Year: 2012

The Drummond report on Ontario’s fiscal woes came mixed with a visionary challenge to make Ontario “a province that provides the best public services, delivered in the most efficient manner, in the world . . . We goad our business sector to win new customers globally in the face of stiff competition. Why not apply the same standards to our government?”
Good question. But to meet Drummond’s challenge, the broad public sector in Ontario will have to muster the same sort of commitment to innovation that politicians constantly urge on the business sector. Unfortunately, governments have been strangely silent when it comes to public sector innovation where they alone have both the tools and the responsibility to act. So the blunt message to policy-makers who want to foster a more innovative Ontario and Canada is, first, to get your own house in order.
The public sector is Canada’s biggest industry, accounting for a quarter of GDP. And public policies regarding education, health care and regulation touch every aspect of society and set the context in which the business sector operates. So while innovative businesses are surely important, an innovative public sector is at least equally important.
We need to distinguish two different public sector roles — one as deliverer of public services and the other as policy-maker.
In the delivery role, the challenge is that public services are rarely subject to the discipline of competitive markets, so the incentives to innovate to achieve greater efficiency are less keenly felt. It is also hard to measure the productivity of most government services — they aren’t like “widgets” that can easily be counted. Thus it is difficult to apply many of the management techniques that foster productivity-boosting innovation in sectors like manufacturing.
So we need innovation to develop practical metrics for public sector productivity and to design the right behavioural incentives. Considerable effort is underway in the U.K., Scandinavia and Australia to do just that. Governments in Canada need to be members of this innovation-minded club, learning and sharing best practices.
Unfortunately, none of this is politically sexy. But as the Drummond report put it: “The ultimate challenge in the years ahead will be to find ways to make government work better and preserve as much as possible the programs Ontarians cherish most.” So governments finally need to pay far more than lip-service to innovation in public service delivery since this is the only way to achieve fiscal sustainability without compromising service quality.
This will require an about-face because today the internal incentives in governments are precisely the opposite of what is needed. Rather than reward the calculated risk-taking on which innovation depends, we have instead created a risk-averse public service culture, hobbled by excessive “accountability” regimes that no longer serve the public interest.
The need for greater innovation is just as apparent in government’s policy function. Although the words “innovative government” sound today like an oxymoron, it was not always so. Canada enjoys the legacy of many visionary and innovative public sector initiatives dating from a former era — initiatives like the CBC, the St. Lawrence Seaway, the National Research Council, medicare, the Charter and others like the Auto Pact, often in creative partnership with business.
Could it be that we have we run out of opportunities for innovative public sector leadership on the really big issues? Obviously not. For example:
• We need a fiscally sustainable way to deliver universal public health care to an aging population.
• We need to redesign grade school education to be more relevant to the realities of the information age.
• We need massive, ongoing investment in new generations of public infrastructure as part of any strategy to make Canada more productive, competitive and environmentally responsible.
Consider, for example, medical care where greater adoption of best clinical practices could be induced by creating a cadre of physicians who would meet face-to-face with doctors and administrators — in effect challenging them to explain the existing widespread discrepancies between their practices and “best practices.” Such evidence-based assessment would lead to improved quality and cost-efficiency of health care.
Or consider K-12 education, where we desperately need to discover the best way to teach the new generations of “digital natives”? How can we instill the critical faculties appropriate for an information-besotted culture? What are practical alternatives to the teacher-centric, lock-step classroom tradition? These are huge questions for which no one in the world has reliable answers. So we need an urgent “R&D” program to inform a new education paradigm for the information era. As one concrete initiative, we should create a “Canada Foundation for Innovation and Research in Education” (or C-FIRE), with federal-provincial co-operation, so as to provide the focus and financial support this vital endeavour will require.
These examples set the bar high, but that is because the stakes are so high. And while specific policy ideas can always be debated, the main message is the need to get governments focused on innovation in their own backyards where both the responsibility to act, and the magnitude of the potential payoff, is greatest.
Peter Nicholson was the inaugural president and CEO of the Council of Canadian Academies and was policy director for prime minister Paul Martin.

In the initial postwar decades, Canada’s economy experienced a historic leap forward, qualitatively and quantitatively. Strong business investment, rapid industrialization, and massive spending on public infrastructure propelled growth and productivity. We went from being poor cousins to our American neighbours, to virtual equals: productivity in the business sector rose from 70 per cent of U.S. levels in 1946, to 90 per cent four decades later. And as Canada built a stronger social safety net and more equal income distribution, the quality of life for most Canadians surpassed U.S. levels.
In the 1980s, Canadian policy-makers became concerned with how to maintain that momentum. The famous Macdonald Commission, influenced heavily by market-oriented economic analysis, made two core recommendations in this regard. Canada’s social welfare programs should be rationalized to reinforce labour market discipline. And we should pursue comprehensive free trade with the U.S., to expose our firms to the full force of competition and eliminate our remaining 10-per-cent productivity disadvantage. The proposals were fiercely debated, but in the end implemented. The Macdonald Commission’s 1985 report heralded a new era of economic rationalism; it might be less “compassionate” than previous policy frameworks, but would surely deliver the productivity goods via the invisible hand of a freed market.
The graph that accompanies this article starkly illustrates the ironic results. No sooner had the Macdonald Commission helped spur a historic turn in Canadian policy, than Canada’s relative productivity began to fade. The more social programs were curtailed, the more we faced global competition, the more sectors were deregulated, and the deeper taxes were cut, the worse Canada’s productivity performance became. Today we’re right back where we started: poor cousins again, with business sector productivity equal to only 70 per cent of U.S. levels, and still sinking.
In terms of innovation, our performance has been even worse: lagging far behind the U.S. and most of the industrialized world. As we focus on extracting and exporting ever-more unprocessed minerals, our capacity to develop innovative products, services, and processes for the world has withered away. The current tribulations of Research In Motion (like Nortel before it) reflect much larger problems: The failure to develop a successful national innovation system, the failure to nurture Canadian-based global champions, the failure to penetrate global markets with anything other than what happens to be buried beneath our feet.
Market-oriented economists struggle to identify remaining residual “barriers” or “frictions” that must explain the failure of their whole policy approach to unleash promised efficiency. But what if the starting assumption of the “rationalist” model — namely, that the unconstrained operation of private markets is the most efficient, innovative way to organize economic activity — is not justified? What if, in fact, markets work more productively and creatively when they are guided, supported, and constrained, rather than simply being unleashed? What if the best approach is to challenge and direct business to more productive and innovative outcomes, rather than coddling and privileging it?
Indeed, the experience of most successful industrializing countries in recent decades suggests a very different idea of how innovation, productivity, and export-led growth actually occur. From Korea to Finland, China to the Netherlands, Brazil to Germany, countries which actively direct and manage growth seem to perform better in productivity, innovation, and global trade. These countries have fostered investment and innovation with focused sector strategies; deliberately favourable capital market, exchange rate, and trade policies; and sophisticated efforts to manage income distribution so that productivity growth visibly translates into higher living standards (unlike Canada where there is no longer any visible link between productivity growth and personal incomes). Intellectual support for the effectiveness of those approaches is provided by recent new thinking in development economics, highlighting the central role of a proactive “developmental state” in attaining qualitative and quantitative economic progress, rather then reifying market forces.
How do you nurture desirable innovation-intensive industries, and national-champion firms to deliver those innovations to the global stage? Using every policy lever in the tool kit: favourable access to capital and technology; close alignment with public training and technology programs; leveraging public procurement to give strategic firms a head start in their home market; actively promoting domestic interests through trade policy (rather than continuing to believe like Boy Scouts that simply “following the rules” will ensure domestic success). That’s how other exporters, even small countries, built and expanded their foothold in high-value global markets.
It’s about time Canada learned some of those lessons. That will require a willingness to break out of the market-oriented straitjacket which has overwhelmingly shaped policy discourse in Canada since the Macdonald Commission. Yet it is under that framework that Canada went from champ to chump, in terms of productivity, innovation, and global trade. Alternative ideas will seem new, even offbeat. Yet they offer considerably more promise than continuing to scrape the bottom of the free-market barrel.
Jim Stanford is an economist with the Canadian Auto Workers, Canada’s largest private-sector trade union.

At the recent Davos World Economic Forum gathering, the Harvard Business School trumpeted a multi-year project on U.S. competitiveness, itself defined in a novel way as “the extent to which firms operating in the U.S. are able to compete successfully in the global economy while supporting high and rising living standards for Americans.” Their resolution is both beguilingly simple in concept and devilishly complex in practice: competitiveness with rising wages and improving living standards hinges on continually increasing productivity. And, for high-income economies, a prime driver of productivity growth over the long run is innovation.
What is innovation and why does it matter? Innovation is our ability to create new products and services, or produce existing products in different ways, or develop new markets. It lies at the heart of modern competitiveness. It drives growth and improves productivity. It raises our living standards and gives consumers new choices. It is the answer to the question of how a high-wage economy like Canada can compete with emerging countries with lower wage costs.
Consider innovation at the level of an individual Canadian firm. The world around it is constantly evolving. Consumer tastes are fluid. Technology is morphing. Markets are changing. Competitors are shifting. In this dynamic environment, innovation is how a firm “stays ahead of the competitive curve.” But such corporate innovation does not happen in the abstract or by chance; it is achieved through structured and distinct channels of innovation within successful firms for product innovation, market innovation, process innovation and organizational innovation.
So, with innovation so vital to our future, how is Canada doing? Not well. While basic research in our universities is reasonably strong, Canadian business spending on R&D is only one per cent of GDP, half of what U.S. corporations spend and one-third of what the leaders Sweden, Finland and Korea invest annually. Canada has slipped to 20th place among OECD countries for business spending on research and development. And it shows: the productivity level of the Canadian business sector is only 72 per cent that of U.S. businesses.
How do we tackle our innovation deficit? By being less complacent: We have a strong dollar and weak productivity; strong public research capacity in our universities and weak commercialization of it; deep trade links with a slow growing U.S. and weak linkages with the dynamic emerging economies. And, by being more collaborative: innovation in a market-driven economy has to happen in individual companies, with governments providing a supportive framework and universities creating talented graduates and world-class research that supports business innovation.
To achieve these objectives, we need to act and learn, not debate and delay. Five reasonable candidates for early action include: competition, financing, talent, research excellence and leadership.
Competition matters to corporate behaviour. Governments, both federal and provincial, should increase market competition in Canada, particularly in protected sectors where productivity and innovation gaps are largest. Governments can also encourage information-driven competition by supporting public productivity and innovation benchmarks for the main sectors of the economy measured against the world’s best.
And new trade agreements with dynamic emerging economies would help reinforce a global mindset and orientation and increase competition.
Financing is crucial, both for innovative startups and established firms looking to invest more in innovation. The venture capital industry in Canada is simply not functioning the way it should. We seriously lag other countries as diverse as the U.S., Israel, Singapore and the U.K. The federal government could consider establishing a review panel to plot a new blueprint for venture capital in Canada.
Government support for business innovation is predominantly delivered through the tax system, with one of the most generous research and development tax credits in the world. Unfortunately, judging by corporate R&D levels, this mechanism is not working as intended. Some of these innovation tax expenditures should be redirected to more direct support for innovation, in line with best practices in other knowledgeintensive economies.
Talent matters in a knowledge-based economy. It is essential for our education systems to be geared to the needs of a global, knowledge-based economy. Business leaders of tomorrow need to be experts in global marketing, to understand the core technologies for their sectors and to be comfortable in risk assessment of innovation. Research in our universities is the backbone of an effective innovation system. We need to continue to fund this public good. But we also need to insist on accountability for global excellence and better commercialization.
Most importantly, leadership is needed, in government, business, universities and labour if we are to improve Canadian living standards and competitiveness. Productivity and innovation lie at the intersection between public policy and private sector behaviour.
Prime Minister Stephen Harper’s speech at Davos signalled a willingness to “undertake major transformations to position Canada for growth over the next generation.” As part of this, we should be desperately seeking a more innovative Canada.
The Honourable Kevin G. Lynch is vice-chair of the BMO Financial Group. From 2006 to 2009 he was clerk of the Privy Council.