Thank you. I'd first like to thank the committee for inviting me back, this time to address the very important question of how to boost innovation in the Canadian economy.
There are as many ways of measuring innovation as there are of defining it, but rather than dwell on how there is no accepted theory or measurement of innovation in economics, I will start by accepting that by almost any measure the Canadian economy lags in innovation.
Just listing the most innovative large companies in the world shows that they are the exclusive domain of the United States: Google, Amazon, Apple, Facebook, Tesla, Microsoft, and so on. These companies dominate and drive the accelerating pace of technological innovation in today's world. This list does not even take into account U.S. dominance of new industries based on fracking and additive manufacturing techniques.
The dominance of American firms partly reflects features unique to American culture—the embrace of entrepreneurship, risk-taking, and the idea that change is inevitable and desirable—that the rest of the world, including Canada, needs to emulate.
Instilling those values, however, will take time. I will instead talk about what Canada can do in the short term to encourage innovation in our economy and our society.
It is worth reflecting on the fact that over half of our economy is either part of the government or is directly regulated by the government. In itself, government spending, including that on health and education, directly accounts for 44% of GDP. On top of this, another 10.5% of the economy is regulated by government, notably by limiting competition in four large industries that account for over 80% of the regulated sector: agriculture, in areas with supply management; finance, in which foreign bank operations in Canada are tightly restricted; telecommunications and broadcasting, with its control on telecom providers and Canadian content rules; and large parts of transportation, notably urban transit, taxis, and the post office. This list does not include sectors of the economy that are insulated from external competition by geography, notably the construction industry.
In a 2014 study for the Macdonald-Laurier Institute, I found that the rationale for regulation in these industries was increasingly outdated. Technological change alone is bypassing regulation in finance and the culture industries. This reflects a persistent weakness in government intervention, which rarely re-examines the rationale behind regulations for its ongoing relevance decades later.
Not very surprisingly, the government and heavily regulated sectors of the economy are not leaders in innovation. This situation reflects the way in which regulation has changed from direct oversight of prices to insulating industries from competition. Recall the list of the leading technological firms. All of them began by challenging or disrupting the conventional business model in their industry. Statistics Canada found that regulation creates barriers to entry and reduces the incentives to innovation and investment, while observing that industries that were deregulated in the 1980s and 1990s posted higher productivity growth than the rest of the business sector.
Some sectors of the Canadian economy have achieved high levels of productivity and hence are competitive on the world stage, notably manufacturing, natural resources, and some parts of retail and wholesale trade. It should not be surprising that export industries, which have to be productive to compete on the world stage, are rarely hampered by government regulation. Each of these industries has seen multifactor productivity growth of 5% to 10% over the past decade alone and has at least doubled productivity since the 1960s. Conversely, productivity has fallen in both transportation and construction, while a small rebound lately in finance still leaves its productivity at almost half its 1960s level.
Related to the lack of innovation in Canada is persistently low levels of business investment. Investment is important, since it embodies the latest technologies and gives our workers the tools to be more productive. Investment in Canada lags behind that of almost all the OECD region. Measured by the share of GDP allocated to investment, Canada invests less than every other country except the United Kingdom, despite the burst of investment in our energy sector—notably the oil sands—over the past decade. This reflects abysmally low levels of investment in machinery and equipment. Canada fares just as badly in the amount of capital each employee has to work with, as its average of almost $9,000 U.S. was third last in the OECD and 50% lower than that in the U.S.
Instead of encouraging more in business investment, Canada seems to be doing everything possible to discourage it. Even as large investments in the oil sands are winding down, there is no offset from pipelines in eastern Canada or LNG terminals on the west coast as regulators dither over approval. Governments across the nation are raising the cost of doing business through higher taxes on everything from carbon to employees to capital.
Taken in isolation, none of these measures may seem significant, but taken together they send the message that there is little understanding in government circles of how the financial performance and reserves of the business sector in Canada have declined in recent years. In such an environment, it should not be surprising that firms are reluctant to invest in Canada. This reduces our ability to innovate and to sustain a high standard of living in the future.
Thank you.