The IPL newsletter: Volume 19, Issue 380

Creating Digital Opportunity for Canada

David A. Wolfe, Innovation Policy Lab
It is no longer possible to underestimate the importance of the digital economy. Not since the introduction of electricity have we seen an interconnected set of technologies with such potential to disrupt established industrial sectors and economic patterns and, in doing so, to generate new opportunities for future generations. The rise of platform firms is creating new opportunities for entrepreneurial start-ups to introduce dynamic new services that turn conventional business models on their heads, and are forcing established companies to follow suit. The result is that platform technologies and the digital networks that support them have become essential tools for businesses across the economy. Most important, the pace of innovation is accelerating, dramatically compressing the time it takes to disrupt established markets. As leading commentators have put it, we are living in an age of exponential growth where digital innovation constantly creates new economic opportunities, but also brings significant disruption. As Canada seeks to harness the unfolding digital revolution as a driver of future growth, three questions stand out:

• What are Canada’s competitive strengths in digital technology?
• Given those strengths, where do the best opportunities lie to grow Canadian companies to global scale?
• What role should government play in supporting the digital economy?

While this report focuses on the opportunities of the digital economy, we cannot ignore the threats. As the repeated examples of the new platform companies has made evident, virtually no sector of the economy is immune to disruption by the rapid spread of digital technologies. The continuing diffusion of cloud computing, social media, data-based technologies, the Internet of Things, and the immanent introduction of 5G mobile technology will only accelerate the trend. The challenge for Canada going forward is to ensure that it turns these potential threats into new opportunities.

Creating Digital Opportunity 5th Annual Conference Papers

In response to the issues identified in the paper above the Innovation Policy Lab established a research partnership to produce the knowledge required to move forward. The Research Partnership on the Digital Economy, including members from 16 universities and 12 partner organizations, has worked together with the goal of situating Canada’s digital opportunity in a global context. It’s fifth annual meeting included presentations from twenty participants on such themes as Canada’s role in East Asian GPNs; the evolving local context for digital firms; digital mining and oil and gas; smart and inclusive Canadian cities; platform economy disruption; global production networks; IT diffusion; and digital inclusion and intelligent communities.

The Final Leg: How Ontario Can Win the Innovation Race

The Institute for Competitiveness and Prosperity
This working paper explores how Ontario’s innovation performance could be boosted by improving commercialization of research and inventions in the province. The Institute examines best practices in commercialization support from the German Fraunhofer Society, which has successfully bridged the gap between early research and large-scale production known as the ‘innovation valley of death’. The Fraunhofer Society, a network of 69 applied research institutes across Germany, is widely regarded as one of the most successful networks of technology and innovation centres (TICs) in the world. Founded in 1949, the Fraunhofer institutes perform technical and commercialization research on contract to public and private sector clients and develop university and self-generated research into marketable products and processes. The Institute’s research suggests that Ontario could improve its poor record of commercializing its own research and boost technology adoption by Ontario businesses by creating a network of TICs to bridge gaps in the innovation process.

Small Cities Face Greater Impact from Automation

Morgan R. Frank, Lijun Sun, Manuel Cebrian, Hyejin Youn, Iyad Rahwan,  Journal of the Royal Society Interface
The city has proved to be the most successful form of human agglomeration and provides wide employment opportunities for its dwellers. As advances in robotics and artificial intelligence revive concerns about the impact of automation on jobs, a question looms: how will automation affect employment in cities? Here, the authors provide a comparative picture of the impact of automation across US urban areas. Small cities will undertake greater adjustments, such as worker displacement and job content substitutions. The report demonstrates that large cities exhibit increased occupational and skill specialization due to increased abundance of managerial and technical professions. These occupations are not easily automatable, and, thus, reduce the potential impact of automation in large cities. This study provides the first empirical law connecting two societal forces: urban agglomeration and automation’s impact on employment.

Specialization of and Complementarities Between (New) Knowledge Clusters in the Frankfurt/Rhein-Main Urban Region

Kati Volgmann and Angelika Munter, Regional Studies, Regional Science
This paper contributes to the discussion about the driving forces behind the polycentric restructuring of urban regions involving a centripetal process of metropolization and a centrifugal process leading to a regionalization of cities. Using the Frankfurt/Rhine-Main urban region in Germany as an example, it analyzes how these processes are manifested in the regional spatial structure. Two different empirical explorations are applied to reveal the spatial distribution and clustering of (1) knowledge-based industry (KBI) firms on a locational scale and (2) the sectoral specializations of and complementarities between the identified clusters. On the one hand, the identified traditional and new KBI clusters mirror the region’s traditional polycentric structure; on the other, the Frankfurt central business district stands out as the definite hotspot for KBI activities within the region. Thus, metropolization processes turn out to be the dominant driver of urban restructuring. Regarding the latter, the analysis shows that new KBI clusters frequently demonstrate strong monofunctional specialization and tend to complement and relieve traditional central business districts with regard to specific types of KBI activities, particularly in high-technology manufacturing and related high-technology knowledge-intensive services.

Why “Smart” Manufacturing Matters and How Countries are Supporting It

Stephen Ezell, ITIF
This report explains how digitalization is transforming manufacturing globally, detailing what smart manufacturing (or “Industry 4.0”) is and examining the productivity impacts it promises. It then examines the small- and medium-sized enterprise (SME) manufacturing support programs and policies of ten nations—Argentina, Australia, Austria, Canada, China, Germany, Japan, Korea, the United Kingdom, and the United States—and provides insights countries can leverage to support the digitalization of their manufacturers. Finally, the report examines how the development of common standards can facilitate technology adoption and proposes a typology that helps conceptualize different manufacturing production systems and strategies, showing how these need to be supported by varying digital toolsets.

Smart Manufacturing Standards

The development of voluntary, industry-led, consensus-based, market-driven global standards for products and technologies benefits producers and consumers alike. Internationally compatible standards enable businesses to leverage technologies and manufacture products efficiently at economies of scale by reducing the cost that would otherwise be involved in producing specific variations of products to meet different jurisdictions’ standards.

Avoid structuring standards as barriers
Unfortunately, some nations are increasingly using mandatory standards as a mercantilist tool to block or limit foreign companies’ access to their markets and to support domestic industries, especially ICT industries. By imposing unfair standards-related measures on imports, foreign governments may game the international trading system on behalf of their domestic industries and impose additional costs that both harm consumers as well as a country’s own competitiveness in digital sectors. The OECD estimates that complying with country-specific technical standards can add as much as 10 percent to the cost of an imported product. It’s therefore important that countries avoid isolated, proprietary standards and siloed solutions and that policymakers encourage the use of globally relevant standards for ICTs, including those applied to digital manufacturing.

Developing standards will facilitate international cooperation
If the smart manufacturing vision is to succeed, a series of standard protocols will be indispensable to allow factories, machines, and products made by vendors from all over the world to communicate and interact with each other and to ensure solutions can be used in any country. As the excellent report “Industrie 4.0 in a Global Context: Strategies for Cooperating with International Partners” explains, “individual modules, components, devices, production lines, robots, machines, sensors, catalogues, directories, systems, databases, and applications will need common standards for the connections between them and the overall semantics, or how data gets seamlessly passed from one device to another.” Thus, standardization of architectures, data exchange formats, vocabularies, taxonomies, ontologies, and interfaces will be key to creating interoperability between different digital manufacturing technologies. Accordingly, as the same report notes, the two key issues standardization must address are ensuring interoperable interfaces between solutions from different manufacturers; and establishing open standards, which are essential for the emergence of open, flexible, and successful ecosystems spanning not only different manufacturers but also different countries and continents. The authors note that, “whoever is first to define such internationally accepted standards will likely gain a long-term competitive advantage.”

Risks of failure
A number of risks arise if the international community fails to achieve standardization around Industry 4.0. First, the inability of sensors, machines, and software produced by a variety of different global vendors to seamlessly exchange data, information, and intelligence in real-time would leave the smart manufacturing vision stillborn. Moreover, if no international standards or universal solutions exist to provide interoperability between different systems, individual companies run the risk of suffering technological lock-in. This in particular affects SMEs, which may be reticent to make the requisite investments in Industry 4.0 technologies or systems, fearing that if they acquire proprietary standalone or siloed solutions they could become dependent on the technology of one particular supplier. The international competition with regard to the establishment of norms and standards for Industry 4.0 actually means that close cooperation will be required between businesses and institutions.

Nations are competing fiercely for advanced manufacturing leadership. Countries will need to introduce a comprehensive national manufacturing digitalization strategy and make the requisite investments if they wish to keep pace. Small manufacturers, especially, can’t be expected to go-it-alone in this environment and will need to benefit from both smart collaborations with suppliers as well as from government programs that encourage and incentivize their adoption and uptake of digital and other advanced-production strategies and technologies.

Please forward this newsletter to anyone you think will find it of value. We look forward to collaborating with you on this initiative. If you would like to comment on, or contribute to, the content, subscribe or unsubscribe, please contact us at ipl.munkschool@utoronto.ca.

This newsletter is prepared by Jen Nelles.
Project manager is David A. Wolfe.