Canada cannot rely on a branch-plant strategy for the future

TORONTO–The supermarket near where I live now has an array of security systems to detect food theft. It is yet another sign of the times: too many people with too little money, as rents, food and other basic living costs climb. Incomes can’t match the price increases, especially among lower-income families. Now, many middle-income families who purchased homes when interest rates were much lower face the prospect of higher mortgage payments to be paid out of already-squeezed after-tax incomes. These hard times facing many families represent a serious time of reckoning for our country in a much more challenging world. We are not up to the challenges of ensuring a better and fairer future. For the past couple of decades, we have operated under the illusion of economic progress. Much of this has been based on “paper wealth," such as the increase in the value of our homes and financial assets in our RRSPs and stock market portfolios. But we have failed to invest in the productive capacity of our economy—in both tangible and intangible assets—so that we have not increased our productivity and wealth creation to support a growing population. We have been living off past capital, but this cannot be sustained. In a number of ways, we have been falling behind. Canadian per capita GDP relative to the United States peaked in the late 1970s and early 1980s, according to Dan Ciuriak, former senior economist with Global Affairs Canada and now an internationally respected economic consultant. Our productivity performance has lagged that of many competitor countries. We have underinvested in intangible and tangible assets, been slow to recognize the implications of a digital world and the role of data, and afraid to stand up to the U.S. when it has undercut us with its "America First" policies. We have neglected the importance of building up Canadian companies with their own intellectual property, carelessly enabling the sale of our promising businesses, their IP, and talent to foreign corporations, generating seed corn for the future benefit of others. It is now clear that as a country, Canada cannot afford to do all the things we need or want to do. Moreover, without a bold new economic strategy to address the challenges of a world in which the U.S., the European Union, China and others are all striving to gain advance in the new technologies, we could face a future of economic stagnation and relative decline. The U.S. clearly understands that IP and innovation are the keys to its economic future, and it is spending tens of billions of dollars and highly protectionist trade policies for economic dominance. We also have to be much bolder and much more determined to pursue our own interests in what is becoming an increasingly zero-sum world. Our current strategy, it seems, is to pay out billions of dollars to multinationals to build research and development branch-plant operations here in Canada where they can hire our top talent, utilize our best professors and tap into our university-based R&D to create new knowledge and IP for their parent companies. This is a recipe for second-class status. The list of the top 50 S&P/TSX companies by market capitalization‚the 50 largest Canadian-controlled public firms—shows our economy is narrowly focused on finance, resources, and retail. Of the top 50 companies, 12 are in finance, eight are in oil and gas, seven are in mining, six are in retail (including supermarkets), four are in telecommunications, and four are utilities. There are only three in the tech sector (Shopify, Constellation Software, and CGI), and only two in manufacturing (Nutrien and Magna International). In 2021, we had a trade deficit of US$9.8-billion in pharmaceutical products and a US$31.5-billion trade deficit in computer, electronic band optical products. Our business funding of R&D, as a share of the economy, ranked us at a lowly 22nd place among OECD countries. The pursuit of electric vehicle assembly plants, battery plants and critical minerals is a prime example of the federal government’s branch-plant mentality. At a cost of tens of billions of dollars of taxpayers' money, we will get jobs and investment. But the economic rents will accrue to the foreign owners, the core technologies, software and machinery and equipment will be imported, and the Canadian content in the high-volume supply chain for this industry will likely be minimal. In a recent paper, Peter Nicholson warned that the traditional Canadian policy of exporting commodities and branch-plant manufactured products while importing innovation was no longer sustainable, and that four headwinds—anti-globalization, technological change, climate change and an aging society—will force us to come up with a new business model. What is in doubt is the capacity of government—and especially business—to adapt to radical change, and quickly. A focused strategy will have to look at many new areas. These include the importance of data ownership, the role of increasingly powerful digital platforms such as Google, Meta, and Amazon, the need to scale-up Canadian businesses in the new technologies, much greater focus on domestic creation and ownership of intellectual property, and Canadian-headquartered firms, and a clear understanding of the changes coming from artificial intelligence, quantum computing, the biosciences, new materials and automated machinery and equipment. Some of our key laws may need to be changed. For example, the review of competition policy should clearly address the excessive market power of the big digital platforms, while the review of federal tax incentives for R&D should focus much more on who owns the resulting IP. There is room for much greater public-private initiatives in building Canadian industries of the future. And we should not allow American bullying to dissuade us from properly taxing big companies like Google, Amazon, Netflix, Meta, and others. We urgently need to push much harder for a bolder, more innovative Canada. This is the leadership challenge that will determine our future. David Crane can be reached at crane@interlog.com.

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Canada cannot rely on a branch-plant strategy for the future

We have underinvested in intangible and tangible assets, been slow to recognize the implications of a digital world, and neglected the importance of building up Canadian companies with their own intellectual property.

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