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Government investment can reverse Canada’s business innovation deficit

There has been a lot of talk during the federal election campaign about how to create more good, "middle-class" jobs. But there has been only limited recognition of the need for a much more active government role if we are to build the more innovative and sustainable economy we need to create such jobs.

The dominant wisdom among economists used to be that the government should just set broad framework policies – low corporate and personal taxes, less regulation, fewer barriers to trade, higher levels of investment in education and skills, and decent public infrastructure – and that the private sector would invest to create jobs. Farewell to anything smacking of hands-on "industrial policy."

While supportive of such "market-based policies," former Toronto-Dominion Bank chief economist Don Drummond and colleagues have acknowledged in a recently released report from the Centre for the Study of Living Standards that the results of such a strategy have been "disappointing," and they call for a more "active" approach.

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As they report, Canada's record of business sector productivity growth over the past decade has been abysmal compared with our own past and compared with almost all other advanced economies. Business investment in research and development, a key driver of productivity, is low and falling in both dollar terms and as a share of gross domestic product, and the Conference Board of Canada has just reported that Canada rates an overall grade of D when judged by key indicators of an innovative economy.

Analytica Advisers, an Ottawa-based clean technology research provider, calculates that we are bit players in the fast-growing global market for clean technology. Our global market share is just 1.3 per cent and falling, and we rank 19th in the world, behind even Malaysia, Denmark, the Czech Republic and tiny Singapore.

While the resource economy and traditional manufacturing struggle, we have largely failed to build new sources of wealth in knowledge-intensive goods and services. This is despite real strengths in university-based and public sector innovation through bodies such as the National Research Council, which have, to some degree, offset the business innovation deficit.

There are, of course, significant exceptions and islands of Canadian excellence in innovation-intensive sectors like aerospace, renewable energy, information technology, software, engineering services, pharmaceuticals, medical devices and biotechnology, to name a few. But they remain the exception rather than the rule. The global economy will continue to provide a fast-growing market in all of these areas, not least when the world begins take climate change and other environmental priorities seriously.

The influential U.K. economist Mariana Mazzucato argues that strategic government leadership and public investments are critical to building innovative economies. She has shown that publicly funded research made well in advance of immediate commercial opportunities, as well as direct support for strategic corporate investments through agencies like DARPA, the Defense Advanced Research Projects Agency, have been central to the growth of innovative capacity in the United States. Corporate research and development as well as venture capital often follow in the wake of ground-breaking public sector entrepreneurship.

In a similar vein, an expert panel appointed by Ottawa in 2010 to look into federal government support for research and development called for more public sector venture capital and a shift in emphasis from broad tax measures to direct government support for corporate investments in innovation. In a partial response, the government has directly invested in venture capital funds through the Business Development Bank of Canada (BDC) and has increased to modest levels funding for strategic investment funds to support the aerospace and auto industries.

There is, however, much further to go in a more interventionist direction.

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Strategic long-term investments through equity and loans need to be made across a much broader range of sectors, including renewable energy and other clean technologies. This could be done at arms length through existing agencies such as BDC and Export Development Canada (EDC) which have the required technical and financial expertise and are not subject to direct political pressure, or through new public investment banks.

For some investments, it will be appropriate to take a long-term equity position to ensure that taxpayers justifiably share in the returns from winning technologies. Current public sector venture capital is, by contrast, geared to a quick exit once a company goes public.

Notwithstanding the constraints of trade and investment agreements, governments at all levels should give preference in their procurement decisions to innovative Canadians companies, especially small startup companies, which need to establish an initial presence and credibility in the market.

Also working to expand markets, regulations such as building codes and vehicle-emission standards and energy-efficiency standards need to be made much more stringent to boost business investments in clean technology. Carbon pricing and other polluter-pay policies can and should lead to a much faster-growing market for energy-efficient technologies and renewable energy.

Broadly based prosperity and good jobs require a major shift to a more innovative economy. We need to hear much more from all of the parties about how the federal government can lead us in that direction.

Andrew Jackson is an adjunct research professor in the Institute of Political Economy at Carleton University in Ottawa and senior policy adviser to the Broadbent Institute.

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About the Author

Andrew Jackson is the Packer Professor of Social Justice at York University and Senior Policy Adviser to the Broadbent Institute. More

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