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Challenges and Opportunities in Innovation, Technology Adoption and Productivity

Challenges and Opportunities in Innovation, Technology Adoption and Productivity








Release date: July 24, 2024


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About Research to Insights

The Research to Insights series
of presentations features a broad range of findings on selected research
topics. Each presentation draws from and integrates evidence from various
studies that use innovative and high-quality data and methods to better
understand relevant and complex policy issues.

Based on applied research of valuable data,
the series is intended to provide decision makers, and Canadians more broadly,
a comprehensive and horizontal view of the current economic, social and health
issues we face in a changing world.

Context

  • Increases in labour productivity are closely associated with long-run improvements in living standards. Since the early 1980s, over 90% of the increase in Canada’s real gross domestic product per capita has reflected improvements in labour productivity. While slower labour productivity growth over much of the past decade stems largely from declines in business investment, concerns persist over the extent to which businesses are harnessing the benefits of innovation and advanced technologies.
  • Statistics Canada’s recent estimates of multifactor productivity suggest that innovation and advanced technology use have not translated into sustained improvements in labour productivity beyond their measured impacts on capital and labour.
  • This is consistent with the “innovation paradox.” While many businesses report developing new products and processes, the payoffs from innovative activity, insofar as they pertain to the aggregate economic returns from the commercialization of new knowledge, have been comparatively modest.
  • This presentation highlights data and analysis at Statistics Canada that can be used to explore linkages between innovation, technology adoption and productivity. It draws on new estimates from the agency’s productivity research program, along with recent surveys that examine the innovation and technological stance of Canadian businesses. The presentation is intended to support ongoing research on the competitiveness of Canada’s economy. 


Challenges and Opportunities in Innovation, Technology Adoption and Productivity

Description for Figure 1

The title of Figure 1 is Framework: Innovation, productivity growth and living standards. There are 3 circles, the first one is labelled A and says “Capital intensity (investment per worker), the second one is labelled B and says “Labour composition (skills upgrading)” and the third one labelled C says “Growth in multifactor productivity”. All A, B and C circles have a red arrow that points to a box that says “Labour productivity growth”. The box for “Labour productivity growth” has a red arrow that points to another box that says “GDP per capita”. On top of The box for “Labour productivity growth” there is a circle that says “Work intensity (hours per employee)”. On the bottom of the box for “Labour productivity growth” there is a circle that says “Employment rate (percentage of the population that is employed)”. Both of these top and bottom circles have red arrows that point to the box that says “GDP per capita”.

There is a note at the bottom of the figure that relates to the “C” circle, it says “The residual portion of labour productivity growth that is not attributable to gains in capital intensity (A) and skills upgrading (B) is called growth in multi-factor productivity (C). It measures the efficiency with which inputs are used in production. Growth in multi-factor productivity is often associated with innovation and technological progress”.



Less productivity growth from capital investment coupled with low contributions from multifactor productivity, which partly reflect modest returns from innovation and technology

  • Non-residential business investment scaled back sharply after the oil price shock in the mid-2010s. Real capital outlays in early 2024 were 22% below peak levels a decade earlier.
  • Slower labour productivity growth since 2015 has been largely attributable to weak capital investment, which was pervasive across industries. Investment per worker in 2022 was nearly 20% below 2014 levels.

    • Large and medium-sized firms have accounted for nearly the entire decrease in investment per worker. Declines in capital intensity were more pronounced among foreign-controlled firms.


Chart 1 Contributions to labour productivity growth, selected periods

Data table for Chart 1














Data table for Chart 1

Table summary

This table displays the results of Data table for Chart 1 1980 to 2000, 2000 to 2015, 2015 to 2022 and 2019 to 2022, calculated using percentage point contributions to the average annual growth in labour productivity units of measure (appearing as column headers).

1980 to 2000 2000 to 2015 2015 to 2022 2019 to 2022
percentage point contributions to the average annual growth in labour productivity
Capital intensity 0.9 0.9 0.4 0.5
Labour Composition 0.4 0.3 0.3 0.3
Multifactor productivity growth 0.5 -0.2 0.1 -0.1
Labour productivity growth 1.8 1.0 0.8 0.8





Over the past two decades, increases in multifactor productivity—which are improvements in business efficiency that stem from innovation and technology use, organizational change, and scale economies—have not translated into sustained improvements in labour productivity.



For more information: The Daily—Multifactor productivity growth estimates and industry productivity database, 2022.


Gap in labour productivity growth between Canada and the United States reflects lower productivity north of the border in several high-tech sectors


  • Since 2000, labour productivity in Canada has increased at an average annual rate of 0.8%, less than half the average annual pace (1.9%) observed in the United States.
  • From 2001 to 2019, the information and cultural services industry, which includes telecommunications, was the largest contributor to widening the labour productivity growth gap between Canada and the United States.
  • Lower productivity in Canadian computer and electronic product manufacturing also contributed to widening the gap, while higher productivity in Canadian financial services tempered the productivity divergence between the two countries.
  • Business demography matters—ongoing research on the productivity gap between Canada and the United States shows that Canada has a larger share of small and medium-sized enterprises (SMEs) than the United States, but that SMEs in Canada are less productive.


Chart 2 Labour productivty growth, Canada and the United States

Data table for Chart 2






















































Data table for Chart 2

Table summary

This table displays the results of Data table for Chart 2 United States and Canada, calculated using index (1980=100) units of measure (appearing as column headers).

United States Canada
index (1980=100)
1980 100.00 100.00
1981 102.13 101.99
1982 101.55 104.56
1983 105.01 108.00
1984 108.00 111.50
1985 110.47 112.83
1986 113.58 112.02
1987 114.19 112.99
1988 115.91 114.78
1989 117.23 115.34
1990 119.56 115.40
1991 121.46 115.25
1992 127.10 117.90
1993 127.22 119.86
1994 127.95 122.81
1995 128.84 124.03
1996 131.98 123.38
1997 134.83 127.24
1998 139.44 130.43
1999 145.12 135.54
2000 149.68 141.62
2001 153.62 143.87
2002 160.12 146.00
2003 166.23 146.58
2004 171.45 147.45
2005 175.28 150.58
2006 177.01 152.98
2007 179.91 153.37
2008 182.37 151.76
2009 189.83 150.22
2010 195.95 152.32
2011 195.59 155.83
2012 196.95 155.73
2013 199.06 158.79
2014 200.58 164.55
2015 203.00 164.31
2016 204.58 165.57
2017 207.30 168.46
2018 210.35 169.04
2019 214.71 169.90
2020 225.68 185.45
2021 229.79 175.09
2022 225.43 173.94
2023 228.67 170.19




For more information: The post-2001 productivity growth divergence between Canada and the United States: The role of the information and cultural services industry.

Opportunities to improve productivity through investment
and innovation

  • Less competition allows dominant firms to gain market
    power and set higher prices without the threat of being undercut by
    competitors, leading to higher prices for consumers and businesses

  • Less competition may be contributing to weaker
    investment while hampering innovation.


    • Business entry rates have trended lower, while
      market concentration has increased since 2015. The Competition Bureau recently
      found that overall competitive intensity has declined over the past two
      decades.
    • Businesses that face more competitors are more
      likely to introduce innovations than those with fewer competitors (Survey of
      Innovation and Business Strategy, 2022).
  • Higher regulation weighs on growth—Transport
    Canada and KPMG, with contributions from Statistics Canada, have developed a
    measure of regulatory requirements at the federal level.

    • The number of regulatory requirements rose by
      40% from 2006 to 2021.
    • Rising regulatory requirements were found to
      have a negative effect on output and productivity growth.


Chart 3 Average entry and exit rates in Canadian industries, 2000 to 2021

Data table for Chart 3
































Data table for Chart 3

Table summary

This table displays the results of Data table for Chart 3 Average entry rate and Average exit rate, calculated using percent units of measure (appearing as column headers).

Average entry rate Average exit rate
percent
2000 14.60 10.26
2001 14.70 10.29
2002 11.86 9.59
2003 10.90 9.37
2004 12.96 9.36
2005 12.34 8.62
2006 11.85 9.42
2007 12.94 8.75
2008 10.79 9.27
2009 9.98 9.57
2010 9.60 8.63
2011 9.69 8.58
2012 10.21 7.88
2013 9.54 8.13
2014 9.42 8.80
2015 9.06 8.91
2016 8.75 9.14
2017 9.24 10.15
2018 9.37 9.04
2019 9.57 9.35
2020 7.75 10.68
2021 7.34 12.17




For more information: Competition
Bureau report finds Canada’s competitive intensity in decline and The
Daily
—Survey of Innovation and Business Strategy, 2022.

Businesses invest in innovation and technology adoption—especially in response to competition


  • More than four in five businesses that used
    advanced technology reported innovations, compared with three in five
    businesses that did not use advanced technology (Survey of Innovation and
    Business Strategy, 2022).
  • In responding to changes in competition in their
    main market, over one-third of businesses (38%) introduced or accelerated the
    introduction of new goods or services. Over one-half (55%) responded by
    introducing new technology or new processes.
  • Nearly two in five businesses that developed and
    introduced product innovations registered to protect their intellectual
    property.
  • In the second quarter of 2024, almost 3 in 10
    businesses (28.3%) reported that technology adoption and innovation improved
    their ability to operate efficiently over the previous 12 months.


Chart 4 Innovation rates, 2020 to 2022

Data table for Chart 4












Data table for Chart 4

Table summary

This table displays the results of Data table for Chart 4 percentage of businesses reporting innovations (appearing as column headers).

percentage of businesses reporting innovations
Users of advanced technology 85.2
All businesses 71.9
Non-users of advanced technology 60.0




For more information: The
Daily
—Survey of Innovation and Business Strategy, 2022 and Aspects
that improved the ability of business or organization to operate efficiently
over the last 12 months, second quarter of 2024.

Business research and development spending is ramping up,
but overall R&D intensity remains well below that of other major industrial
economies


  • In 2021, most of the growth in industrial
    R&D spending reflected higher outlays by the largest R&D performers,
    both domestic and foreign-owned. Early data for 2022 and 2023 point to steady
    increases in business R&D spending.
  • Canada’s R&D spending as a share of gross
    domestic product (GDP) lags well behind the G7 average and, in 2021, fell two
    spots to 19th in the Organisation for Economic Co-operation and Development.
    Canada’s business-sector R&D spending as a share of GDP was the second
    lowest in the G7.
  • R&D intensities for domestic and foreign-owned
    producers vary across industries.

    • The average R&D-to-sales ratio for
      Canadian-owned manufacturers was 2.2% in 2021, compared with 1.6% for
      foreign-controlled manufacturers.
    • Canadian-owned information and communications
      technology (ICT) businesses had an average R&D-to-sales ratio of 5.9%, well
      below the average for foreign-controlled ICT firms (12.9%).

  • Foreign multinationals accounted for over 40% of
    all intramural research and development (R&D) spending by corporations in
    2021, and one-third of all corporate expenditures on intellectual property (IP)
    in 2022.


Chart 5 Growth in business research and development spending, by expenditure groups

Data table for Chart 5













Data table for Chart 5

Table summary

This table displays the results of Data table for Chart 5 2016, 2017, 2018, 2019, 2020 and 2021, calculated using index (2016=1) units of measure (appearing as column headers).

2016 2017 2018 2019 2020 2021
index (2016=1)
Less than $500,000 1.00 0.90 0.91 0.89 1.11 0.99
$500,000 to $9,999,999 1.00 1.02 1.18 1.22 1.29 1.32
$10,000,000 and more 1.00 1.04 1.11 1.20 1.28 1.65




For more information: The
Daily
—Industrial research and development, 2021 (actual), 2022
(preliminary) and 2023 (intentions) and Activities
of multinational enterprises in Canada, Canadian and foreign multinationals, as
a share of the Canadian economy.

Many businesses benefited from federal support for
innovation and growth during the recovery from the COVID-19 pandemic


  • In 2021, as Canada recovered from the
    COVID-19 pandemic, the federal government provided
    over 33,000 businesses with innovation and growth support, valued at
    $4.5 billion, through 134 federal programs.
  • In 2021, small and medium-sized enterprises
    (those with fewer than 500 employees) accounted for 96% of all program
    recipients and over three-quarters of total support value.
  • Several indicators are consistent with the
    notion that business innovation and growth support (BIGS) programs
    helped businesses recover from the pandemic.
  • The revenues of BIGS-supported corporations
    expanded by 16% in 2021, three times higher than in 2020. Their
    export revenue rose 15% during the same period, after declining by 4%
    from 2019 to 2020.
  • BIGS recipients continued to innovate
    in 2021, as their research and development expenditures rose by 12%,
    comparable with the 11% increase from 2019 to 2020.


Chart 6 Business innovation and growth support by employment size, 2021

Data table for Chart 6












Data table for Chart 6

Table summary

This table displays the results of Data table for Chart 6 Enterprises and Total value of support, calculated using percent units of measure (appearing as column headers).

Enterprises Total value of support
percent
Small- and medium-sized enterprises 96 77
Large enterprises 4 23




For more information: The
Daily
—Business innovation and growth support, 2021.

Patent activity scaled back prior to the COVID-19 pandemic


  • Growth in patent applications in Canada and
    applications abroad by Canadians stagnated in the years leading up to the
    pandemic, falling to levels observed in the early 2000s.
  • While over one in five businesses owned an
    intellectual property (IP) asset in 2022, only about 6% owned patents (Survey
    of Innovation and Business Strategy, 2022).
  • New research at Statistics Canada shows that
    Canadian multinationals demonstrated superior IP generation than foreign-owned
    multinationals, with four in five high-tech patent applications originating
    from Canadian-controlled entities.
  • Revenues for IP rebounded in 2021. Businesses in
    Canada performing research and development generated more revenue
    from the use of their IP than ever before, as receipts rose 37%
    to $8.9 billion. At the same time, payments
    for IP increased 34% to $2.2 billion.


Chart 7 Number of patents

Data table for Chart 7













Data table for Chart 7

Table summary

This table displays the results of Data table for Chart 7 2001 to 2005, 2006 to 2010, 2011 to 2015 and 2016 to 2019, calculated using number of patents units of measure (appearing as column headers).

2001 to 2005 2006 to 2010 2011 to 2015 2016 to 2019
number of patents
CIPO 2,914 3,004 3,038 2,625
USPTO 2,569 3,458 5,217 5,133
Other international patent office 4,538 4,758 3,834 2,631




For more information: The
Daily
—Survey of Innovation and Business Strategy, 2022 and Innovation
in focus: Exploring trends in the development of advanced technology through
patent applications.

Adoption of disruptive technologies is in its early stages


  • According to the 2022 Survey of Advanced
    Technology, almost two-thirds of businesses (62.1%) have adopted at least one
    type of advanced technology. However, spending levels are modest, and take-up
    rates for disruptive technologies are comparatively low.
  • Only 3.1% of businesses reported using
    artificial intelligence, while 2.1% reported using robotics.
  • The top three obstacles reported by enterprises
    that did not adopt advanced technologies were low returns on investment or long
    payback periods from such investments (40.6%), challenges recruiting skilled
    staff (36.7%) and difficulties integrating new advanced technologies with
    existing systems (34.7%).


Chart 8 Share of capital expenditures on advanced technology by type of technology, 2020 to 2022

Data table for Chart 8



















Data table for Chart 8

Table summary

This table displays the results of Data table for Chart 8 percentage of advanced technology spending (appearing as column headers).

percentage of advanced technology spending
Advanced design and information control technologies 23.4
Additional advanced technologies 15.2
Advanced business intelligence technologies 14.9
Clean technologies 11.7
Advanced processing and fabrication technologies 11.4
Advanced material handling, supply chain and logistics technologies 8.0
Internet-connected smart devices or systems 5.5
Other 4.7
Robotics 3.9
Artificial intelligence technologies 1.3




For more information: The
Daily
—Survey of Advanced Technology, 2022.

Comparatively low spending on advanced technologies 

  • While a majority of businesses covered by the 2022 Survey of Advanced Technology adopted at least one type of advanced technology, capital outlays on advanced technologies from 2020 to 2022 totalled only $6 billion. By comparison, private sector expenditures on research and development during this three-year period amounted to $79 billion.
  • Of businesses that did not incur any capital
    expenditures on advanced technologies from 2020 to 2022, about 6 in 10 reported
    that they were not applicable to the enterprise’s activities. Similarly, one in
    five non-investing businesses reported that investments in advanced technology
    were not necessary for continuing operations.
  • In the second quarter of 2024, about one-half of businesses reported that they did not have any plans to adopt or incorporate AI or other advanced digital technologies over the next 12 months (a group that includes non-adopters and past adopters). One-third of these businesses reported that digital technologies were not relevant to their organization.
  • Low adoption rates and expenditure levels for disruptive
    technologies raise questions about how well-positioned businesses are to reap
    the benefits of major technological advances. In the second quarter of 2024, 6%
    of businesses reported using artificial intelligence for producing goods or
    delivering services over the previous 12 months.

For more information: The
Daily
—Survey of Advanced Technology, 2022, The
Daily
—Non-residential capital and repair expenditures, 2022 (revised), 2023
(preliminary) and 2024 (intentions), Reasons
for not investing capital expenditures in advanced technologies, by industry
and enterprise size, Technologies
the business or organization plans to adopt or incorporate over the next 12
months, second quarter of 2024 and Analysis
on artificial intelligence use by businesses in Canada, second quarter of 2024.

Impacts of artificial intelligence on the workforce may be
more far-reaching than earlier technological transformations

  • Previous waves of automation mainly affected
    workers performing routine and manual tasks—artificial intelligence (AI) is
    expected to impact a larger segment of the workforce because of its increasing
    capacity to perform cognitive and non-routine tasks.
  • New research at Statistics Canada has produced
    experimental estimates of potential AI occupational exposure and
    complementarity in Canada, and it was found that 40% of workers have low
    exposure to AI. The remaining 60% are split into two groups: workers with high
    exposure that have high complementarity with AI technologies (29%), and workers
    with high exposure and low complementarity with AI (31%).
  • High earners are more likely to be in jobs that
    have high exposure and high complementarity with AI, while middle earners are
    more likely to be in high-exposure jobs with low complementarity.

Artificial intelligence is expected to have far-reaching
impacts on business productivity and the nature of work  


Figure 2 Potential artificial intelligence occupational exposure and complementarity in Canada

Description for Figure 2

This chart shows a scatter plot with the AI occupational exposure index ranging from 5 to 7 on the horizontal axis and the complementarity index ranging from 0.4 to 0.8 on the vertical axis. There are 490 data points. Each data point represents an occupation as per the 4-digit National Occupation Classification version 2016 and are colour-coded with three different colours. The colours are used to distinguish the occupations according to their minimum educational requirement. Occupations requiring a bachelor’s degree or higher are represented by blue, occupations requiring some postsecondary education below bachelor’s degree are represented by green, and occupations requiring high school or less education are represented by red. The chart shows the relationship between AI occupational exposure and the extent to which AI can play a complementary role in a given occupation. A higher AI occupational exposure index is associated with greater potential occupational exposure to AI. A higher complementarity index is associated with greater potential complementarity with AI. The median AI occupational exposure index score of 6 and the median complementarity index score of 0.6 are used to group the various occupations into four quadrants. The top-left quadrant contain data points representing occupations which might be relatively less exposed to AI and highly complementary with AI. The majority of occupations in that quadrant require some postsecondary education below bachelor’s degree but there are also a few which require high school or less education. Some examples include firefighters, plumbers, and carpenters. The bottom-left quadrant contain data points representing occupations which might also be relatively less exposed to AI but also less complementary with AI. The majority of occupations in that quadrant require high school or less education but there are also a few which require some postsecondary education below bachelor’s degree. Some examples include food and beverage servers, labourers in processing, manufacturing and utilities, and welders and related machine operators. The top-right quadrant contain data points representing occupations which might be highly exposed to AI and highly complementary with AI. The majority of occupations in that quadrant require a bachelor’s degree or higher education but there are a few which require some postsecondary education below bachelor’s degree. Some examples include general practitioners and family physicians, secondary school teachers, and electrical engineers. The bottom-right quadrant contain data points representing occupations which might be highly exposed to AI but less complementary with AI. This quadrant has fewer data points than the other quadrants and the occupations represented by the data points have a mixture of educational requirements. Some examples include data entry clerks, economists, computer network technicians, and computer programmers and interactive media developers.



Takeaways

  • There is little evidence from Canada’s official
    productivity statistics that innovation and advanced technology adoption are
    translating into sustained improvements in business efficiency beyond their
    measured impacts on capital and labour. This aligns with a longstanding
    concern: the need for businesses to more fully exploit the benefits of
    innovation and advanced technology to expand output and increase labour
    productivity.
  • Recent data from innovation and technology
    surveys highlight the positive linkages between competition, innovation and
    business efficiency. While business expenditures on research and development (R&D)
    and receipts from intellectual property are rising, concerns over the intensity
    with which businesses are investing in knowledge capital persist, especially in
    relation to many competitor economies. R&D intensity remains low, while
    patent applications scaled back measurably prior to the pandemic.
  • Business investment in disruptive technologies, widely touted as a potential game changer for productivity, is in its early stages. Artificial intelligence (AI) adoption rates were about 3% in 2022, with little capital spending on emergent technologies. While 6% of businesses reported using AI in the second quarter of 2024, over one-half of businesses were not planning to adopt or incorporate AI or other advanced digital technologies over the coming year (a group that includes both non-adopters and past adopters). 


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