Canada could learn from other countries on industrial policy, say international experts

Countries around the world have adopted industrial policies to improve their economic performance and standard of living, said a panel of international innovation and policy experts, who suggested Canada could draw valuable lessons from these examples. In addition to designing and implementing a strategic policy of our own, they pointed to several components crucial to achieving desired goals, such as a structural transformation to a net-zero economy.

“There has to be a clear sense of what the technological learning component of the strategy is going to be and execute on that,” said Dr. Tilman Altenburg, PhD, head of the transformation of economic and social systems research program at the German Institute of Development and Sustainability.

For Canada, an industrial policy is not about responding to the U.S. Inflation Reduction Act (IRA), with its US$360 billion in new spending and tax breaks to support green energy innovation, said Dr. Olga Mikheeva, PhD, honorary senior research fellow at the Institute for Innovation and Public Purpose at the University College London. “The IRA is one way of doing things. What would be the way in Canada and what would be the goals, because they necessarily have to be Canada-specific?”

Altenburg and Mikheeva participated in an April 26 webinar presented by the Transition Accelerator, a pan-Canadian charity working to move Canada down viable pathways to reach net-zero greenhouse gas emissions by 2050. They, along with moderator Dr. Bentley Allan, PhD, a Transition Accelerator research director, cited several components of international best practices for an industrial policy, including:

• A clearly stated vision and societal goals shared by all stakeholders
• Qualitative and transformative targets, including for the country and for specific industrial sectors and technologies
• Close and continuous coordination by the public and private sectors
• Deep capacity in the public sector for understanding the industries involved, along with knowledge of how to design and implement industrial strategies
• An independent source of expertise, serving as an objective intermediary between government and industry
• R&D incentives, along with public subsidies, resulting in technological learning and new industries
• Coordinated financing and investments, ensuring the whole system works
• Market creation, accounting for both demand and supply sides of the economy

According to Derek Eaton, director of industrial policy at the Transition Accelerator, government capacity is critical to knowing where the most promising prospects are for economic value creation, including exports and jobs. In an e-mail interview with Research Money, he emphasized the need to understand Canada's economic strengths in the context of evolving global value chains, which are reconfiguring towards net-zero emissions.

This perspective, he noted, will be essential in order to place good “bets” on future prospects, and develop a balanced portfolio of plays. Unfortunately, “since the early 1990s, the capacity to do this type of analysis and policy has generally been whittled down in the Canadian government."

In addition to government capacity, Eaton added, some form of support measures for emerging value chains will be needed, whether grants, loans, tax credits or regulations.       

 Coordination is key to effective industrial policy

Allan announced during the webinar that the Transition Accelerator has launched a new Centre for Net-Zero Industrial Policy. The centre will support research and new, action-oriented public-private partnerships, ensuring government and industry decision-makers can access the expertise needed to collaborate on the net-zero economy.

He insisted that such policy efforts are not all about planning. “It’s preparing so you can adapt to the unexpected, which is very different than planning,” he said.

By way of example, Altenburg suggested implementing a sufficiently high carbon price — as Canada has done — “is a smart and necessary thing to do. But it still does not replace industrial policy because there are lots of [potential] coordination failures.”

These challenges can take the form of chicken-and-egg conundrums, such as car manufacturers not building electric vehicles without a reliable charging infrastructure, and energy utilities not investing in a charging infrastructure without a sufficient number of EVs on the road.  Similar resolutions need to be reached on R&D and standards, as well as EV battery supply chains. “The key to industrial policy is coordinating all these things," Altenburg concluded.

After reviewing industrial policies that have been applied in the U.S., Europe and East Asia, Eaton pointed to a common outstanding feature:  the role of strategic partnerships between government and industry.

“Canada is sorely lacking this dynamic process of sectoral collaboration,” he said. “These partnerships need to be focused on target-setting and problem-solving, so they need to be dynamic and evolve as they learn from experience.”

Nor does collaboration have to be the same in every instance. Altenburg contrasted successful industrial policies adopted by Norway and Sweden. Norway is very good at a few sectors, such as oil and gas and seafood, but has few diversified industrial capabilities and less economic complexity. Sweden, on the other hand, has diversified capabilities with industrial sectors that can be combined — positioning it as a potential global leader, for example, in hydrogen-fuelled steelmaking.

Such distinctions raise questions about Canada's preferred policy. “Does it want to remain as a specialized, resource-driven economy like Norway, or does it want to have industrial capability at large scale and recombine [sectors] in a way that the future knowledge economy requires?"

Scholars who participated at Research Money’s annual conference in April said Canada needs to develop an industrial policy for advanced industries that are not based on natural resources, along with innovation policy that encompasses activities from idea creation to finished, value-added products.

The Parliamentary Standing Committee on International Trade, in a report released this month, recommended that the federal government — in response to the IRA — collaborate with all relevant stakeholders to “develop and implement a national industrial strategy that has specific, measurable and timely actions.”

Another recommendation was that the government should consider creating a “blue ribbon” panel on manufacturing with representatives from the private sector and organized labour groups, to work on ensuring that future federal support programs for companies are made available expeditiously.         

Using “smart subsidies” to develop new industrial sectors

Altenburg was skeptical that the U.S. IRA is the best way to design and deliver industrial policy.

“It is very much leaning towards subsidies for multinationals and relatively little to R&D and local capability building and clustering, and all the things that modern innovation policy is all about,” he said. “Basically, the country that gets most taxpayers to subsidize multinationals wins the race at the end of the day. That then is basically a beggar-thy-neighbour policy that doesn’t benefit anyone.”

He also questioned the Canadian federal government’s strategy, in response to the IRA, of offering a subsidy of up to $13 billion over 10 years to Volkswagen to build a $20-billion battery manufacturing plant in St. Thomas, Ontario.

“What’s the technological learning of that for Canada?” he asked. “Attracting multinationals is not what builds capacity.”

In contrast, China used what Altenburg described as “smart subsidies” to address harmful air pollution in Shenzhen, by electrifying the city’s entire bus fleet and taxi fleet within 10 years and creating a new industry. Chinese companies are now exporting their technologies to Europe and the U.S.

Mikheeva, whose expertise includes economic development and innovation, said the financial aspect of an effective industrial policy is not about the quantity of financing available, because “there’s a lot of it out there.”

Rather, the financing should serve the purposes and goals of an industrial strategy and support achieving qualitative, transformative targets, she argued. “Then the question is: How do I organize the finance, both public and private, to enable that? It’s about the quality and the type of money and funding.”

Mechanisms needed to implement Canada’s net-zero industrial policy

The federal government, with its “Made-in-Canada Plan” in Budget 2023, laid out its net-zero industrial policy and took a clear step towards a more strategic and intentional approach to coordinating government programs and instruments, says a new Transition Accelerator report by Allan, Eaton, and other authors.

According to that report, Budget 2023’s proposed 15-percent clean energy tax credit (worth up to $6.3 billion to 2028, and $19.4 billion more to 2034) is a crucial investment, “as clean electricity is the backbone of any Canadian industrial strategy: it provides an affordable input to all industries that want to deliver low-carbon products to domestic and international markets.”

However, tax credits and accompanying subsidies “do not constitute an industrial policy,” the report cautions. Canada now needs to develop the apparatus to implement an industrial policy, including targets and sector tables to develop clear strategies, organizing and focusing work in the sectors.

“Without intentional development of such coordination mechanisms, Budget 2023’s commendable initiatives will risk falling into the Canadian pattern of spreading innovation supports (e.g. research funding and R&D and investment tax credits) too thin to achieve meaningful scale in any one strategic technology.”

Eaton said a crucial element needed to move Canada’s net-zero industrial policy forward is setting goals and milestones for key growth opportunities. “These goals should ideally be physical production or technology deployment targets, not monetary or revenue objectives.”

Another essential element, he said, is establishing and empowering collaborative partnerships through sector-level tables of experts. These tables, which need to operate at arm’s-length from government, would have active working groups to advise on goals, create strategy, and identify high-priority investment areas.

The Transition Accelerator report recommends that both the Canada Growth Fund and the Canada Infrastructure Bank need to:

• streamline identification and appraisal of new deals
• develop financing models across different priority sectors
• take investment positions to effectively blend capital from other financial institutions
• formulate a monitoring and evaluation mechanism for performance measurement and adjust lending/investing criteria over time.

For Eaton, the challenge will be to ensure that both the Canada Growth Fund and the Canada Infrastructure Bank contribute to the strategic development of supply chains in a coherent way, coordinated with roadmaps developed by the dynamic sectoral collaborations.

Canada also needs homegrown innovation capacity, but the report warns Budget 2023 is “somewhat elusive as to how the Canadian strategy will promote the development of domestic firms and manage the risk that public funding will be captured primarily by foreign firms who control the intellectual property of technology and have the option to outsource their production."

Instead, the report recommends, the federal government should explore policy options targeting the development and deployment of Canadian innovations and companies,  as well as placing greater restrictions on the delocalization or sale of publicly funded firms into foreign markets or companies.

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