Students of classical economics all learn about the three factors of production: Land, labour and capital. Over the years, though, we've come to learn that land, labour and capital are actually not quite sufficient. They never spontaneously combine on their own to create anything new and useful. What's missing is a fourth factor: Innovation. Sometimes, it's called creativity or entrepreneurialism. But by any name we give it, innovation is what drives wealth creation.
On this front, Canada was dealt some sobering news last week. In the most recent global competitiveness rankings by the World Economic Forum (WEF), Canada placed a disappointing 14th. The report considers a variety of criteria, and Canada scores reasonably well in financial markets, stable institutions, and infrastructure. But where we stumble badly is innovation.
The author of the WEF report, Klaus Schwab, writes: "Although substantial gains can be obtained by improving institutions, building infrastructure, reducing macroeconomic instability, or improving human capital, all these factors eventually run into diminishing returns. … In the long run, standards of living can be largely enhanced by technological innovation."
It's almost as if he's pointing directly at Canada.
The irony is that almost every corporate mission statement and every government strategy paper talks about being innovative. Companies boast about being the most innovative in their sector; universities and colleges show off new research labs. But for all the chatter, Canadians just don't seem to be that innovative.
It's a fair question to ask whether we should worry about our poor WEF ranking. So what if we're 14th in the world in business competitiveness? Our economy remains in far better shape than a lot of other countries that outranked us. And some of the ways in which innovation is measured – such as dollars spent on scientific research and development – can be misleading. Canada's comparative advantage is in resources, not pharmaceuticals, biotech or other sectors that naturally benefit from research in a lab.
But dismissing the WEF rankings is a mistake. While it's certainly true that energy, forestry and agriculture traditionally have not been heavily research oriented, the future of these sectors is going to depend on innovation in resource management and conservation. For example, players in Alberta's oil sands are becoming particularly innovative in developing techniques and processes – ones that will be more environmentally acceptable to an increasingly critical global market.
There are solutions to Canada's innovation deficit. The Conference Board of Canada, which prepared the Canadian analysis for the WEF report, makes several smart suggestions. Encouraging more spending on R&D, making better use of advanced technology, and increasing the research linkages between universities and industry all make sense.
But a big part of the problem is our knee-jerk reaction to expect governments to provide the solutions. Need corporate R&D? Ask Ottawa for more tax credits. Lacking venture capital? Insist tax dollars are put into a fund. Want more high tech? Demand provincial governments to spend more on university research.
Good public policies can certainly nudge us in the right direction, but it's lazy to sit back and wait for government to solve the problem. The truth is that tax credits and research subsidies do not drive innovation. Curiosity drives innovation.
Maybe we're asking the wrong question. Instead of "what policy can drive innovation?", we need to ask "how can we become a society of inquisitive individuals?" That's a more difficult question. It is too simplistic to call for more creativity in the classrooms, but surely strong literacy skills at an early age form the bedrock of curiosity and innovative thinking in adulthood. Children who are encouraged to read, to question, to wonder and to imagine will carry those abilities with them into adulthood.
But innovation cannot wait for a generation of learners to make it to the labour market. If Canada is to compete and succeed in the 21st century, we need to find ways to improve our record on innovation immediately. Implementing the Conference Board's policy recommendations is a great place to start, but they need to be accompanied by some shifts in our own attitudes and habits. We are only as innovative as we are curious – tax credits or not.
Todd Hirsch is the Calgary-based Chief Economist of ATB Financial, and author of The Boiling Frog Dilemma: Saving Canada from Economic Decline.