Living next door to the world’s biggest braggart, Canadians learn early that American-style self-promotion is obnoxious. We value decorum and, like good junior partners, wait to be noticed (and get inordinately excited when a Canadian actor, singer, or athlete attracts Americans’ attention and receives their seal of approval, as though it’s worth more than ours). We haven’t come up with an effective Canadian way to sell ourselves, so, at least in the business arena, we often sell ourselves short.
“Kids at Harvard and Yale aren’t necessarily any smarter than kids at Queen’s or McGill,” says Reza Satchu, founding partner of Alignvest Capital Management and of Next 36, which provides intensive training for talented undergraduates with entrepreneurial aspirations. But, he continues, there’s an aspiration gap, and Canadians are on the wrong side of it. “American kids don’t just aspire to write a book. They aspire to win the Pulitzer Prize.” Next 36 co-founder Ajay Agrawal, an economist at the University of Toronto, agrees. According to Agrawal, “If you ask top engineering students in Toronto what their ambition is, they’ll say something like, ‘I’m going to lead the artificial intelligence group at Google.’ The same students at MIT will say, ‘I’m going to start the next Google.’”
I see this phenomenon frequently in the tech incubators and accelerators I’m involved in, where Canadians with the skills to take on the world often conduct themselves tentatively and apologetically. Not all Canadians, all the time, of course; to every sweeping argument, there are notable exceptions. But the chronic lack of ambition and confidence that characterizes our business sector is prima facie evidence of a national inferiority complex vis-à-vis the United States.
Other relatively small countries that don’t have ready access to the enormous US market conduct themselves like scrappy upstarts, not timid junior partners. They’ve taken on the world because they had to. Sweden has Ikea, Ericsson, H&M, Electrolux, Skype, and Spotify. The Netherlands built Heineken, Shell, ING, Unilever. Switzerland is home to Nestlé, UBS, Lindt, Rolex, Credit Suisse. Canada has…a long history, in just about every sector, of passing up international expansion opportunities. As author Andrea Mandel-Campbell explained in Why Mexicans Don’t Drink Molson, time and again, Canadian CEOs have dithered, hamstrung by self-doubt and an excess of caution. They’ve acted too late or bet too small.
Why? Because global expansion is risky—and it has also been unnecessary. The main reason that no one outside of Canada has heard of Rogers or Canadian Tire or RBC is that the biggest Canadian companies do exceptionally well for themselves right here at home. Even when the loonie is weak, the corporate profits of Canada’s biggest companies are usually substantially higher than their American counterparts’. The reason is not that the Canadian companies are more wonderful but that they are uncontested, thanks in large part to a regulatory environment that provides de facto protection for oligopolies. Six companies dominate the Canadian banking industry. Four companies dominate the internet-service-provider market. Three companies dominate English-language television broadcasting, the supermarket industry, and wireless telecommunications. A duopoly dominates the airline industry. And so on.
Oligopoly players are fat and happy. They have absolutely no incentive to take big, risky bets on global expansion. They don’t even have to scramble to keep customers happy, because people have nowhere else to go. Canadian consumers tend to stick with the devil they know, especially when the devils all seem interchangeable. The trick for an incumbent in an oligopoly is to move just fast enough to keep up with the pack, but not so fast that the bottom line is imperilled. A leisurely walk rather than a frantic sprint to cross the finish line first, in other words. Go for the bronze.
A country’s dominant business culture has a profound influence on entrepreneurial aspirations and achievement. Surely one reason so many ambitious and innovative Canadian tech entrepreneurs wind up in Silicon Valley is that they feel more at home there, culturally, which is why so few of them return after they’ve made their millions. And surely the junior-partner syndrome has something to do with the fact that there are so few iconic Canadian multinationals.
It’s in Canada’s self-interest for that to change. Building new and bigger companies will help nudge our GDP in the right direction. In order to get back up to 3 percent GDP growth, which many economists see as the magic number, we will soon need to start adding about $20 billion to the economy every year—roughly the equivalent of adding a BlackBerry (at its peak) annually. To achieve this, we need to do more than change our business culture. We need new public policies that disrupt stifling monopolies and effectively promote competition and, thus, innovation.
That’s a tall order, and we are under serious time pressure to fulfill it, because once all the boomers retire, our GDP growth will slow even more. The problem isn’t just that they won’t be in the labour force, helping to create more goods and services and generally pumping up the economy, but that retirees aren’t big spenders, generally. They consume less and tend to move money out of the stock market and into fixed-income investments—all of which makes perfect sense for seniors but will have a negative impact on Canada’s already sluggish growth. At the same time, life expectancy continues to climb, which means that boomers will be increasingly reliant on our social safety net for a very long time. That net is already hugely expensive to maintain. The responsibility for keeping it from fraying or breaking altogether will rest with a progressively smaller number of Canadians. To prevent disaster, then, we need the economy to grow much faster. Starting now.
Growth happens for two reasons: either you add more workers or the ones you already have become more productive. Although we should be bringing in as many skilled immigrants as we can, even massively increased immigration won’t fully make up for the decline in labour-force participation that will come as boomers retire. We also need to boost labour productivity: workers need to start generating more GDP per hour. The idea isn’t to work longer but to work smarter, so you reduce input but increase output.
Unfortunately, we have an abysmal track record on productivity growth, falling further and further behind our global peers every year. Looking at the top twenty-one developed nations in the the Organisation for Economic Co-operation and Development (OECD), Canada is number fifteen in terms of productivity growth, trailing even countries like France, where people work fewer hours on fewer days than we do. If we keep going this way, in fifty years, Canada will have the lowest rate of GDP growth of any developed nation. What this means is that our kids’ prospects and quality of life will be dramatically worse than ours were—if they even choose to stay here.
Labour productivity isn’t a sexy subject, but it’s crucial that every Canadian understand why we’re falling short, because productivity is the key determinant of our standard of living. The problem is not that we’re dumb or lazy. In fact, our workforce is highly skilled and remarkably well-educated. What we are not very good at is finding new ways to do things more efficiently or coming up with whole new things altogether and then commercializing our discoveries—in Canada. Many Canadians commercialize their inventions and innovative ideas all right, but they do it in the United States, thereby radically limiting the positive impact on our own economy. Here at home, Canadian businesses tend to stick with the same old, same old rather than seeking the new.
A lot of factors contribute to productivity, but the bottom line is that innovation is the key driver. Innovation doesn’t require mind-blowing, world-changing technological advances, such as the steam engine or smart phone (though those are always welcome). Any new or improved product or process that creates value qualifies as innovation. Streamlining a manufacturing process so that you crank out more widgets in less time counts as innovation. So does dreaming up a new sales-and-marketing approach. So does figuring out a new way to organize your workforce. Whether by creating a whole new market or tweaking an established product or process to make it more efficient, innovation ramps up productivity.
That’s why the Trudeau government is talking non-stop about innovation and the need for more of it. The feds have been throwing money at the problem for decades now and, along the way, created one of the most pro-business tax regimes in the world. But despite an annual infusion of almost $23 billion of taxpayers’ money via 147 innovation-related programs and tax expenditures, every single year, Canada either declines or fails to improve on nearly every measure of innovation, falling further and further behind our OECD peers (many of which, such as the Scandinavian countries, are much smaller than we are). We’re in fifteenth place on the annual Global Innovation Index, according to the World Intellectual Property Office. The Conference Board of Canada gave us a “C” on its last innovation report card.
Why, when we’re so smart and well-educated, can’t we innovate? The question has launched a thousand op-eds, and bureaucrats and academics have inspected the puzzle from all angles. Canadian businesses are laggards in terms of research-and-development spending: Canada is twenty-fourth on the OECD’s Business Expenditure on Research and Development (BERD) index. Ten years ago, Canadian companies spent 1.5 percent of GDP on research and development, but today, after a sharp reduction in the manufacturing sector’s share of the economy, they’re spending only 0.9 percent. American companies are spending more than twice as much, and Israeli businesses spend more than four times as much, which helps explain why both countries are ahead of Canada on the Innovation Index. It’s worth pointing out, too, that foreign-controlled multinationals are responsible for almost 40 percent of all BERD spending in Canada (and also account for a whopping 50 percent of all our merchandise exports).
Possible reasons for our low BERD rate include “business complacency, the low educational attainment of Canadian managers, the dearth of management experience and business acumen, and the aversion to risk in Canadian businesses,” according to a startlingly frank 2017 report by the OECD. Evidently, Canadian executives don’t invest in R&D because they are not very good at their jobs.
Kevin Lynch’s assessment is more diplomatic. Lynch, now vice-chair of BMO Financial Group after a stellar career in government that included a stint as clerk of the Privy Council, attributes the lack of investment to a more general trend, which he calls “short-termism: the press worries about this morning, the politicians worry about today, the markets worry, at most, about the quarter.” Canadian businesses are no exception, he says. They don’t think long-term, “and there’s nothing more long term than R&D.”
Only 30 percent of Canadian firms consider any form of innovation to be extremely or very important, according to a recent survey, and just 15 percent would assume significant financial risk to pursue it. Why? Because they don’t have to. Trying to surpass rivals and attract more customers isn’t something you knock yourself out to do when there’s not much rivalry. When there’s market concentration and the costs of entry are high—as they are in every industry in Canada that’s dominated by an oligopoly—incumbents don’t have to worry that an upstart might pop up out of nowhere and try to take them down.
So there’s really no reason to take big R&D bets that might not pan out. In fact, there’s a big disincentive: if you spend a lot of money cooking up innovations that other incumbents immediately imitate, you won’t increase your market share much, but you’ll be stuck with a hefty bill. It’s no big mystery, really, why Canadian companies don’t innovate: it would be irrational.
The US has its own oligopolies, but, with very few exceptions, prices are lower and service is better there. Size matters: larger markets support more competition, and companies that invest in R&D are more likely than those in smaller markets to recoup their expenses. Therefore, even where there’s market concentration in the US, companies compete more vigorously for market share, and they certainly spend a lot more on R&D than their Canadian counterparts do, in part because they are making more complicated, higher-end goods but also because they are more vulnerable to disruption. When upstarts knock old stalwarts off their comfortable perches, the US government is more likely to let that happen; and US consumers are much more likely to demand action be taken to shut down anti-competitive behaviour that drives up the price of goods and services. The US has other advantages too: easier access to much deeper pools of capital and the existence of well-developed clusters of research and industry, such as the one outside Boston, where everyone in pharmaceuticals is running around trying to create the next big blockbuster drug. And then there’s culture: Americans worship competition and lionize winners, and, yes, sometimes that’s pretty ugly. But it goes a long way to explaining why the US doesn’t have an innovation problem and we do.
When cutthroat competition is the norm, not taking a risk can be the biggest risk of all. A company that doesn’t invest in innovation can be obliterated by one that does. When the uncertainty about what competitors are up to is coupled with the fear of losing traction, innovation is a necessity, not a frill.
But that’s not the universe most big Canadian businesses inhabit. In their world, a well-managed company isn’t one that moves the needle and delights consumers. It’s one that keeps shareholders happy by focusing relentlessly on keeping costs down, yet avoids pissing off customers so much that they leave. By these standards, a lot of Canadian companies are extremely well run, and the people in charge of them are doing exactly what they’re supposed to do. They don’t blow a lot of money on R&D. Once it’s economical to do so, they adopt advances pioneered and proven in the US. Even those companies that aren’t branch plants of American multinationals tend to conduct themselves as if they were, acting like followers rather than leaders.
If you don’t really have to compete, you don’t really have to innovate. I think a very big part of the solution to Canada’s century-long innovation drought is this simple: promote competition, and innovation—the kind that improves labour productivity and shows up in our GDP—will follow. Cozy oligopolies won’t change until they’re forced to, and why would they? They’ve got a good thing going. The only way to change their behaviour is to change the conditions that currently reward it. Do that, and I am certain that the telco incumbents, at least, would open the floodgates to R&D spending. If they faced greater competition, they’d have to, to try to protect their market share.
Eventually, competition will be foisted upon even the most protected Canadian sectors, because of technological advances, a shift in our relationship with the US, incursions into Canada by players in emerging markets, or world events we can’t predict. Will our companies be ready and able to rise to the challenge? Or will a history of protected complacency have rendered them fatally weak? What is the likelihood they will be able to compete abroad if they haven’t first learned to compete at home? Slim, would be my guess, but I don’t think we should wait to find out. Instead of more grand talk about innovation and more spending on programs that have failed to yield results, the government should focus on creating a more competitive, and therefore more innovation friendly, climate right now. I’m not talking about overnight, unfettered deregulation. If the government is simply aggressively enforced its own pro-competition policies—and, through its procurement activities, started giving innovative and potentially disruptive companies a chance—that would be an excellent start.
Canada is at a critical moment, an inflection point where all of us have a responsibility to try to bend the arc of history in the right direction, so that our children and their children enjoy the same quality of life and equality of opportunity that we have had. That will not happen if, collectively, we keep going for bronze.
Some good news, finally: we have the talent to win global contests and create lasting prosperity. Through my work in incubators and accelerators geared to helping entrepreneurs, I’ve met Canadians who are as intelligent, innovative, and highly skilled as anyone in the world. What they need, and what we do not yet have, is a business community that is truly open for business.
Creating one will require a deep cultural shift, not just on Bay Street but in every corner of Canadian society. We need to embrace competition and view it as an incentive to improve and achieve, not as an existential threat. The challenges we are facing are serious and they are daunting. To meet them, we need to pull together and demand more and better from our businesses, our government, our educational institutions, and, most of all, ourselves. We need to aim for gold and believe we can achieve it.
Excerpted from How We Can Win by Anthony Lacavera and Kate Fillion. Copyright © 2017 Anthony Lacavera. Published by Random House Canada, a division of Penguin Random House Canada Limited. Reproduced by arrangement with the Publisher. All rights reserved.