Schools Out: Canada’s Economic Performance Report Card 2014

Having looked at exports and trade and the changing political climates that may affect these economic aspects, the conversation now turns to Foreign Direct Investments (FDI). The shift to this topic is probably quite obvious: FDI impact production and trade, and obviously political climates affect FDI. So where does Canada rank in regards to its FDI in relation to GDP?

You are about to be educated. And no, not because I’m some authority on the matter, but because Canada has actually received a report card breaking down its economic performance. The Conference Board of Canada has released its annual “How Canada Performs” report card, grading Canada’s performance (provincially and internationally) in the areas of income per capita, gross domestic product (GDP) growth, employment growth, unemployment rate, inflation, and labour productivity growth.   

Overall, Canada appears to be a solid economic performer, earning an overall GPA of “B.” Alberta is definitely the forerunner, scoring “A’s” and “A+’s” in the majority of graded categories, its lowest mark only being a “C,” while others show grades sitting as low as “D-.” The Maritimes continue to be lower performers, but the territories have proven to be quite strong.

Here is an overview of the economic performance report card by province as dictated by The Conference Board of Canada. 

REPORT CARD SUMMARY

PROVINCIAL RANKING REPORT CARD

CANADA

NL

P.E.I.

NS

NB

QB

ON

MB

SK

AB

BC

YK

NWT

NU

Income Per Capita

C

B

D-

D

D-

D

C

D

B

A+

C

A+

A+

B

GDP growth

A

A+

B

B

C

B

B

A

A+

A+

A

B

A

A+

Labour Productivity growth

C

D-

C

B

C

C

C

B

C

C

C

A

D-

A+

Unemployment rate

B

D

D

C

C

B

B

A

A

A

B

A

B

D

Employment growth

A

A

A+

D

C

A

A+

B

A+

A+

C

A+

C

A+

Inflation

B

A

A

A

B

B

A

A

A

A

C

A

A

A

Inward Greenfield FDI

C

A+

A+

C

B

D

C

D

C

B

C

-

-

-

Outward Greenfield FDI

D

D-

D-

D-

D-

D-

C

D-

D-

B

A

-

-

-

The highest grades are awarded to the provinces that are rich in resources, which are Canada’s primary exports and account for over 70% of its GDP, so really this doesn't come as a shock. Where Canada seems to be lagging, however, is in innovation and by extension Foreign Direct Investment (FDI).  

According to The Conference Board of Canada, there are three aspects to measuring the economic aspect of quality of life for any given country or province/state; these are:

1.       Economic wealth, measured by income per capita – the ability for the province our country to sustain living standards, i.e. the ability for its residents “to purchase the goods and services needed to live, such as housing, food, and clothing,” and the ability for a province or country to “sustain living standards through public spending on education, health, and infrastructure.” In other words, the ability for a province or country to be self-sufficient.

2.       Economic disadvantage and hardship, measured by the unemployment rate, affecting “labour productivity and its GDP growth,” as well as a link to “elevated rates of poverty, homelessness, income inequality, crime, poor health outcomes, low self-esteem, and social exclusion.”

3.       Economic sustainability, measured by economic growth, macroeconomic stability, and global integration – this is a country or province’s ability to “sustain its economic growth and prosperity into the future.”

Where Canada needs to see some improvement is in the Economic Sustainability sector, which is tied heavily to global integration; this is primarily inward and outward FDI.

So where do we stand on this matter of FDI? The data paints a picture of steady decline, dropping from 16% in 1970 to 3% as of 2009. Meanwhile, our neighbour to the south has risen from 8% in 1970 to 29% in 1986 before falling back down to a modest 12% in 2009 (Conference Board of Canada).

     This decline in FDI isn’t actually as devastating as the numbers perhaps suggest. When considering something like Foreign Investment, it helps to look at it in context. This context is called the inward FDI performance index, which compares a country’s share of global FDI with its share of global gross domestic product (GDP). The index rates performance on a numerical scale: 1 is at par with economy size, “anything greater than 1 means the courting is attracting more inward FDI than its economy size would warrant. A value of less than 1 indicates it is attracting less inward FDI than it should, based on size of the economy” (Conference Board of Canada).

      In other words, the index offers a performance review relative to economy size. Based on the size of the Canadian economy, 16% was above and beyond the FDI that its size warranted, situating us at around a 6.0 on the index scale, whereas, at 3% we are hovering around a 1.1 to 1.2 on the index scale, meaning that “its share of global inward FDI is still larger than its share of global GDP,” and therefore “it is not correct to say that Canada is not attracting its ‘fair’ share of inward FDI” (Conference Board of Canada).

      Why is FDI so important? Well, for many reasons, but mainly because, as the Conference Board of Canada notes, “in this new era of integrative trade, global supply chains are driven by FDI.” Inward FDI helps to “expand trade” and can also “boost productivity by providing access to new technology, business and manufacturing processes, and management know-how, as well as by fostering a competitive and innovative business environment” (Conference Board of Canada).

      Coming back to the statistics of Canada’s FDI verses that of the USA, one must beg the question, what is the U.S. doing differently? Mainly, they employ a vastly competitive market that thrives on invention and beating the other guys to the punch. Taking the terminology of the Human Race to heart, from the arms race to the space race, and now the marathon of technological invention, America tends to place itself on the front-lines of the new and the revolutionary. This Kennedy mentality, to not “look at things that are and ask why,” but instead “look at things that never were and ask why not,” is the medicine that the Conference Board of Canada prescribes to get Canada back into shape. Put more specifically, where Canada is lagging which is affecting its ability to secure FDI is in innovation. What the Conference Board of Canada suggests that Canada needs to do to attract FDI is “focus on creating a business environment that is more open to competition and conducive to innovation – especially in key industries such as telecom and air transportation.” 

    

      I would like to suggest, however, that air transportation has been a very successful industry in Canada as of 2013 and 2014 and is expected to fare well in 2015, as was suggested by the export forecast by EDC. Where Canada has been investing funds in R&D and innovation has been in the clean technology industry, as was mentioned in a previous blog post as well. It isn't fair to say that Canada doesn't invest in R&D and innovation; however, it might actually be fairer to say that Canada has yet to see a return on its investment. There are a few industries where Canada is poised to be a leading innovator, and sustainable clean technology is one of them.

      Nevertheless, Canada seems to have a habit of getting into the game slightly late instead of being a game changer. “Canada has been slow to adopt leading-edge technologies,” remarks the Conference Board of Canada, which is problematic, because “innovative products have increasingly short cycles.” Which means that in a short time after being introduced to markets, innovative products then need to be upgraded or replaced. In these circumstances, “slow adopters never catch up; they are always at least one generation behind the advancing frontier of possibilities that new technology represents” (Conference Board of Canada). It would appear that Canada is playing catch-up with too many new technologies.

   

     There remains a sort of catch 22 situation, however, because investments are necessary to be able to produce innovative products and by extension boost trade, but without innovative products being produced, this market is not an attractive investment opportunity. As was mentioned in past blogs regarding Canada’s export and trade performance, we tend to be falling short. Like a child struggling to grasp course material, Canada is not meeting the performance level of its peer countries; it is essentially being left behind and being left out of a significant piece of a rather delicious economic pie:

     “Between 1990 and 2007, global GDP increased by an average of 5.5 per cent per year and exports by 8.5 per cent; the flow of FDI worldwide grew by a whopping 14.6 per cent per year” (Conference Board of Canada).

     Ultimately, the Conference Board of Canada offers the critical feedback that Canada’s sub-par performance is of its own doing. To keep with the metaphor, this is the equivalent of the parent-teacher conversation wherein the teacher advises that the struggling child just needs to apply him/herself more. But this advice, however well-intended, is always easier said than done. The Conference Board of Canada notes that:

     “Canada does not take the steps that other countries take to ensure research can be successfully commercialized and used as a source of advantage for innovative companies seeking global market share. Canadian companies are thus rarely at the leading edge of new technology and too often find themselves a generation or more behind the productivity growth achieved by global industry leaders” (Conference Board of Canada).

      Again, we may be tempted to ask, why is it such a big deal for a country to be invested in innovation? According to the Conference Board of Canada, “Innovation is essential to a high-performing economy.” As statistics would suggest, countries that are more innovative are “passing Canada on measures such as income per capita, productivity, and the quality of social programs” (Conference Board of Canada). Innovation also proves to be “critical to environmental protection, a high-performing education system, a well-functioning system of health promotion and health care, and an inclusive society” (Conference Board of Canada). Without innovation, all these systems stagnate; and as statistics seem to suggest, if your are standing in one place, you may very well not be moving backwards, but you are definitely not moving forward. Eventually this lack of forward momentum will leave you behind everyone else, and that appears to be what has happened to Canada. Moreover, FDI is linked to labour productivity. Higher productivity increased FDI attractiveness; however, it often takes FDI interest to increase productivity. Again we find ourselves in this vicious cycle.

    

     Canada unfortunately has a rather low productivity level compared to other peer countries, which is only one reason that it is not seen as a particularly attractive investment market. There are three main factors, according to the Conference Board of Canada, that drive firms to invest in a host country; these are:

1.       Markets

2.       Resources

3.       Efficiency

      Canada is not seen as a particularly attractive market for foreign companies to invest in to expand their reach because Canada “has a small domestic market base, an aging population, and slowing population growth” (Conference Board of Canada). Although it would seem that investing in Canada would offer better access to the larger US market (accounting for 15% of global FDI), particularly because of the Canada-US Free Trade Agreement and the North American Free Trade Agreement, there seems to be very little interest in making use of this trade tether.

     What is more, out of all of the peer countries, Canada has “the second-highest FDI Restrictiveness Index” which measures “regulatory restrictions on FDI that focuses on ‘equity restrictions, screening and approval requirements, restrictions on foreign key personnel, and other operational restrictions (such as limits on purchase of land or on repatriation of profits and capital)’” (Conference Board of Canada). So many rules and regulations decrease the appeal for foreign investment. If it becomes too difficult or too expensive a market, why waste the time and energy investing in it? To jump through these hoops, the incentive would have to be considerably high; something that Canada doesn't exactly have in its back pocket at the moment.

  

      Where Canada is very strong, however, is in natural resources. Between 2005 and 2009, the mining and oil and gas extraction sector “received an average of 32 per cent of FDI inflows into Canada” (Conference Board of Canada). Canada also holds appeal because of its highly skilled and educated workforce: “With high rates of high-school and university attainment, high literacy rates, and strong student skills, Canada performs well on the education report card, ranking 2^nd overall in this category” (Conference Board of Canada).

      Canada needs to harness these strengths and, when coupled with some investment in R&D and innovation, step off of the sidelines and become a key player and even game changer on the front of technological production. We are, after all, the nation that taught the world to type with their thumbs with the revolutionary Blackberry. Although Blackberry is floundering now, surely we have something else up our sleeves that has the same revolutionary power: we are considerably bright people who are capable of impressive things. I believe that the investment in aerospace is a good start, as well as all of the investment in clean technology and sustainable energy, we just have to see these investments materialize enough results to spark further FDI interest. 

Amanda Labelle

      Sources:

      "How Canada Performs," The Conference Board of Canada, Web. http://www.conferenceboard.ca,  accessed June 3rd 2014. 

      "Northern Lights: Canada's Territories Shine in Economic Performance," News Wire, Web.  http://www.newswire.ca/en/story/1356487/northern-lights-canada-s-territories-shine-in-economic-performance, accessed June 3rd 2014.