“Building Canada’s Prosperity
in a New Century”
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Gordon Nixon
President and Chief Executive Officer
RBC Financial Group
Canadian Club of Montreal
Montreal, Quebec
May 6, 2002
It is a pleasure to be in Montreal, a city deeply rooted
in Canadian history, and vibrantly engaged in tomorrow's
economy. Over the last decade, Montreal has undergone an
economic renaissance, and like the rest of Canada, is now
looking at how it can lay the foundation for a new era of
prosperity. That is what I would like to talk about today:
How Canadians can work together to build our nation's prosperity
in the global economy.
Canada has made significant progress in the last decade.
From the fiscal framework of government, to the quality
of life enjoyed by our citizens, Canada is one of the best
places in the world to live, work and raise a family.
Consider, for example, the turnaround in the management
of Canada's public finances. As a nation, we have gone from
chronic budget deficits to the strongest surplus position
of any G7 country.
Consider, also, the growth of Canada's exports, which has
created four new jobs in five since 1993. Exports of goods
and services, which accounted for 25 per cent of Canada's
output before the Free Trade Agreement with the United States,
now comprise 45 per cent of our GDP.
In addition, our economy has become significantly more
diversified. Three decades ago, more than two-thirds of
our exports were in natural resources. Today, that figure
is less than one-third and falling as Canada moves ahead
in value-added sectors such as information and telecommunications,
aerospace, biopharmaceuticals and product design -- all
mainstays of the Montreal economy.
However, notwithstanding the progress that we have made
over the past decade in managing our public finances, reducing
deficits, lowering taxes and taming inflation, there is
no basis for complacency and still grounds for concern.
The past is important in that it creates a base for the
future, and while we have a solid base, it is critical that
we move forward to the issues of this decade.
Our standard of living has not kept pace with other industrialized
countries. We face challenges in areas of critical importance
to our social well being such as healthcare, education and
the infrastructure of our major cities. And we must do a
better job in the key drivers of competitiveness such as
innovation and productivity.
As Roger Martin of the University of Toronto and Michael
Porter of Harvard University noted last year, Canada's global
economic ranking slipped from third place to fifth during
the 1990s. According to their study, "had Canada maintained
third place in the world, the income for the average family
of four in Canada would have been higher by 10 thousand
dollars in 1999."
The long-term decline in the exchange rate has further
compounded the problem, and in areas like productivity,
innovation, regulatory efficiency and global industry leadership,
we have lost ground. And while we benefited from a rising
tide of global economic growth in the 1990s, the next decade
will, in my view, be more challenging if we don't focus
on the fundamental issues.
I believe our country is at a major crossroads in this
regard, and that we have some tough policy decisions in
front of us. Our competitive performance is Canada's only
lasting source of economic vitality, and we must collectively
become more focused on its key drivers. We must do this
not by driving down wages, but by developing high
value goods and services which the rest of the world wants
to buy, and which provide good jobs and a high standard
of living for Canadians. This is not simply an issue for
government policy. Various constituents and the business
community in particular, must step up to the plate if we
are to address this challenge.
What specifically needs to be done? Let's look at some
key issues, beginning with our currency.
While some believe the lower Canadian dollar enhances our
competitiveness by decreasing the relative price of our
exports, there are also some negative effects. According
to the Canadian Manufacturers and Exporters: "Canada's
depreciated dollar has helped to boost export sales revenue,
but it has also dramatically increased the cost of innovation.
It has cushioned Canadian industry from competitive pressures
that businesses in other countries have faced, thus removing
an important incentive for Canadian firms to innovate."
Deputy Prime Minister John Manley took a lot of heat for
saying that Canadian business uses the weak dollar as a
"crutch". But he was right on the substance of
his remarks. Canadian business has been delaying some technology
investments that would enhance productivity because they
are denominated in expensive US dollars.
Economists can, and will, debate the various reasons for
the decline in the value of our currency. But the fact of
the matter is that fundamental forces, which include productivity
and other measures of competitiveness, influence our dollar.
The decline in our currency has provided a cost cushion
for Canadian companies and in turn has supported our GDP
growth, but we cannot ignore the reasons for the decline
nor the impact in other areas of long-term importance.
For example, the decline in our dollar has been one of
the contributing factors to an issue of extreme importance
to our competitiveness, sovereignty and quality of life
that is often referred to as the "hollowing out"
of corporate Canada.
Since the beginning of 2000, 62 of our nation's largest
companies representing 27 per cent of the current public
float value of the Toronto Stock Exchange 300 Index have
disappeared through mergers and acquisitions. Of that total,
53 per cent (70 per cent by value) were acquired by foreign
firms, the majority of which were American. It should also
be noted that three of the five largest "in market"
acquisitions by Canadian firms were in telecommunications
and media - businesses that, like financial institutions,
are protected from foreign acquisition. At the beginning
of 1995 there were 58 companies on the Toronto Stock Exchange
oil and gas index -- today only 11 remain. Foreign investment
is important, and open markets are critical, but we should
be asking why many of our industry leaders are being consolidated,
rather than doing the consolidating; why we are losing head
offices at such at alarming rate; and what is the cost.
Whether through foreign takeovers, or Canadian firms deciding
to relocate executives to other countries, a significant
number of our country's head office jobs have been lost.
These jobs are important not just for the salaries and tax
revenue they generate directly, but also for a wide range
of secondary benefits to the economy and our communities.
It is difficult to argue that Canada's competitiveness
in the global economy is not in decline. As measured
by the World Economic Forum, it has slipped from sixth place
in 1998, to 11th place in 2000.
If we want to address the challenges of competitiveness,
our currency, living standards and hollowing out of corporate
Canada, we must focus on the underlying issues, beginning
with innovation and productivity.
Today, Canada's gross expenditure on research and development
as a percentage of GDP remains the second lowest in the
G7 and one of the lowest in the industrialized world.
While the growth of patent applications has increased faster
in Canada than the US over the last decade, we still rank
dead last among G7 nations in domestic patent applications
on a per capita basis.
Productivity in the classic sense is measured by output
per worker, and when employees hear the word productivity,
they think management is planning to eliminate their jobs.
But productivity is ultimately a measurement of the prosperity
of every Canadian family. Enhancing productivity as a nation
will not only preserve and increase employment opportunities,
it will result in higher value jobs and higher standards
of living.
As Montreal economist Pierre Fortin has noted, the real
per capita incomes of Canadians increased by only five per
cent between 1988 and 1998, while the real per capita incomes
of the French rose three times as fast, and of Americans
almost four times as fast.
Standing still is not an option. As the most trade-reliant
nation in the G7, Canada cannot afford to lose customers
in any of its global markets. We can't afford to let others
get ahead of us, and we are ill advised to compete solely
on the basis of a low cost operating environment.
Productivity, as the American experience of the last decade
has demonstrated, is enhanced by technology. Technology
is driven by innovation. And innovation is the constant
of economic change.
According to the OECD, Canada ranks 16th on the innovation
index, hardly a stellar performance. The federal government
has formally set a target for reaching fifth place for Canada's
international innovation ranking by the year 2010.
That's an attainable objective. But in a world that is
moving at the speed of Moore's Law, we should try to get
there faster. I serve as co-chair of the national policy
committee of the Canadian Council of Chief Executives. Our
primary focus is on Canada's competitiveness and we would
like to see Canada reach its innovation target closer to
the middle rather than the end of this decade.
But frankly, while goals are important, the real issue
is how do we change and execute a strategy to get there.
We are a small country competing in a global marketplace
and we need to find ways to capitalize on our competitive
advantages, rather than create barriers to success. We also
now live in a world where the ability to create and commercialize
ideas is a critical determinant of economic success. So
our overall goal must include creating a culture of excellence,
through education, innovation and business leadership.
With respect to innovation, Ottawa has set four priorities:
- First, creating knowledge and bringing it to market
quickly;
- Second, making sure Canadians have the skill sets necessary
to compete;
- Third, creating the right business and regulatory environment;
- And fourth, making Canada a good place to invest as
well as to live.
Our national priorities are the right ones and government
leaders are focusing on the right issues. As for our country's
past performance on competitiveness, our shortfalls are
a shared responsibility among all stakeholders, including
business, government, labour and others. Since the responsibility
is shared, we must collectively be part of the solution.
And that's where we sometimes struggle -- agreeing on priorities
and putting them into action.
Unlike deficits and taxes that have significant political
complexities but are relatively straightforward in terms
of remedies, innovation, productivity and competitiveness
are more difficult to tackle. Success will require greater
risk taking, and a leap of faith that Canada's industries
and institutions will rise to the occasion if the right
conditions exist.
I would like to offer some ideas and suggestions on how
we can begin to tackle these issues from a business perspective.
In particular, I want to focus on six areas that I believe
are important to our future prosperity in the 21st Century.
First, Canada needs a sectoral strategy for excellence.
While we have achieved good success in creating the right
macro-economic conditions, we need to do a better job in
creating the right micro-economic climate on a sector-by-sector
basis. That doesn't mean picking winners and losers -- that's
the market's job. But it does mean leveraging Canadian strengths.
Government and industry must work co-operatively to develop
policies that create the right environment for our key industries.
As I have said before, we should not be trying to simply
create a level playing field in Canada, but rather tilting
it to the advantage of our industries the way other countries
do, including the United States.
Let's look at an area that I am familiar with, Financial
Services. According to a recent report by Standard and Poor's,
Canadians have one of the most efficient banking systems
in the world, with leading-edge infrastructure, good management
controls, low lending spreads, and competitive service fees.
With these strengths, Canadians should be strong in global
banking, and should be reaping the economic benefits for
our country. But instead, our sector has become less globally
relevant, and we have fallen behind other countries, including
some smaller than Canada. For example, in 1975 Royal Bank
of Canada was the 23rd largest bank in the world as measured
by assets. Today, RBC is 53rd in the world. The market capitalization
of a single Dutch financial institution -- ING Group - is
now almost as big as Canada's five largest banks combined.
There are a number of reasons why our financial services
sector has not kept pace, but as we move forward, I believe
it is critical to develop a broader consensus of what we
want for this industry, and to clearly articulate the strategies
that will take us there.
The same applies to other key industries from resources
like energy, forestry and mining, to sectors like technology
and telecommunications. In many sectors, we have lost ground
in terms of our global rankings. If we want to win on the
global stage, we need to understand the barriers that our
different industries face at home and abroad, and align
all the constituents in creating the right strategies, environment
and policies to encourage Canadian achievement and success.
The second area in which we need to improve is our ability
to grow our small and medium-sized enterprises, the backbone
of our economy. Canada has a comparable rate of new business
creation versus the United States. However, where we are
falling behind is in our ability to grow these businesses
into larger, more successful companies.
We need to improve Canada's ability to grow our most promising
small firms, not only to replace those that are disappearing,
but also to ensure we remain a diversified, value-added
economy with high-paying jobs. In some ways, Canada is a
"sandwich" economy, with low-wage producers like
Mexico on one side striving to move up into higher value
products and services by investing in education, technology
and research, and high-value producers like the US on the
other side investing heavily in the industries of the future.
We need to find and grow our own competitive niches, and
reduce the risk of becoming too dependent on our small and
medium-sized businesses producing low value-added exports.
There are some shining examples of Canadian small businesses
that have made the transition into global leaders, but there
have been fewer recently and we need more. For example,
if you look at private companies that have gone public since
1995, more than 20 times more equity has been raised in
the US than in Canada. We need to find ways to encourage
our small companies to invest in their future, and we need
to remove impediments to their growth. I am pleased to announce
that RBC Financial Group, in cooperation with Canadian Manufacturers
and Exporters, and the Canadian Federation of Independent
Business will conduct a national study to identify the impediments
to the growth of small and medium-sized businesses, and
develop recommendations on how Canada can do a better job
of growing more world-class companies.
I wouldn't want to pre-judge the outcome by any means,
but two recent reports cast some light on the issue. The
first study for the Ontario government compared labour productivity
rates in 10 Canadian provinces and 50 US states. It found
that Canada rated poorly, with Quebec ranked 49th and Ontario
32nd. A second report by Jack Mintz of the C.D. Howe Institute
suggests that Canada has a bloated tax system that "impedes
entrepreneurial investment far more than many industrialized
countries." I also believe that too many Canadian business
leaders -- in small, medium and large companies -- lack
the culture of innovation to take their companies to the
next level.
This brings me to our third point -- innovation. Innovation
is about having a vision of where a company wants to be,
about developing new products and services, about creating
new relationships with suppliers and customers, and about
new ways of delivering value. It's also about commitment
to research and development, and putting the results of
that R&D to work. Commercialization of R&D is a
serious issue in Canada, and bringing knowledge to market
takes money, long-term thinking, and creativity.
Clearly, we need to deepen the pool of investment capital.
As Industry Minister Allan Rock has said, Canada needs to
make "more private venture capital available so that
our best ideas can get developed right here, by Canadians."
One of the ways to do that is to encourage more capital,
particularly venture capital, to come into the country.
While progress was made in the last budget, there are still
some disincentives that continue to make it less appealing
for foreign funds to invest in Canada.
We also need to look at whether pension funds can do more
to finance the companies of tomorrow, as the Caisse de Depot
has done right here in Quebec. In Britain, the government
has adopted several recommendations on venture capital.
They include focusing on tax measures and regulatory frameworks,
and creating regional venture capital funds with public
money but managed by private managers. We should be looking
at similar measures in Canada because the ability to create
and commercialize new ideas is critical to our economic
success.
Dr. John Evans, Chair of the Canada Foundation for Innovation
said in a recent lecture that Canada needs a new "Public
Research Contract" that involves longer-term commitments
by governments and universities. He says that for Government,
this means "a much higher level of investment than
previously provided to Canadian universities for their traditional
role in the creation and transmission of knowledge. For
universities the commitment is economic and social return
on public investment and particularly, jobs and wealth created
in Canada."
Unfortunately, Canada lags behind a number of countries
in the funding of university research. In the US, for example,
more than 82 per cent of university research is government
funded, as compared with only 66 per cent in Canada. In
addition, the amount of licensing income earned by universities
in the US is 49 times greater than in Canada. These gaps
need to be addressed, and it is encouraging to see that
the federal government is focusing on this issue.
There's no point creating a culture of innovation if you
can't get your products delivered on time. So a fourth area
of focus involves the issue of a transparent border with
the United States, the world's largest economy and our principal
trading partner. We must work towards unified procedures
and standards for processing people, trade and capital.
It's been estimated that border delays add a hidden tax
of anywhere from five to 10 per cent to the cost of doing
business between Canada and the United States. That's about
30 to 60 billion dollars of delay-related costs per year
that could be taken out of the system.
Free trade was one of the most important policy initiatives
for Canada in the 20th century, but there are still substantial
barriers between Canada, the United States and Mexico. Our
proximity and relationship with the world's largest marketplace
is a great competitive advantage... however, it places significant
risk on us to ensure the free flow of goods, services, people
and capital. Market integration and border transparency
in North America are critical to protecting and enhancing
our prosperity, which in turn is the best way to protect
our sovereignty.
We also need to remove barriers to inter-provincial trade,
a persistent hindrance to the functioning of the Canadian
common market. This country was founded as a customs union,
but it still doesn't function that way, with protectionist
provincial policies in a number of industries.
A fifth area we need to address concerns the ongoing need
for regulatory and tax reform, issues that directly affect
Canadian competitiveness. Across a wide range of issues
from environmental approvals to corporate mergers, Canadian
businesses are subject to costly and lengthy regulatory
processes that cry out for greater transparency and predictability.
Canadian industry is also subject to an army of regulators
and red tape. For example, every train that pulls out of
Montreal bound for the US Midwest can be subject to as much
as six levels of government regulation between the two countries.
In financial services, RBC is subject to the oversight of
more than 50 financial services regulators spread across
14 jurisdictions. We should be striving for a lot more regulatory
efficiency, as it is ultimately a drag on our competitiveness.
In terms of tax reform, we have made good progress, but
more remains to be done. Canada's existing tax structure
still discourages innovation by leaning too heavily on the
capital and income of business. No form of taxation is more
damaging to innovation than capital taxes, because they
penalize business investment in assets such as new machinery
and equipment, and act as a disincentive to growth. The
federal government should abolish capital taxes and encourage
provincial governments to do the same. In improving our
tax system, we should be creating incentives for companies
to choose Canada as their base for serving North American
and global markets.
The sixth and final item on our prosperity agenda deals
with our quality of life, including education, health care,
and the infrastructure of our cities. We should be striving
to have the best education system, the best health care,
and the most dynamic and attractive cities in the world.
We also need to ensure our cities are the best places to
work, and the best locations for head offices of our global
corporations.
Clearly, we need to provide our decaying cities with the
means to invest in their roads, public services, housing,
transit, airports and cultural institutions. This will require
more flexible and creative sources of funding for our cities,
including federal and provincial transfers, and public-private
partnerships.
In the last three decades, the Canadian economy has been
transformed from resource-based to value-added manufacturing,
and from branch plants protected by tariffs to an exporting
powerhouse in a more integrated North American economy.
Each decade has brought new challenges, and we have risen
to them all.
There is no question that today's world is in a constant
state of flux, and that the speed of technological change
and globalization of our markets has resulted in new challenges
for our industries and our country. To prosper in this new
economic reality, we must collectively develop and implement
a strategy to enhance our competitive position.
As I said in a speech last November, one of the best descriptions
I've heard of what our country needs comes from a group
of young Canadians called "Canada 25."
Last June they issued a report entitled "A New Magnetic
North" in which they endorse innovation in every area.
This is a quote: "Social innovation to build a fair
and equitable society; economic innovation to foster investment;
policy innovation to solve the challenges of our demographic
profile, and cultural innovation to strengthen our national
pride. Innovation is at a premium - and the fuel for innovation
is talent."
As a passionate Canadian, I can't read something like that
and not be optimistic that we can overcome the challenges
I've talked about today.
Building Canada's prosperity in a new century of global
competition will require a common agenda, creative policies,
stronger commitments to action and most importantly, a new
spirit of cooperation and teamwork from all levels of government,
industry and other key constituents. Great nations, successful
companies and thoughtful institutions respect their traditions
and values, but constantly transform themselves. This must
be our mission if we are going to compete and realize our
full potential as Canadians.
Thank you.
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