• Canada and innovation – mediocre industrial policy at its finest

    Canada’s national newspaper has published a new article on the “state of innovation” in the country. Quite similar to many past articles it has published on this topic in the past, but let’s explore some of the highlights and then dig into them.

    • Canadian stakeholders asked to comment on the proposed Canadian Innovation and Investment Agency were unimpressed. (IPB Comment – Quel Surprise! Canadian business stakeholders disappointed that they have to confront their poor innovation record! Why not throw a tantrum and blame the government to deflect? Oh wait – that’s what they did.)
    • Jim Balsillie disappointed with something the Canadian government has done on innovation. (IPB Comment – also not a new phenomenon.)
    • Canada’s weak productivity growth is attributed to weak innovation outcomes. (IPB Comment – sure that’s one reason, but overly simplistic to focus on that as the sole cause.)
    • The mouthpiece of Canadian corporate mediocrity, the CD Howe Institute, weights in on what Canada needs to fix its innovation problems. (IPB Comment – Canada needs more think tanks. Also, Canada needs better think tanks.)
    • A big part of the federal government’s innovation strategy is attracting foreign multinationals to assemble electric vehicles in Canada. (IPB Comment – this is sad and funny at the same time.)
    • Canada’s Innovation Supercluster Strategy is not performing well. (IPB Comment – probably too soon to judge to be fair, but seems like a safe bet.)
    • Procurement of Canadian innovations by the federal government remains at an immature level. (IPB Comment – of course it is.)
    • The venture capital industry in Canada is dependent on the federal/provincial governments to supply it with capital. (IPB Comment – that was predictable.)

    A lot to dig into, but let’s expand on some of this short (and pithy commentary).

    First, it seems likely that most Canadian innovation policy thinkers have not read critical pieces of literature that would help them understand the causes of the country’s innovation shortfalls. Certainly, I have a lot more to read on this topic too, but at a minimum I would recommend others start with:

    • The so-called “Lamontagne Commission” from the late 1960s/1970s. Difficult to find the links to the report, but try this.
    • Asleep at the Switch by Bruce Smardon, which includes a summary of the Lamontagne Commission as well as its predecessors and successors (e.g., Jenkins Report).

    Both books explain in details (especially the multiple volumes of the Lamontagne Commission) that Canada’s innovation weakness stems from its weak domestic industrial base. Combine that with a late-stage industrializing country like Canada that relied upon foreign capital (first British, then American) to finance its development, and its “upstream position in global supply chains” (to quote Dr. Peter Nicholson’s work) and you get a “low innovation equilibrium.” Or in plain English:

    Weak domestic entrepreneurship + foreign capital + branch plant economy + natural resources-driven economy
    = weak innovation outcomes.

    Going back to my summary of the article:

    • Of course Canadian stakeholders like CFIB are going to be upset. Anything that doesn’t jive with their narrow notions of innovation (i.e., lets get American companies to innovate and trade oil for it) will get their backs up.
    • While Jim Balsillie has provided a great role model for Canadian entrepreneurs, his forays into public policy seem to have been uneven in their success.
    • Its very convenient to attribute Canadian productivity challenges to innovation. How about ill-thought out free trade? As Richard Harris had pointed out, liberalized trade without a way to counteract the inevitable rationalizing of business activity in the North American continent would leave Canada worse off. If you build a branch plant economy, and then let all the branches move to the US or Mexico, what do you think will happen to productivity? (I think the research of Paul Samuelson and William Baumol on free trade with less developed countries also supports these ideas.)
    • On superclusters, see my comment on Lamontagne and Smardon. Why would anyone think that such an initiative would work, especially when many of the participants are likely foreign-owned firms? In principle, there is nothing wrong with the ownership status of a company. But in certain industries, it is clear from the evidence that their is a “home bias” when it comes to innovation. Toyota is unlikely to move the bulk of its R&D activities outside of Japan. Ditto for Apple. While there is certainly the “internationalization” of R&D, is this mainly to reorient products for export markets? Perhaps where there is clear expertise, like with Canada and machine learning, foreign firms will set up shop. But will they commercialize this activity in Canada? Past experience points to no.
    • The victory lap taken by the current federal government on EV battery plants and the related EV OEMs is also quite funny. We know that branch plants have inhibited the innovation capacity of this country for decades. And yet the solution to that is…well, more branch plants. Well these ones are for EVs, so it’s totally different. Sure it is.
    • The discussion on innovation-based procurement is also quite sad. Perhaps the only helpful part of the Jenkins Report commissioned by the previous government was the call for more procurement a la the US example. And yet despite massive efforts, the article indicates that this still accounts for a fraction of Canadian government expenditures. Low hanging fruit that is apparently too high to reach.

    Perhaps the only solace we can take from this article is that the Canadian VC market is in much better shape than a decade ago. Without government intervention and flooding the market with capital, Canada would not have firms like Shopify. Let’s hope that decision-makers learn from the example of the Canadian VC market, and try and apply that approach to the rest that ails the Canadian innovation ecosystem.

  • 2023 recession? Time for more industrial policy, not less

    The temptation among mainstream commentators will be that the impending recession requires reduced government spending. This is because unlike a typical recession, this one has been caused by monetary policy to alleviate inflationary pressures. And while this is has mathematical elegance, it is probably wrong.

    Why? Because it is pretty evident that most of the inflationary pressures have been caused by ill-thought out global trade policies and flimsy supply lines. Raising interest rates to depress domestic aggregate demand will reduce inflationary pressures caused by wages. But this assumes that global supply chains will fix themselves. Will they? Doesn’t appear to be the case.

    Similarly, when will the Russia-Ukraine war end? Who knows. And even when it does end, will this mean a business-as-usual situation for the flow of fertilizers and grains from the two countries? I seriously doubt it.

    There is no going back. Covid taught us all that cheap t-shirts from Asia are nice, but necessities need to be produced closer to market just in case. And this requires industrial policy.

    For political reasons, nearly all governments facing inflation will have to moderate fiscal expenditures in the short to medium term. But hopefully, the appropriate industrial policies can be introduced to alleviate supply chain-induced inflation. This could include:

    • Reallocating research spending (whether through national research organizations or higher education) to tackle issues related to the supply chain. For instance, can substitute goods be created for materials that are difficult to access? Can agricultural innovations be accelerated or diffused to deal with the shocks to the food system?
    • Existing government outlays on business supports need to be better thought through. The ambulance chasing going on in North America for EV battery plants is overshadowing more serious industrial policies for the domestic production of essential/critical goods.
    • Additional fiscal tools need to be employed to reduce inflation, with the funds reallocated to industrial policy priorities. I’m talking to you, excess profits tax.

    More than likely, governments will follow the orthodoxy and stay on the sidelines while a short recession plagues workers. But hopefully, somewhere out there, a visionary and truly progressive government will seize upon this opportunity to start remaking their local economy.

  • Inflation – the impetus for industrial policy (which will be ignored!)

    I’ll try to keep this brief, as it’s only a partial thought. But I have found it profoundly frustrating to follow the discourse in recent weeks/months on inflation with hardly a mention of price controls! I completely appreciate that such an approach is political naive in the current environment. But then again, so was open discussion of industrial policy not too long ago, and yet its rehabilitation is slowly occurring.

    Most of us are fully aware that (wage and) price controls were used extensively during wartime to prevent inflation. Of course, in the face of a crisis like a world war, public sentiment allows for such experimentation. As is my understanding, these systems did persist in economies as they emerged from their war footing, but only for a time.

    Their next appearance was naturally during the turbulent decade of the 70s, which marked the violent end of the New Keynesian/neoclassical synthesis era, and quickly ushered in the Volker Shock and the neoliberal era. And while mainstream economists continue to savage this idea, what do they know? Is their solution to deal with supply-chain inflation by immiserating working class people? While price controls may be inappropriate for many goods that are seeing demand in the “post-Covid” era, surely there is a rationale for applying them to items like food. Especially considering that grocery stores (at least in North America from my readings) are experiencing super-normal profits currently. These profits could also be addressed through an excess profits tax that is then recycled back to the public.

    But will marginalized members of society that have weak connections to the tax system benefit from such an approach? Would it not be more efficient (!) just to impose price controls on essential food products that are required for life?

    As some commentators have put it of late, our connections to global supply chains means we are “importing inflation.” In the neoliberal era, we exported jobs and imported deflation in terms of cheap consumer goods and nonperishables like food. But now, both product market categories are wrecked. Creating a price control system and strengthening domestic production of food stuffs may sound like a fleeting idea in the face of inflation. But if the next crisis that follows is a food crisis due to climate change, the intersection of food and industrial policy (and price controls!) may become essential for life.

  • Defining industrial policy – not as easy as it seems

    When reviewing my collection of literature on the subject of industrial policy in search of a definition, it quickly dawned on me on how complicated this simple question was. More than likely, I will have to revisit this topic in a future post. But here goes nothing…

    After reviewing about a dozen or so sources, it seems like they could be grouped into a few categories:

    1. Highly simplified definitions;
    2. Broad definitions that choose to focus on particular activities/actions for the sake of simplicity; and
    3. Nuanced, robust, and complicated definitions (spoiler alert – I prefer these).

    While Dani Rodrik is perhaps the academic most associated with industrial policy (?), in a 2008 paper, he uses quite a terse definition:

    “Policies that stimulate specific economic activities and promote structural change.”

    Well that is a start.

    Equally terse is this one from the IMF from 2017.

    “This departmental paper sets out a conceptual framework to analyze industrial policy, defined as targeted sectoral interventions.”

    Definitely ranking in the middle category that I’ve outlined is from this Carnegie Endowment paper.

    “For the purpose of this short note, industrial policy is defined as government intervention in a specific sector which is designed to boost the growth prospects of that sector and to promote development of the wider economy. I exclude (emphasis added) from this definition horizontal policies, such as investment in education, reinforcement of the rule of law and property rights, and so on, even though these horizontal policies can affect different sectors differently and so can be part of an industrial policy. I do so for the sake of brevity and because the importance of horizontal policies is widely understood, and there is much less controversy surrounding them than around sectoral interventions. To sharpen the focus further, I also exclude interventions at the sectoral level which aim to achieve other objectives than growth and employment, such as improving environmental and safety standards, as these interventions aim to correct well-recognized market failures and are also relatively uncontroversial.”

    So now we’re getting somewhere. As opposed to sectoral interventions identified in the first two quotes, here we see some existential debates about industrial policy. Unfortunately, while the author sees the debate, the answer is to chop off the parts that are contentious, and focus on the easy/non-controversial aspects: sectors, growth, economy. Helpful to some extent, but again missing the point I think.

    Honourable mention goes to the OECD and the work of Warwick, who had several interesting papers on industrial policy in the mid 2010s. Here’s a nice quote from this paper:

    “A broad definition is ‘any type of intervention or government policy that attempts to improve the business environment or to alter the structure of economic activity towards sectors, technologies or tasks that are expected to offer better prospects for economic growth or social welfare than would occur in the absence of such interventions.”

    There’s a lot there, but I think one word is critical – any. This begins to open the door to myriad possibilities. What does any mean? Social policies? Labour policies? Health policies? Education policies? Environmental policies? This goes further than the Carnegie quote by not wishing away the complexities of industrial policy.

    But from the papers I’ve assembled over the years, these series of excerpts are the winners for me.

    • In other studies, we ourselves define industrial policies as broadly as ‘any programs of government that relate directly to the economic activity of one or more of a nation’s regions, industries, firms, or plants.’
    • However broadly or narrowly the definitional net is cast, many subclassifications of industrial policy are possible. For example, they can be classified as ‘interventionist’ or ‘noninterventionist.’ Noninterventionist policies can be divided into general macroeconomic policies and general structural policies (such as free trade and competition policy). Interventionist policies, to which most attention has been directed, particularly by those who want to develop an industrial strategy, can be divided into general industrial policies, industry-specific policies, regional policies, and firm-specific policies; they can also be divided into those that promote growth, those that protect against change or decline, and those that assist adjustment (the reallocation of resources away from declining industries). Policies can also be divided in terms of the policy instruments employed: regulations, subsidies, tariff protection, nontariff barriers, procurement policy, government ownership, tax incentives, and so on.
    • Almost every public policy affecting business – particularly, those policies intended to promote, defend, or assist specific industries – falls within the ambit ’industrial policy,’ in the end everyone defines the term to suit his or her own purposes.
    • (Industrial policy is) broadly as a set of policies affecting industrial structure. Such policies may operate at the level of the whole economy, of an industry, or of firms. They may be aimed at choosing and backing winners, at saving losers or helping them to adjust, or at providing an appropriate environment for economic forces to determine the outcome.

    “Industrial Policy In Ontario,” Richard M. Bird, Ontario Economic Council, 1985.

    Perhaps it’s a bit unfair to cite so much from one paper compared to the others. That being said, Bird was shrewd enough to explore the definition more thoroughly than most. Key ideas he introduces include:

    • The existence of subclassifications, in this case, noninterventionist vs. interventionist industrial policies;
    • The idea that industrial policy can be broad, involving almost any public policy; and
    • The scope of analysis/intervention can be to the firm, the industry, or the entire economy.

    With Bird’s highly robust and nuanced definition in mind, I can start to map out a definition for this blog that can be applied to evaluate industrial policies. More to come on that!

  • Canada and the eternal quest for a foreign economic saviour

    I had to let a few weeks pass after the recent visit of Chancellor Scholz to Canada (where this blog is based). I needed the time to let my anger subside at the recurring theme in Canada’s industrial policy – the zombie-like resilience of the staples trap!

    But this time it isn’t furs, or timber, or agricultural products. It’s natural gas (once again) with a new companion – critical minerals!

    Perhaps I have chosen the most inflammatory article to reinforce my point, but read this and see where I am going:

    • “Volkswagen says it’s looking for stakes in Ontario mines, while Benz will be shipping the materials to Europe.
    • Mercedes-Benz, meanwhile, announced a deal with Rock Tech Lithium that will see annual production of 10,000 tonnes of processed lithium destined for Germany by 2027.
    • VW is looking for sites for a battery facility in North America, while Mercedes-Benz has joined forces with Stellantis in building its own battery-manufacturing venture. Both plants are likely to be built close to their current Tennessee and Alabama facilities, respectively, because of the difficulties in transporting complete battery assemblies.”

    So, Canada is sitting on the raw materials to anchor electric vehicles and various other advanced technologies. But rather encourage domestic firms to commercialize these products, or ensure that the processing activities and production of batteries occurs here, we have agreed to:

    • Let the raw materials be exported;
    • Let them be processed in other countries (US, Germany);
    • Then buy back these batteries (embedded in electric vehicles), resulting in essentially a wealth transfer from Canada to other countries.

    I wish I could say that this is the first time this has happened, but sadly folks, this is the basic playbook for economic development in Canada. While such critiques are ignored as “nationalistic” or regurgitation of Innis/Watkins, I think there is a plain logic to it. If Canada wants to develop its economy, it must break its 400+ year cycle of pulling things out of the ground, selling those raw materials, and buying them back as processed goods. This is not ideology; this is common sense.

  • The return of industrial policy? It never really went away

    Recent developments in the US under the Biden Administration, as well the recognition of economic gaps in the wake of Covid-19 across the developed world, have slowly returned the previously exiled (and reviled!) term of “industrial policy” back into the broader public discourse. Governments and parties on both the left and right are increasingly implicitly or explicitly calling for a more active role of “The State” in economic development to address economic challenges. This was most clearly seen in efforts to increase Covid-19 vaccine production capacity in many developed countries.

    But the actions of the Biden Administration have perhaps been the most demonstrable example that a change is at hand. Recent legislation has promised to restore the US’ industrial capacity in semiconductors. Legislation related to electric vehicles demonstrates that a laissez-faire approach to the auto sector is no longer acceptable when confronting the twin issues of climate change and China’s industrial might in this industry.

    But despite this growing attention, it must be said that industrial policy never went away. What’s the proof?

    • Authors, most notably Dani Rodrik and Ha-Joon Chang, have written extensively about industrial policy. There are many other scholars and authors that have too, but perhaps not to the same notoriety as Rodrik and Chang.
    • Neoclassical/neoliberal organizations like the Organisation for Economic Co-operation and Development (OECD) have written about industrial policy off and on for years. Normally, their publications correlated with recessions (think 2008 Global Financial Crisis and the initial phases of the Covid recession in 2020).
    • Perhaps most critical, the success of the Chinese economy, especially after its succession to the World Trade Organization, demonstrated that the developmental state model/industrial policy approach was worthy of study. Any investigation of the Chinese growth model indirectly is a study of industrial policy.

    Last, but not least, one can argue that industrial policy never really went away, but only had a toxic brand. As will be explored in a future post, if industrial policy is defined as horizontal or vertical policy interventions by governments to affect the industrial composition and outcomes of an economy, all governments engage in industrial policy! Even the most non-interventionist, laissez-faire government claiming to use a hands-off approach to economic growth is probably using a few industrial policy instruments like tax or regulatory reform. While some may find this argument a cop-out, I think it reasonable. The question is not “industrial policy: yes/no?”. A better question is “what kind of industrial policy does this jurisdiction want?”

    That is what this blog will hope to explore!