By Kirk Dudtschak, RBC Financial Group Regional President for Saskatchewan, Manitoba & NW Ontario                                                                               

The next industrial revolution is happening right now and Canada’s is losing ground rapidly. Canada faces economic risk and lost opportunity to play a role global leadership role as our business world transforms through the next industrial revolution. The “hollowing out” of our Canadian corporate foundation is the leading indicator to last place in the global leadership race for economic strength and prosperity.

Kirk Dudtschak, RBC Financial Group Regional President for Saskatchewan, Manitoba & NW Ontario

Kirk Dudtschak, RBC Financial Group Regional President for Saskatchewan, Manitoba & NW Ontario

Hollowing out is the term being applied to the phenomenon of our Canadian-owned, Canadian head-quartered companies being bought up by foreigners resulting in the “hollowing out” of head office jobs, capital market listings, corporate tax revenues, and charitable donations.  We are not referring to the shift of manufacturing jobs to China or the transfer of back-office and call centre jobs to India. The hollowing out we are referring to here is the purchase of national firms by foreign countries. Martin and Nixon, in “Growing Global Leaders” warn that Canada is losing economic sovereignty. But, if that is not enough to sound the wake up alarm, it actually gets much worse. Although “hollowing out” is not unique to Canada in that most industrialized nations are monitoring foreign buy outs with concern, there is a greater issue at stake – surviving this next industrial revolution.

We are in the middle of a  global transformation that is similar to that of the Industrial Revolution, where during the years 1780 – 1830 industries changed completely. Trade patterns changed; markets were created and destroyed and the impact was a step-change rise in the pace of economic growth. Much about a country’s relative place in the world for the subsequent century or so depended on how it reacted and adapted to opportunity during this transformational period.

The world is not flat, and the global economy does not deliver a level playing field as if all the economic activity of the world will be spread across markets and countries like butter. Professors Michel Porter and Richard Florida, see a world economy that is “spiky” and getting progressively spikier as we move through this great transformation.  Spiky refers to a set of conditions in the local market that create and support a cluster of competitive companies that pressure each other to innovate and upgrade, teach local customers to be ever more demanding, draw in a develop fabulous human resources, and attract co-location of helpful related and supporting industries.  The cluster of companies keeps on getting better and better and, on the basis of the beneficial local competition, helps its members succeed internationally against competitors who don’t have the power of a strong local cluster behind them. Porter’s theory predicts a spiky world in which most of the successful competitors in a given global industry will come from very few places and dominate exports to the rest of the world. As trade barriers come down the trend of industry clusters and spikes will grow.

What does this mean for Canada?

We need to build as many globally competitive firms and clusters thereof as possible. We won’t get a second chance if history is any guide. Our #1 economic imperative should support Canadian global leaders in industries we know exist for us.  Some games are over for Canada already – consumer electronics, automotive OEM, consumer packaged goods, and beer – and the ownership of steel and mining are heading away from our shores rapidly. We need a sense of urgency because if we hit 2030 with few global leaders to call our own Canada may face being an inconsequential country in the world economy.

Admitedly, it is not all bad news. In 1985 Canada has only fourteen companies we could call world scale global leaders; which means owned and head-quartered here, ranked in the top five of their industry and one billion in sales. The current list has grown to thirty-nine world scale global leaders.  Members include great Canadian names such as Magma, RIM, Husky Injection Molding, Couche-Tard and Manulife. The fact that over the last ten years foreign firms’ investments in Canada have been outpaced by Canadian firms investing abroad is also promising.  But since 2003 we have lost 15% of our precious stock of Canadian global leadership with the sale of firms such as ATI, Masonite, Domtar.  Another concerning factor is absolute size matters more and more in the global consolidation game. While Inco and ATI were number one players in a narrow niche of their industry they were acquired by considerably larger players in the broad industry. In the global ranking of top 500 firms, Canada’s first appearance is at 250 with Royal Bank of Canada.

Martin and Nixon think that Canadian policy is largely indifferent to the transformation that is going on today, While we should expect global consolidations from abroad, they suggest that we need to ask whether we are doing enough to make sure we enter the new economy with a sufficient volume of Canadian global leaders necessary to underpin a prosperous and growing local economy.  The following policy prescriptions are four key areas of priority that may help us grow and strengthen our own clusters of “spikes” and world leaders in key industries.

Policy Prescriptions for a Positive Position

The following suggestions are only brief summaries of what might be considered. The full essay by Martin and Nixon contains supporting content and examples that help to demonstrate why these policies are viable options for Canada. 

1) Taxation of Business Investment : Despite the national myth of high personal taxes we are ranked 11th lowest out of 30 OECD countries. We are 3rd highest for business tax. We need corporations to invest aggressively, upgrade productivity, innovate and expand globally.  In countries like Scandinavia noted for one of the highest personal taxes, their business tax is almost half what ours is. The question is how to structure taxation so that corporations have the best chance of becoming global leaders and well to-do Canadian individuals pay their fair share of the overall tax burden.

2) Screening of Foreign Takeovers: We need to assure that Canada is giving its firms a fair platform for globalization rather than passively accepting aggressive policies that advantage foreign firms. Investment Canada’s mandate and role should be reviewed. We need the ability to delay any acquisition if the foreign government is withholding or restricting approval of a related or opposing situation. We need the ability to extract more value for foreign acquisition such as retaining headquarters or some operations in Canada. We need a stronger policy dealing with acquisition by a foreign firm that is government owned or controlled. We need to ensure reciprocity of regulatory protection and how we deal with increasingly aggressive expansion of government entities in our country.

3) Regulation of Canadian Business Environment:  Ironically, regulatory barriers simultaneously stifle both the competitive pressure and the support (access to labour, resources etc.) that are necessary to thrive in a spiky world. Canadian companies face entry regulations that reduce competitive intensity and dull beneficial customer power and inter-provincial trade barriers that fractionate an already small market. Securities regulations make our capital markets less attractive and prevent Canada’s world class financial industry from capitalizing on the same opportunities as global competitors.

4) Support our Canadian Global Leaders: We have less than seventy five current and aspiring world class global leaders. Government needs to be in regular contact asking what is needed to succeed.  Understanding and supporting access to sophisticated and demanding customers, highly specialized talent, world class infrastructure and open foreign markets are critical areas for working together.

Now is the time; now is the opportunity

Canada is at a critical point in its economic history. The decisions we make in the next few years will determine our collective position in the world for the next century. While Canada enjoys high prosperity currently, continued prosperity is contingent on our production of global leading companies. That means helping both our current global leaders prosper and maintain their Canadian ownership and growing new global leaders.

Summarized from an essay by Roger Martin, Dean of the Rotman School of Management and Gordon M Nixon, President and CEO, RBC. To obtain the full article go to: http://www.rbc.com/newsroom/index.html

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