Canada lags its peers in innovation and productivity growth, with R&D investment ranking lowest among major economies. Anthony Okolie speaks with James Marple, Senior Economist, TD Bank, about why Canada is falling behind and what steps the country can take to close the innovation gap.
JAMES MARPLE [00:00:13] Well, of course, it depends who you compare yourself to. We tend to compare ourselves to the United States. And unfortunately, there, the gap has widened. So if you go back 50 years to 1970, we were about 15% behind the US in terms of labor productivity. By 2019, that gap had widened to 25%. So that means that for roughly every worker, the US is getting 25% more GDP out of each and every one of them. So that's a that's a pretty big gap. Unfortunately, we've also widened relative to other advanced economies, especially in Europe: Germany, France, the Nordic countries, Australia. We have seen our productivity deteriorate in relative terms, relative to them. We used to be ahead of the G7 average. We're unfortunately now about 15% behind. So, you know, if you're comparing with our advanced economy peers, we're behind. And unfortunately, the growth rate of productivity in many of those countries has been faster than in Canada. So the gap has widened over the last several decades.
ANTHONY OKOLIE [00:01:28] So why does Canada rank so low on innovation and productivity?
JAMES MARPLE [00:01:32] Well, that's that's a really good question and something that I think has been the subject of economic research for the past several decades. I know the former chief economist at TD, Don Drummond, has written a lot about that. We're currently still thinking and writing about this. It's hard to point to any one factor as contributing to the weak productivity. But certainly you can point to the fact that Canadian companies especially invest less in research and development, invest less in information and communication technology, the kind of stuff that innovation is made of relative to their peers. In terms of explanations for why that is, there's again a number of things that have been proposed. We're a smaller consumer market, certainly relative to the United States. In the past we pointed to issues and in venture capital, especially for smaller companies. That has changed over the last several years. In fact, over the past year, the amount of venture capital raised in Canada was at a record high. And we're well ahead of our European peers on that front. So you have to start to look a little bit at some other sources. And one of them probably is just that we still do have in Canada a number of regulatory and just jurisdictional barriers to trade, despite the fact that we don't have tariffs on trade between countries. There are a lot of non tariff barriers to trade, different regulations across provinces, different credentials for various types of businesses. Even transportation regulations around trucking and sending goods across borders, even things like food and alcohol, you can't trade across borders in many cases. So if you look at that, Statistics Canada had estimated in a paper, that the cost of all those non geographical barriers to trade, so of course we're a large country, there are going to be natural barriers, but notwithstanding that, that amounts to about a 7% tariff on all goods traded across provinces across Canada. And if you do the same kind of methodology and look at the United States, they find no barriers. So we've imposed an extra GST on all goods traded in the country. And that probably has something to do with some of the productivity and innovation woes because it acts as a limitation on business growth. In fact, another study by economists at the IMF found that if you could get rid of all those barriers, we'd probably see a lift in GDP per capita of about 4%. So that's that's pretty significant. It won't close all the gap in terms of labor productivity or innovation, but it certainly could help.
ANTHONY OKOLIE [00:04:27] So given these challenges, as you mentioned, the tariffs and other costs, what Canada do to close this innovation gap?
JAMES MARPLE [00:04:35] Well, yeah, I think starting with looking at the regulatory environment, there has been a push toward free trade within Canada, provincial free trade. We signed in 2017 a free trade agreement across provinces. Provinces agreed to work together to try to reduce some of those non tariff barriers. Unfortunately, many of them still exist. Again, you can point to leaders in Alberta, they've unilaterally acted to recognize the credentials of professionals across the country and try to have procurement of whenever government are putting out contracts to allow bidders across the country to bid on them and not have this sort of provincial protectionism. But it's still something where we could see more progress on. I think in general, just trying to make sure that the regulations make sense in terms of, there are many that have to be there for very good reason for safety, but making sure those aren't imposing unnecessary barriers, especially on business growth, and to be able to sort of expand your business across this whole wide country and not be limited to wherever you happen to start, would be would be great. And of course, that would maybe allow some of our companies that don't tend to, especially small businesses, trade across international borders to be able to grow that way as well.
ANTHONY OKOLIE [00:06:05] OK, talk to us about energy and the transition to net zero emissions. How can Canada promote greater innovation in green technology?
JAMES MARPLE [00:06:14] Yeah, Anthony, I mean, this is so important. I mean, this is the biggest economic challenge we're going to face over the next 20 to 30 years, how to decarbonize the economy, to move to an economy that is not based on the extraction of fossil fuels or the consumption of fossil fuels. We need to do that globally. So, I mean, first, obviously, having a carbon tax in place to price the pollution is is important. But one thing we talk about in the paper is the importance of having certainty about not only the current carbon price, but the future carbon price, to make sure that businesses know that they can invest now in anticipation of a much higher carbon price in the future and that those investments will pay off because they can they can count on that higher price and governments can do more to risk share to say these these businesses will be profitable with a higher carbon price, and we'll take the risk if the carbon price goes up, they make money and the government makes money. If you're looking at something like the Canadian Infrastructure Bank as an example of how they could do that and if the carbon price is changed or doesn't go up the way it was promised to them, then the government loses out and the company still has some insurance against that. So, I mean, of course, there has to be some continued direct support for especially research and development. We argue that that should really be supported at the beginning of the stage to really get the research perhaps in areas where they're not marketable yet, where we don't have a clear path, but we know that they're going to be important technological innovations to getting us where we need to be in in 10, 20, 30 years. So increase both the sort of the carrots and sticks and of course, allow competition and promote competition within that space and more generally in order to get the best allocative bang for your buck.
ANTHONY OKOLIE [00:08:14] Now, you also stated in your report that the jury's still out on Canadian initiatives to support superclusters like A.I. In Montreal, for example. Why is that?
JAMES MARPLE [00:08:24] Well, I mean, the idea behind clusters is really putting the whole innovation ecosystem into one place. So having both companies that are set up to do, A.I. companies, for example, but also to have them close to to post-secondary, to university researchers, to have the companies even in close proximity to each other, to have learning spillovers and really to try to advance the field by having all those synergies of people working on the same project in one place. And you see it. This is kind of the notion behind Silicon Valley, is the place where we've seen these initial tech startups flourish. So there's certainly some good evidence that having those kind of clusters are a good idea. We're still in the early stages. We don't have a lot of evidence yet that they've that they've worked. The government has spent quite a bit of money on it. I mean, almost a trillion dollars over 5 years to support these initiatives. I think there is there's some sound logic to it. But again, we're still in the early stages. We haven't really seen the payoffs. But again, I think there is good promise over the next several years that that could help on the innovation front.
ANTHONY OKOLIE [00:09:36] OK, so given where we are today, what's your key takeaway for Canada to raise the bar on innovation?
JAMES MARPLE [00:09:43] Yeah, well, again, I just want to focus or mention that Canada has done many of the right things. I mean, we've lowered corporate income taxes. We have a pretty good business environment for businesses to start up. We have the right institutions in terms of low, stable inflation. We've had governments committed to limiting deficits. And those are all the things that have been promoted in the past as promoting innovation. And they will continue to be important in the future. We would argue that a more of a focus on regulation and especially on regulatory certainty. So for businesses to grow, for reducing barriers to firm growth and also competition to make sure that we don't have a lot of protected industries where perhaps the incentive to innovate is reduced just by the fact that there is limited competition. So if we can do all those things and of course invest in the skills of the population and in primary research, we should be able to up our innovation game.
ANTHONY OKOLIE [00:10:50] Thank you very much for joining us.
JAMES MARPLE [00:10:52] You're very welcome. Thank you.