Is Canadian industry taking the lead in advocating coherent industrial policy for Canada? – Blog # 35

9, November 2022

 Is Canadian industry taking the lead in advocating coherent industrial policy for Canada?

Not for several decades has a Canadian federal government shown any coherent and sustained interest in policy at the industry level: in cultivating what today we more commonly refer to as “ecosystems” – sustainable industrial environments that can nurture and expand high-growth enterprise at all scales over the long-term.

Such ecosystems are essential for anchoring and maximizing returns from public and private investments in research and innovation. Canada is unique in the G7 in its reticence to embrace contemporary models of industrial policy, which are simply about organizing and coordinating public and private sector actions and investments as targeted to towards mutually defined societal needs – like the environment, energy,
health, education, housing and transportation.

But significant signs are emerging that our major established and emerging industries are not at all reticent about renewing our commitment to industrial policy, and that they understand the stakes of not doing so very well. This is indicated strongly in three recent reports.

Industrial policy is most commonly motivated by some combination of crisis and opportunity. In Canada’s New Economic Engine2 from the Trillium Network for Advanced Manufacturing and Clean Energy Canada, we see an industrial development strategy motivated by the climate crisis and targeting existing and emerging Canadian strengths in electronic vehicle (EV) batteries.

Starting out with an assessment of the nature, scale and urgency of the opportunity, the strategy builds out from an assessment of the existing Canadian capacity to respond – focusing on the competitive advantages Canada could deploy right now in this emerging industry. The strategy leverages Canada’s existing highly skilled workforce in automotive component manufacture and assembly by integrating it with emerging
knowledge-intensive strengths in areas like critical minerals and recycling, all underpinned by abundant clean energy and access to the US market.

Most significantly from an “eco-system” perspective, the strategy encompasses every stage of the EV battery supply and production chain, from mineral exploration, extraction and processing, to cell and module manufacturing, EV assembly and recycling. Thus it encompass the vast bulk of quickly productive knowledge transfer and R&D opportunities. And most significant overall, the main goal of the strategy is to
develop a sustainable high value presence in global markets for Canadian designed and manufactured EV battery systems and services. All facilitated and supported by coordinated actions at the industrial, legislative, regulatory, financial and trade levels. This is “textbook” industrial policy as it pertains to one emerging product group.

At a regional level, Define the Decade”1″ from the Business Council of Alberta, while not oriented to laying out a coherent industrial strategy as such, nevertheless incorporates many of the same ideas. This time motivated by the need to transition a highly skilled and educated workforce from an oil and gas sector orientation towards new industrial opportunities. A centerpiece of the approach is an industrial development agency
modelled explicitly on AOSTRA, the 1990s agency that, ironically, opened up the potential of the oil sands. But this is a good example of how effective policy models can be repurposed.

Restart, Recover and Imagine Prosperity for All Canadians “4”  from Canada’s Industry Strategy Council (an ISED advisory group) is far more ambitious; proposing a strategy for developing a comprehensive national industrial policy. The motivation is post covid
economic recovery, but the strategy is to use this as a lever not only to restart the national economy, but to fix many chronic deficiencies that inhibit Canada’s ability to more fully embrace emerging economic opportunities. To this end, a challenge is issued:

“Canada must develop a true post‑pandemic industrial strategy and this strategy has to be implemented through an ambitious growth investment plan. This would set a precedent. But given the magnitude of the crisis, we strongly believe that this is the appropriate response. We need Canadian companies to be global leaders where we can succeed.”

Beyond these few highlights, the detail in these and other reports tells us a great deal more about how Canadian business and industry is envisaging the public and private sector relationship in restoring and energizing our economy. Together, they contain many of the acknowledged key elements of effective industrial policy as pursued by our competitors:

  • They are all fundamentally grounded in establishing advanced new domestically anchored production capabilities in both manufacturing and services.
  • They all start with what can be accomplished already with existing or near horizon technologies and industrial capabilities.
  • R&D is situated as an essential ongoing function within the production chain, not as some external force.
  • Basic research is seen to be driven forward by how knowledge is applied.
  • Intellectual property is treated as investment capital, not as a rent producing asset.
  • All stress price-making over price-taking as a fundamental investment criterion.
  • All conceptualize successful new company formation and growth primarily as the product of new industry formation.
  • All see the public sector role as an active collaborator; a rule maker and market facilitator, rather than as a passive provider of non-targeted “conditions for growth”.

Canadian business and industry seem to be getting the message. It is high time governments started listening to them.

References:
1. Define the Decade www.businesscouncilab.com/definethedecade
2. Canada’s new Economic Engine

Canada’s New Economic Engine


3. THECIS Blog 31 https://thecis.ca/new-economic-development-strategy￾for-alberta-blog-31/
4. https://ised-isde.canada.ca/site/innovation-better-canada/en/industry￾strategy-council/restart-recover-and-reimagine-prosperity-all-canadians
Peter Josty & Richard Hawkins.


The ones that got away – Blog #33

12 October 2022

The ones that got away – Blog #33

It is well recognized that innovations have been the main driver of economic progress and that items such as the internet, artificial intelligence and social media have transformed our lives.

We celebrate unicorns, make lists of the fastest growing companies and give awards to the entrepreneur of the year. But we usually don’t think much about the innovations that don’t make it – the failures. An exhibit called the “Museum of Failure” makes up for this. The idea was started in 2017 by Samuel West who is a Swedish psychologist. The exhibit has toured world-wide – in Asia (Shanghai and Taiwan), Europe (Paris and Helsingborg) and the US (Washington, Los Angeles and Minneapolis). It is in Calgary – its first stop in Canada – until the end of September and then possibly in Toronto and Montreal.

The Museum exhibits about 160 failures over quite a time span. The oldest exhibit shows the Vasa, a Swedish warship that sank spectacularly on its maiden voyage in 1628. More recently it highlights the Boeing 737MAX.

Some of the exhibits will be well known, such as the Ford Edsel and New Coke. Some are quite hilarious – Harley Davidson Cologne and Colgate Frozen Dinner. (Talk about mixed messages!)

The exhibits are organized according to a variety of themes such as Medical Mishaps, Bad Taste, Digital Disasters, Failure in Motion, etc. There is even a section on Donald Trump’s innovations, such as Trump University, Trump steaks, Trump Shuttle and Trump resorts, all of which ended in failure usually accompanied by illegal business practices and lawsuits.

The exhibit come with a handy app that you can view QR codes at all the exhibits to get more information.

There are inspiring quotations about failure:

  • Thomas Edison: I have not failed; I’ve just found 10,000 ways that won’t work.
  • Robert F. Kennedy: Only those who dare to fail greatly can ever achieve greatly.
  • Robert Kiyosaki: Failure is part of the process of success. People who avoid failure also avoid success.
  • Harvard University: Innovation is a risky business. Over 70% of all innovation initiatives fail.
  • Elon Musk: Failure is an option here. If things are not failing, you are not innovating enough.

Here are some of the more notable failures in the exhibit:

  • Lawn darts. These were outdoor game darts with heavy metal spikes. Over 6,000 children were injured by these darts, which also killed three children. They were eventually banned in 1988.
  • Seagrams Old Breed. The newly appointed CEO of Seagram’s, Edgar Bronfman, Jr., had the idea to add whisky to beer, and was convinced this was a winner. One of their employees said: “Lord it was awful. It smelled like the rug at a fraternity on the Sunday morning after a keg party. And it tasted even worse.” Bronfman then tried to turn the venerable producer of distilled spirits into an entertainment company that eventually destroyed it.
  • Apple. There are several Apple innovations that flopped, among them the Apple Newton (a device with handwriting recognition that was the precursor of the iPod.) and the Apple USB mouse (called the Hockey Puck due to its size. It was among the 10 worst Apple products of all time.)
  • Microsoft. Quite a few Microsoft products are in the exhibit including Windows 8, Microsoft Bob (a cartoon interface for beginners), and Microsoft Tay (an artificial intelligence based chatterbot that was shut down 16 hours after launch as it began giving inflammatory and offensive tweets.)
  • THERANOS. This is one of the few outright scams in the exhibit. THERANOS claimed to have developed a much improved blood test, but investigation revealed it was a scam. The inventor and CEO- Elizabeth Holmes – was convicted of defrauding investors and faces a fine of $500,000 and up to 20 years in jail.

Conclusion

The exhibit is a timely reminder that failures are an unavoidable part of innovation. Perhaps we should pay more attention to the failures and see what can be learned from them.

 

Peter Josty


The impact of COVID on entrepreneurship in Alberta – Blog #32

21 September  2022

The impact of COVID on entrepreneurship in Alberta – Blog #32

COVID has affected different sectors of the economy in different ways, and this is also true of entrepreneurship. A recent report by the Global Entrepreneurship Monitor (GEM) illustrates how the pandemic has affected different types of entrepreneurs in Alberta. GEM is the largest study of entrepreneurship in the world and routinely covers 50-70 countries.

In 2021 the Alberta economy grew by 5.8% after a decline of 7.9% in 2020. The report illustrates how the pandemic affected different stages of entrepreneurship as they recovered from the big decline in 2020.   The different stages of entrepreneurship described in the report are nascent entrepreneurs (those planning to start a new business), baby businesses (those 3-42 months old) and established business (more than 42 months old). The report also shows how entrepreneurs of different ages and education levels were affected differently.

New opportunities.

There was a significant difference in how the different stages of entrepreneurs identified new opportunities to grow their businesses. 53% of nascent entrepreneurs agreed that the pandemic had provided new opportunities, contrasted with 66% of baby businesses but only 33% of established businesses. Overall, about 60% of entrepreneurs agreed that the pandemic had provided new opportunities for them. This finding is consistent with research showing how adversity often creates opportunity for those looking for it. It is surprising that only 33% of established businesses saw opportunity arising from the pandemic. Perhaps this is because they already had a well-honed business approach that they were trying to maintain, and the pandemic disrupted that.

Government response

The different stages of entrepreneurs also responded differently when asked how satisfied they were with government supports. 51% of nascent entrepreneurs were satisfied with the response, compared with 70% or baby businesses but only 44% for established businesses.  Overall about 60% of entrepreneurs were satisfied with government supports. It is likely that the explanation for these differences lies partly in their eligibility for funding. Startups have no revenue so in many cases were not eligible for funding. Established business could have been disproportionately affected by lock downs and pandemic restrictions and that may explain their low satisfaction levels. Baby businesses in some sense had the best of both worlds – they had a revenue stream so could attract funding, but did not have the fixed costs of the established businesses.

Effect on household income by age, gender and education.

Alberta entrepreneurs experienced a much steeper decline in household income than those in BC or Saskatchewan. 41% saw a decline in household income in Alberta, compared with 32% in BC and 30% in Saskatchewan.

Male entrepreneurs had a slightly higher decrease in income than female entrepreneurs (42% compared with40%).

The age of the entrepreneur had a very significant effect on their decline in income. The youngest entrepreneurs (aged 18-24) saw the biggest decline in household income (52%), and the oldest entrepreneurs in the study (aged 65-74) had the smallest decline (22%). In between, the 56-54 age group had the largest decrease in household income (47%). The 25-34 age group saw the biggest increase in household income in 2021.

Education level also affected income in 2021. The highest reported percentile decrease in household income was with those with some high school education (56%), followed by those with no/less than high school (45%) some college/university (45%), and completed high school (44%). The lowest decrease was in the graduate group, with a Masters or PhD (30%).

Growth expectations.

Alberta entrepreneurs were optimistic about future growth prospects, despite the difficulties of the pandemic.  The most optimistic group were the Established Businesses, where 36% expected higher growth and only 25% expected lower growth.  The least optimistic were the Baby Businesses, where 33% expected higher growth but 29% expected lower growth.  Overall these numbers seem to reflect confidence in the future economy in Alberta.

Future employment

Entrepreneurs were asked how many people they expected to employ in 5 years’ time. 11% of startups expect to employ 20+ people in the next five years. 38% of Baby Businesses and 25% of Established businesses also expect to employ 20+ people in the next 5 years. The results for Baby Businesses and Established Businesses were the highest among the four western provinces, and higher than Canada as whole. These metrics also show a considerable amount of optimism about future growth prospects.

Conclusion.

These results are a reminder to those providing services to entrepreneurs that not all entrepreneurs are the same, and that segmenting the group into categories may be a way to provide them with better services in the future.

The full report can be found  https://thecis.ca/wpdm-package/gem-impact-of-covid-on-entrepreneurship-in-alberta/

Peter Josty

 


New Economic Development strategy for Alberta – Blog #31

7 September 2022

New Economic Development strategy for Alberta – Blog #31

Economic Development Strategies usually come as top down documents from governments.  An exception to this rule is the “Define the Decade” document recently released by the Business Council of Alberta. This vision and plan was developed as a result of an extensive consultation process (i.e. bottom up) and comes from a private sector organization. The Business Council of Alberta (BCA) consists of 100+ CEOs of companies across Alberta, including most of the major companies in the province.

So what is in this plan?

The plan starts by stating three goals:

  • A good life for all;
  • Economic expansion;
  • Long term sustainability.

The BCA then sensibly starts by identifying the areas where Alberta has a competitive advantage and has potential to meet global needs. These areas are;

  • Energy
  • Medical and wellness.

In addition to identifying the areas to focus on (the “what”) the strategy includes a significant focus on “how” to achieve its goals. These include an emphasis on social goals such as inclusion, diversity, collaboration and reconciliation.

Let’s look at these areas one at a time.

Agriculture

For agriculture the plan takes a broad and forward looking approach, both strengthening existing agricultural sectors and incorporating new approaches such as precision farming, hydroponics, aeroponics, vertical farming and greenhouse growing. It points out that the global food market will be $4.1 trillion by 2024, and that Alberta is one of only a few jurisdictions in the world that produces more food than it consumes. Alberta is definitely building on strengths here – in 2021 agricultural exports were $14 Billion, and there are already 17.6 million square feet of greenhouses in the province.

It proposes these changes, among many others:

  • Using technology for more precise use of water and fertilizer;
  • More value added food production;
  • Expanding technologies such as vertical farming and hydroponics.

Energy

Under this heading the strategy includes low carbon energy, materials and critical minerals such as lithium and copper.  It points out that the Russian invasion of Ukraine has changed the global situation, and that we need to address the imperative of climate change. Alberta has the possibility of becoming a global leader in clean energy and materials by having the lowest carbon footprint possible, using carbon capture and storage.

Alberta has significant strengths in this area. Canada is the 4th largest oil producer in the world and Alberta is a big part of that. It has technical expertise, leading research and innovation centres, coal free electricity by 2023 and geological capacity for carbon storage. It also has one of the largest petrochemical complexes in the world and significant wind turbine capacity.

The plan proposes these changes, among many others:

  • Developing a water strategy;
  • Building infrastructure for low carbon energy – power grids and pipelines;
  • Expanding recycling;
  • Expanding petrochemicals;
  • Accelerating the use of wind, solar and geothermal energy;
  • Expanding post-secondary to build the necessary skilled workforce.

Medical and wellness.

The plan points out the challenges and opportunities facing medicine and wellness: an aging population, rise of chronic diseases such as dementia, Parkinson’s disease, heart disease and diabetes. It also describes the need for more equitable outcomes from medicine, and the need to address mental health. Addressing these challenges requires breakthroughs in research, new diagnostic technologies, and innovative pharmaceuticals and therapies. New technologies such as virtual reality and artificial intelligence are becoming available that may also be able to help.

Alberta has strengths in this area: a province wide healthcare system, the largest in Canada, research centres at the University of Calgary and University of Alberta. There are also a growing number of health and med-tech startups across the province.  The province has significant expertise in a wide range of areas, including AI and machine learning, virology, diabetes, medical robotics, brain research, urology, diagnostics, and biomedical research—all fields of growing importance over the next decade.

It proposes these changes, among many others:

  • Creating incentives for innovation in healthcare;
  • New collaboration between industry, healthcare providers and academic institutions.
  • Prioritizing behavioural health as much as physical health
  • Empowering patients and families to be active participants in their own care
  • Ensuring adequate domestic production of supplies, medicines, and vaccines
  • Transforming the health care system to constantly assess outcomes and quality of care.

In addition to the three targeted areas, the plan identifies three additional strengths in Alberta – tourism, transportation and logistics, and fintech and social enterprise.

It also proposes the development of a “mega region” encompassing Calgary, Edmonton, Lethbridge, Medicine Hat, Grande Prairie and Red Deer to position the province to compete with similar regions elsewhere.

Measuring progress.

The plan proposes six “prosperity pillars”:

  • Quality of life and belonging
  • Skilled and prepared workforce;
  • Technology and Innovation;
  • Physical and digital infrastructure;
  • Environmental sustainability;
  • Fiscal sustainability.

For each of these six pillars three metrics are proposed to measure progress, which would be reported on periodically.

Implementation.

Two main measures are proposed to implement the strategy:

  • Creation of an “Alberta Mission Agency” similar to AOSTRA that is arm’s length from government modelled on the German Fraunhofer and Max Planck Institutes. [AOSTRA is the Alberta Oil Sands Technology and Research Authority that spearheaded development of the oil sands in the 1970’s 80’s and 90’s and is regarded as one of the most successful innovations in Canadian history.]
  • Creation of a “Heartland Economic Region” to compete against other similar regions such as Toronto-Waterloo, Cascadia Corridor, Front Range Corridor, Silicon Valley, and others.

What to make of this?

This is one of the most comprehensive and well thought out economic strategies I have seen. I particularly liked the strong focus on social aspects as well as the hard economic numbers, as well as the focus on only three areas to avoid dilution of efforts.

The plan can be criticized for leaving out any dollar cost but that is understandable given the ambitious agenda.

How well it can succeed will depend in large part of the political will of provincial and federal governments, as this approach will require large and sustained funding. The Alberta government is currently undergoing a leadership election and a provincial election is scheduled for 2023, so it may be some time before the degree of provincial support can be gauged.

However, given the current high price of oil and likely large government surpluses, Alberta certainly has the capacity to implement this very ambitious plan. Let’s hope it gets some serious traction in the months ahead.

 

Peter Josty


Entrepreneurship is growing in Canada. Is that good? Blog #30

14 June, 2022

Entrepreneurship is growing in Canada. Is that good?

Entrepreneurship is a measure of economic dynamism. Over the last ten years the percentage of the population involved in entrepreneurship in Canada has increased by over 50%, according to the Global Entrepreneurship Monitor. In 2021 about 20% of the adult population was involved in planning or starting up a business.

The graph below shows the evolution in Canada since 2013 using the Global Entrepreneurship Monitor (GEM) database.

TEA (Total early stage entrepreneurship activity) is a combination of two numbers – nascent entrepreneurs, those actively starting up a business and owner managers of a business less than 3.5 years old.

EB (established businesses) are owner managers of a company more than 3.5 year old.

In both cases the numbers refer to the percentage of the adult population (age 18+) engaged.

The TEA rate has crept steadily upwards since 2013, with a dip in 2020 due to COVID, while the EB rate has remained fairly constant.

Statistics Canada data confirms that the number of firms, adjusted for population growth, has remained roughly constant since 2014.

Is this just a Canadian phenomenon?  If you look at the GEM data for several other countries you see exactly the same phenomenon. TEA has risen significantly from 2013 to 2021 – in the UK (by 80%), in France (by 70%), in Germany (by 40%) and in the US (by 30%), that compares with the rise in Canada of 70%.  So this is certainly not a uniquely Canadian situation.

The EB rate in the other countries has also remained fairly constant over the same period.

So what is going on?  The real answer is that at this point we don’t know for sure. There would appear to be several possibilities at least1:

  • More people are involved in each new startup. Might this be because startups are becoming more complex requiring more diversity of skills?
  • There may be more hybrid entrepreneurs – people who work for a large company and work to develop opportunities either for their employer or for themselves.
  • More business consolidations are happening early in the life cycle.

 

Does it matter?  The negatives.

The larger question is: does this really matter?  The hard facts are that from an economy wide perspective, large businesses are much more productive than small business. In Canada 2.4 million people (15.1% of the labour force) work for large companies, and produce 48.1% of the GDP, while 13.7 million people (84.9% of the labour force) work for small and medium sized companies and produce 51.9% of GDP. So, a person working in a large company, on average, produces 5 times as much GDP as a person working in a small or medium sized company.

Do we put too much effort into encouraging entrepreneurs?  Well-known American author Scott Shane thinks so – one of his papers is entitled ”Why encouraging entrepreneurship is bad public policy”. Shane argues that the typical start-up is not innovative, creates few jobs, and generates little wealth.

If entrepreneurship is such a good thing, then why is Canada a laggard in innovation and R&D spending?  [See Blogs 24 and 29]

 

Does it matter?  The positives

However, it has been well established that entrepreneurs and other outsiders are a main vehicle for introducing radical new technologies to the marketplace.  Just think why Tesla is the leader in electric cars rather than GM or Toyota. The current rise in tech startups in Canada is likely a manifestation of this.

Several large sectors of the Canadian economy, such as retail, construction and healthcare, rely on small and medium sized firms, and they make a significant contribution to the overall economy and provide valuable employment.

Also, in a period of economic turbulence, such as we seem to be entering now, having entrepreneurial skills is a valuable attribute, whether in a large company or a startup. The key role of the entrepreneur is to identify opportunities, and then generate the enthusiasm, vision and plans needed to create a successful venture.

 

Conclusion

Although most startups don’t generate much wealth, innovation or jobs, nevertheless some of them do, and this is a key driver of economic growth.

  1. Shane, S. Why encouraging more people to become entrepreneurs is bad public policy. Small Bus Econ 33, 141–149 (2009). https://doi.org/10.1007/s11187-009-9215-5
  2. I am indebted to Marc Duhamel and Étienne St-Jean for helpful discussion on this.

Innovation Policy in Canada – Blog #29

24, May 2022

Innovation Policy in Canada.

Canada is ranked poorly for innovation in most international comparisons. For example, it is ranked #16 globally in the WIPO Global Innovation Index, 6th of the seven G7 countries.

A recent book1 casts interesting light on this. It is a rare example of a non-partisan look at innovation policy in Canada at the provincial level. It has a chapter for each province and the territories and is written by 20 mostly academics from across Canada (including me). The value of a book like this is that it doesn’t provide “the answer” to Canada’s innovation problem but it documents approaches taken recently, assesses what worked and what didn’t and stimulates further discussion.

Here are some of the topics that caught my attention from the Chapter on “Conclusions and Lessons Learned”:

  • Canada’s innovation performance. The authors describe the conundrum that while Canada has numerous advantages, including a stable political situation, well-educated population, broad socio-economic advantages such as multiculturalism, a merit-based immigration system, broad social safety nets and good social mobility, etc., and yet it performs poorly on innovation. Companies underperform on R&D spending, companies are not scaling, entrepreneurs tend to move to other jurisdictions, and so on.
  • Evaluation of policies. One of the biggest weaknesses in the Canadian policy system is the almost complete absence of structured evaluation of any policy ideas. The authors note that there are established methods that exist around the world (for example, the Maryland Scientific Methods Scale) to support policymakers in delivering evidence-based policies. The provincial chapters show no evidence of any substantive assessments of programs to support innovation.
  • Natural experiments among provinces. The authors note that provinces have powers over many of the drivers of innovation, so comparing the performance of different Provinces – reflecting the different political differences and dynamics across the county – is a natural experiment to determine what works best. It is one of the aims of the book to document this. This can be seen as one of the advantages of a federal structure in Canada.
  • Drawbacks of the federal structure. The authors note that as powers influencing innovation are very diffuse across Canada not much happens unless two or three levels of government are aligned. Generally, the federal government sets the agenda, and the provinces and territories selectively respond.  This makes it hard to get support for Canada wide efforts.
  • Diffuse focus. A review showed more than ninety program streams to support business innovation, across twenty different federal organizations. Each province also has numerous support programs, so overall there are a vast number of support programs across the country, which spreads the support very thinly.
  • Broad-based support. The authors note that there is reluctance among provincial governments to pick winners, and as a result most support programs fall back on offering general support to whichever firms can access their programming. This leads to efforts that are more incremental than transformative.
  • Big bets can pay off. One example of a sustained long-term effort to support innovation citied in the book is AOSTRA (The Alberta Oil Sands Technology and Research Authority) that led to the development of the Alberta oil sands and made a material contribution to the Canadian economy. This was led by the provincial government. Other examples include ocean industries in the Atlantic region, digital industries in New Brunswick and PEI, aerospace and transportation in Quebec, and agri-food in Manitoba and Saskatchewan.
  • SME focus. The authors note that Canada’s private sector is dominated by SMEs (small and medium sized enterprises) and that many large companies are foreign owned. This explains why many innovation programs are aimed at SMEs and startups, and why success stories are usually about small businesses doing well, while reports of innovation among Ontario’s branch plant auto industry are seldom heard.
  • Bias towards technological innovation. The book notes that Canadian innovation support programs have a strong bias towards technological innovation at both the federal and provincial levels. “The evidence that a science and technology focused research funding strategy will generate innovation in a predictable fashion is slim to none.” This bias has a couple of consequences. 1. It mainly focuses on cities, and ignores rural areas and the territories, leaving out 98% of Canada’s geography and 40% of its people and 2.  it neglects the voluntary, cultural and creative sectors that generated $169.2 billion in 2017, 8.5% of the GDP.
  • Impact of resource industries. Despite the strong orientation of policy towards SMEs, the authors note that adoption of innovation by large resource based forms generated most of the improvements. This is not surprising, as a 1% increase in productivity in a $5 billion company has more impact than a 100% increase in a 30 person startup.
  • Challenge of implementation. While provinces and territories recognize the need to create the conditions that lead to innovation driven economic growth, their ability to implement policies and programs has been more challenging. Part of the reason for this, as the authors note, is the relatively low staffing levels of innovation specialists with sufficient experience and expertise in provincial governments.
  • Role of Universities. The authors note that universities, often seen as a significant source of ideas that lead to commercialization, are not evaluated provincially or federally in a way that would account for their net economic contribution. Contributions of universities are often overestimated. Research at universities costs about $13 billion a year but generate less than $75 million annually in commercial technology transfer activity.
  • Institutional gaps. The authors identify a number of institutional gaps in Canada with their recommendations:

 

  • Raise Canada’s research and development effort. This would require support at both federal and provincial levels.
  • Develop more targeted and sustained innovation efforts. These have been demonstrated to generate successful results, e.g. AOSTRA, mentioned above.
  • Improve threat identification and hazard mitigation that can produce dual use technologies for civilian security and defence applications.
  • Focus more on digitalization. This has been described by former Bank of Canada Governor David Dodge as an “absolute imperative”. It is an area where Canada has lagged behind other countries.
  • Avoid misalignment between federal and provincial innovation policies, particularly for energy and climate.

If any of this strikes a chord with you get a copy of the book to learn more.

Peter Josty

 

  1. “Ideas, Institutions and Interests” – The Drivers of Canadian Provincial Science, Technology and Innovation Policy – Edited by Peter Phillips and David Castle, University of Toronto Press, 2022, 398 pages.

Is Canada a hewer of wood and drawer of water? – Blog #28

3, May 2022

Is Canada a hewer of wood and drawer of water?

Canada is often described as a resource based economy, or, less kindly, as a hewer of wood and drawer of water. But is this really true?  As a resource based economy Canada is often compared to countries like Australia, Norway and Russia. But look at the graphic below.

This shows a measure for each country called the Economic Complexity Index.1 The Economic Complexity Index is a ranking of countries based on the diversity and complexity of their export basket. High complexity countries are home to a range of sophisticated, specialized capabilities and are therefore able to produce a highly diversified set of complex products. Low complexity countries export more undifferentiated commodities and simpler products. The reason this index looks at exports, rather than total production, is that exports are seen to be a measure of international competitiveness, and allow better international comparisons.

So, Canada is far from being a hewer of wood and drawer of water. We have a much more complex export mix than Australia, Norway and Russia.

Broadly speaking, richer countries usually have more complex exports.  The highest ranked countries according to this index are Japan, Switzerland, Germany, South Korea and Singapore. The US ranks #11 out of 133 countries.  The lowest ranked countries are Venezuela, Cameroon, Papua New Guinea, Liberia, Guinea and Nigeria.

The comparison with Australia is particularly interesting as Australia is often seen as a twin for Canada. Canada ranks #36 out of 133 countries in this ranking (and is growing more complex), and Australia ranks #88 (and is growing less complex.) That is a huge difference, and is explained by the fact that a much larger proportion of Australia’s exports are “simple” compared to Canada. Well over half of Australia’s exports are commodities such as iron ore, coal, petroleum and gold. The corresponding number for Canada is roughly half that, with exports of petroleum, gas, gold, lumber and wheat. Canada has significant exports of complex products such as cars, car parts, ICT, machinery, medications and plastics.

The researchers place the diversity of tacit knowledge—or knowhow—that a society has at the heart of its economic growth story. Research from the Growth Lab finds that countries whose exports are more complex than expected for their income level, grow faster. So, according to this approach Canada would be expected to grow faster than Australia.  This is true, with Canada’s growth to 2029 estimated to be 3.06% per year, compared with 2.17% for Australia. (These estimates were made before COVID-19, so take them with a grain of salt.)

The Harvard Growth Lab has an interesting view on economic development. They see that countries grow by diversifying into new products of increasing complexity. So the more complex your export mix the more opportunities you have to grow into adjacent areas. Some examples from Canada could be:

  • Oil and gas firms getting into other energy sources such as geothermal energy, that exploits their drilling and energy expertise;
  • Automobile firms getting into electric vehicles, that exploits their manufacturing expertise.
  • Forestry firms using drones for reforestation exploiting their expertise in forestry.
  • Energy firms getting into hydrogen production to exploit their expertise in natural gas and related technologies such a carbon capture and storage.
  • A historical example is Shell getting into GPS technology to know where they were drilling, and subsequently spinning off the business, that seeded the formation of the Calgary GPS cluster.

Conclusion.
Canada has a much more complex economy than we realize. The idea of using the diversity of tacit knowledge to diversify into adjacent areas is an interesting one that should receive more attention. It’s probably a much more robust approach that trying to attract unrelated businesses to set up here.

Peter Josty

  1. Harvard Atlas of Economic Complexity https://atlas.cid.harvard.edu/

Canada’s new Innovation Agency – Blog #27

18, April 2022

Canada’s new Innovation Agency

The Federal government announced that it will create a “Canada Innovation and Investment Agency” in the 2022 Budget.

This is how it was described:

  • It will proactively work with new and established Canadian industries and businesses to help them make the investments they need to innovate
  • Operationally independent
  • $1 billion over five years to support its initial operations.
  • Modeled on approaches that have been successful in Finland (TEKES) and Israel (Israel Innovation Authority).
  • With private sector leadership and expertise
  • It will also enable innovation and growth within the Canadian defense sector and boost investments in Canadian defense manufacturing.

This initiative has broadly been welcomed by the business community. It is one among a suite of measures in the budget aimed at improving Canada’s dismal performance in innovation, productivity and economic growth. (See Blog 22 and 24.) It also represents a change in thinking from a passive support role (SRED) to a more active investment approach.

A key point is that it is being modeled on approaches in Finland and Israel. What have these approaches been?

First of a couple of caveats:

  • Both Finland and Israel are very small unitary countries (populations of 5.6 million and 9.2 million). Canada is a much larger country with a federal structure.
  • Transferring ideas that work in one place to another place is notoriously difficult (think of the many failed attempts to replicate Silicon Valley).

TEKES

TEKES was founded in 1983 in response to recessions in the 1970s as a funding agency to promote technology development. TEKES merged with the Finnish export promotion agency in 2018 to form Business Finland. It currently has about 750 employees. Finland joined the European Union in 1995.

Business Finland functions as a funding agency for research and technology development as well as export promotion. Receivers of the funding are universities, polytechnics, research institutes such as VTT Technical Research Centre of Finland, the European Space Agency, startups, small and medium-sized enterprises (SMEs), large corporations and public bodies. In enterprise projects, funding is given to transform research-stage ideas into viable businesses, and may combine direct unconditional funding with guaranteed loans conditional on the success of the resulting business. It funds up to 50% of project costs.

In addition to funding, Business Finland provides companies with advice on networking, finding new markets and customers, help with joint offerings and connections with international investors.

Business Finland is well regarded by SME’s in Finland. According to a survey, 38% of SMEs considered this service to be central for their business activity.

Business Finland has some current weaknesses. The Confederation of Finnish Industries says it should focus more on companies with export potential.

In 2021, Business Finland’s R&D funding is estimated to be EUR 740.4 million ($1.01 Billion CDN) that included EUR 200 due to COVID expenses.

Israel Innovation Authority (IIA).

The IIA was founded in 1965 as the Office of the Chief Scientist of Israel’s Ministry of Economy, charged with fostering the development of industrial R&D within Israel. It became the IIA in 2016.  It currently has about 150 employees.

Its mission is to assist the advancement of Israel’s knowledge-based science and technology industries in order to encourage innovation and entrepreneurship while stimulating economic growth.

“The Israel Innovation Authority, an independent publicly funded agency, was thus created to provide a variety of practical tools and funding platforms aimed at effectively addressing the dynamic and changing needs of the local and international innovation ecosystems. This includes early-stage entrepreneurs, mature companies developing new products or manufacturing processes, academic groups seeking to transfer their ideas to the market, global corporations interested in collaborating with Israeli technology, Israeli companies seeking new markets abroad and traditional factories and plants seeking to incorporate innovative and advanced manufacturing into their businesses.”

The Israel Innovation Authority produces a comprehensive annual report: https://innovationisrael.org.il/en/sites/default/files/Israel%20Innovation%20Authority%20-%202021%20Innovation%20Report%20-%20English%2017.6.pdf

In 2019 Israel joined the network of Centers for the Fourth Industrial Revolution (C4IR), a body set up by the World Economic Forum to share knowledge, experience and best practices related to innovative technologies’ regulation by establishing collaborations between governments, leading corporations, private sector, and experts from around the world. The IIA is the focus.

Annual budget is 1.6 Billion NIS, or about $630 million CDN. It describes itself as “an independent publicly funded agency”

Comparison

TEKES and the IIA have some similarities:

  • They both provide grants and loans to businesses and universities as well as advice.
  • They both operate as “independent publicly funded agencies”. Business Finland is part of the Finnish Ministry of Employment and the Economy; and the Chair of the Board of the IIA is Israel’s Chief Scientist.
  • Both have a strong international focus. Business Finland has 42 offices abroad, and the IIA has an International Collaboration Division.
  • Both have a strong R&D and technology development focus.

But there are also differences:

  • Israel has had an influx of highly skilled immigrants from various countries, including Russia, that is not the case in Finland.
  • A factor affecting Israel’s innovation performance is military spending. Israel spends 5.6% of its GDP on military spending (about four times as much as Canada), and that includes significant R&D that has spillover to the civilian economy.

Conclusion

Whatever form the Innovation Agency takes, it will be one part of a complex innovation ecosystem. To improve innovation performance other aspects of the ecosystem need to be enhanced, in particular the supply of talent and the limited competitiveness in many sectors of the economy. And announced funding for the Agency is significantly less than in Finland or Israel, which are much smaller countries.

Peter Josty


Why are mid-sized companies so important in Alberta? – Blog #25

15, March 2022

Why are mid-sized companies so important in Alberta?

Mid-sized companies play a key role in the Alberta economy due to their stability, innovation, their exporting, and contribution to the community.
In December 2021 the size distribution of firms in Alberta is shown in the table below1:

Mid-sized companies employ about 20% of the workforce in Alberta. Mid-sized firms are active in most areas of the Alberta economy. The Table below shows the percentage active in the most frequent areas1:

But the main reason they are important is because of their characteristics. Several years ago we interviewed the CEOs of mid-sized firms in Alberta. A large majority of the firms interviewed displayed the following key characteristics:

  • They are very stable. We found most medium sized companies have been in existence for 10 years and many were 50 and 60 years old and more. They are almost always privately owned so are not subject to the influence of stock markets and the pressure to produce quarter to quarter improvements, and therefore can think much longer term
  • They have deep expertise. Frequently the founders had gained industry experience in a big company before branching out by themselves. This is a common but not universal experience. Almost all CEOs interviewed had a university education and many had graduate degrees.
    They respond positively to the challenges of finding skilled people. A frequently expressed barrier to growth was lack of qualified people. Alberta MSEs have responded in various ways. One found an Alberta Innovates program very valuable. It helped to subsidize new hires (engineers) for a year or two while they learned the business and could become productive.
    There is huge attention to employee wellbeing. Likely related to the challenges of finding qualified workers, most MSEs interviewed go to great lengths to keep employees happy. This results in employee loyalty and very low attrition rates. One company had a retention rate of 99%. Another was proud to be the recipient of many “Best Place to work in Alberta” awards. Most go to great lengths not to lay off employees in a downturn.
  • They focus. Most medium sized companies have a quite a narrow and sharp business focus. They know their niche very well and don’t want to stray outside it. They tend to be deep rather than broad.
  • They innovate. Although some of the MSEs interviewed were reluctant to describe themselves as ‘innovators’, most were observed to have made significant innovations in terms of new products, new processes or new business models.
  • Access to capital is not a huge issue. MSEs are stable, profitable businesses with good prospects, so many are prime candidates for accessing normal banking instruments – loans and lines of credit. None mentioned venture capital funding.
  • Growth is not in itself a high priority. Many MSEs see themselves as being an appropriate size to serve their niche; growing beyond that would be problematic. Some saw a tradeoff between high growth and survival. Many regarded aiming for high growth as a risky strategy.
  • Use of contractors is widespread. Many of the MSEs interviewed used contractors to supplement their workforce. One design firm employed hundreds of extra people for large projects. Others contracted with software developers abroad, where costs were lower than in Alberta. However, it was often stressed that this did not reduce employment in Canada as all the core personnel remained in Alberta.
  • Many export. One firm had no customers at all in Canada for the first eight years it existed. But some served local markets and did not export at all. A majority of the firms we interviewed exported more than 30% of their sales revenue.
  • They contribute to the community. Many companies are deeply involved in community affairs, supporting local cultural institutions, charities and industrial organizations. Such involvement was often described as a defining element of the company culture.
  • MSEs operate largely outside the milieu of targeted industry supports. Use of government support programs varied considerably, but no firm interviewed was dependent on such programs. Most expressed the view that MSEs were generally not on the radar of most of these programs.
  • Flight risks are mounting. Most MSEs seem happily embedded in Alberta, and have no plans to consider moving to another jurisdiction. However several expressed concern about increasing regulation and taxes compared with the US and were starting to look at relocating their business.
  • The overall business environment is critical. SMEs have structural relationships with many sectors throughout the Alberta economy, especially but not exclusively with the resource sector. They tend to thrive best when overall conditions are favorable for the economy as a whole and can be severely affected when legislation and regulation is not synchronous with up or downturns.

Conclusion

We need more medium sized businesses in Alberta,

Peter Josty

  1. Statistics Canada. Table 33-10-0493-01  Canadian Business Counts, with employees, December 2021
  2. Businesses are counted according to the number of “statistical locations” they have. For example, a retail business with 10 stores and a head office is counted 11 times in the Canadian business counts.

The latest R&D statistics are just out. Here’s what they mean, and what to do about them. – Blog #24

1, March 2022

The latest R&D statistics are just out. Here’s what they mean, and what to do about them.

The latest headline numbers from Statistics Canada for R&D spending in Canada are:
2021 (intentions) $40.1 billion, down 1.4%;
2020 (preliminary) $40.6 billion, up 0.7%;
2019 (final) 40.3 billion, up 3.9%.

Before getting into the detail it may be worthwhile reviewing the significance of R&D (technically – gross domestic expenditure on research and development, or GERD). These statistics are often used as an indicator or proxy for innovation. However they are very imperfect indicators of innovation, for a number of reasons. First, they are input measures, not output measures. Second, they cover a multitude of different activities with very different risk/reward levels. For example, one company may be developing a new improved type of yogurt, and another may be working on nuclear fusion, and these have totally different risks, rewards and timelines. Third, several industries innovate in ways that don’t show up in R&D statistics – for example natural resource industries such as the oil sands where tweaking in the field can offer major improvements. Nevertheless, these statistics are widely followed.

International comparison

So how does Canada compare internationally?  The graph below, from the OECD, shows GERD as a percentage of GDP, for Canada, the USA and the OECD average.

Source: OECD, https://data.oecd.org/rd/gross-domestic-spending-on-r-d.htm

This doesn’t look very reassuring for Canada. However it is not that different from the UK and Australia.

Who does R&D in Canada?

Who does the R&D in Canada? The main performers of R&D in 2021 are forecast to be business (52%), higher education (40%) and the Federal government (6%).

The main funders of R&D are: business (43%), higher education (20%), the Federal government (18%) and foreign sources (9%).

How did Alberta do?

In 2019 (latest available provincial data) Alberta did $3.79 Billion of R&D. The main performers of R&D were: business (47%), higher education (45%), the provincial government (4%) and the federal government (3%).

The main funders of R&D were: business (45%), higher education (20%), federal government (15%), the provincial government (10%), and foreign sources (5%).

In terms of R&D as a percentage of GDP, Alberta’s ratio is about 1.3% of the provincial GDP, about two thirds of the corresponding rate for Canada as a whole.

Why is Canada so low?
There are a number of reasons:

  • Canada is a resource based economy and resource companies typically don’t spend much on R&D.
  • Canada has a small number of companies in industries that typically spend the most on R&D, such as pharmaceuticals and high tech companies.
  • Canada has fewer large firms than competitors and these usually spend more on R&D.
  • Canada has relatively few head offices, and there is often a ‘head office effect’ where R&D is performed near the head office. This is related to the fact than many Canadian companies are foreign owned.
  • Offsetting this, Canada’s public sector spends more on R&D than the OECD average.

It is remarkable that the five US companies in the graphic below each spend more money in 2021 than all Canada business combined. (Canada business R&D was about $17.7 USD in 2021)

Source: The Economist January 22, 2022.

Does it matter?

This topic is hotly debated. The main argument usually goes that as the world embarks on the fourth industrial revolution, with a stress on connectivity, artificial intelligence, robotics, Internet of things, and autonomous vehicles, etc., the economy is becoming more knowledge intensive and so intellectual property and R&D is becoming more and more important. That argument clearly has merit.

However, by conventional economic metrics Canada is doing well.  The table below shows a comparison between selected countries for 2020.

Country GERD as % of GDP (OECD) GDP per capita $US (World Bank)
Israel 4.93 $44,169
South Korea 4.64 $31,632
Sweden 3.39 $52,274
UK 1.76 $41,124
Canada 1.59 $43,258

So there clearly isn’t a linear relationship between R&D spending and GDP per capita.

By quality of life rankings, Canada fares very well. The table below shows the latest quality of life ranking from US New and World report:

Ranking Country
1 Canada
2 Denmark
3. Sweden
4. Norway
5. Switzerland
6. Australia
7. Netherlands
8. Finland
9. Germany
10. New Zealand

Source: https://www.usnews.com/news/best-countries/quality-of-life-rankings

What to do?

Trying to figure out what to do should be based on three ideas:

  • Canada’s low spending on R&D is primarily a business problem. Government spending on R&D is above the OECD average.
  • Low spending by businesses on R&D is part of a pattern of behavious that also includes: low spending on machinery and equipment, low spending on IT, low spending on employee training, and low productivity, all low by comparison with other countries.
  • No CEO spends money on R&D because they want to. They spend money on R&D because the have to in order to remain competive. Amazon spends $60 billion a year on R&D because their business is hyper-competitive and fast moving and if they don’t they will become uncompetitive.

So we can re-phrase the question as follows: How to incentivize companies to spend on R&D?  Clearly incentives like the SRED tax credit are not enough – Canada has among the most generous incentives in the world.

I think the best clue lies in the nature of the Canadian economy. Significant parts of it are oligopolies, with few players and low competitive pressures. Some examples:

  • Three companies dominate telecommunications;
  • Two companies dominate airlines;
  • Five companies dominate banking;
  • Three companies dominate grocery stores;
  • Two companies dominate print media;
  • There are many more examples.

So the best way to increase R&D spending – that will also improve  a host of other factor such as low spending on IT, low employee training, etc.- is to make the economy more competitive. That means more anti-trust enforcement, and updating the  Competition Act (the Canadian government has already announced some small steps in this direction). Even the the Commissioner at the Competition Bureau has noted the decline in competitiveness of the Canadian economy and called for updating the Competition Act to create a more competitive economy.

Do you agree with this approach?

Peter Josty

This blog appeared first at www.thecis.ca