“THE NEW GLOBAL REALITY: YOU WANT TO BE COMPETITIVE, YOU BETTER BE INNOVATIVE!” by The Honourable Kevin G. Lynch Vice-Chair, BMO Financial Group to Institute of Public Administration of Canada L'Institut d'administration publique du Canada 64th Annual Conference St. John’s Newfoundland August 20, 2012

1. “THE NEW GLOBAL REALITY: YOU WANT TO BE
COMPETITIVE, YOU BETTER BE INNOVATIVE!”
by
The Honourable Kevin G. Lynch
Vice-Chair, BMO Financial Group
to
Institute of Public Administration of Canada
L'Institut d'administration publique du Canada
64th Annual Conference
St. John’s Newfoundland
August 20, 2012
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2. THE NEW GLOBAL REALITY: YOU WANT TO BE COMPETITIVE, YOU
BETTER BE INNOVATIVE!
Introduction
Why does innovation matter so much for our competitiveness today? What is the role
of government in building an innovative economy? Where is there scope for innovation
in public administration during an era of fiscal restraint? All good, pertinent and
challenging questions, and ones with which public servants should be earnestly grappling
because getting the answers right will be crucial for Canada’s future.
Long banished to the periphery of public policy and corporate strategy, innovation is
now front and centre, as a core element of the solution to countries struggling with
austerity and low growth, and companies confronting stagnating sales, new overseas
competitors and declining competitiveness.
The public policy starting point for innovation is the context, and the context we now
face is pervasively global and profoundly changing. Structural trends and seismic events
are reshaping economies, societies, politics, power and expectations around the world.
And, this changing context is shifting the “drivers of success” for the Canadian economy.
Six such pivotal trends include:
o Pervasive globalization: the global center of economic gravity is shifting towards
Asia with the rise of dynamic emerging economies in Asia and elsewhere. The
“new global reality” is increasingly a two-speed world, where the West is in the
slower lane.
o Demographics: for the first time in a very long time, we’re collectively aging in
Western countries, and this will have underestimated consequences for potential
economic growth through slowing expansions in the labour force, and for longer
term fiscal frameworks through increasing pension and health care costs. One
consequence is that the hunt for talent is going global, and the winners, both
countries and firms, will be in the driver’s seat in the new global competitiveness.
o Information revolution: from the Internet to Facebook to Tahrir Square, we have
moved from a connected West to a hyper-connected world. This hyper-connected
world is changing the reality of what a market is, how markets are accessed, and
where work can be done in real-time distributed systems. It is redefining the
nature of communications, both the medium and the style of messaging and, as
the Arab Spring has demonstrated, anyone with a smart phone is now a journalist.
o The ultimate hang-over: the global financial crisis of 2008 is like the hangover
that will never end, no matter how many aspirins governments and financial
systems in many countries take. It has spawned a low growth, low interest rate,
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3. high volatility environment in the developed world, with continued deleveraging
and uncertainty a fact of life in Europe and a lingering reality in the United States.
o The decline of trust: the cumulative effect over the last decade and across
countries of corporate failings, environmental disasters, financial crises,
government mishaps and misleading public information has led to substantial and
sustained loss of trust by the public in leadership broadly defined.
o New global competitiveness: today, it is increasingly productivity and innovation
that drive competitiveness. In advanced economies, it is less low costs and
massive scale and more flexibility and creativity; it is less geography and more
capacity.
So, in this future, what will competitive economies look like? Tom Friedman
believes we have progressed to a hyper connected world where, for innovation-driven,
global corporations, the mantra is now: “imagined here, designed there, manufactured
elsewhere, sold everywhere.” Michael Porter believes we can only have competitiveness
with rising living standards in Western countries if we reinvent ourselves as high
productivity growth economies, led by innovation. Even President Obama believes that
“Innovation is the first step in restoring American competitiveness”.
And why do they all believe that innovation is so pivotal? Simply put, innovation is
the ability to create new products or services, produce existing products or deliver
existing services in new ways, and develop new markets. Innovation is clearly not the
same as research and invention; rather, it is the process of turning new ideas into
commercially successful goods and services that bring perceived value to consumers. Or,
more colloquially, research is a process that transforms money into knowledge, and
innovation is the process that transforms knowledge into money.
Innovation is crucial to the economy because it drives productivity, and a more
productive economy grows faster, adapts better, and supports higher wages, more jobs
and improved living standards. It helps answer the question of how a high-wage economy
like Canada's can compete with those of emerging countries. It is as much a social
imperative as an economic one: increasing productivity growth through innovation raises
the living standards of a society just as it increases the competitiveness of an economy.
Where does all this leave Canada? Frankly, we are wedged between the new global
reality and an economy that has not stressed productivity, innovation and diversification.
Consider a few, rather dismal, facts:
o Canada’s business productivity levels are now only 72% of U.S. business on
average, and we no longer have a low dollar to subsidize poor productivity.
o Canada’s business spending on R&D is 1.0% of GDP, well below the OECD
average of 1.6%, half that of U.S. business and almost a third Swedish business.
Canadian business has the dubious distinction of ranking 20th in the OECD in
research, at a time when innovation is the life blood of the new competitiveness.
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4. o Canadian business spends only 48% as much as U.S. business on ICT
(information and communications technologies) and only 75% as much on
leading edge machinery and equipment --- both instrumental to productivity
growth.
o Canada’s trade is highly concentrated with the United States (over 75% of
Canada’s exports), and no dynamic emerging economy accounts for more than
1% of Canada’s exports (save China which is only 3%).
Herein lies Canada’s challenge --- we are a sophisticated economy, with a well-
educated and multicultural workforce, and a very high standard of living. We are one of
the great economic success stories. But the global marketplace we operate in is dynamic
not static. Competitiveness is increasingly bifurcating into either enormous scale with
low costs or high creativity and flexibility with premium prices. In this changing world
we are a high wage economy and a chronic underperformer in innovation and
productivity. Canada simply cannot sustain above-average living standards and below-
average innovation investment and productivity growth, especially with a Canadian
dollar around parity, weak U.S. growth and growing demographic pressures.
In this new global reality, Canada is over-invested in trade with slower growing
Western economies and under-invested in continual innovation in the goods and services
we produce and how we produce them. What this means is we need to diversify: to shift
more of our future trade towards a strategic set of dynamic emerging economies; to focus
on the new middle class in these emerging economies, not solely on selling them natural
resources; and to change the nature of what we sell and how we sell it, in both our core
U.S. market and in the new emerging markets, towards more innovative goods and
services that rely on meeting changing consumers’ needs at premium prices.
Innovation Nation: The Challenge Ahead
While Canada has produced world class innovative firms and exceptional innovators,
no one would rank Canada as an “innovation nation” or a nation of innovators. The
reality is that Canada’s productivity and innovation challenge runs deep and broad. The
keys to its solution lie in many hands --- the private sector, universities, financial
markets, individual entrepreneurs and of course the public sector. And, the urgency of
greater, faster, and more sustained action rises as the pace at which the global economy is
changing, increases.
Getting the “macro conditions right” is absolutely necessary, and Canada has done
well on this front. We have low levels of net public debt, low corporate tax rates, high
public investment rates in university research, sound financial system, strong civic
institutions and a commitment to fiscal balance, which most governments in Canada are
implementing at present albeit at different paces and intensities.
But these are clearly not sufficient for success in creating an innovative and
productive private sector --- the facts above speak for themselves. So what is missing?
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5. Governments need find the right balance between pressure for change and support to
change, both key elements in encouraging firms to innovate. We should not forget the
oft-cited observation that “most people don’t change because they see the light, they
change because they feel the heat”. Competition and exposure to diverse foreign markets
create pressure on firms to innovate and improve their productivity, just as well designed
programs and tax incentives can support corporate innovation.
While there are a number of Canadian businesses that have demonstrated exceptional
innovativeness through entrepreneurial risk taking, they are more the exception than the
rule. There is not enough competitive pressure in the Canadian economy to drive most
firms to continually seek productivity growth and new innovations. As a result, our
average competitive performance is well below our best performance.
To be successful at innovation, firms need to organize for it, manage for it, and create
incentives for it. Today, the majority of innovations start with consumers and front line
staff, not research labs. But to turn the knowledge of consumer wants or needs into
innovative, commercially viable goods and services requires corporate leadership, an
openness to new ideas from customers and staff, non-hierarchical channels for expressing
them inside firms, and organizational structures within firms to turn ideas into iPods.
Diversity plays an important role in creating inventions and innovations --- the
creative process is anything but linear, and new perspectives, learnings, experiences,
backgrounds can provide that creative spark. Immigration provides such talent diversity,
and the innovation impacts can be dramatic: between 1995 and 2005, 25 % of all new
U.S. high technology firms had at least one foreign-born founder.
Corporate innovation is not the sole preserve of high technology firms; indeed,
innovation can have equal impacts on productivity and competitiveness in the retail
sector, the manufacturing and the natural resource sectors. Whatever the sector, what is
changing most about corporate innovation strategies is the shift to “open innovation”
rather than solely “in-house innovation”. Proctor and Gamble now sources 50% of new
products outside the firm. However, no matter how open, networked or collaborative
their innovation model, firms still need internal “receptor capacity”--- both organizational
and technological --- to be successful at continual innovation.
And governments --- federal, provincial territorial and municipal --- have to be part of
the productivity and innovation solution, not just in the policies they establish but also in
the way they work. Government accounts for a sizeable proportion of GDP in Canada,
and innovation-led improvements in the productivity of the delivery of government
services would improve our national competitiveness. Governments need a productivity
focus and lens, just like the private sector; after all, they are huge suppliers of health and
education services, security, taxes and pensions, information, regulatory compliance and
a myriad of other services --- all of which are amenable to innovation and productivity.
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6. While we have many programs to encourage innovation, we lack alignment of
interests, strategies and support mechanisms across governments, the private sector and
the higher education sector. What we need is a clearer “frame”, or ecosystem, around
which the various participants in the innovation system can coalesce. While such an
ecosystem in reality will be complex, dynamic and somewhat sector specific, it will have
core common elements such as a clear sense of collective and individual purpose, active
collaboration among private sector firms, governments, universities and financial
markets. And the establishment of such alignment and the frame for it requires the use of
the “convening power” of governments to engage leaders across the economy.
One possible “frame” for the Canadian ecosystem could include four basic elements:
 the “macro innovation environment”, where governments, both federal and
provincial, play a lead role in establishing the public finance, tax, regulatory,
competition, trade and broad-based support environment --- the “ objectives and
rules of the game” if you will;
 the “micro innovation environment”, where universities and community
colleges play a lead role in developing the talent and the research excellence
Canada needs, and in collaboration with the private sector (not in isolation from),
and where governments deploy more customized supports when there are market
gaps and a lack of scale;
 the “community innovation infrastructure”, where the modern version of
industrial policy, that of picking sectors and broad technologies with the potential
to win, takes shape, and it brings together at the local level governments,
universities, financial sector, mentors, angel investors and peers, all of whom have
a key role; and
 the “organizational innovation infrastructure”, where firms play the lead role
in putting the structures, incentives and capacity in place within corporations (and
outside with research centres) to drive continual innovation.
Innovation in Government
Besides the framing role for government, the government sector, as you well know,
is a multi-faceted player in innovation through: the public policy it sets; the way it
delivers public services; and, the standards it sets for what it buys. The good news is that
Canada has some excellent public analysis of what government can do in this regard
through the work of the Wilson Panel (The Competition Policy Review Panel, June,
2008) and the Jenkins Panel (Panel on Federal Support to Research and Development,
October, 2011) as well as the recent OECD Survey of Canada (OECD Economic
Surveys: Canada, 2012). Further, there is much that we can learn from experiments and
experience in other countries.
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7. Drawing on both this research on innovation at home and promising successes
abroad, I would offer several areas where the public service itself could examine the
potential for innovation and change within government. And I do not think that
innovation and austerity are incompatible --- indeed, in flush times, it is more difficult to
tackle the status quo not less, and lean times offer more understanding of the need for
change as well as the impetus of necessity.
The five areas that I would encourage you to examine are procurement; regulatory
processes; health care delivery; shifting to less indirect and more direct innovation
support; and helping SMEs go global. Let’s touch briefly on each in turn.
First, consider the enormous potential procurement has to stimulate and support
innovation, without impeding competition concerns or value-for-money concerns of
auditors general. With respect to government procurement, a giant change would be to
modify the standard procurement mandate towards something akin to “innovative goods
and services at the best price” and away from the current mandate of “goods and services
at the lowest price”. This would have a major impact on both start-up firms and
established firms that are branching out into more innovative and less standardized
products and services.
Second, more efficient processes working backwards from the business or citizen
perspective, using technology to improve the process without any reduction of standards;
a slow process is neither a necessary or sufficient condition for a rigorous standard.
Third, we have a great health care system in Canada but the Canada Health Act
(CHA) enshrines principles not the status quo, and there is much scope for innovation
and productivity in the way we deliver health care consistent with the CHA. As a very
micro example, look at what the application of “lean processes” at St. Joseph’s Hospital
in Toronto has done for processing times and patient satisfaction.
Fourth, Canada is an outlier among OECD countries in its reliance on tax
expenditures to encourage and support private sector innovation, and without much
evident success. It is timely to consider reducing this excessive reliance on passive tax
expenditures, and re-directing support towards targeted, active and customized types of
support. This could include experimenting with interesting Israeli and U.S. models of
“de-risking” support to venture capital.
And fifth, getting many more Canadian SMEs trading throughout Canada (and
putting pressure on governments to eliminate internal trade barriers as part of the
experience), across the NAFTA region and around the world. The experience from other
countries is that the more Canadian SMEs engage in trade in new and diverse markets,
the more experienced, innovative and productive they will become. But, we still have
only a minority of our firms trading outside Canada, and fewer still outside NAFTA, and
this could be a useful area for innovation in programs and policies.
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8. Conclusion
To conclude, despite our challenges, there is absolutely no reason for Canada to be an
innovation and productivity laggard. Governments can and should play a leadership role,
and it is not all about spending --- part of its role is framing the questions and convening
the players. Business, university and labour all need to be part of the innovation
leadership imperative. We also need our public service leadership fully engaged – you
are a tremendous national resource of knowledge, analysis and policy capacity, and being
nonpartisan and without sectoral self-interest, you have a unique contribution to make to
the public good of improving Canada’s innovation and productivity.
We all need to make the question “What will it take for Canada to build an innovative
and productive economy?” part of our ongoing public discourse, as well as the continued
focus of future budgets and corporate Canada’s strategic business plans.
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