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“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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