A colossal waste of money

The taxpayer-funded Automotive Innovation Fund produces few jobs and actually stifles innovation.

 

(THE CANADIAN PRESS/Chris Young)

Canada’s automotive sector frequently behaves like a struggling theatre troupe or a small-town museum—it constantly warns of closure unless another public subsidy can be found. This month, Prime Minister Stephen Harper announced another $250 million for the country’s Automotive Innovation Fund, established in 2008 to support research and development initiatives. The Canadian Auto Workers described the money as a “step in the right direction.” A parts manufacturer told The Globe and Mail the millions were a “good start.” The industry’s ho-hum reaction to a payout that amounts to $2,252 in spending for every automotive job in Canada shows how dysfunctional this thicket of subsidies has become.

The problem is not just the federal government’s mothering of big, grown-up companies. It’s that innovating—creating genuinely new products and processes—requires, and fosters, efficiency. Subsidies, however, are highly uneconomical ways to create jobs or fund research. They promote “inefficient innovation”—something as undesirable as it is oxymoronic.

In announcing the fund’s renewal, Harper said: “Our goal was to promote and secure more high-quality manufacturing jobs in this industry through innovation.” But as processes become more efficient, less labour is often required. If the government’s goal is job creation, they’re failing; five assembly plants have closed in Canada since 2001, while only one new facility, a Toyota plant in Ontario, has opened. More than 170,000 automotive jobs have disappeared in the past five years. New positions do exist in some of the plants funded by the Innovation Fund—Toyota expects to add 400 new jobs this year—but these jobs come an inflated cost. For each position either saved or created, the Institute for Research on Public Policy found, government spent as much as $212,946.

If the automotive fund is a poor option for job creation, it’s even worse for accomplishing its headline task: spurring actual innovation. The fund has largely benefited global behemoths like Ford and Toyota. Harper’s own expert R&D panel in 2011 called for a strategy focused “more sharply on the strategic objective of growing innovative firms into larger enterprises,” a recognition of where innovation is actually taking place.

So the government is spending its money in the wrong place. But should it be spending it at all? The infamous case of Solyndra, a solar-panel manufacturer that went bankrupt after receiving a $535-million loan guarantee from the American government, suggests not. James Nelson, whose company Solar 3D rivalled the doomed company, later argued before a congressional committee that government subsidies led Solyndra to build an overpriced domestic factory in an expensive location. Suggesting “we need to get better through the discipline and grit of the free enterprise system,” he argued against further government funding for green-energy commercialization. But his observations hold true, regardless of the sector. In 2012, researchers with Germany’s Institute for the Study of Labour, an independent research institute, found government funding for innovation did inspire corporations to spend more on research and development, but with diminishing returns. The more they spent, the less innovation each dollar produced. The result hints at Nelson’s explanation: companies simply aren’t as careful when they’re spending someone else’s money.

Canada would clearly risk a decline in its automotive sector if it ended its innovation fund. It now competes against other jurisdictions that are happy to cajole automakers with cash, tax benefits, or both. But just because everyone else is doing it is a lousy rationale for a counterproductive practice. Canada needs to accept there will be short-term pain that comes with making the leap from its manufacturing past. But by subsidizing the status quo, the government isn’t spurring innovation. The only thing it’s building is an inefficient life-support system for an ailing industry. Better to say goodbye now and save our resources for the renewal that true innovation brings.

James Cowan is deputy editor of Canadian Business

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