On Canadian Competitiveness and Innovation

“Switzerland and Singapore top the list of most competitive countries in the world in a global ranking that puts Canada in a distant 14th position.

Finland, Germany and the United States round out the top five of this year’s most competitive nations on the World Economic Forum’s annual list, released Wednesday in Geneva. Canada’s ranking was the same as last year. Back in 2009, Canada sat in ninth position.

Canada fares well in education, efficient financial and labour markets, and its strong institutions. But several factors keep it out of the top 10, among them innovation and business sophistication, where Canada has tumbled to 25th in the rankings.”

  • When it comes to competitiveness, Canada can’t compete, by TAVIA GRANT, the Globe and Mail, Last updated Wednesday, Sep. 04 2013, 3:12 PM EDT)

 

Over the last couple of weeks, I have listened to a number of different business stories. The Verizon story prompted questions about the future of the Canadian Mobile Industry. This included questions about the status of incumbent players, foreign entrants and new comers like Wind Telecom, Mobilicity or Public Mobile. There was also a report on Global Competitiveness and the question of who might buy Blackberry. There was the declaration by Prime Minister Stephen Harper and Mr. Flaherty that “Canada is targeting a federal debt-to-GDP (gross domestic product) ratio of 25 percent by 2021.” (Canada softens target for federal debt-to-GDP ratio, Sep 5, 2013 9:26am EDT, Reuters.com).  Additionally, it was reported that “Canada’s current account deficit widened in the second quarter as exports struggled to gain traction and lower oil shipments to the United States caused the bilateral trade surplus to shrink, according to Statistics Canada data on Thursday.” (Canada’s current account gap widens in second quarter, Aug 29, 2013 8:40am EDT, Reuters Canada Website) Or put differently, Canada is still dependent on the export of our raw resources. For me, all of these stories had one thread: innovation, competitiveness and how to grow the Canadian economy.

For years, we have heard conservatives argue that Canada’s lack of innovation has been due to one simple cause: Government Size. High taxes, high deficits and bloated Government have stymied the Canadian Economy. Mulroney argued this in the 1980’s. Consequently, he replaced the Manufacturers Sales Tax with the GST. Furthermore, he set a firm cost to government by making crown corporations and airports into self-sufficient entities. In fact, after Mulroney, some of them made money and paid dividends to the federal government. However, that was not enough.

In 1994, the Government of Jean Chrétien argued the same thing. Consequently, from 1993 to 2006, the Federal Government, on a net basis, cut corporate taxes, cut the social welfare state, cut or downloaded government services and reduced the size of the civil service. The cuts were so profound that between 1997 and 2006, Liberal Finance Ministers were able to announce to the House that they had continuous balanced budgets.

But it does not end there. For most, if not all, provincial governments did the same thing. In Ontario, the Harris Government sold off assets including a provincial highway (i.e. the Highway 407 privatization). In Quebec, the Lucien Bouchard Government re-negotiated their “social contract”; while in Alberta, Premier Klein radically reshaped government. While for very different reasons, every level of Canadian Government was committed to decreasing the size and scope of the Canadian State. It was so successful that most Governments had to reshape their bond issues because the Canadian Bond Market did not have enough product for domestic and foreign investors.

But the reduction of government did not stop there. In fact, the same thing happened under Mr. Harper.

In 2006, when Mr. Harper had a budgetary surplus, he decided to cut the GST and many government services. Consequently, from 1984 to 2013, from Mr. Mulroney to Mr. Harper, we have seen a general erosion of the Canadian State. In other words, for 29 years we have had one consistent policy. Given that the post-war consensus was 39 years (ie from 1945 to 1984) and it provided huge dividends, one would think that the cutting of government for 29 years would provide some return. However, we have not seen a corollary change in Canada’s economic competitiveness. If one listens to Conservatives like Brian Lilley, Kevin O’Leary, Stephen Harper or Mr. Flaherty, they would argue that we have not done enough. In their minds, Government needs to be cut further, for only those cuts will yield the necessary change to motivate the private sector.

In watching the Lang and O’Leary Report, I realized that some economists like Glen Hodgson, Chief Economist for the Conference Board of Canada, are starting to come to different conclusions. In my case, I strongly believe that Government Action is needed. But the question should be “what type of Government intervention” and not “how much government do we need”.

For evidence of my opinion, we can view one study on the issue. It declared that the world’s most competitive economies are Switzerland, Singapore, Finland, Germany and the United States. None of those economies would be described as a low cost, low tax economy. If you want proof, just look at the 2012 US election. Through that campaign, the Republican Vice-Presidential candidate often complained that Canadian federal tax rates were so low that it made it difficult for American companies to compete with them. And yet, in the survey, the US surpasses Canada in terms of their efficiency measures.

What is most interesting is that the same study which ranks Canada as the 14th most competitive country in the world also indicates that traditional low cost players were behind us. Or as they said, “China held on to the 29th rank, Brazil fell eight slots to 56th and India slipped one place to 60th. Indonesia is the most improved Group of 20 nation since 2006. The nation rose to 38th from 50th in the latest rankings”. (Switzerland Still Most Competitive Economy as U.S., Germany Gain, By Simon Kennedy, Bloomberg.com – Sep 3, 2013 4:01 PM MT).

So one question rests in my head: why did Switzerland, Singapore, Finland, Germany and the United States succeed?  The first thing that all of these countries do right is that they spend large sums of money on Research and Development. While Canada spends 1.8% and China spends 1.97% of GDP, the five leaders spent more than 2% of their GDP on R&D. Singapore, Germany and Switzerland are on the low end of that trend spending between 2.2% and 2.3%. The US spends 2.7% and Finland spends 3.1%.

In fact a wider reading of the report will note a strong correlation between R&D spending and efficiency improvements.  Sweden and Japan are both in the top ten and spend 3.3% and 3.67%, respectively. While, this is not the only trend, it is clearly an important one.

Another part of the story comes from having strong national champions. Switzerland is home to companies like Nestle SA and Novartis AG. With a strong national presence, these companies feel comfortable in innovating at home and then unleashing their products to the world. Or look at Nokia. The Finnish based telecom manufacturer is just one of many high tech and engineering firms based in Finland. Unlike Canada, in the 1990’s, Finland – with Government Assistance – moved away from being a “hewer of earth and water” to being a centre for electronics and engineering excellence. 

Compare Finland’s policy of government involvement to the actions of the Harper Government. In 2009, by Research In Motion’s co-CEO Jim Balsillie made a dramatic bid “to buy up key Canadian technology from Nortel for $1.1 billion (U.S.)” (Nortel-RIM could be PM’s Avro Arrow, By David Olive Toronto Star, Published on Jul 23 2009). The public, media and government were indifferent. Mr. Balsillie argued that these assets were vital to the future of his company and Canadian telecom because they allowed technology companies to build new products. For, “Patent litigation is now commonplace amongst technology firms aiming to slow down competitors through lengthy court proceedings”. Consequently, it should not be a surprise that Kent Walker, Google’s senior vice president and general counsel at the time said that the acquisition of “Nortel’s patent portfolio is a defensive maneuver — one designed to create a disincentive for other companies to sue Google — but is also a way to help the company foster open source innovation.” (Google in bid to acquire Nortel’s patent portfolio, Financial Post Staff, Originally published 11/04/04, Last Updated: 11/04/05 10:09 AM ET) So Google, Microsoft, Ericsson and a number of other firms faced off for these technical assets. Without the help of the federal government, those patents were lost to RIM’s competitors and Canada’s economy.

Instead of ponying up money for Nortel’s intellectual assets – as Ottawa and Queen’s Park had done to rescue foreign-owned General Motors Corp. and Chrysler Corp –, the federal government allowed its financing arm, the Export Development Bank of Canada (EDC), to fund the sale of Nortel’s assets. So ironically, after years of helping Nortel through the Export Development Bank of Canada, the Federal Government abandoned all of their hard work. What made it worse is instead of owning assets that would have allowed RIM or other Canadian firms to dictate how the world’s phone companies would build their networks; the Harper Government let those assets go to Europe, Asia and the United States. When coupled with the loss of national champions like Alcan, Inco, Abitibi, Falconbridge and Seagram, one must ask if no government involvement in our economy has helped Canada.

I say this because one can see that American Government R&D, and not its private sector R&D, has driven American economic growth for the last fifty years. Computers were not developed by the private sector, they were developed by Governments. The British developed Colossus and the Americans developed ENIAC to break codes during World War II. All that hard work, over the subsequent decades ended up in the private sector so that companies, like IBM, could apply the principles to the private sector.

Or think about transistors. They had been around for years. For example, the first patent for a field-effect transistor was filed in Canada by Austrian-Hungarian physicist Julius Edgar Lilienfeld on October 22, 1925. Bell Labs and Compagnie des Freins et Signaux Westinghouse brought out improvements after World War II. But one can argue that their popular use in society, only happened when the US military and NASA needed to miniaturize the equipment. Or put differently, in the Cold War, the American State sought innovative strategies to deal with Soviet threats. In anticipation of conflict, the US military wanted to shrink their equipment and make it more accurate. Switching from vacuum tubes to transistors meant having stronger, lighter and more durable communication networks. The use of transistors brought the computational power that made regular human space flight possible. Because military spending made transistors more plentiful, they dropped in price and were used in more commercial products. If one still has questions, one just needs to think of the original purpose of the internet: a communication network for the US military should there ever had been a nuclear war. As Dr. Neil deGrasse Tyson has shown in his work, Innovations come from Government Action.

Still don’t believe me? Look at Canada. Our railways were built because of the National Policy. Our national pipeline system – oil and natural gas – did not come from market reaction. It came to be because of the actions of C.D. Howe, a Liberal Minister. The creation of TransCanada, in many respects, was one of the reasons why Diefenbaker was elected. Or look at the AVRO Arrow cancelled by the Diefenbaker government. A Canadian fighter jet built in the 1950’s; it was a jet that was supposed deal with Canada’s various military needs. When it was cancelled, its creators left for France, Britain and the US. Those creators are credited with building the Concorde, the F-14, the Space Shuttle and a number of different aeronautical vehicles.

This might seem ironic but it is true. For government funding allows scientists to think boldly about the future. Released from the demand to meet short term needs, scientists dream about what can be and seek to make it happen. That type of thinking is where innovation comes from. This is how we should think about innovation.

Consequently, our goals become obvious. In the short term, Governments should seek to develop higher regulatory standards. Germany, as an example, has sought to develop high levels of solar energy production. This is a big part of their “pie-in-the-sky” dreams. It is easy to see that these dreams need engineers and engineering leaps. By setting those “dreams” for the market, Governments over time are encouraging the market to come up with new and innovative solutions. Rather than figuring out how to reduce costs, Governments are forcing the market to come up with new technology – something private sector participants rarely do on their own.  Once those goods are developed, market participants gain because they become the market leaders.

On the other side, the Government of Canada needs to provide money to scientists without many strings. Allow them to develop patents and knowledge without consideration for market use, then allow Canadian and foreign companies to buy, rent or lease that knowledge. Given strength of the international intellectual property regime, those rights can largely be enforced through lawsuits. Use of this technique will attract the very best scientists, engineers and academics. Those people will want to come to Canada and they will create hubs of excellence. If one needs proof, ask one question: why did RIM/Blackberry emerge in the Kitchener/Waterloo area. My answer is simple: many of the creators of the Colossus computer came to the University of Waterloo. Those creators of Colossus became professors teaching Mathematics and, what we now call, Computer Science. In fact, this is the very school that one of RIM’s co-founders, Mike Lazaridis, attended. Does one think there is a coincidence? Like Silicon Valley, the alignment of knowledge and resources is important. By appealing to the very best scientists, engineers and academics the world has to offer, one will find that companies will follow; companies that want to use, exploit and develop that talent. Surely with all that brain power, innovation ought to follow.

Finally, our government needs to have our own “extraordinary goals”. The AVRO Arrow and Anik series of satellites spawned wonderful technology for Canada, just as the US space programme did for the Americans. A part of the success of the British Empire was their development of some of the best scientific knowledge; while the Spanish Empire started to fall after it fully consumed the knowledge provided by the seven hundred plus years of Islamic Rule.

For simple proof, think about this: “The increase in ranking puts Singapore behind only the U.K. and U.S. in the $6.67 trillion global currencies trading market, according to the Bank for International Settlements or BIS. The city’s foreign-exchange market expanded as the government offered incentives to boost its financial markets, which also led to a surge in the nation’s fund management industry, where more than 500 asset managers oversee about $1.1 trillion.” (Singapore Overtakes Japan as Asia’s Top Foreign-Exchange Hub (1), By Kristine Aquino, Bloomberg News, as published on Business Week.com, September 05, 2013). Government action can lead to prosperity and innovation. For, it can lead to the “greatest happiness of the greatest number”; while guaranteeing the reasonable rights, freedoms and limits of individuals and minorities which are justified in a free and democratic society. With this being said, Liberals should never be fearful of government action in our economy, we should ask for the right type of help.

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