Archived — Canada in the 21st Century: Paper Number 10: The Corporate Response—Innovation in the Information Age

by Randall Morck, University of Alberta, and Bernard Yeung, University of Michigan, under contract with Industry Canada, 1998


Summary

In forecasting courses, undergraduate students of economics are routinely taught to plot trends in variables of interest, and then to use statistics to extrapolate them into the future. This procedure has the advantage of requiring virtually no work in understanding the thing being predicted. It also leads to spectacularly wrong results. We believe the key to making educated guesses about the future is understanding some basic elements of economics. We believe an economic theory called Austrian economics, part of which has recently emerged from a half-century of obscurity in the guise of endogenous growth theory, is the key to understanding our current situation.

Predictions that the world is on the verge of a totally new age are fun to make but the world usually does not co-operate. Corporations and jobs 10 years from now will probably not be that different from what they are now. However, there are a few changes that probably will matter. We believe the most important of these to be the accelerating pace of innovations, globalization, and the changing demographics of Canada's population. These three changes are not unrelated.

Immigration is probably the only way to rescue Canada from demographic disaster as its existing population ages. This leads us to what we think are some reasonably safe predictions about Canada 10 years from now: its population will be more diverse than that of other advanced Western countries, and the diversity will be a tremendous competitive advantage in forging economic links with newly rich countries in Asia and elsewhere.

Accordingly, globalization can be a very good thing for Canada. We may be in a better position to benefit from the shift of the world's centre of economic gravity out of the North Atlantic. Canada's current policy of pushing for global free trade makes sense. But the accelerating pace of innovation is an even stronger rationale for Canada to push for free trade.

Innovations have unique economic properties. Once a firm has spent money on R&D to develop a new process or product, it makes a higher return if the innovation can be marketed on a larger scale. We believe it will become increasingly obvious that the real competition in the global free market economy will be competition to innovate. If Canadian firms are to be competitive innovators, they must be able to earn high returns on their innovations. To do that, they must have access to the largest market possible: the global market.

In our view, government has a crucial role to play in fostering Canada's economic health in the next decade, but this role is quite different from the one it has assumed in much of the 20th century. Government is becoming a competitive business. Governments that fail to provide high-quality tangible and intangible public infrastructure at competitive tax rates will lose capital, skilled labour and therefore knowledge to other economies. A critical part of this infrastructure, we believe, is a sound, reliable and fair legal system that protects property rights, both tangible and intellectual. Essential to the legal system are corporate governance laws that promote investment by strengthening investors' trust in corporations. Education, public order and social safety nets are other basic components of the infrastructure. Subsidies to corporations, for whatever allegedly good cause, are not.

We conclude with a brief description of the corporate job of the future and end with a forecast that we believe to be a sure bet, in case the others fail to pan out.

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