Canadian workers have enjoyed less robust investment in plant and equipment than their counterparts in the United States and other major developed countries over the past 15 years. And notwithstanding Canada’s relative economic resilience through the recent slump, the per-worker investment gap vis-à-vis other countries appears to have widened. The authors say if this pattern continues, Canadian businesses will continue equipping their workers less well than those in other countries, a setback in the quest for rising living standards in the coming expansion.Economic Growth and Innovation, Canadian workers, business investment per worker

Colin Busby

William B.P. Robson

English

Research Papers in Economics

e-brief
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October 7, 2010
 Canadian workers have enjoyed less robust investment in plant and
equipment than their counterparts in the United States and other major
developed countries over the past 15 years. And notwithstanding Canada’s
relative economic resilience through the recent slump, the per-worker
investment gap vis-à-vis other countries appears to have widened.
 Policy measures to foster more investment in physical capital would give
Canadian workers the tools to match foreign rivals and achieve high and
growing incomes in the years ahead.
 Policymakers should increase domestic exposure to global competition 
and improve international tax provisions to attract inbound foreign investment
and encourage repatriation of earnings by Canadian companies abroad.
We thank Andrew Sharpe and Serge Coulombe for useful comments on an earlier draft. Responsibility for any errors and 
for conclusions is ours alone.
1 Empirically, growth in capital stock has been correlated to growth in real wages across Canadian jurisdictions. Using growth
data from 1991 to 2010, a simple regression of capital stock per worker and real wages, by province, yields a significant 
positive relationship between the two variables - so regions with more capital spending also experience higher wage growth, 
over time. In an oft-cited international examination of the issue, Sali-i-Martin (1997) demonstrates the positive spillover 
effects from investment in equipment and other capital structures on national economic growth. 
2 This e-brief updates similar surveys in previous years: see Robson and Goldfarb (2004, 2005, 2006), Banerjee and Robson
(2007, 2008) and Busby and Robson (2009).
A key lesson from Canada’s own experience and from economic development around the world is that
business investment in plant and equipment is critical to raising output and living standards.  Increased work
effort contributes negligibly to rising incomes over time: what matters much more are new machinery,
equipment and buildings, and the technological innovations and organizational improvements they entail.
1
For Canadians worried about their country’s prospects in a world where large developing countries are
increasing their share of markets in manufacturing and other sectors, the prospect of Canadian workers 
falling behind better equipped counterparts abroad is akin to sending them unarmed into the global contest 
for higher productivity and economic security. 
The image of going into battle empty-handed is admittedly a strong one, but the numbers comparing
capital investment by Canadian businesses with that of firms in the United States and elsewhere tell an 
unhappy story.
2
E EC CO ON NO OM MI IC C   G GR RO OW WT TH H   A AN ND D   I IN NN NO OV VA AT TI IO ON N
Disarmed and Disadvantaged: Canada’s Workers Need More
Physical Capital to Confront the Productivity Challenge
By
By Colin Busby and William B.P. Robson For every dollar of new plant and equipment enjoyed by workers in the OECD, on average, over the 1993-2008 period,
Canadian workers also enjoyed about a dollar of new investment, but now, Canadian workers appear to be getting only 94
cents for every dollar enjoyed by their OECD counterparts. For every dollar enjoyed by G7 workers from 1993-2008, Canadian
workers enjoyed about 94 cents; now they are enjoying only 92 cents. And for every dollar enjoyed by US workers from 
1993-2008, Canadian workers enjoyed 83 cents; now, they are enjoying less than 79 cents.
3
The recent deterioration in Canada’s relative numbers partly reflects the fact that employment in Canada has been more
resilient during the recession and early recovery than in other countries: compared to elsewhere, the new tools that are being
put in place are being shared among more hands. If this pattern continues, however, Canadian businesses will be equipping
their workers less well than those in other countries, a setback in the quest for rising living standards in the coming expansion.
Measuring and Interpreting Investment per Worker
We use data from several standard sources to make our comparisons of business investment per worker internationally 
and among Canadian provinces. Data on business capital formation −that is, investment in machinery and non-residential
structures
4 −and employment are from the OECD, and we use comparable data for Canadian jurisdictions from Statistics
Canada. We convert foreign investment figures into Canadian dollars using purchasing-power parity (PPP) exchange rates 
from the OECD.
5
Since 1995, business investment per worker in Canada has generally matched OECD average figures, but lagged 
the G7, and particularly the United States (Figure 1). Canada’s relative performance was particularly poor a decade ago, then
improved somewhat −but recently appears to have worsened again, with the slump affecting investment in Canada worse than
investment abroad. Statistics Canada’s survey of investment intentions suggests that Canadian workers will get 6 cents less per
dollar invested in the average OECD worker in 2010, 8 cents less per dollar invested in the average G7 worker, and 22 cents 
less per dollar invested in the average US worker (Tables 1 and 2).
Provincial Strengths and Weaknesses 
Fluctuations in investment per worker in Canada may be greater than those in most developed countries because of 
the greater domestic importance of natural resource industries, which tend to be capital intensive and sensitive to global prices.
The fact that Alberta has recently experienced declines in investment partly explains the sagging Canadian totals. That, however,
is not the entire story: in Saskatchewan and Newfoundland and Labrador, the other two provinces with high investment rates, the
picture is more robust.
6
Other contrasts are evident across the country. In some provinces with positive per-worker investment trends over time,
such as British Columbia and New Brunswick, the intentions survey suggests that investment per worker is holding up fairly well.
Manitoba had been doing better, but seems to have suffered a setback. Quebec, long a low-investment province −from 1993 to
2008, Quebec workers benefited from less than 73 cents of investment for every dollar enjoyed by OECD workers −is now in
the mid-60-cent range. Very discouraging, given its economic weight in the country, is the performance of Ontario. From 1993
to 2008, Ontario workers enjoyed almost 84 cents of investment per dollar across the OECD as a whole. That number has
declined for more than a decade: it dropped below 70 cents in 2008, and appears to be mired at that level since then.
INDEPENDENT REASONED RELEVANT
| 2 e-brief
3 These figures come from OECD’s Economic Outlook data.
4 The OECD and Statistics Canada investment numbers include private businesses and government business enterprises 
functioning in a commercial environment.
5 The purchasing-power adjustment allows more meaningful comparisons of the “bang per buck” of investment spending in 
different countries than market exchange rates would do, since − especially at a point in time − market rates will reflect relative domestic 
price levels very imprecisely. We make capital-goods-specific adjustments using OECD’s 2005 benchmark PPP figures for gross 
fixed capital formation, and then construct time series from economy − wide PPP measures for each country. 
6 To the extent that Saskatchewan is attracting fossil-fuel investment from Alberta, where the fiscal regime affecting the industry 
changed for the worse, some of the change in activity represents migration within the country rather than a national trend.5,000
6,000
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9,000
10,000
11,000
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13,000
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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E
Year
OECD United States G7 Canada
Sources: OECD; Statistics Canada; authors’ calculations.
Figure 1: Private Non-Residential Gross Capital Formation per Worker, 1995 - 2011E.
INDEPENDENT REASONED RELEVANT
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Table 1: Private Non-Residential Gross Capital Formation per Worker, in Canadian Dollars, for Provinces, Canada, OECD, G7 and US, 2000-2010E
Sources: OECD; Statistics Canada; authors’ calculations.
Note: The Figures use total employment, full and part time; Canadian national and provincial figures are derived from Statistics Canada data whereas 
international figures use OECD data.
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2009 2010E 2009 2010E
AB 19,100 20,300 19,000 20,000 22,400 28,700 32,000 32,100 32,000 22,500 23,000 216 218 211 213
BC 6,900 7,500 7,100 7,200 7,800 8,500 9,700 9,800 10,500 8,700 8,900 83 84 81 82
MB 7,100 7,300 7,200 7,000 7,300 7,200 7,900 8,300 10,000 9,100 8,400 87 80 85 78
NB 8,000 6,100 5,900 6,600 6,900 7,300 9,400 10,000 10,200 9,100 9,100 87 87 85 85
NL 11,800 10,900 10,100 11,600 13,900 15,300 13,400 11,600 10,900 10,900 13,100 104 124 102 121
NS 7,800 8,000 8,200 7,500 7,000 7,100 7,000 7,400 6,900 7,200 7,100 69 67 67 66
ON 8,000 7,700 7,400 7,200 7,300 7,800 8,200 8,400 8,300 7,200 7,200 69 68 68 67
PEI 5,300 5,100 5,000 5,100 5,500 5,200 5,700 7,300 6,700 5,500 5,400 53 51 51 50
QC 7,100 6,500 6,300 6,400 6,900 6,800 7,000 7,200 7,300 6,900 6,900 66 65 64 64
SK 11,900 11,700 10,700 11,400 11,200 13,500 15,400 17,000 19,000 17,600 18,400 169 175 165 171
Canada 9,000 9,100 8,500 8,600 9,200 10,400 11,400 11,700 11,700 9,800 9,900 94 94 92 92
OECD 9,200 9,100 8,700 8,800 9,200 10,000 10,800 11,600 12,000 10,400 10,500 100 100 98 98
G7 9,800 9,700 9,200 9,200 9,700 10,600 11,400 12,200 12,600 10,700 10,800 103 102 100 100
US 11,500 11,100 10,200 10,200 10,900 11,800 12,900 13,900 14,500 12,300 12,600 118 120 115 117
Ra o to OECD Ra o to G7
Canadian DollarsINDEPENDENT REASONED RELEVANT
e-brief /4
What about the BRIC Countries?
Because Canada must compete with the rapidly rising economic giants − Brazil, Russia, India and China (BRIC) in
particular − it would be good to widen the comparison of investment per worker to include them as well. Differences in data,
however, prevent the same sorts of comparisons outside the OECD.
If we use purchasing-power adjustments from the International Monetary Fund for these countries, and national data 
on investment and employment, we get investment rates that are considerably lower than Canada’s, but rising rapidly − from
about 14 cents per dollar invested in a Canadian worker in 2002 to about 22 cents in 2008. While the magnitudes are
suspect, the trends are convincing: Canada is not matching the pace of major developing countries’ progress in closing
investment-per-worker gaps with other developed countries.
Fostering More Robust Investment
Before turning to possible ways to improve Canada’s relative performance, two caveats are in order. The numbers 
for 2010 may be affected by differences in timing: the Statistics Canada survey we use for domestic investment came later 
than many of the numbers going into the OECD projections, so downward revisions in forecasts and intentions in the
intervening period may make the Canadian numbers more pessimistic.
Perhaps, moreover, Canada’s performance is not quite as bad as the investment-per-worker measure suggests.
A remarkable feature of Canada’s experience in the slump and the recovery is the robustness of the job market. 
Employment fell by much less than in the United States, for example, and has rebounded more smartly. It is not clear why 
this happened, and in the midst of a still uncertain recovery, this relatively healthy employment record is welcome. Looking
further ahead, however, we want not just lots of jobs, but well-paying, secure jobs. For that, healthy rates of investment per
worker are critical, and the task of ensuring that the new plant and equipment being put in place is sufficient for the number
of workers who need it is no less urgent.
In the wake of an economic crisis that featured a virtually unprecedented seizing up of credit markets, it seems
reasonable to ask if investment has sagged because of lack of funds. Data on the financial state of Canadian firms suggest no
such problem however: in fact, a striking feature of recent experience is the extent to which Canadian companies, historically
net borrowers of funds from the rest of the economy, have become major net lenders (Figure 2). Lack of funds is not the
issue; hesitancy in reinvesting them in the business, and tapping into household saving to add to capital, is what needs
explaining.
While some may be inclined to criticize Canadian managers for less aggressive investment than their counterparts
abroad, economists tend to look for features of the environment in which managers are operating that might explain their
behaviour. One suspect is taxation. Corporate income taxes, capital taxes and sales taxes on business inputs made Canada,
until recently, one of the world’s least hospitable tax jurisdictions. With corporate tax rates generally coming down, and this
year’s replacement of provincial sales taxes in Ontario and British Columbia lessening the tax bite on investment and other
business inputs, Canada’s position in that respect has improved markedly (Chen, Mintz and Tarazov 2007, Poschmann 2009),
holding out hope for better numbers in 2011 and beyond. 
Regulatory reform is critical to boosting domestic competition. On this score, important policy reforms would 
remove ownership limitations on large domestic industries, such as transportation, telecommunications and finance 
(Canada 2008b).
7
7 Non-resident withholding taxes in Canada make non-resident investors pay a 25 percent tax on interest, dividends, royalties, and other 
payments from Canadians. Under bilateral tax treaties, the tax rate is normally reduced to around 15 percent or lower. Offering national 
(or non-discriminatory) treatment similar to the treatment that applies to Canadian corporations operating in many foreign countries 
would also help boost inbound investment (Cockfield 2008).  INDEPENDENT REASONED RELEVANT
Table 2: Private Non-Residential Gross Capital Formation per Worker, US=100, 2000 - 2010E
Sources: OECD; Statistics Canada; authors’ calculations.
Note: The Figures use total employment, full and part time; Canadian national and provincial figures are derived from Statistics Canada data whereas international 
figures use OECD data.
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E
AB 165.9 182.4 185.3 194.9 205.0 243.3 247.4 230.1 221.3 182.6 182.2
BC 60.0 67.6 69.1 70.7 71.4 71.9 75.1 70.0 72.2 70.3 70.3
MB 62.0 66.0 70.7 68.7 67.3 60.7 61.1 59.8 69.0 73.9 66.6
NB 69.3 54.8 57.3 64.3 63.1 61.8 72.4 71.8 70.6 73.8 72.3
NL 102.9 98.3 98.2 113.3 127.4 129.3 103.6 83.4 75.0 88.3 103.8
NS 67.7 71.9 80.2 73.3 64.3 59.9 54.4 52.9 47.8 58.1 56.2
ON 69.2 69.5 71.9 70.0 66.9 65.7 63.7 59.9 57.5 58.6 57.1
PEI 45.7 45.9 48.7 49.5 50.6 44.2 44.0 52.4 46.5 44.5 42.5
QC 61.7 58.8 61.7 62.8 63.3 57.2 53.9 51.8 50.3 55.7 54.4
SK 103.2 105.3 104.3 111.2 102.9 114.5 118.9 121.6 131.3 143.1 145.9
Canada 78.4 81.0 83.5 84.3 84.4 86.9 86.8 82.5 81.1 79.7 78.5
OECD  79.6 81.4 84.8 85.5 84.5 84.5 83.1 82.9 82.7 84.5 83.4
G7 85.1 87.2 89.4 89.7 89.0 89.7 88.0 87.7 87.1 86.7 85.4
| 5 e-brief
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Net Lending Capital Investment Saving
Figure 2: National Business Saving and Net Lending, 1961Q1-2010Q2.
Sources: Statistics Canada; authors’ calculations.
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INDEPENDENT REASONED RELEVANT
Given the increasing mobility of investable capital across national boundaries, modest changes to Canada’s treatment 
of foreign investment might also encourage more domestic capital investment. Reducing non-resident withholding taxes in
future bilateral tax treaties would help. And Canadian firms investing outside Canada might repatriate and reinvest more of
the income they earn abroad if Canadian taxes treated all foreign active business income as exempt surplus (Canada 2008a).  
Turning to the larger fiscal and economic environment, it is worth highlighting the fact that, before the recent crisis,
investment rates per Canadian worker were improving relative to those in other developed countries. With its generally
supportive and sustainable fiscal environment and its openness to flows of goods, services, people and capital from abroad,
Canada had a growing reputation as a good place to invest. Thanks to its robust financial system and relatively sound public
finances, its reputation stands all the higher after the slump. Each province, and the country as a whole, should monitor the
rate at which its workers are getting new tools with which to do their jobs. Making higher rates of investment a priority will
help ensure that Canadians enjoy high and rising incomes, whatever their competitors abroad are doing.INDEPENDENT REASONED RELEVANT
References
Banerjee, Robin, and William Robson. 2008. “New Tools for a Richer, Greener Future: Why Canadian Workers Need More Robust Business
Investment.” C.D. Howe Institute e-brief. Toronto: C.D. Howe Institute. July.
−−−−. 2007. “Give Canadian Workers the Tools to do the Job! Why Canada Needs More Robust Capital Investment.” C.D. Howe Institute e-brief.
Toronto: C.D. Howe Institute. May.
Busby, Colin and William Robson. 2009. “Equipping Ourselves in Tough Times: Canada’s Improved Business Investment Performance.” C.D.
Howe Institute e-brief. Toronto: C.D. Howe Institute. June.
Canada. 2008a. “Enhancing Canada’s International Tax Advantage.” Consultation Paper Issued by the Advisory Panel on Canada’s System of
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Canada. 2008b. Compete To Win. Competition Policy Review Panel: Final Report. Ottawa: Industry Canada. June.
Chen, Duanjie, Jack Mintz and Andrey Tarazov. 2007. “Federal and Provincial Tax Reforms: Let’s Get Back on Track.” Backgrounder 102. Toronto:
C.D. Howe Institute. July.
Cockfield, Arthur J. 2008. Finding Silver Linings in the Storm: An Evaluation of Recent Canada-US Crossborder Tax Developments. Commentary 272.
Toronto: C.D. Howe Institute. September.
Goldfarb, Danielle, and William B.P. Robson. 2005. “Canadian Workers Need the Tools to Do the Job and Keep Pace in the Global Investment
Race.” C.D. Howe Institute e-brief. Toronto: C.D. Howe Institute. May.
Robson, William B.P., and Danielle Goldfarb. 2004. “Tools for Workers: How Canada is Faring in the Competition for Capital Investment.”
Backgrounder 87. Toronto: C.D. Howe Institute. December.
−−−−. 2006. “Canadian Workers Need Better Tools: Rating Canada’s Performance in the Global Investment Race.” C.D. Howe Institute e-brief.
Toronto: C.D. Howe Institute. June.
Poschmann, Finn. 2009. “Sales Tax Reform in Ontario: The Time is Right.” C.D. Howe Institute e-brief. Toronto: C.D. Howe Institute. March.
Sala-i-Martin, Xavier. 1997. “I Just Ran Two Million Regressions.” The American Economic Review, 87: 2 (Papers and Proceedings).
e-brief /7
This e-brief is a publication of the C.D. Howe Institute.
William B.P. Robson is President and Chief Executive Officer and Colin Busby is a Policy Analyst of the C.D. Howe Institute.
For more information call 416-865-1904.
This e-brief is available at www.cdhowe.org.
Permission is granted to reprint this text if the content is not altered and proper attribution is provided.

Canadian Workers Need Better Tools: Rating Canada’s Performance

Compete To Win. Competition Policy Review Panel: Final Report.

Enhancing Canada’s International Tax Advantage.” Consultation Paper Issued by the Advisory Panel on Canada’s System of International Taxation. Final Report.

Equipping Ourselves in Tough Times:

Finding Silver Linings in the Storm: An Evaluation of Recent Canada-US Crossborder Tax Developments. Commentary 272.

Give Canadian Workers the Tools to do the Job! Why Canada Needs More Robust Capital Investment.” C.D. Howe Institute e-brief.

I Just Ran Two Million Regressions.” The American Economic Review, 87: 2 (Papers and Proceedings). e-brief /7 This e-brief is a publication of the C.D.

New Tools for a Richer, Greener Future: Why Canadian Workers Need

Sales Tax Reform in Ontario: The Time is Right.”

Tools for Workers: How Canada is Faring

Disarmed and Disadvantaged: Canada’s Workers Need More Physical Capital to Confront the Productivity Challenge

Disarmed and Disadvantaged: Canada’s Workers Need More Physical Capital to Confront the Productivity Challenge

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