“Productivity isn’t everything,” Paul Krugman once wrote in his New York Times column, “but in the long run it is almost everything.” Strange then, with Canada’s poor productivity and innovation performance compared with that of the U.S., that we remain complacent. Where’s our sense of urgency?
Productivity growth is the dividend produced by innovation. So our difficulties are placed in sharp relief when we see that our productivity growth has dropped substantially, from average growth of close to 3 per cent annually from 1961 to 1980, to under 1 per cent since 2000. And that gap between Canada and the U.S. has widened in the past decade, despite the relative improvement of macroeconomic fundamentals in our country.
Innovative firms adapt and modify their products, processes or concepts of markets to take advantage of the changing environment. Those who do so will prosper. Those who don’t will fall behind.
Innovation doesn’t happen in the abstract – corporations have to manage for it. Successful innovation happens in four distinct areas.
Product innovation: The capacity of a firm to introduce new products and services ahead of competitors, to anticipate consumer needs or even to create them.
Market innovation: The capacity of a firm to decide to change its market, whether it’s geographically, virtually or creatively.
Process innovation: The capacity to change how goods and services are produced and delivered to reduce cost, improve efficiency and increase convenience for customers.
Organizational innovation: The capacity to convert creativity, market and customer knowledge and technology into marketable innovations.
But with Canadian firms ranking only 15th among OECD countries in research and development spending, we clearly need a stronger culture of innovation. Such innovation can be improved by five key drivers.
First, competition matters to corporate behaviour. We need to introduce a more competitive frame into our business environment, and a more international mindset into our management.
Second, Canada is an OECD outlier in that it delivers much of its private-sector innovation support through the tax system. We should be providing more direct support through new channels.
Third, financing is crucial, both for start-up and established firms that wish to invest more in innovation and productivity. Financial institutions should develop more expertise in advising clients and facilitating credit.
Fourth, access to new technologies is essential. All firms should have technologically literate senior managers, and we need better incentives to encourage greater movement between the corporate and academic spheres.
Fifth, management and management structures matter. Are we developing managers who are experts in global marketing, who understand the core technologies for their sectors, who are comfortable in risk assessment of product innovation? Are our education systems geared to the needs of a globally oriented, knowledge-based economy? Our competitors are already ahead of us.
We’ve done well as a country, but there’s much we need to do. Canada is in an excellent position to prosper, provided we build on our strengths and tackle our weaknesses. Those weaknesses include poor innovation and productivity performance.
Kevin Lynch is vice-chair of BMO Financial Group, and Munir Sheikh is a distinguished fellow at Queen’s University.