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Canada's innovation gap Add to ...

When Michael Davis-Burchat moved to Finland for a job at Nokia Corp. last year, the Canadian-born industrial designer made the switch for more than a chance to work for the world's biggest cellphone maker or live amid the Jugendstil architecture of his adopted Helsinki neighbourhood.

At Nokia, Mr. Davis-Burchat found a "learning corporation" that is constantly receptive to new ideas about the way to design its phones and move into the exploding sector of wireless applications and services.

"Ninety per cent of [North American]companies approach innovation by altering their existing products," Mr. Davis-Burchat says. "They end up being really good at an old paradigm, instead of going out into the world to see not just what people are doing, but what they are trying to do, and designing their products accordingly."

This may help explain why Canada is losing at the innovation game. Yet, policy makers seem strangely unmoved even as Canada's productivity stagnates, its manufacturing sector craters and its resource industries wait out the recession with the casual assurance that the next commodities boom will elevate them - and the country - from the dumps.

Politicians seemed similarly unperturbed at the insolvency and break-up of Nortel Networks Corp., and the pending sale of one of its key units to a Nokia subsidiary.

The decline of Nortel, which began with the bursting of the global technology bubble in 2000, coincides with a worrying widening of the productivity gap between Canada and the United States, a dangerous drop in business spending on research and development here, and the country's increasing dependence on natural resources to fuel economic growth.

Between 1981 and 2000, Canadian companies' expenditures on R&D grew by almost 10 per cent annually. But since 2001, they have been flat in real, after-inflation terms and have declined by fully one-fifth when expressed as a percentage of gross domestic product.

At its zenith in 2000, Nortel alone spent almost $6-billion on R&D. By 2008, that had fallen by more than 70 per cent to $1.67-billion, based on average Canada-U.S. exchange rates. The outlay still amounted to 15 per cent of Nortel's sales last year, however, making it one of the country's most R&D-intensive firms.

Canada's new R&D players - BlackBerry inventor Research In Motion Ltd. being the most notable - remain too few to alter a troubling reality. RIM spent 6.2 per cent of sales on R&D in the fiscal year that ended Feb. 28, less than half of Nortel's level of investment last year.

Still, RIM's R&D budget as a percentage of its sales is several times that of Canada's biggest oil and gas companies, which have been stock market stars throughout this decade and which remain the foundation on which the country has pinned its hopes for a rapid recovery. Despite overflowing profits in recent years, EnCana, Petro-Canada and Suncor have spent less than 0.5 per cent of annual revenues on R&D.

That raises questions about where Canada's wealth will come from in future decades. Economies thrive by developing new products and processes that the world demands. While the prospect of triple-digit oil prices and renewed fury in the fertilizer market will clearly fuel Canada's post-recession economy for a while, resources have always proven to be a highly unreliable creator of wealth.

Prices plunge as fast as they rise, and the booms bring with them nasty, unintended consequences, such as a shortage of skilled labour as young people see less need to pursue costly higher education when even burger-flippers can earn premium wages. What's more, as non-renewable resources dwindle or become more difficult to access, the cost of extracting, much less processing them, increases rapidly.

Yet, Canada's decades-long attempt to move out of its "staples trap" appears not only to have stalled, but to have to taken a giant step backward.

The staples theory was originally developed in the 1920s by historian Harold Innis to explain Canada's development as a provider of valuable raw resources - initially fish and fur - to the British Empire. It was later seized on by the economists on the left to explain Canada's failure to move into higher value-added industries. Canadians, they argued, had developed a "commodity mentality," resigned to sending unprocessed resources abroad, instead of building a modern economy at home. The small group of elites that got rich on these resources controlled the political levers to ensure nothing changed.

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