Productivity is the most critical determinant of any economy’s long-term growth potential. It represents the value of goods and services produced, divided by the number of hours needed to produce them.
Productivity increases when businesses invest in new machinery, equipment, technologies and structures, and when workers become better educated and acquire in-demand technical skills. Productivity gains are also realized when additional output is created by doing a better job of combining inputs through the application of fresh ideas, advanced technologies and improved business models. In more productive economies, employees typically receive higher compensation, and governments can obtain the resources needed to provide good public services without having to resort to ruinous levels of taxation.
In recent decades, British Columbia has faced a persistent productivity challenge, one reflected in a pattern of generally lacklustre productivity growth. B.C. currently ranks fifth among the provinces in overall productivity – the value of output per hour worked. Like Canada as a whole, B.C. needs to up its game in areas central to raising productivity: building skills and talent, scaling up businesses and encouraging investment in physical capital, technology, infrastructure and various forms of “intangible” capital.
In our view, innovation is the most important pathway to a more productive B.C. economy. Indeed, innovation has become the primary engine of growth in all modern economies. It often flows from research – fundamental, experimental or applied – which leads to the development of new products or knowledge in the form of intellectual property and advances in technology. However, more commonly, innovation involves incremental improvements in production processes and in the quality of goods and services.
The Conference Board of Canada regularly publishes an assessment of where Canada stands on innovation, relative to other advanced economies. In its latest report, Canada again receives a middling grade, ranking ninth among 16 peer economies.
Canada’s innovation-related strengths include strong academic institutions, excellent science at the “upstream” end of the knowledge spectrum, and an entrepreneurial business culture. In the last decade or so, Canada has made progress in a few other areas linked to innovation, including the availability of venture capital and the expansion of broadband connectivity (although even here we are only average performers by advanced-country standards). Canada’s principal innovation shortfalls are around private-sector research and development spending, the difficulty of commercializing new knowledge and technologies, a slow rate of technology diffusion across the business sector and the presence of relatively few global-scale Canadian-based firms. Canada’s innovation-related strengths and weaknesses are replicated in British Columbia.
Innovation is about more than “big-bang” breakthroughs or producing new or better products; it also encompasses how quickly leading-edge technologies are adopted across the economy and the pattern of value-augmenting changes in organizational processes, management practices, manufacturing systems, service delivery, logistics, marketing and the development and deployment of human resources.
In Canada, including British Columbia, innovation is frequently identified (or conflated) with the high-technology sector. But innovation is not about any particular industry. The need for innovation is widespread across the economy – including the public sector. For British Columbia, a successful innovation strategy is not mainly about growing the high-technology industry (although that is a desirable goal). Instead, the focus should be on establishing an economic and policy environment that encourages all sectors to use leading-edge technologies, digital tools and other forms of advanced knowledge to improve performance, facilitate enterprise growth and produce high-quality goods and services for global as well as local markets.
What are the elements of a smart provincial innovation strategy? We would emphasize:
•Better connect and integrate B.C. businesses to global markets and supply chains to help more local companies export and grow into larger enterprises.
•Use public-sector procurement to stimulate business innovation.
•Provide a ready supply of talent – through the education system, technical and other skills training and well-targeted immigration policies.
•Leverage B.C.’s strengths in health-related research, health data, life sciences and selected fields of health delivery to build a better health-care system and an increasingly export-oriented health innovation cluster.
•Revisit and modify tax policy to ensure closer alignment with the imperatives of an innovation-led economy. Among other things, this means reducing the tax burden on investments in assets and activities that drive higher productivity; developing incentives to spur companies to acquire and use advanced process technologies, digital tools and up-to-date machinery and equipment; keeping personal income tax burdens at reasonable levels to support the retention of talent; and reforming the business tax system to encourage businesses to scale up in size and sophistication. •
Jock Finlayson is the Business Council of British Columbia’s executive vice-president and chief policy officer; Ken Peacock is the council’s chief economist.
As published by Business in Vancouver.