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Christyn Cianfarani is president of the Canadian Association of Defence and Security Industries (CADSI)

Innovation might be the latest buzzword in Ottawa, but it is so much more than that. It is a central idea underpinning the Trudeau government's economic policy.

Budget 2017 is expected to unveil the government's Inclusive Innovation Agenda, an initiative intended to bolster Canada's weak performance in productivity growth. Navdeep Bains, the Minister of Innovation, Science and Economic Development (ISED), his staff, officials and 10 "innovation leaders" he appointed have been consulting broadly for months to help flesh out this agenda.

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The concept of clusters – a geographically concentrated group of companies and research institutions operating in a particular field – has emerged as a key focus. Budget 2016 allocated $800-million to support innovation clusters.

An emphasis on clusters to drive innovation is a welcome idea for Canada. Leading economists from Alfred Marshall in the 19th century to Michael Porter in the late 20th century have argued that firms concentrated in clusters tend to be more innovative and therefore more productive and competitive. Many successful clusters – from Waterloo's information and communications technology cluster to the Montreal aerospace cluster – support this argument.

The role of government in fostering new clusters and strengthening existing ones, however, is debated. Was Silicon Valley in Northern California – often held up as the world's leading and most successful cluster – the product of a revolution led by bold venture capitalists, visionary angel investors, and risk-taking entrepreneurs, with little to no government involvement? Or was the U.S. federal government generally, and the Department of Defense specifically, "the biggest angel of them all" in Silicon Valley, as Stuart Leslie of Johns Hopkins University has argued.

One key fact supporting Prof. Leslie's argument is that at the dawn of Silicon Valley in the early 1960s, the U.S. Polaris and Minuteman missile systems absorbed virtually all of the Valley's output of integrated circuits, for which the cluster would become famous decades later. This demonstrates the buying power of public procurement.

Furthermore, up until at least the early 2000s, the largest single employer in the Valley was Lockheed Martin, one of the world's biggest defence companies, which at one point employed 28,000 people in the region. And into the late 1990s, Silicon Valley remained one of the leading recipients of U.S. defence contracts, receiving four times the national average in total dollars spent.

So tales of Silicon Valley that centre on swashbuckling entrepreneurs and hyperfree markets reveal only part of the story. Some of the key firms in the successful history of this cluster have in fact been in the defence business and other sectors that relied heavily on defence contracts.

In her book The Entrepreneurial State: Debunking Public vs. Private Sector Myths, economist Mariana Mazzucato develops this argument and shows how defence investments in a wide array of disparate technologies – from LCD screens to GPS to voice recognition software – allowed Steve Jobs and Apple to put them together into the iPod and then the iPhone. This is an example of the spinoff power of government defence research.

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Moreover, a recent paper by Enrico Moretti of University of California, Berkeley, Claudia Steinwender of Harvard Business School and John Van Reenen of the London School of Economics concludes that increases in defence R&D can have a meaningful impact on an economy's total factor productivity growth (i.e. innovation).

There are two central points here for building a successful innovation agenda in Canada.

First, defence procurement and defence R&D can be powerful instruments in the innovation policy arsenal, and can help foster new, as well as strengthen existing clusters. This can lead to commercial applications that have enormous long-term benefits for a country's productivity and competitiveness.

Second, defence companies need to be thought of more broadly as technology firms and innovators. We need to understand that most Canadian defence companies operate in both commercial and military markets, at home and abroad. A recent ISED/Statistics Canada report concluded that almost 60 per cent of Canadian defence companies derived less than half their revenue from military sales.

The Trudeau government is right to be pursuing an Innovation Agenda to bolster Canada's productivity growth. The government is also correct to focus on clusters as a pathway to greater innovation. The history and origins of Silicon Valley tells us that defence spending on procurement and R&D can and should be a major part of Canada's innovation solution.

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