Canada’s BDC (Business Development Bank of Canada) published a document in June 2024 titled “Canada’s Productivity Puzzle” link that highlighted the following themes:
* Productivity Stagnation: Canadian productivity has stagnated, particularly post-pandemic, with average annual growth dropping to 0% from 2019 to 2023, compared to 1.3% from 2009 to 2019.
* Investment Deficiency: Capital investment per worker in Canada is significantly lower than in the U.S., at only 41% of American levels in 2022.
* Innovation Decline: The share of Canadian companies innovating has decreased, with only 72% introducing new products or processes between 2020-22, down from 80% in 2017-19.
* Sectoral Disparities: There are notable productivity gaps between small and medium-sized enterprises (SMEs) and large firms, with SMEs operating at only 58% of the productivity level of larger companies.
* Call to Action: The report emphasizes the urgent need for businesses to invest in technology, automation, and employee training to enhance productivity and competitiveness.
* Economic Implications: The decline in productivity is contributing to inflation, as rising labor costs outpace productivity growth, making it unsustainable for businesses in the long run.
While the document doesn’t explictly state it, some of Canada’s longstanding and pervasive productivity challenges are due the fact that big chunks of the Canadian economy are by definition averse to change or innovation.
Canada’s many, large, and influential pension funds and former corporate income trusts, permeate industry policy, corporate boards, economic and political decision making. This cautious investor class measures returns in consistent, reliable dividends and interest rather than relatively uncertain returns from new markets/product innovation, market share capture or creation of competitive advantage.
The cautious Canadian investor class negative impact on productivity:
* Investment Focus: Canadian pension funds and corporate income trusts tend to prioritize stable, consistent returns from established investments over risky ventures associated with innovation and market expansion. This cautious approach influences corporate strategies, often leading to a preference for incremental improvements rather than transformative changes.
* Board Influence: These funds have significant representation on corporate boards, which can result in a conservative mindset towards decision-making. This often manifests in a reluctance to invest in new technologies or innovative practices that could disrupt existing revenue streams.
* Policy and Economic Decisions: The pervasive presence of pension funds in industry policy and economic decision-making can stifle competition and innovation. The focus on reliable dividends and interest payments may lead companies to underinvest in research and development (R&D), further exacerbating the productivity gap in Canada.
* Stagnation of Productivity: The overall effect of this cautious investment approach contributes to stagnating productivity levels in Canada, particularly among small and medium-sized enterprises (SMEs), which struggle to compete with larger firms that can afford to innovate.
In summary, the cautious investment preferences of pension funds significantly shape corporate decision-making in Canada, often at the expense of innovation and productivity growth.