When Canadian regulations favour corporate concentration

There is growing evidence that Canada’s regulatory regime is hampering innovation, investment and competition. (Pexels Photo)

By Policy Options

(Version française disponible ici)

This is part one of a two-part series.

Canada’s economy is dominated by a few large corporations – a trend that has accelerated over the past two decades – leading to numerous adverse outcomes: higher prices for goods and services, limited choices for consumers, lower wages, deteriorating working conditions for the middle class and rising income inequality. A select group of large companies benefits from this concentration by boosting profits through reduced market competition.

This business environment erects tangible and psychological barriers for small- and medium-sized enterprises (SMEs) and new entrants, whether domestic or international. Visible in sectors like telecommunications, financial services, airlines and groceries, the trend has attracted media scrutiny, public ire and political criticism.

A pro-competition regulatory landscape that served the public interest and minimized uncertainties could nurture economic growth across the country and enhance standards of living. And reducing the regulatory burden would make Canada more attractive for investments and streamline business operations.

Such measures could benefit consumers by offering cost savings and more choices, since a greater number of firms typically leads to lower prices and increased options. A smarter and better-defined regulatory regime – not necessarily less regulation – would stimulate competition. And a more competitive environment would enable smaller businesses to compete with larger corporations, eventually creating more job opportunities.

A competitive disadvantage

Ample evidence, including from a Business Council of Canada report, suggests that Canada’s business community views the country’s regulatory regime as a competitive disadvantage. Deloitte identified it as an underlying weakness compared with other business aspects and corroborated the country’s declining performance in various surveys and indexes.

Canada’s Competition Bureau reported that the country’s competitive intensity, which refers to how hard businesses work to outperform their rivals, has decreased from 2000 to 2020. The Herfindahl-Hirschman Index (HHI), a measure of corporate concentration that shows how few firms dominate an industry, rose by 8.6 per cent in the top 10-per-cent-most-concentrated industries, from 2,818 in 2005 to 3,060 in 2018.

The number of industries with an HHI greater than 2,500, indicating high concentration, increased from 19 in 2005 to 27 in 2018. Rank stability, which measures how entrenched the top firms are, increased across all industries from 2003 to 2020, meaning top firms face less competition. Both entry rates (of new firms) and exit rates fell from 2001 to 2020, from 11.8 to nine per cent in the former case, and from 13.4 to 12.3 per cent in the latter. This indicates that Canadian industries have become less dynamic over time.

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In the World Economic Forum’s 2018 global-competitiveness index, Canada ranked 12^th out of 140 countries overall. This somewhat flattering position masked deep-rooted regulatory issues: labour policies came in at 22^nd, the regulatory burden was 53^rd and ease of hiring foreign labour sat at 81^st. The United States – Canada’s largest trading partner and competitor – outperformed us in 10 of 13 major categories.

An OECD database, the Fraser Institute’s economic freedom index, and reports by the Canadian Chamber of Commerce and the Canadian Federation of Independent Business, all indicate little has changed in recent years. Canada’s regulatory environment is acting as a bottleneck, while the private sector anxiously awaits a clear signal from the federal government that the country is truly open for business beyond mere rhetoric.

Canada’s position is compounded by inefficiencies that include government bureaucracy, high tax rates and a complicated, expensive regulatory framework. A Business Council of Canada survey in 2019 found that 41 per cent of its members considered reduced regulatory burden or outright reform critical for improving the business climate.

They indicated that uncertainty and decision-making delays and regulatory inconsistencies have served as stumbling blocks, discouraging entrepreneurs from taking risks in setting up businesses or pushing them toward foreign markets.

All the above evidence points toward three overarching problems that underlie growing corporate concentration.

• Regulatory compliance costs and barriers to entry are heightened by lengthy waits for securing necessary permits and in navigating the regulatory landscape. This disproportionately affects SMEs and potential market entrants. Larger, well-resourced firms operate with carte blanche, while smaller, under-resourced firms are marginalized.
• The competitive disadvantage relative to major trading partners, mainly the U.S., intensifies the flight of capital and talent to more business-friendly jurisdictions. Emigration encourages market concentration in Canada, leaving an economy dominated by fewer, larger entities. Stories of Canadian entrepreneurs relocating their startups to the U.S. are becoming common. They are drawn by a more favourable regulatory environment, a richer pool of venture capital and greater access to funding that does not require giving up equity in a company.
• Variability in regulatory enforcement and public policy across different jurisdictions in Canada creates an uneven playing field. Market entry risks for new competitors are amplified under regulatory unpredictability — which cements the position of established firms — while policies that impede competition that could diversify the market eventually lead to greater corporate concentration.

These regulatory difficulties lead in turn to three problems:

• The economy’s pace of adopting new technology and innovative ideas is slowed by rigid and complex regulation. Delays hurt Canada’s competitiveness by thwarting productivity growth and broader economic efficiencies that could be realized from leveraging cutting-edge technologies and business models.
• Canada’s regulatory landscape creates a climate that discourages both direct foreign and domestic investment. This leads to undercapitalization of critical sectors such as renewable-energy production and high-tech manufacturing. Sustained investment in capital and research and development fuels economic vitality. The opposite causes industries to stagnate, innovation to be curtailed and long-term growth to be compromised. Underinvestment in key industries diminishes Canada’s ability to adapt to challenges and opportunities.
• Regulatory inefficiencies inflate operational costs for businesses, again detracting from Canada’s overall international competitiveness. Increased expenditures render domestic goods and services more costly in foreign markets. This economic disadvantage affects the trade balance, decreases export volumes and makes it difficult for Canada to uphold a robust position in global markets, which can eventually erode the country’s national wealth and employment levels.

The perception of a restrictive regulatory environment as well as actual regulatory constraints have led to a high concentration of corporate power and a belief that it is difficult to do business in Canada compared with the United States in particular. Canada will not outgrow its southern neighbour, largely because the U.S. economy is 10 times larger. Nonetheless, there is ample room for the federal government to step up its game.

Canada is struggling with declining economic prosperity complicated by complex standards engineered, among others, by Ottawa. These trends are not unrelated. More than simply imposing financial costs on businesses, unwieldy regulations serve as a deterrent to investment in several major sectors of the economy.

Regulation is necessary for the orderly functioning of a modern society. However, rules for the sake of rules, even if well-intended, can hurt all Canadians by stifling economic growth and business investment. For some time now, growth has not been a federal policy priority. That needs to change. In the next article, we’ll have a look at what could be done.

The views expressed in this article are personal opinions and do not reflect the views or opinions of any organization, institution, or entity associated with the author.

This article first appeared on Policy Options and is republished here under a Creative Commons license.