When the Bank of Canada recently raised the alarm that the major cause of Canada’s low productivity was the poor investment by Canadian businesses in their own company and employees, what was shocking was that this has been a problem for the last fifty years! Obviously, the pandemic cannot be blamed. Here are some reasons why that is, and how the Canadian business culture can change.
Are Canadians intrepid, innovative, and entrepreneurial enough to be productive?
Well, we used to be. Consider the first major investors in Canada were King Charles II and his company of adventurers, or the adventurous noblemen --- including his cousin, Prince Rupert for whom 40% of modern day Canada was named until 1870. They invested in a new venture presented by the two French-born explorers after an unsuccessful pitch to King Louis XIV of France. The venture could fail completely, but if successful it would make them rich.
Two ships set sail from England on a new route directly to the Hudson Bay to access the beaver pelts riches in the northern reaches of Canada. Pierre-Esprit Radisson’s ship had to turn back after suffering heavy damage from a storm, but the Nonsuch, with his brother-in-law, Médard Chouart des Groseilliers, on board successfully returned with beaver pelts within the year. The company of adventurers’ charter lasted centuries and made many rich from investing in the Hudson Bay Company. There was no such reward for the explorers because they were short-changed by their business partners.
Today, funding from venture capitalists, even those with deep pockets, is hard to come by because they are more like the banks -- only investing in something that has a guaranteed return with minimal risk. Plus, banks are more conservative today than they were fifty years ago.
Over the past fifty years, the Canadian business culture has become very risk-adverse. Spoiled for the longest time with free and plentiful resources along with cheap labour and environmental costs business owners didn’t have to bear, there has been scant need to invest in their businesses, especially a long term investment. Today, few Canadian businesses are intergenerational, including the Hudson Bay Company which is currently owned by an American investment firm whose focus, like others, is to make money for their shareholders on a continual short-term basis.
Canadian companies have long operated under the mantra, “if it ain’t broke, don’t fix it”, only spending money when something is broken. The exception is when the government provides tax dollars to fund part or all of the investment. Today, only investments with a return on investment of 2-4 years is considered.
Canadian businesses have long been exposed to the impact of global markets, and foreign owners since the founding of the Hudson Bay Company. Not spending money to prevent breakage defies best practices, unless the breakage is to get everybody on the same page thereby making it easier to move forward in a new direction.
One of the important indicators the Bank of Canada uses to assess Canada’s productivity is the number of patents, but it is a poor one. I have several patents, and I can attest that patents are expensive to register, maintain, and virtually impossible to enforce, especially in other countries, and there is little appreciation for them. Even if Canadian businesses innovate, they may, or may not seek a patent, and if they do, the first place to apply is the U.S patent office. Surely, the Bank of Canada can find a more accurate indicator of Canada’s productivity.
Research is also an important business investment for innovation that is expensive and has a high failure rate over a long investment period, which is expected. Sometimes the failure ends up being a winner for an unintended outcome like 3M’s Post-it Note, but that’s rare. Although Canada has a world-class Scientific Research and Experimental Development (SR&ED) program to help Canadian companies make the investment in research, Canada Revenue Agency has made it increasingly difficult to get the promised refund, making it even riskier for a risk-adverse business culture. For the Bank of Canada to use research as a productivity indicator is questionable.
Globalization has accelerated competition within multi-national companies, and between local, national, and international companies for the local and global consumers who can shop around the world. Rapid changes in the marketplace discourages investments so that normally only investments with a return-on-investment (ROI) of 2-3 years are considered.
When I attended conferences on Ontario’s cap-and-trade program, many mandatory participants were saying one of the benefits of having a carbon price on greenhouse gas emissions, especially one that was increasing year-over-year was that it shortened the ROI, which enabled the justification to make the much needed investments to improve productivity and reduce GHG emissions.
Subsequent to the Bank of Canada’s warning, economists have warned that Canada’s low productivity could persist for decades. If so, then this is the perfect set-up to try a new economic framework since the existing one is broken.
If Canada wants to improve its productivity quickly, a dramatic holistic shift is needed to stop its decline, and grow. The only economic framework that can do this is the green economy. A national cap-and-trade program that is supported by government, businesses, and consumers that also provides accountability and transparency is the ideal framework to achieve this new growth in productivity. The net gain is a better place to live, work, and play.
Sharolyn Mathieu Vettese
President
SMV Energy Solutions www.smvholdings.com