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KEVIN LYNCH

Global rankings tell worrisome tale about state of Canadian innovation Add to ...

Kevin Lynch is vice-chair at BMO Financial Group.

Canada is gaining an international reputation on the innovation front, but not the one we want.

Global productivity and innovation benchmarks for Canada from the World Economic Forum, the Organization for Economic Co-operation and Development and the International Monetary Fund all point in the same distressingly downward direction.

The WEF ranks Canada only 26th for business innovation. The OECD places business investment on research and development at 22nd among OECD countries. The IMF estimates Canadian business productivity as 17th among OECD countries.

And Compass, in its 2015 ranking of startup ecosystems, has four Canadian cities in its top 25 global innovation centres but Toronto, Vancouver and Waterloo are among those that have declined most since the 2012 ranking.

These rankings tell a worrisome story, not just for innovation but also for the future of Canadian competitiveness and growth, and yet they occasion little debate and less action.

What should we do? The simple answer is change – the evidence rather clearly suggests that more of the same is not going to solve the problem. And the OECD offers useful insights on what we could do differently, drawn from innovation experiences in other countries.

The Canadian policy approach to microeconomic issues, from industrial strategy to innovation, has been largely to set the macroeconomic environment – low taxes, low inflation, limited role for government, liberalized trade, well-educated work force, solid research funding for universities and generous business research tax credits – and rely on market forces to do the rest. But innovation is exceedingly complex, as experience in the United States and elsewhere demonstrates, and it requires more than sound macroeconomic conditions, as important as they are.

In Canada, there has been a failure to build dynamic innovation ecosystems at a sufficient scale, relying too much on lodestars such as Nortel, BlackBerry and Bombardier.

We have not embedded innovation and entrepreneurship into our higher-education systems, unlike successful innovation locales in Silicon Valley, Boston and Haifa. Canadian corporate culture and management incentives are seldom oriented toward driving and rewarding innovation, and certainly not disruptive innovation.

Canadian small- and medium-sized enterprises (SMEs) have much lower export tendencies than other G7 economies, and underinvest in leading-edge technologies. And government programs and procurement systems shy away from innovative products and services due to risk aversion, providing little support for innovative new firms.

More than almost any other country, Canada supports private-sector innovation almost solely through the tax system, using research-and-development tax credits.

Other countries, led by the United States, have opted for much more balance between such indirect tax incentives and direct supports to targeted technologies and related sectors, delivered on a competitive basis. The history of active U.S. government support to nascent technologies through the Defense Advanced Research Projects Agency and other vehicles leading to vibrant new industries is instructive. Canada needs to move to a more balanced policy toolkit of both direct and indirect supports to transformative technologies and innovation.

Canada gears its government procurement programs to the lowest-cost and lowest-risk suppliers – hardly a prescription for innovation within government or an early market for Canadian innovators as they scale up. Procurement by major businesses in Canada has similar features, with comparable effects on homegrown innovation.

Government procurement systems from Scandinavia to the United States have strategic procurement programs that encourage innovative products and services from SMEs by creating early markets for them on a competitive basis, and we should follow this model both federally and provincially.

While Canada produces world-class business innovators, they are too often the exception.

Tellingly, in most sectors in Canada, the gap between leading firms with best-in-class productivity and innovation performance and the average performance of firms within the sector is large and static. Across other OECD countries, SMEs that market their products and services globally and invest in leading-edge technologies are much more productive and competitive, and yet few Canadian small businesses export or invest in innovation.

Simply creating stronger incentives to raise our average firm performance toward existing best-in-class behaviours would have substantial impacts on Canadian productivity and competitiveness metrics. This suggests a lack of competitive pressures in many sectors, which inhibits innovation.

Governments, from a policy perspective, tend to think of the country as the innovation ecosystem, but successful innovation is usually “place-based” – think Silicon Valley.

Its success flows from a rather unique combination of government policies, world-class research universities, extraordinarily deep talent pools, risk-taking capital and critical mass. The Compass methodology for ranking startup ecosystems is instructive – the success drivers it measures are: funding availability locally; market reach locally; global scalability; talent availability locally and its cost; and output performance locally as measured by revenues, valuations and exits. We have all the ingredients, but not the recipe.

Canada needs a sharper focus on the right mix of government policies and local conditions that can create global top-tier innovation ecosystems in Canada that have the density to benefit the entire economy. How effectively we do so will shape our economy and society well into the future.

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