Category Archives: Innovation

What Drives the Circular Economy

sharing-economy

Published in the Telegraph-Journal 14th May 2013

Economists continue to insist that the recovery is at hand, even though unemployment remains stubbornly high, global warming continues unabated, GDP growth stagnates one quarter after another and governments stagger under record deficits.

In the face of these set-backs or even outright failures, some are asking whether more economic growth is the single solution to deliver prosperity and well-being for our societies. There is little denying that development and growth is essential for poorer countries but in the advanced economies the argument is gaining momentum that ever-increasing consumption makes little contribution to human satisfaction. In addition, the critics of unconstrained growth charge that the ecosystem that supports economies is straining to the point of breaking under the weight of rising consumption. For these critics, the solution is devising a route to prosperity that does not depend on continued growth.

This limited-growth thesis has startling implications. It proposes that society has reached a fundamental turning point in its economic history in which the growth of industrial civilization can no longer be guaranteed. Economic orthodoxy would view this as heresy. Supporters view the limits to growth as the most urgent task of our times. They see the possibilities of flourishing within the ecological limits of a finite planet. And they see an opportunity to improve the sources of well-being, creativity and lasting prosperity that lie beyond the reach of the market.

This is what became known as the sharing economy. Participants in this economy were developing better ways to share fewer resources for less money, sacrificing or limiting their ownership of things such as living accommodations, vehicles, clothing and consumer technologies. The sharing economy, which can be seen as a circular economy rather than the conventional linear economy, was built on the belief that, because the Internet had connected everyone, a global inventory had been created that could be discounted and shared.

The profit margin from the sharing business was significantly smaller than anyone thought even a few years ago. With time and perspective, the circular economy has failed to take over in the way it was anticipated. Instead, its resilience has been uneven and limited to specific segments of the market. The ideal sharing economy customers are young urbanites who value flexibility and savings over consumer purchases. The question is how much of their decisions are ideological and driven by concerns for the planet.

But the limited success of the circular economy is only part of the story. Tim Jackson, professor of sustainable development at the University of Surrey and an economic adviser to the UK government, makes a compelling case against continued economic growth in developed nations. Mr. Jackson argues that “prosperity goes beyond material concerns”, and at beyond a certain point growth does not increase human well-being. Mr. Jackson asks if it is conceivable that economic growth may not deliver lasting prosperity.

These concerns have some resonance in New Brunswick. Some are beginning to question if conventional economic growth is the solution for everyone in all parts of the province. New Brunswick is a society with not insignificant economic problems. Life in this province can be, for an increasing number of its residents, more difficult than in other places. But New Brunswick also possesses greater strengths and assets and it is clear that most residents find it a rewarding place to call home.

Facing a slowing economy, increasing regional disparities and a chronic skilled human resource scarcity, governments and businesses will soon be forced to review the prospect that unorthodox directions should be considered alongside those traditional policy solutions that have shown limited effectiveness for an increasing number of New Brunswickers.

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Filed under Economic Growth, Innovation, Sharing Economy, Social policy

We Need to be Ready for Immigration in New Brunswick

Shanghai Times Square, and bus 926

Published in the Telegraph-Journal 7th May 2013

The shortage of skilled labour in the Alberta oil sands has become a vexing issue that today is emblematic of our thinking about how Canada can maintain its prosperity in the 21st century. A similar lack of labour exists across the country. The Conference Board of Canada has forecast that within 10 years, there will be a shortage of more than a million workers across Canada. This shortage is a serious risk to our potential to compete into the future.

In Atlantic Canada, a third of the population will be over 65 in less than two decades. In the absence of Atlantic Canadians suddenly having radically larger families, the region will need to dramatically increase its immigration levels in order to compensate for the steady out-migration that continues to characterize the region. Even promising growth in some industries, in ship building in Nova Scotia and oil and gas finds in Newfoundland and Labrador, has not stemmed the flow of young people from the Atlantic provinces to the West.

For New Brunswick, the great challenge for the 21st century will be to find and attract the people we need to rebuild our economy and way of life. To achieve this, we will need to provide immigrants with real opportunities. We will need to embrace the ways they will reshape this province and integrate them into our communities.

The solution would appear straightforward enough: simply open New Brunswick’s borders to immigrants and wait for people from other countries to populate the province. The reality is more complex.

To grow our population and maintain our standard of living, we will need to welcome thousands of immigrants, a far larger number than are attracted to the province today. To compete with the magnetic pull of cities such as Toronto, Montreal, Calgary and Vancouver, New Brunswick communities must grow substantially and sustainably. Immigration is not a panacea, but ignoring immigration and its attendant diversity, as well as its beneficial effects on trade, innovation and international networks, is not an option. We need to realize that an essential and defining part of New Brunswick’s identity and brand must be that the province is recognized as an open and welcoming society.

Enormous transformation will be necessary for New Brunswick to achieve economic success in the near and medium term. Radical alterations in immigration policy — and the dramatic demographic changes that will be brought about by the large-scale arrival of immigrants to this province — will not come without wrenching dislocation.

In her 1961 classic, The Death and Life of Great American Cities, urban activist Jane Jacobs argued that “economic development, no matter when or where it occurs, is profoundly subversive of the status quo.” This is a succinct explanation for the failure of many policies and programs that generate and support economic development and why they are not implemented. New rules of the game can be an inherent threat to those that benefit from the status quo.

This argument has it that the real preference of those with entrenched influence in many cases is the maintenance of the status quo rather than disruptive economic development. It is also an explanation for why there is so much public obsessing over labour shortages, lack of innovation and shortfalls in investment, but relatively less discussion of the more radical approach that substantial increases of immigration would represent.

Currently, the issue is largely moot. While the imperative to stabilize New Brunswick’s population is real enough, there are substantial challenges associated with keeping immigrants in this province. Attracting skilled workers is one obstacle to be overcome but retaining them is another. New Brunswick first needs to be viewed by the world not as a second-class destination but as a place of opportunity equal to Ontario, Alberta and Saskatchewan.

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Filed under Immigration, Innovation, Job creation, Unemployment

Health Care Has Become a Signal Issue of Our Time

Published in the Telegraph-Journal 19th October 2012

Canada’s publicly-funded health care system is poised to undergo its greatest reform since the signing of the Canada Health Act in 1984. The reasons for this pending transformation have much to do with health care’s financial unsustainability. A number of factors will drive changes in the total health care spending-to-GDP ratio over time. In New Brunswick, these factors include changes in the age demographics of the population because per capita health care spending increases rapidly beyond a mid-40s age threshold.

An additional challenge involves GDP growth that has effectively stalled while health care costs continue to rise by significantly greater than inflation. While New Brunswick’s fiscal deficit has been brought largely under control, government’s debt remains high. Historically low interest rates have helped to keep the government’s debt service costs low as well, but this is a temporary phenomenon. To compound the problem, global population aging is set to place upward pressure on long-term interest rates and therefore intensify debt service costs over the next fifty years.

Health care technology is one of the cornerstones of the cost challenge. Technology has increased efficiencies and dramatically improved the quality of medical services. Changes in medical technology and practices have had a material impact on health care spending. The introduction of more sophisticated tools has been shown to increase demand for health care services and raise costs. Pharmaceutical technologies have increased costs even more dramatically. In Canada, technology changes accounted for as much as 25 per cent of the growth in real per capita health care spending from 1996 to 2009.

Even with substantial health care reforms, a combination of initiatives will be necessary to cover rising health care costs. Individuals and employers may be faced with increased spending for government services in the form of fees or surcharges. However, the public may still see a reduction in government services. Increased taxes to finance the public share of health care spending may become necessary. Budgetary restrictions may lead to some form of co-payment spending by individuals on health care services that currently are provincially insured.

This could lead to the development of a privately funded health care system to provide better-quality care for those willing and able to pay for it. The UK and many European countries have this “two-tier” system, and New Brunswick already has elements of this system in place in the form of private clinics. The partial privatization of health care would have little impact on the rate of growth of total spending although it does alter the public-private split and has distributional implications. There is a greater risk that a weakening of the health care system will lead to a major degradation of publicly-insured health care standards such as longer queues, lower quality service provision and delisted products and services.

At the same time, technology will be one of the cornerstones of the transformation needed to realign health care with our fiscal reality. Over the course of more than 15 years, numerous attempts have been made to wield technology to introduce greater productivity into the health care system, but so far there has been little progress. Significant potential clinical and financial benefits would be achieved with the implementation and networking of health information technology (HIT), primarily through the widespread adoption of electronic medical records (EMR). By improving health care efficiency and safety, HIT-enabled prevention and management of chronic disease could significantly increase benefits.

However, in New Brunswick, these benefits are unlikely to be realized without related changes to the health care system. These changes amount to a full-scale transformation of health care, our fundamental assumptions about how it is provided and how we plan to pay for it.

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Filed under Economics, Finance, Fiscal Policy, Government transformation, Health Care, Innovation, New Brunswick

Talent Recruitment Dominates Innovation Discussion

By Peter Lindfield, published in the Telegraph-Journal 18th September 2012

The questions are familiar: why do some companies embrace innovative thinking and bring to market compelling new products and services, while others falter and are unable to compete? Why do companies and regions that were models of competitiveness fall to the wayside? Why do entrepreneurs succeed in some regions but struggle in others?

To government policy-makers, economists and business people who seek to support creativity and reap its benefits, these questions are of compelling and enduring interest.

Although there has been no shortage of effort to develop an overarching theory of innovation, there is no model with the necessary probative value and explanatory power to provide a reliable roadmap or blueprint for growth. But there are a substantial number of practical lessons that policy-makers and business managers can leverage today.

First, innovation thrives in ecosystems. For more than 30 years, Harvard University’s Michael Porter has elaborated on how regions around the world have become internationally competitive and how they possess common features of success.

His now-famous theory of national advantage places the elements of an ecosystem – firm strategy, demand conditions, factor conditions and related and supporting industries – at the centre of competitive capability. There are disagreements over whether Porter’s model is accurate, but the concept of competitive ecosystems has become embedded in the economic growth lexicon.

Second, innovation is more than hardware, machines and tools. Some of the most powerful industry success stories have been the consequence of process innovation.

Outsourcing, continuous improvement and data mining, among other process innovations, have revolutionized companies in every industry. Innovation is spurred when a powerful technology platform becomes widely used. The economic growth of nations today is inextricably linked to the adoption of information and communications technology.

Third, the drive to attract talent dominates industries and at two levels. Entrepreneurs are a critical factor in industry innovation but entrepreneurs alone are unproductive without the skills and ambitions of their workforce.

A key characteristic of competitive regions is not only that they attract the leading entrepreneurs that can become household names, but they are also a magnet for the supporting talent that entrepreneurs need.

In mature economies, skilled talent has become mobile, seeking the best environment in which to thrive and become prosperous. Companies must think beyond boundaries to make investments in creative talent sourcing practices, develop global talent competencies and cultivate the powerful employer brands with which their employees can identify.

This means that corporate culture is critical to the retention of employees who have other options.

This has profound implications for many regions. Every industry is caught in a global squeeze for people.

Finally, consistent government support matters. The intersection of innovation, policy and investment has always determined the rate at which economies advance.

For Porter, the appropriate role of government is encouraging companies to raise the performance of firms. Governments achieve this by enforcing strict product standards, fostering early demand for advanced products and stimulating local rivalry by encouraging competition and limiting direct co-operation.

But governments increasingly are constrained by high levels of debt and the rising costs of entitlements, such as health care, education and social welfare. In the absence of raising taxes, which may discourage investment, governments will need to balance debt-reduction measures with expenditures to support growth.

This puts high-debt regions at a disadvantage, at least until their debt levels recede.

Governments additionally are subject to the effects of ‘time compression diseconomies,’ a term coined by INSEAD professors Ingemar Dierickx and Karel Cool: when an organization tries to compress substantial effort and growth into a short time frame, it will not be as effective as when that effort is distributed over a longer period of time.

Consistent effort over a long time frame has been shown to pay dividends. But this approach runs headlong into the challenge of how much time is available before it is too late.

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Filed under Innovation, Labor force management

Will Social Impact Bonds Revolutionize Public Services?

By Peter Lindfield, published in the Telegraph-Journal 13th July 2012

With the persistent issues of rising health care costs, homelessness and poverty, it is becoming increasingly apparent that the old paradigms of government aid and individual benevolence are inadequate to the future challenges that face us.

With budget pressures mounting at all levels of government, it will be critical to adapt to changing needs and expectations. Social impact bonds are being considered as a way to provide services in areas such as justice and corrections, mental health, homelessness and support for people with developmental disabilities. Bond issues have been directed to reducing crime and homelessness. These two challenges have interventions where there exists knowledge about what works and where costs can be reduced. They also have outcomes where measurements are possible in the medium term.

How social impact bonds work is deceptively simple. Private investors fund new services and are repaid their capital and an agreed-upon profit but only if social outcomes that are also agreed upon in advance are met. Social impact bonds are focused on outcomes rather than outputs, so governments – and the public – pay only if an initiative is successful. This pressure to achieve outcomes creates an incentive to innovate. Social impact bonds may fundamentally alter how some social service programs are structured, improving outcomes and reducing costs for government departments and social sector organizations.

The promises of improved outcomes and future cost savings are attractive propositions for governments. In the last federal government budget, Finance Minister Jim Flaherty said that the bond concept holds promise, stating that government was considering them. In his recent report, Don Drummond recommended that the Ontario government initiate pilot bond projects in a number of areas. Alberta’s Premier Alison Redford has committed to the introduction of social impact bonds in that province. In the U.S., Massachusetts is working to sign contracts to back $50 million in social impact bonds for two projects. The first is targeted to people exiting the juvenile justice system to make the transition to adult life, while the second will support housing for the chronically homeless.

This financial innovation is not without its detractors. The National Union of Public and General Employees (NUPGE) claims that the social impact bond funding scheme for public services introduces risks in the form of “higher costs, reduced accountability and privatization”.

“We will oppose these deals at every step,” said James Clancy, NUPGE national president. “Social impact bonds are just the latest quick fix funding scheme to catch the attention of governments. We urge governments to find the financial resources through a fairer tax system to invest in social programs and public services, instead of wasting time on more expensive and riskier ideas.”

The McKinsey Group points out that establishing rigorous outcomes-oriented management carries risk as well as reward. In a recent report on the potential of social impact bonds, McKinsey stated that it is easier to secure resources if a bond’s assessment provided evidence of significant impact, “but poor or misinterpreted results could lead to lower levels of financial support. Ongoing performance management, in which the nonprofit learns from what it is doing wrong and becomes more effective in achieving its mission, is crucial to long-term success”.

Social impact bonds are the latest example of two important movements in the delivery of social services. One is measuring outcomes rather than outputs while the other is financial reward for the achievement of that outcome. Both movements should be welcomed by beleaguered taxpayers.

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Filed under Finance, Government transformation, Innovation

How Technology Startups Fail

By Peter Lindfield, published in the Telegraph-Journal 6th July 2012

With the recent decline of Research In Motion and the earlier failure of Nortel on the Canadian technology landscape, questions are being asked about the health of the knowledge-based sectors of the Canadian economy.

The viability of Canada’s technology sectors is directly proportional to the success of its startups and early stage companies. Even these early stages of growth, too many technology firms are failing. We need to identify the reasons for these failures and understand why we haven’t taken the necessary actions to improve survival prospects for entrepreneurs.

Starting and growing any business is a challenging undertaking. Substantial research over the last 30 years of Canadian technology companies have revealed that while entrepreneurs tend to focus on technology, many have serious gaps in business skills. In these studies, three key factors have been identified that conspire to accelerate technology startup and early stage company failures: inadequate management skills, underdeveloped operational competence – especially in sales – and dysfunctional governance.

These findings highlighted that in many companies that failed, poor management planning decisions reveal a lack of awareness of changing competitor and market conditions as well as a misreading of markets. This failing usually involved overestimations of the size of the customer base. Product development often included little or no input from potential customers and the development cycles themselves were often far longer than planned. Poor planning and organization in some startups and early stage firms delayed the establishment of a viable customer base and without the capacity to generate revenue, these firms quickly burned through their cash. Others spent their time attempting to establish distribution networks even before they had products or customers. Some entrepreneurs were preoccupied with raising money but neglected customer relationships and organizational issues, while other misjudged the market and simply ran out of options.

Many technology startups had substantial problems with managing sales organization, planning and financial control. An inadequate knowledge of such critical sales management functions as distribution channels, compensation and territory development hindered revenue growth and reduced margins. Unmet sales forecasts eroded confidence in the company’s management and encouraged unnecessary risk taking. Many firms had identified markets rather than actual potential customers. High salesperson turnover reflected the consequences of hiring inexperienced personnel, but inadequate recruitment skills ensured that the problem could not easily be solved.

Governance is a clear challenge. Goals and expectations of management and boards of directors were often not shared, particularly with respect to exit timing and conditions. Too many board members lacked operational experience. An insufficient number of board members were independent and boards tended to be overrepresented by finance specialists. Board members often had no clear understanding of sales or practices associated with productive interactions with customers. Inexperienced finance specialists or lawyers were sometimes placed in positions of responsibility on boards of young firms.

Studies also revealed that more Canadian venture capitalists and angel financiers lacked operational experience than their American counterparts, many of whom are serial entrepreneurs. Investors who did not fully understand the nature of the business in which they were investing, tended to under-invest. Canadian lawyers and accountants similarly lacked operational business experience.

According to research undertaken by the now-defunct Science Council of Canada, the most common reactions of boards of directors of startups and early stage technology companies to impending trouble were changing key personnel, especially the CEO, attempting to raise additional financing, or changing the target market. These board reactions rarely addressed the real issues faced by the firm.

Improvements in management expertise, operations skills and a movement to good governance are all within the realm of the possible for startup and early stage companies. Large, successful firms have long ago identified excellence in management and a professional approach to selling as critical to their continued survival. In recent years, good governance has become an indispensable factor in a company’s success. We urgently need to redouble our efforts to support innovation where it is most fragile and where it has most promise.

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Filed under Entrepreneurship, Innovation

Is Crowdfunding the Answer to Private Equity Investing?

By Peter Lindfield, published in the Telegraph-Journal 3rd July 2012

There is widespread agreement that Canada has been falling behind in innovation and entrepreneurship support. At the same time, the availability of private equity investment has been declining for small and medium businesses in Canada. Angel and venture capital investors have reduced early stage investments over the course of the last decade.

Even though there is recognition among business analysts and industry leaders that we need to accelerate the growth of startups in Canada, the more rapid pace of change in other jurisdictions means that Canada risks losing next-generation leaders to more sophisticated funding environments.

Some business leaders think a new investment phenomenon is a potential answer to Canada’s perennial problem of the shortage of investment capital for innovative entrepreneurs. A powerful new merger of social media and finance known as crowdfunding promises to accelerate the growth and support of innovative startups. Crowdfunding involves the collective co-operation of people who network and pool capital to support startups. Proponents of this investment approach argue that it allows good ideas to be funded even when they do not fit the pattern established by conventional investors.

The U.S. JOBS Act, which allows for a wider pool of smaller investors with fewer restrictions, recently was signed into law by President Obama and the U.S. Securities and Exchange Commission (SEC) and will establish specific funding rules. But crowdfunding has not received regulatory approval in Canada.

John Reid, president and CEO of the Canadian Advanced Technology Alliance (CATA), thinks Canada needs to adopt crowdfunding to allow this country’s emerging small- and medium-sized companies to keep up with the pace of change. “Frustrated Canadian entrepreneurs will see the advantages offered by the crowdfunding provisions for raising capital when those provisions are implemented in the United States, and they will take their best ideas to the U.S. to develop and commercialize,” said Reid.

Proponents of crowdfunding such as CATA and Invest Crowdfund Canada (ICC) claim that if securities regulators approve crowdfunding in this country, the new investment vehicle will help establish new markets, create new jobs and connect buyers with sellers in lower cost models. ICC is comprised of national industry leaders who have volunteered to create legislative change to legalize investment crowdfunding and bring Canada forward in its support of growing startups.

Crowdfunding is not without its disadvantages for startups. There is a requirement for the startup to publically disclose the intellectual property of the business opportunity for which the funding is sought. This can be a significant drawback for companies seeking to protect their innovation portfolio. At a very early stage, an organization’s intellectual property may be less defensible, exposing the organization to the prospect that the intellectual property can be copied and developed more rapidly by better-financed competitors. Similarly, making public such guarded information as business plans and financial statements can present real risk to startups.

Another significant challenge to crowdfunding is securities regulation. Soliciting investments from the general public in most jurisdictions requires that the opportunity is filed with the appropriate securities regulatory authority. The New Brunswick Securities Commission has not yet provided its approval for crowdfunding.

Investment capital is in short supply in New Brunswick. Is crowdfunding the answer? Innovative firms may never fully develop if they are not carefully provided with financial support. But financing is not the only problem facing many startups. Management experience, developing defensible intellectual property and early operational expertise are needed for startups to survive.

However, adequate investment is critical in New Brunswick where many local firms are likely to be small with few financial resources relative to the established firms against which they have to compete. The transition to broader competition needs to allow time for these small firms to adapt and improve themselves. Underfunding at an early stage simply exposes startups to greater and unnecessary risks of failure. If crowdfunding is approved as an additional investment method, we may make greater headway to support the entrepreneurship this country critically needs.

[Header image courtesy of www.crowdsourcing.org]

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Filed under Entrepreneurship, Innovation, New Brunswick