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"Achieving Canada's potential in the 21st century"

Gordon Nixon
President & CEO
RBC Financial Group
Princeton Investments Distinguished Lecture in Finance
Edmonton, Alberta

November 2, 2004

Good afternoon. I would like to thank John Ferguson for inviting me to participate in this year's Distinguished Lecture in Finance. It is an honour - and a pleasure - for me to be at an event put together by the School of Business at the University of Alberta.

When we talk of the factors that make an economy competitive, and a society successful, one of the first things we have to look at is the quality of our schools and universities. They are at the heart of the knowledge-based economy, providing the talented people and advances in knowledge and understanding for a better future. And the University of Alberta is amongst the best.

I know there are a number of business students with us today, and I'm sure most of you have thought about your future, and where you'll be living once you begin your career. Hopefully, you'll all be able to find good jobs here in Canada, live in a great community, and provide a good standard of living for your families. However, while that's a noble goal, it is no longer one Canadians can take for granted in a globalized, high-tech and hyper-competitive world.

If we want to achieve our potential as a successful society in the 21st century, we must understand the economic challenges we face as a country. More importantly, we must meet those challenges in a way that provides a higher standard of living for all Canadians.

That's what I would like to talk about today.

My message has a sense of urgency about it, because the world around us is undergoing profound change, and the stakes are incredibly high for every Canadian. Our country has much to offer its citizens in terms of social services, lifestyle, and standard of living. Yet it is too easy to take what we have for granted. And it is too easy to be complacent about the economic shifts and global rebalancing that could threaten our future prosperity.

Think back to 1990. How many people were talking about China as the world's giant factory, and not just for cheap goods, but for value-added products as well? How many people saw India as a centre for software outsourcing? Who would have thought that a Korean automobile would end up winning awards for the highest level of quality and performance?

For that matter, even the Internet was a relatively new tool in 1990, and the Human Genome Project was still an idea, not an accomplishment.

These forces and technologies changed our lives. They also led to economic growth and gains in productivity, which raised living standards almost everywhere. Advances in science and technology, along with the decision of such countries as China, India, and Brazil to join the global economic system, have set the stage for a new global economy.

Yet this is just a foretaste of the world we will inhabit in the decades ahead. A world of great potential for advances in human well-being, but also a world of intense competition and even more rapid advances in new knowledge and understanding.

Today, I want to focus on the importance for Canada of developing new sources of wealth-creation that will enhance our ability to sustain a high standard of living, with good jobs and healthy communities.

Canadians have high ambitions for the kind of society we want. This can be seen in the debate over ways to strengthen our health care system, to deliver new funds to make our cities more liveable, or to advance the agenda for early childhood development.

All of these are important and valuable issues - but they all depend on our ability to generate the wealth to afford them. A good social agenda can only be implemented in conjunction with a sound economic agenda. This is a reality we ignore too often.

There are three key ways for an economy to grow and prosper.

The first is to invest in what are known as the factors of production - improving human skills through education and training, and by investing in the most advanced technologies.

The second way is to pursue international markets through foreign trade and investment, identifying our niches and specializing in those things that we do best.

The third way to promote economic growth, and the one I would like to emphasize today, is to promote and stimulate innovation and entrepreneurship.

But what is the new competitive environment in which we find ourselves?

First, we know that new jobs and wealth will come primarily from new activities, not by protecting existing businesses and industries where jobs are declining. These new activities - new goods or services, or new ways of doing things - will occur in countries that are both able to generate new ideas or knowledge and to successfully commercialize them.

There will be intense competition among countries to gain leadership in these new activities. Canada must find its niches. And we must do so quickly because the rest of the world won't wait.

Our disappointing rankings in the most recent Global Competitiveness Report of the World Economic Forum underline our need to take this challenge more seriously. In particular, we need to move faster in reforming our tax system to eliminate disincentives to investment and growth. And we need to improve the flexibility and training of our workforce so they are better able to adapt to new competitive challenges.

Second, globalization means we face an increasingly competitive world. Countries like China, India, Brazil, and Mexico have become more sophisticated in their own capabilities and hence even more formidable competitors in all areas of industry.

We will see Chinese cars and computers in the years ahead. We'll see Indian software companies that retail products under their own brand names, competing with the likes of Microsoft and other established players. We already see Brazil competing head-to-head with Canada in the aviation industry.

South Korea shows how quickly a determined country can move from a manufacturer of low-cost goods to a global producer of brand-name products. Today, the world knows about Hyundai cars, Samsung flat screens, and LG consumer appliances.

China has the potential to repeat that success, but on a much larger scale. Not only because of the size of their marketplace and low wage rates, but because they are developing the knowledge and skills needed for a 21st century economy. As an example, China is graduating 200,000 engineers per year - almost three times as many as the United States. And while many of the world's most talented and educated people once immigrated to western countries, many are now remaining or returning home because of the immense opportunities.

This is another reason why Canada has to find its own areas of specialization in a much more competitive world. As emerging market economies become wealthier and more successful, they will also become larger markets for unique, high-value goods and services, the kinds of things where we must focus our own efforts.

Third, to succeed, Canada has to build the business services that can support entrepreneurship and the creation of globally competitive Canadian companies. This includes the importance of highly developed, globally competitive and innovative financial services.

Canada has one of the best financial systems in the world, and over the past 10 to 15 years we have responded to the needs of the knowledge-based economy. But we recognize that more needs to be done to support the growth of our small and medium-sized businesses. As a country, we do a good job at getting new businesses up and running. But we fall short in growing our small companies into larger ones, and in improving their rate of productivity.

One way to address this challenge is to facilitate greater access to capital through a wider scope of partners and models. In particular, more financial innovations are needed to finance the development of knowledge-based companies where risk levels are high, time to market can be very long, and life cycles for new products and services are shorter.

Productivity growth drives profitability and enables businesses to expand. Although our productivity gap with the United States shows we must do better, there is still much in which Canadians can take pride. We are becoming a more innovative, knowledge-based nation. And our governments have been increasing their investment in fundamental science, through expanded support for research in our universities and research hospitals.

This is a key role for government. These investments provide the new knowledge base that businesses and entrepreneurs can exploit to strengthen existing companies or to create new ones.

The advances in information and communications technologies, and in the life sciences, have sprung from basic research undertaken in our publicly funded institutions. The same will be true for the revolution in emerging fields such as nanotechnology and quantum physics.

Indeed, science and technology will drive economies as never before, which is why countries around the world are investing increasing resources in research and development to advance their own frontiers of knowledge and understanding.

For its part, the Government of Canada has set a goal of making our country the fifth most research-intensive nation in the world by 2010, compared to 14th today. This is an ambitious goal, and we will need to become more focused and committed if we are going to achieve it.

In terms of Western Canada, the pace of economic change has been significant. While it may seem less evident in light of the billion dollar energy projects that seem to be announced on a daily basis, the West has become a leading centre of science and technology. In effect, a new West is emerging as a key force in building Canada's knowledge economy of the future.

While the history of economic development in Western Canada has been tied to natural resources -- especially energy in Alberta -- the resource economy has always depended on science, technology and engineering. Each of these sectors will need advances in knowledge to sustain their growth and to create new opportunities. And in order to fund future growth in these areas, we must reinvest the wealth that our natural resources are producing.

The new economy of Western Canada includes the emergence of biotechnology and nanotechnology industries right here in Edmonton. And it's not just Alberta that is moving to a 21st century economy.

British Columbia is becoming a major centre for fuel cells and biotechnology. Manitoba is a growing centre for public health research in Canada. And Saskatchewan is the home of the Canadian Light Source Synchrotron, which I visited yesterday. The largest science project in Canada, this $174 million investment will enable critical new research into the microstructure of materials.

It is all very exciting, and somewhere in these many facilities across Western Canada are researchers who will come up with remarkable new ideas that will create challenging new opportunities for Canada's future.

But this huge and growing investment in science and innovation raises the question of how we can capture the commercial potential to build a stronger and more successful Canada. How do we convert new knowledge into new jobs and new businesses?

This is an area where Canada is badly lagging. For example, the ratio of commercialization revenue to research expenditures is about three times higher in the United States than in Canada. In addition, institutional research in the U.S. generates far more patents per dollar of investment than in Canada.

To the fullest extent possible, we must ensure that new knowledge generated here leads to successful commercialization in Canada, so that the resulting jobs and wealth flow to Canadians.

To accomplish this, we need to identify and build support for improvements in our technology transfer process. We need more consistent and user-friendly intellectual property policies across our universities and research centres. And we need to improve venture capital participation in early stage technology business, through better public/private sector risk-sharing models.

This is where the roles of finance, government and education come together. We need a financial system that enables growth; government policies that encourage, facilitate and reward growth; and an educational system that produces both the people capable of generating new ideas and people with the management skills necessary to successfully exploit new ideas.

This will require both public and private capital. This is not an ideological issue. It is a practical question of finding what works best.

This is something we have given a lot of thought to at RBC Financial Group.

We have actively participated on the Prime Minister's Advisory Council on Science and Technology since 1996, which has produced a number of important reports including one on commercialization. We have supported the development of Canada's National Angel Organization, whose purpose is to expand the circle of Canadians who have the personal wealth to invest in local new businesses that are at the early stages of growth.

We have also looked at ways to participate in the venture capital market, including through our subsidiary, RBC Technology Ventures. This subsidiary is focused on early stage venture financing, starting with seed capital. In Canada, this is where the biggest gap exists and we are fully engaged in trying to find better ways to commercialize innovation successfully from research institutions and corporations.

The business model of RBC Technology Ventures is one of creating funds with like-minded partners to invest in promising sectors in Canada that have real research strengths. These sectors include biotechnology, information technology, engineering, physical sciences, and agri-food technologies. Our partners, some of whom come from the U.S. and Europe, bring their expertise and money to Canadian science. Since 1999, we have helped 48 new companies in these sectors raise more than half a billion dollars. Over half of this has come from outside Canada, which is a great validation of the quality of science in this country.

But from Canada's perspective, we need to do more.

If we don't do a good job in commercialization, then the benefits of our expanding public investment in new knowledge will flow to other countries that can commercialize this knowledge. Our goal must be to create a new generation of Canadian companies, headquartered in this country, that can create good jobs here at home by producing valuable goods and services that can be sold around the world.

There is currently a large need for early stage venture capital for new technology businesses at the proof of principle and seed stages. This funding is critical to establishing the validity of new technologies and enabling the creation of new start-up companies.

In Canada, various public and/or private sector institutions are trying to meet this need, but the gap is still large. We need to fill it effectively so that new technology companies are well placed to attract further rounds of venture financing that will take them successfully to market.

In addition to more creative financing, we also need to expand the pool of skilled business managers in Canada. This leadership capability is essential to develop and grow our best companies on a national and global scale.

Several years ago, we became concerned at RBC about Canada's underperformance, relative to the United States, especially in growing small businesses into sustainable, profitable bigger businesses. We seemed be better than Americans in launching new businesses. But we were not as successful at growing them into bigger enterprises.

To improve our understanding, we undertook two studies. The first was with the Canadian Manufacturers and Exporters, and the Canadian Federation of Independent Business. The second was with Queen's Business School and the Canadian Manufactures and Exporters.

The first study - The Path to Prosperity - was published in 2002. It examined external barriers to growth, and found that Canadian entrepreneurs were just as ambitious and open to risk-taking as their American counterparts. But it found that the barriers to growth were greater in Canada, and that we needed changes in tax and regulatory policies, and new approaches by financial institutions and business leaders.

The second study - Managing for Growth - examined the internal barriers. While it also recommended changes by governments, financial institutions and universities, it focused much more on the importance of skilled management to achieve business success.

This focus on management was no surprise. Angel investors, the venture capital industry and financial institutions all need to feel confident in the management skills of those running businesses in which they might invest.

It is not enough to have a good business idea. What matters just as much is the ability to design and execute a credible business strategy. The biggest single reason why smaller businesses fail to get the financing they want is because investors do not have confidence in their management ability.

If Canada is to succeed in commercializing new knowledge from its universities, research hospitals and other institutions, it must do a better job of training managers who can create commercial success from new knowledge.

Roger Martin, dean of the Rotman School of Management at the University of Toronto, goes further. He argues that Canada's innovation gap with the United States is due in large part because Canada is focused on investing in the capacity to generate the supply of new knowledge, but is seriously under investing on the demand side.

The supply side consists of our investment in scientists and engineers, and their research and development activities. The demand side consists of skilled management who have the capacity to understand how new ideas can be translated into production for commercial success.

If there is a limited demand side, Martin argues, then simply expanding the supply side will not lead to greater innovation in Canada. We will end up funding the discovery of new ideas, but the real value will be exported to countries that can commercialize it. And they will gain the economic benefit - not Canadians.

Proportionately, there is not much difference between Canada and the United States in the graduation of scientists and engineers. But the United States produces nearly twice as many educated managers as Canada does. This is Canada's real innovation gap, Martin argues.

This is illustrated in the Global Competitiveness Report of the World Economic Forum, which shows that companies are not taking full advantage of Canada's business environment.

Clearly we can and must do better.

In addition, in a country as large and dispersed as Canada, we need to figure out better ways of collaboration so we can create scale and expertise. For example, universities and centres of excellence need to work together on projects wherever possible. Without scale, we won't develop the level of excellence needed to compete globally.

At the start of my remarks, I stressed that Canada faces many challenges if it is going to succeed in the knowledge-based economy of the 21st century. I also expressed concern that we were too complacent about the changes that needed to respond successfully to these challenges.

But I don't want to leave the impression that nothing is happening.

There are hopeful signs that we are beginning to respond. One example is the national initiative by the Canadian Manufacturers and Exporters to draft a new strategy on the future of manufacturing in Canada. Another is the work of the Conference Board of Canada in producing its annual Performance and Potential reports on the Canadian economy. And the Canadian Labour Congress has launched its own initiative, recognizing the need for improved productivity performance in Canada.

Likewise, our new Minister of Industry, David Emerson, has indicated he understands the need for better venture financing for young Canadian companies, of the importance of sector strategies, and of the need to get small and midsize companies to adopt new technologies faster.

And Jim Peterson, the Minister for International Trade, has launched a new initiative to identify ways in which Canadian businesses can improve their trade and investment in emerging market economies such as China, India, and Brazil.

But we need more.

We need agreement that our country's economic agenda is just as important as our social agenda - in fact, I believe the two are inextricably linked. There has been a lot of focus recently on the need to improve Canada's health care system and the infrastructure of our cities.

My key message today is that if we want the world's best healthcare system and the most attractive cities, then we need to become one of the world's most competitive nations in order to pay for it. This requires focus, coordination, and investment. And it requires the commitment of all constituents.

Today, Canada has so much going for it. We have an abundance of natural resources. We have the only budgetary surplus in the G7. Our ratio of net debt to Gross Domestic Product is among the best in the OECD. Our immigration polices enable us to attract valuable human capital. And Canada has a reputation as one of the best places in the world to live and do business.

Ladies and gentlemen, Canada is truly a great country that has many advantages and benefits. But we must never become complacent about how much hard work it took to get here, and how much hard work it will take to maintain and improve our standard of living.

We are competing in a world where significant economic shifts are occurring. If we are going to succeed in this new world, our politicians, our business leaders, our labour leaders and our academics must work together. And together, we must ensure that Canada has every opportunity to live up to its potential, for the benefit of all Canadians.

Thank you.

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