Growing the new economy: the integral relationship between competition and innovation

Speech

Remarks by John Pecman, Commissioner of Competition
Vancouver Competition Policy Roundtable
January 18, 2018
Vancouver, British Columbia

(As prepared for delivery)

Thank you for inviting me to speak with you today.

I’ve just spent a great few days on the West Coast and I’ve had the opportunity to speak to three university classes on this trip. I have to say, it’s really refreshing to spend time with young people on the cusp of their careers. That’s not to say I don’t enjoy the company of those farther down their career path—which happens to be where I find myself these days—but there is something inspiring about engaging with young minds that are open to all the possibilities that the future holds. They will be the ones to shape the course of the next several decades. They will be the change-makers, the innovators.

Innovation is a much-used word these days. You can’t scroll through the headlines without coming across it. Even the news itself has been transformed by innovation. I can now watch the CBC’s nightly newscast on my smart phone, while watching the Leafs win on my tablet. Just five years ago, I’d have been flipping back and forth between TV channels (and watching the Leafs lose).

But my point is that innovation is, without question, one of the most talked about subjects across the globe.

From governments, to businesses, to academic institutions like the University of British Columbia, in places from Australia to Canada, everyone is engaged in what I like to call the great innovation conversation. Innovation has truly become the buzzword of the millennium.

So why are governments so engaged in the great innovation conversation? Why are so many declaring that they’ve embarked on an innovation agenda?

I would argue that there are many good reasons for that.

Many governments have realized that innovation is one of the most essential components of growing a modern, thriving economy—in both the short and long term. It can bring direct benefits to consumers in the form of better products and more convenient services. It can also benefit businesses by enabling firms to reduce costs, increase their productivity and contribute to overall economic growth.

Speaking more broadly, innovation holds the potential for solutions to some of our globe’s most pressing challenges such as health care, transportation, and environmental protection.

In short, innovation is key to inclusive economic growth in the rapidly evolving digital economy.

Let me provide two examples that illustrate this clearly.

First, electric cars. A decade ago, the idea that electric cars would soon play a significant role in the automotive sector seemed implausible to many. Cue 2018, where electric cars are no longer viewed with the same sort of skepticism. It now seems highly plausible that you or I will own an electric car in our lifetime. We can see charging stations cropping up across Canada – there are now four at UBC alone. The implications for the economy, transportation and the environment are significant.

The second example is just a short distance from the Competition Bureau’s head office. I’m referring to the Canadian tech company Shopify. This company brilliantly illustrates how the concept of innovation is critical to inclusive economic growth. It also underscores a point I’ll be coming to later about competition and innovation. Its three founders initially intended to sell snowboards, but became frustrated by the limited e-commerce options available to them. Realizing that merchants around the world faced the same challenge, they launched their own e-commerce platform in 2008. They began offering businesses and fellow start-ups a customizable online storefront.

Their platform effectively transformed e-commerce for small business, making it accessible for any merchant to set up an online storefront, regardless of size. Ten years later, the company is valued at more than $12 billion, and half a million merchants from 175 countries are using the Shopify platform as their gateway to the digital economy.

This includes a little electric car company called Tesla.

What’s significant about these two examples is that, while these innovations have had and will have profound impacts, they are also new inventions, new products that create value for which customers will pay. Economists call the competition around these new inventions “competition for the market”.

I’ll return to this notion later as I explore the Bureau’s two key touch points with respect to innovation: enforcement and advocacy. But before I do that, let me take a step back. I mentioned that governments the world over have thrown themselves into the great innovation conversation. What are they saying?

Innovation and government policy

Governments are constantly talking about inculcating and incubating innovation. We (economists, policy makers, legislators, academics, the media) spend a lot of time talking about how to foster innovation, how to put businesses in a position to do it, and how to instill it in the next generation. The Government of Canada talks about it in terms of an Innovation Agenda.

And here is what we talk about most often—creating hubs or superclusters, implementing attractive tax policies, direct investment and skills training programs.

Innovation and competition

But there is one piece that I believe too often gets left out of the innovation conversation—and that’s competition. Competition drives innovation! It’s an essential underpinning of any plan to grow innovation.

Competition is an integral part of innovation for a very obvious and intuitive reason. If companies did not face competition from rivals in a dynamic marketplace, what reason would they have to invest in innovation? What would drive them to improve? To go back to my earlier example, what drove car manufacturers to seriously invest in, and inevitably launch an electric vehicle?

The answer is competition. Competition keeps companies on their toes—perhaps even a little bit afraid. From another perspective, why would any entrepreneur, such as the trio that founded Shopify, innovate without the prospect of being able to displace incumbents?

This link between competition and innovation is by no means a novel idea: nearly 10 years ago Canada’s Competition Policy Review Panel said that “competition is the strongest spur to innovation and value creation, leading to a higher standard of living for all Canadians.”

Similarly, nearly two decades ago, distinguished Harvard business professor Michael Porter wrote: “While technological innovation is the result of a variety of factors, there is no doubt that healthy competition is an essential part. One need only review the dismal innovation record of countries lacking strong competition to be convinced of this fact. Vigorous competition in a healthy business environment is the only path to sustained productivity growth, and therefore to long term economic vitality.”

Of this we can be sure: when it comes to innovation, competition is key.

How does the Bureau foster innovation?

So we know that competition drives innovation. In open and competitive markets, companies are forced to adopt more efficient production processes, and offer new and improved products and services to customers.

But competition and innovation can be stifled in at least two ways. First, by private anti-competitive behaviour, and second, by overly restrictive government regulations. Let’s think of these as “roadblocks” on the path to innovation. This is where the Bureau comes in. The Bureau’s role is to clear these “roadblocks”, where possible, through a combination of enforcement and advocacy tools.

The Bureau plays a unique role in this regard. Government can take all of the measures that it wants to grow innovative firms, but if those firms cannot compete because of anti-competitive conduct or overly restrictive regulations, then the desired outcome will not be achieved.

Enforcement

We enforce the Competition Act to stop anti-competitive behaviour; the kind of behaviour that we know is innovation-stifling. This behaviour can take a number of different forms.

For example, it can be when incumbents abuse their dominant position to prevent an innovative start-up from entering the marketplace. It can also be cartel behaviour—when businesses collude, the pressure to innovate disappears.

Similarly, when companies make fraudulent claims, legitimate innovators suffer. The merger of two rivals may also reduce competition and diminish the drive to innovate within an entire industry.

In all of these scenarios, consumers end up worse off.

Two recent enforcement cases exemplify this kind of work well:

The first is our case against the Toronto Real Estate Board (TREB), which was found to have prevented its members from offering data through innovative brokerage models. In this case, we were able to identify specific innovative business practices and services that the conduct was directly stopping. This is an important case for enforcement generally and for innovation specifically. I’m proud of the Bureau’s work here – this case clearly underscores that crucial link between competition and innovation and the Bureau’s role in upholding both.

The Tribunal’s decision was recently upheld by the Federal Court of Appeal. TREB has announced that it intends to file for leave to appeal to the Supreme Court. The Bureau will oppose that application in order to make sure that a “roadblock” to innovation in the GTA real estate market is taken down without further delay.

The second case is the merger between Dow and DuPont, which was reviewed in multiple jurisdictions. In Canada, our innovation-related competition concerns were addressed through a consent agreement. I say innovation-related competition concerns for good reason. Our review specifically recognized the important role of innovation within the agricultural sector and identified concerns related to the proposed merger’s impact on innovation. This fact was made plain in our position statement, which included 17 references to “innovation”. Moreover, we were able to be fairly specific about how innovation would be harmed. For example, both Dow and DuPont were working to innovate within their respective herbicide portfolios. We found that the loss of innovation rivalry brought about by the merger would reduce the incentive to innovate, and therefore reduce the likelihood of bringing new and more effective products to market.

In other words, we identified specific “roadblocks” to innovation that likely would have led to consumer harm, and we obtained a remedy to avoid that outcome.

This merger was reviewed in a number of jurisdictions, and we collaborated closely with the European Commission, the U.S. Department of Justice and the Australian Competition and Consumer Commission. The Europeans published a highly detailed 915-page decision that also recognized the importance of innovation. It did something we did not do, however: it used the notion of “innovation spaces” (more commonly known as “innovation markets”) to support an argument that the merger would harm consumers by lessening innovation.

What is remarkable about this argument is that in no way does it require linking innovative activity to specific innovative products that benefit consumers; instead, the argument holds that the reduction in innovative activities itself constitutes harm to competition.

That’s important because, unlike the TREB case, this argument does not require identification of specific products that benefit consumers. In fact, the link between consumer benefit and innovation need not even be developed.

So, we have both recognized that dampening innovation can lead to harm to consumers and to competition. But we have done so in markedly different ways. This raises the question: how discernible does the “roadblock” to innovation have to be in order for an antitrust enforcer to take action to prevent harm to consumers?

Advocacy

Along with our enforcement work, advocacy is an important way that the Bureau fosters competition and innovation. Why? Because it can help to clear “roadblocks” to innovation that aren’t put up by businesses through their conduct or when they merge.

One example of our innovation-related advocacy work is our recently published white paper on big data.

Firms are increasingly using big data to drive innovation in many different industries. Some feel that big data offers great benefits to both individuals and businesses. Others believe that companies that control substantial volumes of it have the potential to undermine the competitive process. Through our big data paper, we’ve initiated a discussion about the role competition policy should play and how we can strike the right balance.

The truth is that we cannot even begin to anticipate all the ways that businesses may use data. This means that antitrust enforcers and governments need to keep asking themselves the following question: how do we take action or regulate in a market that is in a constant, rapid state of flux without inadvertently putting up “roadblocks” that could impede the very innovation we want to promote?

Keeping this in mind, what I’ve seen to date suggests to me that applying the tried and tested competition framework remains the best mechanism to preserve competition and, hence, innovation.

That is not a trivial statement, particularly in light of the fact that there are a number of influential people calling for enforcers to apply a different and more aggressive framework when it comes to data.

Another example of our innovation-related advocacy work is our FinTech market study. Our report covers technological innovation in various types of financial services. Again, like big data, it is nearly impossible to anticipate all the ways in which entrepreneurs will remake financial services.

Perhaps the most important findings of our FinTech study are related to the impact of regulation on innovation, and competition. They speak strongly to the need for balance and a principle-based approach.

We found that, on the one hand, excessive, heavy-handed regulation, or being slow to amend regulation to reflect current realities, can stifle innovation and in turn, economic growth.

Prominent entrepreneurs have been saying much the same thing for decades, albeit more colloquially. Jeff Bezos, CEO of Amazon, believes that you can’t innovate if you can’t experiment and break rules. And, as Asian e-commerce juggernaut Alibaba founder Jack Ma puts it, fostering innovation means giving businesses the freedom to “play”.

Now, as the head of an enforcement agency, I’m not suggesting we break any rules. What I am saying is that businesses need the room to experiment, to play, if we want them to innovate, and regulations should be formulated to enable that.

Other competition agency heads have expressed the same sentiment. Acting Chairman of the United States Federal Trade Commission (FTC) Maureen Ohlhausen advocates the principle of regulatory humility, which holds that regulators cannot have perfect foresight into the ways that businesses will need to “play” in order to come up with the next great product. Hence, regulatory interventions that impose strict, top-down solutions are unwise.

Our FinTech study also found that, on the other hand, a lack of regulation can hold back innovation in this space. For example, it is clear that few want to loan money or accept payment via a new platform that may fall outside of any regulatory framework. In certain markets such as financial services, regulation brings certainty and confidence for consumers and businesses alike.

What I am getting at is this: We need to strike the right balance. Regulation addresses genuine public interest concerns. At times, it is even necessary to create the grounds for innovation. But we need to address those concerns, and promote confidence, in a way that encourages competition as much as possible.

In some cases, finding this balance is easy. For example, a few years ago, the Bureau advocated for a relaxing of regulations in the taxi business that were stifling, and in some cases, entirely excluding, new and innovative entrants like Uber and Lyft. That was an easy call: not only did these new entrants bring innovative new services that consumers wanted; the added competition was driving incumbents in the taxi industry to improve their services and launch their own apps.

British Colombia is currently looking at this same issue, and these principles are applicable here and now.

In other cases, the questions are more complex.

Do competition agencies need a crystal ball?

Our big data and FinTech papers highlighted a much broader fact: competition authorities do not always have the luxury of knowing what new products, services or business models will emerge. The uncertainty—and the stakes—are very high. This makes the questions I have raised thus far very difficult to answer unequivocally.

The challenge is not knowing what the future will bring.

Fiona Scott Morton, a professor at Yale and formerly the chief economist at the Antitrust Division of the United States Department of Justice, recently asked, hypothetically, if WhatsApp had the potential to eventually displace Facebook in the market for messaging, should we take legal steps to prevent the two companies from merging? That’s a difficult question to answer because of the many uncertainties built into it. We have to look into the future, where any player could bring about disruptive change. Earlier, I mentioned the concept of “competition for the market”. Professor Scott Morton has argued that, in the digital economy, we may see more examples of competition “for the market” as opposed to competition “in the market.”

Now, it’s obvious that looking into the future is always, by definition, uncertain. That said, what is different about where we find ourselves today is that we have never before experienced this incredible pace and breadth of change. This means that the questions I have raised about innovation and dynamic competition will become increasingly common in the future, leading to greater challenges for competition authorities.

One approach to dynamic markets is to be conservative and limit ourselves to taking action where we can identify products, services and new business models that would likely emerge in the future. If we only take action in these types of cases, we risk permitting anti-competitive abuses solely because we lack certainty.

Another approach is for competition agencies to be less risk averse, and to take action even where we do not know what new products, services or business models may emerge. The cost of making a mistake in this kind of case is to potentially stifle innovation.

Perhaps the most important question to keep in mind when we are trying to find the right balance is this: which approach will lead to better outcomes for Canadians?

Conclusion

As I started my remarks today, I talked about being further down the road on my “career path”, exactly 34 years this month, all of it spent at the Competition Bureau.

As you can imagine, I’ve seen a lot of innovation over the course of those 34 years.

And if there’s one thing I’ve learned about innovation, it’s that innovation is essential to evolution and growth: for individuals, for organizations, for economies.

I believe innovation is critically important to the Canadian economy. I also believe that competition is critically important to innovation. And I believe those conclusions should be embraced with enthusiasm.

In the face of innovation, countries will either lead or they will lag. Overregulating, or being too prescriptive, is almost a guaranteed way to ensure that a country will lag its counterparts. Similarly, walking away from competition is a head start to winning the race to the bottom.

As I approach my departure this coming June, I am working hard to ensure that the Bureau will continue to support innovation through its enforcement, outreach and advocacy—with a focus on the important issues we are now facing in the rapidly-evolving digital economy.

We need to do this to ensure that consumers and businesses prosper in a competitive and innovative marketplace. To ensure that Canada is creating an environment that is ripe for innovation. And to ensure that competition takes a central part in the great innovation conversation.

At the same time, I want all of us to continue to ask hard questions like the ones I have raised today. And to seek answers to those questions.

I don’t pretend to have all of the answers. But I do know one thing: we need to make sure we don’t needlessly get in the way of the next trio of young, ambitious snowboard makers who have a great idea that could make the world just a little bit better.

Thank you.


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