Canadian business innovation and advanced technology adoption failing to improve productivity

Innovation and advanced technology adoption by Canadian businesses aren’t producing sustained improvements in business efficiency, according to a study by Statistics Canada.

There’s little evidence, based on Canada’s official productivity statistics, that innovation and advanced technology adoption are having an impact, beyond their measured impacts on capital and labour, the study says.

“Essentially, Canadian businesses are innovating, but there is little evidence that innovations have translated into productivity growth or higher standards of living,” says the study by Guy Gellatly and Wulong Gu at StatsCan.

“This aligns with a longstanding concern: the need for businesses to more fully exploit the benefits of innovation and advanced technology to expand output and increase labour productivity.”

Gellatly (photo at left) is the chief economic advisor in the Strategic Analysis, Publications and Training Division, Analytical Studies and Modelling Branch at StatsCan. Gu (photo at right) is the acting director of the Economic Analysis Division, Analytical Studies and Modelling Branch at StatsCan.

Their study draws on new estimates from StatsCan’s productivity research program, along with recent surveys that examine the innovation and technological stance of Canadian businesses. The study is intended to support ongoing research on the competitiveness of Canada’s economy. 

Recent data from innovation and technology surveys highlight the positive linkages between competition, innovation and business efficiency, their study notes.

While business expenditures on research and development (R&D) and receipts from intellectual property are rising, concerns persist about  the intensity with which businesses are investing in knowledge capital, according to the study.

Especially in relation to many competitor nations’ economies, business R&D intensity remains low, while patent applications were scaled back measurably prior to the pandemic.

The study also found that business investment in disruptive technologies – widely touted as a potential game changer for productivity – is in its early stages.

Artificial intelligence adoption rates were about three percent in 2022, with little capital spending on emergent technologies.

While six percent of businesses reported using AI in the second quarter of 2024, more than one-half of businesses were not planning to adopt or incorporate AI or other advanced digital technologies over the coming year (a group that includes both non-adopters and past adopters).

Gellatly and Gu point out that Increases in labour productivity are closely associated with long-run improvements in living standards.

Since the early 1980s, over 90 percent of the increase in Canada’s real gross domestic product per capita has reflected improvements in labour productivity. While slower labour productivity growth over much of the past decade stems largely from declines in business investment, “concerns persist” that businesses aren’t adequately harnessing the benefits of innovation and advanced technologies, their study says.

The lack of sustained improvements in labour productivity is consistent with the “innovation paradox.” Despite substantial investments in innovation and technological capacity, the payoffs from innovative activity – insofar as they pertain to the productivity and output-enhancing benefits that arise from the commercialization of new knowledge – have been comparatively modest.

Widening Canada-U.S. gap in labour productivity

According to the study, non-residential business investment in Canada scaled back sharply after the oil price shock in the mid-2010s. Real capital outlays in early 2024 were 22 percent below peak levels a decade earlier.

Slower labour productivity growth since 2015 has been largely attributable to weak capital investment, which was pervasive across industries. Investment per worker in 2022 was nearly 20 percent below 2014 levels.

Large and medium-sized firms have accounted for nearly the entire decrease in investment per worker. Declines in capital intensity were more pronounced among foreign-controlled firms.

Since 2000, labour productivity in Canada has increased at an average annual rate of 0.8 percent, less than half the average annual pace (1.9 percent) observed in the United States, the study says.

From 2001 to 2019, the information and cultural services industry, which includes telecommunications, was the largest contributor to widening the labour productivity growth gap between Canada and the U.S.

Lower productivity in Canadian computer and electronic product manufacturing also contributed to widening the gap, while higher productivity in Canadian financial services tempered the productivity divergence between the two countries.

Business demography matters: ongoing research on the productivity gap between Canada and the U.S. shows that Canada has a larger share of small and medium-sized enterprises than the U.S., but that SMEs in Canada are less productive.

More competition spurs greater investment and innovation

Less competition allows dominant firms to gain market power and set higher prices without the threat of being undercut by competitors, leading to higher prices for consumers and businesses, the study notes. “Less competition may be contributing to weaker investment while hampering innovation.”

Business entry rates have trended lower, while market concentration has increased since 2015, the study says. The Competition Bureau recently found that overall competitive intensity has declined over the past two decades.

Businesses that face more competitors are more likely to introduce innovations than those with fewer competitors (StatsCan Survey of Innovation and Business Strategy, 2022).

More than four in five businesses that used advanced technology reported innovations, compared with three in five businesses that did not use advanced technology (StatsCan Survey of Innovation and Business Strategy, 2022).

In responding to changes in competition in their main market, over one-third of businesses (38 percent) introduced or accelerated the introduction of new goods or services, according to Gellaty and Gu’s study. Over one-half (55 percent) responded by introducing new technology or new processes.

Nearly two in five businesses that developed and introduced product innovations registered to protect their intellectual property.

In the second quarter of 2024, almost three in 10 businesses (28.3 percent) reported that technology adoption and innovation improved their ability to operate efficiently over the previous 12 months.

Along with less competition, “Higher regulation weighs on [productivity] growth,” the study says. Transport Canada and KPMG, with contributions from StatsCan, have developed a measure of regulatory requirements at the federal level.

Based on this measure, the number of regulatory requirements rose by 40 percent from 2006 to 2021. Moreover, rising regulatory requirements were found to have a negative effect on output and productivity growth.

Business is ramping up R&D spending but R&D intensity lags well behind other major industrial economies

The study found that in 2021, most of the growth in industrial R&D spending reflected higher outlays by the largest R&D performers, both domestic and foreign-owned. Early data for 2022 and 2023 point to steady increases in business R&D spending.

However, Canada’s R&D spending as a share of gross domestic product was the second-lowest in the G7 in 2021. That year, Canada fell two spots to 19^th in the Organisation for Economic Co-operation and Development, in business-sector R&D spending as a share of GDP.

R&D intensities for domestic and foreign-owned producers vary across industries. For example, the average R&D-to-sales ratio for Canadian-owned manufacturers was 2.2 per cent in 2021, compared with 1.6 percent for foreign-controlled manufacturers.

Canadian-owned information and communications technology businesses had an average R&D-to-sales ratio of 5.9 percent, well below the average for foreign-controlled ICT firms (12.9 percent).

Foreign multinationals accounted for more than 40 percent of all intramural R&D spending by corporations in 2021, and one-third of all corporate expenditures on intellectual property in 2022.

Federal post-COVID recovery support benefitted many businesses

In 2021, as Canada recovered from the COVID-19 pandemic, the federal government provided more than 33,000 businesses with innovation and growth support, valued at $4.5 billion, through 134 federal programs, according to the study.

In 2021, SMEs (those with fewer than 500 employees) accounted for 96 percent of all program recipients and over three-quarters of total support value.

Several indicators are consistent with the notion that business innovation and growth support (BIGS) programs helped businesses recover from the pandemic.

For example, the revenues of BIGS-supported corporations expanded by 16 percent in 2021, three times higher than in 2020. Their export revenue rose 15 percent during the same period, after declining by four percent from 2019 to 2020.

BIGS recipients continued to innovate in 2021, as their R&D expenditures rose by 12 percent, comparable with the 11-percent increase from 2019 to 2020.

The study found that growth in patent applications in Canada and applications abroad by Canadians stagnated in the years leading up to the pandemic, falling to levels observed in the early 2000s.

While over one in five businesses owned an intellectual property (IP) asset in 2022, only about six percent owned patents (StatsCan Survey of Innovation and Business Strategy, 2022).

New research at StatsCan shows that Canadian multinationals demonstrated superior IP generation than foreign-owned multinationals, with four in five high-tech patent applications originating from Canadian-controlled entities.

Revenues for IP rebounded in 2021. Businesses in Canada performing R&D generated more revenue from the use of their IP than ever before, as receipts rose 37 percent to $8.9 billion. At the same time, payments for IP increased 34 percent to $2.2 billion.

Adoption of disruptive technologies is in its early stages

According to StatsCan’s 2022 Survey of Advanced Technology, almost two-thirds of businesses (62.1 percent) have adopted at least one type of advanced technology. However, spending levels are modest, and take-up rates for disruptive technologies are comparatively low.

Only 3.1 percent of businesses reported using artificial intelligence, while 2.1 percent reported using robotics. The top three obstacles reported by enterprises that did not adopt advanced technologies were:

• low returns on investment or long payback periods from such investments (40.6 percent)
• challenges recruiting skilled staff (36.7 percent)
• difficulties integrating new advanced technologies with existing systems (34.7 percent.

While a majority of businesses covered by the 2022 Survey of Advanced Technology adopted at least one type of advanced technology, capital outlays on advanced technologies from 2020 to 2022 totalled only $6 billion. In  comparison, private sector expenditures on R&D during this three-year period amounted to $79 billion.

Of businesses that did not incur any capital expenditures on advanced technologies from 2020 to 2022, about six in 10 reported that such technologies were not applicable to the enterprise’s activities. 

In the second quarter of 2024, about one-half of businesses reported that they did not have any plans to adopt or incorporate AI or other advanced digital technologies over the next 12 months (a group that includes non-adopters and past adopters). One-third of these businesses reported that digital technologies were not relevant to their organization.

In the second quarter of 2024, just six percent of businesses reported using AI for producing goods or delivering services over the previous 12 months.

“Low adoption rates and expenditure levels for disruptive technologies raise questions about how well-positioned businesses are to reap the benefits of major technological advances,” the study notes.

Previous waves of automation mainly affected workers performing routine and manual tasks. However, AI is expected to impact a larger segment of the workforce because of its increasing capacity to perform cognitive and non-routine tasks, the study says.

New research at StatsCan has produced experimental estimates of potential AI occupational  exposure and complementarity in Canada, and it was found that 40 percent of workers have low exposure to AI.

The remaining 60 percent are split into two groups: workers with high exposure that have high complementarity with AI technologies (29 percent), and workers with high exposure and low complementarity with AI (31 percent).

According to the new research, high earners are more likely to be in jobs that have high exposure and high complementarity with AI, while middle earners are more likely to be in high-exposure jobs with low complementarity.

Gellaty and Gu’s study notes that potential causes of slower multifactor productivity growth are summarized in the International Monetary Fund’s 2024 World Economic Outlook and include, among other factors, the misallocation of capital and labour away from higher productivity firms, the waning benefits associated with earlier investments in information and communications technologies, and declines in business dynamism.

While the dynamics of multifactor productivity growth are complex, their study says, “Canada’ recent track record aligns with the view that businesses need to more fully exploit the benefits of innovation and advanced technology to expand output and raise productivity.”

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