Turning the focus inward

I have received several emails lately that have turned my thinking inward towards our locally based businesses and their role in long term economic development.  When I say our local businesses I am talking exclusively about those that are exporting (products or services) or are export ready or could become export ready.  We need to put this qualifier in because we don’t do it enough.  Somewhere around 95%  of our businesses generate substantially all their business inside New Brunswick.  Taxpayer funded programs that give a company an advantage over their local competition (grants, loans, training subsidies, etc.) isn’t economic development.  It doesn’t increase the size of the economic pie.  It only uses tax payer dollars to redistribute economic activity from one firm to another within New Brunswick and that is not a good thing.  Economic developers and policy makers would be wise to understand this distinction.  The 5% rule – is critical to our thinking about ED.

But to those 5%, I haven’t put much of my thinking beyond the obvious broad brush kinds of things.  In fact, I tend to be quite critical of programs such as loan guarantees for SMEs.  I think they let banks off the hook and distort the functioning of the capital markets.  At the same time I realize that banks have a systemic risk aversion for SMEs in this region that they don’t have in Ontario (at least southern Ontario) – but I don’t know if that is a cause or effect of government policy.

But my point here is not to criticize government policy and programs designed to support the SME and its efforts to grow.  My point is that maybe guys like me need to put more thinking towards this rather than just the need to bring in more business investment.  That is my preoccupation because we have been so woeful at it for – I don’t know say – 150 years or so and I think that is a core reason why we have not achieved far more economic potential as a region.

One of these emails talked about innovation economics following up on the Ideas Festival.  How do we embed a culture of innovation in our SMEs?  Is there government policy that can foster that thinking without damping it down even further?  It’s true that the bulk of our firms have based their business model on cheap costs.  Many of our manufacturers (and our IT and other professional services firms) have tried to be ‘cheaper’ than the competition in other markets and I think that will remain a key part of our value proposition as a relatively small urban area with a lower living cost structure.  But in an era of wildly fluctuation currency rates and increasingly labour market challenges, lower costs cannot be a sustainable differentiatable advantage.  Therefore, if our companies can be innovative – that is jump ahead of their competition – that will be key.  How do we foster this?  One easy way is to tilt tax incentives and other policy levers far more towards R&D.  But that is not enough.  Governments have to lead by example.  The United States leads the world in direct government funding of R&D.  New Brunswick’s direct funding of R&D is almost non-existent.  A little for RPC and a dribble out of the NBIF.  That’s it.  If I remember correctly, Ontario spends around $50/per capita directly on R&D.  That would be about $40 million per year in New Brunswick.  A good starting point I think. 

Other ways to foster innovative companies?  First of all – getting them exposure to international markets.  Companies that network, that sniff around, that are curious – tend to be more innovative.  How do we use government policy to foster competitive curiosity?  That’s the question.

Then we need better access to risk capital.  Yawn.  That is a tired cliched statement that has been used since Dorothy went over the rainbow.  But it is true.  It would be nice to see some larger NB-based private businesses investing in risky but exciting new ventures rather than gobbling up the staid old firms of the region.

Another email was directed at making our companies more productive.  This person thought that New Brunswick firms were in bad shape competitively with respect to cost efficiences, staffing, etc.  He recommended wide use of kaizen and other tools to help our firms become more professional and effective.  He thought (thinks) this will be crucical to a competitive and prosperous New Brunswick.  Who could argue against that?  The challenge is how can government policy impact it?

I think we have to be very careful not to turn ourselves into a business nanny state.  I already hear economic developers talking about companies as if they were persons on social assistance.  “They need help with their staffing….”  “We need to work with them on their financing plans…” “Without government loan guarantees, this company would go bankrupt”   Our companies shouldn’t need government coming in and telling them what to do.  This is a fine line.  We should use government policy to incentivize the kind of behaviour that contributes to the economic development of the province but we don’t want to have a few thousand companies that are totally reliant on government to survive.  You know what I am talking about. 

Last point on this (I have a day job too).  These programs should be offered by Chambers, industry associations, CFIB type organizations.  They are led and funded by business.  They are far better suited to helping their members.