Sunday, August 15, 2004
Macroeconomy and innovations : Canadians are beginning to ask themselves why Canada is not able to translate its high potential for innovations into home-grown technology winners. Right question, wrong answers.
What is it about a society that makes it more suitable for innovation? Are there any macroeconomic policy options for the government to stimulate innovation and monetize it for its citizens? Let's make a very simple model of wealth creation in which R&D supply is "purchased" for a society by its government, productization is done by entrepreneurs and financial markets serve as intermedieries. Government funding or R&D in labs and universities as well the development of well-regulated finanical markets can be effected by sound policy-making. However, the key differentiator is entrepreneurship, which is as much a manifestation of culture and societal values as it is a product of personal attitudes and public policy. If policy-making addressed this part of the equation, then that would lead to improvement in macroeconomic wealth-creation.
Think about why the US has been the innovation engine of the West, even though most western economies spend similar amounts on government R&D and have access to well-developed financial markets. It is openness, meritocracy, forgiveness of failure, willingness to take risks, availability of risk capital looking for high returns, cultural diversity and a belief in free enterprise. Compare these to Europe and Canada to see the contrast. Avoidance of risk, lack of diversity and an ambivalent attitude towards wealth creation through entrepreneurship are some of the key reasons why Canadians and Europeans have been losing the innovation race to the US. While a lot of these factors are a product of history, many of them also have real implications on policy-making. For example, compare the US bankruptcy laws with France. Or look at capital gains tax difference between US and Northern Europe. Or see the laws on stock options and their taxation/accounting. Look at the acceptance and assimilation of non-natives in the job market, as well as in corporate hierarchies.
Sound policy-making can indeed overcome many hindrances to entrepreneurship by addressing these factors. Specifically in the US-Canadian context, the major differences are in attitude towards risk-taking and the assimilation of non-natives in the labour market. What policies are in place in Canada to encourage risk-taking and absorption of imported skills in the economy? Why is it that a much smaller percentage of Canadian entrepreneurs are foreign-born compared to the US, inspite of Canada having a higher foreign-born population?
In my opinion, one big breakdown is in Canadian labour market. Canadian policy makers should be asking themselves some very hard questions about why some of their most qualified immigrants face extremely high barriers to entering the work force, because that has a disroportionately large adversarial impact on entrepreneurship and wealth creation. Comparison to the US on that parameter of policy-making is startling. For more research, look at these:
1.Immigrant Skill Utilization in the Canadian Labour Market:
Implications of Human Capital Research (University of Toronto)
2.The Hidden Job Screen (Trinity Western University)
Compare this with the US:
1.Silicon Valley's New Immigrant Entrepreneurs (Public Policy Institute of California)
2.Local and Global Networks of Immigrant Professionals in Silicon Valley (Public Policy Institute of California)
Note to Canadian policy-makers : next time you hail a cab, take a good look at the driver to see the failure of Canadian labour market policy staring at you in your face. Fixing it would go a long way in helping Canadian entrepreneurship.