Unlocking business investments in Canada

Robert Asselin’s testimony to the Senate Committee on Banking, Commerce, and the Economy.

Madam Chair,

The lack of business investment in machinery, equipment and intellectual property in Canada is well-documented and well-known. Canadian business investment per available worker badly lags that in the United States and other OECD countries. This underperformance in business investment directly contributes to our poor productivity performance.

It is no coincidence that Canada’s export competitiveness weakened in recent years as its share of the U.S market declined. Over the past two decades, Canadian exports have risen at just half the pace of the overall economy. Without the oil and gas sector, these numbers would be catastrophic. The over-reliance of our economy on consumer spending and residential investment needs to be understood. In 2020, residential investment represented 37 percent of gross fixed capital formation in Canada.

Dans un tel contexte, bien comprendre les causes structurelles du problème est primordial car répondre à ce sous-investissement en posant des gestes rapides et non réfléchis ne règlera rien. 

À mon avis, il y a quatre causes principales, et elle sont reliées entre elles.

Cause 1: The composition of our economy

A country’s industrial composition matters a great deal. Certain sectors generate significantly higher output per employee and can increase productivity at a faster rate. Advanced industries are key to this goal because they combine significant R&D intensity and a highly qualified workforce. 

Sectors that invest heavily in technology and innovation tend to be more productive than others. 

Advanced economies will compete on the global stage over three broad families of technologies: 

1. computing-related technologies, including microelectronics, quantum and AI 
2. biotechnologies and bio manufacturing and 
3. clean energy technologies

This is where the intangible economy meets the tangible one – and where the new frontiers of economic competitiveness are being drawn. And this is why Canada needs a new modern industrial strategy for advanced industries. It should not be designed around corporate subsidies, but rather on boosting mission-driven industrial R&D, technology transfers mechanisms, and IP creation and protection. Think about the successes of DARPA and NASA in the U.S, or the Max Planck and Fraunhofer Institutes in Germany. 

Cause 2: Scale

Le Canada est essentiellement une économie de PME. Il n’y a rien de mal avec les PME bien sûr, mais si nous voulons accroitre nos investissements privés, surtout en R&D, il nous faut plus de grandes corporations. À titre de comparaison, quand on compare les Etats-Unis au Canada, le ratio est de 3 pour 1 pour l’indicateur des grandes corporations versus PME. 

De 1993 à 2000, le Toronto Stock Exchange (TSX) a enregistré une moyenne de 41 offres initiales publiques (initial public offerings) par année. De 2001à 2021, la moyenne annuelle est passée à 15 seulement. 

This means a lot of our most promising businesses get absorbed by larger companies too early. These larger companies are almost always foreign, because in most advanced industries, we don’t have enough scale to become the purchasers.

Cause 3: Our science and technology architecture is not generating innovation

Canada’s science and technology organizational structure has not adapted to the 21st century. We still rely too heavily on incremental innovation or safe bets. Furthermore, our research strengths (mostly in social sciences) do not align with our industrial advantages and needs. We are not generating enough IP, and we are not providing enough protection of the IP we produce. Science is to be translated into productivity growth and future prosperity. Many countries have understood this, but we have not.

Cause 4: Macroeconomic environment

When it comes to business investments, tax and regulatory incentives are obviously key to capital formation. Permitting and regulatory hurdles specifically are to be prioritized. À quoi bon par exemple une stratégie sur les minéraux critiques si nous ne sommes pas en mesure d’extraire ces minéraux dans des délais raisonnables? Les corporations qui sont prêtes à déployer le capital nécessaire évalueront ce risque très sérieusement. 

In a speech at the Brookings Institute last October the Deputy Prime Minister suggested that we had to “fast-track the energy and mining projects our allies need to heat their homes and to manufacture electric vehicles”. Following through on this commitment will be paramount and time is the essence in this new geopolitical challenged environment.

Watch highlights of the Q&A