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Rather than prop up the manufacturing sector, Dezsö Horváth, left, and Matthias Kipping say that Canada’s governments should invest in industries and activities that can propel the country and its companies into a leading role in the global economy of the 21 st century. (Schulich School of Business)
Rather than prop up the manufacturing sector, Dezsö Horváth, left, and Matthias Kipping say that Canada’s governments should invest in industries and activities that can propel the country and its companies into a leading role in the global economy of the 21 st century. (Schulich School of Business)

CANADA COMPETES

Canada must fight its addiction to the old economy Add to ...

Canada is truly blessed. It has an abundance of natural resources coveted by other nations, which include metals, oil and gas, as well as water, and it shares its only border and a free trade area with the world’s most prosperous economy. For Canada’s companies and its economy, however, these are mixed blessings.

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In the natural resources and mining sectors, Canada has indeed been a world-class player, spawning a dense ecology of highly skilled human resources providing technical, financial, legal, accounting and consulting services that make Toronto the global hub of the mining industry and Calgary a world leader in oil and gas.

Our finance industry has been world-class too: Canada’s banks are rated among the world’s best, as are – often overlooked – our life insurance companies, which have played a leading role in both developed and emerging markets since the late 19th century.

As for the United States, although some Canadian firms have prospered by setting up shop south of the border, others returned with bloodied noses and sizable losses. The key point is Canadian companies have been too fixated on the United States – both the winners and the losers might have done better by going abroad to markets in Latin America, Europe and Asia.

Relying on past successes and old trade patterns has kept us from moving more quickly into global markets, beyond North America and into the knowledge- and research-intensive industries of the so-called “third industrial revolution.” Instead, Canada has clung to the manufacturing jobs of the second industrial revolution, often in foreign branch plants, which are increasingly moving to lower-cost countries.

Rather than trying to stem the inexorable exodus with billions of dollars in subsidies, particularly in the troubled auto industry, Canada’s federal and provincial governments would do better to invest in those industries and activities that can propel the country and its companies into a leading role in the global economy of the 21st century. Here is what is needed:

Develop high-quality skills:

While it’s true that the world’s biggest corporations do most of the research and development, according to the latest Battelle Memorial Institute survey, size is not everything and extremely large firms are not the only ones that can benefit from R&D spending or contribute to a nation’s economic performance.

Take Sweden and Finland, for example, which spent almost twice as much on R&D as Canada in 2011 – 3.62 per cent and 3.83 per cent of GDP, respectively, compared to our 1.95 per cent. They also have among the highest ratios of engineers and scientists relative to their general populations: 5,000 and 7,000 per one million inhabitants, respectively, compared with 4,000 for Canada. Both countries have consistently focused on knowledge-intensive activities, even in more traditional sectors, and, according to the World Economic Forum’s Global Competitiveness Index, rank third and fourth in the world, with Canada a distant 12th.

We would do well to follow the lead of these Scandinavian nations.

Commercialize innovation:

While Canadian firms are creating technological and scientific breakthroughs, they are not commercializing enough of them. Examples abound in Canada’s pharmaceutical and biotech industries.

In 2005, the MaRS Discovery District was set up to explore ways to capture the commercial potential of Toronto’s $1-billion per-year science and technology research spending, but much more is needed to bridge the commercialization gap.

You don’t have to be large to go from innovation to worldwide commercial success. Take Germany, which has many well-known huge global corporations but derives its main strength and more than half its exports from the so-called hidden champions: medium-sized firms with deep regional roots that lead the global market through innovative, high-quality products and unrivalled after-sales service.

Canada has its own hidden champions such as OpenText and IMAX, highly innovative companies that have revolutionized and become leaders in their market segments globally. But these hidden champions are the exceptions in Canada. They have to become the rule.

Sustain growth over the long term:

Even the largest and most successful companies of today started small. German organic chemical producers surpassed their British, American and French rivals in the 19th century due to close collaboration with the country’s universities, a relationship that led to their subsequent growth and lasting global dominance.

While Canada is adept at encouraging new ventures, it has been less successful in developing a climate that will help transform small firms into medium-sized and large firms, and later, once they have reached a certain size, helping firms to stay innovative and competitive. Our small and medium-sized firms either die on the vine or are acquired.

Canada’s largest software company, Cognos, had a technology rivalling global leaders SAP and Oracle, but instead of going it on its own, it was bought by IBM for $4.9-billion in 2007. Likewise, ATI Technologies, a dominant Canadian developer of advanced graphics chips, was gobbled up by U.S.-based AMD for $5.4-billion in 2006.

Go global:

Canadian firms will never have the luxury of developing within a huge domestic market like their counterparts from the United States. But neither do firms from most other countries. Take Israel’s Teva, the global leader in generic pharmaceuticals with revenue of more than $18-billion.

Canadian companies of all sizes and sectors should follow the example of Teva or, closer to home, of Montreal-based, IT-services group CGI, which recently broke its dependence on North American markets with the $2.8-billion friendly takeover of Anglo-Dutch Logica – a move that doubled its size and propelled it into the global elite in its industry. This is even more urgent today, given that North America will decline in relative importance as China, India, Brazil and other emerging economies develop to their full potential.

In short, it’s time for Canadian businesses to wean themselves off traditional industries and tried-and-true markets, to instead develop – and commercialize – innovative technologies and ideas, and sell them to new markets around the world.

Dezso J. Horvath is Tanna H. Schulich Chair in Strategic Management and dean of the Schulich School of Business at York University in Toronto. Matthias Kipping is a professor of policy and chair in business history at Schulich.

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