Deloitte’s new research on Canadian and American business leaders shows that Canadians are far more optimistic about the current and future state of the country’s economy than their peers in the United States are about their own economy over the next five years. Yet, despite optimism about the economy and the future, along with relatively favourable macro-economic conditions in Canada, Canadian business leaders are not planning to invest in the types of activities that are required to improve productivity.
“Our study substantiates for the first time that it’s true – not a hypothesis – that Canadians are indeed more risk-averse than Americans, despite our current positive economic climate,” confirms Bill Currie, Deloitte Canada’s Vice Chair and Americas Managing Director, Consulting.
According to the report, despite self-reporting similar risk tolerances to Americans and being more optimistic in their outlook on the economy, Canadian business leaders are, on average, a full 13 % less tolerant of risk than their American counterparts. This gap widens to 18% when adjusted for the more negative current economic state and future outlook of Americans.
This is one of the many compelling findings of a new report from Deloitte entitled The future of productivity – An eight-step game plan for Canada, which uncovers new evidence about the source and extent of Canada’s productivity problem, and offers specific measures to correct it. In the comprehensive year-long study, Deloitte surveyed more than 900 North American business leaders and conducted a deep examination of more than 25 drivers of productivity – everything from our national brand to military spending.
The report argues that Canada is currently at a productivity crossroads because of today’s promising economic conditions: Executives in Canada exhibit strongly positive outlooks on the current and future state of our own economy; U.S. price levels remain depressed by the recent recession and the Canadian dollar is above parity with the U.S. dollar; Canadian marginal tax rates on capital investments are the lowest among the G7.
According to Larry Scott, Vice Chair of Deloitte in Canada, and the Chief Strategy Officer for Canada as well as the global organization, “Canada’s strength through the recession has created a unique – but likely finite – window during which our productivity trajectory can be reset. The conditions are effectively aligned to make us or break us.”
Among the six key issues identified by the report as driving Canada’s productivity woes – chronic under-investment in machinery and equipment; sheltering of the Canadian economy; increasing competition for human capital; inefficient and insufficient support for innovation; and lack of risk capital for start-up companies – one of the most interesting is risk aversion.
The new study contrasts individuals’ reported risk tolerances with the level of risk tolerance implied by the actual decisions that they reported making and the decision-making heuristics used to inform those decisions. This analysis is reflected in the Deloitte Executive Risk Behaviour Index, which evaluates the risk tolerance of firms based on criteria such as investments in R&D, investments in commercialization of innovation, and risk evaluation practices.
Behaviours of risk avoiders and reliance on government account for Canadian underperformance in R&D
The new report shows that while there is no important difference in the number of Canadian or American respondents who reported a high risk tolerance (risk takers) or a low risk tolerance (risk avoiders), major variations in the behaviour of these two groups in Canada and the United States are evident, particularly in the significantly lower participation of Canadian firms in R&D. Canadian and American risk takers participate in R&D at comparable rates (81% vs. 86%), but the R&D rate of participation among risk avoiders in the two countries reveals a sizable difference (70% vs. 83%), which accounts for the majority of Canadian underperformance on R&D participation.
According to Currie, a similar pattern was observed on questions ranging from commercialization of innovation to risk evaluation metrics and dependence on government.
“Regardless of their reported risk tolerance, it appears that American firms tend to evaluate and accept risks fairly homogenously – particularly when contrasted with the sharp divide that exists between Canadian risk takers who either match or slightly trail the U.S. average, and risk avoiders who lag American firms by a significant margin across many indicators.”
In addition, the new data suggests a greater reliance by Canadian firms on government support in order to motivate investments in R&D.
“In our study, Canadian firms indicated that they would be more likely than American firms to adjust their R&D spending in response to government support for R&D (e.g., tax credits, research grants), while American firms would be more likely than Canadian firms to adjust their R&D spending in response to circumstances such as expansion in the availability of risk capital or an improvement in the protections offered to innovations by intellectual property rights,” Currie noted.
Deloitte identifies chronic under-investment in machinery and equipment (M&E) as a significant factor in the country’s poor productivity showing. For example, the reports points out that Canadian investment in information and communications technology (ICT) is only 49% of that in the United States, with investment in the communications technology subcomponent of ICT at 34% of U.S. levels. The report also indicates that M&E investments are particularly pressing, given that Canada’s lower labour costs are likely unsustainable as the growing proportion of retirees in the population is expected to place upward pressure on those costs, eroding the competitive advantage that Canada has historically had in this area.
“The good news is that there are indications that Canadian firms are responding to these changes and beginning to increase their investments in M&E,” said Currie.
The courage to lead: An eight-step game plan for Canada
According to Larry Scott, from 2001-2009, Canada’s annualized productivity growth of 0.7% was in the bottom quartile of the Organisation for economic co-operation and development (OECD), far below traditional comparators like Australia (1.1%), as well as other small economies like Austria (1.4%) and Israel (1.3%).
“Because the convergence of current favourable conditions could dissipate quickly, we at Deloitte believe the time to act is now,” Scott said. “We are calling on the highest levels of business, government and academia to have the courage to lead in order to foster accelerated growth and close the increasing gap between Canadian productivity and that of other advanced economies.”
In the new report, Deloitte lays out an eight-step plan for near-term implementation with recommendations for people, ideas, infrastructure and access to markets. The action plan is designed to create the right people and the right environment – the foundation for a new competitiveness and continued high standard of living:
Educate: ensure our education system fosters entrepreneurship and innovation at all levels
The shaping of Canadian attitudes towards innovation, risk and the value of learning itself begins in our primary and secondary (K-12) education system. Deloitte recommends the development of new content to equip the next generation.
Populate: re-tool the immigration system to attract and fully utilize skilled immigrants
Deloitte recommends that the Canadian government work with professional associations and licensing bodies to identify more effective mechanisms for determining foreign credential acceptance.
Innovate: improve the effectiveness of R&D
To increase private sector R&D, Deloitte believes that Canadian governments should align their R&D incentive programs with the needs of different innovation life-cycle stages. The level and quality of communication and collaboration between business and academia must be improved by reducing bureaucracy.
Incubate: bolster the pool of risk capital
Deloitte recommends the creation of angel tax credits at both the provincial and the federal level similar to those instituted by the province of British Columbia. Studies of the B.C. credit show that it has increased angel investment by 50-70%, and that for every dollar spent on the credit an average of $1.98 in new tax revenue is created.
Co-locate: create a national clustering strategy
Deloitte believes that a national clustering strategy is necessary to capture gains, but that this strategy should be a regional effort, supported by provincial and federal governments, rather than a top-down initiative. Local businesses, municipal governments and nearby universities have the strongest grasp of local strengths, and should be encouraged to develop local cluster associations and strategies.
Update: invest in machinery and equipment
Conditions for Canadian businesses to invest in machinery and equipment are extremely favourable. U.S. price levels remain depressed and the Canadian dollar is above parity. However, these favourable conditions could dissipate quickly.
Accommodate: ease the flow of foreign direct investment
Deloitte believes that the net benefit test should be made more transparent, with more information provided on the metrics used to measure each component and on their relative weightings. Deloitte also suggests that the term “strategic industries” be better explained.
Facilitate: reduce trade barriers and pursue new markets
Canadian businesses need to reframe their point of reference beyond North America to the global economy, while our government must foster conditions for them to compete with greater agility around the world. New trade agreements with emerging economies should be created, and the backlog of pending trade agreements finalized.
The future of productivity is part of Deloitte’s The Future of Canada series. The first platform – The future of tax – launched in 2010.
Deloitte, one of Canada’s leading professional services firms, provides audit, tax, consulting, and financial advisory services through more than 7,600 people in 57 offices. Deloitte operates in Québec as Samson Bélair/Deloitte & Touche s.e.n.c.r.l.
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