Thank you, Mr. Chair. I appreciate the opportunity to appear this morning.
When we talk about the service sector, we're covering a vast range of work, three-quarters of the jobs in the economy. With your permission, I'm going to focus my initial remarks on two areas in which we've done specific research into what it takes to compete for highly skilled and well-paid work, two specific kinds of service jobs, if I can put it that way: those involved in head offices and those involved in research and development.
The head office subject came to the fore last year with the highly publicized foreign takeovers of major enterprises, which led to fears in some quarters of the hollowing out of Canada's head offices. Obviously—we're a CEO-based organization—what happens to head offices matters a great deal to us as well as to the well-being of all Canadians, and we decided to dig a little deeper into the specific issue of head office jobs.
The first point I'd make on this front is that where a company's shares are owned doesn't necessarily determine where it decides to set up centres of high-level decision-making. Many Canadian subsidiaries of foreign-based multinationals function as centres of leadership for North American and global responsibilities. By the same token, Canadian-based companies, as they expand abroad, tend to set up centres of expertise in other countries and recruit talent globally. In other words, Canada has to compete to be a preferred location for these kinds of jobs, within Canadian and foreign firms alike.
We did a detailed survey of our CEO members last year and particularly looked at how companies decide where to set up head-office-type operations. The responses indicated two dominant drivers in this respect.
First is tax policy. The economic evidence on corporate tax policy has been clear for years: high corporate taxes in a global economy don't pay. This is a critical issue for companies in the service sector, because Canada's current corporate tax structure is heavily biased against services. Given the current crisis in manufacturing, it's obviously understandable that we want to focus in the short term on how to retain jobs in that sector. But we are going to be counting on services, moving forward, to provide the bulk of our future job growth, and our tax system actively discourages investment in this area.
I think the C.D. Howe Institute has noted that Canada has the second-highest marginal effective tax rate in the world on business investment in the service sector, behind only the United States. It's important to note that even higher-tax jurisdictions, countries such as Sweden, understand the importance of this. Even though Sweden has an overall tax burden that's much higher than Canada's, its effective tax rate on business investment is 42% lower than Canada's and its effective tax rate on investment in services is less than half of Canada's current rate.
When it comes to attracting head office jobs, personal tax rates also matter. Individuals think about a lot of things when they're deciding where to move and where to live with their families. But the fact is that people with high incomes who can earn high incomes anywhere in the world have a lot of choice and certainly focus on what their money buys after taxes.
The C.D. Howe Institute, in its submission to the Competition Policy Review Panel, noted that policies that enable companies to pay high gross incomes, and personal income taxes that leave a larger share of those gross incomes in the pockets of the people who earn them, are a key source of competitive advantage for a jurisdiction that seeks high-value business activities.
There is a second, very different issue that also has a huge impact on where to locate head office jobs. The fact is that senior executives at large companies have to travel a lot. They have to manage their operations; they have to build relationships with customers; they have to deal with investors. The reality for growing Canadian companies is that many of those employees, customers, and investors don't live in Canada; they live in the United States and beyond. Basically, the time it takes to travel to see those people has a major role in determining where a given executive wants to be located.
At one level, that reinforces the importance of basic infrastructure, such as good airports. But the broader issue for Canada is the efficiency of the Canada-U.S. border. We've been working hard since September 11, 2001, to ensure that our neighbour's understandable focus on its own security doesn't impede legitimate traffic across the border for people or goods, and our organization has been actively involved in the work of the North American Competitiveness Council to try to make the border less of a barrier.
We are concerned that the border is getting more difficult to cross, rather than easier. We're particularly worried about the implementation of the western hemisphere travel initiative, which of course is scheduled to include a requirement for a passport at land crossings by mid-2009. That seems likely to make border delays worse.
The fact is, a Canada-U.S. border that creates regular delays for business travellers provides a powerful incentive for top executives to live on the same side of the border as the bulk of their customers, their investors, their operations. For expanding Canadian companies, that increasingly means, when looking at where to set up shop for North America, that this basically provides a powerful incentive to locate south of the border rather than north of the border for key head office functions.
Before I close, Mr. Chair, let me address the other source of high-value work that I mentioned at the outset: research and innovation.
We know that business investment in innovation is a fundamental driver of a more competitive and prosperous economy, but by at least one key indicator, business expenditure on research and development, our record is mediocre at best. We therefore launched, last year, a joint project with Industry Canada to dig deeper into this issue. We started with a CEO-level survey that essentially asked what it is that enables and encourages companies to do as much research and innovation as they do and what discourages them from doing more. We also asked what matters most when their company is deciding whether to do research in Canada or somewhere else and how Canada stacks up on those factors.
The survey confirmed that intense competition is the key driver of innovation. But its evaluation of Canada's strengths and weaknesses was rather sobering. The CEOs who responded applauded Canada's strong pool of talented people and its high quality of life, but it pointed to two key weaknesses: the regulatory environment and the treatment of intellectual property, which effectively is the true currency of the knowledge economy. They also rated these two factors as the ones that matter most when companies decide whether to invest here or somewhere else.
The result is stark. When they were asked about their company's intentions for investment and innovation over the next three years, most said their investment would remain flat in Canada, and for companies that were planning to increase investment in innovation substantially, the bulk of that innovation expenditure is going to take place outside Canada.