THE STANDING SENATE COMMITTEE ON BANKING, COMMERCE AND THE ECONOMY
EVIDENCE
OTTAWA, Wednesday, March 22, 2023
The Standing Senate Committee on Banking, Commerce and the Economy met with videoconference this day at 4:15 p.m. [ET] to study matters relating to banking, trade and commerce generally.
Senator Pamela Wallin (Chair) in the chair.
[English]
The Chair: Good evening, everyone. Welcome to this meeting of the Standing Senate Committee on Banking, Commerce and the Economy. My name is Pamela Wallin, and I’m the chair of this committee. I’ll introduce some of the members who are with us: Senator Deacon, Senator Gignac, Senator Marshall and Senator Smith. Others will arrive shortly.
Today, we will continue our study on business investment in Canada. For our first panel, we have the pleasure of welcoming Robert Asselin. He’s the Senior Vice-President, Policy, at the Business Council of Canada. Welcome. Thank you very much for being with us today. I know you have an opening statement, so please begin.
Robert Asselin, Senior Vice President, Policy, Business Council of Canada, as an individual: Madam Chair, the lack of business investment in machinery, equipment and intellectual property in Canada is well documented and well known. Canadian business investment per available worker badly lags that in the United States and other OECD countries. This underperformance in business investment directly contributes to our poor productivity performance.
It is no coincidence that Canada’s export competitiveness weakened in recent years as its share of the U.S. market declined. Over the past two decades, Canadian exports have risen at just half the pace of the overall economy. Without the oil and gas sector, these numbers would be catastrophic. The over-reliance of our economy on consumer spending and residential investment needs to be understood. In 2020, residential investment represented 37% of gross fixed capital formation in Canada.
[Translation]
In such a context, fully understanding the structural causes of the problem is paramount, as responding to this underinvestment with actions that are quick and not thought out will not solve anything.
In my opinion, there are four main causes, and they are all interconnected.
[English]
Cause 1: The composition of our economy. A country’s industrial composition matters a great deal. Certain sectors generate significantly higher output per employee and can increase productivity at a faster rate. Advanced industries are key to this goal because they combine significant R&D intensity and a highly qualified workforce. Sectors that invest heavily in technology and innovation tend to be more productive than others.
Advanced economies will compete on the global stage over three broad families of technologies: First, computing-related technologies, including microelectronics, quantum and AI; second, biotechnology and biomanufacturing; and, third, clean energy technologies.
This is where the intangible economy meets the tangible one and where the new frontiers of economic competitiveness are being drawn. And this is why Canada needs a modern industrial strategy for advanced industries. It should not be designed around corporate subsidies, but rather on boosting mission-driven industrial R&D, technology transfer mechanisms and IP creation and protection. Think about the successes of DARPA and NASA in the U.S., or the Max Planck and Fraunhofer Institutes in Germany.
Cause 2: Scale.
[Translation]
Canada’s economy is essentially geared toward SMEs. Of course, there is nothing wrong with SMEs, but if we want to increase our private investments, especially in research and development, we need more large companies. When we compare the United States to Canada, the ratio is three to one for the indicator of large corporations to SMEs.
From 1993 to 2000, the Toronto Stock Exchange, TSX, recorded an average of 41 initial public offerings per year. From 2001 to 2021, over the past 20 years, the annual average dropped to just 15.
[English]
This means a lot of our most promising businesses get absorbed by larger companies too early. These larger companies are almost always foreign because, in most advanced industries, we don’t have enough scale to become the purchasers.
Cause 3: Our science technology architecture is not generating innovation. Canada’s science and technology organizational structure has not adapted to the 21st century. We still rely too heavily on incremental innovation or safe bets. Furthermore, our research strengths, mostly in social sciences, do not align with our industrial advantages and needs. We are not generating enough IP, and we’re not providing enough protection of the IP we produce. Science is to be translated into productivity, growth and future prosperity. Many countries have understood this, but we have not.
Cause 4: Macroeconomic environment. I’m sure you’ve heard a lot about this. When it comes to business investments, tax and regulatory incentives are obviously key to capital formation. Permitting and regulatory hurdles specifically are to be prioritized.
[Translation]
For example, what is the point of having a Canadian critical minerals strategy if we are not able to extract these minerals in a timely manner? Companies that are willing to deploy the necessary capital will assess that risk very seriously.
[English]
In a recent speech at the Brookings Institute last October, the Deputy Prime Minister suggested that we had to fast-track the energy and mining projects our allies need to heat their homes and to manufacture electric vehicles. Following through on this commitment will be paramount, and time is of the essence in this new geopolitically challenged environment.
Thank you, Madam Chair.
The Chair: Thank you very much, Mr. Asselin. We appreciate it.
I want to start with some of the notes that were prepared for us by our staff here. It just struck me. We’ll come back to the four points that you were talking about. In 2019, the Business Council proposed a plan on how Canada could sustain long-term economic growth. There were six recommendations: regulatory modernization, prioritizing nationally significant infrastructure, modernizing and simplifying the tax system, foreign policy for a changing world order, a labour force to meet Canada’s needs and a national resource and climate strategy. Have we made any progress on any of those files?
Mr. Asselin: Honestly, Madam Chair, not enough. The one that is most preoccupying is the regulatory framework aspect, because capital formation is so important in this clean energy transition we are going through. If we are to move forward on extracting critical minerals, keeping and investing in our natural resources, this aspect is really important.
I will give some credit to the government on the human capital side. I know they’ve invested a lot on skills, although a lot is shared with the provinces. In the last few budgets, they’ve put a lot of resources into retraining and re-skilling, so I think one has to give them some credit for that.
I think overall there’s a lack of long-term growth strategy, senator, that is obvious. We’re doing this piecemeal, budget after budget. At the end of the day, when you compare what the Americans just did on their game plan for the future, it’s not clear that we have one that is clear and that is actionable.
The Chair: I will come back to that a little bit later on.
Senator C. Deacon: Thank you, Mr. Asselin, for being here today. I’m grateful for that.
Getting to the regulatory modernization point that our chair was just speaking about, we see a lot of investment in innovation by this government; investing in businesses, and government programs to invest in businesses. But the job of integrating those innovative enterprises into the economy often requires regulatory reform, legislative reform, new competition, updated competition, legislation for the digital era and updated privacy legislation for the digital era. Reducing regulatory moats around incumbent industries that provide a layer of protection from new entrants, that are innovative and competitive, but they can’t afford to break through those moats. Those are the sorts of issues. I want to weigh those two in your mind. The value of investing in innovative enterprises is never integrated into the economy because we don’t do the plumbing over here. What are your thoughts when you consider that as one of our challenges in Canada?
Mr. Asselin: Our main problem on that is scale and scaling our businesses. You may be right that the regulatory framework doesn’t easily allow these companies to become very competitive. In general, in Canada, we have competitive markets. There’s always room for improvement. But to me, what is worse, as I stated earlier, is the fact that most companies choose not to grow in Canada, to exit, mostly to the United States, as you know, either because they find it too difficult on the long-term, risk capital side of things, or they find it too difficult to have the management talent to grow their company in their sectors.
If I had to state a clear priority in our innovation ecosystem, I would say generally, senator, that we have spread the peanut butter very thin when it comes to innovation policy. We just have to be very intentional. Public procurement is part of it, as you know. In Canada, we have had our own global champions not even being encouraged by their government, and nowhere else does this exist.
I agree with some of the premise of your question, but I think competition in itself would not be enough on the scaling side of the challenge.
Senator C. Deacon: If I could just carry on one second, according to the OECD and the World Bank and other groups, we have the highest regulatory burden at a municipal, provincial and federal level of virtually any economy of the developed world. That regulatory burden has got to be a factor in driving businesses to sell elsewhere. It certainly was for me, I can assure you, in building businesses. I just never tried to sell in Canada.
I’d love your response on this because the Business Council of Canada represents 150 of the biggest companies in the country. You’ve got a lens that you look through at the Business Council which is that of the biggest companies. We have one of the most consolidated economies in the world. In each sector, the five largest banks have 85% of the markets and, in the United States, 30% of the market, that sort of difference. Consolidation doesn’t enable a really active, diverse marketplace. Would that be a fair assumption? Would you not agree?
Mr. Asselin: Yes, although I would push back that we don’t have competitive markets in Canada. The problem is we don’t have enough large companies. We need more of them in these markets. I know people pick a lot on the financial industry, for example, or financial sector. The biggest bank, RBC, is about 25% of the overall market. I don’t think this is a monopoly. When you talk about 25% of the financial market, it’s a significant part of it, but it’s not all of it.
For everything that has happened over the last two weeks, personally, I take some pride in the stability of our financial system and the resilience of it. You’re right, senator, that there are some trade offs between innovation and the financial sector stability, but I would say overall, we’ve achieved a pretty good balance in that specific sector. Personally, in light of everything that has happened over the last two weeks, I wouldn’t trade our sector for any other one.
Senator C. Deacon: You attribute that only to size, not to the strength of regulation; right? Good regulation can be helpful.
Mr. Asselin: Yes, I agree we are over regulated as a country. If our CEOs would sit here at this table, they would say that it’s crazy to wait all this time for permitting and for getting through the regulatory process on everything, absolutely.
Senator Smith: You’ve noted in various reports that the federal government fiscal anchor is not adequate. You also stated that the government cannot keep financing its programs using deficits; at some point, they have to think about reducing spending or raising taxes. Why is it important for governments in strong fiscal positions when looking to attract business investment? Do you feel the federal government’s use of deficit financing is creating a sense of uncertainty in the business community? I’m trying to get at the idea that you have to have a strong foundation before you can attract people. Then the other issues, such as regulatory burdens, fall into place. Can you just comment on that?
Mr. Asselin: Yes. I’m very proud to have written a recent report with David Dodge, the former Governor of the Bank of Canada, on the fiscal anchor and what we thought about the sustainability of federal finances. I would say the risk right now is on the upside. Interest rates are higher. We have doubled the debt in a few years. Some of it was warranted, given COVID spending, but it’s big now. There is a lot of uncertainty about future growth in this country. You take those factors into account, and you have a fiscal framework that is not what it was, necessarily, in the 1990s, but it’s certainly more fragile. For business confidence — to your question — it’s really important that the government is seen to have a strong fiscal anchor.
The problem with the debt-to-GDP ratio they have used is they have raised it from 30 to 50, and staying around 50, for me, is not a reasonable anchor. It’s still very high. You need to add the provincial part of that public debt as well, which is significant, so you easily get to around 90% to even 100% of GDP, which I think is high. Then you have private indebtedness.
For attracting investments, having a sense of a strong fiscal anchor for the future is really important. I was looking at the real GDP projection over the next four years. It was 1.4 real GDP. That’s very low. If that is the trajectory of growth in this country, we’re going to be in trouble. That will have an impact on public finances.
Senator Smith: If you had a magic wand, what would you do?
Mr. Asselin: The one thing we suggested with Mr. Dodge was debt services costs not exceeding 10% of revenues, because we think that if you get over that, you get into trouble. That is what happened in the 1990s. We lost control of the primary deficit because interest rates kept rising. We lost control of the deficit even if we cut spending. People have to understand that. We’re nowhere near where we were in the 1990s, but if interest rates stay higher and the growth is not there, we’re going to get into trouble at some point.
Senator Smith: Is our tax system competitive?
Mr. Asselin: I would argue, senator, that we have good services in this country, in general, but we’re a highly taxed jurisdiction when you compare the provincial plus federal level. There’s not much room on the income tax side or the corporate tax side to go much higher.
Senator Smith: Thank you.
[Translation]
Senator Gignac: I welcome the witness. I want to acknowledge your track record and your background. You’ve worked with the Minister of Finance here in Ottawa and you’ve been a special advisor, as well.
What kind of policy change should the federal government prioritize to encourage investment in the country and in the government? Is there any reluctance? I’m trying to figure out why we are where we are today.
Mr. Asselin: That is a good question. First of all, I think the regulatory framework needs to be looked at more seriously. I think, naturally, we’ve been quite complacent, because we have an abundance of natural resources. We’re a nation that’s good at international trade. We have a partner, the United States, which is quite important for us; it accounts for 80% of our exports. That has brought a certain complacency.
We are now seeing a geopolitical world that tends toward protectionism, and I find that Canada does not have a clear long-term strategy for growth. When I say strategy, I’m really talking about a multi-element strategy.
I’ve written a lot about industrial policy and innovation policy because I think Canada is really lagging in that area. As I said, the really important industries are innovative ones, where there is a lot of research and development, and where workers are highly skilled.
In Quebec, we have the aerospace industry, the semiconductor industry and the battery industry for vehicles that will have to become more efficient. All these niches are very promising and compelling. That is the direction to move in. More research and development on the industrial side needs to be done.
Bridges between universities and the private sector are lacking. I find that, in this respect, we are very much anchored in the 1980s and 1990s. I would say that these are the main elements I would bet on. We have a very impressive human capital in Canada because of our immigration policy and our post-secondary graduation rate. We’re not capitalizing on our potential. We need to go a little further.
Senator Gignac: You mentioned in your opening remarks that intellectual property is not sufficiently protected; we had that debate in a committee meeting two weeks ago.
It seems to me that our universities are good at research and development, but when it comes to commercializing intellectual property, foreign firms, like venture capital firms from Boston, buy that.
I was wondering what you had in mind. Are any policy changes needed? Should there be a requirement for Canadian participation? How do you see the commercialization of intellectual property?
Mr. Asselin: The granting councils are showing complacency in the awarding of research grants. Intellectual property requirements should be attached. I think that reform would be easy to implement.
Some provinces, including Ontario, have created intellectual property agencies, and I think that’s a step in the right direction. It would be really good if we could have that nationally.
It must really be understood that the research being subsidized is subsidized by Canadian taxpayers, so the return to the economy has to be beneficial for all Canadians. So every time our research and development is exported outside the country, it’s really a very negative externality that must absolutely be avoided.
Awareness is growing in Canada, but I see that incentives at the university level are not there yet. I see some of our brightest researchers signing and giving their patents to foreign companies that I won’t name today, but that are quite problematic in terms of national security. I think there needs to be more awareness of what is being done in that area.
[English]
The Chair: That’s an excellent point, and we’re going to be following up on it in other ways.
Senator Marshall: Thank you for being here.
In your opening remarks, you were talking about large companies in Canada. You were saying we need more. Some of the large companies moved to the U.S. They buy American or other foreign companies, and they get a taste of what it’s like to work in the United States or some other country. They seem to prefer that to Canada, so I don’t really see a lot of big companies staying in Canada, coming to Canada or developing in Canada.
What is it about Canada such that these large companies seem to like other jurisdictions? I know we talked about the regulatory framework, but it’s not just that. There’s something else besides that that drives them south of the border, and they don’t want to come back. What is it? Is it something that the government is doing, or is it something that the government is not doing but should be? How are we going to get these large companies to stay within the country?
Mr. Asselin: Part of it is cultural, senator. Again, we’ve been very complacent. Because we were naturally gifted with our natural resources, we didn’t really compete in advanced industries. Now we have to. This is where countries compete, as I explained, in these three big families of technology. We will need to be much better at scaling our companies and having the new Nortels and Blackberries in biopharma, Quantum and AI. But it requires some dynamism in the economy. That’s the second part. I find the U.S. a very dynamic market. Canada, unfortunately, because of its size, its geography, maybe, has been challenged.
When I look at our own membership, our own companies, they are global champions. Think about Linamar in advanced manufacturing, Magna, CAE and Bombardier. We do well. We can compete; there’s no question. But we need more of our global champions out there. We don’t have enough, I guess, is the overall point.
Senator Marshall: We spend a lot of time in the Senate Committee on National Finance, even in this committee, on small business. It gets a lot of attention. It is almost as though the large companies are demonized. Do you think that factors into the decisions for large companies to move south of the border?
Mr. Asselin: Honestly senator, yes. In our culture, big is problematic and small is beautiful, whereas, in economics, usually, the bigger a company gets, the more it invests and the more it pays its workers and the more diversity it has.
I look at R&D investments. One of the reasons we are not doing well in R&D is that we don’t have enough large companies in these advanced industries that compete globally. Unless you change that, unless you have a real innovation policy, industrial policy, in advanced industries, I don’t think we’ll get to a good outcome.
Again, I’m not saying it’s an either/or. SMEs are really important. For some reason, some companies will decide not to scale, but from a microeconomic perspective, you need more large companies in Canada.
Senator Marshall: Thank you.
The Chair: Interesting notions there.
Senator Loffreda: Thank you, Mr. Asselin, for being here with us today.
You have written some interesting and insightful articles lately. I was particularly interested in “Refocusing the debate on industrial policy” of January 12, 2023.
I was also particularly interested in a recent quote from The Wall Street Journal by Jamie Dimon, the CEO of JPMorgan Chase. He states, and I will refresh your memory:
Global trade will necessarily be restructured so that we don’t rely on potential adversaries for critical goods and services. This will require more “industrial planning” than America is used to — and we must ensure it is properly done and is not used for political purposes … Most developing countries would prefer to align economically with the West if we help them solve their problems. We should develop a new strategic and economic framework to make ourselves their partner of choice.
Now, that’s an important statement, a strong statement. How can we in Canada take advantage of that, do that and increase business investment in Canada?
Mr. Asselin: That’s a great question, senator.
What I like about this quote is the public-private partnership aspect of it. It’s the realization that we’ve returned to political economy, where national security and climate change are the main drivers. In other words, the markets in themselves will not go there naturally.
This is where I find Americans to be very strong. They understand, on the technological front, where their competition is going and the implications on national security. We are in the same boat. If we don’t compete in these industries, capital will just move. The climate change one is very prescient. You will have seen, since the adoption of the Inflation Reduction Act, the IRA, how quickly capital has moved down south. It is a race; it is a very intense competition. Among our membership, again, most CEOs would have a very similar take on this kind of partnership that we need with the Government of Canada.
You need ambition. You need a plan to execute. You need some vision, some bold kind of moves, again, on the stuff that is not necessarily sexy but, in 5 or 10 years, will be really rewarding. I am mostly thinking about industrial R&D. When you think about an institution in the U.S., like DARPA, on defence, what they did over 40 years is reinvent every cycle of technology and then make companies like Boeing and Lockheed Martin into the giants they are today. That is the kind of partnership we need in advanced industries, but I find we just lack the ambition and the execution to get there.
[Translation]
Senator Massicotte: Thank you for joining us today.
I repeat the comments that have been made: your experience and track record are very impressive. We have to agree with you immediately; it makes a lot of sense. You are passing on all your knowledge to us.
At the same time, I’m thinking to myself that we’re here, that people are committed to our country’s interest. We are all telling ourselves that this is alarming, and rightly so, as major changes are happening around the world for security reasons. We have to be part of the gang. So, I’m thinking, the situation is threatening, we need to do this and we need to get it done, but I’ve been hearing this speech for years and we’re not getting it done.
Is it because no one is accountable for results? Are our political leaders too busy getting elected? What is the problem? Why can’t we do it? This is a major problem and it’s a scary situation.
You’re intelligent, public officials are intelligent. We’re trying hard, and we may get there, but something is missing somewhere.
Mr. Asselin: When we look at countries that do innovation well, such as Israel, Germany, South Korea and the United States, the common denominator is that they are countries that feel threatened by something. In Israel’s case, the reasons are historical. Considering where South Korea is geographically located, there is always concern. Germany was involved in both world wars. It really had a very aggressive manufacturing policy. The Netherlands is the second largest agricultural exporter in the world, and it’s a country that’s half the size of New Brunswick. They were starving after the war, but they got their act together.
So there’s an element of threat that we don’t feel in Canada. We are very complacent on the cultural level. We tell ourselves that we’ll be okay because we have natural resources and we’ve always done relatively well. Let’s be honest: We’re a successful country.
In the new competitive age, we have to somehow change our mindset and go a little bit further.
I’m trying to be as candid as possible with you. In my opinion, we are very bad when it comes to execution. We know what we need to do in Canada. We have been talking about productivity for a long time. Senator Gignac was a minister. He knows what I am talking about.
It’s not that we don’t know what the problem is, it’s that we’re still very hesitant in terms of execution, nationally.
One last point I would like to make very respectfully is that our thinking is too short term. We think in terms of the election cycle. Long-term vision is lacking. What the Americans did with the IRA, the Inflation Reduction Act, is something that will pay dividends over 30, 40 or 50 years. In a budget, if you’re thinking about how much money to give to this clientele in the next year, before the election, you’re never going to get anywhere with that kind of a long-term plan.
We all need to work together to raise awareness and try to get the decision makers to that level.
[English]
The Chair: It’s interesting. We just had a conversation with the oil and gas sector. The woman who was their spokesperson put it just that bluntly, which is, if we don’t do something like the Inflation Reduction Act — which is long-term — we will never catch up. When you say lack of ambition, lack of vision, we almost need a threat to focus our minds. We’ve been spoiled by living in the shadow of the U.S. and the easy trade.
Mr. Asselin: Yes, exactly.
The Chair: We have to kind of kick-start that somewhere. Is there a button?
Mr. Asselin: Can I give a current example? How we reacted in COVID is a great example. We were threatened then, and we came up with solutions. Suddenly, public and private sectors worked together on PPE and on vaccines. It is amazing what happened in Canada, but elsewhere, too. It is this kind of, “Okay, we have no choice.” It is almost a kind of survivalist thinking that gets you there. If we go back to the regular program, in four years we’ll still be talking about regulatory reform, unfortunately. This is what some of you have witnessed.
The Chair: We were just saying that. We have done an awful lot of studies on that issue in this committee.
Mr. Asselin: Can I plug something that I think is important for the country? It is being led by Anne McLellan and Lisa Raitt — the Coalition for a Better Future. The concept is very simple. It’s a scorecard with KPIs. There are 21 of them. It measures Canada vis-à-vis our peers on important metrics: GDP per capita, business investment, climate change, poverty reduction, emission reduction, clean tech investments and narwhals. I find it’s an amazing tool for us to say over time, without being partisan, look, governments say they do things, but at some point you need the data to show for it. If we had this kind of thinking about accountability and scorecard KPIs, without being accountants, at least you have a measure of how we are doing over a longer period.
The Chair: I think we’ll invite them as witnesses. Thank you.
Mr. Asselin: That would be great.
Senator Marwah: Thank you, Mr. Asselin, for being here.
I would like your perspective on trade. As you know, we have signed many free trade agreements, whether it is USMCA, CPTPP or CETA, yet our trade as a percentage of GDP is going down. Our exports are growing less rapidly than our imports. We have a great brand and are known as safe, reliable and high quality. It should be the opposite. What is the issue, and how do we correct it?
Mr. Asselin: That is a good question, senator.
I would say our current account deficit is a big problem, especially in advanced industries, because it is okay, I would argue, to import T-shirts and stuff where countries don’t have to compete for high-skills labour and some intensity in R&D, but it is not okay if you are a net importer in every advanced industry. We are going to have to compete on these advanced industries; otherwise, we are just going to become less competitive.
I think at the core of why our export competitiveness is declining relatively speaking is an issue of scale. SMEs, by definition, are very tentative when it comes to entering global markets, except maybe the U.S., which is more natural. Then there is the question of competing where advanced economies compete, so if you are not there, you are just going to lose market share.
As I said, if you take out oil and gas and auto parts, we are nowhere to be seen on exports. If you take those two things off, it would be catastrophic. We know where the trend on oil and gas is going. This is, again, I hope a credible threat to the country going forward on exports. We have to be more competitive. That means more automation, more digital adoption, scaling our companies and just being more ambitious.
Senator Marwah: What about going up the value chain? One of our biggest issues has been that we are great drawers of water and hewers of wood. Send out the material and let somebody else convert that into a finished product. What about the government providing encouragement to, let’s say, ag tech? Rather than sending canola seeds out, go up the value chain and make canola oil, make canola products, and send the finished products rather than the unfinished products’ raw material. Would incentives to encourage our SMEs to do that work, in your view?
Mr. Asselin: Yes. It’s all connected. I talked about our lack of industrial R&D. I’m so glad you brought up ag tech. I find it the most promising sector for Canada. We are good at ag but not great at ag tech. Why is it that, with the land we have, we are not the first exporter? We are not better than the Netherlands, which is half the size of New Brunswick. It’s the tech aspect. It’s the R&D aspect. This is where industrial policy needs to be focused — not on corporate subsidies but on derisking private investment in R&D and scale. This is where I find, senator, we are lacking focus.
Senator Marwah: If you have any thoughts on how to push the ag tech issue, please send them to us. We would love to hear them. Thank you.
Senator Yussuff: It is good to see you again.
Let me put your feet to the fire because there is a bit of double-talk. You guys have been the champion of expanded trade and getting these trade agreements done. I’ll use CETA as an example. It has been quite some time since we signed the CETA agreement. Yet the failure of the CETA agreement is not the Europeans, by the way. They have taken advantage of the market we have provided them. Canadian companies have yet to respond to this new market that they have unimpeded access to. Yet, all of you were the big champions: “We need to get this done.” So we got it done. Where is the initiative to say how we need to take this on? And by the way, we can compete largely. I don’t disagree with you in that regard. We can also compete in a small way. It is how we take advantage of the market. If we are going to disinvest from the American market with the way we have been saying we always feel threatened, we now have an equal-sized market to take advantage of. But yet Canadian companies, to follow up from my colleague here, have not done that. The government is simply expecting Canadian entrepreneurs to do what is expected of them. You have the market, you have the access and we have given you the tools, so why aren’t we doing it?
Mr. Asselin: It is a good question. Thank you for that.
I think, unfortunately, it relates to the composition of our economy — not enough scale in key industries where we can export and take market share. Again, if you take out commodities, where we do well generally, we are not a net exporter in many advanced industries, and that’s the problem. It speaks to really taking care of that part of the business, which is having more large firms in key competitive sectors. It really comes down to that, senator, I believe. I don’t think it is a lack of willingness of businesses to go and take these opportunities. I think it is because we don’t have enough of them, frankly, and they are not big enough. This is the problem. Our membership is taking these opportunities fully and they are making strides, but the problem is not there. Large businesses in Canada are 0.2% of businesses overall. We need that number to go to 1%.
Senator Yussuff: If I could pursue this a little bit, we recognize the dynamic, of course, that with the pandemic and the war in Ukraine, we need a new approach. It seems to me the right messages have been there, and we’ll see what happens in the budget.
This is also going to require a collaborative conversation with the provinces because we don’t have the reach at the federal level and, to be fair, we are not the only ones who should be financing all of this. The provinces have an important role and responsibility to do that as well. I’m happy to see what Ontario and the federal government were able to do with two major investments, one in Windsor and, most recently, one in St. Thomas, and similarly what happened in Newfoundland and Labrador with the German investment around hydrogen.
I think we have got the right message. The bigger question is whether we have the scale and the collaboration required to make sure we can actually now take the next steps. This is a real opportunity for the country to look at its future in a very different way, recognizing that the raw materials don’t have to be exported and we can be sending the finished goods this time.
Mr. Asselin: Exactly. You and I worked on a very successful collaboration with federal and provincial governments, which was CPP expansion.
Senator Yussuff: It just took nine years.
Mr. Asselin: I know. But you know at least it can be done.
Senator Yussuff: That’s my point. We need champions. I know we bicker about a lot of things, but there are things we don’t need to argue about. How can we find the ways —
Mr. Asselin: I must say on the positive side that I’m very encouraged by the Ford-Trudeau collaboration on advanced manufacturing on cars, on EVs. It seems like there is a willingness there to think about long-term investment. I think we need to reproduce that at scale and do it in ag tech and clean tech and biotech. Those are, again, the competing industries where we need to be better.
Senator Yussuff: One thing that has worked for the Europeans — and I say this in a sincere way — is that they have a way to have conversations where it’s not you against me. Business, labour and government actually sit together and have these conversations.
Mr. Asselin: Absolutely.
Senator Yussuff: Don’t you think we need to do more of that here? If we’re going to innovate and advance the scale of what we have with our people and our technology, we don’t have enough of those conversations. You say one thing, unions and others will say something else, and then we’re competing about how government will listen to whom.
Mr. Asselin: I agree. We’re too small not to be together, is my short answer.
The Chair: Yes. I think that’s exactly right.
Senator C. Deacon: I want to keep building off the point that we need more large companies. We need to catalyze our growth companies. We’ve got a lot of great growth companies that are coming along. I would argue that good regulation doesn’t need to be burdensome or cumbersome or slow. You can have highly effective regulation that is easy for business to deal with. I’m quite interested in the opportunity for Canada. We have heard at a lot of our meetings so far that there’s huge opportunity at Canada’s doorstep. Something that struck me recently is our business sector as judged by foreigners. The Edelman Trust Barometer is a measure. Our business sector is the most respected around the world. We have some of the most trusted businesses in the world in Canada. We’ve got these trade agreements, but we’re simply not taking advantage of them. We’re not catalyzing our growth companies by making their life easier to break down barriers and to help them make those first trades. We’re not seeing that as central to our grandchildren’s prosperity. We’re seeing that as something to control versus catalyze. How do we do more catalyzing? I’ll put it that way.
Mr. Asselin: You need to create the incentive in the institutions. I agree that we don’t have enough of these institutions that create these public-private partnerships. I want to go back to my DARPA example for defence, or NASA for space. We have a great company in space, MDA. I think it could become one of the best in the world, but our government doesn’t do public procurement with them. How will they be able to grow that company if they have to go to NASA to nurture their technology? That’s being strategic, frankly, in key sectors. It’s the same with Bombardier. Right now, they’re selling their planes to the Pentagon for their own missions — these small planes are very specialized — but National Defence in Canada won’t hear about it. This is crazy. This is shooting ourselves in the foot.
Senator C. Deacon: Back to your point about KPIs, can I suggest one that I’d like your opinion on, namely, the high knowledge intensive industry exports per worker?
Mr. Asselin: Yes. Great KPI.
Senator C. Deacon: Wouldn’t that be a great KPI for this country?
Mr. Asselin: I agree. You, senator, should have this one and ask every witness annually how we’re doing on it. I agree. It’s important.
Senator C. Deacon: Agreed.
The Chair: We’re just going to issue report cards. That’s what it’s going to be.
Senator Gignac: Could you elaborate a bit about procurement and the role of the provincial/federal government? We have heard from smart people like you before. People say that we need capital and clients and markets. In some cases, small businesses become much bigger at some point. Is it possible that procurement could be at play? I know the federal government is always concerned about free trade, Washington, and so on, but there is a lot of protectionism there as well. Could you elaborate on procurement and if it’s time to revisit that?
Mr. Asselin: It’s a big part of the IRA and the CHIPS and Science Act. The Americans are not worried about buying their fleet of vehicles from American companies, so why are we? You want to create global champions, but governments have to be part of the solution on public procurement. It seems like, again, we’re very naive. To Senator Deacon’s point, some growing companies have a lot of potential on technology but, somehow, they don’t get that first buyer. We have this small program with innovative solutions, but it’s very small and not at scale. Again, I repeat: Boeing and Lockheed Martin wouldn’t be the companies they are if it wasn’t for the American government. It’s not to give out a free pass, but you need to encourage your own champions.
The Chair: Thank you very much.
Senator Massicotte: If you’re looking to scare us, if that’s how we have to behave — and, you made reference to it — then take out the oil and gas sector. From an investment point of view, it’s probably 80% of the investment. If you focus on that, I think you have reason to be very scared. It is very threatening.
Let me make another comment relative to the culture. I spent a lot of time in the United States, and I have seen how they behave. The Americans, including union workers, are all very pro-business. If you have a pro-business problem, they all hurry up and get together and find resolutions to it. Even if those people are not in businesses, they accept it. It’s part of their culture. They know it’s important to have those jobs. That’s something we should try to change. We’re a long ways from that, but I think it would be helpful if we also had a different attitude, like we need this. It’s not like they’re the enemy or the bad guy all the time. We have to change.
Mr. Asselin: I totally agree, senator. Absolutely.
Senator Loffreda: Can you further elaborate on how we can quickly correct the impediments to growth that we’ve discussed, namely, the long-term risk, the management talent and the high regulatory burden? In some industries, you need more regulation, not less regulation. You also mentioned the banking industry. Although we are fairly regulated in Canada, it’s fine. We don’t want to be like the U.S. We don’t have enough large companies, so how can we quickly correct those issues?
Senator Yussuff mentioned CEDA and that we haven’t taken advantage of CEDA. That is correct. Is it because we’re too close to the U.S. market and Canadian companies rely too heavily on the U.S. market? Our exports have decreased — and Senator Marwah mentioned that too — maybe because of the “buy in the U.S.” philosophy that is currently in place in the U.S. We have to diversify and we have to do better.
If you can further elaborate on how we can accomplish that, it would be welcome.
Mr. Asselin: To summarize, the strategy for growth is very simple. We have all of the ingredients, but we’re not putting them together. It’s people, capital and ideas, which relates to innovation. I think we’re doing pretty well on the people aspect, if we’re honest with ourselves. Canada is a gifted country on intellectual capital, but we’ve not built the incentives or the institutions to translate that intellectual capital into the economy. The R&D aspect is really important. We can’t just say to universities, “You’re in charge of innovation.” This won’t work. We need to create the bridges between university commercialization and then public procurement. The capital side is mostly related to regulatory and taxation. Again, I think there’s a lot of scope for improvement there to incite capital formation and investment. On the idea side, innovation policy, again, we’ve been very weak in Canada. We’re all over the place, with small Crown Corps. trying to please everyone, every sector. I see this again with the new innovation corporation. I think it’s very tentative.
I look at Secretary Raimondo’s speech. She’s the Secretary of Commerce in the U.S. About a month ago, she gave a speech about where the U.S. is going. Again, it was focused on three families of technology. She was stating, “This is what we’re going to do. This is how we’re going to execute it. I’ll be accountable.” I’m just waiting for a minister or the Prime Minister to say something like this in Canada. This is where we’re lacking.
The Chair: We’re going to wrap up here, but we’ve heard from other witnesses as well — and you’ve put it very starkly — on the question of procurement. Is it actually possible to say, that is, if the government had the wherewithal or the vision or whatever it is, “It’s now mandatory; we’re going to shop Canadian?” Just say it. Make it a policy.
Mr. Asselin: The Americans have done it with the IRA. This is their policy. Why couldn’t we? Why couldn’t the Minister of Defence instruct the department to buy 50% of everything from Canadian companies as opposed to the lowest bid? We’ve talked about this for a long time. I don’t know why we haven’t moved on this. We procure a lot of things, and provincial governments do too. If you pool all these resources together, you could have very impressive results.
The Chair: It’s almost in the no-brainer category. Mr. Asselin, thank you so much. You’re so clear and so focused on what we should be doing. Whether we can get there is another question. Thank you, Mr. Asselin.
For our second panel today, we have the pleasure of welcoming in person Mr. Philip Cross, Senior Fellow at the Fraser Institute. We’re still all excited to see people in person. It’s great. Welcome, and thank you for being here. If you have some opening remarks, please go ahead now.
Philip Cross, Senior Fellow, Fraser Institute: Thank you. Yes, it is a pleasure to be back in person. It’s the first time I’ve appeared at the House or the Senate since the pandemic began.
I’m pleased this committee is devoting a session to business investment in Canada. Economists recognize the fundamental importance of investment to long-term growth, but governments do not do enough to act on that critical insight.
Canada’s recent track record of business investment is abysmal, which helps explain why our GDP growth is lagging.
Since late 2014, the volume of investment has fallen over 17%. Weak investment has resulted in a reduction in net capital stock available to the average Canadian worker, from $16,000 in 2014 to $11,920 in 2021, according to a recent study from the C. D. Howe Institute. With less capital to work with, the productivity of Canadians also fell, putting downward pressure on wages and upward pressure on unit labour costs and prices. The much lower level of capital per worker in Canada than in the U.S. has occurred despite the large amounts of investment required by our geography and our reliance on capital-intensive manufacturing and resource industries. The shortfall of investment is concentrated in machinery and equipment, which is directly related to our poor productivity performance.
More broadly, business investment and merchandise exports have declined from their peaks in 2014 and 2015 respectively. The two are related because, with less investment, our competitiveness in global export markets is reduced. In turn, lower expert volume means our firms do not have the resources or incentive to invest.
With the two most dynamic sectors of economy representing nearly 40% of GDP in secular decline, it’s not surprising Canada’s economic growth over the last decade has been the slowest since the 1930s. Worse, our per capita real GDP growth has fallen well behind the U.S., with a cumulative 2.8% increase in Canada since the fourth quarter of 2016 versus an 11.7% gain in the U.S. This gap has opened up in all three time periods: before, during and after the pandemic.
Low investment reinforces the stagnation of Canada’s multifactor productivity since 2004. This threatens to make Canada’s poor economic performance a chronic defect. For example, the OECD recently released a forecast that Canada would have the lowest growth of real GDP per capita among its 29 member nations between 2020 and 2060 because of our low productivity growth and weak capital investment.
One difficulty in identifying remedies to boost capital spending is that while economists understand investment is important, we don’t have a working theory of its determinants. Still, comparing the 23.5% increase in investment in the U.S. since 2014 with the outright decline in Canada of 17.6% suggests some contributing factors.
Regulations that deter investment, especially in natural resource industries such as oil and gas and pipelines, are clearly a major deterrent given this industry is the largest investor in Canada. However, barriers to Canada’s energy sector are not the only factor in weak investment since an astounding 40% of Canada’s major business industries have cut investments since 2014. Other factors depressing investment include high levels of debt-fuelled household and government spending, with the latter implying even higher taxes in the future, and a smaller pool of investment funds than in the U.S.
One overlooked factor in Canada’s weak business investment lies in what Keyne’s called animal spirits. This reflects the lack of encouragement for businesses and entrepreneurship in Canada. By lack of support, I do not mean the myriad subsidies, government protections, exemptions and preferences that governments all too often deploy in Canada to attract investments. These actions only encourage rent seeking and favouritism that is the antithesis of support for an entrepreneurial business environment. What I mean instead is a growing culture in Canada that, in the words of political columnist Paul Wells, makes people run a successful business in Canada feel they have done something wrong.
Canada’s recent track record shows that policy-makers can get a lot of little things right, but this is outweighed by getting a few big things wrong. Canada has adopted many policies that economists recommended, such as robust levels of immigration, the highest education levels in the OECD, free trade deals with all the other G7 nations and shifting the tax burden from income taxes to consumption taxes. Nevertheless, economic growth in Canada has lagged for nearly a decade. We steadfastly refuse to dismantle barriers to interprovincial trade that are estimated to lower GDP by 4%, an astronomical amount in terms of growth accounting.
Perhaps even more importantly, we do not cultivate a culture in which business firms can thrive and attract our most capable young people to pursue entrepreneurial careers in business. Symptomatic of this attitude is a recent poll about institutions in Canada to make Canada a better country. All the institutions were in the public sector, ranging from education and health care to Parliament. No private sector institutions were even considered.
The late Senator Daniel Patrick Moynihan famously wrote that the conservative central truth is that it’s culture, not politics, that determines the success of a society. The central liberal truth is that politics can change a culture and save it from itself. Canada needs its political leaders to initiate a change in its culture, emphasizing the need for sustained business investment and innovation.
Thank you, and I’ll do my best to answer your questions.
The Chair: Thank you very much, Mr. Cross.
I feel like we need to invite some psychologists here. We have heard from our previous witness that we lack ambition and that somehow without a credible threat to our future, we’re never going to act, even in our own best interests. You’ve talked about that lack of animal spirit that we see elsewhere. Does that have to come from the top down or the bottom up? Where are we going to change that mindset about success being good as opposed to bad?
Mr. Cross: I think that in any conversation, somebody has to initiate it or has to lead it.
By the way, I wouldn’t say it was psychology. We’re talking more about values. Economists have been very reluctant to get into that because economists like to quantify things. I know. I spent 36 years at Statistics Canada. That’s what we do. The idea that a lot of economic growth theorists are pushing — Deirdre McCloskey is one; Joel Mokyr is another — is that when we look back in history, the major reason some countries are rich and others are poor is not institutions. It’s not even technology. If it was technology, everybody would be rich because we can share technology. What increasingly differentiates poor from rich societies is values.
However, people have been afraid to go down that road because it’s hard to quantify. Recently, Edmund Phelps, who won a Nobel Prize for economic growth theory in, I think, 2011, has tried to quantify this. He’s put out some really interesting work that regresses and looks at how — he first goes out and does surveys of different values in different societies. He asks things like whether they like their children to be independent. Do they like risk taking? What importance do they attach to achievement on the job? These are measurable values that should be related to economic growth, and indeed, he does find that those societies — notably the United States — that innovate the best have the values that most readily encourage these things. Canada is near the bottom. For example, we think of the Japanese as being very strict in raising children. It turns out that, in terms of values, we prize the independence of our children as low as the Japanese do. If you’re going to lead children around by the nose and tell them what to do, they’re not going to grow up to be risk takers in Silicon Valley.
Yes, changing values is going to be difficult. It takes time. But if it’s going to start, it’s going to start with our leaders initiating a discussion. To expect this to spontaneously come from the bottom up is going to take longer. If we’re going to accelerate this process, it has to be our political and educational leaders who start it.
Kevin Lynch wrote a very good op-ed in The Globe and Mail a few years ago that talked about how we can teach innovation in schools. Innovation is not some magic formula out there. This is a skill, and skills can be taught in schools.
That’s a long-winded answer.
The Chair: That’s a wonderful setting of the stage. It’s what we’ve been wrestling with. Thank you for giving some precision to the answer.
Senator C. Deacon: Thank you, Mr. Cross, for being with us and for your recent comment piece in the Financial Post, which I enjoyed reading.
I want to focus in on a Statistics Canada study that looked at GDP growth in knowledge-intensive sectors relative to the rest of the economy over 20 years. I think it identified that GDP growth in those knowledge-intensive businesses was four times that of the rest of the economy. We’re seeing tremendous growth in digitally intensive, knowledge-intensive sectors.
We’ve just heard from the previous witness that measuring high-knowledge-intensive exports per worker could be a useful KPI that might then drive a lot of the little and bigger changes through government. Because if we’re measuring what we really want to accomplish and what we think will be precipitous of a lot of benefits, it could be useful in making changes. Certainly for business, having a really useful KPI that captures what you really want to accomplish helps keep everybody focused. What are your thoughts in that regard?
Mr. Cross: I agree with the idea that knowledge is important, but I don’t know why I would confine it to certain specific industries. You started out by talking about knowledge-based industries —
Senator C. Deacon: I wouldn’t see that it is defined to a certain sector, because every industry is becoming more and more high knowledge.
Mr. Cross: Exactly. That’s what I was going to get into. It’s not just digitally based industries. Agriculture is an extremely knowledge-based industry these days. So is oil and gas and energy. The people who invented shale oil in the U.S. — that was a game-changing innovation that was years in the making. Almost any industry I look at that grows rapidly, well, it’s because they’re innovating. Innovating means I’m doing something different, which means I’m applying knowledge. I’m taking what existed before, and I’m making it a little better.
As a statistician, I don’t know how to define that a priori. That’s why I would go back to it being values that interest me much more at this point. We want to encourage people to innovate — to do things differently and creatively and not say, for example, that we should only do it in manufacturing. No, we need to be innovative and creative in everything we do: in agriculture, energy, manufacturing, services, high tech and government.
Senator C. Deacon: I couldn’t agree more. I just want to make the point that high-knowledge-intensive or high-value exports are key because exports give you a sense of how the world is valuing that product or that innovation. That’s why that element is important. Would you agree with that?
Mr. Cross: Very much so. That’s why, in my opening statement, I started with the thing that worries me about the Canadian economy. It isn’t our lousy GDP numbers because that’s just a symptom. It’s that the two sectors of the economy that drive growth over the long term, business investment and exports, have not grown since 2015. My goodness. That’s eight years. No growth in the volume of merchandise exports in eight years? That says something about —
Senator C. Deacon: The competitiveness of our business.
Mr. Cross: — how we’re doing. That’s a warning signal. Okay, we’ve kept growth afloat and alive by having a big boom in the real estate sector and lots of consumption, but if we don’t get business investments and exports going, that’s going to threaten everything else. Because that’s where wealth is ultimately generated: tradeable goods. If you don’t invest, you’re going to be dead meat in the global economy today.
The Chair: We’re having a lot of moments of clarity here today, and we really appreciate it. Thank you.
Senator Gignac: Welcome to our witnesses. Please allow me to spend 20 seconds highlighting that Mr. Cross has spent 35 years at Statistics Canada. For the last decade, he was the chief economist. I dealt with him in my previous life. It was under his leadership that Canada became a reference in OECD countries. That was very important. Thank you for being with us.
Mr. Cross: I remember those conversations I had with you quite clearly.
[Translation]
Senator Gignac: I don’t know if you did the study, but it was certainly the Fraser Institute that drew a parallel between Canada and Australia. I’m interested because there are similarities between Canada and Australia in terms of natural resources. Can you talk a little bit about that? What policies has Australia put in place to increase productivity?
[English]
Mr. Cross: They’ve developed and are much more reliant on their natural resource sector, particularly their mining sector. They have been much more aggressive in developing that. They’re right next door to — outside of the U.S., the biggest market in the world for commodities is China. Obviously, the rapid growth in China has driven extremely rapid growth in the resource sector in Australia, and they haven’t resisted that until perhaps recently. I think now they’re starting to get a little nervous about the amount of Chinese investment in their resource sector, but by and large, they’ve been very happy to develop particularly their mining industries — the iron ore and so on — whereas we have, particularly with regards to the oil and gas industry, put up a lot of regulatory barriers and created a lot of regulatory uncertainty.
Look at the difference between the American attitude to their oil and gas industry and ours, and you’ll see what happened over the last year. After the Russian invasion of Ukraine, natural gas and energy supplies to Europe dropped substantially. Who runs to the rescue? The United States. They export at a hugely profitable price because prices were much higher in Europe. They took every amount of oil and gas they could possibly ship to Europe and got the higher price. Then they turned around, and for their domestic needs, they bought the really cheap stuff from us. We sit here and wonder, why are Americans doing so much better than us? Why are their GDP and investments up 20% while ours are down almost 20%? Our GDP per capita has lagged over 10% in just six years. If that gap keeps growing, we are going to have a problem keeping young people in this country. I don’t know why we are so reluctant to look at that. Again you go back to Phelps and the work they do.
The United States is the most innovative economy in the world. Every country in the world wants to imitate the U.S. Every country wants to know how the U.S. developed Facebook, Amazon, Apple, Netflix and Google. These companies are the technological drivers for the world. Everyone is trying to understand what it is about the U.S. that they keep hitting home run after home run, and we just don’t seem to be asking that question.
One thing that Canada always did well was being the people who explained the U.S. to the rest of the world, because the rest of the world looks at the U.S. and thinks that these people are nuts with the guns and everything else, but we were always in between. We were next to the U.S. and we would help explain to Asia and Europe that this is what is going on in the U.S. We seem to have lost that ability. We don’t seem to try to understand the U.S. anymore, and we don’t have any more answers than the U.S. does about why the U.S. is so good at innovation and what lessons that has for us. We don’t even seem to be asking the question.
That is so far away from your original question about Australia.
The Chair: But interesting nevertheless.
Mr. Cross: One thing I like about these Senate testimonies is that you can kind of take the ball and run with it.
Senator Loffreda: Thank you, Mr. Cross, for being here with us.
I’m looking at the table of business investment, nonresidential, as a share of GDP. I go back 20 years — the Fraser Institute research bulletin was informative enough to give us these tables — and the one thing that jumps out at me from these tables is that if we look at the 2000 to 2008 average percentage of business investment as a share of GDP, and we look at 2009 to 2014 and 2015–2017 — and probably those numbers haven’t changed — the countries that were number one in 2000 are still number one in 2017 and probably still number one in 2022. Canada was number 15 in 2000 to 2008 on the average, and we are number 16 recently. The only difference in those rankings comes from the energy sector between 2009 and 2014. When the energy sector was performing, Canada went from numbers 15 to 8 and back to 16. Norway sees the same thing; they went from 12 to 7 to 13. Why can we not learn from the best? Why is that constant for the last 22 years? We can go through the list. The United States, which we mentioned, was number 9, then 10, then 8.
The rankings have not changed in 20 years when it comes to business investment, yet business investment is so important to quality of life. Fewer businesses and fewer jobs, less money to spend on social programs and less quality of life. Why don’t governments focus more on what we can learn? I know we did it in business: Who is performing and doing it better? What can we learn? We did it from region to region, sharing best practices. Why is that not being done?
Mr. Cross: The stickiness of investment by country that you mentioned partly reflects that a good portion of investment is driven by your geographical environment. Canada is a huge place. It is cold and dark, and as everybody has noted, we invest a lot in energy. If you took energy out from these investment statistics, we would be shockingly low.
I was trying to allude to this in the introduction. We should be doing a lot better at investment just because we are a very capital intensive country. We have a lot of land. We have a lot of resources. We have relatively few people. This is a recipe for a capital-intensive economy, and yet we invest much less than Americans. The difference is in structures and engineering. We have lots of dams and mining and those types of things. Where we lag is that we just don’t give our workers computers. The result is not very surprising. Our workers have very low productivity, and as a result they get paid a lot less than American counterparts. I know people in my family who work for firms that have a footprint on both sides of the border, and we are the low-wage country. A good way to change that is to give our workers more tools so that they can become more productive. Should we be paying more attention to that and measuring it? Absolutely. And you shouldn’t be having to go to the Fraser Institute for this data. Statistics Canada should be putting that data out up front. This is a national priority.
The Chair: We are going to follow up on that one too. Thank you.
Senator Marshall: One of the areas that interests me is big business versus small business. Small business is praised. The government gives them a lot of money and a lot of attention. But big businesses seem to be demonized. I’m thinking specifically of how, in recent months, we have heard of a number of companies making record profits, and “profit” is seen as a dirty word. It seems it is ingrained in our culture that big business is bad and small business is good. I notice that you referenced this in one of your articles when you talked about weak investment. You are saying there is an anticorporate narrative to circulate the blame, and greedy corporations are blamed for, say, inflation.
How do we change? It is almost cultural. We see big businesses move south of the border. There is something in our culture that is anti-big business. Big business employ a lot of people and they pay good wages and pay a lot of income tax and other taxes. What is it about our culture that is so anti-big business, and what can be done to change it?
Mr. Cross: I don’t know specifically why. I can give you another example, though. I was astounded. I wrote this up as a short paper for the Fraser Institute a few years ago. I was reading Dalton McGuinty’s autobiography. It’s 250 or 300 pages. I was simply astounded when I got to the end of it. I literally went back and counted the number of times he mentioned corporations or business, and it was twice. Once was that he gave the auto industry a bunch of money to bail them out in 2008-09, and the other was to complain the banks hadn’t warned him about the 2008-09 crisis coming. Other than that, you would have had the impression that after nearly a decade as premier of Ontario, all he did was go from conference to conference on how to improve the provision of public services. I’m not saying that public services aren’t important. I worked there for 36 years, and I’m a third generation civil servant. I’m not going to sit here and trash the civil service. But I’m not going to pretend either that we are everything.
We saw this again during the pandemic. There was a lot of talk about thanking the health care workers and so forth. Again, it goes back to words being important and the way we talk being important, and a lot of our political discussions that are reported on TV focus on the public sector. I go back to this Nanos survey about what institutions make Canada better. I couldn’t believe it. They asked about you people. They asked about the Governor General. They asked about the Supreme Court. They asked about every public institution you could possibly think of. They didn’t ask about one private sector industry. Are you kidding? Where do you think the money for all this comes from?
Senator Marshall: Yes, it’s terrible. These are the companies that are moving south of the border and we wonder why. We say we have a problem with investment in Canada, but you don’t appreciate the companies we’re depending on for investment. They’re going to other jurisdictions where they are appreciated. How do you change it?
Mr. Cross: I don’t know. But we have to recognize that we have a free trade agreement with the United States. Companies, when they are setting up operations or expanding, can look at going to the U.S. and be treated like —
Senator Marshall: Royalty.
Mr. Cross: — like I’m making a real positive contribution to society, or I can go to Canada and be taxed to death and told, “Well, we allowed you to succeed, but you really owe it all to us.” I’m amazed that investment in Canada is as high as it is, not that it is so low. I don’t know why anybody would invest in this country when you have access to the U.S. market.
I’m told one of the reasons is that foreign firms — not domestic firms, but foreign firms — do look at Canada’s free trade agreements with the other G7 nations and realize that is one advantage from being in Canada and not being in the U.S., because you can access free trade to these other nations that the U.S. doesn’t have free trade agreements with. The senior leader who I was talking to said it is only American corporations who have figured that out, not Canadian businesses.
Senator Marshall: When we hear of a company making record profits, I think, “Good for them.” But everybody else, or a lot of other people, are saying, “Well, shame on them.” I don’t know how to change the narrative.
[Translation]
Senator Bellemare: Thanks for being with us today. My question is a bit complicated.
You talk about culture. Yes, it is true that many economists have noted the rentier culture that is so fundamental to Canadians. We are rentiers with respect to our natural resources. It’s not easy to combine with Keynes’ animal spirits; it’s hard to mix the two.
But Canada is also the sum of its provinces and territories. In the analysis done by the Fraser Institute, you have already seen differences at the provincial and territorial levels. So can you tell us more about whether our culture and behaviours are the same from province to province?
In another aspect of this same question, do you think government contracts can make a difference? Do you think immigration can make a difference because of the cultural elements brought into the country?
So, I’d like to hear your thoughts on this multi-pronged question.
[English]
Mr. Cross: That’s a very good point. I believe, actually, it was a paper I wrote for the University of Calgary School of Public Policy that talked about provincial differences in innovation and culture. That was a very good point, though, that Alberta certainly has probably the most entrepreneurial culture, the one that is closest to the U.S. culture when it comes to self-reliance and innovation and independence and so on. It probably goes back to their background in farming and in the oil and gas industry. So yes, there probably are large provincial differences in this.
As I said, a lot of my work is based on Phelps. There is very little hard data we have on cultural values for different jurisdictions. It is hard enough to get that at a national level. We can do that a little bit now thanks to Phelps. I have never really seen it done at the provincial level. You have to go back to manifestations and see which provinces are most likely to reduce their interprovincial trade barriers. Well, the West does very well on that. A lot of the provinces there have agreements to increase the flow of goods.
There are encouraging things. It goes back to the question of how you change culture. Unfortunately, slowly. I think it is very encouraging that in the CAQ government — recently re-elected in Quebec — over half of cabinet ministers have a background in the business community. I think that’s a good step forward. I mean, François Legault ran Air Transat, which very nicely just flew me back from France in January, so this man should know something about running a business. The more of those types of people you have in government, I think the better communications you are going to have between the government and the business sector.
Obviously, I thought the McGuinty government was a complete disaster on that front. The Ford government, they defy classification. I still cannot figure out the Ford government. We saw this under the Harper government. There we had a federal government that knew how to communicate better with the business sector, but then we had a number of provincial governments, particularly in Ontario and Alberta, that offset a lot of that. I think a lot of times we are working at cross purposes. The configuration of provincial governments these days is relatively encouraging. Federal government, work on it.
The Chair: Thanks for that.
Senator Smith: Thank you for being with us.
The words that keep coming up in my mind are leadership and competition. It infuriates me when I hear some things. I will talk briefly on the simple example of sport. As a young person growing up, I always wanted to be a professional football player, and all of a sudden I get through university and have a very good career, and I end up getting drafted and going to the Alouettes. I am the number one draft choice. So I get X. I made 10,000 bucks and $1,000 signing bonus. But all the American players got $25,000 or $30,000. The thing I noticed about them was they all believed they were better than us.
Part of it is, like we were talking about, the culture. How do we change that culture? It is going to take a long time, but what can government do? If government is going to get involved, what are the one or two issues or elements the government is going to do? We have had some government groups come in in terms of civil servants, and there is a real marked difference between some of the feedback we get. Is there a reorganization that needs to take place within our civil service? But you can’t penalize the civil service because they do, generally, a good job. But how can you improve it so there can be incremental steps? They can be short steps, but steps that can be done more quickly as opposed to trying to hit a home run, which is not going to happen. You have to have it stepped.
We talked about provincial free trade and opening up the corridors. We talked about red tape. The first thing I heard in 2010 when I came here is, “We have to cut red tape.” But, “Oh, I’m sorry, we can only do that in five years from now.” We were going to have 46 changes — we went through this last year. We’re going to have some changes, but it is going to take time to get the changes implemented. Well, geez, I might be dead by the time the changes are done.
How do we create a sense of leadership and sense of energy and urgency that is controlled? We always heard in life it is better to be not too high, not too low, but make sure you have a focus. I would like to hear your point of view on that. Without getting into trouble —
Mr. Cross: No, I search out trouble, and I am going to do it now by saying this. You talked about how the civil service generally does a good job, and I would agree. On the other hand, I have been out of StatCan now — and if I say “out” like I’m out of prison, that’s exactly what I mean. I have been out now for ten years, so this doesn’t take into account inflation. When I was there, internally, in our accounting, we assumed that the average employee cost $100,000, all in: wages, the computer, the desk, the training, everything. So that was $100,000 then. It has to be closer to well over to $125,000, if not $150,000, today. I would often sit in meetings when I was bored, and I would look around the table and go, “How many of you are worth $100,000? Not many.” So let’s stop coddling the civil service. They do a good job. They are paid very well. By the way, that calculation does not include the portion of the pensions that are going to be financed by the taxpayers in the future, but that’s all off the books, so the actual cost is way above $100,000. If you are going to pay a person way more than $100,000, they had better show up and do a damned good job every day. And we should not be thanking them every day, “Oh, that you showed up today. Thank you very much.”
Senator Smith: How do we get that sea change?
Mr. Cross: I don’t want to get too far down this road. I just wanted to say that the civil service does a good job, and they had better. They are very well compensated. They are provided with every tool and resource.
I’m aware that since I left StatCan, I don’t have a staff. One thing government brings to the table is resources. If you go to war, you want government there. They show up with everything they have got. But being nimble and being quick, not so good.
That would be a starting point: let’s stop the talking to the public sector as if they need constant boosting. The thing that needs constant boosting in our society is entrepreneurs. What do we do instead? We drag them before finance committees and ask them about food prices. Does that go on in the U.S.? I’m not an expert on Congress, but I haven’t heard that. They drag their high tech up, which doesn’t make any sense. These are the guys driving growth. But they like to beat up on their high tech.
Senator Smith: Maybe one element is there is opportunity to improve the productivity within the federal civil service. But that will only happen through leadership, which you mentioned earlier, and that’s why hopefully you recruit people —
Mr. Cross: We need to reward, verbally as well as materially our entrepreneurs. Recognize them, that they are doing something good for society, and that without their investments and creativity, we are going to lose our export competitiveness. Our investment will fall even more, and in the long term this will have really severe consequences for our standard of living.
Senator Smith: We need leaders in our Canadian community to do that.
Mr. Cross: One nuance I would add, just to complicate things further: I might be leaving the impression that economic growth is simple, and it is not. I’m very serious about that. Lots of smart people have spent their whole lives studying why some regions, some countries — why did growth pick up in Japan for a certain amount of time and then suddenly they hit a wall? It is a very complicated process.
We can’t just fixate on small business. There is too much of a narrative in this country that small business is great. Yes, they are very good. I run a small business. I’m not going to badmouth small businesses. What drives economic growth are what is called gazelles — small businesses that are in the process of becoming big firms. Facebook made a transition in a decade from being basically nothing to dominating the world. That’s where economic growth comes from.
Senator Smith: I took too much of your time. There are others.
The Chair: It’s a good point about the gazelle. That was back to Senator Marshall’s point. I think that’s a great answer.
Senator Ringuette: This is interesting.
From the outset, I will say that I come from Atlantic Canada, and I believe that the greatest Canadian resource that we have is our human capital. Otherwise, you can look at any other sector and nothing would happen. I want to make clear that this is my perspective.
Our previous witness today, and other witnesses in the last few weeks, talked about when the Government of Canada or the provinces provide funds for research, that it should be conditional on a form of ownership so that we as Canadians can keep control of that intellectual property. In essence, we are talking about helping and fostering research that will bring start-up. That’s one side of the conversation. Then we have another side of the conversation that says, well, we need to focus on the big ones. I would like to understand, from your point of view, should we concentrate only on the big ones, or should we also concentrate on the small egg that will grow and become a chicken?
Mr. Cross: That’s exactly what I was referring to with gazelles. You don’t become a rapidly growing, successful economy by having a bunch of small businesses that stay small or a bunch of big businesses that are only interested in consolidating their position. Rapid economic growth comes from gazelles. How do you foster that? I would say the worst thing you can do is put control of ownership on. If I were a small business that had a great idea and I was that rare Canadian who aspired to not just be successful in Canada but on the global stage, the minute someone from the Canadian government came to me and said we’re interested in putting some restrictions on your ownership, I’d say, “I’m out of here. I’m sorry. I’m off to the U.S.”
Senator Ringuette: I want to clarify. Maybe you didn’t understand. We are talking about government funding for research and development that is done in our universities for intellectual property. We have concerns in regard to our intellectual property being bought by foreign entities. Would you put some value into conditions on these research grants?
Mr. Cross: None whatsoever. I have written three papers on innovation. The first one was at MLI. The second was at the University of Calgary. The third was at the Fraser Institute. I have looked into this a lot. Research and development is not innovation. It is a very poor way of thinking about innovation. It’s failure as a way of understanding innovation is shown by the fact that Canada, government policy, has provided a lot of support to R&D over the years. What has it got us in terms of innovation? Nothing. We are going down the wrong road on this one.
Senator Ringuette: Where would you invest?
Mr. Cross: I, me, being the government, I wouldn’t invest. The whole point of what I’m trying to say is I want to get people in the private sector investing. Go back to the question of why is the United States the most innovative economy in the world? Why do they have Apple, Netflix and Google? It’s not because of government grants. Where are all these innovative firms located? They are all on the West Coast. Bill Gates said, “I put Microsoft in Seattle because I wanted to be as far away from Washington as humanly possible.” Who’s in Washington? The U.S. manufacturers’ association. They moved their headquarters from New York to Washington so they could be first in line at the trough and lobby. That’s why the U.S. manufacturers’ association does not fund a lot of innovation, and I think that’s why a lot of high tech does. You want to be far away from government.
The idea that you are dependent upon government or reliant on government and need government subsidies — no. You show me a firm that thinks like that and I’ll show you a firm that is lazy, is not creative, and will be smashed to smithereens on the world stage. If it has any growth, it will be behind government regulations and import controls. It will only succeed in the Canadian market.
The Financial Times still compiles lists of the 100 most innovative companies in the world. We used to regularly have 10 to 15 firms on that in the mid 1990s. In the last ranking, we had one, Shopify, which has had trouble since then.
I don’t believe that government support and R&D subsidies are the way for us to get 10 firms back on that list, but that’s the goal, to me.
The Chair: I’m so glad that you’re so very reticent about telling us what you think, Mr. Cross. It’s great.
Senator Marwah: I’m always fascinated how, in Canada, we continually look to the government for leadership on virtually every front. But what about all the other creators of economic growth — small businesses, big businesses, entrepreneurs, academics, our label? Nobody talks about them and their roles. Don’t you think they should be a lot more circumspect about what they need to do, not just blame the government? It’s always about regulation or government policy, but there’s very little inward looking that considers, “Maybe we have to do something different, too. ”There’s very little discourse on that introspection or circumspect view of what they need to do to help things move along. It’s always one way — not always, but 90% of the time, 10% the other way. Why is that?
Mr. Cross: I have written that I am concerned that we are developing a business sector that doesn’t try to be innovative. The goal of a lot of successful firms in Canada — and it’s just in Canada, because you’ll never be successful on the global stage with this attitude — is to latch onto some sort of government protection. It’s called “rent-seeking.” “Can I get some sort of government subsidy? If I cozy up to government, I’ll have nice quiet life. I’ll earn a nice steady rate of return and be kind of insulated from competition. I can go to ribbon-cutting ceremonies, and we can say it’s all great success.”
The problem is that after 10 years of that, then you look at GDP statistics, investment and exports, and you see investments and exports are declining, and GDP growth is doing nothing — you see us continually sliding down the international rankings of economic performance, and you realize this is not working for the Canadian people, though this might be working for individuals.
To put it another way, being pro-business in this country, to governments, has come to mean giving a subsidy. “You want to build an electric vehicle plant? Here are a few billion dollars, and that shows I’m pro-business.” No, that shows you don’t trust business, and it makes people cynical about business. It makes people think that business people owe their success not to being innovative or creative; they’re just buddy buddies with the minister, and that’s how he got rich. It creates a culture that becomes even more anti-business, anti-wealth, et cetera.
So I quite agree.
Senator Marwah: Which is exactly my point, Mr. Cross: We’re always looking to the government as the solution to all problems. I think that’s wrong. These sectors — all sectors, including labour and us — have got to look more at the mirror and consider that we’ve got to change a few things.
Here is a classic example: We’ve created all these free trade agreements. We’ve laid it on the platter for businesses to export, yet our imports are growing faster. It’s because we just don’t use them. We don’t utilize them. It’s not the fault of government; they’ve created the platform. Businesses have not risen to the occasion. Entrepreneurs have not risen to the occasion, in my point of view. Whether it’s the U.S. or not, it doesn’t matter. We have just not leveraged the platform that has been handed to them.
Mr. Cross: I’m not going to agree with that, because I think governments make it too easy. If firms know they can go to government and there’s a good chance they’ll get a handout, protection, favour or something, they’re going to do it, because it’s an easy way to make money for an individual. It’s a lousy way for a society or an economy to operate.
You can go to business and tell them they shouldn’t be asking for handouts. The auto industry shouldn’t be going to the government for constant billions of dollars to build plants. But that’s naive; they’re going to do that as long as they know it’s available. At some point, it’s up to the government to take the initiative and say “no” to more handouts.
Senator Marwah: But the free trade agreements are not handouts; they’re just opening up the borders for all sides in the agreement. I’m asking this: Why haven’t businesses risen to the occasion? They haven’t. Businesses have to be a lot more circumspect as to whether they’ve risen to the occasion and not always blame the government.
Mr. Cross: Why would you do that? Why would you go to the trouble, risk and uncertainty of exporting to the U.S. when you can sit here and your local or provincial government will just make life nice, easy and cozy for you?
The Chair: We’re going to try and get to a second round here to get a few more issues on the table.
Senator C. Deacon: I would love to just distinguish a little bit between business executives and entrepreneurs. Business executives are a very different category. I think that’s been mixed quite a bit here.
I look at it in terms of the role that the Australian Competition and Consumer Commission and the Australian Productivity Commission have played in highlighting problems around the need for greater competition in that economy to drive innovation and competitiveness to address some of the issues that were holding business productivity, growth and the highest-growth-potential businesses back. What work have you done to look at how Australia has leaned into this issue, and what lessons could we learn from them?
Mr. Cross: Specifically none. I have not closely examined the Australian economy.
Senator C. Deacon: Let’s just look at competition in its own right. We have more of an oligopolistic economy in Canada that is highly concentrated in a lot of key sectors where there are regulatory moats that make it harder for new entrants and innovators to break in. It does provide that comfort you were speaking about a few minutes ago. What would you look at in terms of the importance of competition as a way to drive innovation with incumbents and new entrants?
Mr. Cross: Competition is incredibly difficult to define. Competition used to be measured by concentration ratios. We used to look at an industry, and the data was published. We used to look at the auto industry. The four largest firms account for 100%, so their concentration ratio is a certain amount. StatsCan stopped producing that partly because it’s very difficult to identify where one market begins and another ends. At some point, all firms are competing for a consumer dollar, and firms are competing with governments for household dollars. The head of Netflix once said that his number one competition was sleep. So defining the marketplace and competition is incredibly difficult.
The important thing is that there’s ease of entry for new competitors. As long as you have that, I don’t care that Facebook —
Senator C. Deacon: Thank you. That’s a very useful definition. We need to have the ability for new entrants to break into sectors in order to drive innovation. Hear, hear.
Senator Loffreda: My question is this: Should we not make a strong distinction between foreign investment and domestic business investment? You did mention that the investment in our energy sector is substantial and is our strong performance with respect to foreign investment in Canada. I say that because a Government of Canada website shows foreign investors choose Canada, and Canada had the second-largest direct foreign investment — FDI-stock-to-GDP ratios — among G20 countries through the 2016-20 period. That’s from the United Nations Conference on Trade. It goes on to say that with the low-cost, low-tax environment at 26.2% in 2021, Canada’s combined federal-provincial corporate income tax rate is one of the lowest in the G7. It’s 13.2 on the treatment for new business. It goes on to say Canada has the most educated talent pool in the OECD: 60% of our population aged 25 to 64 have received tertiary level education. That’s on education from a glance from the OECD. So we have a lot to offer.
Can we make a distinction? Why, according to the website, are we performing well on foreign investment — if you say it’s strictly energy, then it’s one thing — and why are we lagging so far behind on the domestic business investment? We know the factors. We’ve discussed them — regulations, talent, industrial policy, political policy — but is there anything you can add to that to take a deeper dive into that issue?
Mr. Cross: Well, first, I am aware that Statistics Canada has produced an avalanche of studies showing that it’s foreign-owned firms followed by export-oriented firms that are the ones that drive everything when it comes to innovation, technology adoption and high productivity. I mean, it’s these people who are on the front lines of global competition and are at the frontiers of technology and productivity, so I think you want to encourage as much foreign investment as possible. Instead, we put up restrictions. Somebody wants to buy RONA, and we go, “Oh, my God, no; we can’t have a non-Canadian owning our hardware store.” Are you kidding?
But you go back to, yes, that is one of the conundrums. We have a lot to offer. I offered that menu list in my introduction. Yes, we have the highest levels of formal education, although studies also show that about half of learning takes place in the firm. What Johnny learns at school may not take him very far in this world, so I wouldn’t stop right there, but as a country, we seem to stop right there and go, “He’s educated; that’s good enough.”
The Chair: Just a final quick point there, and we are going to try and get one more question.
Mr. Cross: Yet the world, for some reason, looks at Canada and says, “Yeah, pass; we’ll go somewhere else.”
That is the question. There’s something missing. We have a lot to offer, but we should be concentrating on why the world is able to so easily pass Canada by these days. It’s not what we offer; it’s what is missing?
The Chair: A quick question, Senator Bellemare, and a quick answer, and then we’ll wrap this up. Thank you.
Senator Bellemare: What do you think Canada should do to take account of the new more than $300 billion of the Inflation Reduction Act and the green economy plans of the U.S.? It’s coming. What will it do to the Canadian economy and to our Canadian entrepreneurs?
Mr. Cross: That’s a difficult question. Thank you for ending the session on that.
It’s a lot like the auto industry. It’s easy to sit there and say, “Well, we shouldn’t be in this game.” It just becomes an endless game of the U.S. offers this much subsidy, so we have to offer that much. It’s a race to the bottom. In the auto industry, it’s so well ingrained that if you don’t play, you feel like you’re — I think it might be an opportunity, though, for us to take a stand and say, “No, we’re not going to play this game.” We’ve played this game of government subsidies to the hilt. We’ve played that a lot better than the Americans do, and it’s not working for us.
You go back to, yes, we have a lot to offer. Government subsidies shouldn’t be one of them. That should not be the reason. I’m very skeptical of Volkswagen coming here for $15 billion. If it takes a $15 billion bribe to get you to invest in this country, you’re not really interested in this country, and the first sign that things go bad, you’re going to be out of here.
I understand the idea that we have to be competitive, but I dislike playing that game.
The Chair: Mr. Cross, thank you very much. You’ve fielded a wide range of questions for us here today, a Senior Fellow at the Fraser Institute and, of course, a long-time chief economic analyst at Statistics Canada, who has been released, who has been given his freedom, in his own words.
Thank you all for joining us for this meeting of the Senate Banking Committee, and we’ll see you all again tomorrow.
(The committee adjourned.)