Running faster is not the solution to Canada’s productivity challenge

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By Denzil Doyle

Canada’s debate on productivity is one in which the country’s high-tech industry has both a right and a responsibility to participate.

If you read what passes for conclusions in the many reports that have been written on the subject over the years, you would be left with the impression that all we have to do is run a little faster on our individual treadmills and apply more sophisticated manufacturing equipment; in no time, we would be as productive as our largest trading partner, the U.S.

Unfortunately, most of these reports are flawed because they fail to take into account the forces of globalization, particularly those that impact on a branch-plant economy like Canada’s.

What the number crunchers do not seem to understand is that a branch plant typically has only one customer, namely a parent company, and the prices charged for its products and services have more to do with what the Canada Revenue Agency will accept in the way of intercompany transfer prices than what some arms-length customer will pay.

The impact of ownership on transfer pricing is illustrated by what typically happens when a Canadian hardware company is taken over by a foreign-owned multinational that is in the same line of business.

Prior to takeover, let us assume that the Canadian company sells its product on the open market for $100 per unit. Its cost of manufacturing that product is $50 per unit, with the remaining $50 going toward selling, marketing, R&D, administration costs and subsidiary profits. After takeover, the parent company decides that it will perform all (or most of) those overhead functions and it will allow the subsidiary to invoice it for something like $75 per unit, of which $50 goes toward manufacturing costs, $10 goes toward subsidiary overhead ( the writing of pay cheques, etc.) and $15 goes toward subsidiary profits.

If all of Canada’s manufacturing companies were foreign-owned (which is almost the case now) you could argue that their combined output is only 75 per cent of what it could be if all of these companies had direct access to foreign markets. In a branch-plant economy, the jobs that are left in the subsidiary are typically much lower paying jobs than those that are exported to the head office – and as we all know, Canada does not have many head offices anymore.

If Canada wishes to increase its productivity, one way of doing it is to lower its corporate tax rate, which would encourage the foreign owners to leave more tax dollars in Canada and thereby increase the sales per employee to something that is more in line with that of the foreign owners. Running faster on treadmills is not the answer.

Denzil Doyle’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.

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