Canada needs to boost innovation and invest more in education to create a high-skilled workforce as it grapples with stagnant productivity growth, according to the Organization for Economic Co-operation and Development (OECD).

In a new report, the Paris-based OECD projects that Canada’s economy will grow by about 2.25% in 2012, and by around 2.5% in 2013. It also identifies sluggish productivity growth as the main long-term challenge facing the economy, noting that multi-factor productivity has remained the same over the past few decades, and overall productivity has actually fallen since 2002.

“Canada is blessed with abundant natural resources. But it needs to do more to develop other sectors of the economy if it is to maintain a high level of employment and an equitable distribution of the fruits of growth,” said Peter Jarrett, one of the authors of the study and the head of the Canada division at the OECD economics department.

The OECD says that to combat this problem Canada needs to boost innovation. It notes that the business sector only devotes about 1% of GDP to research and development (R&D) in Canada, compared with 2% in the U.S. and more than 2.5% in Japan, Korea and some of the Nordic countries.

The OECD recommends more focused support for business investment in R&D. “The government should maintain the current system of tax credits; however, particularly generous credits to small Canadian-owned private firms should be reined in and partly replaced by more targeted direct grants,” it suggests.

Additionally, it says that opening up network industries and liberal professions to more competition would also enhance incentives for innovation, ultimately generating higher productivity.

The OECD also recommends that Canada should invest further to improve both the quality, and access to post-secondary education, “to maintain the supply of highly skilled workers as the population ages”.

“Financial assistance to students should become more targeted and granted on a means-tested basis. This would help reduce the barriers for financially disadvantaged students and promote more socially inclusive growth,” it says, adding that the system should also become more flexible and facilitate lifelong learning.

Canada should also seek to attract more foreign students, it says, and make it easier for them to work and stay in Canada after graduation.