Government investment can reverse Canada’s business innovation deficit

While the resource economy and traditional manufacturing struggle, we have largely failed to build new sources of wealth in knowledge intensive goods and services.

Writing thought on a glass wall.
Photo by Kvalifik on Unsplash.

There has been a lot of talk during the federal election campaign about how to create more good, “middle-class” jobs. But there has been only limited recognition of the need for a much more active government role if we are to build the more innovative and sustainable economy we need to create such jobs.

The dominant wisdom among economists used to be that the government should just set broad framework policies – low corporate and personal taxes, less regulation, fewer barriers to trade, higher levels of investment in education, skills, and decent public infrastructure – and that the private sector would invest to create jobs. Farewell to anything smacking of hands-on “industrial policy.”

While supportive of  such “market based policies” former TD chief economist Don Drummond and colleagues acknowledge in a just-released report from the Centre for the Study of Living Standards that the results have been “disappointing”, and they call for a more “active” approach.

As they document, Canada’s record of business sector productivity growth over the past decade has been abysmal compared to our own past and compared to almost all other advanced economies. Business investment in research and development, a key driver of productivity, is very low and falling in dollar terms and as a share of GDP, and the Conference Board of Canada has just reported that Canada rates an overall grade of “D” when judged by key indicators of an innovative economy.

Analytica Advisers, an Ottawa-based clean technology research provider, calculate that we are bit players in the fast growing global market for clean technology. Our global market share is just 1.3% and falling, and we rank just nineteenth in the world, behind even Malaysia, Denmark, the Czech republic and tiny Singapore.

While the resource economy and traditional manufacturing struggle, we have largely failed to build new sources of wealth in knowledge intensive goods and services. This is despite real strengths in university based and public sector innovation through bodies such as the National Research Council which have, to some degree, offset the business innovation deficit.

There are, of course, significant exceptions and islands of Canadian excellence in innovation intensive sectors like aerospace, renewable energy, information technology, software, engineering services, pharmaceuticals, medical devices and biotechnology, to name but a few. But they remain the exception rather than the rule

The global economy will continue to provide a fast-growing market in all of these areas, not least as and when the world begins take climate change and other environmental priorities seriously.

The influential UK economist Mariana Mazzucato argues that strategic government leadership and public investments are critical to building innovative economies. She has shown that publicly funded research well in advance of immediate commercial opportunities as well as direct support for strategic corporate investments through agencies like the Defense Advanced Research Projects Agency (DARPA) have been central to the growth of innovative capacity in the United States. Corporate research and development, and venture capital, often follow in the wake of ground-breaking public sector entrepreneurship.

In a similar vein, an expert panel appointed by the Harper government called for more public sector venture capital and a shift in emphasis from broad tax measures to direct government support for corporate investments in innovation. In a partial response, the government has directly invested in venture capital funds through the Business Development Bank of Canada (BDC) and has increased to modest levels funding for strategic investment funds to support the aerospace and auto industries.

There is, however, much further to go in a more interventionist direction.

Strategic long-term investments through equity and loans need to be made across a much broader range of sectors, including renewable energy and other clean technologies. This could be done at arms-length through existing agencies such as BDC and Export Development Canada (EDC) which have the required technical and financial expertise and are not subject to direct political pressure, or through new public investment banks.

For some investments, it will be appropriate to take a long term equity position so as to ensure that taxpayers justifiably share in the returns from winning technologies. Current public sector venture capital is, by contrast, geared to a quick exit once a company goes public.

Notwithstanding the constraints of trade and investment agreements, governments at all levels should  give preference in their procurement decisions to innovative Canadians companies, especially small start-up companies which need to establish an initial presence and credibility in the market.

Also working so as to expand markets, regulations such as building codes and vehicle emission standards and energy efficiency standards need to be made much more stringent to boost business investments in clean technology. Carbon pricing and other polluter pay policies can and should lead to a much faster-growing market for energy efficient technologies and renewable energy.

Broadly based prosperity and good jobs require a major shift to a more innovative economy. We need to hear much more from all of the parties about how the federal government can lead us to in that direction.

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