The reluctance of Canadian companies to bolster their sagging productivity despite years of nagging by policymakers is one of the great "mysteries" baffling economists.
Geoffrey Somes, a senior economist with State Street Global Advisors in Boston, says he is among those struggling to understand why Canadian businesses have been so slow to act -- especially now.
He notes the dramatic strengthening of the loonie is giving companies "strong incentives" to import high-tech machinery that is generally priced in U.S. dollars.
Moreover, there are signs that the U.S. economic recovery is gaining momentum -- a development that should seemingly buttress the confidence of Canadian exporters.
Nonetheless, companies north of the border still appear unenthusiastic to make the necessary investments to improve their competitiveness.
"It's been one of the mysteries," said Mr. Somes in a recent interview. "I think a lot of people are scratching their heads trying to figure out a good reason for it."
Small and medium-sized companies, in particular, say they worry about making costly expenditures on high-tech machinery given the lingering risks to the U.S. recovery. They want to be sure the customers will be there -- 12 to 24 months from now -- if they take the plunge.
But Mr. Somes argues that Canadian companies that fail to invest will be worse off in the long run because their competitiveness will continue to erode. That, in turn, poses a larger risk to the Canadian economy because the country's quality of life will suffer.
"Unfortunately, it is not a recent phenomenon. The productivity in Canada has been absolutely abysmal -- and there is no other way to put that," added Mr. Somes.
The pressure, however, is building for companies to take action. Last week, Bank of Canada Governor Mark Carney dialled up his rhetoric on the issue -- warning businesses to produce their products more efficiently or risk losing more market share abroad.
Mr. Carney's warnings appear to have taken on a new sense of urgency this week. That's because U.S. President Barack Obama stressed the need to improve U.S. competitiveness through innovation during Tuesday's State of the Union address.
"It is not my role to be an apologist for your central bank governor," said Mr. Somes. Still, he notes Canadian businesses should appreciate the full thrust of Mr. Carney's message.
"I think one of the things he was talking about in investing was not simply to expand your capacity to meet greater demand -- it is also to change the nature of the business to become more efficient to be able to take advantage of what ever demand is out there."
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