Canadian firms lagging global peers in investment: report

OTTAWA—Canadian companies are falling behind rivals in the rest of the world in terms of investment, according to a new report from the C.D. Howe Institute.

The report, written by the institute’s Benjamin Dachis, William Robson and Nicholas Chesterley, finds that companies in Ontario and Quebec, in particular, have hit a 10-year low in investment per worker.

The report comes at a time when the issue of so-called “dead money”—profits socked away by companies rather than spent on new machinery and equipment—remains an area of contention among economists and policy-makers.

This week, Bank of Canada governor Stephen Poloz called the lack of business confidence and investment, not just in Canada but around the world, as the primary cause for what’s ailing economies in general.

The latest figures from Statistics Canada show cash holdings among private non-financial corporations rose to $630 billion in first quarter of 2014, although the “dead money” phenomenon had been cited in the past by former Bank of Canada governor Mark Carney.

The C.D. Howe report does not speculate about why Canadian companies have not been investing as much as their peers with whom they must ultimately compete, but urges governments to do what they can to encourage investment in machinery, computers and innovation.

“Private investment is what separates developed countries from poorer countries,” said Dachis, a senior policy analyst with the think-tank.

“Look around the world at the close relationship between the quality of tools and equipment workers have (and economic well-being) … if we’re not getting enough investment, the long-term growth in Canada is going to be in serious jeopardy.”

Dachis said that business investment per worker in Canada had been catching up to the United States in recent years, although still lagging, but the last three years have seen a “discouraging about-face.”

Projections for 2014 suggest Canadian firms will, on average, invest only 71 cents for every dollar invested by their peers in the U.S., down from 74 cents between 2008 and 2012.

Although comparison with other Organisation for Economic Co-operation and Development (OECD) countries is problematic due to different approaches in collecting data, the report calculates that it appears Canadian investment will also fall sharply behind many other industrialized countries, including Australia, which has also seen an investment lag of late.

“However, Australian investment per worker still outstrips Canadian investment per worker by more than $6,000 (a year),” the report notes.

Most alarming is the drop-off in Ontario and Quebec, Canada’s two most populous provinces.

At $5,700 per worker, Quebec firms’ investment projections for 2014 will be the lowest among Canadian provinces for the first time in 30 years, just below Ontario at $7,000 per worker.

By comparison, those in Alberta are projected to invest $37,000 per worker this year, $26,400 per worker in Saskatchewan and $47,000 per worker in Newfoundland and Labrador.

The discrepancy is mostly due to investment in the energy sector, which now represent 41 of the total, the report states.

But Dachis adds that there is no reason why Ontario and Quebec should be falling so far behind manufacturing regions in the U.S., where investment is stronger and growing.

Recommendations in the C.D. Howe report include reducing taxes that discourage investment and opening up more of the economy to the private sector, such as in Ontario’s mostly government-owned electric utility sector.