Is investment a good measure of economic performance?

The author is President and CEO of Montréal International, an organization whose mission is to attract talent, foreign businesses, and international organizations to Greater Montréal.

If you’ve read the two recent articles in Macleans and La Presse titled “Why Québec is closed for business” and “Investissements des entreprises : Québec, le cancre,” you may have noticed that they both use non-residential business investment data to show how poorly the economies of Québec and Ontario fare against those of other Canadian provinces.

Such numbers are often cited by decision-makers and the media, but are they a good measure of economic performance? That’s what we should be asking ourselves and here’s what I think about it.

To begin with, business investment data covers only business capital expenditure, i.e., what businesses spend on buildings, machinery, and equipment. Even though such investments help increase business productivity, they do not reflect the strength of tech industries and other growth sectors, which are central to the economic development strategy of Greater Montréal and many other major cities around the world. Montréal’s video game industry, for instance, has seen dramatic growth in the past few years despite relatively low capital investments.

We should also bear in mind that, in knowledge-based economies, businesses often spend less on machinery and equipment, but invest more in the salaries of their skilled workers and in so-called intangible assets like R&D, technology transfer, training and professional development, and marketing and brand building. Such investments create considerable value, but are not reflected in currently available data.

Additionally, as long as we’re talking economic development, investment is not an end in itself, but a means to generate economic wealth. Just how much wealth an investment generates, however, depends on the economic return of the investment, which varies greatly from one industry to the next. Not all investments are created equal.

According to a recent SECOR-KPMG study commissioned by Montréal International, the GDP impact of a $100-million investment would be $491M in the scientific services industry as opposed to just $60M in the paper industry, meaning that a paper mill would have to invest eight times as much as a scientific services company to generate the same amount of wealth.

And we’ve seen that with some investment projects we’ve helped get off the ground. For example, a food processing company that turned to Montréal International for assistance wanted to invest five times as much in capital assets as a video game company. In the end, however, the amount invested by the video game company generated twice as much wealth because it created more jobs.

To sum up, we believe that Québec’s—and Ontario’s—poor performance in terms of non-residential business investment is just a reflection of the decline in traditional manufacturing in the two provinces over the past few years. It is hardly representative of the vibrant high­tech, creative, and knowledge-driven industries, which have seen tremendous growth in Greater Montréal and have played a major role in driving wealth creation. Investment data should be interpreted with a grain of salt when used to rate a region’s economic performance. Investment alone is an incomplete and—in this case—a misleading indicator, which is why we should also consider others, such as revenues, salaries paid, and GDP impact. The analysis of these high-knowledge industries requires indicators tailored to their reality.

Dominique Anglade

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