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Business Commentary Creating a nation of innovators starts with good corporate R&D

DuPont’s massive research complex outside Wilmington, Del., has produced some of the best applied chemistry of the past century. It was the birthplace of materials such as nylon, Kevlar and Tyvek. In the 1960s, the company’s labs published more articles in academic journals than MIT and many other leading universities.

But, like a lot of large companies, DuPont (now merged with Dow) has significantly scaled back its in-house research and development, cutting hundreds of scientists’ jobs and relying more on outside science.

DuPont isn’t alone. The days are gone when companies were willing to invest big dollars on research projects and wait patiently for the results. That has led to a fading role for some of the world’s iconic corporate research hubs such as AT&T’s Bell Labs, Xerox’s Palo Alto Research Center and IBM’s Watson Labs. In Canada, Bell Northern Research’s Ottawa campus is now home to the Department of National Defence.

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But the decline of corporate labs may have had an unfortunate downside for the broader economy – less innovation and slower productivity growth. That, at least, is the conclusion of a group of economists at Duke University, the U.S. National Bureau of Economic Research and Britain’s University of East Anglia.

Instead of generating their own ideas, large companies have become increasingly reliant on science produced by others, mainly universities and smaller start-up companies, according to their report, The changing structure of innovation: Cautionary remarks for economic growth.

The retreat of corporate labs has left a correspondingly large hole in the innovation ecosystem. The burden of producing good R&D has fallen increasingly on colleges and universities. And it’s not clear they’re producing enough of the kind of science that companies can readily use in new products.

“The translation of scientific knowledge generated in universities to productivity-enhancing technical progress has proved to be more difficult to accomplish,” the report found. “Spinoffs, startups and university licensing offices have not fully filled the gap left by the decline of the corporate lab.”

The impact is measurable. In the U.S., the relative share of research done by businesses – rather than governments and universities – has fallen to a third from nearly half since the late 1990s.

Part of the problem is that R&D, particularly basic research, is expensive and often does not produce the quick commercial successes that top executives and investors crave. Internal R&D has fallen out of favour and is unlikely to ever “rediscover its glory days,” the report says.

“The fundamental challenge of managing long-run research inside a for-profit corporation remains a formidable one,” the authors conclude.

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The situation is similar in Canada. The share of R&D done by businesses was 52 per cent in 2018, down from 60 per cent in 2000. Colleges and universities have picked up all of the slack, and then some, performing 41 per cent of R&D in 2018, up from just 28 per cent in 2000.

The federal Liberals have talked a good line about improving the country’s record on innovation, announcing more money for university research and venture capital, while working to convince foreign multinationals to do more of their research and development in Canada. Finance Minister Bill Morneau unveiled a host of measures – and money – in his 2017 budget as part of the government’s “Innovation and Skills Plan.”

This government, like those before it, is still looking for the magic formula that will help turn Canada into a nation of innovators. That frustrates Jim Balsillie, the former co-chief executive of BlackBerry predecessor Research in Motion. He says too much of the Liberals’ innovation strategy has hinged on attracting foreign companies, such as Google and Amazon, instead of creating incentives for homegrown Canadian companies to grow, hire and develop their own intellectual property (IP). That, he says, is the key to generating wealth, boosting government tax revenues and creating more philanthropists, like him.

“I don’t understand why the government doesn’t believe we can be an innovation powerhouse,” Mr. Balsillie said in a recent interview. “They focused on the branch-plant economy. If you want to generate the billions in wealth and you want to keep the talent, you have to grow companies.”

Ottawa should also consider whether it’s getting good value for all the money it’s spending on R&D at colleges and universities. Higher education now consumes more than half of federal R&D spending.

Figuring out how to encourage companies to do more remains elusive.

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