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Living up to our Potential in a Globally Competitive World

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Gordon Nixon
President & CEO
RBC Financial Group
Kingston Canadian Club
Kingston, Ontario

February 10, 2005

Good afternoon. I would like to thank Patrick McCue and the Kingston Canadian Club for inviting me today.

It is always a pleasure to be back in Kingston where I have such great memories from my university days.

Each time I visit, I am amazed at how much both Queen's and Kingston have changed, but comforted by how much remains the same.

This morning, I met with a class from the Queen's Business School, and what did hit home for me was not how much the students and school have changed, but rather how much the environment they are about to enter has changed.

Students still talk about the same issues that preoccupied my class 25 years ago. They're worried about landing the best job. About how long it will take to repay their student loan. About the type of career they want and how to achieve it.

They struggle with the tension between ambition and lifestyle, between making money and solving world issues. But they enter a world and a business environment that is vastly different than the one my class faced.

When I was at Queen's, we had every confidence that Canada was one of the best countries in which we could strive to succeed. We weren't guaranteed a good standard of living, but we trusted that it was well within our reach. There was demand for most graduates regardless of their training, and most joined companies and institutions, fully expecting to build long-term careers.

But graduates no longer take much of that for granted. They're living in a globalized, high-tech, hyper-competitive and transparent world. It's a world in which there has been profound change. And the stakes have never been higher for every Canadian.

Canada has much to offer its citizens when it comes to social services, lifestyle, and a high standard of living. Yet it is too easy for us to be complacent about the economic shifts and global rebalancing that could threaten our future prosperity.

That's what I would like to talk about today. And my message has a sense of urgency.

If we want to achieve our potential as a successful society in the 21st century, we must understand the economic challenges our country faces.

More importantly, we must meet those challenges in a way that provides a higher standard of living for all Canadians.

Think back to 1990. How many people thought China would be a giant factory, producing both cheap goods and value-added products for the whole world? How many people saw India as a centre for software outsourcing?

Who would have thought that a Korean car would end up winning awards for quality and performance? For that matter, even the Internet was a relatively new development in 1990, and cell phones were something that you would have expected to find at one of the Kingston Penitentiaries.

Our lives have been changed by globalization, technological advancements, transparency and geo-political shifts. The way business is conducted has changed dramatically and the time-frame in which companies succeed or fail has shrunk considerably.

There is no question that these influences have created benefits, including economic growth, gains in productivity and an improved standard of living in most developing countries. We have seen great wealth creation for entrepreneurs, innovators, and risk-takers. The stage has now been set for a dynamic and expanding global economy, led by advances in science and technology and a re-definition of the global economic system.

This is just a taste of the world we will inhabit in the years ahead. It will be a world filled with great potential for economic gain and advances in human well-being, but it will also be a world of intense competition, complete transparency and ever more rapid advances that will transform industries.

It will be a world where a gradual shift of economic power from west to east will create significant opportunities, but also major challenges.

Canada must continue to re-position itself to compete in this new reality.

Canadians have high ambitions for the kind of society we want. You see this almost every time you pick up a newspaper, from the current debates over how we should strengthen our health care system, to how we should deliver new funds to make our cities more liveable.

All of these are important concerns - but they all rest on one critical assumption: that we will be able to afford the solutions.

It is critical that Canadians recognize that a well-intentioned social agenda cannot be implemented without a sound economic agenda.

Simply put, if we want the world's best healthcare and more liveable cities, then we need to become one of the world's most competitive nations to pay for it. We need focus, public policy and a commitment from all constituents to live up to our potential.

There are three ways for an economy like Canada's to grow and prosper.

  • The first is to invest in improving human skills through education and training, and by investing in the most advanced technologies.

  • The second 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.

I'd like to, first, spend a few moments providing some context on the new competitive environment in which we find ourselves.

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 not only generate new ideas or knowledge, but in countries that can commercialize them successfully as well.

There will be intense competition between countries to see who will be the leaders. Canada must find its niches-and quickly, because the rest of the world won't wait. Competitiveness and productivity will determine where investments are made.

Our disappointing rankings in the most recent Global Competitiveness Report of the World Economic Forum show that we must take this challenge seriously.

Our productivity level has slipped, and if we want to elevate our real standard of living, especially as our work force ages, we must reverse this trend.

In recent testimony before the Senate Banking Committee, David Dodge emphasized the need to boost productivity, suggesting that this was "perhaps the most important micro-economic issue facing Canada."

To improve our competitiveness:

  • We need to move faster in reforming our tax system, eliminating disincentives to investment and growth, and creating incentives for investment and innovation.

  • We need to improve the flexibility and training of our workforce so they are better able to adapt to new competitive challenges.

  • We need smart regulation that protects the public interest but also recognizes the need to compete.

  • And we need sound public policy that recognizes our competitive advantages and strategically positions Canada for future decades.

A second facet of this new competitive environment is the increasing impact of globalization. Countries like China, India, Brazil, and Mexico are aggressive new competitors who will become even more formidable as they enhance their capabilities.

China will be a major global economic force, not only because of the size of its marketplace and low wage rates, but because it is developing the knowledge and skills needed for a 21st century economy.

China is graduating 200,000 engineers per year - almost three times as many as the United States does.

And while many of the world's most talented and educated people once immigrated to western countries, many Chinese graduates are now remaining or returning home because of the immense opportunities.

Napoleon Bonaparte once described China as a sleeping giant, and said "let her sleep, for when she wakes, she will shake the world".

I don't think that Napoleon was referring to 21st century industrial policy, but in the end, he was right. In my view, the world's economic landscape will be redefined by domestic growth in the east, led by China. This is a significant change from the last two decades when the US was the economic engine of the world, and Canada derived natural advantages accordingly.

China's domestic market potential is staggering. As a result of workers migrating from rural to urban areas, it is estimated that China is growing a city the size of Houston every month.

Foreign direct investment in China is currently running at about a billion dollars a week. Someone is going to make a lot of money.

In the years ahead, we will see Chinese cars and computers. But we'll also see Indian software companies that retail products under their own brand names, and competing head-to-head with the Microsofts of the world. We're already seeing a tough new competitor in the aviation industry-in Brazil.

Globalization is a double edge sword creating new and growing markets but also increased competition in our traditional markets. Canada has to find its own areas of specialization. As emerging market economies become more successful, they will also become viable markets for unique, high-value goods and services, the kinds of things where we must focus our own efforts and also they will become increasingly competitive in areas where we have traditionally enjoyed strength.

A third reality is that, to succeed, Canada has to build business services to support entrepreneurship and the creation of globally competitive Canadian companies.

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 know that we need to do more 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 when it comes to growing our small companies into larger ones, and in improving their productivity.

One way to address this is to make sure our new businesses have better access to capital through a wider scope of partners and models.

We need more innovative ways to finance the development of knowledge-based companies, especially those where risk is high, time to market is long, and life cycles for new products and services are short.

Another way to meet this challenge is to increase our country's investment in fundamental science, through expanded support for research in our universities and hospitals.

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

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.

But talk is cheap.

Today, we are number 14. If we are to achieve the government's ambitious goal, we will need to focus on creating a competitive environment to support innovative companies, and business research and development. There are some good examples of this, and none better, perhaps, than right here in Kingston.

To prepare for this visit, I picked up a copy of a paper written in 2002 by the Kingston Economic Development Corporation in response to the government of Canada's Innovation Strategy, called "Scope and Scale: Kingston's approach to innovation". I wouldn't be surprised if a number of you in this room had a hand in writing it.

Clearly, Kingston already has most of the ingredients required to ensure economic prosperity in the 21st century: an impressive scope of world-class academic and health care institutions dedicated to research, a growing base of companies focused on the commercialization of research, and a strong will to build networks between all sectors. I believe you are taking exactly the right approach, and I congratulate you for your vision, especially for the focus on increasing support for targeted commercialization programs.

Other cities and provinces are quickly moving down the road of innovation as well. British Columbia is becoming a major centre for fuel cells and biotechnology; and Manitoba, for public health research.

Last year, I visited the largest science project in Canada-the Canadian Light Source Synchrotron in Saskatchewan. This $174 million investment will enable critical new research into the microstructure of materials.

Right now, somewhere in BC, or Saskatchewan, or right here in Kingston, researchers who are coming up with remarkable new ideas that will create lucrative opportunities to enhance Canada's future.

But this huge and growing investment in science and innovation does raise questions:

  • How can we capture the commercial potential of science 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.

In the United States, the ratio of commercialization revenue to research expenditures is about three times higher than it is in Canada. In addition, institutional research in the U.S. generates far more patents per dollar of investment than in Canada. And we can't just compare ourselves to the United States, because even they recognize that they are lagging and face serious competitive challenges from the rest of the world.

Foreign-owned companies and foreign-born inventors account for almost half of all U.S. patents. Japan, Korea and Taiwan account for more than one-fourth of all U. S. patents.

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 must collectively create the right framework to attract research, for new and innovative companies to succeed.

There are a number of things we can do to make this happen.

  • 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.

  • Collectively, we need to develop strategies and facilities to encourage and facilitate commercialization.

  • We need to improve venture capital participation in early stage technology business, through better public/private sector risk-sharing models.

Now is the time when financial institutions, government and academia must intersect. We need a financial system that enables growth; we need government policies that encourage, facilitate and reward growth; we need an educational system that produces the people capable of generating new ideas and we need a business climate that produces leaders with the management skills necessary to bring new ideas to market.

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

At RBC Financial Group, we've given a lot of thought to what we can do. We 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 are also involved in the venture capital market through our subsidiary, RBC Technology Ventures. This part of our company is focused on early stage venture financing, starting with seed capital.

Since 1999, RBC has helped 48 new companies raise more than half a billion dollars, with over half of this coming from outside Canada. The confidence of these investors is a ringing endorsement of the quality of science in this country. But we can't rest on our laurels.

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 better than we can. We must create a new generation of Canadian companies, headquartered in Canada, and creating good Canadian jobs by producing valuable goods and services that can be sold around the world.

It is great to see the growth and success of businesses like Kingston' Millennium Biologix, a biomedical company that develops and supplies products for Regenerative Medicine in the field of skeletal disease and trauma. Global commercialization of research is at their core of their business, and their corporate vision is to be the most sought-after international alliance partner in world markets for bioactive medical products and tissue engineering systems.

This multinational corporation has experienced so much growth that they just went public a few weeks ago-and coincidentally, they also happen to be an RBC client. For a banker, nothing is more satisfying than a story like this.

In addition to more creative financing, we also need to expand the pool of skilled business managers in Canada. We cannot grow our best companies on a national and global scale without this leadership capability.

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.

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 part of Canada's innovation gap. You see this 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 a country as large and dispersed as Canada, we need to figure out better ways to collaborate 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.

As a matter of interest, I co-chair, with Dr. John Evans, the Toronto Region Research Alliance, whose mission is to build public and private research capacity, embrace the commercialization of research and attract research-intensive companies to the GTA. Our focus is primarily on building consensus among the region's institutions, to align academia, business and government to accomplish our objectives.

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 what we needed to do to address these challenges. But I don't want to leave the impression that nothing is happening.

There are hopeful signs, such as:

  • the national initiative by the Canadian Manufacturers and Exporters to draft a new strategy on the future of manufacturing in Canada.

  • 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.

But we need more.

We need agreement that our country's economic agenda is just as important as our social agenda - the two are inextricably linked. If we want the world's best healthcare system and its most liveable 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 changes to our existing rules regulations and processes -- and the commitment of all constituents. It is about execution and must be based on a long-term strategy.

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 in which to live and do business.

Canada is a great country, 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 focus on ensuring our businesses have every competitive advantage. We have abundant raw material to work with but we must have a coordinated strategy to ensure that Canada has every opportunity to live up to its potential, for the benefit of all Canadians.

Thank you.