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.

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