While we tend to celebrate private entrepreneurship, the state is crucially important in driving and shaping innovation. The question of which economies will thrive and which will lag behind on innovation has a lot to do with sound public policy.
With an economy historically reliant on natural resources and one with high rates of foreign ownership, the role government plays is even more important for Canada.
For 30 years Canadian economic policy has been focused on the supposed need to liberate private enterprise from the heavy hand of the state. The focus has been on slashing corporate tax rates, reducing public interest regulation and liberalizing trade and investment.
But has this “pro-business” agenda worked?
Since 2000, the Canadian economy has actually regressed in terms of producing highly innovative products and services for global markets, with major technological champions from Nortel to BlackBerry foundering. Over the last decade, labour productivity in Canada grew at a dismal pace and Canada is running record high trade deficits.
The key to Canada’s falling competitiveness is the fact that Canadian firms are not reinvesting their profits in areas that support long-run competitiveness — human capital and especially research and development. In 2011 the Canadian Conference Board gave Canada a “D” on R&D spending, ranking 15th out of 16 peer nations.
Canadian governments played vital roles in the development of innovative sectors in the past, for example in aerospace and information technology. Since then, however, the Canadian economic landscape has become increasingly dependent on natural resources, with privatization of the profits from its exploitation retarding rather than supporting industrial policy.
While profits may soar when taxes fall, investments don’t. Canadian businesses are hoarding cash at record levels — $626 billion according to Statistics Canada — and the investment that is taking place is in the resource extraction of the old economy rather than the innovative technologies of the new economy.
The combination of lagging private sector investment and public sector austerity puts Canada’s ability to be a world leader in new technologies in doubt.
I have always wondered why provincial governments don’t take the profit out of renewable resources and start incubating new technology or renewable resource industries like other countries have. I think our resource economies have made us complacent and there is literally hundreds of examples of technologies that we have let stagnate and pass us by that the rest of the world is jumping on and making a lot of money while doing it.