Business investment is a powerful driver of economic growth, providing the resources for new machinery, equipment and technologies, which are necessary to improve productivity and ultimately wages. Politicians, bureaucrats, and the public are becoming more aware of the importance of business investment to our prosperity. Unfortunately, the results for Quebec indicate that it has the worst investment climate in Canada.

A new study, the Canadian Provincial Investment Climate Report, analyzes the relative investment climates of the Canadian provinces. The policies included in the report were determined from seven years of survey data from Canadian investment and pension managers. Specifically, the study evaluates provincial investment policies in seven areas: corporate income tax, fiscal prudence, personal income taxes, infrastructure, corporate capital taxes, labour market regulation and regulatory burden.

The results for Quebec are nothing short of disastrous. The province ranked last overall among the 10 provinces with a score of 3.5 out of a possible 10. Quebec trailed such other poorly performing provinces as Nova Scotia and Prince Edward Island by a sizeable margin. It also significantly underperformed compared with Ontario, Canada’s other highly populated province; Ontario ranked third with a score of 5.9. Quebec was a country mile behind Canada’s two leading provinces, Alberta and British Columbia, whose investment climates received scores of 8.7 and 6.7, respectively.

Fortunately, the path to an improved investment climate can be found by examining Quebec’s performance in specific policy areas. For starters, Quebec ranked dead last in two of the seven indicators examined: labour-market regulation and the regulatory burden. Quebec’s labour laws were determined to be the most rigid and biased in all of Canada. Biased and rigid labour laws have been demonstrated to result in less job growth, higher rates of unemployment, and lower levels of investment and economic growth.

The regulatory burden, which measures the costs imposed on Quebec by provincial regulations, was estimated at a startling 4.5 per cent of the Quebec economy in 2005. An easy way to understand regulatory costs is to think of them as invisible taxes. Thus, regulatory costs impose an additional 4.5-per-cent tax on the entire Quebec economy.

Unfortunately, labour laws and the regulatory burden are not the only problems facing the province. Quebec also performed poorly (9th) in fiscal prudence, which measures the government’s ability to balance its books and constrain spending.

Another concern is Quebec’s use of corporate capital taxes, which are an extraordinarily damaging and costly tax. Again, Quebec ranked 9th, just ahead of Saskatchewan. Given that Saskatchewan is expected to significantly curtail, if not outright eliminate, its use of this tax in the upcoming budget, Quebec might become the country’s largest user of capital taxes. Finally, Quebec ranked near the bottom for its personal income taxes (8th) and transportation infrastructure (7th).

The one bright spot for Quebec was corporate income-tax rates, where it ranked first among the provinces. Unfortunately, Quebec is poised to reduce its strong performance in this area by raising its statutory corporate income-tax rates.

While Quebec has the worst investment climate among the Canadian provinces, its performance in attracting investment is stronger than one would expect. That discrepancy is the result of home bias. That is, Quebec is garnering more investment than one would expect given its public policies because of a built in predisposition for domestic, or home-based investment.

This predisposition is based on a greater understanding of one’s home jurisdiction. Thus, the fact that Quebec possesses one of the largest concentrations of financial firms and investors in Canada provides an explanation for why it performs reasonably well on survey-based assessments and attracts better-than-expected investment. The risk to Quebec is that it will fall farther and farther behind while other provinces move ahead with more sound economic policies that will eventually mitigate the beneficial effects of home bias.

Quebec’s investment climate is in need of repair unless the province is satisfied with continued underperformance and over-reliance on Montreal’s financial class. The better path to improved economic performance based on strong investment is by improving the areas identified as weak. Specifically, the province must reduce personal and capital taxes, improve its finances, promote investment in infrastructure, implement balanced labour laws and dramatically reduce the cost of regulation. These policies will establish a strong and viable foundation for improved economic and investment performance in Quebec.