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Briefing to Government of Canada’s Deputy Ministers Committees

On May 18, 2021, Fellows from CIFAR’s Innovation, Equity, & The Future of Prosperity program participated in an invited briefing to a joint meeting of the Government of Canada’s Deputy Ministers Committees on Economic Frameworks & Inclusive Growth and Social Development & Wellbeing. The conversation at the briefing focused on questions around the “what” and “why” of innovation, the different levers and approaches that policymakers can use to promote an innovation-based economy, and the distributive consequences of different innovation policies for promoting more equitable social and economic outcomes. This brief highlights key insights from the presentations and subsequent discussion.

Key Insights

  • Innovation is about more than inventions or high-tech gadgets. It encompasses the entire process of taking ideas and turning them into new or improved products and services, from design, production, to after-sales.
  • Innovation is one of the major ways of ensuring a society’s sustained prosperity and growth of welfare. However, there are different models for an innovation economy, and the most-often copied model of venture capital-backed startups, as exemplified by Silicon Valley, also results in some of the most unequal societies. Other models, such as that of Taiwan, may be better able to create more egalitarian societies with more opportunities for citizens with different kinds of skills to engage in economic prosperity.
    • With economic globalization, the production of goods and services is globally fragmented, and it is specific activities (e.g., design, prototype development, component innovation, production and assembly), not whole industries, that are clustered at specific locales. By focusing on “high level” novel product innovation, ecosystems like Silicon Valley have lost the ability to innovate at other levels, such as in semiconductor manufacturing. There are significant distributional consequences to the choices that governments make in terms of the activities or stages of production in which they choose to support through innovation policies.
    • Policymakers should think about why they want innovation for their jurisdiction. They should have a vision for what they want the local economy to look like, and then work backwards to identify the innovation model that could work for different cities or regions, the industries and the specific activities in which to invest, and the resources necessary to create an ecosystem to reinforce local benefits for firms. These resources, including public and semi-public goods such as an educated workforce, as well as financing mechanisms (e.g., venture capital vs. sustained capital investment), should match the kinds of companies in a locale.
    • When translating social science knowledge to policy, it is necessary to look specifically at local leaders: while certain policy levers are best tackled at the national level (such as competition policy), others need to be tuned locally. At the same time, one must understand the limits of policy leverages, rather than relying on the ideal of a policymaker who can do what is not even possible for a national government.
  • The experience of the United Kingdom in the past three decades may offer lessons on innovation policy — that an emphasis on supply side investments alone is not enough to drive economic growth, but there is instead a need to think in the larger context of demand.
    • Despite significant investment in education and skills in the 1990s — including expanded secondary and tertiary education and increased investment in pure research — and the building up of urban public infrastructure, the rate of growth in UK productivity failed to rebound following the 2007-8 financial crisis. By the time of the COVID pandemic, the Office of National Statistics estimated a loss of earning of £5000/worker/year compared to the pre-2007 trendline.
    • While economists debate the causes of such a severe decline in productivity growth, consensus points include: a long tail of low-productivity firms with little investment in capital that rely on low-wage labour (possibly as a result of a low minimum wage and tax credits that incentivized low wage work); skills mismatch, where a large low-wage sector increasingly employed high-skilled people; and a stall in productivity and underinvestment in capital by even high-performing firms, even in the country’s wealthiest region around London. The challenge for policymakers, then, is to figure out how to encourage more capital investment by the private sector, and to improve the use of skills.
    • The UK’s main success during the COVID pandemic, the AstraZeneca/Oxford vaccine, demonstrates the joining up of the supply side and demand side approaches: investment by a public-private partnership in pure research helped create the vaccine, but the ability to expand sites for testing and clinical trial (through the National Health Service) and the massive demand created by government procurement were also crucial in facilitating the rapid development of a low-cost vaccine.  
    • As economic support for firms and workers tapers off post-COVID, the challenge for the government is to ensure that the ensuing creative destruction in retail and hospitality sectors will not further increase inequity; and as more investments are made in infrastructure and R&D that is not London-centric, to make sure that these investments match with a model of local demand that firms can build on.
  • As governments consider a shift towards using industrial policy to promote innovation and economic growth, they should avoid inadvertently shoring up low-productivity firms. While such policies should have protection in place for displaced workers, governments must separate the policy goal of innovation from the immediate political incentives of “saving jobs”. Inefficient tax credits that incentivize low-productivity firms to preserve jobs (such as by cutting back social insurance contributions) should be avoided. 
    • In general, grants for R&D may be better tools of innovation policy than tax credits, because the former allows for discipline — by having mechanisms in place to review how companies used the grant money and the outcomes of projects, and real consequences (such as being shut out of funding for the next number of years) that can discipline the behaviour of firms. This has been an important element in the success of industrial and innovation policies in the Asian “tiger” economies and Israel.

Briefing Presenters

  • Dan Breznitz, Co-director, Innovation Policy Lab, and Professor, University of Toronto / Co-director, Innovation, Equity & The Future Of Prosperity program, CIFAR
  • Jane Gingrich, Professor, University of Oxford / Fellow, Innovation, Equity & The Future Of Prosperity program, CIFAR

Further Reading

CIFAR resources:

Inclusive Innovation: COVID and After (event brief)
A bigger, tastier, more equitable economic pie is possible (CIFAR news)
Growth and equity — can we have both? (CIFAR virtual talk)

Other resources:

A Q&A With Dan Breznitz
Mismatch: University Education and Labor Market Institutions, by B. Ansell and J. Gingrich
Welfare states need reinforcement, not reinvention, by S. Häusermann and J. Gingrich

For more information, contact
Fiona Cunningham
Director, Innovation
CIFAR
fiona.cunningham@cifar.ca

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