6, June 2023

What the Hamilton Index says about Canada

There are many ways to compare Canada with other countries. Each one does the comparison using different data and together they build a better perspective of the overall situation.

One of the more recent comparisons is the Hamilton Index. It comes from the Hamilton Center in Washington, DC, that is part of the Information Technology and Innovation Foundation (ITIF). It is named after Alexander Hamilton, one of the fathers of the US and an early practitioner of industrial policy there. ITIF was founded by Rob Atkinson, a Canadian who was born in Calgary.

The Hamilton Index is a measure of competitiveness. It starts from the view that competitiveness is determined by the sectors of the economy that are internationally traded. In that respect it is different from productivity and innovation that, if they apply only to domestic industries, do not affect competitiveness. It does not include the resource sector, so oil and gas, mining and agriculture are excluded.

The seven industry sectors the Hamilton Index incorporates are:  pharmaceuticals; medicinal, chemical, and botanical products; electrical equipment; machinery and equipment; motor vehicle equipment; other transport equipment; computer, electronic, and optical products; and information technology and information services.

The diagram below shows the Hamilton Index for the seven sectors combined. (There are also separate Indexes for each of the 7 sectors that you can find here.)  There is a lot of information on this graphic so let’s unpack it. There are three dimensions on the graphic:

  1. Global Market share (the x axis). This is the combined market share of the seven industry sectors for 10 countries and regions: the United States, Canada, Mexico, Germany, the EU-28 minus Germany, China, India, Japan, Korea, and Taiwan plus a category of ‘all other countries’.
  2. Total production of the seven sectors in each country. This is shown by the size of the circles, and the dollar figure is also shown, in $US.
  3. Relative concentration. (the y axis). This is the location quotient LQ) for each country. The location Quotient is the fraction of the workforce employed in these 7 sectors, as a percentage of the country’s total workforce, relative to the global average. So, for example, if in Canada 0.5 % of the workforce is employed in pharmaceuticals, and the global average employment in pharmaceuticals is 1.0% of the workforce, then the location quotient for Canada in pharmaceuticals is 0.5.

Total production and global market shares in Hamilton Index sectors, 2018

Canada’s ranking.
Several facts are immediately obvious from this graphic:
  • Canada’s production in these 7 sectors is very small, in fact the smallest of all the countries ranked, at $87 billion.
  • Canada’s global market share is very low, co-equal with Mexico and Taiwan.
  • Canada’s location quotient is lower than the 10 comparator countries and similar to the global average.
Sector performance
Of the seven Hamilton sectors, Canada did best in the “other transportation equipment” category. This is likely because of Bombardier’s production of trains and aircraft.

 

Global shares of other transportation equipment production, 2018

Trends from 1995 to 2018

Canada lost global market share in all seven industries in the Hamilton Index, with the largest losses in motor vehicles and computer and electronics. Canada’s global share of all advanced industries fell by one-third from 1995 to 2018, from 1.8 percent to 1.2 percent. See the Figure below.

Canada’s performance in Hamilton Index industry sectors

Rob Atkinson suggests some thoughts on what to do:

  1. Expand and reform SR&ED. Rob noted that Canada has the 16th most generous support for business R&D, but that it clearly is not having the desired result as BERD in Canada is extremely low.
  2. Tie university funding to commercialization performance. This approach is intended to provide an incentive for universities to commercialize their R&D.
  3. Increase funding for Polytechnics tied to key industries. The Dutch use a system on innovation vouchers to encourage cmpetition.
  4. Create “Manufacturing Canada Institutes” and link with US Institutes. He suggests that Canada join this US scheme to make it North American.
  5. Light touch regulation, especially on IT/AI. He sugested building on the EU approach.
  6. Impose a resource excise tax.

Peter Josty