Canada lags badly in innovation and productivity

At the recent Davos World Economic Forum gathering, the Harvard Business School trumpeted a multi-year project on U.S. competitiveness, itself defined in a novel way as “the extent to which firms operating in the U.S. are able to compete successfully in the global economy while supporting high and rising living standards for Americans.” Their resolution is both beguilingly simple in concept and devilishly complex in practice: competitiveness with rising wages and improving living standards hinges on continually increasing productivity. And, for high-income economies, a prime driver of productivity growth over the long run is innovation.
What is innovation and why does it matter? Innovation is our ability to create new products and services, or produce existing products in different ways, or develop new markets. It lies at the heart of modern competitiveness. It drives growth and improves productivity. It raises our living standards and gives consumers new choices. It is the answer to the question of how a high-wage economy like Canada can compete with emerging countries with lower wage costs.
Consider innovation at the level of an individual Canadian firm. The world around it is constantly evolving. Consumer tastes are fluid. Technology is morphing. Markets are changing. Competitors are shifting. In this dynamic environment, innovation is how a firm “stays ahead of the competitive curve.” But such corporate innovation does not happen in the abstract or by chance; it is achieved through structured and distinct channels of innovation within successful firms for product innovation, market innovation, process innovation and organizational innovation.
So, with innovation so vital to our future, how is Canada doing? Not well. While basic research in our universities is reasonably strong, Canadian business spending on R&D is only one per cent of GDP, half of what U.S. corporations spend and one-third of what the leaders Sweden, Finland and Korea invest annually. Canada has slipped to 20th place among OECD countries for business spending on research and development. And it shows: the productivity level of the Canadian business sector is only 72 per cent that of U.S. businesses.
How do we tackle our innovation deficit? By being less complacent: We have a strong dollar and weak productivity; strong public research capacity in our universities and weak commercialization of it; deep trade links with a slow growing U.S. and weak linkages with the dynamic emerging economies. And, by being more collaborative: innovation in a market-driven economy has to happen in individual companies, with governments providing a supportive framework and universities creating talented graduates and world-class research that supports business innovation.
To achieve these objectives, we need to act and learn, not debate and delay. Five reasonable candidates for early action include: competition, financing, talent, research excellence and leadership.
Competition matters to corporate behaviour. Governments, both federal and provincial, should increase market competition in Canada, particularly in protected sectors where productivity and innovation gaps are largest. Governments can also encourage information-driven competition by supporting public productivity and innovation benchmarks for the main sectors of the economy measured against the world’s best.
And new trade agreements with dynamic emerging economies would help reinforce a global mindset and orientation and increase competition.
Financing is crucial, both for innovative startups and established firms looking to invest more in innovation. The venture capital industry in Canada is simply not functioning the way it should. We seriously lag other countries as diverse as the U.S., Israel, Singapore and the U.K. The federal government could consider establishing a review panel to plot a new blueprint for venture capital in Canada.
Government support for business innovation is predominantly delivered through the tax system, with one of the most generous research and development tax credits in the world. Unfortunately, judging by corporate R&D levels, this mechanism is not working as intended. Some of these innovation tax expenditures should be redirected to more direct support for innovation, in line with best practices in other knowledgeintensive economies.
Talent matters in a knowledge-based economy. It is essential for our education systems to be geared to the needs of a global, knowledge-based economy. Business leaders of tomorrow need to be experts in global marketing, to understand the core technologies for their sectors and to be comfortable in risk assessment of innovation. Research in our universities is the backbone of an effective innovation system. We need to continue to fund this public good. But we also need to insist on accountability for global excellence and better commercialization.
Most importantly, leadership is needed, in government, business, universities and labour if we are to improve Canadian living standards and competitiveness. Productivity and innovation lie at the intersection between public policy and private sector behaviour.
Prime Minister Stephen Harper’s speech at Davos signalled a willingness to “undertake major transformations to position Canada for growth over the next generation.” As part of this, we should be desperately seeking a more innovative Canada.
The Honourable Kevin G. Lynch is vice-chair of the BMO Financial Group. From 2006 to 2009 he was clerk of the Privy Council.