Investment misunderstandings a major cause for Canada’s productivity gap

“We had hypothesis that there would be some sectors that were be underperforming or some geographies, and in fact it’s not true, these are across sectors and across geographies,” Bill Currie, Deloitte s Managing Director for the Americas and co-author of the report, said in an interview.

“The fact that there’s a number that is this high was a surprise.”

The report, titled “The future of productivity: A wake-up call for Canadian companies” found that companies investing above the median for their size and sector contributed 84 per cent of the total investment.

“Static” companies, or those that are aware they are under investing in their businesses, made up just 14 per cent of Canadian firms.

The rest were eager to grow and willing to take risks, but 36 per cent were “overconfident” — a term Deloitte used for those investing below the median for their size and sector but unaware they were doing so.

As a result, they failed to take advantage of the many productivity improvement incentives put in place by government.

If overconfident firms had a better understanding of how their investments compared with those of their competitors, Deloitte said, they would likely change their behaviour and live up to how they see themselves.

“To achieve the greatest impact, we must focus, among other things, on changing the self-perceptions of Canada’s overconfident firms,” the report said.

“With better information, they could be motivated to increase their investment levels — a decision that could decrease our pending disparity with the United States by 29 per cent.”

Changing he attitudes of static firms would be more difficult, but it could potentially decrease the investment divide between Canadian and U.S. businesses by 14 per cent, the report found.

The best way to bridge that gap, according to Deloitte, is through competitive intelligence. The company is developing a diagnostic tool that will allow companies to understand how their investment levels compare to their peers. They also urge companies to make use of available data, like the numbers complied by Statistics Canada, and to support industry associations dedicated to that type of research.

“Most businesses already gather metrics about their past performance — the focus should be on putting this data in a wider context to gain insight into future requirements,” the report said.

Currie said companies tend to look only at themselves when it comes to investment levels, and even when they look at their competitors, they tend to look at the actions they can see.

The investments that drive productivity, however, are often in the background.

“We don’t think that they are looking hard enough, trying hard enough to understand what their competitors are doing operationally,” he said.

“Unless we actually change the trajectory so that we are no longer falling behind the U.S. and other global competitors, then our children, our next generation, will not be as affluent as we are.”

The study looked at top executives at 884 firms from across Canada, with data across firm size, age, sector and geography.

Previous Deloitte productivity studies have shown that despite a strong dollar, low interest rates and a stable investment environment, many Canadian businesses invest materially less in the research and development and machinery and equipment that are vital to improving productivity.

They have also documented that Canadian business leaders are more risk averse than those in the United States, and that neither company size nor sector composition have a meaningful impact on the country’s overall productivity.

Deloitte is a professional services firms, providing audit, tax, consulting and financial advisory services.