s Scientific Research & Experimental Development (SR&ED) Tax Credit Program is widely recognized as providing one of the most generous systems of tax-based support for industrial R&D.
Globally, support for industrial research in Canada (direct funding of business R&D expenditures et fiscal expenditures) is much more important (40% to 50%) than what is offered in the United States.
But high marginal effective corporate tax rates on capital operate might be discouraging corporate and entrepreneurial investment.
Canada 100 Italy U.S.A. France Japan Germany 85 84 80 77 71 71 U.K. Source: Warda, Jacek, Rating Canada’s R&D Tax Treatment: A 2003 Update, December, 2003. R elative Generosity of R&D Tax Incentives The generous tax-based support for industrial R&D may be offset by high effective tax rates on capital
Returns on human capital investment are also reduced by high taxes
Return to education is one of the most important driver of human capital accumulation and a factor in retaining mobile skilled labour in Canada.
Canada’s effective tax rate on university graduates was on average 15.9 percent, almost twice as much as that in the U.S.
High personal taxes affect savings and investment, entrepreneurship and risk taking, work effort, and net migration, particularly for skilled workers. They can also influence decisions to upgrade skills.
The tax wedge—the difference between the gross and net of taxes wages—is higher in Canada than the U.S. for highly mobile individuals.
Effective Tax Rates for First University Degree Graduates, 1997 (percent) Source: Collins and Davies, 2003, “Tax Treatment of Human Capital in Canada and the United States: An Overview and Examination of the Case of University Graduates,” in North American Linkages: Opportunities and Challenges for Canada , ed., R. Harris, Calgary: University of Calgary. Income tax plus employees and employers security contributions, 2004 (as a % of labour costs)* *Single individual without children at the income level of the average production worker Source: OECD Taxing wages: 2003 / 2004
On the other hand, favourable tax treatment may in part explain low returns to venture capital
Risk capital is a vital source of funding for innovative businesses.
Returns on venture capital investments, a measure of the quality of the venture capital industry, are much lower in Canada than in the U.S.
Overall, the rate of return on venture capital, over a 10-year investment period, ending on December 31, 2004, was only 3.6% in Canada, compared to 26.0% in the U.S.
Note: many analysts have attributed this “quality” problem to the significant role of labour-sponsored venture capital corporations in Canada – the favourable tax treatment for individual investors may reduce the quality of management of these funds (less incentive for high pre-tax rates of return due to preferential tax treatment)
Source: Venture Economics/NVCA (U.S.); Macdonald & Associates Limited (Canada). Before Tax Annual Rate of Return (%) on Venture Capital Investment, 1994-2004
However, Government debt-GDP ratio in Canada have declined dramatically since the mid 1990s… Source: OECD
Many claims were and are made that government’s poor fiscal situation, weak (high) Canadian dollar and higher corporate taxes are the main reasons for hollowing-out.
But the available research do not show a systematic relationship between hollowing-out and the above mentioned variables.
Furthermore, the overall business climate in Canada has improved dramatically. If hollowing-out did not happen when the economic fundamentals were not in Canada’s favour, there is less danger that it will happen now.
General government net financial liability as percent of GDP
… the recent corporate tax cuts would give Canada a competitive edge over other G-7 countries, …
Based on the “Economic Statement” announced by Finance Canada on October 30, 2007, corporate income tax rate would be cut from 22 percent in 2007 to 15 percent in 2012, which will make Canada the most competitive tax in the G-7 countries.
* Includes capital tax equivalents Source: Economic Statement, Department of Finance, Canada, 2007 Corporate Income Tax Rates* for G-7 Countries, 2012 (%) Corporate Tax Reductions in Canada (%) 15.0 16.5 18.0 19.0 19.5 22.12 Proposed rates 18.5 18.5 19.0 20.0 20.5 22.12 Existing rates 2012 2011 2010 2009 2008 2007
Average annual US dollar per Canadian dollar Sources: World Bank and Bank of Canada … and the value of Canadian dollar vis-à-vis U.S. currency has increased by over 50% since 2002
The sharp rise in the value of Canadian dollar would stimulate investment in physical, knowledge and human capital and improve Canada’s productivity and competitiveness by
increasing competitive pressure;
lowering the cost of M&E investment.
6. Indicators of ICT industry competitiveness
Canadian ICT sector is relatively smaller than in other countries... Source: OECD Key Indicators, http://www.oecd.org/dataoecd/20/6/34083289.xls Share of ICT Sector in the Business Sector Value Added, 2003 or latest 1995 16th 2003 17th (out of 25) Top 5 countries % of total business value added
The share of ICT sector in the total business sector value added in Canada was 7.6 percent in 2003, 2.9 percentage points lower than the U.S. share and 1.4 percentage points lower than the average share of all OECD countries.
...and less R&D is performed by the Canadian ICT sector Source: OECD, ANBERD and National accounts database, October 2006; http://www.oecd.org/document/23/0,2340,en_2649_201185_33987543_1_1_1_1,00.html 9th Percentage of GDP Top 5 countries ICT Sector R&D Expenditures, 2003 or latest
R&D expenditure to GDP ratio in Canadian ICT sector is much lower than the U.S. ratio and also lower than the OECD average.
Canada is loosing market shares in the US... Import shares of U.S. ICT imports, by country
From 1997 to 2005, US ICT imports from the world increased from $156 billion to $256 billion, 5.8% (CAGR). During the same period, US ICT imports from Canada decreased from $10.3 billion to $9.5 billion
Canada’s decreasing share of US ICT imports was largely a result of decreasing computer and peripheral equipment imports from Canada. From 1997 to 2005, they declined from $3.4 billion to $1.6 billion
China has become the dominant ICT supplier in the US; from 1997 to 2005, China’s share increased from 6.6% to 32%
China’s increasing share is largely a result of increasing US computer and peripheral equipment imports from China, up from $4 billion in 1997 to $40 billion in 2005
China is also making gains in the telecom market, US telecom imports from China increased from $1.7 billion in 1997 to $14.9 billion in 2005
...and in the BRIC countries Canada’s share of BRIC countries ICT imports
From 1997 to 2005, Canada lost ICT import market share in all BRIC countries, with the exception of India
In China, due to strong growth in global ICT imports, Canada lost import share but Chinese ICT imports from Canada tripled between 1997 and 2005
In India, Canada maintained its share because Indian ICT imports from Canada increased as fast (six fold) as global Indian ICT imports
In Russia and Brazil, Canada’s decreasing ICT import share was a result of a decline in imports from Canada