Productivity is a topic that attracts a great deal of attention at both the federal and provincial levels of government in Canada. Most observers paint a grim picture of Canadian productivity across all sectors.
A recent entrant to the debate is Donald Drummond who authored an article in the June 26 issue of the National Post which carried the ominous heading, No more excuses for business. Mr. Drummond is described as “one of Canada’s foremost authorities on economics and an avid contributor to and commentator on Canadian fiscal and public policy.” He is obviously someone we should listen to on a topic of such importance.
I scanned his article carefully to see if it elevated the debate beyond the quagmire in which it has been trapped in recent years. Unfortunately, it did not. Like the others, it leaves one with the impression that Canadians must run a little faster on the treadmill and apply more technology in our manufacturing sector if we are going to close the alleged productivity gap that exists between us and our major trading partners, the U.S. in particular.
The major flaw in the debate is that it fails to accommodate the reality of branch plant economics. In particular, it fails to recognize that in a branch plant, the selling price for a product or service is typically dictated by a parent company and has more to do with where it wants to leave profits around the world than with external market forces.
Using the high technology industry as an example, a Canadian hardware company will typically have sales in the range of $200,000 per employee and it will engage in all aspects of the business, namely manufacturing, selling, R&D, marketing, etc. However, when it gets sold to a foreign owner, its mandate will typically get reduced to include only one of those functions (possibly R&D) and its only customer will typically be the parent company. Its revenues will be determined by the parent company and will be more like $100,000 per employee — enough to cover wages and the minimum amount of overhead that the Canadian tax authorities will allow.
When one realizes that the level of foreign ownership in Canada’s high technology industry, whether measured in assets or sales, is well over 50 percent, and when one recognizes the close relationship that exists between sales per employee and productivity, it is irresponsible to ignore the ownership issue. At present, we are implying that it costs more to manufacture a piece of electronic hardware in Hamilton than in Toledo. We have no statistics that confirm this, but that is what the debaters are implying.
If Canada really wanted to juice up its productivity, it would tell the world that it is a good place to leave profits. It might also explore ways to encourage the foreign owners to leave more of the high paying jobs in Canada, namely the jobs that make the difference between the $200-and-$100,000 figures mentioned.
Until the debate gets to this level, full page articles such as Mr. Drummond’s will be good for wrapping fish, but little else.
Denzil Doyle is an associate at Francis Moran and Associates. Denzil’s involvement in Ottawa’s high technology industry goes back to the early 1960s when he established a sales office for Digital Equipment Corporation, a Boston-based firm that had just developed the world’s first minicomputer. The Canadian operation quickly evolved into a multi-faceted subsidiary. When he left the company in 1981, Canadian sales exceeded $160 million and its employment exceeded 1,500. In his next career, Doyle built a consulting and investment company, Doyletech Corporation, that not only helped emerging companies, but built companies of its own. In recognition of his contributions to Canada’s high technology industry, he was awarded an honourary Doctorate of Engineering by Carleton University in 1981 and a membership in the Order of Canada in 1995.
Image: The Star