Economic Development Strategies Need New Perspectives

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Published in the Telegraph-Journal 11th December 2012

Government, business and academia are beginning to recognize the importance of the economic growth even if they are not in full agreement about what to do about it. Canada’s standard response to global economic transformation has essentially resulted in maintaining the status quo but this can no longer be enough. For future generations to continue to enjoy the high standard of living that has become emblematic of the Canadian identity, elements of an economic development strategy may be necessary

What is clear is that some of the policy measures initiated at the provincial or federal level must be integrated into a comprehensive, long-term country-wide strategy. At the same time, this national vision must be incorporated into approaches that respond to local conditions on the ground because not all economic growth is created equal. In Canada, a large number of firms are small and medium size (SME), without the critical mass to compete internationally. While business mythology has it that SMEs are responsible for the creation of the largest number of jobs in Canada, this statistic is not the whole story. The key success factor that underpins whether firms will grow and create jobs is not size but an ability to sustain high levels of growth.

Across industries in Canada, and irrespective of firm size, a small percentage of firms that achieve high growth are responsible for driving a disproportionately high level of economic expansion. A study by the Conference Board of Canada states that more than forty per cent of new jobs come from the fastest growing 5 per cent of all firms. In the U.S., from 1998 to 2008, high growth firms were responsible for significantly higher productivity levels than other firms across size and sector characteristics.

We start off productively enough. Canada has a high level of entrepreneurial activity, but over time several factors – such as risk aversion, low export activity, lack of practical university support and weak R&D spending, have conspired to suppress firm growth. Ensuring that these firms are able to achieve scale and sustain their growth to compete on global markets should be a key priority for government, business and academia. Among OECD nations, Canada produces more than its fair share of fast growing firms under five years old.  But as Canadian firms mature, fewer are able to sustain growth, while firms in countries such as the U.S., Sweden and Israel accelerate their growth.

In recent decades, Canadian productivity has substantially lagged the United States and other advanced economies. Productivity growth in Canadian manufacturing averaged less than one per cent between 2000 and 2008 against 3.3 per cent for the American manufacturing industry. Although 4.5 per cent of American services firms are able to sustain their high growth trajectory, fewer than three per cent of Canadian firms are able to do so. Comparisons with other countries in areas such as the number of trade agreements reveal similar disparities. That Canadians have signed far fewer trade agreements than many of its OECD counterparts illustrates our over-reliance on the American market which ironically was strengthened by the North America Free Trade Agreement.

Firms must aggressively exploit opportunities for growth and continually re-evaluate strategic priorities to address a highly charged competitive environment. Mid-size firms that are competing internationally usually are adept at taking advantage of government and university programs and assistance. But there has been very little research performed on how firms can achieve escape velocity to transition from successful start-ups to becoming viable and competitive global players. Instead, governments and academia remain transfixed by the dynamics of start-up sustainability and competition. For firms that seek to move to becoming more global in scope, there is substantially less capable advice, support and intelligence.

Because demographics increasingly constrain the ability of a reduced workforce to support an aging population, we need bold competitors on the world stage. While some Canadians have shown that they can compete globally, too few of our business leaders go down this path. We know that this needs to change but government and academia need to provide the necessary guidance to minimize risk and uncertainty.

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Filed under economic development, Innovation strategy

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