Barriers to competition must fall if productivity is to gain

Canada’s lacklustre productivity growth has become a preoccupation of policy makers, and a prime suspect is the lack of competition faced by Canadian firms.
Many of Canada’s productivity detectives increasingly suspect that because key sectors aren’t disciplined by adequate competition, many businesses don’t face the “creative destruction” that drives innovation.
The average Canadian worker produces roughly 20 per cent less than her or his U.S. counterpart.
We’ve heard it before: If we want to sustain our living standards, Canada must achieve better productivity growth. Various studies have concluded that our laggard growth owes to a failure to invest and innovate. But why? Wouldn’t any rational firm seek productivity gains to increase profitability?
Reflecting on Canadian businesses’ record retained earnings from 2003 to 2007, economist Don Drummond puzzled: “Why did corporations just sit on their profits over this period? Did they not realize that this was a golden opportunity to ramp up their productivity to better withstand global competition?”
As Mr. Drummond observed, we’ve largely checked off the list on his Economist’s Manifesto for productivity growth with stable government finances, reductions in taxes on capital, predictable inflation and a sound banking system. So what gives? Canada’s competitive landscape seems to be the looming, amorphous challenge with which policy makers have yet to fully grapple.
We now have a world-leading framework for competition law, and the Competition Bureau has ramped up its enforcement activities substantially in past years. However, regulatory barriers to competition remain, particularly for key network sectors, such as telecommunications and airlines, and under foreign investment restrictions.
In a report published Thursday by Canada 2020, we survey Canada’s competitive landscape. As we conclude, the productivity agenda for Canada must shift from macroeconomic and fiscal reforms to the microeconomic foundations of innovation and particularly to competitive intensity as a driver of firm performance.
Many of the main policy levers to boost competition were identified in Red Wilson’s landmark Competition Policy Review Panel. There has been some progress on implementing its recommendations – such as the 2009 amendments to modernize Canada’s Competition Act and the federal government’s liberalization of foreign ownership restrictions in telecommunications.
However, certain items remain. In particular, the Investment Canada Act places the burden on the foreign investor to prove “net benefit,” and foreign airlines remain restricted from flying domestic routes. As argued in a recent commentary on Economy Lab, the cost of airfare for Canadian travellers would likely be improved by allowing foreign airlines to fly between Canadian cities. As well, Canada should improve the climate for foreign competition by reversing the onus on foreign investment review, placing the burden on the minister to demonstrate “net detriment.”
Yet, recent debates have flared regarding “national champions,” showing that not everyone is sold on competition as the necessary medicine.
Certain policy makers may still feel the lure of protecting “infant industries” from the full brunt of the market. The question is whether protecting certain firms from competition does more harm than good.
As Canadian public policy increasingly turns toward addressing our productivity shortfall, competition in our national economy must be a key issue.