Meanwhile, the rest of Canada looks on and, like a child, is condemned to relive the sins of the parent. The enmity between East and West continues to percolate while petty rivalries among companies domestically spill into global markets and prevent them from being able to co-operate internationally. “We are one of the most bitchy sandbox players I have ever seen,” says business consultant John Wiebe. “We don’t know how to get together and take on the world. Everybody is looking for his share of the pie, and it’s all about getting money out of the government. There’s this zero-sum-game we all play, and we all end up losing in the long run.”
This is not to say that the government isn’t aware of the problem or hasn’t made efforts to confront the country’s nagging productivity concerns and lacklustre record of innovation. Following Finland’s example, Prime Minister Jean Chrétien unveiled the Liberal government’s Innovation Agenda, allocating an estimated $4 billion a year to fund research chairs, centres of excellence, national research labs and generous tax credits with the goal of placing Canada among the top five nations in the world for r&d spending by 2010.127 During his economic and fiscal update in 2005, Finance Minister Ralph Goodale mentioned some variation of the words “competitive” and “innovative” nineteen times. Goodale’s successor, Jim Flaherty, also took a run at the problem during his November 2006 fiscal update, though he opted to use euphemisms like “quality of life” and “sustainable growth.” But so far, despite the grand speeches and wads of cash thrown at the problem, nothing seems to be working and many observers are left scratching their heads, wondering why.
It’s no great mystery. Aside from the reasons mentioned above, we’ve got to ask a very basic question: What fuels innovation? Why would a forestry company invest in new silviculture methods? Why would a Manitoba farmer plant new wheat varieties with higher yields? Why would a Canadian bank offer its clients new services, such as being able to withdraw money from accounts denominated in any number of worldwide currencies? Why would a Newfoundland fishery invest in state-of-the-art, labour-saving technology or diversify into the aquaculture business?
One thing is for sure: it’s not because of more government-funded research labs. According to the oecd, public r&d spending has no statistically significant effect on economic growth. On the other hand, an increase in business spending from 2 per cent to 3 per cent translates into a 12 per cent jump in real gdp per capita.128 There’s only one reason why business would deny itself a short-term dividend in favour of longer-term returns: because it has to. As Roger Martin, dean of Toronto’s Rotman School of Management, argues, it’s not a problem of supplying more scientists, it’s a question of more demand on the part of business.129 And where does that demand come from? From the incentive fuelled by a competitive environment. Without that competitive drive, public investment and business are like two toddlers who, despite being put in the same room, continue to parallel play— they may handle the same toys, but they never interact.
So how do we create more demand for innovation? There’s no need to reinvent the wheel. To be innovative doesn’t mean having to build whole new industries from the ground up in sexy-sounding sectors like nanotechnology and biopharmaceuticals. Innovation is all around us. Rolf Penner is a third-generation grain and hog farmer from Morris, Manitoba. He’d love to feed his own grain to his hogs and “work up and down the value chain,” but since the Canadian Wheat Board blocks him from growing cheaper, higher-yield varieties, it’s more economical for him to import corn and soybeans from the United States. He’d also love to diversify into processing chicken, which is a more popular meat than pork, but because of a strict quota system on chicken production he can’t. “When I look around the Prairies, all I see is potential — all this space, all this grain and not a lot of people,” he says. “Any yet, everywhere I look, I see roadblocks to fulfilling that potential.”
LEAD BY EXAMPLE
Government in Canada has a huge role to play in fostering global competitiveness. But to do that it must first have a strategy, and that strategy has to be based on a clear goal. Blurry concepts like productivity, innovation or even global competitiveness, per se, are not the goals, but merely a measure of whether the goal has been achieved. The fundamental question that government policy-makers should ask themselves is, how can Canadians graduate from being telemarketers, middle managers and commodity producers to not only running, but leading, globally oriented enterprises? “If the goal of every government is to have high-end jobs, industrial competitiveness comes from leadership. If you stop producing corporate-level people, that expertise, those jobs, disappear,” explains business consultant John Gruetzner.
It requires nothing short of a radical shift in the Canadian mindset, and the starting point should be our perspective. We need to adjust our depth of field and, even more importantly, to look at everything we do in Canada through the lens of international markets. During the last review of the federal Bank Act in 2006, legislators honed in on shortening the critically important time it takes to process a cheque, but mundane issues of the banks’ international reach or viability were never addressed. Despite all the money flung at the Innovation Agenda, a connection was never made between innovation and international markets. “There was no real understanding of what innovation was, and no theory of how it fit internationally,” says Toronto lawyer Chuck Gastle. Montreal-based pharmaceutical tycoon Francesco Bellini could never use the $70 million made available to his company, BioChem Pharma, through Technology Partnerships Canada because it was conditional on conducting drug trials in Canada. “To sell a global drug you need global trials,” he explains.
For this strategy to work, the concept of “international” needs to infuse every aspect of government oversight, from education and taxation to immigration, trade policy, the financial system, labour laws and energy policy. “Canada is in a great position, but it needs people (in business and government) with a more global perspective to really leverage that and really push the country to the next level,” says Dr. Xiang Bing, the Canadian-educated dean of China’s Cheung Kong Graduate School of Business. “If Canadians don’t work together to build up their global capabilities it could jeopardize their current position, because everybody else is moving up so fast. There’s a new league coming, a super league of countries and companies, and you have to be ready for it.” It’s a tall order, and many of the people interviewed for this book expressed doubt that Canadians, together with their government, can pull it off. Here’s to hoping they’re wrong.
PROMOTE WINNERS INSTE AD OF PROTECTING LOSERS
Industrial policy is a dirty word in Canada, and no wonder. Like an experiment in alchemy that explodes in your face, what was supposed to produce the golden nugget has turned into a lump of coal. The government grand wizards cast the spell backwards, producing the opposite and inverse of what they had originally intended. By blocking the foreign ownership of Canadian companies in certain sectors, while at the same time prohibiting foreigners from competing against those companies in the domestic market, government created the worst of all possible worlds. Without any real competition, it had to resort to manufacturing competition. “The brilliance of the stupidity of the banking policy in Canada is they want competition, but they want it to be Canadian,” says David Bond, the former chief economist for HSBC Canada. “Is God going to create new banks? It’s absurd; they want competition, but they don’t want foreigners, especially if they’re gringos. It’s inconsistent and irrational.”
But instead of reversing the spell, government architects spun a very elaborate web of checks and balances in a bid to cleave together what is an inherently contradictory construct. They forced Canadian investors to buy Canadian stocks to make up for the fact these companies’ stocks were penalized because they couldn’t raise funds internationally. They conjured up the CRTC to rein in the massive monopolies they had created, only to have the regulator impose a “plethora of restrictions . . . never applied in any other industrialized country in
the world.”130 Until now, the government has tried to defend a host of odd mutations that persist in the Canadian economy as evidence of how we are “different.” I would counter that it is damning evidence of an underlying malignancy that pervades the economy.
These ill-conceived policies not only alienate consumers* but also foster animosity between the government, companies and would-be entrepreneurs, giving rise to the country’s pervasive bitchiness. There is no love lost between the crtc and the big telcos or the banks and Export Development Canada. The acrimony fuelled by the Canadian Wheat Board has pitted farmer against farmer on the Prairies. What’s even more destructive is the message government sends to Canadians: it is telling them that their own government thinks they wouldn’t survive without protection. Why? Because the competitors outside Canada are better than they are. Canadians seem to have taken the hint. As Roger Martin notes, in any sector where there is heavy government protection, Canada has produced no global leaders. It would seem that basing industrial policy on nationality rather than competitiveness is perhaps the most unCanadian thing imaginable. “We are like Gulliver— we’ve tied down our multinational companies and made them less competitive,” says John Hancock, a Canadian trade counsellor at the wto. “In the name of protecting our sovereignty, we’ve diminished it.”
Which is why Canada should work to shed its mantle as one of the “most restrictive” countries in the oecd in terms of barriers to foreign investment. The government should either allow foreigners to compete in the market or remove the ownership caps on telecommunications, media and airline operators. It should also bid the Canadian Wheat Board a fond farewell, along with the dairy, egg and poultry marketing boards, and auction off a good percentage of Crown land to forestry companies. The Conservative government of Stephen Harper has made some positive inroads in this regard; Industry Minister Maxime Bernier, an unabashed freemarketer, has taken on the crtc and many of its most stunting regulations, declaring: “Our goal is to reshape telecommunications policy so that it supports an internationally competitive and robust telecommunications industry in Canada.”131 Chuck Strahl, minister of agriculture and agri-food, has pledged to dismantle the Canadian Wheat Board’s monopoly and proposes introducing a dual marketing system that gives farmers the choice of selling their wheat and barley either independently or through the board. *
With these restrictions removed, the Conference Board of Canada estimates that Canada could up its share of foreign investment from its current 3 per cent stake of global inflows to 9 per cent. “We should have a wide-open market. Let’s have an industrial strategy aimed at creating home-grown, global multinationals,” says Hancock.
Key to encouraging global champions is making certain the nation has a fully functioning financial system, the backbone of any successful economy. When banks don’t participate in export-trade finance, don’t have an international presence that would allow them to support Canadian companies in developing markets and don’t even recognize foreign assets as collateral, something is very wrong. The solution, says Carleton University trade guru Michael Hart, is simple: “Reduce the regulatory barriers on banks, and they’ll provide export finance.” With restrictions on foreign ownership removed, there is no reason why banks should not be allowed to merge.
This is not to say that government should get out of the way entirely. While some argue that the market should be allowed to operate unfettered, there is a role for supporting strategic industries. That doesn’t mean simply throwing money at desperate cattle ranchers or softwood lumber producers who are blocked from exporting to the United States. A good example of a successful strategy is the co-operative approach taken with the Ontario automotive industry. The industry found itself in a highly precarious position: not only had Ontario been bypassed for nineteen of the last twenty car plants built in North America, but the big vehicle manufacturers, despite being among the country’s largest companies, don’t even make the list of top 100 r&d spenders. To clinch it, as Michael Grimaldi, GM Canada’s CEO , pointed out, “While a student today can obtain a degree in aerospace engineering at Ryerson University [in Toronto], we still do not have an integrated degree in automotive design and engineering offered in any Canadian university.”132
So the industry, together with the union and the federal and provincial governments, joined forces to find a way to lure new, cutting-edge investment. Between 2004 and 2006, $1 billion in government funding clinched $7 billion in industry commitments, much of it tied to next-generation flexible manufacturing and the establishment of research centres, including a new, gm-sponsored Canadian automotive centre of excellence in Oshawa, which will feature Canada’s first bachelor’s program in automotive engineering.
The failure of Canadian industrial policy has been one of intent, says the wto’s Hancock. Instead of “promoting winners, it’s always been about protecting losers.” There is no reason government can’t pick winners, adds Gerry Fedchun, president of the Canadian Automotive Parts Manufacturers’ Association, as long as it’s using the right measure of success: profitability. “The government should be a profit-oriented organization,” he says. “If you invest tax money and you get more tax dollars back, that’s a good deal for taxpayers.” It requires a fundamental shift in government philosophy, one that until now has been preoccupied with wealth distribution rather than wealth creation and with guaranteeing jobs over the long-term sustainability of business.
“Industrial policy can work if you are smart about it. The Finns had a vision — the government did its part and industry did its part,” says Avrim Lazar, president of the Forest Products Association of Canada. “In Canada, industrial policy is really social policy; regulations are developed around creating an industry where there is no market. I’m not sure an industrial policy was ever tried in Canada where the idea was to make money. While other countries focus on making a buck, we try to right a wrong.”
NO MORE MANURE
The ultimate irony of the National Policy is that nearly 130 years later, free trade still does not exist in Canada. In the United States, where they seem to take these things a little more seriously, it is illegal to bar trade within the Union; Canada should follow their example. The Conference Board of Canada makes a direct connection between the tangle of conflicting provincial regulations and Canada’s productivity gap with the United States. The bureaucratic overload not only costs business an estimated $33 billion annually, but fragments the Canadian marketplace, leaving companies smaller and less competitive.133 “When you’ve got business owners spending huge amounts of time filling out paperwork for government, you know they aren’t going to be thinking about going to other markets,” says Catherine Swift, president of the Canadian Federation of Independent Business. “It’s not rocket science.”
According to Brian Lee Crowley, president of the Atlantic Institute for Market Studies, it’s high time the federal government flexed its muscles and instilled some discipline. Until now Ottawa has avoided imposing its will in the name of national unity, but it’s time the federal government reclaimed its responsibility over national economic policy, he says. Ottawa should give the provinces one year to remove interprovincial trade barriers, or bring in federal legislation to outlaw them. The feds should take a similar stance with a national securities exchange, as well as insisting that any individual professionally qualified in one province is qualified for the entire country. If the provinces balk, says Crowley, Ottawa should go to the Supreme Court for a reinterpretation of the trade and commerce clause in the Constitution Act, which clearly states that the national economic space falls within federal jurisdiction.
Canada is in dire need of national strategies in a range of sectors, from forestry and energy to the education sector, but if the country is to make any headway it will have to grapple with the issue of Quebec. Until now, Ottawa has preferred to placate the provinces by offloading more powers and spreading the wealth around. Sylvia Ostry, a former deputy minister under Pierre Trudeau and a distinguis
hed fellow at the University of Toronto, calls it “the manure policy.” “You spread it across the country and hope something springs up,” she says. “I said that to Trudeau, and his response was, ‘But what about Quebec?’ You can’t run a country like that. If we had the political will and were determined, there is a policy way. It would require a huge cultural mental shift. The business of Quebec has overshadowed our ability to do this.”
A good place to shore up the country’s increasing balkanization is abroad. While I understand Stephen Harper’s desire to court Quebec, his decision to allow the province to have a seat at unesco was a mistake, as was his approval for turning Quebec’s Washington bureau into a full-fledged political and economic delegation. The “have-not” province already boasts twenty-eight delegations in eighteen nations and is aiming for close to three hundred around the world. These delegates not only enjoy cushy diplomatic packets, but are often unapologetically separatist. I don’t know how many times I’ve come across a Latin American whose only knowledge of Canada is “the plight of Quebec.” It not only makes Canada look ridiculous, but as Derek Burney, Canada’s former ambassador to the United States, wrote, provincial delegations “diminish, if not confuse, Canada’s voice in the world.”134
CULTIVATE INTERESTS, NOT FRIENDS
In 2000, Parliament’s Commons Committee on Foreign Affairs and International Trade undertook a review of Export Development Canada ( EDC ). A thorough assessment of the agency’s continued viability was long overdue, yet the exercise largely revolved around whether the EDC was upholding Canadian standards on human rights and the environment in its dealings abroad. “ EDC has demonstrated its effectiveness in bringing economic benefits to Canadians and plays an equally vital role in promoting Canadian values globally,” declared International Trade Minister Pierre Pettigrew, in response to the hopelessly misdirected review. “We are taking steps to ensure that [ EDC ] is able to continue to evolve as an effective agency dedicated to supporting exporters with a clearer focus on working to support Canadian values in the areas of human rights and the environment.” 135 Huh? What about the value of having as many Canadians exporting as possible? Apparently that wasn’t on the agenda.
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