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|Jessica Edge |
Organizational Effectiveness and Learning
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|Douglas Watt |
Industry and Business Strategy Research
Canada’s performance in the World Economic Forum’s global competitiveness rankings continues its slow decline. Canada ranks 15th this year on the Global Competitiveness Index (GCI), dropping one position from last year and well behind top-ranked Switzerland (1st), Singapore (2nd), and the United States (3rd). (See Table 1.) “Canada must improve its overall competitiveness performance so that we can sustain our high quality of life and create opportunities for future generations. Failure to do so will put pressure on our standard of living and the things that we, as Canadians, cherish, including our health care, education, and social security systems,” says Daniel Muzyka, president and chief executive officer of The Conference Board of Canada.
Canada’s persistent decline in the global competitiveness rankings comes as other key competitor countries see marked improvements in the performance of their economies. Most notably, the U.S. advanced for the second year in a row—moving up from 7th place in 2012, to 5th in 2013, to 3rd this year. While this improvement shows the economic recovery is beginning to take hold in the U.S., it also underscores the country’s capacity for innovation and commercialization success, including high R&D spending, top-quality scientific research institutions, and a strong record of collaboration between post-secondary institutions and industry. Japan saw improvement on its score as well this year, moving up three spots to 6th place. Japan benefits from its high level of business sophistication, including its sophisticated production processes, the breadth of its value chains, and the quality of its local suppliers. Japan’s improved competitiveness score also suggests that attempts to address its macroeconomic challenges are beginning to show results.
Canada’s Competitive Strengths and Weaknesses
In large part, Canada’s performance has not changed significantly since last year. Canada’s fundamentals are strong, including respected and trusted institutions (14th), strong health and primary education systems (7th), and efficient labour (7th) and goods (15th) markets. While Canada’s macroeconomic environment ranks 51st, it is well ahead of the U.S., Japan, and the United Kingdom. However, Canada’s performance this year sees notable change in three areas—infrastructure, financial markets, and business sophistication—suggesting areas of future promise, along with one notable weakness. Table 2 highlights Canada’s strengths and weaknesses on the GCI.
Cracks in Our Infrastructure Are Beginning to Show
Infrastructure is an emerging weakness. This matters because it influences where individuals choose to work and companies choose to do business. It connects markets, enabling the movement of people, products, and services. Canada saw the largest decrease on its GCI score this year on the infrastructure pillar, falling from 12th to 15th place. Canada’s score dropped on seven out of nine indicators related to infrastructure, including quality of overall infrastructure (from 15th to 19th), quality of our roads (from 19th to 23rd), quality of our railroad infrastructure (from 16th to 18th), and the quality of our port infrastructure (from 20th to 21st).
Inefficient (and, in some cases, insufficient) infrastructure across Canada increases the cost of doing business and is detrimental to our quality of life. For example, long commuting times increase the stress workers experience and decrease their productivity. Residents in the Greater Toronto and Hamilton Area have some of the longest commutes in North America—at an average of 32.8 minutes one way, or 5.5 hours per week.1 As has been well-documented by a number of organizations, much of Canada’s infrastructure is chronically underfunded and badly in need of repair. At the same time, emerging markets, such as Indonesia and China, are investing heavily to improve their airports, roads, and high-speed rail. To remain competitive, Canadian businesses, communities, and governments must ensure that our infrastructure is available, accessible, and dependable.
Increased Financial Market Efficiency
Canada saw its largest improvement this year on the financial markets pillar, moving from 12th to 8th place. Scores improved on six out of eight indicators related to financial market efficacy, including availability of financial services (up from 9th to 5th), financing through local equity markets (15th to 11th), ease of access to loans (26th to 18th), and venture capital availability (23rd to 17th). Canada also retains its first-place ranking for the soundness of its banking system.
Financial markets are a key factor impacting a country’s ability to innovate. An efficient financial market channels funds needed for innovation and commercialization into the private sector, while providing regulation to protect investors and the economy as a whole. Canada is widely lauded for its stable banking system, but has lagged its peers on the availability of financing for innovation. Canada’s improved financial markets score suggests that efforts to improve financing for innovation, including venture capital, are paying off. For example, in 2013, the federal government provided $400 million in new funding for the venture capital sector.2 Investments made in Canada’s venture capital market also showed a moderate year-over-year rise in the first quarter of 2014, increasing by 2 per cent from the same time last year.3 As a result of these and other positive developments, 45 per cent of Canadian entrepreneurs say access to venture capital funding has improved, compared with 35 per cent across the G20 as a whole.4 More can be done, but Canada continues to move in the right direction.
Brightening Prospects for Business Sophistication and Innovation
Canada’s competitiveness ranking continues to be hampered by its poor business sophistication and innovation performance. This is troubling. We are a developed economy that is predominantly innovation-driven, and if we cannot produce new or improved products and services through advanced production processes or gain access to new markets, our competitiveness will falter. The World Economic Forum’s business sophistication pillar focuses on non-technological innovations related to the nature of a country’s competitive advantage, its value chains, and production processes. The innovation pillar focuses primarily on technological innovation, related to factors such as university–industry collaboration activities, government procurement of advanced technology products, and company spending on R&D. Canada ranks 23rd on this year’s business sophistication pillar (up two places from 2013) and 22nd on the innovation pillar (down one place).
Canada’s improved scores in business sophistication and financial markets performance suggest that our innovation performance may be improving, albeit slowly and unevenly. Canada’s score on the business sophistication pillar moved up from 26th place in 2012, to 25th in 2013, to 23rd in 2014. More notably, on the indicator of whether a country’s competitive advantage is based primarily on its natural resources or advanced products, processes, and services, Canada moved to 35th place this year, up from 52nd in 2013 (although there is still considerable room for improvement). This suggests that steps taken by policy-makers, businesses, and other stakeholders to improve the environment for innovation in Canada—including investments in tertiary education, increases in public spending on R&D, and reductions in corporate tax rates—are paying off. To further improve our innovation and business sophistication score, businesses will need to take steps, such as increasing their R&D spending (Canada currently ranks 27th), and become more early adopters of new technologies (we rank 30th).
Canadian policy-makers, businesses, educators, and other stakeholders must continue to take steps to improve our innovation performance, while ensuring performance in other areas is not neglected, including the quality of our infrastructure. As peer countries, such as the U.S. and Japan, recover from the recession and emerging markets continue to make investments in areas such as infrastructure and education, Canada must also step up its game.
Watch our reaction to the World Economic Forum 2014 Global Competitiveness Index with comments from Conference Board of Canada CEO Daniel F. Muzyka.
About the Global Competitiveness Index
The Conference Board of Canada is pleased, once again, to be the Canadian Partner Institute at the World Economic Forum’s Global Competitiveness and Benchmarking Network, contributing to the development of this year’s global competitiveness report. Over 13,000 business leaders from around the world responded to the Executive Opinion Survey, from which the Global Competitiveness Index and The Global Competitiveness Report are derived. The Global Competitiveness Index ranks countries on three sub-indexes, 12 pillars, and 112 indicators. To view the full Global Competitiveness Report, see www.weforum.org/issues/global-competitiveness.