Study finds a 20% drop in investment per worker among Canadian firms from 2006 to 2021
A study titled “Investment Slowdown in Canada After the Mid-2000s: The Role of Competition and Intangibles” investigates the reasons behind the weakened capital investment among Canadian firms since the mid-2000s.
This decline in investment is critical as capital investment is the main driver of growth in labour productivity. The study found that investment per worker among Canadian firms declined by 20 percent from 2006 to 2021.
The report highlights a more significant decline in investment per worker in large- and medium-sized firms compared to small firms.
These larger firms accounted for 90 percent of the overall decline in investment per worker from 2006 to 2021, a figure much larger than their share of investment, which stood at 65 percent in 2021.
The study also observed a more pronounced decline in investment per worker in foreign-controlled firms compared to domestically controlled firms.
Foreign-controlled firms contributed 30 percent of the decline in investment per worker from 2006 to 2021, despite only accounting for 20 percent of investment in that period.
A major factor contributing to this investment slowdown is a shift in spending patterns. After 2006, firms increasingly spent more on intangible assets such as data, training, organizational changes, and brand equity, as opposed to tangible assets like machinery and equipment, and building structures.
This shift is reflected in the increase of intangible assets as a portion of total fixed assets on firms' balance sheets, which grew from 8 percent in 2006 to 17 percent in 2021.
Another contributing factor is the decline in new firms, leading to less investment. The entry rate, or the percentage of new firms in a year, declined from 12 percent in 2006 to 10 percent in 2019.
This decline continued at a faster pace during the first two years of the COVID-19 pandemic, dropping to 8 percent in 2020 and 7 percent in 2021. The study indicates that fewer new firms mean less competition among firms, contributing to lower investment.
In fact, the decline in both the rate of firm entry and competitive intensity in the pre-pandemic period from 2006 to 2019 accounted for 30 percent of the decline in investment per worker during that period.
