Investment, innovation and the future

I had a great conversation with the President of one of KW’s academic institutions a few weeks ago to discuss the role of research, education and innovation in the Canadian economy. As a follow up to that conversation he passed along some fascinating research from Peter J. Nicholson, President and CEO of the Council of Canadian Academies, who recently penned an interesting article looking at Canada’s innovation environment, and for the interest of this post, at the relationship between firm level investment in ICT and company profitability.

In it he compares Canadian and US productivity levels, noting that Canada’s multi-factor productivity rate lags behind the American standard at less than 75% (it peaked in 1984 at 93%).

To explain this quite dramatic lag, he notes that Canadian firms invest only 80% of what their American counterparts do into ICTs, and that Canadian investment into R & D (as a % of GDP) has declined by 20% since 2001, and currently sits at approximately 1% compared to the US’ 2% and an OECD average of 1.5%.

In practice, we’ve been taught that such relative underinvestment in both ICT and more broadly, R & D, should lead to non-competitive or atleast less competitive Canadian industry. Yet, here’s the fascinating conclusion of the study: Canadian companies have, for more than 80 per cent of the years since 1961, recorded corporate profits that exceeded those of American companies that invest more.

A few years back I began my professional research career with the following question: do investments in information technology lead to competitive advantage? The obvious answer was yes, if and when those investments are in strategic, networked IT.

Well this research tends to blur those results.  Nicholson’s analysis shows that what matters atleast equally to strategy and investments (in the short-term) is the composition of the primary (i.e. domestic) market.

In this case, the Canadian market is relatively isolated from its export end-users, and is small and geographically dispersed, factors that influence a relatively stagnant and risk-averse investment strategy. Which is fine in and of itself, in the short-term.

However, if one looks at the longer-swath of economic history, weak investment strategies (corporate or government) tend to portend weak economic futures. And like a Darwinian evolutionary process, open markets tend to force change and/or disappearance.

As I wrote previously about Japan’s policy failure vis-à-vis ongoing investment in productivity enhancing technologies, they failed to adapt their investment and openness strategies to adapt to an increasingly competitive regional and global market. In Japan this meant the loss of all but the top-tier electronics and manufacturing companies.

In Canada, a poor short-term investment strategy might similarly translate into a similar long-term hollowing out of our economy beyond the top-tier and natural resources. In the short-term, profits may look good but we need to ask ourselves how long this can, and will, last given the increase in competition in both low and high-value industry and services.

Nicholson portends that it might take a nasty shock for Canadian companies to start thinking bigger about investments and innovation, as it did in Finland in the late 80s and early 90s.

But is that the only way we’ll deal with our increasing short-termism?

There’s a role for government policy to help incent companies to look at the long-term sustainability and competitiveness of their businesses and technologies.

Here’s hoping our next Federal budget on March 3rd takes that into account.

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