Canada is losing the global innovation race because it's throwing far too much money at dubious research and doing too little to jolt companies out of their sheltered complacency.
Those are the main conclusions of a provocative new report by economist Marcel Côté and HEC Montreal engineer Roger Miller being released Thursday by the Centre for the Study of Living Standards.
Federal and provincial governments are spending as much as $20-billion a year on innovation policies that are demonstrably not working, the authors argue in a 14-page report, which forms the core of an upcoming book, Innovation Reinvented: Six Games That Drive Growth.
"These efforts … have yet to significantly move the productivity needle," the report says.
The authors theorize that Canada's business environment has too little competition and is infected with "a culture of comfort" that discourages risk-taking and causes businesses to spurn innovation in favour of easy profits.
Even recent changes to federal research-and-development policy, announced in last month's budget, don't do nearly enough to fix a system that is fundamentally broken, Mr. Côté of Montreal-based Secor said in an interview.
"I'm not saying that we should go into radical change overnight, but we're stuck," he said. "I don't think the budget will make much of a difference."
The main flaw in the Canadian model is that government programs typically target R&D, which the report argues isn't the main source of innovation. Rather, companies innovate because they are forced to by intense competition, corporate culture and a drive to continually deliver better products.
"R&D is very rarely the critical factor," Mr. Côté said. Roughly 95 per cent of innovation occurs after initial breakthrough inventions in the lab – out in the marketplace, where new ideas are "grafted" on to existing products and processes, Mr. Côté and Mr. Miller argue.
"These ideas can come from a wide range of sources: customers, employees, suppliers, competitors, internal R&D and increasingly, from 'out there.' Open innovation is the biggest trend in the realm of innovation," the report says.
Ultimately, governments have "limited leverage" to spur innovation, the report says. But where it is used, policy should target the "continuous stream of improvements" that are the main source of real-world innovation, the authors say.
They cite the example of the smartphone market, launched in 1997 by Research In Motion's first e-mail pager. Most of the innovation came later as RIM went after business users with steady improvements to the BlackBerry, and then when Apple's iPhone and Google's open Android operating system tapped the consumer market by bringing the Web to devices.
RIM biggest failure, Mr. Côté suggested, was to stifle innovation by not opening up its operating system to mobile app developers earlier on.
The authors are particularly critical of the $5-billion a year Ottawa and the provinces spend on R&D tax credits, which they say have spawned a generation of companies "hooked on these injections of cheap capital." Instead of driving innovation, tax credits may encourage companies to do marginal projects crafted specifically to generate credits.
They also fault the way billions of dollars are spent in universities and government research labs. The main contribution of universities to innovation isn't basic research, but brain power – a pool of smart graduate students who take their cutting-edge knowledge to employers, the report says. More money should go to encourage companies to hire students.
The results of what Canada is doing aren't pretty as the quest continues for the next RIM or Bombardier Inc. None of roughly 20 PC makers spawned here in Canada in the 1980s survived. Roughly $2-billion a year spent on biotech research has produced just one company with a market capitalization of more than $1-billion. And drug company jobs and R&D continue to decline.
The authors are more supportive of government subsidies targeted at later-stage development and commercialization (including the National Research Council's Industrial Research Assistance Program), as well as targeted support for industry sectors and regional clusters.
And the authors lament the absence in Canada of an ambitious government-directed strategy to maintain technological dominance, similar to the U.S. Defense Advanced Research Projects Agency (DARPA).
The report, and the upcoming book, are the product of an extensive research project that looked at the innovation strategies of 800 companies around the world, plus 50 case studies of companies as diverse as General Electric to Michelin, along with interviews with top executives.