Corporate Canada increasingly outsourcing innovation to universities

Risk-averse businessess' investment in R&D lags OECD average

Canadian companies are funnelling a growing chunk of their research and development spending through the country’s universities and colleges, with the total coming in at just under a billion dollars in 2013:

Firms are looking to higher education in an attempt to minimize their financial exposure, according to Rob Annan, interim CEO of Mitacs, a non-profit that links industry and academia with similar research interests. “It’s an internal decision of offloading some of the risk associated with R&D,” he explains, citing pharmaceutical companies attracted to university labs by government funding for healthcare research.

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Affordability also plays a role. “We tend to be a country of small firms, and those small firms tend to not have in-house R&D departments,” Annan observes. “So for those firms, a lot of them outsource their R&D to the university sector because it’s the best mechanism they have.”

But small businesses mean small investments, and corporate Canada contributes relatively little of total spending on research conducted at Canada’s post-secondary institutions:

Harvey Weingarten, President and CEO of the Higher Education Quality Council of Ontario, was a member of the Council of Canadian Academies panel on The State of Industrial R&D in Canada. The panel found companies’ research spending woefully inadequate compared to other OECD nations. “Private sector companies and industries in Canada spend less on R&D than in competitor countries,” he notes. “That has been true for a long time, and it is still true.”

Innovation is vitally important to any country’s economic health, and Canada has a strong track record of inventing the world’s next big things. Weingarten cautions against equating R&D spending too closely with innovation, noting that many oil and gas companies fare poorly under such measurements because of Statistics Canada’s criteria for research spending, but still frequently develop new methods and ideas.

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Still, we could afford to learn from competing economies, and Germany serves as a useful case-study. “They have a series of institutes called the Fraunhofer Institutes set up as applied research centres,” Annan explains. “They are universities, in the sense that they are degree-awarding, but they really are designed to be very well-integrated with business. I think in Canada there has been a history where the universities and business treat each other a little more cautiously, maybe even suspiciously.”

Too many Canadian executives don’t understand the value of research, according to Weingarten. “If you look at who the CEOs of companies are, in the United States they tend to be engineers, and in Canada they tend to be MBAs and businesspeople,” he says. “If you look at the total number of researchers and scientists in Canadian companies versus other countries, we have a lower percentage of scientifically-trained and research-trained employees in Canada relative to other countries.”

Those numbers are unlikely to change any time soon; not enough students at Canadian universities are enrolled in the science, technology, engineering and mathematics (STEM) disciplines, according to the Conference Board of Canada.

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How can Canadian firms bridge the knowledge gap? Richard Warnica suggests hiring a chief innovation officer:

A single C-suite executive guiding innovation from the top down, after all, just seems to go against so much of what we know about how creativity works. But when you break “innovation” down to what it really means in a corporate setting—essentially, finding new ways to make money—it can start to seem like a much better idea to have someone in charge of that process.

Maybe companies just need to change their outlook. “A lot of businesses, especially small businesses, don’t think of their challenges in terms of research potential,” says Annan. “But often these things are very interesting research challenges, whether it’s improvements in prototypes, or in processes.”

Government can help by focusing on small-scale businesses with an appetite for innovation. Mitel chairman Terry Matthews has argued that research funding should be directed to companies, not universities:

“Canada is at the bottom of the list for direct funding to companies, and at the top for funding university research and development, which is ‘curiosity’ research. To build tech champions, the government should put more energy into funding R&D in a commercial environment, because you employ a hell of a lot more people and can build scale.”

That seems a little extreme—educational institutions are still valuable contributors to the economic and cultural landscape. And with more and more businesses seeking collaborations with academia to produce new ideas, the answer to Canada’s innovation problem may just be more funding for university research, not less.