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(The Globe and Mail, iSTOCK)
(The Globe and Mail, iSTOCK)

Canada's innovation window of opportunity Add to ...

Canada boasts a stable government, sound finances, boundless resources and an educated work force. But for all of those strengths, there’s a dirty little secret about our economy.

We are underperformers – not compared with our overindebted G7 compatriots but compared with our economic potential. Canada’s record on productivity is poor, and the country suffers from a chronic innovation gap. Outside of the mining and energy sectors, the list of Canadian companies making a meaningful impact on a global stage is exceedingly short. The most innovative one of all, Research In Motion Ltd. of Waterloo, Ont., has been put on the defensive by foreign competitors that have been stealing market share with products that are more cutting-edge than the BlackBerry.

Were it not for an abundance of commodities that developing countries are demanding right now, such as potash and oil, our economic growth would be far weaker than it is.

But with the threat of a decade of stagnation hanging over the global economy, there’s a campaign under way to revive some neglected ideas to make Canada a much more competitive place – and to do it now.

The sense of urgency is driven by a number of factors. One is the economic and political dysfunction of our largest trading partner, the United States, which is still hobbled by the after-effects of a consumer debt binge and a banking crisis. Another is the changed political climate of Ottawa since voters granted the Conservatives a majority in the May election. For the first time since 2004, a government can tackle some difficult economic problems, and make policy shifts, without fear of triggering an election.

Putting Canada on a more competitive footing will likely mean diversifying trade links beyond the U.S., converting corporate profits into world-beating innovation and pursuing big infrastructure projects. It also means welcoming more foreign investment from places such as China and the Middle East and deregulating a host of stodgy pre-Internet industries, such as telecommunications, cable and transportation.

Such a campaign has a long way to go – as is highlighted by the comments of foreign investors like Naguib Sawiris, the Egyptian telecommunications tycoon. It was his money, controversially, that helped fund the startup of Wind Mobile in this country. In an interview with The Globe and Mail this week, he blamed Ottawa’s telecommunications policy for making it harder for new wireless companies to establish themselves.

“Anybody who asks me, I tell him look, we are the stupid investors that poured a billion dollars into Canada here and created 1,000 new jobs, please don’t do this mistake. Don’t come here,” Mr. Sawiris said. He also drew a direct link between the long-standing federal policy of limiting foreign investment and the lack of global presence of Canada’s major telcos.

“If they were that good, why are they just in Canada here? Why don’t we have Rogers in the U.K. or Germany? Why is Vodafone everywhere? Why is France Télécom everywhere? And this national champion Rogers is only in Canada? Because only in Canada it gets pampered and it can kill its competitors.”

A push for reform

In 2008, an expert panel set up by the Harper government to examine Canada’s competitiveness recommended a major shift in Ottawa’s approach to telecom, in favour of opening it up to far more foreign investment.

Three and half years later, the chairman of that panel, Red Wilson, looks back on his effort with a mixture of pride and regret. Pride because his panel’s findings are just as relevant today as they were then. But it’s tinged with disappointment because most of the 65 recommendations, including the one on foreign ownership of telecom companies, remain on the shelf even as the country’s innovation and productivity performance sputters.

“I was happy to see some of the things implemented. Others are still hanging,” Mr. Wilson, the 71-year-old former chairman of BCE Inc., says diplomatically.

He also laments that Ottawa never embraced his call to create a dedicated competition advocate to track the country’s progress on key measures such as productivity and to hold decision makers to account. General Electric chairman Jeffrey Immelt recently took on a similar post for U.S. President Barack Obama.

But Mr. Wilson’s agenda has plenty of converts. Bank of Canada Governor Mark Carney is talking up productivity at every opportunity – in speeches and private chats with chief executives. Software executive Tom Jenkins is out pushing his report on spurring innovation with an overhaul of federal research and development spending. And several eminent former ministers, top bureaucrats and policy experts, including Michael Wilson and John Manley, are prodding the Harper government to mount an ambitious economic agenda.

“It’s fair enough for people to talk about all these things,” Mr. Wilson said. “But you’ve got to get some political initiative here. That’s the groundswell that’s still not there.”

The lead federal minister on the file – Industry Minister Christian Paradis – has promised to take a fresh look at the report. “We will continue to look to the panel report for inspiration in bringing forward further proposals,” spokesman Pascal Boulay said.

What the campaign has going for it is a rare window of opportunity to complete an ambitious agenda. Canada’s fiscal position is relatively sound and its economy is healthier than most in the industrialized world. And for the first time in seven years, the country has a government stable enough to carry out even unpopular policies.

“It’s one of those rare times that Canada starts out with a policy advantage compared to most countries,” remarked former Liberal cabinet minister John Manley, who speaks for the heads of the country’s largest companies as president the Canadian Council of Chief Executives.

“The whole dynamic in Ottawa has changed. The [Harper government]no longer has to negotiate, item by item, with three opposition parties. They government is carrying the ball. They initiate and they can complete.”

Pushing ahead with deregulation and trade need not cost much. Indeed, in an environment of fiscal restraint, policies that come with small price tags are more likely to get done, Mr. Manley explained.

“The whole challenge at a time like this is to do the things that are going to pay off, that are going to create economic activity and jobs,” he said.

The flurry of talk about competitiveness and innovation is carefully timed to coincide with the government’s preparations for its first budget with a secure majority, expected as early as February.

And a majority government’s first budget is traditionally the time to launch big and potentially controversial ideas.

“There’s pent-up demand,” agreed David Stewart-Patterson, vice-president of public policy at the Conference Board of Canada, an independent think tank. “For six years, there was no opportunity to explore long-term strategic thinking at the federal level. That’s the political window.”

The cost of poor productivity

There’s a lot of work to do and a compelling reason to do it. Poor productivity is not just a theoretical problems. It saps government tax revenues and destroys wealth. The University of Toronto’s Institute for Competitiveness and Prosperity has estimated that low productivity costs Ottawa $112-billion a year in lost tax revenue. That’s money that isn’t available for health care, highways, tax cuts or investing in R&D.

Poor productivity is also eroding Canadians’ prosperity. Per capita gross domestic product is a measure of the value created by workers and companies, and Canada has been steadily losing ground to its closest trading partner, the United States. In 2010, GDP per capita was $47,500 in Canada and $57,000 in the U.S. – a gap of $9,500. Three decades ago the gap was less than $3,000.

When the Canadian dollar was low in the 1990s, companies could mask their poor productivity – it made exports more competitive. But that’s no longer possible with a dollar that many economists believe could stay at or near par for years.

A key reason for Canada’s lagging productivity is that government regulation shields companies in some industries from global competition, Open Text Corp. chairman Tom Jenkins argued in a recent paper for the Institute for Research in Public Policy. The result is that Canadian cable providers, phone companies and airlines have little incentive to become more efficient because they can generate better returns simply by charging customer more, rather than becoming better at what they do. And those costs are passed along to Canadians.

“We can’t have it both ways,” he wrote. “We either protect or we compete.”

Mr. Jenkins, who recently chaired a federal panel investigating federal R&D incentives, applied a similar logic in recommending an overhaul of the generous tax breaks that Ottawa offers companies to do research. Offering billions of dollars in cash rebates to small companies that aren’t profitable may create jobs for scientists, but it doesn’t necessarily drive innovation or create wealth, he pointed out in a recent interview.

“The closer we can get to rewarding the outcome instead of the input, the better,” he said.

That means rewarding companies that generate profits from their R&D and then offsetting part of their tax burden with credits. “Creating profits, that’s what we want to encourage,” he said.

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