Dr. Kevin G. Lynch Vice-Chair BMO Financial Group

1. Dr. Kevin G. Lynch Vice-ChairBMO Financial Group Innovation for our Changing World IPAC Annual Conference Ottawa, August 23, 2010

2. In good banking fashion: a WARNING. Beware --- there may be risks associated with this presentation.

3. Back to Basics: what is innovation and why does it matter…let’s start with something as basic and critical as our standard of living and how this is linked to productivity and demographics… Employed Canadians as share of total Canadian population Hours worked on average by Canadian workers Standard of Living: GDP per Canadian in 2009 was $45,000 per capita, among top 5 OECD countries Value of output (GDP) produced per hour by Canadian workers x x Canada has a very high “employment ratio” among OECD countries, higher than U.S., but demographic trends suggest this will decline as boomers age, reducing our standard of living ceteris paribus Canada has a much higher number of average hours worked per workers than the OECD average, but in line with U.S. Productivity of Canadian workers per hour worked is significantly below the U.S., and many other, major OECD countries Canadians’ standard of living in 2009 was $10,000 per capita behind U.S…And it will decline on current demographic trends unless productivity increases x x

4. PRODUCTIVITY PERFORMANCE FLAGGING: Labour Productivity Growth in the Canadian Business Sector annual rate, % 4 4.0 3 2 1.6 1 0.8 0 1973-2000 2000-2008 1947-1973 Relative Productivity: Canada as % of U.S. (Labour Productivity) U.S.=100 100 95 90 85 80 75 73.6% 70 1984 1987 1990 1993 1996 1999 2002 2005 2008 1981 Productivity matters: our productivity is lower than our major competitors, keeping our living standard lower than the U.S. …and, with our ageing demography, our standard of living will decline (not rise as we have become accustomed to) unless we increase productivity per person. Productivity growth: Canada’s performance has been poor and worsening…subsidized until lately by a low dollar, strong U.S demand, high energy prices. - Productivity growth rate has been declining since 1970s; averaging only 0.8% since 2000. Productivity levels: Canada’s business sector has an average productivity level only 75% of U.S. - At 95+ cent dollar, our lower productivity hits home, and hurts. Cost of the “productivity deficit”: Canada’s productivity is 20+% less than the U.S. … a “cost” of over $300B annually or $10,000 per person. Source: David Fung – Conference on Global Value Chains

5. SWE JPN FIN KOR SWI U.S. GER DEN AUT ICE LUX FRA BEL U.K. CAN 15th 0.0 1.0 2.0 3.0 This is where innovation comes in. Innovation is the key to modern competitiveness and affects productivity in a variety of ways. The problem: Canada is NOT an innovation leader, particularly in the business sector. Innovation is the ability to create new products and services, to produce existing products in new ways, and to develop new markets. It drives productivity; it drives growth; and it drives our living standards. It lies at the heart of modern competitiveness … Business Sector R&D Expenditures % of GDP Our public sector investments in R&D spending as a % of GDP, delivered largely through universities, are well above OECD averages, and even the U.S. But, the Canadian business sector ranked 14th among OECD countries in business R&D expenditures as a percentage of the economy. Canadian business R&D spending is only 1% of GDP, well below the OECD average of 1.6%; half the U.S. and a third of leaders like South Korea, Sweden, Finland and others.

6. Canada - U.S. ICT gap also worrisome: Canadian sectors significantly lag U.S. in ICT investments except utilities. ICT Capital Stock per Worker Selected Industries, 2006 Utilities Finance & insurance Information & Cultural Industries Retail Trade Agriculture, Forestry, Fishing & Hunting BUSINESS SECTOR AVERAGE Wholesale Trade Manufacturing Transportation & Warehousing Professional, Scientific & Technical Services U.S.=100% 0 20 40 60 80 100 Canada as % of U.S.

7. Innovation comes in many shapes and colors …consider the iPod. Everyone agrees it is “innovative”, but what is the nature of the innovation? Innovative Technology? Innovative Design? Innovative Functionality? iPod Innovative Services (access to music)? Innovative Marketing?

8. Radically re-thought car design and supply chain to sell car at ~USD $2,500 Aimed at 14 million Indians likely to purchase new low cost cars Launch now planned for 2011 – 12 in EU and US And the west is losing its monopoly on innovation…it will come from many new corners of the globe…and this also will be transformative. Tata’s NANO – Developed for India, but soon for sale in the US and EU Global Fortune 500 BRIC-based companies 58 27 Tata Motors filed for 37 patents associated with the design of the Nano 2005 2009 Source: WIPO; Fortune; OECD

9. In short: Innovation matters. And government can influence innovation in many ways including by its own operations. Vision, objectives, leadership Branding Public policies Government and Innovation: many channels of Influence Investments in R+D (including gov’t labs) + Public Information: Statistics Innovations: front office (expand reach) Innovations: back office (efficiency)

10. The vision “thing”: In a rapidly changing world, where the information revolution is a key productivity driver…vision, strategy and execution are primordial…what is Canada’s “connectivity and content 3.0” vision? National Vision is Essential • Information revolution is disruptive: it is changing markets, business, governance, and society; and enabling pervasive globalization. • Innovation must be key to our IT vision: we cannot lead by being average…an example: the Blackberry is transformative in how people work. Partnerships are Key • ITC is a core driver of innovation, and ITC business usage in Canada lags U.S by 50%...need to address slow ITC adoption, particularly in service sector (70% of economy). Global Thinking is a Must • All IT marketplaces are truly global: must think globally, and deliver • locally --- master innovative “mass customization”. Speed Wins • Lead countries, and companies, will dominate ICT markets… the margins are in value-added products and services not commoditized ones.

11. Web 3.0 Brilliant at basics Applications Regulatory science Best practice “drivers”: demonstrate that Canadian governments can be innovation leaders in specific lines of business…thereby contributing to Canadian productivity growth… leading-edge interaction with Canadians: be the “Google” and “Electronic Arts” of governments…more government content online in accessible, interesting, interactive forms use ITC to create seamless digital back offices: but need to change processes to optimize software, not reverse use existing technology (e.g. web/webcams) to innovatively connect Canadians to their patrimony (e.g. Kulani National Park; Geo-mapping; Arctic,…) make Canada a leader in aspects of regulation based on world leading science (e.g. food, drugs, product safety), just as we are leaders in financial sector regulation

12. “Niche ITC leadership” is entirely possible: remember connecting Canadians coming out of IHAC in the mid-1990s, a consensus on the ambition to make Canada the most connected country in the world… connecting.canadians Canadian Content Online Electronic Commerce Canada Online Smart Communities Canadian Governments Online Connected Canada to the World 15 years on, the information revolution continues apace, but Canada no longer has a global ITC leadership position

13. Brands create value: we need a “Canada Brand”. It would help Canadian business sell abroad, attract investment, entice new Canadians, open markets and reduce risk of negative branding by others? Risk: Wall St Journal Financial Crisis Oil Sands Seal Hunt Branding of Canada by Others • Possible Canadian Brand Characteristics: • - sound financial sector: avoided crisis • - massive energy/natural resource reserves • - corporate tax advantage over U.S.(12.5 p.p.) • - prudently managed country: lowest gov’t debt • - cities that work: environment, institutions, culture • well educated, multi-cultural work force • values …or… ? Nice Canadians

14. Last Word: we need to tackle innovation more holistically, and more strategically and for the long-term… • In tackling the innovation deficit, a clear and collaborative strategy is essential, and private sector involvement and leadership is key… Yogi Berra…“if you don’t know where you are going, you won’t know when you’re lost” • We need to break out of “short-termism”…which bedevils longer term strategies and riskier, longer term investments. • Public service innovation needs to be part of dealing with our innovation and productivity deficits…the public service can make a productivity difference… • And…CREATIVITY and PERSEVERANCE will win. Canada has the potential; we now need to realize it…