Canada must encourage business to break its low-innovation streak

Peter Nicholson | October 23, 2018

Canada has been an economic success story for as long as the country has existed. In fact, the growth rate of Canada’s GDP per capita – the basic measure of raw economic performance – has matched that of the United States on average for the past 150 years. Herein lies a deep paradox. Innovation is what ultimately drives economic performance, yet Canadian businesses are innovation laggards among advanced countries. So what gives?

The answer is that Canada has always had the good fortune of a uniquely close relationship with the world’s two innovation leaders – first Britain, and then the United States. Canada has been able to exploit its comparative advantage in natural resources to, in effect, trade commodities for technologies. We have been good at employing those technologies – for example, our highly productive auto and aerospace industries – but much less good at creating technologies or innovative business models. That’s because we really haven’t had to.

This explains why Canada ranks so low on innovation metrics such as business R&D and knowledge-intensive exports. And the low-innovation approach has persisted because it has worked extremely well for Canadian business and for Canadians generally. The perennial hand-wringing over Canada’s innovation weakness elicits mostly a yawn in the corridors of political and business power because our economy continues to deliver, and business continues to ring up healthy profits overall despite subpar innovation by international standards. Bottom line: Unless the model that has worked so well for Canada ceases to do so, nothing will really change.

Darkening this complacent picture are two big clouds that will require a major reorientation of business strategy and of government innovation policy. The first is that Canada’s productivity growth has been very weak since the mid-1980s, especially relative to the United States. We have only been able to keep pace in per-capita GDP growth as a result of our stronger job creation relative to population. But demographic aging implies that employment is going to fall as a per cent of population. This means that the future growth of per-capita GDP – and thus the growth of average living standards and of the tax base to support social policies – will depend entirely on productivity growth. And productivity growth depends ultimately on innovation, because innovation is the source of improvement in equipment, including software, and of new and better ways to combine talent, capital and resources to generate increasing economic value.

The second cloud concerns fundamental challenges to the longer-term profitability of Canadian business. The trajectory of the global economy is being set by four megatrends related to: (1) globalization – particularly the shift of growth to Asia; (2) technology – especially information technology, which is disrupting businesses everywhere; (3) sustainability – reflecting both a cultural and economic imperative to reduce environmental impact; and (4) demographic aging, which can only increase the importance of productivity growth. Prevailing Canadian business models are particularly vulnerable to these megatrends given our concentration in the U.S. market; lagging IT investment per worker; and the resource intensity of our economy. The only way to turn these challenges into opportunities will be through business strategies powerfully focused on innovation.

So the ball is in business’s court and market realities will provide the greatest motivation to embrace the innovation imperative. Public policy also has an essential role to play by creating conditions that give Canadian companies, large and small, the best chance to succeed.

Traditionally, government’s encouragement of business innovation has operated mostly on the “supply side” – helping to build capacity to innovate through development of highly trained people; subsidies for R&D; public infrastructure, and so forth. These measures continue to be necessary but clearly have not been sufficient. Needed now is more potent encouragement for Canadian business to break its low-innovation habit. Most effective will be policy measures that directly affect the bottom line – such as greater public procurement of innovative products from Canadian suppliers; regulatory approaches that encourage rather than inhibit innovation; trade and competition policies that create powerful incentives for Canadian companies to innovate to survive and grow.

Such “demand-side” approaches represent a new take on innovation policy, but they require a shift of mindset inside government to embrace a much broader conception of innovation and of how it can be supported. A whole-of-government responsibility for innovation will be resisted given the siloed organization of the public sector. That is why the change needs powerfully committed leadership from the very top. What justifies such a priority? It is simply that innovation is what will determine the future prosperity of Canadians.

Peter Nicholson is the founding president of the Council of Canadian Academies, a former policy adviser to the Prime Minister’s Office and former business executive. He is the author of Facing the Facts: Reconsidering Business Innovation Policy in Canada, published by the Institute for Research on Public Policy.

Facing the Facts: Reconsidering Business Innovation Policy in Canada

Facing the Facts: Reconsidering Business Innovation Policy in Canada