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Kevin Lynch, vice-chair of BMO Financial Group and former clerk of the Privy Council and secretary to the cabinet (JIM YOUNG/Reuters)
Kevin Lynch, vice-chair of BMO Financial Group and former clerk of the Privy Council and secretary to the cabinet (JIM YOUNG/Reuters)

Kevin Lynch

Innovation is our hidden deficit Add to ...

When you message on your BlackBerry or let your GPS find your destination, do you think of innovation? You should. Innovation lies at the heart of modern competitiveness. It drives growth. It improves productivity and living standards. It gives consumers new choices. It is the answer to the question of how a high-wage economy such as Canada's can compete with emerging countries with low costs of production.

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The problem is that Canada is not an innovation leader, Canadian business invests far less in innovation than many of their foreign competitors, and the competition is about to get tougher as China and India start investing in targeted innovation. It's time to discuss Canada's innovation deficit.

Innovation is the ability to create new products and services, to produce existing products in new ways, to develop new markets. To get a perspective on the innovation landscape, the usual starting point is investment in research and development by government and the private sector. What is surprising is their divergent paths over the past decade, with rising government spending on R&D as a proportion of the economy, mainly through university research, and falling business-sector R&D spending relative to the economy's size.

Government attitudes to innovation changed dramatically in the mid-1990s, after a compelling public debate about the risks to the nation from a perceived brain drain of our researchers. This led to a fundamental rethink of public policy toward university research - a focus on global excellence, a more strategic approach to research priorities by universities, more competition amongst research institutions, and greater financial investments by government.

The renewal went well beyond dollars. Independent institutions such as the Canada Foundation for Innovation and Genome Canada were created, 2,000 Canada Research Chairs and 20 Canada Global Excellence Chairs were established to attract world-class researchers, and new world-class scholarships were introduced. The results have been dramatic: In just 10 years, university research spending relative to the economy is now higher in Canada than all OECD countries except Sweden.

Private-sector innovation is a different story. In 2007, the Canadian business sector ranked 14th among OECD countries in their R&D expenditures as a percentage of the economy. Canadian business R&D spending was only 1 per cent of GDP, well below the OECD average of 1.6 per cent, roughly half of what the U.S. spends and barely a third of Sweden, Finland and South Korea.

This R&D spending is also highly concentrated. The service sector, now 70 per cent of Canadian GDP, spends only 0.6 per cent of its output on R&D, while the natural resource, utilities and construction sectors, which account for 16 per cent of GDP, spend barely 0.3 per cent on R&D.

What this means is that a "business as usual" approach to innovation will just not cut it. The global economy is restructuring, driven by the global financial crisis and the rise of increasingly sophisticated competitors in China and elsewhere. Innovation is becoming more important than ever for the ability of Canadian business to compete, and for the long-term economic welfare and security of Canadians.

Without large increases in business investment in R&D, Canada cannot eliminate its innovation deficit. Just raising its game to the OECD average would require $10-billion in additional R&D spending each year by Canadian business. A strong dollar, innovation-savvy competitors and new products and processes emerging daily around the world certainly provide the incentive for new business thinking about the role of innovation.

Despite the progress in building a stronger university research base in Canada, better commercialization of this research is needed to create products, businesses and jobs. Stronger research collaborations between business and publicly funded research are needed, and Sweden and Finland have much to teach us. Consideration could be given to targeting a portion of new government R&D funding to research that helps Canada solve specific challenges.

The oil sands, where yet-to-be-developed technologies have the potential to fundamentally redesign carbon dioxide emissions, energy intensity, water usage and soil remediation, is a case in point. So, too, may be aspects of next-generation manufacturing, or smart-energy technologies for existing energy sources and transmission systems. And we need to build research partnerships with the world's best.

A broader public dialogue is essential. We need to make the question "What would it take for Canada to be an innovative economy for the 21st century?" part of our public narrative - partly because our innovation deficit is a threat to our competitiveness and living standards, and partly because we can be a world leader in innovation. We should aspire to be a nation of innovators. We should rebrand Canada as technologically savvy, entrepreneurial and creative.

Kevin Lynch is vice-chair of BMO Financial Group and former clerk of the Privy Council and secretary to the cabinet.

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