activities to Mexico or India, where labour costs are relatively low and
hence labour-intensive production techniques remain quite profitable. A
second firm chooses to reduce its use of labour but increase its use of
capital equipment. These two firms have, in different ways, chosen to
substitute away from the higher-priced Canadian labour. A third firm
devotes resources to developing new production techniques, perhaps by
using robotics or other new equipment. This firm has innovated away
from higher-priced Canadian labour.
All three are possible reactions to the changed circumstances. The first
two are largely well understood in advance and will lead to reduced costs
relative to continued reliance on the original production methods. The
third response, depending on the often unpredictable results of the
innovation, may fail completely or it may succeed and so reduce costs
sufficiently to warrant the investment in research and development and
may even lead to substantially more effective production techniques that
allow the firm to maintain an advantage over its competitors for a number
of years. Invention and innovation are subject to great uncertainties that
are hard to estimate in advance. For this reason, they must produce large
profits when they do succeed in order to induce inventing firms to incur
the costs of pushing into the unknown.