Three Policies to Improve Productivity Growth in Canada

29

Canada was 55 per cent of that in the United States in 2003. This lower capital intensity
reflects lower levels of investment. Indeed, machinery and equipment investment in
Canada as a share of GDP has considerably lagged that in the United States over the last
half century.

Investment is the vector through which most technological advances are
manifested in the workplace. These advances are in effect embodied in new capital
goods. This weak investment implies that the vintage of the technology in use in Canada
is on average older and therefore less advanced than in the United States. To the degree
that Canadian firms in these industries can adopt advanced technologies through
increased investment, some of the Canada-US labour productivity gap can be closed.
From this perspective, public policies that foster the diffusion and adoption of best
practice technologies, largely through investment, have a significant role to play in
improving Canada’s productivity growth, both in absolute and relative terms.

Canada produces only a very small share of the world stock of new knowledge.
In 2004, Canada was responsible for 2.9 per cent of OECD R&D. If the R&D
expenditure of non-OECD countries is added, Canada’s share of world R&D would be
even smaller, likely around 2 per cent. This means that if Canadian firms want to be on
the technology frontier they must make use of technologies developed in other countries
and hence must be aware of the existence of these technologies.

Some free market economists argue that public policies to foster the adoption of
new technologies are not needed because firms already have a huge economic incentive
to adopt best practice technologies. Early adopters of new technologies can earn excess
profits. If so, why would firms need additional incentives from government to do what is
already in their interest?

The counterargument to this is that certain types of firms, particularly small and
medium-sized firms (SMEs), may face barriers to the adoption of new technologies and
government policy can assist firms in overcoming these barriers. The acquisition of
information and adoption of new technologies has a cost, and SMEs may not have the
different types of resources needed. They may not have the time to keep abreast of new
technological developments at the world level. They may not have the expertise to
identify those technological developments that would be potentially appropriate for their
production processes and to make effective use of these technologies. They also may not
have the financial resources to purchase the capital goods that embody the technology. A
case will be made below for government assistance for technology transfer

2) R&D Is Important, But There is More to Innovation than R&D

The federal government and provincial governments in Canada devote significant
resources to subsiding the research and development (R&D) activities of the private
sector, particularly through tax credits. Indeed, the federal scientific research and
experimental development tax credit in 2007 is projected to cost $2,675 million (Finance
Canada, 2005). Mackenzie (2005) finds very large subsidies (negative tax rates) for R&D

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