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For corporate Canada, dollar’s drop reveals a missed opportunity

As the loss of 46,000 jobs sent the Canadian dollar spiralling down toward 91 cents (U.S.) territory, memories of the parity days should set off a wave of regrets.

Not that you could have bought a condo in Florida or made that long-dreamed wine-tasting trip to California's Russian River Valley. But maybe you should have invested in a new computer system or in that slick automated machinery when the loonie was richer than the greenback.

Relatively speaking, Canada breezed through the financial crisis and the ensuing recession. As Canadians blushed under the praise of Forbes magazine (No. 1 ranking in the best-countries-to-do-business list) and of the World Economic Forum (world's soundest banking system), they became quite content with themselves and their lauded financial prudence. But that same Canadian prudence is having a wickedly perverse effect on investments. And given the country was already a notorious investment laggard, especially compared with the United States, its main economic partner, the recent setbacks in employment and in trade should come as no surprise.

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In the 1990s, common wisdom held that if Canadian businesses weren't more keen to modernize themselves, it was because most machinery and IT systems were imported – and priced in such muscular currencies as the U.S. dollar or the euro.

But as the loonie flew up, up and away starting a decade or so ago, Canada still remained behind, even as foreign machinery became cheaper, notes Nicolas Vincent, an associate professor at HEC Montreal who examined currency swings and investment decisions in a 2012 study.

As the U.S. dollar lost ground against the Canadian dollar, Canadian exporters saw their revenues deteriorate quickly, especially those who were improperly hedged. And that set off alarm bells for business leaders who refrained from investing even if lower production costs would have allowed them to reduce their prices and regain some of their competitiveness in outside markets. "When entrepreneurs face a lot of uncertainties, they wait," Mr. Vincent says.

Even governmental policies that were set out to encourage business investment have had limited success, as a number of companies displaced their investment dollars from IT systems to machinery to get tax credits, or vice versa, without increasing their overall investments.

By the time businesses devised investment strategies to deal with the high-flying loonie, the financial crisis hit, adds Simon Prévost, president of the Manufacturiers et exportateurs du Québec, which represents 300 businesses that employ 60 per cent of the province's manufacturing workers. As a result, for many businesses and regions, the 2000s were the lost decade of investment.

In Canada, private investment per worker grew by over 50 per cent between 2002 and 2012, from $8,700 to $13,200, a recent study by the C.D. Howe Institute shows. The country caught up with the OECD average in 2009 and almost equalled the United States in 2010, 2011 and 2012.

But the national data is in some ways misleading. There has been an investment boom in the resources industry that has been concentrated in provinces such as Alberta, Newfoundland and Saskatchewan. And those investments are now waning.

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The story is quite different in the manufacturing provinces of Central Canada. While investments in Quebec have made a comeback, especially in 2012, Ontario still hasn't recovered from the recession. Private investment per worker stood at a measly $8,300 in 2012, far behind the Canadian average.

The Canadian capital stock in manufacturing has declined 13 per cent since 2000. And there is a whopping 20-per-cent decrease in Ontario, most of which occurred after 2007, points out Stéfane Marion, chief economist and strategist at National Bank Financial. "Going back all the way back to the early 1960s, we have never seen as much destruction in manufacturing capacity," he says.

Now Canada is so poorly equipped it can barely take advantage of the economic recovery in the United States and the slumping Canadian dollar. "In the wide transportation sector, which includes the automotive and aerospace industries, so much capacity has been taken out that businesses are operating at almost full capacity and wouldn't be able to sell more to the United States," Mr. Marion says.

Companies have just waited too long to invest and grab a bigger share of a market that is not growing quickly in size, Mr. Prévost says. "The time for prudence is over," he argues.

It is not too late, or so hopes the Bank of Canada, which has pegged the country's recovery on business investment. Unfortunately, many business leaders remain on the sidelines, in a wait-and-see mode, the latest survey by the central bank suggests.

At some point, missed sales and lost market share might sink in. So will this hard-learned truth: not taking the investment risk may well be the riskiest bet of them all.

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About the Author
Chief Quebec correspondent

Sophie Cousineau is The Globe and Mail’s chief Quebec correspondent. She has been working as a journalist for more than 20 years, and was La Presse’s business columnist prior to joining the Globe in 2012. Ms. Cousineau earned a master’s degree in journalism from the University of Illinois and a bachelor’s degree in economics and political science from McGill University. More


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