Startup visa – good policy or bad? It’s good.

I’ve had a couple of questions today about a visit from Chris Alexander, the minister of citizenship and immigration, and his announcement of an improved visa process for foreign entrepreneurs. See story here.

One individual queried why we’d support foreigners and not just our own entrepreneurs. Now I have an evident political bias against the current governing party but I won’t let cloud my policy lens. The answer is that the startup visa, or other programs like it, are good policy, and help create the grounds for significant domestic employment growth.

There’s a wealth of research that highlights the immense contributions made by immigrants to technology or other research and development intensive sectors. The best work I’ve seen was done by Vivek Wadhwa and Annalee Saxenian (and others).[1]

They looked at a sample of 11,000 venture-backed companies in the United States over the period 1990 to 2005. The authors found that 25% of them had at least one immigrant as a key founder of the company. And the impacts of these immigrant-founded companies on the broader American economy is immense, contributing over $52 billion in 2005 sales and creating nearly 450,000 jobs. A subsequent National Foundation for American Policy analysis of the top 50 venture-capital-backed companies in 2011 shows that nearly half of those 50 firms were founded or co-founded by immigrants.

Here in Canada I’ve yet to see similarly rich data, however Industry Canada has a series of papers that looks at the contributions of new Canadians. They find a higher propensity towards entrepreneurship than the Canadian average, and a significantly higher rate of investment into R&D amongst those immigrant-founder and majority-owned businesses. Moreover, immigrant-founded businesses are nearly twice as likely to export their product than other Canadian firms.[2]

Given the link between exporting and investment in technology or research as a driver for high-growth, promoting these firms is very good policy.  Finding a way to bring the best and brightest to Canada to start their entrepreneurial ventures is similarly good policy. These programs bring innovative ideas and jobs to Canadians, new and old. If someone tells you otherwise, ask for some data to back it up.

[1] http://papers.ssrn.com/sol3/papers.cfm?abstract_id=990152

[2] http://www.conferenceboard.ca/press/newsrelease/14-06-24/businesses_owned_by_recent_immigrants_more_likely_to_export_to_the_us_and_beyond.aspx

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Entrepreneurial support key to Canada’s future

Published in the Waterloo Record, July 18, 2014: http://www.therecord.com/opinion-story/4636423-entrepreneurial-support-key-to-canada-s-future

Co-authored with Anthony D. Williams

Last Friday’s Canadian jobs report highlights ongoing sluggishness in the Canadian economy and continued concerns about where employment and economic growth will come from in the future. And new research by the Waterloo-based Centre for Digital Entrepreneurship and Economic Performance (a think tank we co-founded in 2012) suggests that while Canada has a strong pool of globally-competitive multinationals, our economy lacks the economic diversity required to support broad-based job creation and prosperity across the country.

We spent most of the past year analyzing Canada’s population of billion-dollar firms. We looked at how this population of Canada’s largest companies has changed over the past decade. And we quantified how much these firms contribute to Canadian employment and innovation.

The results tell us a great deal about the recent transformation in Canada’s economy and what policymakers and business leaders need to do make sure Canadian firms remain competitive in a global economy.

Our study evaluated 169 publicly traded firms with revenues of over CAD $1 billion. Together they employ nearly 1.4 million Canadians. Looking at the period 2003-2012, our study finds that employment in Canada’s largest firms has grown most strongly in resource, service and engineering and construction sectors. In fact, Canada’s strength in natural resources means it has done well, and even exceeded some of its peers (Germany, the US and the UK, for example) in producing billion dollar firms on a per capita basis. If there is a risk, it’s that the majority of growth in large firms is concentrated in one sector and one province (you guessed it,  the energy sector in Alberta). Whether this is a good thing or not is up for debate. What’s clear is that given the  sectors’ environmental impacts, a more nuanced approach would meld Canada’s entrepreneurial ecosystem with technological solutions to those environmental challenges.

Beyond resources, our research also uncovered many encouraging signs that Canadian firms are gearing up to compete on the international stage. For example, we found that leading Canadian firms are more globally engaged than ever, and this global engagement is a significant factor underpinning their growth—both over the past decade and into the future. Canada’s most successful firms generally point to their internationalization as a necessary step given the relatively small size of Canada’s domestic market and the significant opportunities for growth elsewhere.

There are certainly risks associated with this external gaze. Our research shows that international growth often means more emphasis on hiring overseas, and potentially less Canadian employment, particularly as internationalizing firms make strategic decisions to locate their operations closest to the largest centres of global demand. However, our data shows that despite their growing international footprint, domestic employment gains in Canada’s billion dollar firms are double the national average.

Our conversations with executives at Canada’s largest firms make it abundantly clear that there is no room for complacency. Executives recognize that they must invest more in technology to reach new levels of efficiency. They must step up their acquisitions of high-potential companies and get access to the best talent, wherever it may be found in the world.

At the same time, our research also shows that governments at all levels can play significant role in helping younger firms climb on the ladder to fast-growth so that we continue to enlarge the ranks of globally-competitive firms.

Today, just 4.7 percent of all Canadian firms account for 50 percent of Canadian job growth. Finding ways to enlarge this pool of high-growth companies and better support existing ones should be task number one. In particular we need to find ways to boost the number of high-growth firms in sectors that are poised for growth like health care, clean air, clean water and education, all of which will benefit from a growing global middle class that demands such quality of life services and that will build on core Canadian competencies.

How can this be done? The public and private sectors need to collaborate to provide stronger support systems for entrepreneurs that can facilitate the evolution of their companies from start-ups to global enterprises that create significant employment and support large-scale investments in innovation. Among other things, this means better access to the supply chains of anchor customers (like government or large firms in Canada), more expansive mentoring systems to connect new entrepreneurs to experienced business executives, more robust linkages between start-ups and university research centres and export development support to ensure that start-ups can access global markets and bring jobs back home.

Canadian entrepreneurs interviewed by the DEEP Centre also called for more investment in branding Canada as a destination for investment in entrepreneurial ventures, greater inclusion of start-ups in international trade missions, more assistance in competing for the best talent, and streamlined access to research and development support from the government.

All together, this spells out that Canada needs a national competitiveness and innovation strategy that builds new clusters of capability around some of the emerging growth sectors identified above; clusters for green technology, health care services, digital education and more. Kitchener-Waterloo’s world-class technology cluster provides the rest of the country with a great example of how to start.
Anthony D. Williams and Dan Herman are the co-founders of the Waterloo-based Centre for Digital Entrepreneurship and Economic Performance. The DEEP Centre’s report on “Canada’s Billion Dollar Firms: Contributions, Challenges and Opportunities,” is the product of a partnership between the Business Development Bank of Canada, the Canadian Digital Media Network, Export Development Canada and Industry Canada. The study is available for public download at www.deepcentre.com.


More on Chinese innovation

Having just returned from a few days in Guangzhou, China I thought I’d post an update on my previous writing on Chinese innovation and the rapid pace of change underway there.

The city of Guangzhou and the Guangdong Province are particularly interesting as they were at the heart of the economic reforms led by Deng Xiaoping in the late 1970s and served as the country’s springboard into a more ambiguous/capitalist form of socialism. In 1979, the city (and its broader Guangdong province) were established as the first special export zone (SEZ) in the country, and the first host for foreign direct investment. Its early success in low-value manufacturing and industry saw the region (according to Ezra Vogel) become the “de facto archetype for how to advance modernization” across the country.

Fast forward three decades and Guangzhou is a fascinating example of the new China, and may serve as the archetype for a subsequent phase of modernization, this one focused on high-value technological innovation.

I first visited the city in 2002 and, at the time, saw it as a rather sleepy, low-rise, industrial city, then with a population of about 6 million. Today it’s home to over 12 million, and has transformed itself from a centre for cheap labour and low-value manufacturing into a (still evolving) modern centre for retail, industry and science. I walked out of the trilingual subway into a rather impressive financial district replete with dozens of sky scrapers and architecture that would be the envy of most cities.

A significant element of this transformation is a heavy focus on science and technology. Guangzhou is home to a series of targeted public investments aimed at developing a “Guangdong Development District”. These include Guangzhou Science City, Guangzhou High-Technology Industrial Development Zone, the Guangzhou Economic and Technological Development District, the Guangzhou Free Trade Zone, the Guangzhou Export Processing Zone, and Guangzhou International Biological Island.

The goal of these economic investments is to “spur transformation” of the local economy away from low-value manufacturing and industry to so called high-value, high-tech fields. All together they form part of the City’s “Master Plan for Building a National Innovation City.” This plan seeks to develop three “strategic and emerging industries” with revenues of approximately $20 billion each, 1500 high tech companies, and a science-based output of over 350 invention patents per million people. An analysis by the Rand Corporation of existing companies (over 300 as of 2012) in this district found that two-thirds are either ICT or biotech companies, both industries defined as emerging by the Country’s latest five-year plan.

All together this evolution of the Chinese and the Guangdong economy is fascinating and it speaks to the significant competitive pressures in high-tech that are, and increasingly will, come from this region.

To be sure, this evolution isn’t smooth. The same Rand report notes that while the district is impressive, it faces significant challenges related to access to expertise and financial capital, and ultimately, the quality of the innovations and patents that result. This issue of quality is increasingly present in conversations about Chinese innovation. China’s National Patent Development Strategy states a goal of 2 million annual patent fillings by 2014, and China’s State Council released a notice in 2011 which noted a goal of tripling the number of international patent applications in strategic emerging industries compared to a 2010 baseline. These quantitative goals, however, belie the fact that quality seems to growing far slower. For example, a recent report from the European Union Chamber of Commerce disputes the China-innovation-hype by noting “while patents are exploding in China and certain innovation is also on the rise, patent quality has not proportionately kept up and in fact the overall strength of China’s actual innovation appears overhyped.”

Overhyped.  I’m not so sure about that.

That a lag exists between patent output and patent quality is understandable in a country that a decade ago was a net development aid recipient and whose per capita income is still less than a quarter of Canada’s. The evolution of quality in Japan and South Korea, for example, highlight a similar lag between initial replication and eventual original design and innovation. And thus the fact that China still rates as a rather middling “innovation economy” according to rankings produced by the World Economic Forum (31st), the INSEAD Global Innovation Index (35th), and even the Chinese Academy of Science and Technology (21st) shouldn’t obscure the country’s dramatic push into high-value, high-tech industries.

So sure, there are real questions as to whether China can develop the right incentives to become a top-tier innovator. However as the world’s 2nd largest aggregate spender on research and development, and one that is increasingly seeking to attract top foreign thinkers and scientists (in addition to returnees), I’m rather bullish on the country’s chances.

In 1980 Guangzhou’s provided the first signs of China’s economic awakening. The city’s impact on global manufacturing and related employment, for example here in Canada, were profound. Three decades later, the city’s foray into high-value, high-tech industries, the same industries that we’re still trying to establish leadership in here in Canada, may portend a similarly impactful, though perhaps not immediate, competitive challenge.

I’ll address what I think this means here in Canada in a subsequent post.


Our obsession with manufacturing

Why manufacturing is special. Really.

Those who know my thinking know that I’m not one to forgive our current (CDN) government’s policy on much of anything. However the recent announcement to invest $250 million in automotive innovation is one that I’m not necessarily against, nor is the general focus on the benefits of the manufacturing sector in an economy and thus the call to support it financially. Others, however, are quite fervently against it. Pundit Andrew Coyne calls it “a cultish preference for making things” while professor/economist Livio Di Matteo , who just happens to be a fellow of the right-wing Fraser Institute, calls it a “1930s Soviet-style view of economic development with heavy industry and manufacturing being the high ground of the economics.”

Yet somehow in these articles by two intelligent, well-studied individuals, the two most important factors related to the issue of manufacturing’s role in the economy are not mentioned. Public policy gets made, and unmade, by the coalescence of political will and public opinion so it drives me nuts vexes me that people with influential voices wilfully oversimplify what are ultimately extremely complex issues.

So why is manufacturing important?

1. The multiplier effect – every job or process in an economy, no matter where it’s done by a robot or a cat, has follow-on impacts across the economy, be it to transport final goods, provide inputs, repair or a litany of other services. One can calculate the effect of any industry through what’s called the multiplier, and the analysis of sectoral input-output tables. So what’s special about manufacturing? An overview of the research seems to highlight that manufacturing has a significantly higher multiplier than do other industries. Canadian and American data on this tend to be broadly similar.

Specifically, the US Bureau of Economic Analysis find that “for every dollar in final sales of manufactured products supports $1.40 in output from other sectors of the economy. Manufacturing has the largest multiplier of all sectors.”  And as the chart below shows, the differential between manufacturing impacts and those of other industries is quite significant.[1]

USBEAStascanMultipliers

As for the CDN government, it defends its auto investment policy with a multiplier of 3.6! Statscan is far more modest, and more in line with the US BEA, finding a manufacturing sector multiplier of 1.74, just shy of construction and a ways back from agriculture.

Regardless of the specific number, what matters is that  it is significantly positive, and quite a bit more positive than other sectors of the economy. So yes, we could allow market forces to choose whether manufacturing exists in Canada, but in so doing we’d most likely be saying goodbye to those jobs, and to the associated jobs with them. And that leads to the second, more important factor.

2. Innovation – A few years ago Andy Grove said something that then was near-heretical about the way we manage knowledge and production. The former CEO of Intel stated that when companies outsource, and his former company was one that did-so aggressively, they cut not only direct jobs, but also what he called the “chain of experience” that allows ideas, knowledge and skill to connect and allow for technological innovation. Dow Chemical CEO Andy Liveris agreed, noting “where manufacturing goes, innovation inevitably follows.”  But didn’t we think that knowledge would seamlessly integrate itself from anywhere? Apparently it doesn’t.

And these comment aren’t just pity and dramatic anecdotes. Rather, as Harvard Business School professors David Pisano and Willy Shih find in their research, “Once manufacturing is outsourced, process-engineering expertise cannot be maintained, since it depends on daily interactions with manufacturing. Without process-engineering capabilities, companies find it increasingly difficult to conduct advanced research on next-generation process technologies. Without the ability to develop such new processes, they find they can no longer develop new products. In the long-term then, an economy that lacks an infrastructure for advanced process engineering and manufacturing will lose its ability to innovate.” These authors highlight that the view that a jurisdiction can specialize only in high-value research and development and forget about manufacturing “ignores the complex nature of innovation.”

In the late 1970s and early 1980s several American economists started to see these linkages. Two industries, in particular, got attention. Alan Altshuler looked at Japanese vehicle production and highlighted that as production increased in Japan, so too did Japanese patenting activity, and eventually the country emerged as the leading producer of automobiles. John Zysman from Berkeley found that the outsourcing of television production to Japan was followed by Japanese-led innovation on VCRs and hi-def televisions. One can continue past Zysman’s research to show how DVD and CD technology followed. Fast-forward to more contemporary products such as solar technologies and Pisano and Shih see the same process of production-mastery being followed by innovation and design mastery at play.

In short, the connections between thought and process are complex and the belief that manufacturing can be severed without any serious effects on the growth capacity of an economy is quite naïve. Now I suppose someone will comment that I’m against allowing any industry or company to die. This certainly isn’t the case. Rather I’m not opposed to admitting that certain industries are more important as a result of their cross-sectoral impacts and that so long as we ensure healthy competition therein, our public investments may yield positive long-term results.

Now, all this said, let’s be honest, manufacturing isn’t going to solve all of our economic problems. The so-called renaissance of manufacturing in the US is going to be a low-wage, low-employment one. A similar one in Canada would yield about the same. But as the above notes, it might yield important offshoots related to innovation, and even broader ones related to the effect of manufacturing on other domestic industries.

So should we protest government funding of certain industries to ensure their existence in Canada? I certainly think we doth protest too much.  For while it’s great to say we shouldn’t subsidize things and that the market should work itself out, we need to think carefully about the counterfactual (what would happen) and about its short- and long-term effects on employment, innovation and ultimately our long-term ability to compete. Doing so yields a far different vision of what the public interest is related to government support of industry.


[1] This BEA data is actually much more modest than other research sources. The Milken Institute, a non-ideological thintank, found for every job created in manufacturing, 2.5 jobs are created in other sectors. Older research by the left-leaning Economic Policy Institute finds a multiplier of 2.9.


Canada’s resource wealth: necessary but insufficient

It’s become near-orthodox belief that Canada’s natural resource wealth endows the country with a superman-like ability to withstand shocks in the global economy. As many an editorial on the state of the Canadian economy has noted, “Compared to its Group of Seven peers, Canada emerged from the financial crisis relatively unscathed in part due to its strong banking system and wealth of natural resources, and it was among the first economies in the developed world to move from the recovery to expansion phase. “ I was presented with this rationale last week during a meeting with a very-well regarded and influential President of a Canadian university, and with resource exports amounting to near $200 billion per year, there’s no doubt that what’s in the ground is indeed an important part of our economy.

But such numbers need to be digested with a critical mind. For while the aggregate total revenue from resource extraction is indeed important, it’s broader impact on employment, both direct and indirect, is far less impressive. For while resources comprise near 40% of Canada’s total exports (which works out to about 4% of total annual GDP), the sector employs only 226,000 Canadians. Compare that to the over 1.5 million who (still) work in manufacturing, the 1.7 million in healthcare and 1.8 million in retail. In fact, resources contribute a measly 2.5 jobs per dollar of GDP compared to 9 jobs for every unit of manufacturing activity, 10 jobs per construction dollar, 24 jobs per retail dollars and a whopping 37 jobs per food services dollar. Evidently, this doesn’t infer that a retail or food service dollar is the way forward, quite the opposite. However, what’s clear is that resources are far from a significant (direct) creator of jobs in Canada. Certainly, resource extraction and its subsequent sale, creates significant revenues, profits and spending that circulates in the economy, however this is true for all forms of economic activity.

For want of easily accessible Canadian data, let’s use US industry multipliers as our guide.  The US Bureau of Industry and Security (…think about that combination for a minute…) estimates an industry multiplier of 1.50 for petroleum and gas extraction, and a 1.65 multiplier for other mining activity. By way of comparison, manufacturing provides an average multiplier of 2.31 and services and retail roughly 1.6.  Applying those multipliers to related export income streams yields what I’ll call a ‘full-impact’ GDP total of $311 billion for resource-related income, a third of the nearly $ trillion ($CAD) in manufacturing-related income.  Resources are a significant source of income for Canada but insufficient as a means of ensuring broad employment, especially in an economy where the primary manufacturing sector has seen approximately 350,000 jobs losses since 2006, and about 600,000 since 2000. The (usual) downgrading of those manufacturing jobs to retail and service positions reduces the associated income multiplier thus requiring other industries to pick up the slack. Yet what seems to have replaced those higher-value jobs (measured in terms of multiplier) is construction and retail employment, and to a lesser extent financial services and healthcare. This mirrors Canada’s aggregate position, whereby since 2001 Canada’s manufactured output has grown by a miniscule 0.2%, services have grown by 2.4%. This growth in services, however, is dependent on incomes created elsewhere in the economy.

So where is that elsewhere? It should be in the innovation and development of competitive products for both domestic and international consumption. Yet as noted, we’ve actually seen a decrease in this type of employment. And while Canada’s 600,000 manufacturing job losses pale in comparison to the 3 million lost south of the border, the (similar) trends experienced in both related to stagnant and declining real wages for most income earners and increasing income equality highlights the potential necessity of a strong (i.e. globally competitive) manufacturing sector to buttress high levels of employment and a relatively equal distribution of the proceeds of growth.  Our switch to services from production has indeed led to more growth, yet it’s done so in an increasingly unbalanced fashion.

And while resource income does provide Canada with a powerful income stream, it’s only as valuable as what we do with that income, and the concomitant shift to service related employment is not the answer. As the President of MIT recently noted in an op-ed to the New York Times, “Rebuilding our manufacturing capacity requires the demolition of the idea that the United States can thrive on its service sector alone. We need to create at least 20 million jobs in the next decade to offset the effects of the recession and to address our $500 billion trade deficit in manufactured goods. These problems are related, given that the service sector accounts for only 20 percent of world trade. To make our economy grow, sell more goods to the world and replenish the work force, we need to restore manufacturing — not the assembly-line jobs of the past, but the high-tech advanced manufacturing of the future.”

The US is far from alone in targeting this challenge. All Western economies will seek to do the same, as will developing economies that currently hold significant wage-related advantages.  Rebalancing a domestic economy in the face of this competition means hard-thinking on not just investment and innovation priorities, but also on wages and productivity and their relative global positioning, and the distribution of profits domestically that can counter the deflationary impacts of a more globally competitive wage structure.

Ultimately, the world’s changing and Canada can’t afford to sit back and assume that the geographic serendipity that endowed us with natural resources is enough to ensure that future generations of Canadians will enjoy the quality of life that we have.  We need a strategy to compete in a 21st century global economy that is dramatically different, and dramatically more competitive, from the past several decades of relative good times. The gradual introduction of millions to the skilled labour force across the emerging and developing world presents a significant challenge to now-orthodox conceptions of wages and incomes in the West. This isn’t about returning to low-value production of textiles and white goods. Rather it’s about competing in the next generation of technology and ensuring a domestic production base. Eventually, growth across the developing world may witness the development of a consumer base that absorbs production from higher-wage countries. However, as we’ve witnessed with China’s emergence, the creation of a broad domestic consumer base is a decades-long process. And in Canada, the US and other mature economies, we can’t wait decades to put people back to work in fulfilling and relatively well-valued work.


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 Read the rest of this entry »