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Archived - 4. What We Heard and What We Learned

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In developing our recommendations, we relied on what we heard during our consultations and what we learned from existing and original research, tempered by our own experiences as business people in competitive markets.

Canadians can take great pride in our economic performance over the past decade as Canada enjoyed economic growth and prosperity. We saw unprecedented budget surpluses, falling unemployment, strong growth in the service sector and the creation of millions of new jobs. In financial markets, Canadians experienced stable and low rates of inflation, falling interest rates and a rising Canadian dollar against other currencies, particularly the US dollar. More recently, as a resource-rich nation, Canada has benefited from growing world demand and rising natural resource prices.

But we heard from Canadians that they are worried about the current economic outlook and are less confident about the future. They spoke to us of risks and uncertainties arising from an array of indicators such as plant closures and job losses, little growth in earnings, escalating prices for basic staples such as food and energy, and the threats of new global rivals whose population and productivity are growing at a faster pace than Canada's. Canadians believe that something is wrong.

However, it became clear to us that Canadians do not perceive that there is an imminent crisis. What they want to avoid is a decline in Canada's standing in the world as other more nimble and aggressive countries rise to displace Canada. But Canadians do not appear to have a view about what needs to be done to avoid this outcome, nor a common view of the root causes of their unease. In the balance of this chapter, we set out the Panel's view of the key warning signs that Canadians told us they see and our conclusions about the underlying issues.

Hollowing Out — the Loss of Canadian Icons

We heard concern that Canadian businesses are being swallowed by foreign competitors in an era of global consolidation. The recent increase in foreign direct investment (FDI) in Canada, particularly through mergers and acquisitions (M&As), has raised concerns in many quarters about diminished control and influence by Canadians over the domestic economy. As multinational enterprises have consolidated, foreign investors have acquired a number of well-established Canadian companies, including Alcan, Falconbridge, Inco and Hudson's Bay Company. Such firms have been significant employers and anchors of Canadian communities.

These transactions sparked questions regarding Canada's foreign investment policies as well as about the effect of losing corporate head offices and associated high-value jobs and services. The transactions have also highlighted the global nature of industry restructuring. Canada's biggest recent M&A transactions were initiated by firms based in the US, the United Kingdom, Switzerland, Brazil, Australia, the Netherlands and the United Arab Emirates.

The debate over the "hollowing out" of the Canadian economy has been emotionally charged. In the first half of this decade, Canada was the world's second most popular site for foreign takeovers.1 It has been argued that, relative to the size of its domestic capital market, Canada has been both the biggest net seller of companies in the world and the easiest country in which to acquire firms.2 Yet overall, the data indicate that the share of assets in Canada's non-financial industries under foreign control has not changed noticeably in recent years.3

Research in Motion

When Mike Lazaridis and Doug Fregin started their electronics company in 1984 with a small government grant and a family loan, they could hardly have predicted what the future had in store for Research In Motion (RIM). The pair knew only that they were pretty handy with a circuit board. Within four years, their electronics company focused on the transmission of wireless data. Co-chairman Jim Balsillie came on board in 1992 and began driving RIM's series of inventions to market. In 1998, RIM introduced the first BlackBerry with basic email, which it has turned into a popular consumer and corporate product for CEOs and soccer moms alike. The BlackBerry reached 1 million subscribers in 2004 and 10 million subscribers in 2007. RIM is expanding to Europe and Asia-Pacific. RIM is now the most valuable company in Canada, based on its market capitalization of nearly $60 billion.4

In fact, we see the increasing success of Canadian companies growing on the global stage. The number of Canadian-owned and headquartered firms that ranked in the top five of their respective industries grew from 15 to 40 over the past two decades.5 Indeed, this period witnessed world-leading Canadian-based multinational enterprises such as Manulife Financial, Research In Motion (RIM) and SNC-Lavalin succeed in growing their international presence. While Canada has lost a number of leading companies in recent years, we are also the host country for a number of growing Canadian champions.

SNC-Lavalin

SNC-Lavalin (a leading group of engineering and construction companies) shows how an international orientation can provide access to large markets and hedge against economic downturns in a company's home economy. SNC-Lavalin leveraged its world-class technical expertise to develop an international network and a strong global supply chain. It consciously built on Canada's good reputation abroad.6

We do not believe that it is desirable — or possible — to stop the natural rhythm of creative destruction and renewal, which is a key tenet of a market-based economy. The benefits of competition are too great. However, we share the concern of Canadians about the effects on Canada and on opportunities for Canadians.

Declining Share of Foreign Investment

In contrast to the concern about foreign takeovers of Canadian companies, some analysts have noted that, over recent decades, Canada has become less successful in attracting international investment. Canada's share of the world FDI stock has fallen from almost 16 percent in 1970 to just over 3 percent in 2006. In terms of FDI relative to gross domestic product, Canada over the past 25 years has experienced the greatest decline in the Organisation for Economic Co-operation and Development (OECD).7

New Labour Market Dynamics

As business competition has become more global and companies have shifted some operations to lower-cost locations, many Canadian workers have faced painful labour market adjustments. Overall, Canada's economy has adjusted well, adding many more new jobs, benefiting from the recent commodity boom and registering an unemployment rate near a three-decade low. In some sectors, strong economic growth has created significant skills shortages, a problem that will worsen as our population ages and indigenous workforce growth declines.

Workers in some sectors have been hard hit by recent global changes, particularly in sectors such as forestry and manufacturing, which have been heavily affected by the rapid appreciation of the Canadian dollar against the US dollar and other challenges.

Canada Has a Limited Presence in Markets Other than the US

Canada's primary trading partner is, and for the foreseeable future will continue to be, the United States.8 But growing markets in the expanding European Union, South America and Asia present new opportunities.

For example, strong growth is forecast in developing markets, including the so-called "BRIC" countries (Brazil, Russia, India and China), where Canada has very limited presence.9 There are expected to be significant opportunities in these markets, driven by the emergence of a vast middle class of many millions of new consumers that their economic growth represents. It is estimated that these new markets may account for as much as 50 percent of the world economy in the coming generation. However, priorities will have to be established to avoid deploying our efforts so widely that they become ineffective in specific markets.

Figure 3 - Geographical Distribution of Canadian Exports, 2007

Figure 3 - Geographical Distribution of Canadian Exports, 2007

*BRIC excluded from Asia, Latin America and Europe.
Source: Industry Canada Trade Data Online.

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In part, our lack of presence in growing markets is due to the structure of the Canadian economy, which is characterized by small and medium-sized enterprises (SMEs) that tend not to be "first movers" into new markets.10 In a world of global integration, the necessity to trade, invest and create strategic alliances will only intensify, and larger enterprises are better placed to meet these challenges. Pressure from low-cost, knowledge-oriented firms elsewhere means increased competition for Canadian firms at home and abroad.11

Canada's Cost Advantage Relative to the US Has Eroded

Canadian productivity is lagging behind that of the US, our biggest trading partner. When our dollar was valued as low as 63 cents per US dollar,12 some Canadian companies grew complacent. Canada enjoyed a large trade surplus as the advantage went to Canadian exporters. The increase in our dollar relative to the US dollar occurred so quickly that firms have struggled to make the necessary adjustments to their operations at the same pace, and some have not been able to cope. Now, with exchange rate parity, the cost advantage is gone and Canada's poor productivity performance is exposed. This challenge is compounded by the "thickening" of the Canada–US border as a result of a US preoccupation with security and international terrorism.

Weak Innovation

Much of Canada's poor productivity performance can be attributed to the comparatively poor performance of Canadian firms with respect to innovation. We rank poorly across almost all aspects of innovation: the creation of knowledge, the diffusion of knowledge, the transformation of knowledge and the use of knowledge through commercialization. This is seen by the Conference Board of Canada as "a serious weakness in Canada's overall performance and [an] alarming portent for the future."13 Other research also indicates that Canadian firms lag behind firms in other major industrialized countries on a number of measures of innovation.14

Weak Productivity Growth

A number of these issues relate to one underlying problem — productivity. Figure 4 illustrates the deeply troubling fact that Canada's productivity growth lagged behind that of most industrialized countries over a 25-year period.15

Figure 4 — Labour Productivity Growth,a Selected OECD Countries, 1981–2006

Figure 4 — Labour Productivity Growth,a Selected OECD Countries, 1981–2006

aReal gross domestic product per hour worked.
G7 countries shaded.
Source: OECD, Labour Productivity Database, July 2007.

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In the business sector, labour productivity in Canada was only about 75 percent of the level in the US in 2007 (Figure 5). The gap has been growing, especially in the manufacturing sector. By 2007, the gap between Canadian and US labour productivity levels in manufacturing was estimated to be close to 40 percent.

Figure 5 — Relative Labour Productivity Gap in Canada, 1991–200716

Figure 5 — Relative Labour Productivity Gap in Canada, 1991–2007

Source: Industry Canada calculations based on data from Statistics Canada, CANSIM VI409153, and US Bureau of Labor Statistics, BLS: PRS840006093

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The impact of Canada's weak productivity growth has been dramatic — the median real earnings of Canadian workers have not grown in a quarter-century.17 Even during a period when the economy grew and Canadians became more educated, average earnings remained virtually the same. In fact, for the bottom fifth of earners, real earnings dropped by about 20 percent, and earnings of immigrants to Canada fell even further. Of course, much of this coincided with a period of rising employment and participation in the workforce, particularly for Canadian women. Consequently, total family incomes rose over this period, to some extent masking individual performance.

More recently (2002–2006), Canada's standard of living has increased faster than that of the US.18 An important underlying factor was the takeoff in commodity prices after 2002 and the consequent improvement in Canada's terms of trade. This resulted in a strong increase in Canadian purchasing power, which benefited Canadians relative to Americans, who were largely unaffected by movements in their own country's terms of trade. In addition, the labour market has been much more buoyant in Canada than in the US during the past decade, making it easier for more of the population who want to work to obtain jobs. This favourable performance over a short time period does not change the long-term picture.

To sum up, Canada's weak personal earnings growth is cause for concern. This trend will be exacerbated in coming decades as Canada's population ages and labour force growth slows. This can be turned around only if Canadian businesses and governments urgently take steps to increase productivity performance.

When we assess what we heard and what we learned in the light of our premises about the benefits of productivity growth and the central importance of competition in achieving those benefits, we conclude that improving Canada's competitive position is the key to ensuring that future generations of Canadians will enjoy the levels of opportunity and prosperity that Canadians have come to expect. We also conclude that the factors driving the changes described above are unavoidable and irreversible, and represent either a serious threat or a great opportunity, depending on whether Canada rises to the challenges of globalization. Finally, we conclude that the longer Canada waits to address these issues, the greater will be the costs and dislocation arising from their resolution. Time is of the essence.