In talking about Canada's persistent and frustrating productivity gap with our U.S. neighbour, there's a tendency to imply that it's somehow a product of poor behaviour – we're inefficient, we're lazy, we're not entrepreneurial, we don't invest and innovate enough. But much of the problem may boil down to the simple, unavoidable fact that we're smaller – not simply in terms of national heft, but, more importantly, at the individual-company level.
Two companion papers published by Statistics Canada Wednesday find that small companies (for the purposes of the research, defined as those with fewer than 500 employees) make up a substantially larger portion of the economy in Canada than they do in the United States – and that this can account for a large part of the productivity gap between the two countries.
According to the Organization for Economic Co-operation and Development (OECD), Canada's labour productivity rate (as measured by nominal GDP per hour worked) is a gaping 27 per cent lower than that of the United States. Meanwhile, Statscan researchers note that in 2008 (the latest detailed data available), small firms accounted for 71 per cent of hours worked in Canada, but just 53 per cent of business-sector gross domestic product; in the U.S., small businesses made up 56 per cent of hours worked and 46 per cent of business-sector GDP. Canada's small-firm labour productivity rate in 2008 was only 47 per cent of that of large firms.
In other words, small companies produced less than half as much from their labour as large firms did, and Canada is bottom-heavy with these smaller firms. That has been working like an anchor on the nation's productivity.
"While small firms are often regarded as dynamic and innovative, in many cases, they may not be able to exploit the scale economies associated with size and, therefore, possess a productivity disadvantage relative to their larger counterparts," the researchers wrote.
They calculated that in 2008, about 60 per cent of The U.S./Canada productivity gap could be accounted for by the differences in prevalence of small businesses between the two countries – both because Canada has a larger proportion of small firms, and because Canadian small firms are relatively less productive than small U.S. companies.
Either way, one solution to Canada's productivity deficit would be to simply build more small companies into large ones; the competitive disadvantages they have, relative both to larger competitors and to their U.S. counterparts, seem to largely evaporate if they can simply get big. Probably easier said than done; with a population only one-10th the size of the U.S., there is a natural constraint in the Canadian domestic market (both in demand and, likely, in access to financing) for companies to reach U.S.-sized proportions in similar numbers.
Perhaps, then, Canada needs to look more beyond its borders for the necessary fuel for company growth. Trade is one obvious route, and the Canadian government is already quite busy promoting expansion opportunities for Canadian businesses overseas. But at the same time, the government may need to reconsider its confusing and at times hostile stance toward foreign investment in Canadian enterprises; encouraging foreign investment, rather than discouraging it, may provide a route for Canadian businesses to grow to more efficient and productive proportions. Ottawa needs to stop looking at foreign investors as a potential threat to economic sovereignty, and instead see them as a potential catalyst to productivity gains – and, by extension, to long-term economic growth.