Economics - Innovation - Inclusive Growth - Public Purpose
Challenging perceptions about public investment in Canada

Challenging perceptions about public investment in Canada

Recently I’ve been on a bit of a world tour (Norway, Sweden, Denmark, Canada, Holland, Italy, Dubai, Brazil, the USA and more) talking to policy makers, business leaders, and trade unions about how to achieve economic growth that is both ‘smart’ (innovation led) and ‘inclusive’. I’ve decided to start documenting some of these encounters. This first blog in the series is on Canada.

 

My first ‘innovation’ meeting in Canada was back in March, 2014. The Broadbent Institute, a social democratic think tank, invited me to speak about the Entrepreneurial Sate at their annual policy and organizing conference, the Progress Summit.

 

As in many other countries, the conversation about government and public investment in Canada has for decades distorted and underplayed the role of the state as a crucial agent in shaping and creating markets.

 

In a country where inequality has grown as the progressive state has been dismantled, I learned that corporate tax rates have been reduced, and generous tax credits given out to promote R&D, all while Canadian corporations hoard over $600 billion in “dead money.” As I outlined in an article for the Toronto Star at the time of my first visit, and explained in an interview for the Canadian Broadcasting Corporation, a visionary state with the courage to direct mission-oriented investments, rather than just ‘de-risk’ the private sector, is needed to spur smart innovation-led growth. The conversation should be around the kind of broad challenges and missions that public and private actors can rally around, rather than on policies that simply increase profits in the short-term. This is particularly important in a country heavily reliant on natural resource exports (see the current oil bust) and with chronically-low business spending on R&D.

 

How might Canada think about re-investing the returns it currently makes from static extraction based sectors into new dynamic areas, such as renewable energy, that could provide the foundation for future decades of ‘sustainable’ growth? And how can this investment strategy be linked to steering the economy towards a new ‘direction’, as Carlota Perez and I argue in our paper on Innovation as Growth Policy.

 

I was invited back to Canada two weeks ago by the Atkinson Foundation and Broadbent Institute to help spark a different conversation. There I met with leading economists and private sector actors, the Toronto Star Editorial board, as well as senior provincial government officials and political party leaders in Ontario.

 

The trip coincided with the release of an important paper by the Atkinson Foundation and Broadbent Institute entitled More Courageous Bets and Equitable Returns: Challenging Perceptions about Public Investment in Innovation. The paper uses my work on the Entrepreneurial State as a jumping off point to explore the Canadian experience on innovation and emphasizes just how critical changing the conversation on the role of public investment is to embracing smart and inclusive growth policies.

 

This report highlighted key Canadian deficiencies. Unlike in countries such as Germany or even the United States that do innovation-led growth well, the majority of public support for industrial research and development in Canada today is provided through tax credits rather than direct investment (with some notable exceptions highlighted in the report).

 

According to the latest OECD data, Canada trails its peers internationally in key innovation indicators, including research and development (R&D) spending.   Canada invested less in R&D in 2012 than back in 2004. Canada’s GERD has also declined significantly. At less than 1.7 per cent of GDP, it is well below the OECD average of 2.4 per cent and 2.98 per cent in Germany.

 

Canada’s business spending on R&D (BERD) is also low and decreased steadily from 1.26 per cent of GDP in 2001 to 0.88 per cent in 2012, giving Canada a rank near the very bottom of OECD countries. This innovation lag is consistent with my own research findings and it’s due to a government approach that is overly reliant on indirect supports such as tax subsidies and incentives and lacking the kind of bold direct investments that push business to big things. This chart shows how Canada compares internationally on this front:

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The Broadbent Atkinson report also made clear that Canadians are not adequately sharing in the rewards from their government’s investments: risks are being socialized while profits privatized. Canada must most of all consider ways to have a more equitable tax and transfer system, which does not result in a race to the bottom.

 

If Canada wants to shift away from oil and its extractive sector to an innovation-led economy, then bold leadership and investment in new directions are needed. ‘Green growth’ is one such potential direction. However, across the globe the countries that are leading in green transformations are precisely those where the State plays a more active role. If Canada wants to compete in this area, it will have to courageously envisage the direction of change to create and shape the new markets that could set it on a path to sustainable and inclusive growth.

 

As I have argued elsewhere, mission oriented investments require new evaluation tools which account for the market shaping/creating role of the public sector, not just ‘market fixing’ role– and new ideas on how to build public sector organisations that welcome the explorative uncertain process that innovation entails, rather than fearing it.

Tags: Canada, Financing Innovation, Market Creating, Mission-Oriented, Patient Finance, R&D, Wealth Creation

 

Read:

The Atkinson Foundation / Broadbent Institute paper: More Courageous Bets and Equitable Returns: Challenging Perceptions about Public Investment in Innovation

 

The Toronto Star, Government Funding Essential to Spur Innovation, by Sara Mojtehedzadeh, 22 February 2015

 

The Toronto Star, Public Investment Gives Private Ingenuity a Springboard, by Carol Goar, 27 January 2015

 

The Toronto Star, Broadbent – a way forward for Canada’s progressives, by Ed Broadbent, 14 April 2014

 

Innovation as Growth Policy: the challenge for Europe – my joint SPRU working paper with Carlota Perez, Centennial Professor of International Development, LSE and Honorary Professor, SPRU, University of Sussex

 

Watch:

Watch the Broadbent Institute talk

 

My interview with TVO Canada in September 2014

tvo

 

My interview with CBC News in April 2014

 

My talk to the Broadbent Institute Talk in March 2014