Diana Carney

Issues: Competition Matters – or does it?

January 23, 2013

LISTEN: Diana Carney and Eugene Lang explain in a podcast why competition policy matters to Canada’s productivity growth.

ISSUES: for a more in depth review of the issues behind this event, read our background deck and framing paper Competition Matters.

On Wednesday, 30 January we will kick off our 2013 Canada We Want in 2020 panel series with a discussion of the importance of competition as a driver of business innovation and productivity.

It is our contention that if we are to have a more innovative, productive Canada by 2020, the business environment in this country needs to become more competitive. This is by no means the whole solution, and it may not even be the main solution, but it does appear to be part of the answer to the significant productivity challenge that we face.

Falling (relative) productivity is a very serious concern in Canada. It matters to businesses whose products are becoming relatively more expensive than those of their international competitors. But it also matters to all of us, because increased labour productivity, in particular, is key to ensuring rising living standards in Canada.

As labour force participation falls with an aging population and other factors – over the next 20 years it is projected to decrease to around 63% from its current level of about 67% – this importance will be further heightened.

At present Canadian labour productivity in the business sector stands at about 70% of the U.S. level (and the U.S. is hardly the most go-ahead economy these days). This is not, unfortunately, a new problem: our relative performance versus the U.S. peaked around 90% in the early 1980s. Since that time there has been much effort devoted to understanding the root cause of the problem, particularly since many of the supposed ‘fixes’ have actually been enacted over this period (such as increased investment in universities, greater deregulation, more free trade, etc.).

There should, of course, be no expectation of uncovering a silver bullet that will magically rebuild Canada’s competitiveness. Our under-performance is likely a result of a complex range of factors spanning workforce quality (education and training), the availability of financing and propensity to invest, intellectual property and other regulations, trade policy, firm-level decision-making, and more.

But what of competition between companies? Does this really make a difference? And is the relative lack of competition in Canada a factor in our under-performance?

Up to about a quarter of the Canadian economy (by GDP) can be classified as ‘regulated’ or not fully competitive and Canada scores well above the OECD average in terms of degree of restriction on foreign direct investment. To make matters worse, many of the sectors that are restricted are so called ‘network sectors’ that have a broad impact on the rest of the economy (think financial services, telecoms, electricity generation and distribution, airlines).

Intuitively, it is easy to understand why greater competition should stimulate innovation, growth and increased productivity. Many academic studies back this up (for details, see our longer background paper on the topic). They show that increased competition results not only in greater firm-level productivity but also overall increases in sectoral productivity as less productive firms are squeezed out. Both should be appealing for Canada.

There are those, however, who argue that so-called ‘competitive intensity’ is really only a very marginal factor in our desultory productivity performance. They point out that in some regulated sectors – such as healthcare and financial services – we do quite well on productivity. And even if we do horribly in the remaining regulated sectors – which is not clear – that would not explain very much of our overall under-performance in productivity and innovation. Furthermore, our relative productivity has actually fallen over the last three decades despite the fact that competition in our economy has actually increased somewhat, casting further doubt on the role of competition in stimulating improved performance.

Some take an even stronger view, arguing that the very solutions that have been put in place to encourage competition (free trade, deregulation, etc.) have been partly to blame for our continued demise (see Canada 2020 author, Jim Stanford, arguing this point in our 2012 productivity and innovation panel).

Our panel will endeavour to get to the heart of this discussion by asking:

  • To what extent is lack of competition responsible for poor productivity growth in Canada?
  • Which types of regulation are most detrimental to productivity growth?
  • Are there reasons why regulations should remain in place, even if they have some negative effect on productivity? (Reasons might include things such as cultural protection or risk-minimization in the financial sector and in provision of physical infrastructure.)
  • Is Canada doing enough to attract foreign companies to set up business here?
  • Is there a will to see change in the competitive environment in Canada and what would it take to secure change, given the existing constellation of vested interests?

We look forward to welcoming you to our event on Wednesday 30 January 2013, both in person and on line at canada2020backup.see-design.com/live.

Bring your questions and thoughts to help us move this important discussion forward.

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