To compete, axe the culture of entitlement

There has been a lot of debate recently about whether Canada has a competition problem, with industry using it as a means to argue for tax cuts while our federal government instead focuses on matters deemed to be of greater importance, such as the roll-out of its national carbon tax plan.

Unfortunately, one thing that many often forget is that capital is highly mobile and it will tell you a lot about the health of a nation’s economic prospects. While the PMO will selectively tout its own stats on the economy — such as low unemployment levels (outside of Alberta of course) — the fact of the matter is the country’s corporate environment has simply become unattractive to investors.

For example, according to Brenda LaCerda at Moody’s Analytics, net foreign flows of Canadian securities year-to-date have reached a decade low, even lower than the 2008 financial crisis. From 2007 to 2017, foreign direct investment into Canada has collapsed nearly 75 per cent, as per Statistics Canada. The OECD FDI Regulatory Restrictiveness Index shows that Canada’s policies on foreign investment are nearly 21/2 times more restrictive than the OECD country average.

I believe that the root of the problem isn’t simply that we are uncompetitive, but that our governments, both past and present, have fostered a culture of entitlement. It is a culture in which everyone demands “our fair share” instead of one that encourages innovation and motivates those that make the most of rules that apply equally to all Canadians.

A great example of this are the recent changes to small-business taxes by the federal government. While the government reduced the tax rate facing small businesses — something that does little to change the disincentive to grow beyond the earnings threshold limit — they also imposed a punitive arm’s-length rule on who can receive dividends that completely disregards capital risk. As a result, small businesses have been encouraged to remain stagnant while, based on my conversations with tax experts, we now appear to be the only country in the world with such eligibility rules on dividends.

The problem is that a culture of entitlement cannot compete on the global stage and will continue to seek support whether it be in the form of large corporate tax cuts, a low Canadian dollar, government bailouts based on a company’s location, or regulations preventing competition such as in our banking, wireless and airline sectors. Pipelines also don’t get built because oil is not “socially acceptable” in certain provinces, even though those provinces are quite happy to receive oil revenues to fund hospitals, schools and daycare programs.

As a result we have become a nation of oligopolies happy with the status quo. Unfortunately, as John Chambers puts it in his book Connecting the Dots, “You can’t have a revolution while maintaining the status quo, and you can’t achieve bold results with incremental change. You can’t transform a country, a company, a career, or anything else by tinkering with a few things while sticking to the path you’re on.”

Consequently, we are missing out on the global innovation revolution being led south of the border with highly competitive companies disrupting the status quo. Simply look at the how successful the FAANG stocks have been and ask why Canada does not have any such companies of our own.

The same applies to other sectors. Take our banking sector, for example, and ask why the same five banks have controlled 90 per cent of the wealth management market for decades whereas the top five U.S. banks currently control only 30 per cent of the corresponding market south of the border. Instead of innovating and growing their market share, our banks have acquired their competition and/ or lobbied to change the regulatory rules simply to protect their positions.

A great first step toward change is to become anti-entitlement — and that means focusing in on areas that need improvement instead of denying that they even exist. It is an important lesson our government and industries need to learn if we want to once again attract investment capital with the goal of becoming global leaders, instead of simply protecting our fair share.

Martin Pelletier, CFA is a Portfolio Manager and OCIO at TriVest Wealth Counsel Ltd, a Calgarybased private client and institutional investment firm specializing in discretionary risk-managed portfolios as well as investment audit and oversight services.