Canada is often touted as being one of the best places to live, work and start a business—and in a lot of ways, it lives up to that image. The latest available data show that our country ranks relatively high in many aspects of well-being on the Organisation for Economic Co-operation and Development’s (OECD) Better Life Index, outperforming the advanced economy average in income, jobs, education, health, environmental quality, social connections, and life satisfaction. Not bad, eh?
A closer look at our business and economic competitiveness, however, reveals a slightly different reality. What do commercial competitiveness indicators tell us about Canada’s strengths and weaknesses, and possible strategies to help realize the full potential of this great country?
Let’s start with macroeconomic fundamentals. While it’s true that average annual incomes in Canada are 13% higher than the OECD average, we still lag behind the group’s top performers, including the United States, Australia, Belgium and Germany. What’s more, Canadian gross domestic product (GDP) per capita has been growing at a slightly slower pace than the rest of the group over the past four decades—a trend that doesn’t bode well for future generations.
When coupled with a few fiscal indicators, Canada’s macroeconomic performance raises some concerns for the future. For instance, our tax base is more limited than the OECD average, potentially hinting at some limitations in our ability to publicly fund the critical infrastructure necessary to facilitate business growth and innovation.
Clearly, there’s also a role for the private sector to play here, in addition to the investment needed in our country’s broader production capacity, to enable us to capture growth opportunities, both at home and abroad.
Perhaps most importantly, Canada continues to fall behind our OECD peers when it comes to the level of credit made available to the private sector. Domestic credit to the private sector tends to hover around 65% of GDP, well below the OECD average of 118%. While some of this gap is explained by differences in the mix of debt and equity financing used by private sector firms, the sheer magnitude of the gap raises questions around whether we are funnelling enough capital to enable private sector firm growth, especially for smaller businesses and creators of intellectual property and researchers.
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When we consider that the share of medium- and large-sized firms in Canada is 64% lower than it is in the U.S., and barely outstrips that in European Union (EU) countries, we have to wonder whether the lack of capital availability impacts smaller Canadian firms’ ability to scale up. It may also underlie a persistent underperformance in productivity, with average revenues per employee about 33% and 19% lower in Canadian firms than in the U.S. and EU, respectively.
Our research has also shown that there’s a strong correlation between levels of credit and new business formation in OECD countries. So, in addition to impacting scalability, the credit gap could also be contributing to relatively lower levels of entrepreneurship in Canada. In fact, despite having a strong legal environment, relatively lower business tax rates, and a lower number of business startup procedures, Canadians tend to start fewer new businesses than those in other OECD countries.
While Canada is quite successful at attracting top researchers from around the world, our R&D expenditure hovers at around 1.8% of GDP, compared to the OECD average of 2.3%. Lower levels of capital made available to researchers poses a fundamental constraint against Canada’s future innovation potential.
The bottom line?
In addition to our overall quality of life, Canada has many strengths and offers a fairly competitive business environment, when compared to other countries. Yet, a look at the data reveals challenges on some key metrics, relative to our advanced economy peers.
One such important gap is access to capital—especially for smaller, private sector firms and researchers across the country. This has and will continue to impact the ability of small businesses to grow, scale up, and generate greater economic returns. For the country as a whole, the difficulty facing startups and researchers in accessing the required capital could spell the difference between being a net exporter or importer of valuable intellectual property.
In the race toward the economy of the future, these trends could very well influence Canada’s chances to innovate and come out on top.
With special thanks this week to Michael Borish, senior analyst at EDC’s Economics, for his upcoming series on Canadian competitiveness, on which this commentary is based.
As always, at EDC Economics, we value your feedback. If you have ideas for topics that you would like us to explore, please send them our way and we’ll do our best to cover them.
This commentary is presented for informational purposes only. It’s not intended to be a comprehensive or detailed statement on any subject and no representations or warranties, express or implied, are made as to its accuracy, timeliness or completeness. Nothing in this commentary is intended to provide financial, legal, accounting or tax advice nor should it be relied upon. EDC nor the author is liable whatsoever for any loss or damage caused by, or resulting from, any use of or any inaccuracies, errors or omissions in the information provided.