Underinvestment in Capital Equipment Is Harming Canadian Productivity, Competitiveness, and Economic Growth, New Report Finds

OTTAWA—Canada is in a productivity crisis, with labour productivity rising just 10 percent over the past decade, while the United States has surged ahead, growing nearly two and a half times faster. Without targeted reforms to boost capital investment and modernize data collection, Canada will continue falling further behind in global competitiveness and economic growth, according to a new report by the Information Technology and Innovation Foundation’s (ITIF) Centre for Canadian Innovation and Competitiveness.

The report examines the critical role of capital equipment in driving labour productivity and finds that Canada’s chronic underinvestment in productivity-enhancing tools, such as software, industrial machinery, computers and electronics, and other advanced technologies, is undermining its ability to defend its national interests.

“Improving Canada’s productivity performance is not just an economic imperative, it’s a strategic necessity,” said Lawrence Zhang, head of policy at ITIF’s Centre for Canadian Innovation and Competitiveness. “Rising trade tensions with the United States make productivity more vital than ever to protect economic competitiveness, living standards, and strategic autonomy. To reverse the crisis, policymakers must go beyond surface-level explanations and thoroughly examine capital investment, which remains critically low across key sectors.”

While overall capital spending appears stable, this is misleading. From 2013 to 2023, capital investments as a share of GDP declined 20 percent, and productive capital grew by just 1 percent in relative terms over the same period. The report warns that headline investment figures are skewed by the inclusion of low-impact assets like furniture, uniforms, and fleet vehicles, which lead to misdiagnosis of business modernization needs across the Canadian economy.

Compounding the issue, overall decreases in capital stock, or how much capital businesses own, is eroding productivity potential. Canada’s productive capital stock has fallen 8 percent as a share of GDP since 2013.

Declines are particularly steep in the most important and productivity-boosting types of capital: industrial machinery fell 19 percent, and computers and electronics declined 10 percent. Productive capital stock also declined in core industries such as manufacturing, information and cultural industries, and wholesale trade. Software capital stock investment has risen but remains insufficient to offset overall declines.

ITIF cautions that if this downward trend continues, much of Canada’s capital stock will become increasingly obsolete, leaving workers without access to the modern tools that enhance efficiency.

Additionally, Canadian firms are not keeping pace with competitors abroad. From 2013 to 2023, U.S. firms invested an average of 11 percent of GDP annually in machinery, equipment, and intellectual property; Canadian firms invested just 8 percent.

“The United States outpaces Canada in nearly every sector when it comes to capital investment—and the results are showing,” said Meghan Ostertag, a research assistant for economic policy at ITIF. “From agriculture and manufacturing to information and cultural industries, Canada is falling behind. This underinvestment is eroding Canada’s global competitiveness.”

The report emphasizes that Canada is missing a major opportunity for firms to boost productivity through the adoption of emerging technologies like robotics and artificial intelligence. The country ranks 17th globally in manufacturing robotics use, and Canadian firms adopt AI at less than half the rate of the United States across all industries except for the media and communications sectors.

This shortfall, ITIF argues, isn’t just a missed opportunity—it’s a growing threat. Without faster uptake of these productivity-enhancing technologies, Canada risks losing even more ground in advanced manufacturing and other innovation-driven sectors.

Another critical weakness is Canada’s lack of data. Statistics Canada does not publish detailed, industry-specific capital expenditure data, making it difficult to distinguish between productivity-enhancing investments, such as automation equipment or software, and less-productive assets like furniture or uniforms.

“Effective industrial strategy depends on understanding where and how capital is being invested, but Canada doesn’t have the granular data policymakers need to connect the dots,” said Zhang. “Apparent weak links between capital investment and productivity may reflect data limitations rather than economic reality. Better data would help pinpoint which investments drive output gains and which industries are falling behind.”

To reverse the decline in capital intensity and close the productivity gap, the report calls on policymakers to take the following actions:

• Allow full expensing of all productive capital in the first year—including machinery, software, and advanced technologies—across all sectors.
• Adopt size-neutral policies so that firms of all sizes face the same tax and regulatory treatment, enabling more small businesses to scale.
• Establish a Prime Minister’s Productivity Innovation Award to recognize Canadian firms demonstrating exceptional use of capital to drive output and efficiency.
• Fund industry-specific productivity groups through Innovation, Science and Economic Development Canada to analyze global best practices and support adaptation by Canadian firms.
• Enhance Statistics Canada’s capital data, including reporting by three-digit North American Industry Classification System (NAICS) codes and more detailed classification of software, leased assets, and retirements.

“Canada cannot compete in the 21st-century economy with 20th-century capital. Nothing can substitute for modernizing the tools and technologies workers rely on daily,” said ITIF President Robert D. Atkinson. “If Canada wants to improve its techno-economic leadership in an era of heightened global competition and trade uncertainty, it must make bold policy reforms to boost investment in productivity-enhancing capital and improve data collection—starting now.”

Read the report.