Ian Parrag, a research and development scientist at Interface Biologics. works on development of an innovative drug delivery system in the lab in Toronto.
Canadian companies don't invest enough in research and new technology, they're too small and there's not enough competition to weed out weak businesses.
It all leads to weak productivity growth compared with other wealthy countries and a growing gap with Canada's largest trading partner, the United States, according to a new study by the Institute for Research on Public Policy.
"The aging of Canada's population and the growing competitive challenges from the U.S. and emerging economies will increase the need for strong productivity growth in the future," writes IRPP research fellow Someshwar Rao, the study's author.
"Given the urgent need to address these productivity challenges, Canada should make them the central focus of all public debates and policy discussions surrounding the economy."
The record of the past few years isn't good. Canada's economy has grown faster than many other developed countries and its government budget deficits are smaller. But labour productivity has been growing at a meagre rate of 0.7 per cent per year in Canada since 2000. That's half the pace of the two previous decades and a fraction of the 2.7-per-cent annual growth rate of the U.S.
The solution is to get companies to invest more in research and development and to spend much more on new technology, according to the Montreal-based IRPP.
To make that happen, Mr. Rao added his voice to a growing chorus of calls for Canada to revamp its R&D efforts – shifting away from tax credits to more direct investments.
The IRPP also recommends that Ottawa do much more to stimulate the creation of so-called R&D "ecosystems," linking businesses, universities and governments.
Mr. Rao also said Ottawa must enhance competition by signing more trade and investment deals with fast-growing emerging markets; continuing to lower barriers to Canada-U.S. trade; and opening up protected industries at home.
The study identifies the small size of Canadian companies and weaker domestic competition as the leading causes of the country's productivity gap. Large companies have higher rates of labour productivity (real gross domestic product per hour worked).
"In short, Canada does not have as many large firms as the U.S., and the large firms in the U.S. are much larger than those in Canada," the study found.
The result is that Canadian companies spend less on machinery and equipment, particularly information technology, than their U.S. counterparts. They also spend less on R&D than businesses in most other member countries of the Organization for Economic Co-operation and Development.
Also missing in Canada is the constant churn – or "creative destruction" of companies – that shifts resources from areas of low productivity to areas of higher productivity, Mr. Rao noted.