The limits of the economic model of public subsidies
As published in La Presse
The Canadian and Quebec governments have issued a flurry of headline-grabbing announcements to attract foreign companies to the battery industry. We’ve lost count of the billions of dollars in direct subsidies paid.
Speaking before the Metropolitan Montreal Chamber of Commerce last week, Prime Minister Justin Trudeau said, “Building healthy industries moving towards carbon neutrality will yield much more than taking this money to reduce the debt.”
There is something deeply simplistic and unhealthy about this economic model, of a public cheque book bent on attracting foreign companies. Obviously, this isn’t about banning or discouraging foreign investment—it’s a necessary thing in a mid-sized economy such as ours—but to go from there to considering it as a sort of magic potion for long-term economic growth is a wide river to cross.
On the one hand, in an employment market characterized by labor shortages, we’re just moving jobs from one company to another, largely to the detriment of SMEs.
On the other, you might wonder if it’s a good idea to put all our eggs in a sector where North American competitiveness in the future is far from being assured. Right now, our production costs remain stubbornly high, and China has a considerable head start over us in supply chain terms. Though there are sectors where we are better positioned: water and energy, artificial intelligence and robotics, biotechnology, aerospace, agri-food, infrastructure, and advanced materials.
Dangerous idea
The idea that government subsidies to foreign companies in themselves will make Quebec and Canada more innovative economies is dangerous. The Americans, Germans, South Koreans, Israelis, and Dutch, to name only a few, have long understood the fundamental contribution of their public research institutions and the importance of coordination in their innovation ecosystems.
Innovation builds on the strength of an ecosystem fueled by the kind of research and development (R&D) that is transferable to Quebec and Canadian companies. In simple terms, we must concentrate on the way (the mechanisms and incentives) we translate intellectual capital and public R&D into more private R&D and ultimately into more innovation and economic growth.
Finally, these “investments” do not in fact create innovation or Quebec and Canadian intellectual property. We’re essentially importing technology from elsewhere that will only yield very small net economic returns for Quebec and Canada. We must instead prioritize local industrial research in our own innovative and productivity-enhancing industries.
To do this, we must create and build bridges and collaborative institutions between the public and private sectors.
It’s at the basis of the ARPA model in the United States, which has been rolled out in defense (DARPA), energy (ARPA-E), biomedical research (BARDA), and, more recently, health (ARPA-H). To this list we can safely add NASA (aerospace), which works roughly along the same lines. It’s the basis of the Max Planck and Fraunhofer model in Germany. It’s the basis of LabEx in France. It’s the basis of the TNO model in the Netherlands, a country half the size of New Brunswick that is the second largest agricultural exporter in the world.
Canada and Quebec need, as a key element of their sectoral industrial strategy, a modern incarnation of what were once known as corporate labs in its innovative industries— places where industrial research, conducted in collaboration with governments, universities, and businesses, leads to real and wide-scale innovation in the economy.
Converting ideas and knowledge into products, services and intellectual property is still a formidable challenge. Making industrial policy out of subsidies to foreign companies and believing that our universities are “innovators” is a recipe for economic stagnation. A modern industrial policy requires an institutional infrastructure to support modern applications of science and technology in highly competitive and advanced local industries. Canada and Quebec have many support mechanisms that are quite peripheral overall, but few or no real generators of innovation. We do not, here in Canada, have a DARPA, a Fraunhofer, a LabEx, or a TNO.
We have to push for an economic growth model in which the intellectual property created by our public R&D funding will drive Canadian companies’ economic growth through innovation and technology adoption. Ultimately, it is that that will kickstart our progress on productivity.
