Want to know the right way to support business? Look to Israel and Texas.
Competitive business environments
The ongoing saga involving SNC-Lavalin Group and the Prime Minister’s Office, in which questions are being raised about the extent to which senior government officials attempted to intervene in the company’s legal issues, is a good opportunity to reflect on how Canadian policymakers can do a better job of creating a fair and competitive business environment.
Doing so means taking a completely different approach than has been taken in the past. Instead of protecting inefficient companies and industries for political reasons, we need to start reverse engineering the kinds of opportunities an investor looks for when deciding where to allocate capital.
A great starting place is to reduce the risks associated with investing in areas of the economy in which capital is desired — quick progress can be made in such areas simply by streamlining regulations and forming strategic partnerships between government and small business.
There are a couple of great examples that show how government-led policy can have a tremendous impact, if done correctly.
To start, look at Israel, a nation that at one time had zero foreign capital being injected into its economy. Their government began to invest massively in research and development (primarily military-related) which has now grown to 2.2 per cent of GDP and is the third-highest in the world.
By partnering small business with the military, new startups could substantially de-risk their business models by first establishing proofs of concept with the military, and then introducing and scaling them into industrial applications in other sectors.
As a result, the country saw growth explode, with thousands of new companies producing telecommunications equipment, software, semiconductors, biotech and medical electronics. Consequently, these high technology products now account for more than 70 per cent of total exports — more than any nation globally.
Israel’s successes are also backstopped by local expertise, which the Israel Defense Forces helped establish by identifying the most talented young people and putting them through rigorous training — a process that has led to the country having the highest percentage of engineers at 135 out of 10,000 workers.
Texas is another region that at one time had a lot in common with Alberta due to its oil and gas exposure, but that has since done a fantastic job of economic diversification. This process is showing its merit as despite the tremendous volatility in oil prices over the last five years, Texas is now the fastest growing state in the U.S. with an annualized 5.2-per-cent GDP gain last quarter and an unemployment rate of only 4.1 per cent. The state also has a higher GDP than Canada despite having a labour force that at 13.5 million people is only about two-thirds of our 20-million-strong pool.
A lot of the state’s success can be attributable to its focus on business-friendly regulations, especially when it comes to promoting small business. According to Chief Executive magazine, Texas has been ranked in the No. 1 spot for doing business in each of the 14 years since the beginning of its survey.
The state also happens to be a hub for financial innovation and could soon rival Silicon Valley. Interestingly, Texas is also the highest recipient for military funding outside of California and the U.S. Army’s new Future of War Command Centre is strategically located in downtown Austin, sharing space with the University of Texas’s School of Engineering.
The lessons for Canada should be clear. If we want to attract capital, we need to see government policy that is finally free from political bias and that instead encourages economic diversity by promoting and rewarding risk taking. So let’s plant the seeds for the next generation of Canadian leaders instead of supporting ones that are reliant on government policy to protect their market share.