Competitiveness: Six Impertinent Questions

Posted on Friday, November 15, 2019

Author: Richard French

Senior Fellow, Graduate School of Public and International Affairs
University of Ottawa

Adapted from a Keynote Speech, CN-Tellier Forum on Business and Public Policy: “Working Together to Improve Canada’s Competitiveness”

I arrived in Ottawa in 1972. My first task was to evaluate the industrial R&D promotion programs of the then Industry Trade and Commerce and Defence departments.

It seemed like a grim moment in our economic history. Apparently too much of our industry was owned by foreigners. Business did not do nearly enough research and development. Our innovation record was terrible. And our productivity was really poor, relative to the United States. Gosh! I wondered whether coming back to Canada from the States was such a good idea after all.

Now, competitiveness is not a well-defined economic variable. It is rather a shorthand for the public debate about the prospects for a country’s success in preserving the living standards of its citizens. It is a rhetorical artifact used and abused by generations of politicians, academics, think tanks and chamber of commerce presidents.

I focus here on the public and policy discussion of “competitiveness” in the light of some of the research. My claim is that the policy discussion is lazy and poorly informed, compared to the research.[1]

Competitiveness, productivity and innovation are very popular themes for the viewers–with-alarm and handwringers, of which Canada has never been short. No one’s interests are threatened by promoting improved productivity (except perhaps for those of some industrial unions, in the days when there were industrial unions). No one, but no one, objects to innovation, except of course when some specific innovation occurs in their workplace.

As general subjects for a speaker in need, or a think tank looking for a hobby-horse, they are very nearly ideal. And that I think is one reason why we have had inflicted upon us so many easy clichés, so much repetition and so much fuzzy thinking.[2]

My first question is, why is the discourse on competitiveness essentially the same in 2019 as it was in 1972? We know what they say about doing the same thing and expecting a different result!

My second question is, if the productivity deficit with the US has been so big for so long, how is it that we are not in the economic abyss so regularly evoked by the competitiveness industry? The measurement of productivity is one of the really tough problems in applied economics.

Why is so little attention paid to the arguments of those who point out that our productivity measurement challenges leave economists having great difficulty identifying exactly how we have been doing, why, and what difference it makes?[3]

Instead of fretting about a measure whose value as an indicator of Canada’s economic performance has proven over forty years to be  modest if not deceptive, we need to understand the features of our own economy and our terms of trade which are responsible for that failure. 

It is not that we don’t want to do all we can to improve our productivity. It is that the policies we are applying may be inappropriate because we don’t even have a firm grasp on the phenomenon. I doubt that governments can do much to promote productivity, but let’s do what we can do intelligently.

The third question is, if the competitiveness discourse is accurate, how is it that over the fifty years 1968-2018, our success in world markets has been the same as that of the United States? I calculate on the basis of World Development Indicators from the World Bank, that over that fifty years, Canada lost .5% of its share of an ever-expanding global GDP, and the United States lost an exactly proportional 5% of global GDP.[4]

Not only did the Americans not eat our lunch, they never even got a sandwich.

The fourth question is, if the competitiveness drum-beat is right about business and innovation, how is it that otherwise intelligent business decision-makers have failed to exploit the opportunities which the discourse suggests are right under their noses? Authorities from government, academia and media have been exhorting business people for more than forty years to do more R&D and innovation, and not to sell assets to foreigners.

Why do they let us down, these business people? According to an otherwise thoughtful StatCan economist, we need to study the “decline of business dynamism” – a perfect example of how, if your discipline can’t answer the question, blame the subject.[5] 

I prefer to think that, as the Council of Canadian Academies concluded in 2013, “Canadian firms have been as innovative as they have needed to be.”[6]  

This is not to encourage complacency. It is a plea to focus on the right problem, the right way. Canadian firms will no doubt have to be more innovative, but it may not be the kind of innovation the competitiveness industry harps upon.  This probably means firm-level and sector-level research and policy-making, much tougher and less glamourous than speechifying about R&D and innovation.

Note that Stephen Globerman reported in 2000 that “There is a significant body of evidence suggesting that rates of return to R&D are lower in Canada than in other developed countries and, indeed, may be statistically insignificant across broad samples of firms and industries.”[7] Maybe those business people are not so obtuse after all.

I have to agree with the Council of Canadian of Canadian Academies that we need “a fundamental change of paradigm away from a preoccupation with ‘R&D supply-push’.”[8]

The fifth question is, why do we measure competitiveness almost exclusively by input measures, that is, the resources that businesses say they apply to R&D and innovation? We simply don’t have very many good output measures, which is why I find myself using our share of global GDP as the best proxy I can think of.

We all know the inadequacies of GDP insofar as it fails to account for social and environmental outcomes. Since the competitiveness industry frames its nostrums in terms of prosperity as conventionally understood, so do I. It would be good to debate this, as at least we would be forced to be more precise about just how “competitiveness” is supposed to be operationalized. [9]

The sixth question is, why do we condemn ourselves as risk-averse when we have shown little risk aversion in the development of mining and energy resources? We don’t seem to want to look behind superficial impressions about our capital markets, to see why we have financing problems which militate against scaling up successful SMEs within Canada.

My argument would be that only in large countries do we find the kind of pools of capital and potential synergies that make the acquisition of any given Canadian enterprise attractive. 

Our lament for foreign acquisitions in the Canadian market needs to come to grips with the fact that foreign capital markets are deep enough to benefit from the portfolio effect of multiple risky investments, and industry sectors developed enough to capture the synergies required, while Canadian capital markets and industry sectors generally are not.

I know that the competitiveness industry is well-intentioned. I accept that productivity is key to economic growth. But I must say that our whole discussion lacks both rigour and imagination. 

In particular, it is animated by a sustained insecurity: we should be ashamed to be picking what is supposedly low-hanging fruit.[10]

Yes, we are at the mercy of global commodity price fluctuations.

But to insist upon making our “competitiveness” depend uniquely upon high technology industry, as for example the now defunct Science, Technology and Innovation Council did in its last report in 2014,[11] is to continue to push upon a string.  

Let us by all means promote research and innovation, notwithstanding what we can only conclude is the modest success of previous efforts.

And let’s diversify and let’s foster competition. The past is no guarantee for the future, though neither is it bereft of lessons for today.

If competitiveness is supposed to mean anything to ordinary citizens, even those without advanced degrees, then let's remember that if the last fifty years is any evidence, completing major projects such as pipelines or the second bridge to Michigan is an order of magnitude more important.

What does the competitiveness drama amount to? It amounts to a claim, the importance of which I deny, that Canada may work in practice, but it doesn’t work in theory.

[1] For example Don Drummond, Annette Ryan,  Michael R. Veall, “Improving Canada’s Productivity Performance: The Potential Contribution of Firm-level Productivity Research” International Productivity Monitor 26 (2013), 86-93.

[2] On the attractions of “competitiveness” as political discourse, and the resulting slack thinking see Paul Krugman, “Competitiveness: A Dangerous Obsession,” Foreign Affairs 73:2 (1994), 28-44 and Richard G. Harris, “The Selling of Competitiveness,” Canadian Business Economics 1:3 (1993), 30-36.

[3] See Paul Boothe and Richard Roy, “Business Sector Productivity in Canada: What Do We Know?” International Productivity Monitor, 16 (2008), 3-13, at 12; W. Erwin Diewert and Emily Yu, “New Estimates of Real Income and Multifactor Productivity Growth for the Canadian Business Sector, 1961-2011” International Productivity Monitor 24 (2012), 27-48; Michael J. Harper, Alice O. Nakamura, and Lu Zhang, “Difficulties Assessing Multifactor Productivity for Canada,” International Productivity Monitor 24 (2012),  76-84; Stephen Globerman, Linkages between Technological Change and Productivity Growth, Ottawa: Industry Canada Occasional Paper No. 23, 2000, at 30.

[4]  Canada’s relative population growth has exceeded that of the US over the period by roughly ten percent. I have not adjusted for that excess growth in population because of the very large undocumented population in the US.

[5] Wulong Gu, Accounting for Slower Productivity Growth in the Canadian Business Sector After 2000: Do Measurement Issues Matter? Ottawa: Statistics Canada, 2018, at 27.

[6] Council of Canadian Academies, Paradox Lost: Explaining Canada’s Research Strength and Innovation Weakness, Ottawa 2013, at 6.

[7] Op. cit., 30.

[8] Op. cit., 7.

[9] On inputs versus outputs in measurement of competitiveness, see Harald Bergsteiner and Gayle Avery, “Misleading Country Rankings Perpetuate Destructive Business Practices,” Journal of Business Ethics 159 (2019), 863-81, esp. 864-5. On alternatives to GDP as an indicator of competitiveness, see ­ibid., 869.

[10] On competitiveness as a matter of prestige rather than prosperity see Kruger, op. cit., 35.

[11] Science, Technology and Innovation Council of Canada, State of the Nation 2014: Canada's Innovation Challenges and Opportunities, Ottawa: Government of Canada (2014).

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