What Canada Must Do Now to Strengthen Productivity: OECD Economic Survey of Canada

Canada’s living standards are among the highest in the world, and the Canadian economy has consistently been resilient to crises, including during the global financial crisis and the recent pandemic. Still, for many years, Canadian productivity growth has been weak. From 2015 to 2023, labour productivity grew by just 0.8% annually, well below the OECD average and considerably behind the United States. In the current juncture of high global policy uncertainty and tariffs imposed by Canada’s largest trading partner, productivity growth might be affected even further.

Understanding the Patterns in Canadian Productivity

As the new 2025 OECD Economic Survey of Canada shows, Canada’s productivity gap is primarily at the firm level and cannot be attributed to the sectoral composition of the Canadian economy. Many studies have not shown that Canada’s heavy reliance on commodity-based activities explains sluggish productivity, in part because this sector’s productivity tends to be high, but somewhat volatile. However, the capital-intensive nature of the resource sector, characterized by substantial investments in large-scale plants and extraction facilities, can also crowd out investment for more innovation- and knowledge-driven activities. 

Overall business investment per worker in Canada remains substantially lower than in peer OECD countries, particularly in key areas such as:

• Information and communication technology (ICT)
• Machinery and equipment
• Intellectual property products

In addition, research and development (R&D) intensity is modest, despite various government support programmes. Structural challenges, including significant barriers to interprovincial trade and labour mobility, limited market size and competition in key sectors, and the predominance of small firms, also continue to weigh on productivity.  

Why Can’t Canada Be More Productive?

This low productivity performance is even more striking if we recall that Canada possesses the essential ingredients for stronger productivity growth, including a highly educated and skilled workforce, financial resources, a stable institutional environment, and business capacity to drive meaningful change. In other words, the potential for faster productivity growth is there, but a concerted effort is needed to unlock it.

Improving productivity growth requires comprehensive policy action. The federal and provincial governments should focus on reducing existing regulatory barriers for businesses to scale up, catalyzing private investment, and equipping the workforce with essential digital skills. Recent federal initiatives, such as the Strategic Innovation Fund (SIF) and the Canada Growth Fund, are positive steps. Still, they could be further expanded and better coordinated to maximize their impact. At the same time, businesses must leverage their talent, access to financing, technological capabilities, and innovative potential to grow and scale. Universities and other research institutions can play a stronger role in bridging basic research with business needs and ramping up commercialization.

The system does not require a complete overhaul, but rather a strengthening of incentives across the board to encourage all actors to contribute to lifting the productivity of the Canadian economy.

More specifically, the following targeted actions should be prioritized to effectively boost productivity: 

1. Enhance firm-level innovation through scaled and simplified government programmes

The federal government should reform the Scientific Research and Experimental Development (SR&ED) tax credit system to ensure it supports equitably firms of all sizes: small, medium, and large. Additionally, digital assets and other advanced capital expenditure should be reintroduced in the base of the tax credit to better support modern business needs. Direct support for productivity-enhancing innovation should also be increased. For instance, Canada could introduce innovation vouchers, just like the Netherlands and Ireland, to facilitate collaboration between businesses and research institutions. Furthermore, simplifying application processes for existing programmes would make them more accessible and effective for businesses. The proposed Canada Innovation Corporation (CIC), envisioned as a new nationwide platform for supporting business R&D, represents a promising step toward streamlining and enhancing the effectiveness of R&D incentives. 

Finally, further expanding the potential and resources of the TSX Venture exchange could be an important avenue of growth and scaling up for innovative firms all across Canada. 

2. Eliminate interprovincial trade and mobility frictions to enable firm growth

Canada’s fragmented regulatory landscape continues to be a significant barrier to efficiency and business scale-up. Interprovincial trade barriers, ranging from occupational licensing restrictions to transport and procurement rules, impose substantial and unjustified costs on firm growth and productivity. To address this, the federal and provincial governments should set a binding timeline to further reduce regulatory fragmentation, harmonize technological standards, and ensure mutual recognition of professional credentials across provinces. The sooner the better.

This effort could be encouraged by linking access to targeted federal transfers with demonstrable progress in reducing trade frictions under the Canadian Free Trade Agreement. Such an approach would provide both the incentives and the accountability needed to drive reform.

3. Enhance competition and firm growth

Canada’s geography presents natural barriers to competition, with vast distances between economic centres often resulting in more isolated regional markets compared to other OECD countries. However, not all barriers are natural. Remaining entry restrictions in some regulated sectors, such as telecommunications, further dampen competition in some selected industries. These restrictions should be reconsidered to help open markets and stimulate innovation.

Furthermore, while several government programmes exist to support start-ups and SMEs, either indirectly through loan guarantees or directly via the government-owned Business Development Bank of Canada, uptake remains modest. These programmes could be made more effective by offering more affordable financing conditions and better targeting young, innovative firms that often lack a track record or tangible assets. 

Continued support beyond the venture capital stage is also essential to help firms scale. It is frequently observed that Canadian start-ups struggle to access the level of funding required to compete globally. Reducing barriers for institutional investors, such as pension funds, insurance companies, and banks, to invest in innovative ventures could be another important step toward strengthening Canada’s innovation ecosystem. 

4. Ensure full utilization of skills

A more productive economy depends not only on acquiring skills but also on ensuring they are fully utilized. However, in Canada, high rates of overqualification, particularly among immigrants, suggest a significant underutilization of talent. Vocational education and apprenticeship programmes remain underutilized, fragmented across provinces, and sometimes insufficiently aligned with labour market needs. Additionally, the full potential of women’s talent is not being realized. To address these challenges, the federal and provincial governments should reduce barriers to labour mobility across provinces, particularly for professional services and the recognition of foreign credentials. Expanding standardized vocational certification programmes, such as the Red Seal, would help improve consistency and portability of qualifications across the country.

Promoting women’s participation in technological fields and leadership roles is also essential, since the share of women in management positions in Canada remains below that of top-performing OECD countries. Continuing the planned expansion of affordable childcare is therefore critical. Promoting a better work-life balance, reducing the so-called “child penalty”, the career and income setback women often face after childbirth, and encouraging more equitable sharing of caregiving responsibilities can further help ensure that women’s skills are more leveraged. 

Towards a More Productive Canada

In conclusion, boosting productivity growth in Canada requires a comprehensive strategy that empowers businesses to invest more, to scale up, and to innovate. This involves not only enhancing existing policy tools but also removing structural barriers to market access and skills deployment. Without decisive action, Canada risks continuing divergence from peer OECD economies in income growth.