'Winner's curse' hampers Canada in productivity stakes

Other than the failure of Canadian teams to win the Stanley Cup, few issues create more angst in the national media than the periodic studies showing us trailing on global competitiveness.

Which raises two questions: Why is Canada falling behind? And does this matter when it comes to Canada as a place to invest?

Our lagging performance is clear in a recent analysis of global competitiveness by the World Economic Forum. At No. 10, Canada was down one spot from last year, just squeaking onto the first page of rankings.

And in June, I attended a conference organized by the Institute of Competitiveness and Prosperity, an economic think tank funded by the Government of Ontario. The institute's report showed a dramatic productivity shortfall for Canada versus the United States and most European countries.

As for the cause for this gap, there's strong evidence that the biggest reason lies in the culture and psyche of Canadian business leadership.

In a recent survey, 75 per cent of Canadian CEOs pointed to risk aversion among executives and a culture of complacency as the biggest barriers to innovation and productivity.

At the June conference I spoke with Kevin Lynch who, before assuming the role of vice-chairman of Bank of Montreal, was Canada's top civil servant as clerk of the Privy Council. He pointed out that Canada invests only 1 per cent of its gross domestic product in research and development, ranking it 14th in the Organization for Economic Co-operation and Development. Our spending on R&D is roughly half the level in the U.S. and about a third of that in global leaders such as South Korea, Finland and Sweden.

Canada's performance on productivity is consistent with work from Harvard's Michael Porter, considered today's leading thinker on competitive strategy. His research has identified something called "the winner's curse," in which companies and countries blessed with natural advantages often coast as a result, losing out to less fortunate but hungrier competitors.

Supporting Prof. Porter's thesis is the fact that the two other developed countries with abundant resources and small populations are Norway and Australia. They rank 14th and 16th, respectively, in the ranking of global competitiveness.

Attention, Investors

Does lagging productivity matter to investors? Let's examine stock market returns in the leaders on competitiveness (Switzerland, Sweden and Singapore) compared with returns in the "blessed trio" of Australia, Canada and Norway.

There's good quality data going back to 1970. Imagine that back then you had invested $100 in each of these countries and let it ride to the end of 1999, before the commodities boom. And for consistency, let's use the U.S. dollar to measure results.

The results are shown in the accompanying table. After 30 years, investing in the competitiveness leaders would have resulted in four times the gains of the more naturally gifted competitiveness laggards.

And the impact of the commodities runup of the past 10 years? Thanks to an especially strong performance from Norway, the gap has closed dramatically, to the point that investors in the laggards are only behind by 55 per cent.

The verdict is crystal clear.

Earlier this year, the Conference Board issued a report ranking Canada 14th out of 17 advanced economies on innovation. Among the countries behind Canada were, wait for it, Australia and Norway.

In periods of strong commodity prices, things like innovation and productivity may not be critical. Over time however, there is compelling evidence that competitiveness drives economic prosperity, standard of living and investor returns.

Of course, it's possible that we'll continue to see booming resource prices - so that productivity and innovation won't matter that much.

A warning however: Investors who believe that Canada can excel as a place to invest without addressing its competitiveness issues should understand that they're fighting history. In the words of American sportswriter Damon Runyon: "The race is not always to the swift nor the battle to the strong, but that's the way to bet."

Hungrier Competitors, Higher Returns

Source: MSCI