The topic of Canadian industrial strategy is getting some new air time.  Discussion has been triggered by a paper The Resurgence of Industrial Policy and What It Means For Canada by Dan Ciuriak and John M. Curtis and recently commented on by Terence Corcoran in the Financial Post.

In a previous post  the lack of industrial strategies was discussed a potential cause factor for Canada’s low innovation performance due to the misalignments between national strengths, R&D, and industry.

This post continues this discussion given recent debate in the press but leads to the need for a national vision to really resolve the industrial strategy debate. As Lewis Carroll said “if you don’t know where you are going, any road will get you there” which seems to be the path Canada is on at the moment.

Framing The Industrial Strategy Debate and The Spectre of Social Unrest

The industrial strategy debate can easily be derailed by various extreme views such as nationalism, fear mongering, anti-globalization, etc so how the debate is framed matters if agreement is ever to be reached. For example, one can detect the fear in developed economies from the rise of Asian economies that is just below the surface. The economic arguments should not be framed as re-slicing the same global economic pie with developed economies getting less and Asian more rather the debate in this case should be framed as one of enlarging the global economic pie with growing the global middle class in BRIC and emerging countries.

Re-shoring movement is another simmering issue which hopes to reverse the flow of manufacturing jobs lost to off shoring over the last decade. For example the Society of Manufacturing Engineers has a program called Take Back Manufacturing to bring visibility to this issue. The re-shoring debate is picking up momentum particularly in jurisdictions that have relied on manufacturing.

One can’t deny though that although developed open economies are far from total collapse today one emergent issue not mentioned in the report and why countries in the EU in particular may be relooking at industrial strategy is the very real potential for social unrest given prolonged weak growth.  Europe is already starting to see the emergence of a lost generation.  While free markets are preferred capitalism does create winners and losers. Industrial strategy is insurance against losing, falling behind, and the social implications. What the last 100 years of capitalism has taught us is that if a country slides from a winner to becoming a loser, unemployment swells, a lost generation forms social unrest soon follows. The re-emergence of industrial strategy may simply be a hedge by governments (Japan, Germany, France, US, etc) who need to avoid the potential for social unrest.

Why Canada Needs Industry Strategies

In Canada, the investment in the oil sands will likely reduce in the medium term GDP and growth will slow and unemployment increase unless other industry sectors pick up. Canada’s economy depends on export trade to grow because of our small economy.  GDP growth from NAFTA stalled a decade ago so the new free trade agreements are positive moves to better access global markets. To export firms need to be large enough to have the resources to develop international markets which is expensive and takes time. 98% of Canadian firms are SMEs. Canada is not growing enough global scale businesses. Canadian gazelles growth slows after five years as reported by Deloitte. Global scale businesses require several decades to grow.  Industrial strategy should enable more bang for the buck from innovation to support growing firms to compete internationally.

Our university education & research system is great but there are not enough high value jobs in industry to absorb the number of students graduating and fully capture the economic benefits of science & technology and innovation investments that are disjoint and spread thin. The so called skills mismatch hotly debated now with the shift of our economy to resource based reflects the fact that the university education system is not geared to a resource economy but rather an advanced industrial economy.

Alignment – The Benefit Industrial Strategies Bring

Notwithstanding long run macroeconomic trends the efficiency of Canadian economic development from innovation investments has been undermined by flip flopping due to changes in political power, departmental agenda conflicts, regional in-fighting, loss of government industrial sector knowledge, and a national deficiency in ability to commercialize ideas. These effects have been destroying value by starting, stopping, changing, and restarting innovation support. Canada needs to dampen these effects to gain the following benefits:

• Align innovation efforts from all levels of government (federal, provincial, and municipal),
• Alignment between industry, academic, NRC, and government R&D investments which requires a long run view to make the right investment choices – such as recent changes at the NRC,
• Alignment maximizes value for limited tax dollars going towards innovation, economic development / industrial development,
• Long term stability to allow clusters to continue to grow and private sector innovation to drive cluster agglomeration and R&D investments to build on each other,
• Secure the returns from new defence procurement investments targeting key technology areas,
• Framework for targeting FDI efforts that feed innovation momentum, and
• Enable Canadian businesses to grow large enough to compete internationally.

Strategic versus Non-Strategic Industries

Although wishful proponents of non-strategic investment may pitch an idea as ‘strategic’ in hopes of gaining an edge there are industries that actually should be designated as strategic. This issue requires honest debate, dialogue, leadership, and long term national vision while avoiding undue influence for agendas that can harm this process. In the presence of globalization nations still have a right and governments an obligation to facilitate this debate and decide what is best for their countries and their citizens. Is this protectionism or simply looking out for the best interests of Canada?

The closest thing Canada has to a stated list of priority areas is the 2007 Science and Technology Strategy where four areas were identified as important for the national interest: environmental; natural resources and energy; health and related life sciences; and information and communication technologies. The report Beyond the Horizon recently proposed that Aerospace and Space be added to these four because of the prominence of this industry sector to the economy overall.

Defence is often touted as ‘strategic industry’ because national security and sovereignty should not be exposed to the risks of a disrupted global supply chain or foreign state interests.  Defence has been a recent focus of Public Works Government Services Canada where there are economic grounds for fostering innovation and maximizing the return from government defence purchases. The often forgotten story behind Silicon Valley is good example of the misconceptions about its history and role government defence investments had in creating the cluster over many decades positioning it to capture the microelectronics and information technology wave.

Building on the four priority science & technology areas, aerospace and space, and defence, two other areas are worthy of consideration: resource value added and food processing/agriculture. With the Canadian economy shifting dramatically to a resource based economy there seems to be a growing recognition that rather than exporting raw materials that Canada should develop a resource value added industrial strategy. With a growing world population Canada has a strong role to play in feeding the world.

Industrial strategies still need to be synchronized with industry cycles and adjust in response to changing macroeconomic, technological, and security environments but by targeting strategic industries the country gains a strong foundation for entire economy in the long run fuelled by aligned innovation to remain globally competitive. Perhaps a good test for a strategic industry is one that enables a country to continue to function within reasonable bounds providing its’ citizens with the necessities for living and security in the presence of a failure in globalization. Beyond this it is really a question of what level of prosperity and wealth the nation intends to reach, maintain, or not drop below.

This leads though to the need for a national vision for the country that can enlighten the debate as to which industries are strategic versus non-strategic in Canada. What is the vision for Canada in the next 20, 50, or 100 years? If we don’t know where we are going how do we know we are taking the right steps to get there.