The power of innovation

Canada needs more ideas, more R&D and more guts if it’s to ever be a leader.

If there was an award for the most popular ambiguous word of the 21st century, innovation could easily win. Ask around, and you’ll be hard pressed to find anyone — certainly not a politician, economist or business leader — who doesn’t think Canada needs more innovation, or that innovation somehow isn’t the source of our future economic prosperity. Trouble is, innovation can mean all sorts of different things, even many things at once.

Trying to gauge a nation’s innovative qualities — its innovative capacity, as it were — is just as tricky. But whether you’re relying on data from Statistics Canada, the World Economic Forum, the Organisation for Economic Co-operation and Development (OECD) or the International Institute for Management Development’s world competitiveness rankings, there is ample evidence that Canada can do better.

In its own attempt to benchmark Canada’s state of innovation, Canadian Business analyzed the IMD World Competitiveness Yearbook from 2006 and 2007, and recut the data to focus on the most relevant measures of innovation, grouped into four broad categories (see chart, page 58). And while the country’s seventh-place ranking among the world’s largest 25 economies might suggest that the sky is, in fact, not falling, Canada’s pervasive mediocrity is disconcerting. Dig into the specifics and a picture begins to emerge of a country that has much of the groundwork laid for a thriving, innovative economy, but has yet to make the most of it.

Consider infrastructure, where Canada earns its highest rank, seventh. It includes 31 statistics that cover various aspects of the country’s telecommunications, education and scientific research systems. By some measures, Canada fares quite well. The country has the highest percentage of 25- to 34-year-olds who have attained post-secondary education, and is in the Top 5 for the quality of its educational institutions, the percentage of science degrees and the amount of basic research conducted, even the kind of collaborative knowledge transfer between companies and universities.

But that’s pretty much it for the good news. By other yardsticks — especially those that more directly translate to economic growth — Canada ranks much worse: the number of patents granted per capita (17th), the number of scientific articles per capita (14th), business R&D as a percentage of GDP (13th), R&D per capita (12th), total R&D as a percentage of GDP (12th) and percentage of high-tech exports (16th). And those scores are still in Canada’s best category.

In government and business efficiency, Canada barely cracks the Top 10, and doesn’t excel in a single statistic. And in economic performance, which is measured by the threat that corporate R&D operations will be relocated elsewhere, Canada ranks fifth-last. In other words, Canada is one of the most likely countries to lose the very thing that sits at the core of an innovative, prosperous economy: businesses investing in R&D.

These latter findings corroborate the Conference Board of Canada’s scathing report card last year, which benchmarked Canada’s socio-economic performance against 16 other top western OECD economies — and graded Canada a big fat D on innovation. The report made particular note of Canada’s low level of business investment in R&D.

The situation isn’t getting better, either. R&D spending by the Top 100 companies declined by 3.8% in 2006 from the previous year — the third decline in the past five years — to $11.4 billion, according to Toronto-based Research Infosource Inc. And it’s not just because of Nortel Networks’ struggles. R&D at the Toronto-based communications equipment manufacturer declined by 2.2%, but strip out its $2.2-billion outlay, and R&D spending by the other 99 companies fell 4.2%. Worse, research intensity — R&D spending as a percentage of revenues — fell even more dramatically by 6.9%.

So what’s the problem? Canada generally appears to have the tools and infrastructure to be innovative, but just, well, isn’t. Is Canada soft, with only a lukewarm fire for risk and adventure burning in its collective belly?

To some degree, yes. Canada has a large proportion of small-business owners, many of whom just get by week to week. Even the successful ones are considered “lifestyle entrepreneurs,” content to run businesses that afford them a big house, nice cars and winter vacations. In other countries, particularly the U.S., but also European nations, the entrepreneurial psyche is geared toward growing as big as possible — and that often requires a greater willingness to aggressively commercialize new products and services through R&D. But even large Canadian companies invest less on R&D on average than foreign-owned firms. The economy’s reliance on natural resources plays a big role. A country such as Switzerland, which placed second in our ranking, has just 7.5 million people and few natural resources, but is situated in the heart of the competitive European marketplace — innovation is a requirement. It ranks first in intellectual property rights, patents granted per capita, and in how basic research enhances long-term economic development.

In Canada, governments and economists have long struggled to replicate that kind of success. As the Conference Board of Canada’s report card last year noted, this country continues to maintain leading tax subsidy rates for business expenditures in R&D, about 32% for small and medium-sized enterprises, and 18% for large firms. But these are no panacea. “In the most innovative countries — Switzerland, Sweden, Finland and Germany — R&D fiscal incentives are virtually nil,” reports the Conference Board. “What will it take to boost business sector in R&D? The answer is not clear. More study is required to determine what causal factors may be at play.”

Of course, that doesn’t mean there aren’t voices calling for more immediate changes. The Scientific Research and Experimental Development (SR&ED) tax credit system is one of the primary means by which the federal government ostensibly encourages businesses to invest in R&D. But trade associations such as the Canadian Advanced Technology Alliance in Ottawa say that SR&ED is in need of an overhaul, both in terms of its actual administration and its policies. In last year’s federal budget, the Conservatives committed to reviewing SR&ED credits, and has since held a series of consultations with businesses and trade associations. But CATA is not optimistic that the credit system will be redesigned enough that, for example, businesses from a broader array of sectors could apply for them.

How much of a difference a thorough overhaul would even make is another matter. Governments, federal and provincial, have not shown a willingness to craft well-honed economic strategies around spurring innovation, and, more specifically, the commercialization of R&D. “It hasn’t been a top priority of many governments, not as much as it should be,” says Gilles Rhéaume, vice-president of public policy for the Conference Board of Canada. “There are things that are happening, but we feel they are baby steps, while a grand strategy and implementation is actually required.”

Politicians have placed more focus on funding scientific research institutions. In the case of the federal government, the Chrétien-era goal of moving Canada into the Top 5 countries in terms of per capita R&D spending has been replaced by less specific targets, and more general tax cuts. The current regime has crafted a new high-level science and technology strategy, and last May created the Science, Technology and Innovation Council to advise on public policy. Worthwhile initiatives, sure, but more could be done downstream in cultivating new competitive markets.

Rhéaume says one of the more effective means of spurring innovation is, in fact, regulation. Canada tends to lag other country’s initiatives in implementing higher environmental standards or other industrial requirements, but these can actually create new domestic markets for innovative products and services. “We’ve seen that when countries develop new standards, it’s helped spur new innovation to develop new technologies to respond to those new regulations,” says Rhéaume. “That means when Canadian industry wants to apply those new standards, they have to import those new technologies that have already been developed elsewhere.”

Clean tech is a perfect example. Increased federal funding for organizations such as Sustainable Development Technology Canada — which received $500 million in the 2007 federal budget to invest in private-sector development of renewable fuel production facilities — helps shape priorities, but lighting strategic fires under existing industries can make a big difference, too. Given the economy’s reliance on its energy and natural resource sectors, it only makes sense that the next generation of technologies related to those industries should be developed here, not abroad.

For instance, instead of trying to save dying mill towns, policy-makers could be doing more to encourage the forestry industry to transition to biofuels — more can be done with wood fibres than make paper. But such long-term thinking on major issues is not a strength of our governments, not when the issues overlap ministry lines, cause power struggles and force politicians to choose favourites. Take energy. Natural Resources Canada oversees issues related to natural resources, energy production and use, while Industry Canada’s domain includes some of the technology businesses that could answer those sectors’ needs. And don’t forget that Environment Canada wants to have a say in policy, too.

If Canada’s economy is to be fuelled by innovation, its leaders need to start tuning up its engine. “We shouldn’t be picking winners, but we should be picking the races we want to win globally,” says Rhéaume, “by focusing on the broader areas where we feel Canada has a competitive advantage.” As a resource-rich country with a small, dispersed population, Canada will need to innovate better than most countries. This is no time for ambiguity.