Clouds pass by Parliament buildings on Aug. 19, 2020.Adrian Wyld/The Canadian Press
Dan Ciuriak is the director and principal of Ciuriak Consulting, Inc and a Centre for International Governance Innovation senior fellow. Laurent Carbonneau is the Director of Policy and Research at the Council of Canadian Innovators.
Budget 2024 earmarks $4.6-billion for technology development. In U.S. dollars, this is about US$3.3-billion, or roughly US$1.7-billion less than a single leading American technology company is dropping on its development program this year.
If Canada were a company, it would not crack the top 20 list of U.S. companies’ R&D spends.
And it’s not just companies. The risks and opportunities raised by transformative technological change prompted more than 2,500 industrial policy interventions by governments worldwide in 2023 to retool and boost their economies, with sometimes vertigo-inducing funding commitments. Canada is in this game whether we like it or not – we cannot resign ourselves as a country to the fact that we’re overmatched and call it a day. If we don’t play, we lose.
The industrial policy question for Canada is not if, but how. The approach must be targeted, effective and within our means. We cannot go toe-to-toe with the geopolitical giants on supply side incentives. So the Moneyball answer is a demand-side measure: government procurement.
Public procurement makes up about 15 per cent of our GDP and 27 per cent of public spending. Canada, unlike the United States, Finland and the United Kingdom to cite some examples, has not used this demand-side buying power systematically as an innovation policy lever.
Procurement is Canada’s sleeping innovation policy giant.
Government procurement is not simply about buying staplers and other established products that already exist in the marketplace to fill a clearly defined need. It can also be used to engage the private sector to develop new and innovative solutions to meet societal needs.
Examples are almost boundless. The computer chip was developed and scaled up through military procurement. The personal computer, on which this article is most likely being viewed, was developed in response to procurement by NASA to fit a room-size computer into a spacecraft. The radial tires on cars use technology developed for the space program.
The solar power industry exists because of government procurement through mechanisms such as feed-in tariffs, which enabled the industry to climb its learning curve during the period when the cost was still higher than fossil fuel competitors. And there is the story of how the United States used procurement of mail delivery services from the nascent airline industry to propel the development of the U.S. continental airline industry. So many stories, so little time.
Why is it effective? Innovation is risky; having a launch customer de-risks. Procurement also provides a runway for firms to realize “learning by doing” productivity gains as they scale up. Strategically used, it results in the firms owning intellectual property that provides them assured freedom to operate, a critical requirement for scaling up and going global. Perhaps most importantly, the government as procurer can use its convening power to bring innovation networks – firms, researchers, educational institutions and community organizations – together to make the procurement project a success.
Why industrial policy and why now?
Industrial policy largely fell out of favour in the 20th century because the empirical evidence of the day suggested that, as often as not, industrial policy initiatives failed. As economist Dani Rodrik wryly observed, simply saying “governments cannot pick winners” became an effective conversation killer.
That was then. Economic and technological conditions have changed materially. And this matters for our approach to innovation today.
The pace of innovation has increased, shortening the time that companies can count on to earn back a return on R&D investments. Shorter payback times mean higher required rates of return and fewer projects that make the cut at the boardroom table for your average start-up.
At the same time, the new battleground technologies such as artificial intelligence and quantum, which could become era-defining general-purpose technologies, have unleashed a winner-take-most contest between a handful of global superstar firms championed by geopolitical giants.
These issues constitute headwinds for Canadian innovators. Procurement addresses them.
Innovation is an essential component of wealth creation and productivity growth in an economy, characterized by technological disruption. A country can’t remain prosperous without it. And it is increasingly clear that you can’t have a thriving innovation economy without industrial policy.
For Canada, procurement is the only industrial policy tool that is tightly enough focused on the innovation challenges of the day to enable us to stay in the game at the scale of policy support we can afford. Canada will not be able to meet this moment without it.