Procurement: The Untapped Tool of Industrial Policy

On September 10, CCI will publish Building Winners: Strategic Procurement in the Age of Innovation. This landmark report authored by CCI Policy Director Laurent Carbonneau and Economist Dan Ciuriak takes a deep dive into the opportunity and the necessity of using procurement as a key economic development tool.

Register to attend our launch event on Zoom, where Laurent and Dan will be speaking about the report, in conversation with, AltaML CEO Nicole Janssen, ClearRisk Board Chair Neil Desai, and CCI Director of Strategic Initiatives Abu Kamat.

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By Laurent Carbonneau
Director of Policy and Research

Throughout 2024, at CCI we’ve been obsessed with government procurement. And this article will be about procurement eventually, but first, we need to talk about some fundamentals.

Let’s talk about industrial policy.

Canada has great research and scientific talent.

We have a robust capital market that would make European economies green with envy.

What’s more, we have the kinds of stable governance/rule of law fundamentals that make investing attractive.

Why aren’t we an innovation powerhouse with all of those assets? And for that matter, whose job is it to put those pieces together?

When the government decides that it’s their job to put it all together, we tend to call that industrial policy. And industrial policy has made something of a return in the last few years. The United States has made huge investments in economic transformation and innovation through the Inflation Reduction Act and the CHIPS and Science Act. Europe and China have followed suit with measures to improve their market share and performance in sectors they deem strategic, like EVs and shipbuilding.  

For the most part, industrial policy went out of fashion with disco and tie-dye by the end of the 1970s. Through the end of the 20th century, Milton Friedman and neoliberalism ruled the day. People said things like, “Government can’t pick winners” and the general attitude was that when bureaucrats tried to meddle in markets, it just resulted in a wasteful mess.

This might have been true at the time, but the return to vogue for industrial policy isn’t about forgetting the mistakes of the past, though. The reality is that the economic game has changed.

In an economy like that of the 1970s and 1980s, what economists call producer rents were low. This means that markets were basically competitive in the same sense as we understand from an Econ 101 textbook: profit margins got competed away, and companies couldn’t count on technological ‘moats’ to protect them, and protectionist policy-based moats mostly fostered uncompetitive companies and were bad for most people. Industrial policy fell out of favour in large part because it’s just not the right tool for an economy with low rents and high competition.

But the economy has changed since then, dramatically. As we started to leave the 1980s, with their Reaganism, big hair and leather jackets behind, there was a tremendous rise in the importance of intangible assets like patents that are associated with producer rents.  

In 1963, there were about 91,000 patent applications filed at the US Patent and Trademark Office (USPTO). A generation later, in 1983, that number had barely crawled its way up to 112,000. But by 2003 the number of patent applications tripled to366,000, and by 2020, the most recent year tracked by USPTO, annual patent applications had nearly doubled again, to around 650,000.

At the same time, the share of GDP taken up by profits hovered between 4-5% through the 70s and 80s, but started to rise in 1990 and is now over 8%.

This tells us that producer rents are back, and that means there is a much stronger case for industrial policy now than there was a generation ago. But more importantly, those rents are coming from technological advantages embedded in intangible assets. In an economy defined by innovation and intangible assets, the lesson is that industrial policy and innovation policy have to be treated as one and the same.

If we accept that it’s fair to use industrial and innovation policy tools in this new economy, what are the best options? We’ve tried tax credits, and like I mentioned earlier, framework policies like education and research funding don’t seem to be enough on their own.

So we have to look at our specific problems – in Canada’s case, the problem is a lack of big, homegrown, innovative firms that drive most productivity growth in advanced economies. Our other problem is that we aren’t able to turn research excellence into industrial innovation.

This is where government procurement comes in. Procurement of innovation can target the problems exactly where they are, by providing a tool for individual firms to scale and by providing a market for cutting-edge technology. Scaling firms pursuing novel challenges have a strong pull to connect up the academic and industrial research systems more intimately to solve tangible scientific and engineering problems.

We can’t just ignore the re-emergence of industrial policy, and we have to remember that all industrial policy now has to be innovation policy in the new economy. These insights point us towards the tools that can help solve our specific Canadian problems – and putting our innovators to work solving real public challenges comes in at the top. ‍

To hear more about these ideas, you’re going to want to attend CCI’s launch event for Building Winners: Strategic Procurement in the Age of Innovation. Register here.