Ideas

October 1, 2020

Canada is falling behind and has no plan to get ahead

On September 23rd, the federal government presented its Speech from the Throne which put forward its agenda for the new session of Parliament. The speech outlined a broad and expansive—and likely very expensive—plan to help Canadians through the economic crisis, and “build back better” by taking steps to develop a more resilient, inclusive, and environmentally sustainable economy.

What was largely missing, however, was a plan to improve business competitiveness and attract investment to the country. To be sure, economic issues did receive some modest callouts in the Throne Speech: the federal government will invest more in workforce training; it is proposing a 50% corporate tax cut for businesses making zero-emission products; and it promised to make Canada “the most competitive jurisdiction in the world for clean technology companies.” However, these signals are insufficient given Canada’s declining competitiveness over the last several years.

Competitiveness and investment attraction are not popular policy issues, but they are foundational to our long-term prosperity. Whether it be domestic companies looking to expand operations, or foreign companies setting up shop in Canada, business investment drives productivity growth which, in turn, is a critical pathway for reducing poverty, increasing the quality of life, and setting us up for a prosperous future. Canada hasn’t seen much in the way of productivity gains in the last several years—an issue we’ll explore in more detail in the coming weeks.

In the meantime, we focus on the fact that the country first needs to do more to create a competitive business climate to enable that investment. Without a major turnaround in private sector investment, we will not achieve the economic growth needed to create jobs and opportunities for Canadians and return to fiscal sustainability.

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What was Canada’s investment record pre-COVID?

Before COVID-19 hit, Canada was already struggling to attract foreign investment. Local companies were not investing in Canada either; many, in fact, were shifting their money to other jurisdictions.

On the foreign direct investment side, Statistics Canada data show that the total value of Canadian outbound investment (Canadians or Canadians companies investing outside of Canada) grew by 65% over the last five years, while the value of foreign investment in Canada (international entities investing in Canada) increased by less than half that amount. Meanwhile, data from the most recent World Investment Report from the UN show that in 2019, new greenfield investment (building from the ground up, as opposed to buying equity in an existing asset) in Canada fell by 76% compared to the previous year and is 36% below the 2005-2007 average. Canada attracted 1.4% of global greenfield investment in 2019, down from 2.4% in 2005-2007.

Source: Statistics Canada

Within Canada, the story isn’t much different. Business investment in 2019 on things like new buildings, machinery and equipment was about 20% below peak levels in 2014. While much of that drop was the result of a flight of capital from Alberta’s energy sector, even outside of resource extraction, private sector investment last year was below 2014 levels.

Source: Statistics Canada

The story is similar on the trade side. While exports are related to direct investment, they are also a proxy measure for Canada’s overall competitiveness. Here, the story is even more concerning. Canada posted a trade deficit of about $8.5 billion last year, which is reasonably modest given the $1.2 trillion in total two-way trade. However, the trade deficit is only that small because a large surplus in exports of fossil fuels is offsetting even larger trade deficits elsewhere. Excluding oil, gas, and refined petroleum, Canada has gone from a trade surplus of $19.2 billion in 2007 to a trade deficit of more than $77 billion in 2019.

Source: Statistics Canada

How did Canada’s investment attractiveness rank compare to other countries?

According to the World Economic Forum’s Global Competitiveness Report, Canada’s competitiveness ranking fell from 12th in 2018 to 14th last year. While this ranking is largely consistent with where Canada has scored in recent years, the report noted that Canada has below average scores in ICT adoption, innovation capability, mobile broadband infrastructure, and R&D spending.

Other international measures paint a worse picture. The World Bank’s Ease of Doing Business Index ranks Canada 23rd in its 2020 report, down from 16th in 2015 and 4th in 2007. Canada ranks highly in terms of the ease of starting a new business, but poorly in areas like getting electricity connections and enforcing contracts. Perhaps the most telling statistic from that report, however, is how long it takes to get construction projects underway. According to the study, it takes an average of 249 days to get the necessary permits—one of the very worst scores in the industrialized world. By comparison, the average time needed in the United States is just 81 days. Canada’s closest company in that measure includes Uzbekistan, Bangladesh, and Sudan.

These measures corroborate other, more on-the-ground challenges reported by businesses. These include lengthy and sometimes politicized major project approvals that could take five years or more under the federal Impact Assessment Act. In recent years, Canada has seen several high-profile projects cancelled or significantly delayed, while investment dollars shift to other, more hospitable, investment climates. A telling sign is the fact that the mere approval of the LNG Canada project in BC was hailed as a tremendous success rather than a normal regulatory decision.

COVID-19 hasn’t helped the cause either. The economic shutdown prompted the federal government to delay its decision on the Nova Gas Transmission Limited (NGTL) project, adding another full year until natural gas can displace coal-fired electricity in Alberta.

A 2016 study published in the Alberta Law Review notes that the average time it takes to get an energy project approved in Canada ranges from 26 weeks for transmission lines to 49 months for pipeline projects. The study also notes that it is the federal government, not the provinces, that are responsible for the delay. Project approvals that were not run or materially influenced by the federal government took an average of 18-33 weeks to be approved (depending on the nature of the project), while those with federal involvement took an average of 38-74 weeks.  

Canada’s deteriorating business climate
  • Canada’s ranking in the World Economic Forum’s Global Competitiveness Report fell from 12th in 2018 to 14th last year. More concerning is that Canada has below average scores in ICT adoption, innovation capability, mobile broadband infrastructure, and R&D spending.
  • In the World Bank’s Ease of Doing Business Index , Canada’s ranking has fallen from 4th in 2007 to 23rd in 2020. Canada’s ranking on the time it takes to get construction permits is one of the very worst in the industrialized world.
  • In 2009, there was $57 billion less foreign investment in Canada than Canadian investment outside Canada. In 2019, that gap had increased to $417 billion.
  • Canada attracted 1.4% of greenfield investment in 2019, down from 2.4% in 2005-2007.
  • In 2007, Canada had a non-energy trade surplus of $19.2 billion. By 2019, that turned into a trade deficit of more than $77 billion.
  • Business capital spending in Canada in 2019 was 20% below 2014 levels.

So, what can we do?

In the Speech from the Throne, the government announced that it would be using this opportunity to “build back better,” but its focus was largely on maintaining or enhancing social supports to help Canadians through the crisis. There was little in the Speech to suggest that business growth, investment attraction (outside of clean tech), or opportunities like repatriating strategic manufacturing capacity in the wake of disrupted global supply chains were priorities for the government. And little apparent recognition of the fact that we cannot create well-paying jobs without a thriving business sector.

To be fair, the Speech did signal some positive ideas. Funding for child care will help more people, and specifically, women, enter (or re-enter) the workforce. Additional supports for training and re-skilling is critically important, especially in light of accelerating technological change and workplace disruption. Tax cuts on clean tech businesses are a step in the right direction. And there was a brief mention of the need to reduce barriers to internal trade. Meaningful action in these areas is critical, but much more needs to be done if Canada is to recover quickly and thrive in the long term. This includes:

  • Accelerating and de-politicizing project approvals;
  • Reducing the regulatory burden on businesses;
  • Maintaining a modern and globally-competitive tax structure;
  • Working with provincial and municipal governments to reduce the time it takes to approve construction permits;
  • Introducing incentives for businesses to invest in machinery, equipment and new technologies;
  • Investing in trade-related transportation infrastructure;
  • Sending a positive message that energy and natural resources are part of Canada’s future; and
  • Making smart investments in emissions-reduction technology to create a competitive climate advantage for Canada.

In short, to accelerate the economic recovery and create jobs we need to attract investment. The role of government is to put in place the conditions necessary for the private sector to create those jobs. That means making Canada the most competitive jurisdiction in the world for investment of all kinds: major projects, capital spending, research and development, commercialization and- scale-up. That’s how we truly build back better.

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