Transcript
Transcript: CSPS Virtual Café Series: Advanced Technology Industries and Global Competitiveness
[The CSPS logo appears onscreen alongside text that reads "CSPS Virtual Café Series".]
[The screen fades to Vanessa Vermette in a video chat panel.]
Vanessa Vermette: Hello everyone, and welcome to the Canada School of Public Service. My name is Vanessa Vermette and I'm the Vice President of the Innovation and Skills Development Branch here at the Canada School. I'm pleased to welcome you to our event today which is part of the Virtual Café series. This series aims to introduce public servants to distinguished speakers and explore interesting ideas through conversation.
Before we begin, I'd like to acknowledge that since I'm broadcasting from Ottawa, I'm on the traditional unceded territory of the Anishinaabe people. While participating in this virtual event, you may be joining from different places and be living, working, and learning in a different traditional Indigenous territory. I invite you to please take a moment to reflect on this and to think about what we all can do to support Indigenous reconciliation.
Today, we have an exciting event in store, focusing on the relationship between advanced technology industries, global competitiveness, and domestic prosperity. One of the early promises of globalization was that the increased trade and openness amongst countries around the world would generate new benefits for everyone. The reality of globalization, however, has been far more complicated, and today, we're going to hear from two incredible speakers, each with unique views on the ways in which investments in advanced technology industries can help shape global competitiveness.
Our first speaker is Dr. Robert Atkinson, the Founder and President of the Information Technology and Innovation Foundation, recognized as one of the world's top think tanks for science and technology policy, and based in Washington, D.C. Robert has authored many books and previously served as co-chair of the White House U.S.-China Innovation Experts Group.
Our second speaker is Iain Stewart, the President of the National Research Council of Canada. Prior to joining the NRC, Iain served at a number of federal departments and agencies, including as Associate Secretary for the Treasury Board Secretariat and Assistant Deputy Minister of Policy at the Department of Innovation, Science, and Economic Development. In September 2020, he was also Deputy Minister at the Public Health Agency of Canada where he was responsible for implementing Canada's national COVID-19 vaccine rollout before returning to the NRC.
In addition to our guest speakers, I'd like to also introduce our event moderator, Dr. Shannon Quinn. Shannon is the Secretary General of the National Research Council where she's responsible for advancing the Government of Canada's science, research, and innovation agenda. She has a strong background in science and technology in both the public and private sectors, having previously held senior leadership roles at Atomic Energy of Canada Ltd., Natural Resources Canada, and as a professor at McMaster University. Thank you, Shannon, for moderating today's discussion.
And with that, I will now turn it over to you to begin today's event.
[The CSPS logo appears onscreen.]
[Shannon Quinn is shown seated next to Robert Atkinson and Iain Stewart.
Shannon Quinn: Thank you so much, Vanessa, and welcome, to everyone who's joining us today. My name is Shannon Quinn. I'm the Secretary General for the National Research Council of Canada, and I am so pleased to welcome Dr. Atkinson and Mr. Stewart with us today. Today, we're here to talk about globalization and industrial policy.
Globalization is sometimes touted as bringing benefits to all, but the reality on the ground is much more nuanced and what we see is that benefits accrue differentially to different organizations, different countries, and across different sectors. So, today, we're going to discuss how industrial policy is a strategic consideration for leaders, some of the things that can affect the benefits that accrue, and where leaders should be thinking about how to invest and how to realize the gains that we expect from industrialization.
So, maybe I'll just jump right in with a very broad question, because when we talk about industrial policy, it means different things to different people. It's very broad. So, Dr. Atkinson, could you maybe tell us what you mean when you talk about industrial policy?
Robert Atkinson: Sure. Thank you, Shannon. It's a pleasure to be with both of you, and call me Rob.
So, industrial policy is really... it's a little bit in the eye of the beholder, and so a lot of people, elected officials, they use it when they don't really define it properly. It's a very simple definition, it's policies that are focused on a particular industry or industries.
So, macroeconomic policy is not industrial policy, trade policy is not, unless you're focused on a particular industry.
So, in the U.S., when we passed what's called the CHIPS and Science Act, the CHIPS part was industrial policy because it was focused on the semiconductor industry. The science part wasn't really industrial policy. That was more innovation policy or science policy or tech policy. So, that's really what industrial policy is.
Then, I think what you have to then combine it with is competitiveness. So, there are a lot of folks on the left in the U.S. now who are sort of using the term industrial policy to mean, really, social policy. So, they're saying, well, we should have an industrial policy for daycare or elderly care, whatever it might be. Technically, that's an industrial policy because daycare is an industry, but I think the way most people think about industrial policy is it's looking at a set of industries that are going to be important to national competitiveness.
Shannon Quinn: Now, Iain, how do you think about industrial policy?
Iain Stewart: Well, I think, for Canada, we haven't necessarily been active articulating industrial policies in a regular, straightforward way. I think we're more comfortable articulating science and innovation strategies, for instance, just to riff off what Rob was saying, and the actual GDP-producing sectors of the economy. Sometimes we do sectorally-oriented initiatives, but standing back and setting out an actual industrial policy for the country is not something we do frequently, about what are our strategic industries, traded goods industries, advanced manufacturing, these kinds of topic areas.
And it's an area where I think Rob's work has been very interesting to look at as a thought leader in the United States, and then therefore, maybe there's some things that we as a community here in Ottawa should be thinking about, what is our industrial policy opportunity?
Robert Atkinson: I would just add also, it's a very important point because industrial policy, at least in the U.S., has gotten this bad name kind of intentionally, frankly, because if you will quote neoclassical economists who think that you don't need to worry about anything except macroeconomic factors and price signals and that anything else is distortive, which is the cardinal sin in their canon but anyway, a lot of those folks have tainted or painted industrial policy as, well, we're in the U.S. or Canada, we're going to pick Ford in Canada but we're not going to pick General Motors. I guess you could call that industrial policy, it's just bad industrial policy that, frankly, no good country does that kind of thing. What they will do is they'll pick particular industries that are critical, in the U.S. case, semiconductors, autos, particular technologies. We all know batteries are going to be important and we all know artificial intelligence is going to be important. So, it's really more of a focus on that.
There are lots of benefits of being in an Anglo-American ecosystem. I say that with, you know, Britain, Australia, Canada, the U.S., but one of the biggest disadvantages is the economics community really doesn't look under the hood. They don't really look at sectors and technology. They frankly don't understand. I mean, they'll acknowledge that, that we don't know anything about this stuff. And so, I think that's a big challenge in Anglo-American, Anglo-Saxon economies, is you have to sort of start rethinking economics to really look in depth at how does the Canadian economy work? You can't figure out how the Canadian economy works unless you understand sectors, and unless you do that... and I can tell you what the Canadian economy is, whatever your GDP is, but gee, I'm going to be so embarrassed. Five trillion?
Iain Stewart: Well, now I'm going to be embarrassed. I would have said north of three trillion for sure.
Robert Atkinson: Alright, somewhere north of three trillion, and this many people in the labour force, yeah, it's interesting but not very useful.
Iain Stewart: I just want to add, you know, there is formal industrial policy and then there are conversations about industrial policy as well, and one of the things, Rob, that you're so central in the U.S. is talking about this and making it an issue, and talking about things that, in Canada, we don't talk about as often, like productivity and competitiveness of our country.
But I want to also underline, we're comfortable having those conversations in Canada. If you think about the panels, Monique Leroux's panels, you know, ways in which the Minister has reached out and tried to encourage discussions and advice, there's a dialogue around industrial policy but not necessarily formal industrial policy per se, classically.
Robert Atkinson: That's not too far off from where the U.S. has been, I would say. Although, the CHIPS Act, which was passed by the Senate and the House, signed by President Biden this summer, was sort of, in a way, crossing the Rubicon because really, for the first time in a long time, Congress said this is an important industry, we're going to put $50 billion towards it, we're going to put a 25% investment tax credit towards it, we're going to put $12 billion in collaborative R&D, hopefully done with our allies, because we know that if we do not have a vibrant ship sector, China will have an enormous amount of power over us, and U.S. leadership realizes that cannot be allowed and so we were able to do that.
The question is, can we go further? But certainly, that was a big moment in the U.S., to say, okay, now we're going to do this, and what was big about it, frankly, was when you look at those original bills, historically, Republicans have been more free market, let the businesses do it. There was actually significant Republican support, and that's a watershed moment in the U.S. You had senators like Todd Young from Indiana, John Cornyn from Texas, a lot of Republicans who embraced this. Even if they didn't sign onto the bill, there were Republicans who supported it but for other reasons, couldn't sign on to the bill.
Shannon Quinn: Yeah, maybe we can follow that up a little bit because this is leading right into this microchips versus potato chips kind of discussion. So, maybe you could talk to us a little bit about the strategic importance in investments in specific advanced technology sectors.
Robert Atkinson: Yeah. So, there's a great line by Alexander Hamilton, who was really sort of the founder of American industrial policy. So, it was Hamilton versus Jefferson back in the early days of the republic, and Jefferson was this agrarian, you know, wanted farms all across the country, and Hamilton was, no, no, no, we've got to have industry, and he said the reason we have to have industry is we can't be dependent upon Europe for our control.
And what was really interesting about this, and very few people realize, is in 1816, Jefferson wrote a letter to a colleague and what he said in the letter was, I was wrong, I thought we were living in this world of total free trade in harmony with our friends, and the British were our enemies. Now, I have to say, I tell my American friends here, when they say, well, you know, the British burned our White House, I was like, well, that's because we burned Canada's White House and you don't seem to learn that in school, but in any case.
So, the reason, now, some people in the U.S. feel like we need industrial strategy is really around three main things. One is, Hamilton said, what you don't want to be is a drawer of water and a hewer of wood. In other words, you don't want to be a natural resource dependent economy because essentially, at the end of the day, you lose control, and I think we just have to look at Russia for that. After the invasion of Ukraine, the U.S. government was able to get 30 countries, including Canada, to sign on to export restrictions, export control restrictions, for ships to Russia. That is hurting Russia. Russia's, I'm sure, thinking man, I wish we had more ships because we can cut them off. So, that's one thing.
The second part of that is these industries pay high wages in the U.S. They pay about 80% more than the average wage. The third factor is that these advanced industries are traded. So, in theory, it's a little easier for Canada to run a trade surplus if you wanted to. You can just sell a lot more oil and a lot more wood and a lot more nickel and all the things that you have, but it's harder for the U.S. to not run a big trade deficit where we have to have strength in advanced industries.
And then finally, advanced industries or related innovation, because it's not just R&D done in this amorphous way, it's tied to industry. So, in other words, a country that doesn't have core advanced industries fundamentally is just not a modern country.
Shannon Quinn: Maybe, Iain, I'll get you to kind of respond to one of the things that Rob said, which was you don't want to be a drawer of water and a hewer of wood, and actually, in Canada, we've been that now since our inception, in some measure, and we've worked very hard over the course of history in this country to try to move away from that or build on that in some cases. Where do you think we are with that right now?
Iain Stewart: That's an excellent question. If you go back to the first settlers, colonists arriving in Canada, it was St. John's area for cod fishery, resources have been central to the modern Canadian... modern in a sense of modern actually being a historical period, the modern economy, and the country is endowed and blessed with natural resources which are abundant and, as Rob was just mentioning, are a source for us for tradeable goods, and so therefore are very important for the health of the economy.
But value-added activity creates a richness around the resource sector. We should note, first of all, if we're simply pumping oil and gas or cutting down trees and shipping whole trees, we're not adding value. we're not processing, we're not creating opportunities for high wage jobs, knowledge intensive jobs.
So, there's a richness to be leveraged from our resource endowments and we've actually suffered and we have not succeeded sometimes in doing as much as we could. A lot of our exports are commodity exports and not necessarily value-add activity, and a particular Canadian challenge which commentators have noted for years is that we ship things to people who make value-added products and ship them back to us at a much higher value-added premium and benefit for their economy.
I think I was reading an example of toothpicks being sent to us from China, which, if you think about it, is a bit extreme, but you know, wheat for pasta, the pasta ends up being made in the States and sold back to Canadian consumers and so on. So, there's lots of examples of that. Those are value-add. They're rounding out. They're leveraging our sector. Famously, our forestry sector is using equipment which is not made in Canada.
And so, people ask, is there an opportunity there that we missed? Certainly, in the fifties and sixties, we did miss that. Maybe as we move to digital and low-carbon technologies, maybe there's an opportunity for new Canadian disruptors to come in and be the providers of the equipment for some of the harvesting that we do in different sectors of our resources. So, that's an interesting opportunity the technology brings.
But then we have several core kind of advanced manufacturing areas as well in the country, and I'd say they're revealed industrial policy, certainly they were official explicit industrial policy. If you think about the automotive industry and the automotive pact between Canada and the U.S., it really enabled industrialization and the supply chains around automotive, which had a huge impact on the Ontario economy, the Canadian economy.
You think about aerospace, we have aerospace in a number of centers across the country, but if you think about the Montreal Aerospace, it's truly one of the leading clusters for commercial air, space, and vehicle, and assembly of these, and motive power. It's a rich ecosystem. That's the legacy of people paying attention to ensuring that we do have advanced manufacturing.
But I think more recently, we've done less of that explicit industrial policy. When I say more recently, I'm thinking eighties, nineties, whatever we're calling the first decade of the 2000s, and it's for the reasons that Rob was just touching on. There is kind of a reluctance. There certainly was... if you think about the old OECD paradigms of the kind of eighties, nineties, you know, get out of having winners, get out of saying Ford rather than GM, get out of building national champions, let the market roll, stand back, and enable, we in Canada really embrace that.
And a lot of the ways we had been supporting industry moved away from direct programing to things like our tax credit, (inaudible) tax credit, and moved towards stimulating our universities so we increase the supply of talented young people and we increase the indirect benefit to companies to invest in the inputs to their competitive position, and we got out of doing a lot of directed support. I say we got out of doing a lot, but we didn't get out completely. We still value the importance of attracting mandates.
And in fact, you'll see. Minister Champagne has been announcing investments in automotive and batteries, showing that the federal government still understands the importance of anchor parts in supply chains to anchor industrial, in effect, policy, but we don't necessarily articulate that into a national vision or strategy or document that we use to guide ourselves, but there is evidence that we think that way.
Robert Atkinson: You mentioned the OECD. It was always a sort of point of interest in the U.S. where you'd see these OECD rankings in Canada just be great, and it's like, we got a great workforce and all this stuff, but it didn't translate, and to me, the reason it didn't translate is those are necessary but not sufficient. They're useful conditions to have, but just having kind of inputs... as I say, you can lead a horse to water, you can't make them drink. And so, that's where you really just have to start saying, okay, what are we doing sectorally and around technology, and where are our strengths? Where can we go further than that?
I'll give you an example in a study we did looking at how countries help small and medium-sized manufacturers. Canada had a program, but I believe it was cut. I could be wrong on that. I thought it was cut, but the Germans were investing about 20 times more per capita than the U.S. and Canada, and the Japanese were investing 40 times more per capita.
And I'm not saying Canada should just... but the reality is they took that whole SME manufacturing supply chain modernization challenge quite seriously for many decades, and the U.S. and Canada, in my view, have not done that.
Shannon Quinn: You can build on this a little bit because your work and work of others has shown that we could do better in Canada from maintaining or growing our share of output relative to our international counterpart. You've referenced investments in small and medium-sized enterprises and their ability to put in new modern technology and so on to be competitive on an international scale, but there are things that are needed that are beyond money. So, of course, money and investment is important. Are there other things that Canada should be doing in order to improve our performance?
Robert Atkinson: Yeah, I mean, people always say money's not the only thing, but it's pretty important. I have to say that. So, we did a study recently, using the latest OECD data, and it was called the Hamilton Index of Advanced Industry Competitiveness, I think it was, and we looked at seven major industries, so essentially biopharmaceuticals, machinery and equipment, electrical equipment, motor vehicles, advanced transportation, which would include the aerospace cluster you have, and computers and electronics and software and information, so think A.I., Microsoft, and companies and technologies like that.
And what we found was that Canada's performance was actually not very good at all. If you look at these sectors and you look at what's called value-added, we talk about how much they're adding value, and then you say, what is that share as a share of the Canadian GDP, and then you look at, what's the rest of the world? How big are these industries as a share of the global GDP? What you find is that Canada's way below the global average, as I recall, somewhere around, I'm going to get the number wrong, 0.6 or so. That's a big, big decline, and it's gone down. You talked about the 2000s, this data starts at '95. We looked at '95, '06, and '18, and Canada's gone way down.
One of the things that's really interesting on that is motor vehicles. Motor vehicles have completely flipped with Mexico here and Canada here, and now Mexico here and Canada here. So, I'm not saying that it's one for one but on net, it was one for one where Mexico was growing its motor vehicle, and that's come at a cost to Canada.
But other areas, like you look at computers and electronics, and we did ten countries. So, you look at Taiwan, they're like way at the top of the graph of just having so much of it because of a company called TSMC, or you look at Samsung and SK Hynix in Korea, way up at the top, and Canada is way, way down here, I mean, hardly anything, biopharmaceuticals, hardly anything, and even in sectors where Canada has been strong, like aerospace, you see a decline in autos.
So, to me, that ought to be a wake up call that says, essentially, either Canada... and I'm not knocking any politician or any party, I'm just saying, because we have problems in the U.S. equally as challenges that you have, but ultimately, you're at a point where you would get to tipping points. So, I was at a dinner with Pat Gelsinger, who's the CEO of Intel. Now, he has an incentive to say what he said, I get it, but I actually agree with him, and he said the U.S. used to have 42% of global chip production 40 years ago. We're down to 12. His point is, if we start going down like eight, seven, six, it's probably at that point you're just going down because you lose the critical mass, you lose the skills, you lose the university capability, you lose the suppliers.
And so, without sounding overly dramatic, this is the decade that Canada has to decide what it wants to do, I would argue, because the competition out there is so strong, and that's not to say that there won't be sort of individual companies that are just great companies, like we've done a little bit of work with D-Wave, a quantum computing company out of Vancouver. It seems like a great company. So, there'll always be those just because you have smart people in Canada who do cool stuff. I don't deny that. You had BlackBerry. I shouldn't say that, right?
But the point being, if you want to do something more than just rely on entrepreneurial talent, which is important, there is these ecosystems here that have to be looked at very carefully, I would argue.
Shannon Quinn: Now, Iain, I think you probably have some insider views here based on the work that we do at the NRC.
Iain Stewart: I do, but before that, I would say I just want to underline the work that you did. The report, your Hamilton index report, I think anybody working in federal economic policy sectors, whatever department, whatever location you're in, should read that report. It's like a summation of where we are and where we've been over the past 20 years, and it is a wake-up call. I read it and I was deeply troubled, I think is the only language I could use. We've seen for years... for those of us who work in the economic policy community here in the Government of Canada and provincially as well, we've seen many of our indicators just going the wrong way for year over year over year, and eventually, that starts to manifest in your basic GDP numbers, and your report has pulled out very well what it means for us.
And we know anecdotally that Pharma left Montreal, Toronto. We know that C-Series was a massive investment by Bombardier, which was a peak company in our ecosystem, and then Airbus ended up coming in as a partner in that. We had BlackBerry rise. BlackBerry invented the modern world. All of us walking around with our iPhones and Samsungs do that because BlackBerry changed the world. They're not with us. Nortel changed the world. It was a loss of an ecosystem champion that was a world dominator, a huge company, huge part of GDP in the country.
Robert Atkinson: I wrote a long study on this, and I have to say, partly because of China, unfair practices.
Iain Stewart: Well, that's a topic that is part of this discussion because... maybe we'll come back to this when you think about it, Rob, because part of the industrial strategy dynamic is realizing, like you were talking about in Hamilton and Jefferson's discourse, is it a free and open economy? Do people respect WTO rules? How do you compete as a country in a world where there's speed bumps and pitfalls and maybe the rules are not being evenly applied and so on, and you get into some of the more even controversial aspects of that.
But we have had global champions. This country can produce them, sustain them, and we still have them. If you look, we have global leaders in areas in mining and lots of sectors still, but we have fewer than you would expect and our performance by sector, which your analysis in your Hamilton index just shines a great big light on, is that we're going the wrong way in every one of our advanced sectors. So, while we were the third largest cluster for commercial aerospace in the world in Montreal, are we going to be there five years from now? We are fully integrated into the North American auto supply chains, the production of vehicles. Will we be there ten years from now?
And I was mentioning, earlier, Minister Champagne's efforts which are just notable. He's going out to the companies, trying to make sure that we're anchoring through critical minerals, through batteries, through electric vehicles, we're anchoring ourselves in the automotive market of the future, but that kind of proactive activity, I think, really is our opportunity right now.
And I would say, to your point on the tipping point and the CEO of Intel, when are we hitting the point where it's going to be maybe not possible for us to reverse these things, is a really good warning that you've just given us to think about, because you do see it. You see it in areas where there's a thinning out occurring in the thickness of the cluster or the area of activity. Those supply chains, those specialized skills, those specialized labour markets, they're what create the soup around which companies can grow and achieve international scale, and as that starts to thin out, it's not going to happen here. It will be part of our longer-term narrative around talented young people who move south because they're seeking that kind of labour market support, that supply chain they need, and we need to keep that in Canada.
I think for the longer term, maybe we'll get to that in other questions so I won't have to talk too much about it, but I would say for the longer term, we have to kind of be realistic about what are going to be the engines of our economic growth for this country, and then how do we thicken them out? How do we add value around those kind of enduring strengths? And in some of the areas like advanced manufacturing, it's a defensive action to make sure we don't lose them and we are able to grow them.
Shannon Quinn: In some of the earlier conversation, you were sort of moving into an area that is thinking about where strategic security considerations are also driving strategic consideration around industrial policy and investments in certain sectors. And so, I think many of the people enjoying today's session, they're not... industrial policy is not their day-to-day business but the pandemic has meant that many, many Canadians have felt the risks of a moving away of certain capacities in certain industries in a way that probably we've not felt before.
And so, maybe you could comment a little bit on the idea of, is it too late to bring some balance back, and if you have any other comments around this idea of intersection between industrial policy and national security.
Robert Atkinson: So, yeah, the supply chain issue gets complicated in the following sense. There are just certain things in supply chains that are random, an earthquake or some kind of, you know, everybody's got COVID at the factory. There's not a lot you can do about that. You're no better off, in a way, having everything in your own country because of that. You can have your own vulnerabilities. So, I don't think those kind of... there's certainly sort of dual sourcing and not having everything in one plant, that makes sense. The big issue, which we should just acknowledge with supply chain vulnerabilities, is not these sort of acts of nature, acts of government, and in this case, China. That's what it is, China.
I wrote a series of articles for a journal in the U.S. called the Journal of International Trade, and it was about, basically, how the Chinese are practicing what is called power trade. This was a study done way back, Albert Hirschman's first book. Anyway, I'm getting (inaudible). Trade theory was about how Germany did that, and Germany did this from 1900 to 1945, and actually, the British, who were really, really worried about this, they saw what Germany was doing, was using trade to gain power, not just militarily but political power, to sort of disrupt where the British Empire was. That's what China does now. So, that's what we have to really be careful of.
And battery, to your point, what the Minister's doing is a great example. China has long had a national strategy to dominate the global battery market, just like they dominate solar panels. We don't really have to worry about solar panels all that much because if they cut us off, it's not like our solar panels don't work. If they cut off batteries, we can't... our auto industry goes down and all these other sectors. So, one of the things I think we should do, and this is where I think we really are, should be having a conversation about much deeper U.S. Canadian alliance and cooperation. So, we're engaged in a pretty serious supply chain mapping exercise now, funding through this last summer. And so, we're going to look at supply chains in all these areas. We should do that with Canada, in my opinion. At one level, what do we care if some factories in Oshawa... fine, cool, doesn't have to be in the U.S., and I would hope you would feel the same way because we're close allies, but if we don't have anything in North America and if it looks like it's in China, then we do have to be careful.
China has shown, very clearly, they're willing to weaponize trade. They've done it against... for example, they used their rare earth dominance to punish Japan over some island thing or some missile. I don't even remember what it was now, but it was pretty clear, you mess with us, no more rare earths, which meant no more magnets, no more computers, all this, and they show they'll do that and we can't let ourselves be dependent upon that.
The other component there also is if you just look at our militaries, the weapons... and this is, I'm sure, even more true in Canada. If you look at the latest study by the Defence Department in the U.S. on the capability of the U.S. defence industrial base, talk about a depressing report. You don't really want to read that report because in pretty much every single technology area that is critical to U.S. defence systems, not everyone, but most of them, are vulnerable now. They're like, well, we don't really produce enough of that here, well, we're dependent upon that, and they've let just slide because they've bought into this globalization view that, well, it doesn't really matter, we can get these things from China, well, not if China's our enemy, not if China invades Taiwan, we're not going to get those things. So, that's what I think we all have to work together on.
Iain Stewart: Well, this is an area, Rob, although you're a Canadian, born and raised, you would be very clear that the national interests of the U.S. and Canada, sometimes there's some disconnects. We had examples of that. I had the privilege to work on our pandemic response at the Public Health Agency for a year, and we had a period where we had questions about supply delivery, of course, from China and other overseas supply chains but we actually even had a period as well where we weren't sure we were going to get deliveries from the United States.
And the previous President was making comments about how those shipments would not come to Canada, they would go first to Americans and so on, and I think for a lot of Canadians, that was sort of kind of a what kind of moment? Like, what? Because Canadians have a very integrated approach, mentally, with Americans for family reasons, educational reasons, recreational reasons, but also massively, economic reasons. We were integrated into a North American market. Our auto industry is geared towards integration with the American auto industry and so on. We have a lot of aspects of the Canadian economy that are actually north-south. Sometimes if you look at the trade flows, you're struck by, you know, it's not an east-west flow. It's a series of north-south flows with east-west, but less than sometimes you would think. And of course, that highlights the importance of having lower trade barriers within Canada, but also, it underlines our extreme, extreme, extreme interest in the United States.
And as we go into this more challenging period where perhaps international trade is not as free and open as we had thought previously and would hope, we North Americans do need to think more in an integrated way. I think the CHIPS Act reflected that when it thinks about semiconductors, supply chains and so on, there is that awareness, but within the United States which is a huge, complex, multi-level, multi-player, multi-interest environment, not everybody's indifferent about where an auto assembly goes.
And Canada has been on the losing end of a number of decisions over time, and I think Canadians would embrace a concept of North American supply chains, given the structure of how our economy operates, given that north-south orientation and a lot of our supply chains. So, that's an area where I'm hoping we'll see more. Now, it gets into other considerations. It's two countries with different interests trying to make sure that they're finding the mutual shared area of opportunity, but on an economic policy front, I think it's really an area where we can do more work together to try and harden up our supply chains and increase our resilience.
It's interesting you talk about military supply chains alone. One would think that from a national security perspective, being able to produce the boots that you're wearing for your desert mission or whatever you have going, your snowmobiles for your arctic, whatever you're doing, you would think that you want to have guaranteed access to that, but actually, in practice, it's quite difficult and we haven't necessarily had as many of those key industrial productivity components locked down, certainly in Canada, as we would need to be able to have that kind of security you're talking about. So, it's an area, I think, that's ripe for more discussion between Canada and the U.S., and economic actors in both of our jurisdictions.
Robert Atkinson: To be fair to President Trump, he was responding to almost this antithesis of that view, globalization, openness with everybody. And so, Trump took the pendulum and just shot it way over here, way too far, and never should have included Canada, never should have included Europe that way but I think that that's not going to happen again. Even if you have sort of an America-first Republican in the White House, I just can't imagine that you're going to see that same thing. Most of the Republicans who are... I'm not saying President Trump won't win again, and I don't know if he wins, if he's going to... what he would do, but that's seen, I think, for most people, including Republicans, as having gone too far.
And particularly now, with this view, if China really is the challenge, we can't afford to alienate our friends and our close friends. And so, I understand the concern in Canada but I think, actually, the upside is much bigger now than we think. There's just a lot of talk in Washington. Every single panel, every single discussion is, we need to work with allies, we need to work with allies. So, I think there's a big opening there.
Shannon Quinn: Now, we've talked about how government has an important role if we're going to sort of turn around our trend lines here in Canada with respect to our output, our competitiveness. The academic sector and businesses themselves, do they have roles and what should they be doing?
Robert Atkinson: So, I can't remember the exact number. I think it's like, in Canada, 40% of basic research is conducted at universities. I ran across that number, and in the U.S., it's around 12, and to me, that's a problem in Canada. I mean, the ethos or the sort of narrative of Canadian universities, it's a little bit like American universities but they're not as bad, in America is just give us a lot of money, give principal investigators a lot of money, do it peer-reviewed, and we're going to write the best journal article you can imagine, it'll be in the Journal of Nature, and man, our citation rates will go way up. I'm not saying that you shouldn't have some of that. If you don't have that, it's hard to train the next generation, but you can't have that be your base.
And so, I think universities, to me, the grand bargain, and I don't want to get too much into Canadian politics but the grand bargain... if you look at what the U.S. did, we passed this CHIPS and Science Act, and the Science Act went through a lot of iterations. The original was a lot better and we were quite involved with helping Senator Schumer and Young craft it, but whatever. Politics is what it is, but what it did do is it created a new division in the National Science Foundation, more around applied research or industry collaborative research with universities, translational research, whatever you want to call it.
And I think that's the way to go, frankly. We live in a world... the world 50 years ago where countries could afford to put a lot of money into basic research and you didn't care where the results went, that's not the world we live in anymore. I think universities have to be more tightly aligned with national missions. Now, does that mean that you're going to tell each researcher what to do? Of course not. You're not going to pick GM, you're not going to do that, but it does mean that industries need to be able to show that they're able to raise money from Industry. If you can't raise any... and I'm not saying on everything, but there should be more of universities being required to raise money from Industry. It should be measured.
I mean, that's the other thing. The U.S. and Canada, certainly the U.S., we don't do a good job of measuring. How many patents are you? How many licenses to companies? How many new startups are you engaged in? how much industry R&D do you get? In Sweden, they actually give universities money on the basis of that. So, the universities are doing well on sort of not just knowledge creation but knowledge transfer. They'll get more money. So, that's one thing I think we could do, or you could do.
The second is I've followed this, what's it called, the R&D credit. I can't remember the name of it.
Iain Stewart: Scientific Research and Experimental Development tax credit.
Robert Atkinson: Yeah, well, number one, you need a shorter name, but number two, I don't know why Canada doesn't do what the what the U.S. did, which was we have what's called the Alternative Simplified Credit where you don't... maybe you've changed this, but the last time I talked, 100% of all your R&D was eligible for this credit. Why would you do that? I'll be blunt, because you're rewarding R&D. Nobody's going to go below 50% and you're just rewarding R&D that companies are doing. What you don't want to do is what we had originally which was basically this incremental credit, so if you go up a little bit, you get a credit, if you go down a little bit, you don't. So, what the Brits did was sort of along that direction and then we copied them, and it's basically this credit of you get the credit of 50% of your R&D and above for the last three-year base period. That essentially doubles the incentive because you can double the rate, more or less double the rate, at the same fiscal cost. So, I would think things like that.
I think in terms of companies, one of the things I do think is a challenge in Canada, being a Canadian... you talked about people coming way over, my parents' grandparents' grandparents' grandparents came over, and some of them in the potato famine, and settled in farms in Peterborough or outside of Peterborough. I do think Canada, like many countries, has just consciously developed entrepreneurial interest and talent and inclination. Canadians just aren't as entrepreneurial. I wouldn't say that. They just aren't. There's sort of this American... why Americans are so crazy sometimes, it's like that's the same as Americans being entrepreneurial. Like, it's the same sort of, let's think outside the box, let's act outside the box.
And I do think there are things countries can do to really encourage that. Like, in the U.S., for example, we didn't have any entrepreneurial education programs 40 years ago. Every single major university now has a really... I shouldn't say great. They all have entrepreneurial programs and some have really great entrepreneurial programs where if you're a student and you really want to do this, you're going to get a lot of different help and encouragement and the like. So, the Canadian education system is great. So, it's not like you don't have that, but injecting more of that risk-taking and entrepreneurialism, I think, is something that... the jury is out whether countries can do it but you look at Sweden 15, 20 years ago. They were like, we're not entrepreneurial, we're Swedish, and they've really, really focused on this and they're pretty entrepreneurial now.
Iain Stewart: Well, there's a lot in what you just said. I would say that the government recognizes a number of the issues that you've touched on. One of the things that the last budget federally announced was a review of the SRED tax credit. It's been a longstanding topic of inquiry. Does the tax credit function the way it's intended? Is it achieving the policy objective? How could it be redesigned to be more impactful? And I should also say the government introduced a number of other initiatives in that last budget that were intended to get at, how do you leverage more economic impact from your research dollar?
For instance, the government announced that it was going to create a new agency. When you talk about the NSF having a stream now focused on the translational or commercialization research, Budget 2022 announced that we would have a funding agency dedicated to supporting business innovation and I think that's also trying to put more money into that space, encouraging growing entrepreneurial businesses, and then also notably in the budget was a $15 billion growth fund which was meant kind of a financing-style provision that was enabled for the entrepreneurial new economy growth kind of opportunity.
I would say, on Canadian universities...
Robert Atkinson: Can I just say before I lose it, I didn't have enough time to say that, I did actually write about that in the report because I knew that this was either being considered and I thought it was great. So, I really, really like those initiatives. I think they're right on the mark.
Iain Stewart: Okay, good. So, it's just to say that people are thinking of these issues, Rob.
For Canadian universities, I'll say a few things. The absence of large scale private sector R&D, business expenditures on R&D in Canada, kind of is, actually, I think, the issue in our tableau. If you look at our statistics about who's performing R&D in relation to our peer group, our universities stand out because they're doing a very appropriate level of research. What we have is we have less expenditure on business R&D. Now, that's profound. So, we don't have large companies pulling on the knowledge supply, the young talent. We don't have large universities doing structural collaborations with the universities. We have them, like I said earlier, we just have fewer than you would expect for an economy of our size.
My career has been spent a lot in this space and it's the absence of those large R&D performing companies that really, I think, gives us the stats we have and a lot of the dynamics we have. If you convene a meeting in Canada to talk about innovation, you'll end up with voices that reflect the community. What you don't have is large industrial companies that have dedicated vice presidents for innovation showing up at that meeting and saying, like they would in Germany or others, what their needs and their desires are to government. Other voices tend to fill that space.
But I just don't want to be unfair to Canadian universities. A lot of them are aware of the need to invest in entrepreneurial development programs, incubation, translational activity. In their space, they are doing what they can contribute to this challenge. The structure of our economy is kind of working against our overall innovation agenda in some ways and that comes back to this topic, which is, you know, for industrial policy, what are the companies of the future that we want to see at the commanding heights of the opportunities for the Canadian economy? How do we grow them? How do we encourage them? How do we avoid some of the problems of the sixties, seventies, and sort of industrial policies that became the reason why the OECD said don't intervene in companies. They learn from mistakes. We have to learn from our mistakes of the eighties and nineties, which is saying simply providing talent and tax credits and standing back isn't necessarily going to preserve your champion companies that are so important to your industrial sectors and so on.
So, it's a rich topic and as always, looking to other countries, like looking to the U.S. and your study, the Hamilton Index looking across our peer group, is just so insightful and so, so helpful.
Robert Atkinson: Yeah, so we have a program in the U.S. that was set up. We kind of go through these phases. We went through this phase in the 1980s. That was a response to the Japanese challenge. And so, we put in place an enormous array of really almost mostly effective programs. Most of them were quite good. In fact, my first job in the U.S. was at NIS, the National Institute of Sales, which had been renamed and re-missioned, if you will.
But one of the programs that was created back then was a little program that NSF runs, National Science Foundation, called the Industry-University Cooperative Research Center program, but what it does is it says to a university, hey, you want some money, you want to focus on microelectronic MEMS, you want to focus on nano, great, we'll give you money but you have to match it dollar for dollar with companies, and you don't have to get big, big giant companies to put a lot in. It's an incredibly effective program. Even though it's not that big, the industry loves it because, first of all, there's real research going on. Like, in Berkeley, for example, the number of startup companies that have come out of that center on MEMS technology is incredible, but they also get talent.
So, look, universities are going to be universities. It's universal. I had this discussion in Japan recently where all the universities want is just give us money and leave us alone. I get that. If I were their lobbyist, I would do the same. It doesn't mean the governments have to sort of go all the way along with it. I think there are things that... like, you look at a place like MIT or University of Utah, you wouldn't think of University of Utah. University of Utah's a great, great place for entrepreneurship, largely because the governors have just focused on this. So, you can get universities who are sort of at the cutting edge and become role models and help teach, if you will, other ones. The other one too, again, not being a huge expert, but my outside view is that the polytechnics play a strong role and could play a stronger role, especially in applied technology areas and training.
Iain Stewart: You are bang on the money. The colleges and polytechnics across the country have about 900 locations across the country. So, they're in all the communities and because industry comes to them for specialized skills, they end up often working with them, and awhile ago, our Natural Sciences and Engineering Research Council set up a program to fund polytechnics and community colleges to kind of set up technology access centers, and they play a really important role in providing technical expertise and support for entrepreneurs in many locales across Canada.
The universities do this as well. Again, I'm actually very proud of Canada's universities and they've managed to sustain international research quality with the rise of China. Canada's stayed at the forefront in many domains. I think in Canada, we drift into talking about universities when actually what we really are trying to talk about is industrial policy and the important role that large companies play in our innovation ecosystems, and universities, I think, are growing the right way but they can't compensate sometimes for some of the absences or structural problems in our economy.
But growing new companies to fill that space is definitely a shared project, and it's shared for universities, for government, for community incubators. Municipal governments play a huge role, provincial governments in Canada play a huge role, and trying to take companies like D-Wave, that you mentioned earlier in your remarks, and make sure that they become all that they can become is a huge part of what we're trying to do. Now, that's a kind of broad discussion that we've had which we started out with, motivated by the Hamilton index work that you did. I don't know if we're running out of time or how we're doing here, but I think we've covered the waterfront from several perspectives at this juncture.
Shannon Quinn: Yeah, so we're coming down towards the end and before I thank you very much, maybe just an opportunity, is there anything else that maybe you were hoping would be drawn out, that you haven't had a chance to say?
Robert Atkinson: Yeah, I guess two things. One is, I remember once, a few years ago, I was at 10 Downing Street with a minister and they asked me to come over to do a little panel on what should the U.K. do, and I said, you've got to do two things. You got to speed up your innovation and production and advance. You got to do all that and you got to work collaboratively with the U.S. to counter China. If you only do the first, it's not going to succeed, and I don't expect Canada to be at the tip of the spear but if we don't counter China, and I don't... by the way, just to be clear, I'm not talking about keeping China down per se. I'm talking about countering where there are systematic, unfair trade practices, where there's forced tech transfer which occurs all the time with Canadian companies in China, IP theft, massive subsidies, limited markets, all that. So, that's number one. I do think that Canada has to think about that if the U.S. has to lead, no question about that but I do hope that Canada can come along for the ride because it's really important.
The second thing I would say is when you look at the Anglo-American countries or the Anglo countries, if you will, the one core area that we do pretty well at... compared to, say, the Japanese or the Germans, which are hardcore engineering economies. We do better at two things: science, so again, to your point, science-based innovation, to me, is going to be a Canadian strength, and software innovation. I really think that even with the little layoffs at Google and whatever, ultimately, this is going to be... the next two decades are going to be digital and they're going to be digital embedded into mining, into cities, into farming. So, having a really strong software economy is critical, and I know you do that, you have some great university programs in Canada, but I just encourage you to keep going on that because software capabilities are really what companies are looking for today.
Iain Stewart: One of the flagship things we do is run a funding program, the Industrial Research Assistance Program, all across the country, 110 locations across the country, and the primary area we focus in year over year over year is digital startups and there are great ecosystems from, well, actually, in every major Canadian city, to be frank, around growing and nurturing digital startups, and I agree with you. When I travel internationally, Germans want to hear how come we're so successful at growing digital startups? What's our secret sauce? Now, being from the NRC, I think IRAP plays a huge role in that but it takes many hands to create a good digital community and it is a strategic advantage. When I was in Israel earlier this year, they were explaining how they want to use their digital startup strength to leverage into ag tech, to leverage into med tech, and we, in Canada, do that as well. It's a real opportunity for us on our innovation.
Robert Atkinson: I mean, I think that is the next big thing, I mean, I hate that term, Fourth Industrial Revolution, but ag tech, mining tech, you name it, embedding auto tech. If your auto sector is good at software, it is an advantage we have in North America. So, I do think that thinking about how do you create that integration between kind of traditional industries and have them drive the next wave of innovation through integrating IT is critical.
Shannon Quinn: Well, thank you so much, Iain, Rob. It's been thought-provoking, it's been honest. I think we've all been challenged to think about how we could do things differently and, in some cases, better. So, thank you so much.
Robert Atkinson: Thank you.
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