Presented at the Halifax State of the Economy Conference Is there something about Nova Scotia’s DNA that hinders the development of business-led clustering and achieving greater productivity? Canada now faces a significant and growing productivity gap relative to the U.S., which will threaten our long-term prosperity. Low productivity is, and will continue to be, the most significant threat to Canada’s standard of living. As a result, Deloitte has invested significant time and energy in the study of Canadian productivity. One of the findings was that in regions with cluster characteristics, business-led incubator and innovation parks can be strong catalysts for economic development. There are several leading incubators gaining global recognition. What is hindering Nova Scotia from developing a similar clustering and innovation culture?

1. The future of productivity
An eight-step game plan for Canada
Greater Halifax Partnership
State of the Economy Conference
May 24, 2012

2. Canada now faces a significant and growing productivity gap relative to the U.S.,
which will threaten our long-term prosperity
Over the past 30 years, productivity growth The period from 2001 to present has been most
has taken divergent trajectories in Canada and challenging, as Canadian productivity growth has
the United States trailed most OECD nations
GDP per worker, indexed to 1981 baseline Labour productivity CAGR, 2001-2009
Sources: Centre for the Study of Living Standards, OECD
1 The future of productivity © Deloitte & Touche LLP and affiliated entities.

3. Within Canada, Nova Scotia helps drive productivity growth but lags in its overall
level of labour productivity
Provincial Productivity Level, Productivity Growth, and GDP
55
Canadian Productivity Growth = US Productivity Growth = 2.0%
0.8%
Labour Productivity Level, 2010 ($/hr)
50
AB
NL
45
ON
Average Canadian Productivity Level = $42/hr
SK
40 BC
QC MB
35
NS NB
Legend
PEI % contribution to national GDP
30
0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%
Labour Productivity Growth, 2000 - 2010
Observations
• Atlantic Canada has the strongest productivity growth, led by Newfoundland, despite representing a small shares of Canadian GDP
© Deloitte & Touche LLP and affiliated entities.
Sources: Statistics Canada

4. Deloitte believes that low productivity is, and will continue to be, the most
significant threat to Canada’s standard of living
Is this a problem for Canada?
No No Yes Yes
Canada’s unemployment rate While the average number Canada’s productivity growth GDP per capita is
has not surpassed 12% in the of hours Canadians work has has been declining in recent increasing at a slower rate
past 40 years, and has hovered decreased slightly over the years on both an absolute than many of our peers
between 6% and 9% in the past 30 years, declines are in basis and relative to its peers
past 10 years line with the OECD average
Sources: OECD, Statistics Canada
3 The future of productivity © Deloitte & Touche LLP and affiliated entities.

5. We have identified six issues that Canada should focus on addressing in order to
close the productivity gap
4 The future of productivity © Deloitte & Touche LLP and affiliated entities.

6. Although some differences exist, Canadian and American executives identify
themselves as having very similar levels of risk tolerance
How firms characterize their risk tolerance levels
46%
43%
31%
25%
Canada
13% 13% 13% United States
11%
2% 3%
Very low risk tolerance Low risk tolerance Moderate risk tolerance High risk tolerance Very high risk tolerance
“Risk Avoiders” “Risk Takers”
Percentage of total firms Percentage of total firms
Canada U.S. Canada U.S.
54% 59% 46% 41%
Source: Deloitte Research
5 The future of productivity © Deloitte & Touche LLP and affiliated entities.

7. However, when measured against Deloitte’s Executive Risk Behavior Index, we see
that, in practice, Canadians are much less willing to take risks
The Deloitte Executive Risk Behaviour Index
57.7
47.4
Canada United States
Observations
• Based on a survey of 900 Canadian and American business leaders, Canada scored a 47.4 on the index vs. the American score of 57.7
(maximum score of 100)
• The Deloitte risk behaviour index was constructed based on a wide array of factors representing a firm’s actions, including a firm’s risk
evaluation practices, involvement in research, development and innovation, and dependence on government support
• The index has been adjusted to account for national differences in the current/future state views on macro-economic conditions
Source: Deloitte Research
6 The future of productivity © Deloitte & Touche LLP and affiliated entities.

8. This is illustrated by behaviours like Canada’s lower R&D participation rates, a
phenomenon that is largely driven by Canadian “risk avoiders”
The overall rate of R&D participation of surveyed firms Risk avoiding Canadian firms are less likely to conduct
in Canada is lower than in the United States R&D than their American counterparts
R&D participation rate R&D participation rate “Risk takers”
“Risk avoiders”
100% 100%
90% 90% 86%
84% 83%
81%
80% 74% 80%
Percent of Survey Respondents
Percent of Survey Respondents
69%
70% 70%
60% 60%
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
Canada United States Canada United States
Observations
• While overall participation in R&D is lower in Canada than in the United States, the difference is most pronounced among firms with “risk
avoiding” business models
Source: Deloitte Research
7 The future of productivity © Deloitte & Touche LLP and affiliated entities.

9. Canadian firms also exhibited a far greater reliance on government incentives
than on market factors to induce productivity-boosting behaviours like R&D
Government factors Market factors
Firms “Somewhat Likely” or “Very Likely” to increase Firms “Somewhat Likely” or “Very Likely” to increase R&D
expenditure on R&D if offered tax credits to do so expenditure due to improved intellectual property protections
74%
68% 64%
60%
Canada United States Canada United States
• Canadian firms are less averse to tax credit-induced • U.S. firms are more likely to expand R&D investment
R&D expenditure than U.S. firms as a result of better IP protection
Firms “Very Likely” to increase R&D expenditure if offered Firms “Somewhat Likely” or “Very Likely” to increase R&D
increased government grants expenditure if there were increased availability of risk capital
68%
61%
33%
23%
Canada United States Canada United States
• Canadian firms are more likely to boost R&D spending • U.S. firms are more likely to increase R&D spending
if incentivized with increased government grants as a result of increased access to risk capital
Source: Deloitte Research
8 The future of productivity © Deloitte & Touche LLP and affiliated entities.

10. We believe that to address the issue of productivity businesses, academia and
government must act in a deliberate and collaborative fashion
9 The future of productivity © Deloitte & Touche LLP and affiliated entities.

11. Deloitte has put forward eight recommendations we believe are necessary
to improve Canada’s productivity in the near-term, and to foster ongoing
productivity growth
In order to achieve meaningful impacts on Canadian productivity, businesses, academia and
government will need to act in a deliberate and collaborative manner across eight key recommendations:
Each recommendation enables the success of others creating a self-reinforcing system for driving
improvement in Canada’s productivity
10 The future of productivity © Deloitte & Touche LLP and affiliated entities.

12. Co-locate: Create a national clustering strategy
Deloitte believes that a national clustering strategy is required in order to increase productivity and drive
innovation in key fields.
A national strategy will enable Canada Cluster development must be led by local … their strategies must be supported
to realize the benefits of clustering businesses, governments and academia… by Federal and Provincial governments
• Clustering supports the growth of high • Local stakeholders must collaborate to • Federal and provincial governments must
productivity, high innovation areas where develop strategies to support the provide the necessary resources and
related firms can actively collaborate emergence or growth of clusters infrastructure to support local cluster
strategies
Key Considerations
• Cluster development requires a long term vision, with the growth of world class clusters measured in decades, not years
• There must be a strong rationale for each cluster that builds on existing talents, industries and or natural advantages (e.g. geography)
11 The future of productivity © Deloitte & Touche LLP and affiliated entities.

13. Deloitte has worked with the leading hubs in Canada to determine their economic
impact and the complexities of their clusters
Communitech is a leading incubator in the Waterloo region
Description Impact
$84M $154M $530M 25
Client capital raised Client revenue Client deal flow New research and industry
collaborations
• Communitech is a not-for-profit organization
that supports technology startups in Waterloo
Region
573 366 $7.1K 8,000
• Communitech plays a material role in New jobs created by Startup client companies
Cost for Communitech to Visitors to the Hub
create a new direct job
championing innovation on a provincial and Communitech clients
national level
• The ecosystem creates a network of
resources that benefit both entrepreneurs and
the members of the network
MaRS is a premiere incubator in Toronto with strong ties to the health sciences
Description Impact
$277M $130M $71M 1,771
Client capital raised Client revenue Total grants received New products to market
• MaRS has a prominent location in the heart of
Toronto with 700,000 square feet available for
research labs, offices and event facilities 2,530 70%
1,203 1,054 Total Jobs New jobs created by ICE
New jobs created by Startup client companies sector
• MaRS accommodates companies across Communitech clients
Information and Communication Technology,
Clean Tech, Life Science and Social
Innovation
Source: Deloitte analysis
© 2010 Deloitte Touche Tohmatsu
© Deloitte & Touche LLP and affiliated entities.

14. Successful hubs leverage available resources and the existing local environment to
address specific market demands
EXTERNAL
Market Demand
ENVIRONMENT
Collaborative • Hubs must have
Networks client / tenant Risk Capital
demand for
• Formal and informal • Investment is
services
collaboration required for high
Talent between Policy
risk / uncertain
stakeholders to
• Pool of talent is activities of • Stakeholders
effectively leverage
necessary for entrepreneurs and consider market
networks for scale,
ideation and best practices researchers regulation and
implementation of financial incentives
innovation (e.g. tax rate and
credits, subsidies)
Innovation
Hub
Dedicated Anchor Hub Financing
• Anchors bring • Typically hubs use
significant resources a mix of
and network public/private
influence to the hub Infrastructure support and
Mentors
revenues
• Co-location
• Experienced
Experienced Hub requires the right
entrepreneurs help
Management mix of space and
new ventures
equipment (e.g.
navigate operational
• Hub management offices, meeting
challenges and
needs the rooms, common
INTERNAL secure funding
capabilities for areas, and labs)
HUB RESOURCES operations
© Deloitte & Touche LLP and affiliated entities.

15. There is a significant opportunity for Halifax to develop a clustering strategy;
the initiative must stem from the business community
Businesses Academia Government
© Deloitte & Touche LLP and affiliated entities.

16. Discussion Questions
1. Would a clustering strategy make Halifax a more productive city?
2. Around which industries should a Halifax cluster be built? Is the
shipbuilding contract a natural catalyst?
3. As a business leader, what is your role in building a cluster and
increasing productivity?
15 The future of productivity © Deloitte & Touche LLP and affiliated entities.