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Productivity

Rising to Canada's productivity gap challenge

How "overconfident" firms can play a key role

by Jesse McWaters



If "overconfident firms" in Canada boosted their investment in productivity-improvements to the median for their size and sector, it could close the Canada-U.S. productivity gap by 29%. And that’s something that would benefit every Canadian.

Overconfident firms are companies that believe they're investing more than their peers on improving their business — but they're actually investing less than the median for their size and sector.

Our research suggests that more than one in three Canadian companies (36%) fits this profile.

We believe that if we can change how Canada's overconfident firms see themselves, we can spur them to take action and invest more in improving productivity.

Gathering competitive intelligence

The good news is that these overconfident firms have many of the same qualities that make Canada's more dynamic companies so successful:

  • They have a high tolerance for risk.
  • They're big believers in innovation.
  • They feel upbeat and optimistic about the Canadian economy.

The only thing missing is a clear understanding of how their investments really compare to those made by their peers.

Addressing this could be comparatively easy to achieve, though. Companies will need to gather competitive intelligence much more actively, and leaders will need to benchmark themselves against their industry and their competitors to make smarter business decisions. Much of the necessary information to do this is already out there — companies just need to access it. Government programs and support could help in this area, of course. But the investment needed would be small, compared to current spending on R&D incentives and other support for productivity investment.

Preferring comfort to risks

We've spent a lot of time exploring Canada's productivity problem with executives, entrepreneurs, legislators and ministry staff. We discovered a commonly held belief that many Canadian business leaders come to prefer comfort and security to growth and its inherent risks and challenges. In other words, these leaders become "satisfied" with what they've achieved and settle for modest success.

But is it true? That's what we wanted to find out. Earlier this year we surveyed 884 senior business leaders — decision makers at firms across Canada — to better understand Canada's chronic underinvestment in productivity. We focused our analysis on those companies that were investing less on R&D, machinery, IT and other equipment than the median for their size and sector peer group.

"Satisfied" firms

Contrary to popular belief, there aren't nearly as many satisfied firms as some think. These firms have the following characteristics:

  • They are often found in local and niche markets.
  • They are investing less than their peers, and they know it.
  • They also tend to have low tolerance for risk, little interest in innovation, and little competitive pressure to make improvements.

Yet only 14% of Canadian firms with 10 or more employees fit this profile. It was obvious that we couldn't lay all the blame for Canada's productivity gap at their doorsteps.

The Canada-U.S. gap

Canadian companies still lag behind the U.S. and many other countries when it comes to productivity-improving investments.

In many sectors, our investment disparity with the U.S. is actually growing wider.

Business R&D spending in 2010 was 1% of the Canadian GDP — less than half of what U.S. companies spend. On a per worker basis, Canadian companies spend 65% as much as U.S. firms on new machinery and equipment, and 53% as much on information and communication technology.

Not surprisingly, this situation has baffled policymakers, industry watchers, economists, academics and others. And since 2010, Deloitte has tried to discover why Canada's productivity gap remains — and why Canadian companies don't make the investments they need to grow and thrive.

Learn more about Deloitte's 2013 report on the future of productivity.

 



Jesse McWaters Jesse McWaters is the lead researcher and co-author of Deloitte's The Future of Productivity series, including The Future of productivity: A wake-up call for Canadian companies (released June 2013).

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