Weak Business Investment: Low productivity

#management #business #productivity #Canada #strategy #technology #innovation

An editorial by Matthew Lau of the Canadian Financial Post this week was on point regarding the issue of productivity in Canada. You can read it here. He underlined what this blog has elaborated on in the past year+. Some of the main points include:

• Labour productivity has increased only 16.5 per cent in Canada versus 54.7 per cent in the United States, with a sharper decline starting in 2017 (source: Fraser Institute).

• The productivity crisis pervades almost all sectors of the Canadian economy (source: McKinsey), with labour productivity falling even more sharply between 2014 and 2023.

• The main thing the federal government can do is to uncompetitive tax regime (sources: Fraser Institute, University of Calgary, C.D. Howe Institute, TD Economics). This means reducing red tape too.
  

  Finally, one of the primary reason for Canada’s continued poor economic outcomes is weak business investment. Which begs the question: what causes investors to under-invest in businesses and for businesses to not re-invest? Here are few answers:

  
  

  1. High Uncertainty and Risk Perception

  2. High Cost of Capital / Better Risk(ier)-Free Alternatives

  3. Low Perceived Growth Opportunities

  4. Tax and Regulatory Drag
  

It is proven that in business, the individuals who control the capital, under-investing is usually the rationally self-interested choice, even though it is often value-destructive for the enterprise over a 10–20-year horizon. This paradigm is the situation that governments must face. In short, the rational self-interest of capital managers systematically underinvests in the future. They cannot be blamed, as a result of poorly planned government policies, they switch to a survival mode.

Governments that wish to have an industrial and technological future must therefore accept that part of their job is to correct this failure... or watch their economies gradually slip. The Canadian government is developing policies that are not grounded in science or economics, such as the carbon net-zero policy. Imposing taxes to meet unrealistic objectives is simply bad policy overall, and this has direct consequences.

Credit: Grok Ai imagine generation.