Corporate Canada's enemy lurks within

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It was enough to send a personal fashion stylist over the edge. Several hundred mostly nerdy economists recently undertook their annual pilgrimage to the spring conference of the Canadian Economics Association, held at the University of Toronto. They bustled from session to session, calculators in hand, enthralled by presentations with titles like "Comparisons of Linear Item Pricing Methods for Iterative Multi-Unit Reverse Combinatorial Auctions" or "The Economic Analysis of Blackjack: An Application of Prospect Theory."

Amidst this vibrant intellectual smorgasbord, in a windowless classroom, it was telling that barely a dozen participants attended one Saturday afternoon session (and nearly half of those were the speakers). This panel was devoted to what was surely an important topic -- yet one that garners less than its share of attention. Why are Canadian companies failing? Why do they do relatively poorly in developing new products, boosting productivity and penetrating global markets?

I can't imagine a topic more important to the future prosperity of our nation. But if it didn't even register on the radar screens of economists, it will be an uphill struggle to catch the attention of the broader Canadian audience.

The panel's focus was an encyclopedic report just published by the Council of Canadian Academies, which reviews Canada's subpar performance in innovation and productivity growth. The dimensions of this problem are well known to economists. Canada has lagged other developed countries for decades in developing new technology and boosting productivity. In fact, for much of this decade, Canadian productivity has actually declined. Meanwhile, with a few notable exceptions, Canadian companies have failed to become globally recognized leaders in cutting-edge industries. We've been left to take up the economic rear, doing stuff (such as resource extraction) that leaves us in a distinctly subsidiary role in world economic affairs.

Somehow productivity has to be made meaningful to the masses. And in this context, the CCA report provides some surprising insight. (Full disclosure: I was a member of the expert panel that oversaw the preparation of the CCA report -- the token labour rep among 18 panelists, mostly business leaders and academics.)

First, the report bluntly places responsibility for lacklustre innovation squarely on the private sector. Not with government. Not with workers and their unions. But with business. "Canada's weak productivity growth over the past two decades is largely due to weak business innovation."

Indeed, the report readily disposes of old knee-jerk arguments that Canada's private sector has been less innovative because Canada is somehow "unfriendly" to business. Taxes can't be the culprit: Business taxes have declined substantially in Canada since 2000, yet business innovation has weakened, not strengthened. And business profits have been consistently higher in Canada than in the U.S. -- thanks, in part, to super-profitable resource industries. So it's not that the carrots we've been dangling in front of business noses are too small. Perhaps it's tough love that our companies need in order to get their act together, not more coddling.

Reams of data reconfirm that Canada faces an uphill climb in the productivity challenge, by virtue of several deep structural features of our economy. First, we are a relatively small country, with smaller internal markets and smaller companies. All this tends to undermine research and development, and other innovative activity. Second, heavy foreign ownership (which is up notably this decade) undermines innovative activity, since most multinationals do their R&D at home (near their head offices). Finally, and perhaps most damagingly, for a developed economy, Canada is uniquely reliant on resource extraction. This hurts innovative performance in many ways: Upstream resource companies conduct little R&D and lack face-to-face contact with end-use consumers (an important factor in successful innovation), and high commodity prices make it easy to generate juicy business profits without any innovation at all.

These are the structural cards we've been dealt as a nation. Can we learn to play them better, and attain a more productive economic trajectory -- one where we add creativity and value to what we produce, rather than just digging stuff out of the ground?

Well, for one thing, we may need to rely more on direct government funding of research and innovation, instead of our highly generous tax credits, which have not delivered the results we need. Capital markets must be prodded to support middle-sized Canadian innovators, which typically sell out to deep-pocketed foreigners as soon as they show signs of promise. Canadian companies need to orient themselves toward global markets, with more sophisticated products and services that benefit from producing on a world scale. Other countries actively promote national champion companies in strategic industries as a way of projecting their economic potential onto the world stage. But in Canada, we shy away from "picking winners," and, instead, we allow our home-grown success stories to be bought out by those deep-pocketed foreigners. That complacency -- rooted in the attitudes of business leaders and politicians alike -- must change if Canada is to emulate the productivity and innovation successes of other smaller countries, from Finland to South Korea.

For years, corporate leaders have blamed red tape, taxes, unions and anything else they could point fingers at for Canada's mediocre productivity record. The more we learn about Canada's productivity failure, however, the more it's clear that the enemy lurks within. It is the failure of Canadian companies to pro-actively embrace innovation as a business strategy, being content instead with raking in profits from commodities and other less creative activities, that is at the heart of our productivity problems. So while we grapple with the impacts of the current downturn, we must also prepare for the next upturn. And there's no better way to start than by rousing Canada's businesses from their productivity slumber.

Jim Stanford is an economist with the CAW.

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