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Canada’s Competitiveness-- Strengths and Challenges –
Presentation to the Industry Canada / ITAC Whiteboard Session on Competitiveness Indicators, November 5, 2007
by Someshwar RaoMicro Economic Policy Analysis BranchIndustry Canada
November, 2007
2
1. What is Competitiveness
3
The concept of competitiveness
• At micro level, a firm is said to be competitive if it is profitable and maintains or gains market share in a world of fair and free markets with intense domestic and international competition• Measures of competitiveness are often calculated at industry level as data on
individual forms are proprietary
• At macro level, according to OECD, a nation's competitiveness is “the degree to which a country can, under free and fair market conditions, produce goods and services which meet the test of international markets, while simultaneously maintain and expand the real incomes of its people over the long term”
4
The drivers of competitiveness
• Productivity, which measures efficiency of resources used to produce goods and services, is the long-term driver of competitiveness • Only growth in productivity will allow firms to compete internationally and
maintain and improve real income
• New investments in education and skills, machinery and equipment (including ICTs), physical and technological infrastructure and innovation (including commercialization) will all contribute to improvements in productivity, competitiveness and prosperity
• However, in the short run, cost structure (unit labour, capital and energy cost) and relative output price will have significant impact on firms trade and output performance and hence their ability to compete in international markets
• Movements in exchange rates also will impact the cost structure and relative output price in the short- to medium-term
5
2. Canada’s Strengths
6
The Canadian economy has performed very well in the last ten years
• Over the 1997-2006 period, Canada experienced the fastest growth in real GDP among G-7 countries.
• Over the same period, Canada’s real GDP per capita grew at an average annual rate of 2.4%, the second best growth rate in the G7 countries.
• Canada’s superior performance in employment growth largely contributed to the stronger growth in per capita real income.
Employment in Canada increased at 2.0% per year since 1997, compared to an average rate of 0.9% in other G-7 countries.
• Canada was the only G-7 country with a government budget surplus during the 2000-2005 period.
Economic Growth in G-7 Countries, 1997-2006
Source: Statistics Canada, U.S. Bureau of Economic Analysis, U.S. Bureau of Labor Statistics, and OECD Economic Outlook, 2007.
Real GDP Growth
Real GDP per Capita Growth
Employment Growth
Canada 3.4 2.4 2.0
U.S. 3.0 1.9 1.0
UK 2.7 2.5 0.9
France 2.3 1.9 1.1
Italy 1.2 1.2 1.3
Germany 1.4 1.3 0.5
Japan 1.0 1.0 -0.3
7
Canada’s standard of living is among highest in OECD countries, …
• A significant component of our quality of life is represented by our standard of living, our GDP per head.
• Canada’s GDP per capita is 2rd highest in the G-7, and 10th among the wealthy OECD nations.
• Canada’s living standard was 19 percent below the U.S. in 2005.
Global Perspective on “Living Standards”(Relative GDP per capita, 2005, U.S.=100)
Source: OECD Productivity database, 2006
0 20 40 60 80 100 120 140
TurkeyMexicoPoland
SlovakRepPortugal
CzechRepKorea
GreeceHungary
NZSpainItaly
GermanyFrance
JapanFinland
UKBelgiumSwedenAustriaCanada
AustraliaDenmark
NetherlandsSw itzerland
IcelandIreland
Norw ayLux'burg
G-7 countries
Other OECD
countries
8
…as well as in terms of national income per capita
• Canada’s GNP or income per capita is 2rd place in the G-7, and 9th among the wealthy OECD nations.
- In 2005, Canada’s per capita GNP was about 21 percent below the U.S. level.
• The GNP-based rank changed significantly from the GDP-based one for some countries. The biggest change in rankings is for Ireland, whose position falls from 4th richest country in terms of GDP to only 8th richest in terms of GNP.
Source: OECD estimates for 2005 and Penn World TablesNote: The data on GDP per capita in 2005 were converted to GNP per capita using the ratio of GNP to GDP in 2000.
0 20 40 60 80 100 120 140
TurkeyMexicoPoland
SlovakRepPortugal
CzechRepKorea
NZGreeceHungary
SpainItaly
GermanyFranceJapanFinland
UKSwedenBelgiumAustria
AustraliaCanadaIreland
DenmarkNetherlands
IcelandSw itzerland
Norw ayLux'burg
G-7 countries
Other OECD
countries
Global Perspective on “Living Standards”(Relative GNP per capita, 2005, U.S.=100)
9
Macro-economic framework in Canada is sound and stable
• Sound fiscal and monetary policies establish the foundation for Canadians to invest in physical, human and knowledge capital.
- Low and stable inflation, coupled with sound fiscal policy lead to low interest rates and boost investment in innovation.
• Canada has established a sound macro-economic framework.
• The appreciation of the real exchange rate can also increase the motivation for investing in knowledge capital.
- Squeezed margins from foreign sales can require firms to upgrade their products, services and production techniques.
- Increased competition on domestic sales can provide the urge to firms to differentiate their products and undertake research and development.
0
2
4
6
8
10
12
14
1990.01
1991.06
1992.11
1994.04
1995.09
1997.02
1998.07
1999.12
2001.05
2002.10
2004.03
2005.08
2007.01
Canada US
Long-Term Bond Yields
*Government 10 year bond yieldsSource: Statistics Canada
10
0
100
200
300
400
Canad
a
Germ
any
France Ita
lyU.K
.
Austra
lia
Japan
199019952004
US = 100
Openness* to trade in G-7 Countries and Australia
• Canada’s trade policy is built on a series of successful bilateral and multilateral trade agreements making Canada a very outward oriented country.
• Trade exposure and foreign direct investment stimulate competition and innovation, and increase productivity.
- Sectors most liberalized under FTA/NAFTA experienced the greatest productivity gains in Canada.
• Yet, Canada’s barriers to trade and investment remain higher than most other industrialized countries, particularly in some services industries like transportation, telecommunications and finance.
*OpennessisdefinedassumofmerchandiseexportsplusmerchandiseimportsdividedbyGDPandthenmultipliedby100.Source:WorldBank
0.0
0.5
1.0
1.5
UK
Ire
lan
d
Ge
rm
an
y
US
Au
str
alia
Ja
pa
n
Fra
nc
e
Ca
na
da
Ita
ly
1998 2003
Note:Thescaleoftheindicatoris0-6fromlesstohighlyrestrictive.Source:OECD,2004,ProductMarketRegulationinOECDCountries,1998and2003(rev.).
Barriers to Trade and Investment
Canada’s trade policy supports access and exposure to world markets
11
Product market regulations are among the lower side …
Product Market Regulations• Marketplace framework policy establishes
the market incentives for firms and individuals to invest in physical and human capital and to compete and innovate.
• Product market regulations can reduce the potential gains of introducing new and innovative products and the incentives to invest in knowledge and to commercialize innovation.
• Much of Canada’s higher product market regulations are the result of higher barriers to trade and foreign direct investment. Note: The scale of indicators is 0-6 from least to most restrictive of competition
Source: OECD Indicators of Product Market Regulation, 2003 (rev.)
0.0
1.0
2.0
3.0
UK
US
Ca
na
da
Ja
pa
n
Ge
rma
ny
Fra
nc
e
Ita
ly
1998 2003
12
0.0
1.0
2.0
3.0
Ca
na
da
UK
US
Ita
ly
Ja
pa
n
Fra
nc
e
Ge
rma
ny
1998 2003
… barriers to entrepreneurship are the lowest among G-7 economies …
Barriers to Entrepreneurship
• Barriers to entrepreneurship decrease market opportunities for firms and individuals to innovate and compete.
• Barriers to entrepreneurship are decreasing in Canada and are the lowest compared to other G-7 countries.
• Canada tops the G-7 in terms of low regulatory cost of business -- the least number of procedures and processing time.
Note: The scale of indicators is 0-6 from least to most restrictive of competitionSource: OECD (2004), Indicators of Product Market Regulation, 1998-2003 (rev.)
35
8
13
1820
24
31
Canada U.S.A. France Italy U.K. OECDAverage*
Germany Japan
*High income OECD countries.Source: Doing Business in 2006 - The World Bank Group
Days Required to Establish a New Business
13
… and labour market regulations are also among the least restrictive
Employment Protection Legislation• Employment protection legislation tends to
impede adjustments in the labour market.
• The U.S., followed by the U.K. and Canada have the most liberal employment protection legislation
- Other G7 economies have significantly more restrictive labour market regimes.
• Still, a gap persists between Canada and the U.S.
- According to the OECD, the employment protection legislation for permanent employees is more stringent in Canada than in U.S. and U.K. (regulations on procedural requirements; notice and severance pay; and the prevailing standards and penalties for “unfair” dismissals)
- The same is true for temporary employment contracts (maximum number for successive renewals; maximum cumulated duration of the contracts; and allowed reasons for which a fixed-term contract can be offered).
0.0
1.0
2.0
3.0
4.0
5.0
Un
ite
d
Sta
tes
Un
ite
d
Kin
gd
om
Ca
na
da
Ja
pa
n
Ge
rma
ny
Fra
nc
e
Ita
ly
1990 1998
Note: The scale of indicators is 0-6 from least to most restrictive of competition. Source: Nicoletti, Scarpetta & Boylaud, OECD Working Paper 226, (2000), Table A3.11.
14
3. Challenges Facing Canada
15
Canada lags several OECD countries in productivity level …
• In 2005, Canada’s labour productivity, not labour utilization, was the main factor behind our lower living standard vis-à-vis the U.S.
- Estimates vary, but most recent OECD calculations suggest a gap of 24 percent between Canada and the U.S.
• Canada’s productivity level was 5th out of G-7 countries in 2005.
Note:Labourutilizationequalstotalhoursworkedpercapita.Source:OECDProductivitydatabase,2006.
The Sources of GDP per Capita with Respect to the United States, 2005GDP per capita (U.S.=100) GDP per hour (U.S.=100)
Effect of labour utilization (U.S.=0)
0 30 60 90 120 150
TurkeyMexicoPoland
SlovakRepPortugal
CzechRepKorea
GreeceNZ
HungarySpainItaly
GermanyFranceJapanFinland
UKBelgiumSw edenAustriaCanada
AustraliaDenmark
NetherlandsSw itzerland
IcelandIreland
Norw ayLux'burg
0 30 60 90 120 -40 -20 0 20 40
16
…and in trend productivity growth
• Labour productivity and MFP growth have been lower in Canada than in many other advanced economies.
• MFP performance has been worse than the productivity of labour suggesting overall poor efficiency gains in production, lagging technology adoption and sub-optimal production practices.
- During 1985-2002, MFP in Canada grew at an annual average rate of 0.5 percent, compared to an average of 1.2 percent per year for Australia, France, Japan, Italy, UK, and U.S.
90
100
110
120
130
85 87 89 91 93 95 97 99 01 03
Canada US Japan UK
Italy France Australia
Multifactor Productivity in Selected OECD Countries (1985-2004, 1985=100)
Note:MFPisbasedonharmonizedpriceindexesforICTcapitalgoods.Source:OECD,ProductivityProgramme.
Labour Productivity in Selected OECD Countries (1985-2004, 1985=100)
90
110
130
150
170
85 87 89 91 93 95 97 99 01 03
Canada US JapanUK Italy FranceAustrialia
17
Productivity and working-age population are key sources of growth in living standards in Canada over the past two decades
Labour productivity
Multifactor productivity
Capital deepening
59.6
33.4
26.2
Working-age Population 11.8
Employment Rate 9.3
Hours Worked per Worker -2.8
Net Foreign Income 5.1
Terms of Trade 17.0
Total 100
Sources of Income per capita growth in Canada: 1981-2006 (percent)
IncomeisGNPcorrectedfortermsoftradeWorking-agepopulation:population15yearsandover.Source:IndustryCanadacomputationbasedondatafromStatisticsCanada
• Real income (GNP adjusted for terms of trade) per capita grew at an annual average rate of 2.1 percent over the period 1981 to 2006.
• About 60 percent of that growth corresponds to improvements in labour productivity.
- Multifactor productivity growth accounted for 33 percentage points (56 percent of the labour productivity growth). Physical capital deepening accounted for the remaining growth.
• The improvement in terms of trade accounted for 17 percent of the increase in real income per capita. Most of the gain took place over the period 2002-2006.
• The growth in the share of working-age population in total population and growth in employment rate accounted for 12 and 9 percent of the income per capita growth.
18
Growth of Working-Age Population and Labour Force, Canada, 1951-56 to 2016-21
Source:StatisticsCanada
• Demographic trends will reduce the growth of the working-age population (15-64) and of the labour force.
• Starting around 2010, the falling share of the working-age population (wp/p) and declining participation rate (I/wp) will both make a negative contribution to the growth of our standard of living.
• It means that Canada needs to depend more and more on productivity growth to raise our standard of living and our quality of life.
-1.0
0.0
1.0
2.0
3.0
4.0
1951
-56
1956
-61
1961
-66
1966
-71
1971
-76
1976
-81
1981
-86
1986
-91
1991
-96
1996
-01
2001
-06
2006
-11
2011
-16
2016
-21Ann
ualP
erce
ntag
eGrowth
LabourForceGrowth Population15-64Growth
Source: Statistics Canada and projections using COPS demographic projections
Components of Growth in GDP Per Capita2.3
0.40.7
1.7 1.7 1.7
0.4
1.5
0.4
0.1
-0.2 -0.1
0.7 0.8
0.0 0.00.2
-0.4
1961-71 1971-81 1981-91 1991-00 2000-10 2010-25
Ann
ualP
erce
ntag
eGrowth
y/l l/wp wp/p
Slower growth and aging of the population will reduce our capacity to grow …
19
… and increased competitive pressures from globalization is adding to the urgency of improving our productivity performance
• The globalization of trade and investment is accelerating – growth rates rose sharply in the 1990s with the emergence of China as an economic “powerhouse”.
• Technology has been a key enabler and driver of globalization and of the offshoring of services to low cost countries.
• Globalization will intensify further as trade and investment barriers continue to fall and communications become ever cheaper and easier.
• Economies will continue to blend into an integrated world economy, with an increasingly global specialization and worldwide product supply chains.
2
4
6
8
10
12
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04
% GDP
*Datafor2004areonlyavailableforafewcountries.Trade=Imports+ExportsSource:WorldDevelopmentIndicators(WDI)databaseWorldBank
U .S.
India
Canada
Japan
Commercial Services Trade as Percentage of GDP, 1990-2004*
China
Germany
0
5
10
15
1982 1987 1992 1997 2002 2004
Percent
Source:WorldBank
OtherEmergingEconomies
China
Share in World Exports of Goods and Services
India
OtheremergingeconomyincludesBrazil,HongKong,Indonesia,Mexico,Korea,Malaysia,thePhilippinesandThailand.ItexcludesSingapore,asthedataforSingaporeonexportsofgoodsandservicesinthisserieswerenotavailable.
20
4. Canada under-invests in key areas
21
• Adoption and diffusion of new technologies
- M&E Investment- ICT Investment
• Research and Development
- Total expenditure in R&D- Business expenditure in R&D- Commercialization of new knowledge
• Public Infrastructure
• Highly skilled labour
- Proportion of highly skilled workers across industries- Output of highly skilled labour from universities
Canadian investment performance is weak in several areas
22
Canada lags many OECD countries in M&E investment
• Physical capital deepening (capital per unit of labour input) contributes to improvements in labour productivity and living standards.
• Physical capital deepening, especially M&E capital, is associated with the adoption and diffusion of new state-of-the-art technologies.
• Canada’s M&E investment, as a percentage of GDP, was the lowest in the 1980s and the 1990s among the G-7 countries, and most other OECD countries.
- Canada’s weak performance in M&E investment did not improve over the period of 2000-2004. Its M&E investment as a percentage of GDP was still the lowest among G-7 countries.
• The M&E investment gap between Canada and the U.S. increased in the 1990s as well as during the 2000-2004 period.
- Over the 2000-2004 period, Canada’s M&E investment, as percentage of GDP, was 8.2 percent, compared to 9.1 percent in the U.S.
Machinery and Equipment Investment as a Percentage of GDP(Percent)
Source:OECDNationalAccounts
1980s 1990s
0 4 8 12 16
Iceland
GreeceCanadaIrelandFinland
GermanyU.K.U.S.
Mexico
SwedenNew Zealand
AustriaNetherlands
SpainDenmark
TurkeyItaly
FranceAustralia
JapanKorea
0 4 8 12 16
IcelandGreeceCanada
GermanyU.S.
TurkeyMexico
DenmarkNetherlands
U.K.Austria
SpainIrelandFrance
SwedenFinland
ItalyAustralia
New ZealandJapanKorea
8.6%
7.8%
9.2%
7.6%
Average% Average%
23
The Canada-U.S. M&E capital gap is large and increased in the 1990s…
• The Canada-U.S. M&E capital intensity gap in the business sector increased from 39 percent in 1992 to 44 percent in 2004.
- ICT contributed about 34 percent to the M&E capital gap in 2003.
• The increase in the M&E capital gap was more dramatic in the manufacturing sector. It increased from around 21 percent in 1992 to over 46 percent in 2004.
- ICT contributed about 24 percent to the M&E capital gap in 2003.
• The differences in industrial structure in the two countries did not contribute significantly to the M&E capital gaps.
30
40
50
60
70
80
90
1987 1989 1991 1993 1995 1997 1999 2001 2003
*M&E capital stock per worker (specific sector M&E investment PPP based). Data for other countries are not available.Source: Statistics Canada and U.S. Bureau of Economic Analysis
Relative M&E Capital Intensity* in Canada, 1987-2004U.S.=100
BusinessSector
ManufacturingSector
24
…across most industries
Relative M&E Capital Intensity in Canadian Industries, 1997 and 2004(Capital stock per worker US = 1)
• Canadian industries are generally less M&E capital intensive than their U.S. counterparts.
- In 26 out of 29 industries, the M&E capital intensity in Canada was lower than in the U.S. in 2004.
• The M&E capital gap increased in 19 industries between 1997 and 2004.
0.0 0.5 1.0 1.5 2.0
PrivateBusinessSector
HealthEducationalservicesProfessionalservices
FIRE,managementInformationandcultural
Transportation,Retailtrade
WholesaletradeFurniture
TransportationElectricalequipment
ComputerandelectronicMachinery
FabricatedmetalPrimarymetalsNonmetallic
PlasticsandrubberChemical
PetroleumandcoalPrintingPaperWood
ApparelandleatherTextile
Food,beverage,tobaccoConstruction
UtilitiesMining
Agriculture
2004
1997
Source: Statistics Canada and U.S. Bureau of Economic Analysis
25
The importance of ICT in M&E capital increased across all industries
ICT Capital Stock as a Percentage of Total M&E Capital Stock in Canada: 1987 and 2003 (per cent)
• Between 1987and 2003, the share of ICT capital in total M&E capital increased in all industries, except transportation equipment and professional services.
- ICT capital, as a percentage of total M&E capital, in the Canadian business sector increased from 14 percent in 1987 to 20 percent in 2003.
- In general, ICTs are more important in service industries than in other industries.
Source:StatisticsCanadaandU.S.BureauofEconomicAnalysis.
0 10 20 30 40 50 60 70 80 90 100
Businesssector
Otherservices(exceptpublicadmin.)AccommodationandfoodservicesArts,entertainmentandrecreationHealthcareandsocialassistance
EducationalservicesAdministrative,w astemanagement
ProfessionalservicesFIRE,management
Informationandculturalindustriestransportation,storage
RetailtradeWholesaletrade
MiscellaneousmanufacturingFurniture
TransportationequipmentElectricalequipments
ComputerandelectronicproductsMachinery
FabricatedmetalsPrimarymetals
NonmetallicmineralsPlasticsandrubberChemicalproductsPetroleumandcoal
PrintingPaperproductsWoodproducts
ApparelandleatherTextilemillsandproducts
Food,beverageandtobaccoConstruction
UtilitiesMining
agriculture
2003
1987
26
Canada also lags some OECD countries in ICT investment
ICT Investment in Selected OECD Countries, 1985-2004(As a Percentage of Non‑residential Gross Fixed Capital Formation, Total
Economy)
• ICT investment as a percentage of total investment rose rapidly in the 1990s in most developed countries.
• In 2004, the share of ICT investment in Canada was higher than that in France, Germany, Italy or Japan, but lower than that in UK and the U.S.
*2002forAustralia,Japan,NewZealand,NorwayandSpain,2004forCanada,Germany,KoreaandtheUnitedKingdom,2003forallothercountries.Note:EstimatesofICTinvestmentarenotyetfullystandardisedacrosscountries,mainlyduetodifferencesinthecapitalisationofsoftwareindifferentcountries.SeeAhmad(2003).Source:OECD,ProductivityDatabase,March2006.
27
R&D Expenditure as a Percentage of GDP in Canada,1981-2004 (percent)
• Investment in innovation leads to higher labour productivity and income growth.
• Research indicates that Investment in innovation is important to countries at or close to the technology frontier such as Canada.
• R & D expenditure is a widely used proxy for investment in innovations.
• R & D investment is also thought to be important for firms to absorb advanced technologies from other countries.
• R&D expenditures as a percentage of GDP increased over the past two decades.
- Business R&D intensity increased from 0.6 percent in 1981 to 1.3 percent in 2001 and declined to 1.0 percent in 2004.
- Gross R&D expenditures, including government and other non-business R&D activities, also trended up.
0.0
0.5
1.0
1.5
2.0
2.5
81 83 85 87 89 91 93 95 97 99 01 03
GERD BERD
BERD: Business Expenditures on R&D
GERD: Gross Expenditures on R&D.
Source: OECD, Main Science and Technology Indicators, 2005-2
Canada’s R&D investments are increasing…
28
…but concentrated in a few industries
BERD as a percentage of value added in Canada: 1987 and 2001
(percent)
BERD: business expenditures on R&D.
Source: OECD, ANBERD and STAN databases.
• The improvement in R&D investment over the past two decades is concentrated in two industry groups:
- machinery and equipment; and
- pharmaceuticals.
- Why aren’t we seeing improvements all over the industry spectrum?
0 5 10 15 20 25
Foodproducts,beveragesandtobacco
Textiles,leatherandfootw ear
Wood,paper,printing,publishing
Refinedpetroleumproducts,cokeandnuclearfuel
Chemicalsexcludingpharmaceuticals
Phamaceuticals
Rubberandplasticsproducts
Othernon-metallicmineralproducts
Basicmetals
Fabricatedmetalproducts
Machineryandequipment
Transportationequipment
Electricity,gasandw atersupply
Concstruction
Wholesaleandretailtrade;repairs
Transportandstorage
Postandtelecommunications
Financialintermediation
Realestate,rentingandbusinessactivities
2001
1987
29
Canada performs relatively poorly on gross expenditure on R&D…
• Canada spends less on R&D investment than other industrialized countries, despite a generous fiscal incentive -- the Scientific Research & Experimental Development (SR&ED) Tax Credit Program.
- Canada ranked 12th in the OECD in terms of gross expenditures on R&D (GERD) as a percent of GDP.
• In particular, Canada trails the leader by more than 2 percentage points and lags the U.S by almost ¾ of a percentage point.
- About 70 percent of the gap with the U.S. was due to lower R&D intensity at the industry level. The remainder was due to differences in the industry composition between the two countries.
GERD as a Percentage of GDP, Top OECD Countries, 2003 or nearest year.
Source : OECD, Main Science and Technology Indicators, 2005-2,
1.8
1.82
1.88
1.89
1.95
2.18
2.19
2.26
2.52
2.57
2.62
2.63
2.68
2.97
3.15
3.48
3.98
0 1 2 3 4 5 6
Netherlands (2002)
E.U.
U.K.
Belgium
Canada
France
Austria
Total OECD
Germany
Switzerland (2000)
Denmark
Korea
U.S.A
Iceland
Japan
Finland
Sweden
GERD as a % of GDP
30
…due to weak R&D investment by business…
• Canada ranks 13th in the OECD in terms of Business Expenditure on R&D.
• Several reasons have been advanced to explain Canada’s lagging performance, including the impact of higher foreign ownership.
• Official R&D data, which capture domestically-produced R&D spending only, may therefore underestimate investment in innovation by Canadian firms.
- Recent work by Statistics Canada shows that when expenditures for foreign payments for R&D services and payments for royalties and license fees are included, the Canada-U.S. knowledge capital gap in 1999 was reduced to 0.40 percentage point from 0.92 percentage point.
BERD as a percentage of GDP, 2003 or nearest year*
*2000 for Switzerland
Source : OECD, Main Science and Technology Indicators, 2005//2,
0.99
1.03
1.15
1.24
1.34
1.37
1.53
1.54
1.76
1.83
1.87
1.90
2.00
2.36
2.45
2.95
0 0.5 1 1.5 2 2.5 3
Netherlands
Canada
E.U.
U.K.
Belgium
France
Total OECD
Iceland
Germany
Denmark
U.S.A.
Switzerland
Korea
Japan
Finland
Sweden
BERD as a % of GDP
31
• Canada’s lagging R&D performance is also apparent when we benchmark our performance against other countries in the top five high tech sectors.
• Although we lead in the office machinery and computer sector this sector makes up a relatively small share of Canada’s output.
Source:AlebabIorwerth,Canada’sLowBusinessR&DIntensity:theRoleofIndustryComposition,FinanceCanadaWorkingPaper,2005-03,March2005.
R&DIntensitiesofHigh-techindustriesasa%ofvalueadded,2002
…and in most high tech sectors…
32
…and government
• We rank 15th in the OECD in government spending on R&D, as a proportion of GDP, despite federal investment in R&D increasing 29% from 1997 to 2003.
• But we do well in R&D performed by the Higher Education sector, where we lead the G-7.
Government-spending R&D as a percentage of GDP for 2003,
selected countries
Source : OECD, Main Science and Technology Indicators 2005-2
0.180.18
0.210.21
0.230.24
0.260.270.280.290.290.30
0.330.330.330.340.34
0.360.74
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8
DenmarkU.K.
CanadaItaly
PolandE.U.
NorwayNetherlandsTotal OECDCzech Rep.
JapanHungary
Australia (2002)Korea
New ZelandFinland
GermanyFranceIceland
GOVERD as a % of GDP
33
Canada has a generous tax support for R&D, but with less direct support
Government Support for BERD• Canada’s government tax assistance
including R&D tax credits is very generous by international standard.
• But, it provides less direct support to business R&D.
• Research intensive industries that have long lead times to commercialization (e.g., fuel cell, biotechnology) are unable to fully benefit from accelerated tax deductions and tax credits.
- Firms in these sectors have gone to public capital markets or foreign partners, disqualifying themselves from access to the refundable tax credits.
- Accelerated tax deductions and non-refundable tax credits only benefit taxable (profitable) enterprises.
Sweden
Finland
Japan
UnitedStates
Germany
Denmark
TotalOECD
France
UnitedKingdom EU
Netherlands
Canada Ita
ly0
2
4
6
8
10
12
14
0
0.05
0.1
0.15
0.2
BERD%GDP %BERDFinancedbyGovt TaxAssistance*
Source: Source: OECD MSTI Database 2003-2.Warda, Jacek, Extending Access to SR&ED Tax Credits, December 2003.
*Tax assistance is represented by one less the b-index - higher numbers = higher tax benefits.
Note: The B-index is equal to the after tax cost (ATC) of a 1$ of R&D expenditure divided by 1 less the corporate income tax (t): ATC/(1-t).
34
Canada is also weak in commercialization
• The World Economic Forum ranks Canada 27th on “propensity to compete on the basis of unique products and processes”.
• Exports of high-tech products as a percent of total manufacturing exports – commercialization in international markets – is well off the US pace.
• Canada’s purchases of foreign intellectual property for further domestic development declined in the last decade to levels well behind both Germany and the UK.
France
Canad
a
Irela
nd
Spain
Germ
any
0
10
20
30
40
50
60
Perce
nt
Innovators
FirstInnovators*
Share of Sales from New or ImprovedProducts or Processes
* Introduced innovations new to Canada or the world.Source: Mohnen and Therrien, How Innovative are Canadian Firms Compared to Some European Firms? A Comparative Look at Innovation Surveys, Merit Research Memorandum, 2001-033, Maastricht, 2001.
*Australia Data available until 2001.
Source:NationalScienceFoundation,Science and Engineering Indicators, 2006.
020
4060
80100
UK
Japan
France
Germ
any
Canad
a
Austra
liaIta
ly
1990
1995
2003*
US = 100
High-Tech Exports(as % of Manufacturing Exports)
35
Overall Canada has a low innovation performance despite favourable innovation framework conditions
• Innovation performance of Canada (innovation activity and technology diffusion) ranked 10th in a group of 27 OECD countries, whereas it ranked 3rd in terms of overall innovation framework conditions (along with Finland and the U.S.).
• The Spider-web indicates where framework conditions in Canada differ from the index values of the top 4 innovator countries (U.S., Finland, Sweden, and Switzerland).
- Canada’s performance is particularly weak in public investment in R&D, and lags in research quality, sufficient knowledge workers, and conditions for technology diffusion.
• This is an enigma that we have to solve. Despite the favorable conditions that we offer, we do not reap the projected benefits. Why?
0
20
40
60
80
100 Public investments in R&D
Quality of research
Relevance of research
Commercialization
Co-operation in R&D
Knowledge workers
Tax incentives and subsidies
Conditions for tech. diffusion
Competition policy
Customers and suppliers
Canada Top-4(US,Finland,Sweden,Switzerland)
Canada Vis-à-Vis Best-Practice Countries in
Individual Policy Areas
Source:OECD.2004.Benchmarking Innovation Performance and Framework Conditions: Contribution from Denmark and Norway, DSTI/IND2004/6.Paris.
36
Canada’s public infrastructure capital has trended down…
Source:IndustryCanadacalculationbasedondatafromStatisticsCanada.
0
0.1
0.2
0.3
0.4
0.5
1961 1971 1981 1991 2001
Research indicates a strong positive relationship between public investment in physical infrastructure capital, productivity and competitiveness.
Public investments in physical infrastructure support productive activities by business and government, movement of goods and services, and communications. In short, investments in physical infrastructure reduce operating costs of doing business in Canada and improve competitiveness.
But, Canada’s investments in public infrastructure did not keep pace with the economy.
- The real public infrastructure capital stock/GDP ratio trended down over the period 1961-2005.
- Similarly, public infrastructure capital stock per employed person fell from $15.5 thousands in 1977 to $12.4 thousands in 2005.
The real ratio of Public Infrastructure Capital Stock to GDP in Canada, 1961-2005
Real Public Infrastructure Capital Stock per Job in Canada (000$), 1961-2005
10
12
14
16
18
1961 1971 1981 1991 2001
37
…also lags some other G-7 countries
Source:TheWorldCompetitivenessYearbook,2003Note:Theratingscalerangesfrom0to10,with10being“best”.
The efficiency of distribution infrastructure, G7 countries, 2003
Maintenance and development of infrastructure, G7 countries, 2003
7.95
7.03 6.81
6.20 6.13
3.763.23
France Germany U.S. Canada Japan Italy U.K.
According to the World Competitiveness Forum, Canada’s performance lags behind France, Germany and the U.S. in maintaining and developing public infrastructure, but is superior to Japan, Italy and the U.K.
Canada also lags Germany, the U.S. and France in the efficient use of public infrastructure.
More than 80 percent foreign multinational executives surveyed indicated that the poor state of public infrastructure adversely affected Canada as a destination for foreign direct investment.
According to the Conference Board of Canada, infrastructure gap in Canada is estimated to be between $50 billion and $125 billion, 6 to 10 times the level of all current government infrastructure budgets combined.
- The infrastructure needs are particularly acute in the west coast (B.C.), because of the rapid expansion of Canada’s commercial links with China and other Asian Pacific countries.
8.48 8.34 8.248.00
5.59
4.67
7.30
Germany U.S. France Canada Japan U.K. Italy
Source:TheWorldCompetitivenessYearbook,2003Note:Theratingscalerangesfrom0to10,with10being“best”.
38
Canada’s labour force has become more educated…
10
15
20
25
1990 1992 1994 1996 1998 2000 2002 2004
Percentage of the Population 25-64 witha University Degree or Above in Canada
Source:StatisticsCanada.
0 10 20 30 40 50 60
AgricultureMiningUtility
ConstructionManufacturing
WholesaletradeRetailtrade
Transpor&storageInformation
FIREProfessionalservice
AdministrativeEducation
HealthEntertainment
Accommo&foodOtherserviceTotalBusiness
2003
1981
Percentage of Hours Worked by Persons with University Degree or Above in Canadian Industries
Source:StatisticsCanada
• Investment in human capital makes an important contribution to increasing our standard of living
- Rising skill levels are an important source of productivity growth
- An innovative economy requires a highly skilled workforce
- The capacity to adopt advanced technology depends on the level of workforce skills
- With increasing competition from emerging economies in global markets, Canada and other advanced economies will increasingly specialize in exports with high skills content
- As workforce growth slows due to population aging, increased levels of skill will be required to maintain growth in standards of living.
• Canadians are now more educated than before.
- The share of the population aged 25-64 with at least university education increased from 14 percent in 1990 to 22 percent in 2004.
• Skill levels have grown across all Canadian industries.
- All industries except health services experienced an increase in the share of workers with at least university education from 1981 to 2003.
39
… making Canada one of the world’s most educated nations
8
9
10
11
12
13
14
Germ
any
Canada
Switzerland
U.S.
Norw
ay
U.K.
Sweden
OECD
Finland
France
Years
1970 1998
0
5
10
15
20
25
30
35
40
45
50
Canada
US
Japan
Sweden
Finland
Australia
Norw
ay
UK
Switzerland
France
Germ
any
University
College/Trades
Percentage of Population 25-64 with Tertiary Qualification, 2003
Average Years of Education of 15-64 Year Olds Across Selected OECD Countries
Source:OECD,EducationataGlance,2005.
• Canada has one of the highest capacities for supplying skilled labour. Among selected OECD countries
- Canada ranks first in the proportion of the population with tertiary credentials.
- Canada has the highest proportion of college and trades graduates, but trails the US and Norway in the proportion of university graduates.
- Canada ranks second in terms of average years of education of the working age population.
Source:OECD,Bassaniniet.al.,ECO/WKP(2001)9,2001.
40
Wage premiums for university graduates have risen
• From 1980 to 2000, wage premiums for male bachelor’s graduates relative to high school graduates rose from 30% to 52%. The bachelor’s degree premium for women rose from 51% to 61%.
• Wage premiums increased slightly for other male post-secondary graduates, but not for other female post-secondary graduates.
• These increases occurred in spite of rapid increase in the percentage of 25-34 year olds with a post-secondary credential.
Source: Boothby and Drewes (2006), Canadian Public Policy, XXXII(1), Table 6.
Men 25-34: Percentage Wage Premium over High School (1980-2000)
0
10
20
30
40
50
60
1980 1985 1990 1995 2000
TradesCollegeBachelor's
Women 25-34: Percentage Wage Premium over High School (1980-2000)
0
10
20
30
40
50
60
70
1980 1985 1990 1995 2000
Trades College Bachelor's
41
University education is important for scientists and engineers across industries
• Professionals in natural and applied sciences are the driving force of technology development and technology adoption.
• In the economy as a whole, about 60 percent of professionals in natural and applied science have a university education.
- The percentage is much higher in mining, utilities, professional services, educational services, and manufacturing.
University Graduates as a Percentage of Employment in Natural and Applied Science Professions, by Industry, 2001
Source:StatisticsCanada
0 10 20 30 40 50 60 70
Total
Accommodationandfoodservices
Realestate
Retailtrade
Transportation
Administrativeandw astemanagement
Arts,entertainmentandrecreation
Financeandinsurance
Otherservices
Construction
Managementandenterprises
Wholesaletrade
Informationandculturalindustries
Publicadministration
Healthandsocialservices
Agriculture,forestryandfishing
Manufacturing
Educationalservices
Professionalservices
Utilities
Mining
Percent
42
But Canada’s performance in producing new HQP is weak…
• University graduation rates benchmark the rate of production of skilled knowledge by universities. The inflow of university-educated youths into the Canadian labour force represents 28% of all entrants.
- Canada lags many OECD countries including the UK and the U.S.
• Canada has also fewer Ph.D. graduates than most other G-7 countries and Australia.
• Canada’s lower university graduation rates and lower secondary completion rates mean that the average years of schooling that new school entrants are predicted to complete are lower in Canada than in many other OECD countries.
New PhD Graduates per Million Population, 2000
314
197 191163 159
129
96
62
Germany U.K. Australia France U.S. Canada Japan Italy0
50
100
150
200
250
300
350
Source:MarioCervantes,OECDScienceandTechnologyPolicyDivision,"TrendsinsupplyanddemandforHumanResourcesinScienceandTechnology",PresentationattheJointCNR-OECDWorkshop.
University Graduation Rates, 2000
Source: OECD, Education at a Glance, 2002.
16
21
26
31
36
UK
Au
str
alia
Fin
lan
d
US
Ja
pa
n
Sw
ed
en
Ca
na
da
Fra
nc
e
Ge
rma
ny
Ita
ly
43
…and Canada lags the U.S. across industries
• On average, Canada has fewer workers with university education than the U.S.
• In 2000, the share of hours worked by workers with university education was 16.3 percent in Canada compared to 26.7 percent in the U.S.
- Canada’s weaker performance is seen in all industries except business services.
Hours Worked by Workers with at Least a University Degree, 2000(percent of total hours worked)
Source:Rao,SharpeandTang,2004,“ProductivityGrowthinServiceIndustries:ACanadianSuccessStory,”IndustryCanadaResearchPaper.
0 10 20 30 40 50 60 70
ServicesIndustries
Transportation
Communications
Electricutilities
Gasutilities
Wholesaletrade
Retailtrade
FIRE
Businessservices
Healthservices
Education,private
Otherservices
Construction
Manufacturing
PrimaryIndustries
BusinessSector U.S.
Canada
44
Canada is also showing weakness in retaining HQP
Ratio of Outflow to Inflow From Permanent Migration Between Canada and the U.S.: Managerial and Selected
Professional Occupations, 1990-1997
0 5 10 15 20
Teachers,exceptpost-secondary
Post-secondaryprofessorsandteachers
Nurses
Physicians
Naturalscientists
Computerscientists
Engineers
Managerialoccupations
Share of Individuals with University Education in population aged 16 and over in 1990s
Source:StatisticsCanadaEducation quarterly review, May, 2000
49%
21%12%
CanadianEmigrants to
US
Immigrants toCanada
Canadian-born people
• Canada is losing highly skilled people to the United States.
• Canadians who moved to the U.S. were better educated than both the Canadian-born population and recent immigrants to Canada.
- 49 percent of Canadian emigrants to the U.S. between 1994 and 1999 aged 16 and over had a university degree. This compares with 12 percent among Canadian-born people and 21 percent among immigrants to Canada who arrived during the 1990s.
• Recent post-secondary graduates who moved to the US
- Came disproportionately from higher level degrees, especially PhDs
- Those who moved for work-related reasons cited higher salaries and greater availability of jobs in the U.S.
:1 :1 :1 :1:1
45
Immigrants are highly educated but may lack the skills required by the Canadian economy
Proportion of Population aged 25 to 44 with University Education, 2001 Census
Average Earnings of Recent Immigrants and Canadian-Born Workers, 2000
Source:StatisticsCanada,DailyOctober8,2003Note:RecentImmigrants:thosewhoarrived1995-1999.
• In 2001, 53 % of recent immigrants aged 25 to 44 had a university education compared to 23 % of Canadian-born.
• Despite their higher level of educational attainment, recent immigrants with a university education earn 58.4 % less than their Canadian-born counterparts.
• The earnings differential suggests that the skills contribution of university educated immigrants to the Canadian economy is less than that of Canadian-born university graduates.
- This could occur because immigrants have lower levels of the skills needed in the Canadian economy or because their skills are not fully used.
- Data from the 2003 literacy survey (IALSS) shows that despite immigrants’ high levels of schooling, their literacy skills are lower than those of the Canadian-born.
0
10
20
30
40
50
60
Canada Toronto Vancouver Montréal
Percentage
RecentImmigrants Canadian-Born
Source:From“TheChangingDiversityofCanada:2001Census”,StatisticsCanada.RecentImmigrants:thosewhoarrived1996-2000.
23,889
31,75831,467
50,306
All UniversityDegree
RecentImmigrants
CanadianBorn
46
Canada also lags in training
• The existing labour force can acquire skills through on-the-job training.
• Canada’s labour force participates less in job-related training than in the U.S., the U.K., and many other countries.
- Average hours per employee spent in training are also lower in Canada than for other countries. 0
10
20
30
40
50
60
Canada U.S. U.K.
Perce
ntag
e
Participation Rates for Workers 25-54 in Employer-Sponsored Job-Related Training Across Selected Countries
Source: Employment Outlook, OECD, 1999: Chart 3.1.
47
5. Possible explanations of under-investment
48
• Output composition effects - scope (e.g., Canada is still a resource-based economy);
• Scale (e.g., small Canadian market – size of firms);
• Extent of competitive pressure (e.g., barriers to foreign competition);
• Business skills and experience (e.g., less educated entrepreneurial and managerial workforce);
• Quality of risk capital (e.g., venture capital); and
• Incentives (e.g., taxes on capital).
Possible explanations include:
49
Low investment in R&D may be partially explained by the structure of the Canadian economy
• The Canadian economy is often described as a resource-based economy.
- In 2004, natural resources and mining represented about 7 percent of value added GDP in the Canadian business sector and about 3 percent in the U.S.
- Although the evidence suggests that the industrial composition of output is not important for explaining our gap in R&D performance, there are reasons to believe that our manufacturing sector is more “resource-oriented” than in most innovative economies; relying more on primary transformation of resources rather than secondary or tertiary transformations where innovation inputs and commercialization are more important.
• The diversity of value-added activities in the Canadian business sector is more evenly distributed than in the US.
- While diversity can mitigate the risks of industry-specific economic fluctuations, industrial diversification can also reflect a lack of specialization.
GDP share of natural resources industries in the business sector, 1987-2003
7.07
2.82
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
1987 1989 1991 1993 1995 1997 1999 2001 2003
Year
Sh
are
(%
)
Canada
U.S.
Diversity of industrial value-added of the business sector, 1997-2004
1.9
2
2.1
2.2
2.3
2.4
2.5
2.6
2.7
1997 1998 1999 2000 2001 2002 2003 2004
Year
1 /
(Gin
i-in
dex
of
ind
ust
ry G
DP
sh
are) Canada
US
Source:StatisticsCanadaandBureauofEconomicAnalysis(US).
50
Canadian firms are too small to compete abroad
• Scale economies and specialization are often seen as drivers of industry productivity and firm competitiveness.
• Manufacturing firms in the U.S. have, on average, twice the scale of Canadian firms.
- In 2002, average shipments per firm across manufacturing industries were C$58 million in the U.S. compared to C$24 million in Canada.
Average shipment per manufacturing firm, 2002 (in 000’s)
Source:ICcalculationsfromStatisticsCanadaandU.S.CensusBureaudata.
$ 0 .0 0
$ 1 0 ,0 0 0 .0 0
$ 2 0 ,0 0 0 .0 0
$ 3 0 ,0 0 0 .0 0
$ 4 0 ,0 0 0 .0 0
$ 5 0 ,0 0 0 .0 0
$ 6 0 ,0 0 0 .0 0
$ 7 0 ,0 0 0 .0 0
C a n a d a U . S .
51
Canada has barriers to foreign competition…
• Inward foreign direct investment brings both tangible and intangible capital to the host country and generates direct and indirect economic benefits.
• An OECD study suggests that Canada has investment restrictions in a number of key service sectors that are much higher than average – and than in the U.S.
- Canada’s foreign ownership restrictions are confined to a few sectors: notably electricity, transport, and telecommunications services.
• The OECD has remarked that foreign ownership restrictions. particularly in the telecommunication sector, are burdensome for Canada and policy objectives should and can be achieved through other means, some of which already exist.
Note:Thescaleoftheindicatoris0-1fromnotocompleterestriction.Source:OECD,2003,PoliciesandInternationalIntegration:InfluencesonTradeand
ForeignDirectInvestment..
0 . 0 0 . 2 0 . 4 0 . 6 0 . 8 1 . 0
T o t a l
B u s in e s s S e r v ic e s
C o n s t r u c t io n
D is t r ib u t io n
H o t e ls a n d R e s t a u r a n t s
M a n u f a c t u r in g
F in a n c e
T e le c o m m u n ic a t io n s
T r a n s p o r t
E le c t r ic it y
U .S .
C a n a d a
O EC D A v e r a g e *
Foreign Direct Investment Restrictions by Industry, Canada and the U.S.
52
…and trails the U.S. on “Competitive Pressure” factors
• Competition and rivalry forces firms to focus on productivity improvement and invest in physical capital, knowledge and human capital.
• Competition is often less intense in Canada than in the US, particularly in service-producing industries that focus on the smaller Canadian market (Conference Board of Canada, 2004).
• According to the Executive Opinion Survey of the World Economic Forum, Canada trails the U.S. in 17 of the 23 “Competitive Pressure” factors which measure the degree of rivalry that induce firms to invest in physical capital, knowledge and human capital.
Competitive Pressure Factors(Canada versus U.S.)
Source:TheInstituteofCompetitivenessandProsperity,Realizingourprosperitypotential,ThirdAnnualReport,November2004.(Exhibit18,atp.47).
53
Canadian production is increasingly concentrated
• Canadian manufacturing firms are becoming larger in order to benefit from scale economies and improve their competitiveness in the global market.
• On the other hand, increased Canadian concentration of domestic production can reduce the competitive intensity in domestic markets, which could be detrimental to innovation.
- Production in Canada is more concentrated than in the U.S. in all manufacturing industries except for the Apparel industry.
4-Firm Concentration Ratio,* Manufacturing Industries
*Combinedproductionshareofthefourlargestfirmsdeterminedbythevalueofshipments.Source:StatisticsCanada,IndustrialAnalysisBranch
54
• Skilled managers and business professionals play a vital role in the overall efficiency of firms and markets.
• Overall, Canadian business managers are less likely to be university graduates than their U.S. counterparts.
• Twice as many managers in the U.S. are university graduates from business programs.
• Could that explain in part why our firms are less innovative, perform less R&D, etc.?
Degrees (BA, MA, PhD) Conferred per Thousand Population (2002/03)
5.58
0.861.27
3.45
6.56
1.451.10
4.01
0
1
2
3
4
5
6
7
Total Business Science&Engineering
AllOthers
Canada US
Source:RebalancingPrioritiesforCanada’sProsperity,InstituteforCompetitivenessandProsperity,2006.
Canadian business managers are less likely to be university graduates than their U.S. counterparts, especially from business programs
55
Canadian companies’ operations and strategies undervalue innovation, compared to those in most of other G-7 countries
• The World Economic Forum ranks Canadian companies considerably lower in company operations and corporate strategies geared towards improving entrepreneurship and productivity.
- In 2003-2004, Canada ranked 14th among 101 countries in company operation and strategy– an integral part of business competitiveness.
• More Canadian businesses are concerned with minimizing cost rather than raising revenues via the introduction of new products, services or production techniques into the market.
- In 2001, less than 40% of establishments in Canada considered that developing new products or production techniques was relatively important, very important or crucial in their general business strategy while more than 50% thought that reducing labor and other operating cost were important.
Company Operations and Strategy Ranking*
0
5
10
15
20
25
Germ
any
U.S.
Japa
nU.K
.
Franc
e
Canad
a
Austra
liaIta
ly
Ra
nk
ing
*Thecompanyoperationsandstrategyindexmeasurestheextenttowhichcompanystrategiesandoperatingpracticesareorientedtowardinnovationversusothermodesofcompeting.CanadalagsmostofitsG-7competitorsonthismeasure.Source:WorldEconomicForum,GlobalCompetitivenessReport,2004-2005
0 .0 %
2 0 .0 %
4 0 .0 %
6 0 .0 %
8 0 .0 %
R e d u c i n g o th e ro p e r a t i n g c o s ts
R e d u c i n gla b o u r c o s ts
D e v e lo p i n gn e w p r o d u c ts /
s e r v i c e s
D e v e lo p i n gn e w p r o d u c t i o n
/ o p e r a t i n gte c h n i q u e s
% e
sta
blis
he
me
nts
1 9 9 9
2 0 0 1
General Business Strategy in Canada, 1999, 2001
Source:EmployerportionoftheWorkplaceandEmployeeSurvey,StatisticsCanada.
56
Effective corporate taxes on physical capital are high in Canada…
0 10 20 30 40 50
China
Canada
US
Germany
Italy
Japan
France
UK
Ireland
Sweden
Source: Mintz, Jack, et al, C.D. Howe Institute, e-brief , Attention G-7 Leaders: Investment Taxes Can Harm Your Nations’ Health. September 20, 2005.
Effective Tax Rates on Capital for Large and Medium–Sized Corporations, Selected Countries, 2005
Average for Manufacturing and Service Industries (%)
• The business tax regime can have a significant effect on investment in physical capital and the creation of knowledge and its commercialization.
• Taxes impact productivity growth and output growth through their effects on savings and investment, entrepreneurship and risk taking, work effort, and net migration, particularly of skilled workers. Taxes can also influence decisions to upgrade skills.
• Higher taxes on capital investment, an important factor determining the user cost of capital, discourage corporate and entrepreneurial investment in Canada.
• Canada has one of the highest effective corporate tax rates on capital in the world.
- In 2005, Canada’s tax rate on capital for large- and medium-sized firms was the second highest behind China.
• Announced reductions in corporate taxes in Canada and the U.S. to date will not close the tax gap significantly.
57
…and pervasive across industries
The Effective Corporate Tax Rates in Canada and the United States, 2002
Source: Chen and Mintz, 2003, How Canada’s Tax System Discourages Investment, C.D. Howe Institute Backgrounder.
• Canadian effective tax rates on capital were above the U.S. levels for all non-resource sectors.
• The rate gap with the US is primarily due to higher federal and provincial capital taxes in Canada, faster CCA rates in the US, and provincial sales taxes on
business inputs.
10 15 20 25 30 35
Aggregate
Land
Inventory
Machinery
Structures
Otherservices
Retailtrade
Wholesaletrade
Electricalpow er
Communications
Transport
Construction
Manufacturing
Forestry
Canada U.S.
58
• Canada’s Scientific Research & Experimental Development (SR&ED) Tax Credit Program is widely recognized as providing one of the most generous systems of tax-based support for industrial R&D.
• Globally, support for industrial research in Canada (direct funding of business R&D expenditures et fiscal expenditures) is much more important (40% to 50%) than what is offered in the United States.
• But high marginal effective corporate tax rates on capital operate might be discouraging corporate and entrepreneurial investment.
Canada 100
Italy
U.S.A.
France
Japan
Germany
85
84
80
77
71
71
U.K.
Source:Warda,Jacek,RatingCanada’sR&DTaxTreatment:A2003Update,December,2003.
Relative Generosity of R&D Tax Incentives
The generous tax-based support for industrial R&D may be offset by high effective tax rates on capital
59
Returns on human capital investment are also reduced by high taxes
• Return to education is one of the most important driver of human capital accumulation and a factor in retaining mobile skilled labour in Canada.
• Canada’s effective tax rate on university graduates was on average 15.9 percent, almost twice as much as that in the U.S.
• High personal taxes affect savings and investment, entrepreneurship and risk taking, work effort, and net migration, particularly for skilled workers. They can also influence decisions to upgrade skills.
- The tax wedge—the difference between the gross and net of taxes wages—is higher in Canada than the U.S. for highly mobile individuals.
Effective Tax Ratesfor First University Degree Graduates, 1997
(percent)19.6
12.1
15.9
9.47.6 8.5
Male Female Average
Canada United States
Source: Collins and Davies, 2003, “Tax Treatment of Human Capital in Canada and the United States: An Overview and Examination of the Case of University Graduates,” in North American Linkages: Opportunities and Challenges for Canada, ed., R. Harris, Calgary: University of Calgary.
Income tax plus employees and employers security contributions, 2004 (as a % of labour costs)*
20.0
25.0
30.0
35.0
40.0
45.0
50.0
55.0
Ja
pa
n
US
UK
Ca
na
da
Ita
ly
Fra
nc
e
Ge
rm
an
y
*Single individual without children at the income level of the average production workerSource: OECD Taxing wages: 2003/2004
60
On the other hand, favourable tax treatment may in part explain low returns to venture capital
• Risk capital is a vital source of funding for innovative businesses.
• Returns on venture capital investments, a measure of the quality of the venture capital industry, are much lower in Canada than in the U.S.
- Overall, the rate of return on venture capital, over a 10-year investment period, ending on December 31, 2004, was only 3.6% in Canada, compared to 26.0% in the U.S.
• Note: many analysts have attributed this “quality” problem to the significant role of labour-sponsored venture capital corporations in Canada – the favourable tax treatment for individual investors may reduce the quality of management of these funds (less incentive for high pre-tax rates of return due to preferential tax treatment)
Source:VentureEconomics/NVCA(U.S.);Macdonald&AssociatesLimited(Canada).
Before Tax Annual Rate of Return (%) on Venture Capital Investment, 1994-2004
3.61.4
26
44.7
0
10
20
30
40
50
All Venture Capital Early Stage Venture Capital
61
However, Government debt-GDP ratio in Canada have declined dramatically since the mid 1990s…
Source: OECD
• Many claims were and are made that government’s poor fiscal situation, weak (high) Canadian dollar and higher corporate taxes are the main reasons for hollowing-out.
• But the available research do not show a systematic relationship between hollowing-out and the above mentioned variables.
• Furthermore, the overall business climate in Canada has improved dramatically. If hollowing-out did not happen when the economic fundamentals were not in Canada’s favour, there is less danger that it will happen now.
20
30
40
50
60
1999-2000 2005-2006
Canada US
General government net financial liability as percent of GDP
62
…the recent corporate tax cuts would give Canada a competitive edge over other G-7 countries, …
41.9
40.0
33.3
29.8
28.0
10.0
15.0
25.0
37.3
0 10 20 30 40 50
Japan
U.S.
Italy
France
Germany
U.K.
Provincial statutory
Federal statutory
Canada - target
• Based on the “Economic Statement” announced by Finance Canada on October 30, 2007, corporate income tax rate would be cut from 22 percent in 2007 to 15 percent in 2012, which will make Canada the most competitive tax in the G-7 countries.
*IncludescapitaltaxequivalentsSource:EconomicStatement,DepartmentofFinance,Canada,2007
Corporate Income Tax Rates* for G-7 Countries, 2012 (%)
2007 2008 2009 2010 2011 2012
Existingrates 22.12 20.5 20.0 19.0 18.5 18.5
Proposedrates 22.12 19.5 19.0 18.0 16.5 15.0
Corporate Tax Reductions in Canada (%)
63
Average annual US dollar per Canadian dollar
0.67
0.85
0.6
0.7
0.8
0.9
1.0
1999-2000 2005-2006
Sources: World Bank and Bank of Canada
…and the value of Canadian dollar vis-à-vis U.S. currency has increased by over 50% since 2002
• The sharp rise in the value of Canadian dollar would stimulate investment in physical, knowledge and human capital and improve Canada’s productivity and competitiveness by
• increasing competitive pressure;• lowering the cost of M&E investment.
64
6. Indicators of ICT industry competitiveness
65
Canadian ICT sector is relatively smaller than in other countries...
14.9%
13.2%
11.8%10.8% 10.5%
9.0%8.1% 7.6%
0%
2%
4%
6%
8%
10%
12%
14%
16%
Finl
and
Kor
ea
Irela
nd
Uni
ted
Kin
gdom
Uni
ted
Stat
es
OEC
D
Aus
tralia
Can
ada
Source:OECDKeyIndicators,http://www.oecd.org/dataoecd/20/6/34083289.xls
Share of ICT Sector in the Business Sector Value Added, 2003 or latest
1995 16th2003 17th(out of 25)
Top 5 countries
%oftotalbusinessvalueadded
• The share of ICT sector in the total business sector value added in Canada was 7.6 percent in 2003, 2.9 percentage points lower than the U.S. share and 1.4 percentage points lower than the average share of all OECD countries.
66
...and less R&D is performed by the Canadian ICT sector
1.56%
1.10%0.96%
0.81%0.66%
0.48%0.39% 0.30% 0.23%
0.0%0.2%0.4%0.6%0.8%1.0%1.2%1.4%1.6%1.8%2.0%
Finl
and
K
orea
Sw
eden
Japa
n
Uni
ted
Sta
tes
O
EC
D
Can
ada
Uni
ted
Kin
gdom
Aus
tral
ia
Services
Manufacturing
Source:OECD,ANBERDandNationalaccountsdatabase,October2006;http://www.oecd.org/document/23/0,2340,en_2649_201185_33987543_1_1_1_1,00.html
9th
PercentageofGDP
Top 5 countries
ICT Sector R&D Expenditures, 2003 or latest
• R&D expenditure to GDP ratio in Canadian ICT sector is much lower than the U.S. ratio and also lower than the OECD average.
67
Canada is loosing market shares in the US...
Import shares of U.S. ICT imports, by country • From 1997 to 2005, US ICT imports from the world
increased from $156 billion to $256 billion, 5.8% (CAGR). During the same period, US ICT imports from Canada decreased from $10.3 billion to $9.5 billion
• Canada’s decreasing share of US ICT imports was largely a result of decreasing computer and peripheral equipment imports from Canada. From 1997 to 2005, they declined from $3.4 billion to $1.6 billion
• China has become the dominant ICT supplier in the US; from 1997 to 2005, China’s share increased from 6.6% to 32%
• China’s increasing share is largely a result of increasing US computer and peripheral equipment imports from China, up from $4 billion in 1997 to $40 billion in 2005
• China is also making gains in the telecom market, US telecom imports from China increased from $1.7 billion in 1997 to $14.9 billion in 2005
0%
5%
10%
15%
20%
25%
30%
35%
1997 1998 1999 2000 2001 2002 2003 2004 2005
China Japan
Mexico Canada
68
...and in the BRIC countries
Canada’s share of BRIC countries ICT imports
• From 1997 to 2005, Canada lost ICT import market share in all BRIC countries, with the exception of India
• In China, due to strong growth in global ICT imports, Canada lost import share but Chinese ICT imports from Canada tripled between 1997 and 2005
• In India, Canada maintained its share because Indian ICT imports from Canada increased as fast (six fold) as global Indian ICT imports
• In Russia and Brazil, Canada’s decreasing ICT import share was a result of a decline in imports from Canada
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
1997 1998 1999 2000 2001 2002 2003 2004 2005
Brazil Russia India China