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Canada has everything going for it -- except innovation

Kevin Lynch, vice-chair, Bank of Montreal

Fernando Morales/Fernando Morales/The Globe and Mail

Creativity lies at the heart of modern competitiveness. Innovation is the ability to create new products and services, to produce existing products in new ways, and to develop new markets. It drives productivity; it drives growth; and it drives our living standards. The problem is that Canada is not an innovation leader.

In 2007, the Canadian business sector ranked 14th among Organization for Economic Co-operation and Development countries in business R&D expenditures as a percentage of the economy. Canadian business R&D spending is only 1 per cent of GDP, well below the OECD average of 1.6 per cent. More troubling, it is roughly half of what the U.S. spends and even further behind countries such as South Korea, Finland and Sweden. Simply to raise Canadian business R&D spending to the OECD average would require an additional $10-billion annually.

In a world where competitiveness is increasingly defined by creativity, Canada cannot sustain above-average living standards and below-average innovation investment. Why is it that Canada lags so far behind our OECD competitors in almost every measure of business sector innovation? And what needs to change?

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We know for certain that it is not a stifling macroeconomic environment. Compared with most OECD countries, Canada has a better fiscal situation, lower debt as a proportion of the economy, low and stable inflation, and a very sound banking system. The statutory corporate tax rate in Canada is now well below the United States. And Canada's tax incentive for R&D is generally cited to be among the most generous.

We also know that it is no longer a lack of public-sector investment in research. As the result of massive investments beginning in the late - 1990s, public-sector investment in research as a proportion of the economy, largely delivered through universities, is now higher in Canada than in the United States and the vast majority of OECD countries.

Canada lags innovative economies in two important supporting infrastructures: venture capital, and information and communications technologies (ICT). Canada does not have a strong venture capital sector, and this clearly inhibits our ability to create and build innovation-driven firms. We significantly lag many OECD countries in ICT applications, particularly in the service sector, while all evidence points to ICT intensity as a driver of business productivity.

Where can we innovate to change the status quo? First, we need better engagement mechanisms to keep productivity and innovation on the "front burner," continually holding up a productivity and innovation "mirror" of global best practices to Canadian business and Canadian governments. Structural change will only happen if it is the ongoing focus of private sector management, boards of directors and governments.

Canada should consider the establishment of a national "Productivity and Innovation Council." Its mandate would be to encourage innovation and productivity by Canadian businesses. Its focus would be clear: to benchmark Canadian business to the global best practice in innovation and productivity, on a sector-by-sector basis. Its remit would be to business and governments. Its structure would be independent of both government and business, but established by federal statute.

The council's effectiveness would be determined by the credibility of its leadership, the rigour of its benchmarking analysis, and the scope of its mandate. Its objective should be ambitious: to have Canada a "top quartile" innovation performer within 10 years, and close at least half the productivity gap with the United States, increasing our standard of living by almost $5,000 dollars per capita.

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Second, we need to address the weakness in our venture capital sector. While a number of contributing factors have been advanced over the years - including scale, critical mass, liquidity, tax issues, insufficient expertise and disparate intellectual property regimes - it is still not clear why our venture capital sector has fallen so far behind countries ranging from the United Stated to Israel to Singapore.

The federal government should also consider the establishment of an "expert panel" on the venture capital sector, with a mandate to report within a year to Parliament on what is needed to establish a world-class venture capital industry in Canada. We need a blueprint for a venture capital sector specifically structured to meet Canada's innovation strengths and needs, and an understanding of how such a redesigned venture capital industry would help reduce Canada's innovation deficit.

Third, we need to unclog the pipes separating Canada's good science from our less-than-stellar commercialization of this research into new Canadian products, services and processes. These pipes are blocked with too many disincentives.

Specifically, Canada lacks a strong university-business interface in the research and applied innovation spaces. We have a plethora of intellectual property right regimes across our universities, which does not help commercialization. We have a costly tax incentive system for R&D, which is not delivering even average business innovation performance. We lack large-scale, collaborative research projects in key sectors such as mining and the oil sands with the potential for a national payoff through innovation and growth. We under-invest in highly trained graduate students, who can be "innovation generators" within businesses.

And we have to unclog whatever is blocking our usage of advanced ICT throughout the economy. The gap between Canadian companies and their U.S. competitors in the application of ICT is particularly acute in the service sector, where our intensity of usage is almost half that of the United States. Canada would benefit from a clearer blueprint, a "connectivity and content vision," on where and how we can be a leader in the information revolution; in applications, in content, and in connectivity.

Fourth, we need a Canada brand - and now is the time. Canada is emerging from the global financial crisis and recession relatively unscathed, we have one of the world's best fiscal positions, one of the world's largest storehouses of natural resources, one of the best-educated and multicultural work forces in the world, and worthy values. It would project our strengths, and create interest in things Canadian in a crowded, competitive global marketplace.

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A Canada brand has the potential to better promote our goods and services, to attract foreign investment, to entice top global researchers and skilled immigrants, to stimulate research collaborations, and to build global business partnerships.

There is no reason for Canada to be an innovation and productivity laggard. The challenges and the solutions lie in our hands. We need to benchmark our innovation and productivity performance to the world's best, and do better. We need to attract world-class researchers and technology entrepreneurs, and encourage commercializing Canadian research to create jobs and growth in Canada. We need to make the question "What will it take for Canada to build an innovative and productive economy?" part of our ongoing business narrative and public discourse.

Kevin Lynch is vice-chair, Bank of Montreal Financial Group.





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