Industrial Policy

  • The impact of international relations on industrial policy

    Most mainstream economists go to great lengths to ignore the impact of politics on economic decisions. If anything, they malign the negative impact of political decisions that otherwise deny the glory and truth of economic “laws.” Vivid imaginations indeed!

    Sensible people know better. When looking at the current state of industrial policy, they realize that both domestic and international politics play a role in creating the conditions for industrial policy. While domestic politics may be the easier to understand of the two, international relations (IR) is probably why anyone cares about industrial policy at all in the Western world. But what’s the proof?

    If we look at the post-Trump era of industrial politics in advanced industrial countries specifically, we can see that a more activist and explicitly enunciated role for the state has been caused by the mishandling of the China situation. Unorthodox IR thinkers like John Mearsheimer predicted through his theory of offensive realism that a rising China would threaten US hegemony, both militarily and economically. And while I do not support US hegemony of any kind, the blissful and childish optimism liberal internationalism has created a situation where a potential threat to the West produces a large proportion of the stuff we need to live. It didn’t have to be this way.

    When the US and the USSR were faced with a very similar conundrum during the post-war era, they chose another route. The Soviets turned down access to the Marshall Plan, and decided to go it their own. While this sowed the seeds for the eventual economic destruction of the USSR, it did actually do the US some good. Realizing that a successful US economy would be an important symbol of the “superiority” of US-style capitalism, combined with the living memory of the catastrophic Great Depression, the post-war era had very active industrial policies across all advanced economies, including the US. One needs only look at US programs/policies to support venture capital and innovation (Bush’s “Science: The Endless Frontier” document, etc.) to see the active role of the State in infant industries and other parts of the economy.

    And ironically, this aligned closely (but not fully) with the vision laid out by Keynes in his General Theory. Trade was managed, rather than free. Coordination was stronger than now on many things, most obviously, currency policy. Hot money was shunned. Financialization was kept in check (kind of). Tariffs and other policies were reduced through the GATT, but with enough room for countries to experiment and advance their own national industrial interests within the team of the “West.” In other words, the Cold War created an environment where capitalism had to succeed, and policy makers realized that the State had to played a role to some extent.

    Contrast that to now. Beginning in the 1970s and accelerated by Reagan/Thatcher, the neoliberal era has been a wonder for GDP growth, and a blunder for everything else. The lack of strategic planning and risk analysis allowed for the mass transfer of industrial capacity to China starting in the Deng era, and only paused due to the tariff policies of Trump. Biden has done the most to move industrial policy out of the shadows in a more coherent way. But it is the threat of entanglement with China, given the divergence in geopolitical issues (South China Sea, Taiwan, Russia, Ukraine) that has likely had the greatest impact on the rise of industrial policy.

    Given that competition with China is not going anywhere anytime soon, it seems like the current geopolitical environment will allow for more and more countries to experiment with their own variation of industrial policy. While I do not relish a new Cold War with China, I also will not look a gift horse in the mouth.

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  • Uncertainty as a justification for industrial policy

    Sorry folks – haven’t posted in a while. Been busy reading and working on some other stuff.

    One of the areas I’ve been brushing up on has been Keynesian economic theory. No, not the “neoclassical synthesis” of the Paul Samuelson variety. I mean what did John Maynard Keynes actually say about economics/economic theory etc.

    As those who already know Keynes’ work well, they would be familiar with the importance of uncertainty in his theories. For Keynes, who earlier in his career had written extensively on probability, this previous intellectual exploration helped to inform his signature economic theories. Unlike classical/neoclassical/new classical theory and its belief in some (or many) certainties, Keynes used uncertainty as a building block for his economic theories. Despite being a fiscal conservative (yes it is true), Keynes still called for stimulation of demand by government and a host of other policies (e.g., low interest rates, elaborate arrangements to deter balance of payments crises) precisely due to uncertainty.

    Which brings me to industrial policy. While mainstream economists hold their noses at industrial policy, relegating it to address “market failures” or “infant industry” situations, is uncertainty not an important justification for industrial policy? Given that no one can predict the future, how do we know for certain that the economy will provide good-paying jobs for the residents of a jurisdiction? In the current context of AI, and the quasi-religious belief that long-term net job gains will offset any perceived short-term technology-induced unemployment, would a sounder (and more conservative!) policy not be to say, “Hey – we don’t know what will happen; let’s use industrial policy as insurance”?

    Certainly, this is not a revelation. Obviously, the post-war approach to growth and the variant of Keynesianism that was used (that seemed to deviate substantially from what Keynes actually wrote) also used these kinds of ideas to encourage different types of industries and activities. Even still, in the post-IRA world that we live in, where the intellectual justifications for industrial policy seem to be more anti-neoliberalism than “pro-something,” I think this is an important point. Far too often, mainstream economic thinking projects a kind of certainty that relegates intervention in the economy as unnecessary. But if we use uncertainty as an essential aspect of contemporary capitalism, it does further strengthen the case for industrial policy. At least it does for me!

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  • Does culture explain variations in industrial policy?

    I have never been a fan of culture as an explanatory variable for most social phenomena. (Clearly, I am not a sociologist.) While I find the study of culture fascinating, too many times I have seen culture used as a variable in theories that seem to defy logic. The clearest example to me of this is the “clash of civilizations” thesis of Samuel Huntington. While as a historical theory it may yield some interesting anecdotes, did it help to predict 9/11? Or the War on Terror? I think not. When we add complexity to this theory, we can see it fall apart. Is Europe a Christian civilization? I guess – just tell me which Christianity (ignoring the non-Christian cultures that predate it, or ignoring the influence of Islamic Empires in large swaths of Europe).

    And so with that context, we turn to industrial policy. Is the depth/breadth of industrial policy determined by cultural factors? Are East Asians more likely to engage in robust and highly-interventionist industrial policy behaviour because of their Confucian heritage? Or some other legacy of Asian culture? Do similar reasons explain the Anglosphere countries have generally weak industrial policy traditions?

    I think in the Anglosphere, you can see the cultural argument meet much trouble. While outwardly, US rhetoric is blatantly anti-industrial policy, it is arguable that it has the most robust industrial policy amongst English-speaking countries. Even before the current administration, the history of Silicon Valley shows how much US government spending drove its development. Certainly the neoliberal revolution that swept through America and reached its peak in the Clinton-Bush years saw the deep embrace of free trade and “limited government.” But even then, the massive industrial policy that is US military research and procurement (through DARPA and ARPA-E etc.) was occurring alongside inventions like In-Q-Tel. 

    What about in Europe? If the the UK had a centrally run global Victorian empire, why has its industrial policies been so volatile, and arguably weak? In the pre-Thatcher period, experiments like the Concorde and ARM were attempted. But with Thatcher onward, it seems to this author that the UK is one of the most unbalanced major economies on the continent, with an overly large financial services system glossing over the erosion of industry. One country, one (complex) culture – how could there be such a drastic change?

    And that’s what I mean about culture. Did the election of Thatcher change British culture so much that the interventionist streak of 1945-1979 vanish into thin air? Did Mrs. Thatcher change the culture over night? Or is it safer to say that a mixture of events, many of which were external (e.g., OPEC Crisis #2, stagflation originating with LBJ’s Vietnam War + Great Society, etc.) led to a decision to abandon a more active industrial policy?

    Rather than culture as an explanation of industrial policy variations, I think it is the ability of societies/bureaucracies/institutions to learn that has led to variations in industrial policy. For most countries post WW2, they had learned from the Great Depression that unbridled capitalism did not work. However, particularly for a handful of countries (e.g., South Korea/East Asian Tigers, Nordic Countries), they were able to ride the ebbs and flows of world events and pivot their economies to maintain a diverse mix of industries. While the Anglo countries have clearly had serious dalliances with industrial policy, it seems more like fashion rather than an inherent philosophy. Who knows how long in the Anglosphere how long the current preoccupation will last.

    And before someone calls me on it, yes, I’m sure you’ll say that the ability for a society to learn and adapt is a cultural trait. Sure it is, but again, like Huntington, an oversimplification.

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  • What’s in store for industrial policy for 2024?

    As we close out 2023, it’s time to turn to prognostication. I guess it would be more logical if I did a comprehensive analysis of 2023 and major industrial policy trends throughout the year – however, to do that justice, it will take some time, so I will try to do that shortly.

    So your guess is as good as mine, but here goes:

    • It seems quite evident that we are living in a post-Inflation Reduction Act and CHIPS and Science Act world. Looks for advanced economies to continue to play catch up to the U.S. and introduce a mixture of policies to enlarge their domestic economic bases/prevent capital flight.
    • The pressure to engage in robust industrial policies will be opposed by fiscal hawks across the political spectrum (not just the Right!), who will instinctively oppose these inflationary policies. Well, be more creative folks. You can re-balance your existing suite of policies to maintain their current fiscal outlays, while still encouraging thoughtful industrial policies.
    • Looking backward for a second, it seems like 2023 was the year where the myth of the Chinese economic development model was finally burst. Even if China does return to a brisker pace of growth, it does not seem like its version of authoritarian industrial policy will be the guiding star for developing countries (or even some developed countries). Again, going back to point 1, this leaves the U.S. as once-again (?) the most influential industrial policy jurisdiction in the world, even with all the inherent contradictions in its political and economic philosophy.
    • A long-running trend that will continue to play out in 2024 is the continued convergence of climate change adaption/mitigation and industrial policy. This is most notable in Saudi Arabia, as the eventual sun-setting of their petroleum industry has led them headlong into myriad ventures (e.g., sports, entertainment, urban development). While the example of Saudi Arabia is most associated with “diversification,” I think this is climate change hedging manifesting as diversification. This can also be seen in (what is to me – please correct if I’m wrong) a resurgence in nuclear reactor construction/development. In the country in which I’m located (Canada), there has been a noticeable shift in public sentiment and actual announcements related to nuclear reactors.
    • If 2023 was the year of AI, 2024 might be where industrial policy grapples with the economic implications of AI. Already the familiar battle lines are being drawn between laissez-faire approaches and a more measured response. Given the disaster of social media proliferation in the 2000s/2010s culminating in the cluster-f of the 2016 US election, it seems like the mood has shifted. The number of countries studying AI or pondering legislation or introducing legislation seems like lessons have been learned from the hands-off mistake from the social media era. Whether these policies will be any good remains to be seen. But the point is pretty clear – in the absence of sensible policies, there is a non-zero probability that unfettered AI proliferation could further destabilize an already shaky global economy that has never really recovered from the 2008 financial crisis. Sensible taxation policies that lead to universal basic income or improved social programs that compensate displaced workers are needed IN ADVANCE of the diffusion of AI. We cannot wait for this tsunami to devastate labour markets, and then use band aids and patchworks to fill the wholes in the ship. We tried this in the WTO/free trade disaster of the 1990s – it led to Donald Trump, Orban, Erdogan, Cameron, etc. Let us not repeat this mistake.

    Again, these are just educated guesses. Let’s see how many turn out to be correct.

    Happy New Year!

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  • Friend-shoring is great until it fails

    The recent diplomatic spat between India and Canada that has also enmeshed Five Eye partner countries is the canary in the coal mine for friend-shoring.

    While a noble sentiment, many others have already pointed this out, but I will join the chorus from an industrial policy angle – “who is a friend?”

    To quote Lord Palmerston, “We have no eternal allies, and we have no perpetual enemies. Our interests are eternal and perpetual.” The situation with India and Canada seems to illustrate this point.

    On the face of it, seems like there’s a lot in common:

    • Democracies;
    • Commonwealth countries;
    • Westminster Parliaments;
    • etc.

    And yet, in recent months, the potential for an Indian-Canadian FTA has collapsed. Bilateral relations are downright frosty. Even the burgeoning immigration from India to Canada could be threatened.

    Luckily, Indo-Canadian bilateral trade has never been substantive. Canada’s inability to trade with anyone than the US has always gotten in the way, while India has a lot of dancing partners to choose from in Asia.

    Looking beyond these two countries, however, this situation acts a case study of why the neoliberal industrial policy tactic of friend-shoring is bound to fail. How often do friendly countries fall into trade spats? Well, quite often when you think of it. The ongoing frictions between Canada and the US on softwood lumber ring a bell. The “Cod Wars” between the UK and Iceland are a European example. Even right now, in the middle of a war, Poland and the Ukraine are engaged in a spat on agricultural products. A friend in need is apparently not a friend in deed here…

    While the logic of trade diversification has merit, the assumption that moving trade dependency from China to democracies = no future problems is flawed. Instead, even with friendly countries, economies will have to plan for contingencies, which requires industrial policies to create a domestic supply of core essential products.

    Sorry folks; no easy way out from being an adult.

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  • Industrial policy as the cure for globalization

    The neoliberal era likely began with the first oil shock in 1973. Eventually, the slowdown in economic growth and the rise of inflation in the developed world required a solution – export employment and import deflation in the form of cheap goods (and services like holidays) obtained from developing countries.

    To quote The Matrix, “Fate, it seems, is not without a sense of of irony.” How funny to see the chickens coming home to roost (that’s not a reshoring joke) now that the developed world is importing inflation via supply chains from far flung corners of the globe. While the reflexive impulse is to further expand trade relationships (hello Vietnam, India, Africa!) it seems like the game is over. Unless the Earth starts importing goods and services from the Moon or Mars (assuming their wages are as low as their gravitational pulls), the world economy cannot import its way out of an inflation mess caused by, dare I say, imports themselves.

    While much of the rhetoric, even in the Biden Administration, has characterized reshoring as a national security response to a more confident China, this deserves half marks. Mainstream economists cannot bring themselves to realize that the Reagan/Thatcher bargain (“we’ll give away your jobs but you’ll be able to buy the same stuff from other countries”) has shown itself to have faulty long-term logic. Beyond the rising price of goods and services for consumers, globalization has now wrecked the housing market in many countries, as unfettered capital markets deploy cash to historically local assets like housing that have become increasingly tradable.

    So what’s the solution to all this? Reshoring without admitting the truth could lead to mistakes, such as an overemphasis on military good or “emergency” goods alone (like vaccines). No, the solution lies in seeing the problem for what it is, and encouraging a sufficient domestic industrial base that can meet the demands of the national economy just in case of supply chain headaches and other black swan events (like wars and pandemics, which I guess are not black swans).

    Intentions matter.

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  • Industrial policy vs. corporate welfare

    For those particularly on the political right or in the mainstream of economic thought, industrial policy inevitably equals direct funding to businesses. As discussed in previous posts, this is a vast oversimplification. Direct subsidies to businesses, particularly in the form of a grant is but one tool in the industrial policy toolkit. (Those on the political right often clamour for tax reductions without acknowledging that this has a comparable effect on government financial capacity. A grant reduces the government’s cash on hand or future cash reserves. Pretty sure a tax credit does the same thing, but I’m getting off track here.)

    Should advocates of industrial policy instinctively call for direct grants to business? As we are seeing in countries like the U.S., Canada, and others in the hunt for EV vehicle/battery production? I’m not so sure about that.

    Perhaps we should focus on the ends, rather than the means. What is the point of industrial policy? To create an industrial mix that achieves public policy objectives (e.g., full employment, rising real incomes, self-sufficiency in critical goods like food/medicines/military products for self-defence, etc.). Are direct subsidies the only way to achieve such goals? Absolutely not. If anything, direct subsidies should only be used as the last resort. So what can be done instead? Well, off the top of my head, things like:

    • Regulations – for instance, certain types of products must be produced locally. Typically, this is a result of national defence requirements, but not always.
    • Tariffs – while this has fallen out of favour due to the GATT/WTO trade regimes, this approach was used by people like Alexander Hamilton to develop the U.S.’ industrial capacity.
    • Privileged/Preferential Access to Capital – in the modern era, this is seen in Chinese government support for various firms. But even for advanced economies, there is often a development bank/export bank lurking somewhere.
    • Taxation policy – using Pigouvian subsidies in the tax system to reward things we like (e.g., production of goods that are considered strategic/important) while discouraging of goods seen as harmful (like tobacco).
    • Strategic procurement – pretty self-explanatory I think.

    The above list is not exhaustive, but hopefully the point has been made. Direct subsidies as seen in the Inflation Reduction Act are but one tool that can be used. So if they are a tool, when should they be used. Well:

    • Firm size should be a consideration. For instance, small firms have more difficulty accessing bank financing due to information asymmetries. Thus, there is a market failure that can be addressed through a grant, though other policies like loan guarantees could also be considered.
    • Risk of the investment should be a factor. For unproven technologies that could have large and positive externalities for the public (e.g., general purpose technologies like semiconductors in the 1960s), there is a rationale for a grant.
    • Maintaining production capacity for “insurance purposes.” In the case of the pandemic, it was exposed in the advanced world that surplus capacity had been eradicated because of the mythology of “just in time” and the “free movement of goods.” But when your neighbour is low on sugar, they’re not going to lend you any. Replace sugar with medical equipment, and neighbour with every country on earth, and that’s sort of what happened during the pandemic.

    So given the above framework laid out above, where do subsidies for EV and EV batteries fall? Well, there is a risk component, but not really. Governments could eliminate the risk through regulations to increase the demand for these vehicles. What about capital flight? Well, this is not the fault of industrial policy per se, but of global trade rules that supported the neoliberal variant of industrial policy. So not only do governments have to de-risk the technologies through R&D support and VC funding, or even make the market for EVs through regulation, but they must also pay to build the damn cars too.

    I think governments have done enough for the auto sector. While this sound like a right-wing smear, large auto companies do not need money to build factories for cars and batteries. They just want the money because a free trade system allows for a “race to the bottom” on subsidies that steals from government coffers to create private profits. This is not industrial policy as envisioned earlier in this piece. This is socialism for the rich. I’m all for socialism, but not for the rich!

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  • Global trade as the solution to global trade

    Don’t have a lot to say on this article, but I am supremely dumbfounded that Canada’s “industrial policy” budget has been followed up with a return to trade negotiations with Mercosur. While I have nothing against Mercosur, it seems like the Canadian government has not received the memo that the neoliberal era is over.

    Even beyond that, is Mercosur not a direct competitor to Canada? Here we have a group of countries that include a large oil producer, a large beer producer, a large producer of aerospace products, large production of agricultural products, and generally in the same “periphery” zone of international trade that Canada plays with countries like the US and China. So where is the comparative advantages here if that is what is motivating these negotiations? Canada will specialize in oil, while Brazil will also specialize…in oil?

    While there has been great fanfare at the national and provincial level that Canada is engaged in “industrial policy,” the combination of the recent federal budget in Canada and the announcement of these negotiations just seems like more of the same. Cognitive dissonance, but in the form of economic policy.

    In recent years, there has been a growing acceptance that unfettered global trade has contributed to the global slowdown in economic, particularly in advanced industrial economies. Why? Essentially, to combat stagflation in the 1970s, countries like Canada exported jobs and imported unemployment to suppress wages, crush unions, and control prices. We also imported the very goods we used to produce domestically to meet those anti-inflationary ends. And while that satisfied decision makers for a long time, this dependence was turned on its head during the pandemic, when basic necessities like medical equipment were impossible to obtain due to the assumption that the global supply chain would also work to the benefit of advanced economies. (As an aside, anyone else having problems getting products that require microchips, say for something like a car?)

    So once again – why are we doing this?

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  • Rationales for activist industrial policies

    A question I had in my head today that I thought would be good to write about is this – why do some countries/jurisdictions engage in activist or interventionist industrial policies, as opposed to pacifist industrial policies a la neoclassical economics?

    While this is not strictly based on the academic evidence, my research and thinking to date point to a few rationales. (Note: They are not mutually exclusive.)

    1. National/Political Will – Thinking about so-called late industrializers like Germany, Sweden, and Canada, why is there so much variation between these countries in terms of their industrial policies? Based on these three examples, one can find commonalities in two of these countries (e.g., sense of nationhood; a common or manufactured historical narrative that created a sense of community; a historical legacy of “exceptionalism”, etc.). Of course, I am speaking about Germany and Sweden. While I am no expert in German unification, proto-German entities like the Holy Roman Empire and the Hanseatic League are presumably seen as antecedents to modern Germany. More clearly for Sweden, the imperial successes of Sweden is likely a source of pride for some Swedes, and perhaps motivated a more active approach to industrial policy. Obviously, Hamiltonian policy in the US is another example. Contrast this with Canada, where ethnic nationhood has always been weak (which is one of the country’s social strengths), but may have come at the cost of a cohesive economic vision. While there have been periods of coherence (e.g., building of the railways post Confederation; the “National Policy” of more than 100 years), they may have been more rhetorical than a concrete vision.
    2. Political/Security Dilemmas – The Meiji Restoration in Japan and its subsequent entry into activist industrial policy seems like a good example of this rationale. It also seems like Singapore falls into this category following the break with Malaysia in the 1960s. The US Chips and Science Act and the Inflation Reduction Act seem to fall into this category, though it may be too soon to tell.
    3. Global Macroeconomic Instability – I may explore this in a future post further, but this is the rationale that I was thinking of the most today. Neo-mercantilist policies of countries like Germany, Japan, and now China seem to be a rational response to the disorderly way the global economy is organized. As Keynes indicated during the Bretton Woods negotiations, the system created by Harry Dexter White has led to political imbalances between creditor and debtor countries that overwhelmingly favour the creditors, unless you issue the global reserve currency (i.e., the US). Why have the Chinese followed the path that they have? As others have pointed out, the experience of the Asian Financial Crisis must have been alarming for the Chinese to watch, seeing that capital flight could lead to serious political repercussions and national embarrassments. German memories of hyperinflation seem to resonate still in the minds of policy makers – otherwise why would they depress living standards via the Hartz Reforms?

    I wouldn’t say this list is comprehensive, but it gives us a good framework to group countries.

    Of note, the Anglo-Saxon economic policies of Canada, Australia, New Zealand, Ireland and the UK from Thatcher onward seem not to have been informed by any of the above. While surely national pride is significant in Ireland, this does not seem to have translated into activist industrial policies resulting in a strong base of domestically-owned multinationals. Rather, this lot have generally deindustrialized, financialized, engaged in “race to the bottom” taxation policies, and in the case of Canada/Australia, been caught up in the commodity supercycle that helped gut their manufacturing sectors via Dutch Disease. Happy to hear if I am wrong about the ANZAC economies, but this lot does not seem to have been motivated by national will, or up until late, a security dilemma, and seems to have ridden the wave of global macro instability to tidy profits for the natural resources industries in Canada and Australia and financial services in the UK. Contrast this with countries like Germany, South Korea, Taiwan, Israel, Sweden, Finland, Singapore, Japan, China, and sometimes the US, who for some or lengthy periods of time, have been motivated by the above factors to engage in a more hands-on approach to their domestic economies.

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  • Canada and innovation – mediocre industrial policy at its finest

    Canada’s national newspaper has published a new article on the “state of innovation” in the country. Quite similar to many past articles it has published on this topic in the past, but let’s explore some of the highlights and then dig into them.

    • Canadian stakeholders asked to comment on the proposed Canadian Innovation and Investment Agency were unimpressed. (IPB Comment – Quel Surprise! Canadian business stakeholders disappointed that they have to confront their poor innovation record! Why not throw a tantrum and blame the government to deflect? Oh wait – that’s what they did.)
    • Jim Balsillie disappointed with something the Canadian government has done on innovation. (IPB Comment – also not a new phenomenon.)
    • Canada’s weak productivity growth is attributed to weak innovation outcomes. (IPB Comment – sure that’s one reason, but overly simplistic to focus on that as the sole cause.)
    • The mouthpiece of Canadian corporate mediocrity, the CD Howe Institute, weights in on what Canada needs to fix its innovation problems. (IPB Comment – Canada needs more think tanks. Also, Canada needs better think tanks.)
    • A big part of the federal government’s innovation strategy is attracting foreign multinationals to assemble electric vehicles in Canada. (IPB Comment – this is sad and funny at the same time.)
    • Canada’s Innovation Supercluster Strategy is not performing well. (IPB Comment – probably too soon to judge to be fair, but seems like a safe bet.)
    • Procurement of Canadian innovations by the federal government remains at an immature level. (IPB Comment – of course it is.)
    • The venture capital industry in Canada is dependent on the federal/provincial governments to supply it with capital. (IPB Comment – that was predictable.)

    A lot to dig into, but let’s expand on some of this short (and pithy commentary).

    First, it seems likely that most Canadian innovation policy thinkers have not read critical pieces of literature that would help them understand the causes of the country’s innovation shortfalls. Certainly, I have a lot more to read on this topic too, but at a minimum I would recommend others start with:

    • The so-called “Lamontagne Commission” from the late 1960s/1970s. Difficult to find the links to the report, but try this.
    • Asleep at the Switch by Bruce Smardon, which includes a summary of the Lamontagne Commission as well as its predecessors and successors (e.g., Jenkins Report).

    Both books explain in details (especially the multiple volumes of the Lamontagne Commission) that Canada’s innovation weakness stems from its weak domestic industrial base. Combine that with a late-stage industrializing country like Canada that relied upon foreign capital (first British, then American) to finance its development, and its “upstream position in global supply chains” (to quote Dr. Peter Nicholson’s work) and you get a “low innovation equilibrium.” Or in plain English:

    Weak domestic entrepreneurship + foreign capital + branch plant economy + natural resources-driven economy
    = weak innovation outcomes.

    Going back to my summary of the article:

    • Of course Canadian stakeholders like CFIB are going to be upset. Anything that doesn’t jive with their narrow notions of innovation (i.e., lets get American companies to innovate and trade oil for it) will get their backs up.
    • While Jim Balsillie has provided a great role model for Canadian entrepreneurs, his forays into public policy seem to have been uneven in their success.
    • Its very convenient to attribute Canadian productivity challenges to innovation. How about ill-thought out free trade? As Richard Harris had pointed out, liberalized trade without a way to counteract the inevitable rationalizing of business activity in the North American continent would leave Canada worse off. If you build a branch plant economy, and then let all the branches move to the US or Mexico, what do you think will happen to productivity? (I think the research of Paul Samuelson and William Baumol on free trade with less developed countries also supports these ideas.)
    • On superclusters, see my comment on Lamontagne and Smardon. Why would anyone think that such an initiative would work, especially when many of the participants are likely foreign-owned firms? In principle, there is nothing wrong with the ownership status of a company. But in certain industries, it is clear from the evidence that their is a “home bias” when it comes to innovation. Toyota is unlikely to move the bulk of its R&D activities outside of Japan. Ditto for Apple. While there is certainly the “internationalization” of R&D, is this mainly to reorient products for export markets? Perhaps where there is clear expertise, like with Canada and machine learning, foreign firms will set up shop. But will they commercialize this activity in Canada? Past experience points to no.
    • The victory lap taken by the current federal government on EV battery plants and the related EV OEMs is also quite funny. We know that branch plants have inhibited the innovation capacity of this country for decades. And yet the solution to that is…well, more branch plants. Well these ones are for EVs, so it’s totally different. Sure it is.
    • The discussion on innovation-based procurement is also quite sad. Perhaps the only helpful part of the Jenkins Report commissioned by the previous government was the call for more procurement a la the US example. And yet despite massive efforts, the article indicates that this still accounts for a fraction of Canadian government expenditures. Low hanging fruit that is apparently too high to reach.

    Perhaps the only solace we can take from this article is that the Canadian VC market is in much better shape than a decade ago. Without government intervention and flooding the market with capital, Canada would not have firms like Shopify. Let’s hope that decision-makers learn from the example of the Canadian VC market, and try and apply that approach to the rest that ails the Canadian innovation ecosystem.

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