Dan Breznitz holds the Munk Chair of Innovation Studies and is a co-director of the innovation policy lab at the Munk School of Global Affairs at the University of Toronto. He is the author or co-author of several books on innovation-based growth.
Canada's economy is not doing well. The only way to ensure continuous economic growth is through innovation. But three things are clear: Our political leaders have failed us on this front for the past 15 years, those now campaigning to be our leaders offer no new ideas, and when they talk and write about innovation, they reveal a shocking lack of basic understanding about what it is.
So what is innovation?
Innovation is not the invention of new technologies and products. Innovation is the complete process of taking new ideas and devising new or improved products and services that are then sold in the marketplace. The true impact of innovation was not in the invention of the internal combustion engine or the first automobile – the true impact was the continuous implementation of large and small inventions to make the car a better and cheaper product, to improve its production and to continuously find ingenious ways to sell, market and service it. If innovation was invention, a smartphone would still be a very large wooden box with a rotating dial, and it would take us about a minute to even attempt a call.
Technically, invention is the process of coming up with a truly novel idea, while innovation is the process of using ideas to offer new or improved products for the same overall cost of production. This is the reason why the most effective innovation agency in the world for the past 50 years, the Israeli Office of the Chief Scientist, has one clear and simple mission: the maximization of business-sector research and development (R&D) activities.
It is here that Ottawa's failure is so glaring – in the one and only place that matters for innovation policy. For the past 15 years, Canada's business spending on R&D has been in constant decline. Canada's business R&D, now at 0.88 per cent of gross domestic product, is so low that it is half of the Organization for Economic Co-operation and Development average of 1.64 per cent, and about a third of what's spent by countries such as Sweden or Finland. Even the rather optimistic Conference Board of Canada readily admits this problem, but it does not do so forcefully enough. Let us be blunt – the OECD should award us the wooden spoon for having the most inefficient innovation policy among its members.
If innovation is the output you desire, then your policy aims should be to spur growth by stimulating companies and individuals to develop products, processes or services that we cannot, by definition, predict. This is why it is so important for governments to constantly and rapidly experiment with different tools and different programs, kill what fails, scale up what works and continuously change their innovation policies in tandem with technology, industry and the global market.
Tragically, if there is one thing our elected leaders have never tolerated, it was innovation policy experimentation. Worse, if you read the party agendas for the future, the brightest idea and most bold policy innovation is … pouring more money into the same policy tools that have already failed us so badly.
If Ottawa is serious about innovation, then there should be new and focused thinking, starting from the basics. We need to clearly define the three goals of innovation policy:
- Building the capacity to innovate (including the needed skills to both invent and innovate);
- Stimulating the private sector (both individuals and firms) to use this capacity to the greatest extent possible; and
- Creating and maintaining an environment or ecosystem in which they can succeed.
A good innovation policy uses public money to leverage more private money for market-oriented R&D. A great innovation policy leverages significantly more private money than it puts in, while also maximizing the success of those undertakings.
And herein lies the key problem. Under pure free-market conditions, private actors do not invest as much in R&D as society would like. Even when they do, the impact of these innovations on economic growth does not diffuse quickly enough throughout society. The reasons have to do with the inherent nature of innovation – it is a high-risk activity with no guarantee that the innovator will gain or profit from his or her efforts.
Nobel-prize-winning economist Kenneth Arrow described the problems as those of high risk, inappropriability and indivisibility. In less technical terms, he meant there is very high chance of failure, there is a low chance of making a profit (even if you succeed), and, once you do innovate, all your competitors have immediate access to the product when they develop the next generation of their own product. We even have an idiom for this: Don't reinvent the wheel.
Thus, at its most basic level, innovation policy must aim first to lower (but not eliminate) risk to a level where entrepreneurs and firms are stimulated to undertake more innovation. The second policy aim should be to create a vibrant ecosystem where actors can collaborate and excel. To do this, the government needs to come up with a legal scheme that, on one hand, allows innovators to reap sufficient benefits that greed serves as a powerful incentive, but on the other hand, allows for the most rapid diffusion so that other companies, individuals and organizations can use it to improve productivity and form the basis for the next round of innovation. This, in essence, is what intellectual property rights, such as patents, trademarks and copyrights, are supposed to accomplish.
Just as importantly, innovation policy should aim to maximize the economic benefits for Canada from Canadian innovation. This question is intensified by globalization. Production of goods and services is now globally fragmented. Things are now produced in multiple stages across different locales, orchestrated by vast global networks. The result has been an ever-increasing regional specialization in particular stages of production, rather than in entire products or industries. For example, not only all of our electronic products, but also their major components, are developed, designed, produced and assembled in more countries than most of us will ever visit.
The implication of these changes is that it is no longer clear to what degree the economic-growth benefits of an innovation remain in its birthplace. The global reorganization of production and services has produced a new logic of value creation, as well as a new set of specialization and innovative capacities. No longer can one country excel at all stages of product development and production. Therefore, we must rethink what innovation-based growth means and what the best strategies for investment might be. This is another key question that those vying to be our elected leaders don't even know to ask.
When each country is specializing in a different stage of production, each country needs to excel in a different set of innovations. At least as important is the fact that each such specialization leads to a different distribution of the economic fruits of success, which means that Canada should not just aspire to imitate the ever more economically and socially unequal United States. Indeed, I would argue that Germany, not the United States, should win the gold as the most innovative OECD country. The United States is certainly more inventive, but once you look at innovation, the widespread use of inventions to increase productivity and sustain jobs and economic growth, Germany wins hands-down in areas such as molecular biotechnology, lasers and experimental software engineering.
This new world is an exciting and optimistic one. It offers multiple new ways to be successful as an innovative country. Indeed, it suggests that each of our provinces can, and should, excel in their own unique ways as innovation bastions. This is one of the greatest advantages of being a diverse, large and highly educated country.
We should not expect miracles from people whose highest aspiration is to spend a lifetime in Ottawa, but we can demand they at least start to ask and answer the right questions, to figure out our strengths and capacities, to question where within these global production networks we should want to be. Would Canadians prefer to be more like South Korea and Germany, or more like the United States and Israel?
The most basic thing a democratic government should do is to ensure its citizens have a chance for continuous prosperity. It is high time for our elected leaders in Ottawa adopt this goal for our country.