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79th Annual Summer Conference, August 5–8, 2010

Now What? Innovation and Global Competitiveness

CANADA’S INNOVATION CONUNDRUM

Dr. Anne Golden, C.M.
President and Chief Executive Officer
The Conference Board of Canada

Introduction: Not a new issue

I was invited to talk about how Canada can boost its productivity and innovation for long-term success. It is widely understood that in a high-wage economy like Canada’s, the only route to higher productivity and competitiveness in our global economy is innovation. And yet, while many agree on the general direction for reform, there is no consensus on precisely what’s to be done and who should do what.

My goal today is to give you my take on why we’re not succeeding and what it will take to meet the challenge.

Now, Canada’s poor productivity performance is not a recent problem. The growing gap in productivity between Canada and the U.S. has existed since the mid-1980s, despite the Canada-U.S. Free Trade Agreement and NAFTA.

We at the Conference Board have been beating the drum on this issue for the past 15 years and it is even more urgent today. At that time, Canada had fallen from 4th place in 1985 to 9th place in 1995 in income per capita among 17 major industrialized countries like our own.

The latest OECD data show us now in 10th place, essentially where we were in the mid-1990s.1 And the per capita income gap with the United States is now double what it was in real dollars (adjusted for inflation) in 1985 – $7,000 per person versus $3,200 per person.

In the 1990s, Canada’s labour productivity growth averaged 1.5 per cent per year and the U.S. averaged 1.8 per cent per year. Over the past decade the gap grew: our annual labour productivity growth fell to a pitiful 1 per cent per year, while the U.S. growth rate stayed consistent. According to the Bank of Canada, that means that Canada stands to lose nearly $1 trillion over the next decade. This translates into $30,000 in income for every Canadian.2

Can Canada close the productivity gap with the United States? It won’t be easy. Countries with lower levels of productivity not only have to grow faster to catch up but must maintain faster growth over a longer time.

For example, if U.S. productivity grows by its 2000–2008 average annual growth rate of 1.8 per cent over the next 15 years, Canada’s productivity growth will have to be 3.4 per cent per year to eventually catch up to the U.S. That’s more than three times Canada’s actual annual productivity growth rate between 2000 and 2008! Closing this gap is essential to closing the income and standard of living gap. But Canada is not only moving too slowly, we’re headed in the wrong direction!

The Conference Board has a framework that guides our research on productivity. [I’m wedded to this framework because I helped create it.] We envision a triangle: at the bottom are global factors affecting productivity over which Canadians have little or no control – changes in world commodity prices; catastrophic events like 9/11; pandemics; or the economic implosion in Greece and Europe’s response to it.

The segments in the middle layer of our triangle determine the domestic business and policy environment: tax and regulatory regimes; industrial structure; size of firm; foreign ownership; degree of competition; openness to trade and investment; urbanization; and the type and quality of infrastructure. These are generally determined by our governments.

At the top of our triangle are factors specific to firms and how they perform, namely: the quality of the workforce (education and skills), the amount and quality of the firm’s physical capital, and the firm’s culture around innovation.

Other organizations have different productivity frameworks to ours. Yet we all arrive at the same conclusion – Canada’s productivity gap is rooted mainly in a failure to innovate and, in particular, our failure to commercialize our research, our development, our inventions.

If consensus, why is Canada not succeeding on innovation?

So if there is consensus on the roots of the problem, why haven’t we been able to solve the innovation conundrum? Let me offer four reasons, each of which points to a solution.

i) Failure to Launch

In our decade-long work on innovation, we determined that when it came to creating knowledge and sharing it, Canada does pretty well. Where we continue to fall down is in commercializing our inventiveness – in cashing in on our creativity.

The Conference Board’s 2009 benchmarking results used 12 “outcome” indicators – such as patents and proportion of knowledge intensive industries (both as a share of our domestic economy and our exports).3 These measure what Canada actually achieves, rather than inputs or efforts. And Canada ranked 14 out of 17 developed countries. Canada got a “D”.

We then took the same criteria and went back and ranked Canada’s performance over four decades. Are you surprised to learn that we have been a consistent “D” performer?

Here’s an example that will resonate: Crocs shoes.

Did you know that Canadians invented Crocs? The plastic clog design was developed as a spa shoe by a Quebec company called Foam Creations; it was acquired by an American entrepreneur (at the time working in Canada) who commercialized them into fashion shoes. Once deemed the fastest growing footwear company on the planet, Crocs had the largest IPO in the history of the shoe industry. Its revenue was over $720 million in 2008 – a missed opportunity for Canada.

But, you are probably thinking, “What about the Blackberry?”

Agreed. It’s exactly what we need: a much-needed high-tech, global product that’s created billions in new revenues and thousands of above-the-neck jobs.

But the fact is that the so-called “technology research triangle” of Kitchener/Waterloo-Cambridge-Guelph, home of the Blackberry inventor, Research-in-Motion, accounts for about two-thirds of Canada’s high-tech start-ups.4 The Blackberry is the exception, not the rule. We need ten more Blackberry’s across the country.

So, why is Canada not commercializing what it does create? Various think tanks, institutes, and forums – including ours, Roger’s, the Expert Panel on Business Innovation, the National Innovation Roundtable – have all delineated and prioritized what needs to be done.

They have not been shy with advice. The Conference Board has consistently called for half a dozen broad measures. They include:

  • Opening Canadian industries to competitive pressures (including reducing barriers to foreign investment);
  • Improving the level and quality of capital intensity (e.g., machinery, equipment, and expansion of plants);
  • Investing more in human capital (e.g., post-grad education, lifelong learning);
  • Focusing infrastructure investments strategically in our major cities, where most innovation occurs;
  • Unleashing organizational and managerial innovation (about which Chapters has thousands of current listings) and where Tom can likely provide concrete advice;
  • Removing barriers to trade within Canada by aligning regulatory standards and processes among all levels of government; and
  • Harmonizing Canada’s regulations with the U.S and appropriate international standards.

Few innovation advocates would disagree with this package of reforms. But, when it comes to translating these strategies into specific policies and actions, there is no agreement.

I was recently part of a high-level National Roundtable on Innovation comprising top academic and business leaders who are preoccupied with innovation.5 We met this past spring. Most of our time was spent analyzing past reports. Our purpose was to solve the innovation conundrum.

But, we went around the room and asked everyone: “What are the top three actions needed to boost innovation?” Guess what? Everyone chose a different three priorities! With such divergent advice, no wonder it’s challenging to come up with a plan to re-boot our country’s innovation economy.

Yes, failure to launch is a big issue, and that’s why I put it first on my list. The second is more specific and a bit controversial.

ii) Governments have shied away from choosing niches.

Governments in Canada have focused on supporting public R&D and much less on turning the fruits of that research into new and significantly improved products and services that sell not only at home but worldwide. Yes, they support centres of excellence and offer some funds for commercialization, but these are small tokens compared to what is required.

In 2006, the Conference Board’s Leaders’ Roundtable for Commercialization (LRTC), comprising 48 of Canada’s prominent academic, business, and government leaders, released its longer-term strategy: Picking a Path to Prosperity. Its key recommendation was to establish national priority areas – based on size of global market demand, Canada’s capacity to compete for this global demand (i.e., critical mass), science and technology capability, and commitment of sector leaders to being global winners. In 2008, the follow-up Leaders Panel on Innovation-Based Commerce (LPIC) actually identified three priority areas: clean energy; water management technologies; and regenerative medicine. Recently, Ontario has invested in the first two at the research end of the scale.

The idea of government choosing priority areas has always been contentious. Some believe that this kind of government intervention unlevels the playing field. Others believe that by the time government chooses priorities, they are already passé and the opportunity has passed.

Many believe that government’s role is only to create the conditions in which firms can innovate, as current provincial and federal governments are trying to do (e.g., with FDI and tax policies). The question is whether that is enough – we don’t think so.

iii) Business leaders haven’t stepped up to the plate.

Recalling my innovation business model, the top of the triangle – at the firm level – is where business leaders have control. But they haven’t exercised the leadership they could and should. Our businesses don’t invest enough in R&D and in modernizing machinery and equipment. As Kevin Lynch correctly noted in his recent Globe and Mail commentary, the public sector is doing its part: Indeed, public sector investment in research, as a proportion of the economy, is now higher in Canada than in the U.S. and most OECD countries.6

R&D is, of course, the pivotal driver for the development of new technologies, products and services; yet Canada ranks 12th among the 17 peer countries on business spending on R&D as a share of GDP – about half the amount spent in Sweden and Finland.

Machinery and equipment – in particular information and communications technology – is closely linked to adopting and diffusing the latest state-of-the-art technologies, which in turn boost productivity. We know that countries with higher machinery and equipment investments generally have higher productivity growth. In fact, Canada’s investment in machinery and equipment as a percentage of GDP is among the lowest of its peer countries.

So why are business leaders not doing what they should be doing? Is it because they are more focused on and being held back by their operating conditions – like existing provincial trade barriers or over-lengthy approval processes for new products and projects? Is it that they lack the leadership and management training? Is it because short-term business pressures trump long-term strategies?

We don’t really know why so many of Canada’s business leaders shy away from making innovation, including R&D, central to their business strategies. Balancing risk management and aggressive growth strategy is not easy.

No doubt, Canada’s top business leaders can be much more creative and effective when it comes to innovation, a theme I will return to.

Now, on to problem number 4.

iv) The platform isn’t viewed as burning.

Our view at the Conference Board is that Canadian business leaders have not had to innovate on a major scale, or at least until maybe now when the high dollar and the aging workforce are fanning the flames.

In the 1990s, they could rely on the depreciating Canadian dollar to compete (some have called this the lazy-exporter hypothesis). In this decade, until the recent financial meltdown, business growth and profitability depended on two things:

First, booming global commodity markets. And, second, the now-expired North American consumer spending binge.7

Jean-René Halde, President and CEO of Business Development Bank of Canada, says in a soon-to-be-published article, “The greatest source of innovation will always be business leaders with a sustained commitment to doing things better and a willingness to seize opportunities. … Entrepreneurs must understand that their companies’ competitiveness depends on their capacity to innovate”.

We all need to internalize the reality that Canada is becoming less competitive in our global economy. We must realize that the platform is burning and that Canada’s future prosperity is at risk.

Three top priorities

Based on our work at the Conference Board, here are three priorities for action:

Priority One: Canada’s governments, working with industry, should support a small number of targeted niche areas where Canada can grow globally competitive high-tech industries. The Conference Board has identified three such areas: clean energy technologies, regenerative medicine, and water management technologies. The broad challenge in each case is to move us from success in the lab to success in the market.

On clean energy, we need to put a price on carbon and we need to align our support for new technology with federal and provincial regulation.

On regenerative medicine, we need to strengthen the links between discoveries, clinical trials, and centres of excellence that improve practitioner knowledge and use of the new technologies. Shorter regulatory reviews and better export support from our overseas commercial officers would also help.

On water management technologies, we need to use pricing and regulation to bring innovative technologies to market.

One example: A handful of Canadian companies are world leaders in technologies that convert tidal motion or wave motion into electric power. They get strong support from government programs, government test sites, and government-funded academic research. Their challenge is convincing the planning departments of provincially-owned utilities that their technology will provide reliable and low cost electric power. To overcome this resistance and to move the technology from lab to market, we need policy and regulatory changes that encourage or even require innovative technologies in the generation mix.

Priority Two: Governments should invest strategically in the infrastructure of Canada’s major cities where most innovation occurs. They also need to invest in relieving our cross-border bottlenecks. This is fundamental to building a productivity and innovation framework integral to Canada’s long-term sustainable prosperity.

While it is true that in our new digital economy innovation relies on data as its core infrastructure, it also relies on physical connectivity and the lack of basic infrastructure of roads and transit hobbles our economic activity, undermines our productivity and smothers innovation. If infrastructure is indeed destiny,8 we need to act. For instance:

  • Imagine the boon to productivity if we had high-speed rail connecting Toronto, Ottawa and Montreal in the east and Edmonton and Calgary in the west.9
  • Imagine if we could end the transportation gridlock in Canada’s city-regions – which costs $3B every year in lost productivity in the GTA alone. A good regional transportation plan has been produced by Metrolinx, but funds are not available to make this plan real. There are many options – including road tolls, a regional gas or sales tax, a new levy on commercial parking spaces, and congestion charges.10 Not all of these are suitable, but an informed discussion is needed on how to fund this infrastructure and operations.
  • Now imagine the benefits if we unblocked the traffic bottleneck between Windsor and Detroit, where more than $100B worth of Canada-US trade flows per year!

Priority Three: We need to boost business investment in R&D and state-of-the-art equipment.

We’ve already improved the macroeconomic environment, notably through tax reform: by cutting corporate income tax, ending the capital tax federally and in several provinces, including Ontario, accelerating capital cost allowances, and harmonizing sales tax in some provinces. Specific R&D tax incentives are the next fiscal element to look at, incentives that go beyond the existing SREDs11 tax credits.

  • There is more to be done. A more robust venture capital market would make a big difference. Canadian venture capitalists invest about two-thirds less than their U.S. counterparts and mostly in early-stage development.
  • Governments can reduce the time and business costs to get regulatory approvals for new technologies and products – without undermining intended safeguards. We are waiting too long for new drugs, healthier food products and safer technologies compared to Americans and Europeans because of our lengthy, cumbersome regulatory processes and not enough skilled people to do the job. It takes about 30 months to get patents for biopharmaceutical products approved in Canada compared to the 10-month average for major industrialized countries.
  • What’s more, eliminating inter-provincial regulatory barriers to labour mobility, trade, and investment would increase competition. This would accelerate innovation and productivity growth. True, there is now a comprehensive agreement between Alberta and British Columbia (TILMA) and more cooperation between Ontario and Quebec, but much remains to be done.

So, to sum up, we need to: one, target niche areas for global growth; two, invest in city-region infrastructure; and three, boost business investment in R&D and state-of-the-art equipment.

But, at the core of innovation and productivity performance are the thousands of decisions made daily within individual firms, including the type and amount of physical capital and how people are used in producing products and services. This takes us back to business strategy and the extent to which innovation is central to that strategy.

My own view is that a lot of this comes down to the issue of our collective culture and mindset.

Perhaps it is something in our DNA or culture. Are we the image captured in that old joke: “Why do Canadians cross the road? To get to the middle.” (Of course, if you stay in the middle of the road, you tend to get run over.)

The recent book, Start-Up Nation: The Story of Israel's Economic Miracle, offers startling comparisons to Canada’s situation.12 With the highest number of start-ups per capita of any nation in the world and massive venture capital investment (Israel’s per capita venture capital in 2008 was more than 2.5 times that of the U.S. and more than 30 times that of Europe), Israel is one of the world's entrepreneurship hubs. Almost half of the world’s top technology companies have bought start-ups or opened R&D centres in Israel. Israel leads the world in the percentage of GDP that goes to R&D.

What makes Israel so innovative and entrepreneurial? Start-Up Nation lists the tight proximity of businesses, universities, and start-ups as well as a support system of suppliers, skilled human capital, and venture capital. A key factor is Israel’s welcoming immigration policy. Also highlighted is the role of the military in both pumping R&D funds into cutting-edge technologies and in giving young people the capacity to manage and lead that they take with them into business life.

But Start-Up Nation makes the case that this alone would not be enough – it is Israel’s cultural core “built on a rich stew of aggressiveness and team orientation, on isolation and connectedness, and on being small and aiming big.”

Can Canada acquire this kind of entrepreneurial spirit? An interesting question, much debated. In his study of the evolution of the Canadian character The Unfinished Canadian, Andrew Cohen (President of The Historica-Dominion Institute) argues that we are a country that likes to cut off its tall poppies, a country that resents rather than celebrates its success.

But, I’m hoping that we can develop some more of our own “rich stew” – a cultural brew that breeds innovation.

Conclusion

As an historian, I have always been interested in what causes change. Change occurs when the climate of opinion changes. As a country we addressed our fiscal deficits and public debt challenges in the mid 90s only after we internalized the realization that we faced a crisis.

So, I would like to conclude with the following question: Will the recent economic recession and current doldrums combined with the strong loonie and looming labour shortages be enough to spark a new era of innovation in Canada? The topic for this 79th Annual Couchiching Conference is encouraging. It is forums like these that help create new conversations.

Improving our productivity through innovation is not a “want to do”, it is an imperative. Ideally, our “rich stew” would combine our traditional sense of caution (which has on occasion served us well and is now being praised as “prudence”) with a stronger dash of entrepreneurialism and “chutzpah”.

Canadians have what it takes to succeed. We are richly endowed with resources and with people. Our fiscal management has won us international respect. We are open to newcomers, and we are attracting terrific talent from abroad, which can only help to beef up our “ambition DNA.” Our success in the Winter Olympics – through Own the Podium – suggests that we are now inclined to go for the gold.

We are the country that invented both the zipper and the Blackberry – we can do this!

End Notes

1. The Conference Board of Canada’s How Canada Performs website still shows 8th place as it is updated once a year.

2. Paul Vieira, Lost Productivity Could Cost Each Canadian $30,000: Carney” [online]. Financial Post, February 4, 2010. www.financialpost.com/news-sectors/economy/story.html?id=2522469.

3. Innovation indicators: Scientific articles; technology exchange; patents per population; patents per country; high- and medium-high-technology manufacturing; knowledge-intensive services; trademarks; export market share – aerospace, electronics, office machinery and computers, pharmaceuticals, and instruments.

4. Toronto Star, David Olive, September 8, 2007.

5. The National Roundtable on Innovation is chaired by Paul Lucas, President and CEO of GlaxoSmithKline, and the Hon. John Manley, President and CEO, Canadian Council of Chief Executives with 20 top leaders from academia, business, and government.

6. Kevin Lynch, “Canada has everything going for it – except innovation”, The Globe and Mail – Opinion, July 21, 2010.

7. In many ways, Canada is still largely a resource-based country – we are drawers of water and hewers of wood. In 2008 alone, natural resource sectors generated 12 percent, or $147.5 billion, of Canada’s GDP, (and that’s not counting the service businesses that support them); and just over half (52.5 per cent) of our exports of goods are natural resources. www.nrcan-rncan.gc.ca/stat/index-eng.php.

8. “A Conversation with Robin Chase.” http://urbanomnibus.net/2009/06/a-conversation-with-robin-chase/

9. President Obama has made high-speed rail service a priority; in January, he pledged to invest $8B in federal stimulus money to kick start high-speed rail in at least ten regions, including one in the northeast that could connect New York and Montreal.

10. Toronto City Summit Alliance. Time to Get Serious: Reliable Funding for GTHA Transit/Transportation Infrastructure. July 10, 2010. www.torontoalliance.ca/imagelibrary/AllianceReliableFundingPaper.pdf.

11. Scientific Research and Engineering Development Tax Credit (SRED). These currently focus more on research and less on creating prototypes and testing new products in the marketplace.

12. Dan Senor and Saul Singer. Start-Up Nation: The Story of Israel's Economic Miracle. New York: Hachette Book Group, 2009.