Blog: Chapter 9 — Economic Policy AI & Job Creation
Take any definition describing innovation and it will undoubtedly mention that: “it’s a process through which economic or social value is extracted from transforming ideas — to produce new or improved products and/or services”.
Regardless of how we define innovation, Research & Development (R&D) plays an ever-increasing role in all advanced economies. For example, to put Canada’s R&D spending in perspective, one must remember that US spends on R&D $463B per year.
According to Statistics Canada: “Canada’s gross domestic expenditures on research and development (GERD) fell from $34.5 billion in 2014 to $33.9 billion in 2015.
Regardless of the actual numbers, even $35B is still only 7.5% of US spending. It’s not easy! To do more for less, Canada Foundation for Innovation, and other government agencies, must deliver more value by leveraging industrial contributions — significantly.
The definition of innovation by Merriam-Webster dictionary is quite succinct:
· The introduction of something new
· A new idea, method, or device
To put more meat on a bone — one may even consider Business Dictionary which reads:
“The process of translating an idea or invention into a good or service that creates value or for which customers will pay. To be called an innovation, an idea must be replicable at an economical cost and must satisfy a specific need.
Innovation involves deliberate application of information, imagination and initiative in deriving greater or different values from resources and includes all processes by which new ideas are generated and converted into useful products.
In business, innovation often results when ideas are applied by the company in order to further satisfy the needs and expectations of the customers.
Innovation is synonymous with risk-taking and organizations that create revolutionary products or technologies take on the greatest risk because they create new markets”
Regardless how we define innovation, R&D plays an ever-increasing role in all advanced economies. In turn, economic growth and job creation is tightly linked to industrial competitiveness.
This leads to substantial investments in R&D by companies, governments, universities & non-profit organizations all around the world. Therefore, it’s not surprising that countries, states/provinces, and even individual companies are being closely monitored, and their R&D expenditures benchmarked, and compared.
In most cases, the ranking is either based on the actual dollar amounts spent, or the ratio of country’s gross domestic expenditures on research and development (GERD) to its gross domestic product (GDP). Such percentage is considered an indicator of the country’s degree of R&D intensity.
The following charts from Visual Capitalist are indicative of above ratios, and the amounts spent:
A breakdown of R&D spending by GDP of select G20 countries:
On a company basis, the top five R&D spenders today are mostly technology companies:
Canadian Innovation Perspective
Although I’m looking at Canadian agency, there is a significant similarity here with other OECD countries, and beyond. So, let’s dive in …
The Canada Foundation for Innovation (CFI), a non-profit corporation created by the Government of Canada in 1997. Its mission is to benefit Canadians by strengthening the capacity of Canadian universities, colleges, research hospitals and non-profit research institutions to carry out world-class research and technology development.
It’s an impressive organization with a solid track record of 20+ years!
“The CFI maximizes the funding it receives from the Government of Canada by contributing up to 40 percent of a project’s research infrastructure costs. Institutions secure the remaining 60 percent through partnerships with provincial governments and other public, private and non-profit organizations.
This means that more than $7 billion invested by the Government of Canada through the CFI has been leveraged into a total investment of close to $17.5 billion in research infrastructure in Canadian institutions since the CFI was created”
According to Statistics Canada:
“The business enterprise sector was also the largest funder of R&D expenditures, providing $15.8 billion or 46% of total gross domestic expenditures. Far behind this sector were the higher education sector and the federal government sector, each making up about 18% of total expenditures”
To measure Canadian innovation performance even further, The Conference Board of Canada, evaluates Canada on the following 10 report card indicators: “public R&D, researchers engaged in R&D, connectivity, scientific articles, entrepreneurial ambition, venture capital investment, business enterprise R&D (BERD), ICT investment, patents, and labour productivity”.
According to Conference Board of Canada’s recent report — Canada ranks 9th of 16 peer countries and earns a “C” on innovation
Canada is competing for the same R&D talent with the entire world! And each of the 140 countries from The Global Competitiveness Index (GCI) by World Economic Forum could use the same virtuous and noble objectives as Canada does — VERBETIM.
One can simply replace the word CANADA — with any other country, and state the following objectives:
· Increase XXX’s capability to carry out important world-class scientific research and technology development;
· Support economic growth and job creation, as well as health and environmental quality through innovation;
· Expand research and job opportunities by providing support through research infrastructure for the development of highly qualified personnel;
· Promote productive networks and collaboration among XXX’s universities, colleges, research hospitals, non-profit research institutions and the private sector
And when government R&D spending remains flat, or decreases, and corporate spending is on the rise — global competition intensifies. In other words: A classic red ocean environment described so elegantly at: https://www.blueoceanstrategy.com.
As per Blue Ocean Strategy’s (BOS) Value Innovation recommendations, IMHO, to do more for less — CFI and other government agencies must deliver more value by leveraging industrial contributions, significantly. And when industry spends more on R&D, it creates more high-paying jobs — an ultimate societal benefit.
“We use the terms red and blue oceans to describe the market universe. Red oceans are all the industries in existence today — the known market space. In the red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known.
Here companies try to outperform their rivals to grab a greater share of existing demand. As the market space gets crowded, prospects for profits and growth are reduced. Products become commodities, and cutthroat competition turns the red ocean bloody. Hence the term red oceans.
Blue oceans, in contrast, denote all the industries not in existence today — the unknown market space, untainted by competition. In blue oceans, demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set.
Blue ocean is an analogy to describe the wider, deeper potential of market space that is not yet explored. Like the ―blue ocean, it is vast, deep, powerful, in terms of profitable growth, and infinite”
So, I’m not surprised that CFI openly asks:
· “How can Canada set itself on the right path for fostering a strong research and innovation system? It’s a pressing question — one that occupies countless boardroom discussions and newspaper columns and has given rise to the development of a new innovation agenda for this country and a review of federal funding for fundamental science
· But even as we scrutinize the mechanisms by which we support research and innovation in Canada, we should take the time to reflect on the ways innovation touches all our lives. In this knowledge era, innovation is integral to nation building and there is almost no limit to what research can teach us. In the broadest sense, both research and innovation are driven by the desire to make things better”
Here is my take on what can be done …
Since business enterprise is already the largest funder of R&D expenditures (providing $15.8 billion or 46% of total gross domestic expenditures) — we can call it a “low-hanging fruit”, or a “Bright Spot”. And all Bright Spots should be replicated, as soon as possible!
But instead of simply competing for existing business enterprise wallets (existing enterprise customers), my recommendation is to bring noncustomers to the table, and HELP THEM embrace innovation, too!
Noncustomers do exist and tapping into such group provides expanding growth opportunity. As per BOS recommendations:
“The noncustomers can be divided into three tiers:
· First-Tier Noncustomers — all enterprise business who would curtail their R&D spending at the first sign of economic slowdown. They may require government policy changes and tax cuts — to stay motivated
· Second-Tier Noncustomers — all mid-size business who consciously thought about R&D spending, but then rejected it because it’s beyond their means
· Third-Tier Noncustomers — all small business who never even considered investing in R&D, consciously — but could use it, or benefit from it. They always rejected it because existing government policy made it unfeasible and unattractive”
You may ask: how big is the noncustomer base, anyway? As per Key Small Business Statistics:
· “As of December 2015, the Canadian economy totaled 1.17 million employer businesses. Of these, 1.14 million (97.9 percent) were small businesses, 21,415 (1.8 percent) were medium-sized businesses and 2,933 (0.3 percent) were large businesses
· Small businesses employed over 8.2 million individuals in Canada, or 70.5 percent of the total private labour force. By comparison, medium-sized businesses accounted for 19.8 percent (2.3 million individuals) and large businesses accounted for 9.7 percent (1.1 million individuals) of the private sector workforce”.
And this is a very SIGNIFICANT growth opportunity, indeed!
But how do you help Small Business embark on R&D journey? I have previously described in this book CVC’s potential to become a partner of choice for startups and small businesses.
And yet, the number of existing CVCs pales in comparison to the number of active VCs in Canada, and around the world. I am convinced that with specific government policies in place, we can encourage CVC formation. As a result — R&D spending could grow by an order of magnitude.
On a surface, if there was a silver bullet that could have solved insufficient R&D funding — reducing marginal tax rates would do the trick! Or so it goes — if you subscribe to such theories.
Well, don’t get me wrong: tax reform is a good thing. According to WSJ:
· “Corporate tax reform is one of the few issues that attract bipartisan support in Washington. Lawmakers from both sides agree that the current system is deeply flawed.
· Because the U.S. hasn’t updated its tax code in 31 years, Congress has a once-in-a-generation opportunity to level the playing field for American businesses and workers
· The U.S. corporate tax rate was among the lowest among developed countries after the 1986 tax reform. It is now the highest
· A recent study confirms that even after accounting for deductions, credits and other tax-reducing provisions, U.S. multinationals face among the highest effective tax rates in the world
· Many U.S. companies opt out of the corporate tax system by organizing as partnerships and “pass through” businesses. In 2013, corporations accounted for only 44% of business income in the U.S. compared with about 80% in 1980
· Current law allows U.S. multinationals to defer U.S. tax payments on foreign earnings until they are repatriated. Most American companies take advantage of this option for at least some of their foreign earnings
· As foreign earnings have grown and foreign corporate tax rates have plummeted, the deferral option has become more attractive. An estimated $2.6 trillion of U.S. companies’ foreign earnings is now trapped abroad. This is money that might otherwise be used to finance investment, job creation and domestic growth”
So, on a surface, it looks as if cutting taxes is all we need. But history proves otherwise. Tax cuts in the past haven’t eased, or ended, the decline of the middle class.
Taxes were cut by president Ronald Reagan during the 1980s, and by president George W. Bush in the 2000s. Yet, the middle class steadily shrank and declined, ever since.
Therefore, I’m recommending a much more balanced and more comprehensive approach. Balance, means:
Lower taxes CONTINGENT upon spending on corporate R&D investments, innovation & training/education
And top it up with much deeper financial reforms — to avoid 1980s’ mistakes.
Contingent Marginal Tax Reduction
Corporate tax should be lowered when corporate entities are spending predefined percentage of their revenues on Innovation & Training.
I’m not throwing around any specific numbers, or Key Performance Indicators (KPIs) — but here is a simple high-level example: to qualify, spend 10% of your EITDA on:
· Corporate Venture Capital (CVC) investment
· Training & Education of existing and new employees
Of course, KPIs can be adjusted up, or down. But since I always look at the OPPOSITES — until such corporate investments are made, all stock buybacks should be EXTREMELY costly. Disallow tax cuts — until all the cash coming home is used to prop innovation, and not the ailing stock!
Yes, modifying tax code and making share buy-backs expensive — will release enormous funds for corporate investments, innovation and training. And as new capabilities emerge, so will the jobs.
One more thing …. innovation doesn’t need to be always DISRUPTIVE. As Peter Thiel so elegantly explained in his book: Zero To One: “Disruptive kids get sent to the principal’s office. Disruptive companies often pick fights they can’t win”
The good thing is that we already know what didn’t work in the past. And since, like in any business, no business plan survives the first contact with the real customer — the fiscal policies must also be tweaked.
It’s time to add more substance to our fight for future prosperity. Experience brings wisdom, and no Twenty Something analyst at IVC can have a better understanding of corporate pain — than their CVC counterparts. All CVCs need is more money and more tax incentives to invest in evolving economy — much more!
And no, I don’t care if IVC investment analysts are wearing designer T Shirt on a West Coast, or a pair of proverbial red suspenders on Wall Street …
AI Global Race
Not surprisingly, governments around the world decided cashing-in on AI craze and start outbidding each other by rolling-out various support programs.
In the last few years, AI became a major socio-economic priority — all around the world. So, the Fear Of Missing Out — forces nations to develop world-class AI capabilities and thrive.
And since Tier-1 consulting firms such as McKinsey estimate that AI has the potential to raise cumulative GDP by 16% by 2030 — the race for AI dominance is on.
In general, picking winners is a bad idea to begin with — and no governments should ever engage in micro managing innovation.
Instead, setting up smart economic support policies as described at the beginning of this chapters — would offer more benefits and more long-term jobs over time.
As Tim Dutton recently reported: “The race to become the global leader in artificial intelligence (AI) has officially begun. Canada, China, Denmark, the EU Commission, Finland, France, India, Italy, Japan, Mexico, the Nordic-Baltic region, Singapore, South Korea, Sweden, Taiwan, the UAE, and the UK have all released strategies to promote the use and development of AI.
No two strategies are alike, with each focusing on different aspects of AI policy: scientific research, talent development, skills and education, public and private sector adoption, ethics and inclusion, standards and regulations, and data and digital infrastructure”
Similarly, HolonIQ recently mapped 35 AI strategies from around the world representing 90%+ of Global GDP in their “AI and Global Education Report”.
Proper tax incentives will generate more, not less AI jobs. And with the amount of funding and incentives already pouring-in, the jobs that will be created will dwarf job losses — by an order of magnitude …
So, happy innovating! Enjoy AI jobs — today and in the future
Oleg Feldgajer is President & CEO of Canada Green ESCO Inc. Oleg is positioning the company to become a leader in financing AI enhanced green energy projects and ventures. CGE’s mission is to guide DISRUPTIVE businesses in ENERGY & TRANSPORTATION toward profitable business models. Oleg is passionate about such mission, and firmly believes that without AI based innovation, we will all prematurely choke on polluted air and dirty water. CGE delivers 100% financing (levered and unlevered) to its clients — and utilizes large equity pools, and non-recourse debt. Oleg offers creative, fresh ideas to open-minded businesses — that embrace both: logic AND opportunistic intuition. CGE stands against mediocrity & its modus operandi is quite simple: If CGE is not invited to join your BOD, or Advisory Board — we failed!