I N T E R N A T I O N A L P R O D U C T I V I T Y MO N I T O R 51

Innovation and Business Strategy: Why Canada Falls Short

Peter Nicholson1

Council of Canadian Academies

ABSTRACT

This article summarizes the report of the Expert Panel on Business Innovation appointed bythe Council of Canadian Academies. The report presents a fresh look at innovation as aneconomic process rather than primarily as a science and engineering activity. Noting thatCanada’s productivity has been falling further behind that of the United States and manyother advanced countries for the past 25 years, the report argues that lagging productivitygrowth has been due to subpar innovation. Innovation is interpreted broadly to encompassthe day-to-day activites of all kinds of businesses looking for new or more efficient ways toserve the needs of customers. The panel concludes that too many businesses in Canada aretechnology followers, not leaders, and that a fresh discussion on innovation in Canada isneeded, one that focuses on the factors that influence adoption of innovation-basedbusiness strategies.

INNOVATION — NEW OR BETTER ways ofdoing valued things — is the creative capacityto transform the imagined into the real. Inno-vation matters for businesses because novel prod-ucts and more eff ic ient processes are theprincipal means of making businesses morecompetitive. It is through innovation that busi-nesses find ways to generate more value fromexisting resources. Innovation is, directly orindirectly, the main driver of productivitygrowth and is thus the principal source ofnational prosperity. Canadians should thereforebe concerned in the face of evidence suggestingthat Canada’s business sector on the whole,though with notable exceptions, is lagging ininnovation relative to many of our peer group

of economically advanced countries.The question is “why.” If innovation is good

for business, why is Canadian business appar-ently less committed to innovation than analystsand policy-makers believe it should be? Thequestion has been asked for decades, yet the sit-uation has not changed much in relative terms.The causes of Canada’s innovation deficiencymust therefore run deep in the nature of theeconomy, and perhaps in Canadian society aswell. To bring to bear a comprehensive contem-porary analysis of the issue, the federal Ministerof Industry asked the Council of Canadian Acad-emies to appoint a panel of business, labour andacademic experts (Box 1) to answer the followingquestions:

1 The author is President of the Council of Canadian Academies. This article is a highly condensed summary ofthe report of the Expert Panel on Business Innovation entitled Innovation and Business Strategy: Why CanadaFalls Short. The panel was appointed and supported by the Council of Canadian Academies following a requestby the federal Minister of Industry. The report can be accessed from the Council’s website www.sciencead-vice.ca. Email: peter.nicholson@scienceadvice.ca.

52 NU M B E R 18 , S P R I N G 2009

• How should the innovation performance ofCanadian firms be assessed?

• How innovative are Canadian firms, andwhat do we know about their innovationperformance at a national, regional and sec-tor level?

• Why is business demand for innovationinputs (for example, research and develop-ment, machinery and equipment, and skilledworkers) weaker in Canada than in manyother OECD countries?

• What are the contributing factors, and whatis the relative importance of these contrib-uting factors?

The ContextThe panel first met in November 2007, a time

when the Toronto Stock Exchange index wasnudging 14,000, oil was close to $100 a barrel, theCanadian dollar was above par with the U.S. dollar,economic growth was solid and the unemploymentrate was at a multi-decade low. But beneath the

Box 1Expert Panel on Business Innovation in Canada

Robert Brown (Chair), President and Chief Executive Officer, CAE Inc. (Montréal, QC)

Savvas Chamberlain, Chairman and Founder, DALSA Corporation (Waterloo, ON)

Marcel Côté, Founding Partner, SECOR Inc (Montréal, QC)Natalie Dakers, Chief Executive Officer, Centre for Drug Research and Develop-

ment, University of British Columbia (Vancouver, BC)Meric Gertler, Dean, Faculty of Arts and Science; Co-Director, Program

on Globalization and Regional Innovation Systems, University of Toronto (Toronto, ON)

Bronwyn Hall, Professor of Economics of Technology and Innovation, University of Maastricht (Maastricht, The Netherlands); Professor of the Graduate School, University of California at Berkeley (Berkeley, CA)

André Marcheterre, Company Director, Former President and Chief Executive Officer, Merck-Frosst Canada (Lorraine, QC)

Arthur May, President Emeritus, Memorial University; Chairman of the Advisory Board, Atlantic Innovation Fund (St. John’s, NL)

Brian McFadden, President and Chief Operating Officer, Prestige Telecom Inc. (Baie d’Urfé, QC)

Walter Mlynaryk, Executive Vice-President, Kruger Inc. (Montréal, QC)David Pecaut, Senior Partner and Managing Director, Boston Consulting Group

(Toronto, ON)Jim Roche, Company Director, and Former President and Chief Executive Officer,

CMC Microsystems (Ottawa, ON)Charles Ruigrok, Former Chief Executive Officer, Syncrude Canada Ltd.

(Calgary, AB)Andrew Sharpe, Executive Director, Centre for the Study of Living Standards

(Ottawa, ON)Jim Stanford, Economist, Canadian Auto Workers (Toronto, ON)Guthrie Stewart, Former Partner, Equity Fund, Edgestone Capital Partners

(Montréal, QC)Alexandre Taillefer, Co-Founder, Stingray Digital Group Inc (Montreal, QC)John Thompson, Chairman, TD Bank Financial Group (Toronto, ON)

I N T E R N A T I O N A L P R O D U C T I V I T Y MO N I T O R 53

1947 1955 1963 1971 1979 1987 1995 200360

70

80

90

100

Labour productivity differencepercentage terms(U.S. – Canada)

Peak Year – 1984(93%)

bullish daily headline data were worrisome longer-term trends, particularly the persistently weak pro-ductivity growth in Canada. Investment in lead-ing-edge technology — especially related tocomputers and communications — was laggingsignificantly behind not only that of the UnitedStates, but also many of the advanced countrieswith which Canada compares itself. Businessspending on research and development as a shareof the economy was down 20 per cent from its 2001peak at the end of the technology boom.

While the panel was completing its work inlate 2008 and early 2009, the world changed dra-matically. Because the extent of the global eco-nomic crisis, and its ultimate impact on Canada’seconomy and society, remains unknown, thepanel did not attempt to factor the crisis promi-nently into its diagnosis of business innovationin Canada. A longer-term perspective is neededin any event since the symptoms of lagging inno-vation are of very long standing. The paneltherefore focused its analysis primarily on long-run phenomena, stretching across several upsand downs of the economic cycle. Thus its find-ings remain relevant notwithstanding the severecontemporary shock to the global economy.

It is emphasized that the panel’s report is pri-marily a diagnosis based on existing sources andnot a policy prescription, though it provides abody of fact and informed opinion that is of pol-icy relevance.

Innovation as an Economic Process

The panel approached innovation as an eco-nomic process rather than as a primarily sci-ence and engineering activity. The theme ofits analysis is the link between business strat-egy and innovat ion ac t iv i ty, interpretedbroadly. An “invention” is not an innovationuntil it has been implemented to a meaningfulextent. Moreover, innovation is not limited toproducts but includes improved processes like

the assembly line, and new business modelslike web-based commerce. Radical innova-tions like the steam engine and the transistorcreate entirely new markets. Much more prev-alent is incremental innovation in establishedmarkets in which goods and services are con-t inuous ly improved — a process tha t i sresponsible for the majority of labour produc-tivity growth. These observations imply amuch broader conception of innovation thanthe traditional R&D-centric views.

Canada has a serious productivity growth prob-lem. Since 1984, relative labour productivity inthe business sector has fallen from more than 90per cent of the U.S. level to about 76 per cent in2007, a trend (Chart 1) that continued in 2008.Over the 1985-2006 period, Canada’s averagelabour productivity growth ranked 15th out of 18of the larger and most advanced comparatorcountries in the OECD (OECD, 2008b).

Canada was rapidly closing the productivity gapwith the United States until the early 1980s. Thestrength of U.S. productivity growth, since themid-90s, is primarily associated with the produc-tion and use of information and communicationstechnologies (ICT).

Chart 1Relative Labour Productivity Levels in the Business Sector, 1947-2007(real GDP per hour Canada as per cent of U.S.)

Source: Centre for the Study of Living Standards (2008a).

54 NU M B E R 18 , S P R I N G 2009

00.5

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Labour Productivity Growth

Capital Deepening

Labour Composition Improvement

Multifactor Productivity Growth

Canada United States

Chart 2 is a growth accounting decompositionby Statistics Canada comparing labour productiv-ity growth in the United States and Canada overa 45-year period, 1961-2006. Productivitygrowth is analyzed as a weighted sum of (i)improvement in the “quality” of the labour force(based primarily on higher educational attain-ment and more employment experience); (ii)

growth of capital services per hour worked (“cap-ital deepening”) and (iii) the residual, multifactorproductivity (MFP) growth, which broadlyreflects the effectiveness with which labour andcapital are combined in the economy. Chart 2shows that Canada’s relative productivity growthweakness is not due to comparative shortcomingsin its workforce. Neither, for the most part, doesit reflect inadequate capital investment though, aswill be described subsequently, business invest-ment in information and communications tech-n o l o g y h a s b e e n e s p e c i a l l y w e a k . T h edecomposition demonstrates clearly that Can-ada’s poor productivity growth is due mainly tothe weak growth of MFP. In fact, MFP growth inCanada has lagged behind that of the UnitedStates for as long as comparable measurementshave been made. Studies by the OECD also showthat Canada’s MFP growth, at least since the mid-1980s, has been among the weakest in its peergroup of economically advanced countries.

The significance of multifactor productivity

Intuitively, changes in MFP measure that por-tion of labour productivity growth that can notbe accounted for by measured growth of bothcapital intensity and the quality of the work-force. Most significant for this discussion is thatMFP growth contains the macroeconomic signatureof aggregate business innovation — the extractionof increasing value from inputs of capital andlabour through inventive activity. Two exampleswill illustrate:• Consider the addition of a drive-through

window in a fast food outlet. A small amountof construction and one or two extra serverscould substantially increase sales volume byexpanding the effective “seating capacity” ofthe restaurant, and, more importantly, byincreasing service convenience and therebyattracting more customers. After accountingfor the modest capital cost of installing the

Chart 2Accounting for Labour Productivity Growth in Canada, 1961-2006(average annual growth rates, per cent)

Note: Labour productivity growth can be accounted for by increasing capitalintensity, improvement in workforce skills, and a residual called multifac-tor productivity (MFP) — which broadly reflects the effectiveness withwhich labour and capital are used. Growth rates in the top panel are thesum of contributions of the factors in the bottom three panels. The timeperiods cover the total 45 year interval (leftmost bars) and two sub-periodswhen Canada was closing the productivity gap (roughly 1961 to 1980) andfalling behind (roughly 1980-2006).

Source: Baldwin and Gu (2007).

I N T E R N A T I O N A L P R O D U C T I V I T Y MO N I T O R 55

drive-through window and some extralabour, the remainder of the increased out-put is chalked up to MFP growth.

• Consider a sales force in the field before theadvent of the cellphone or, better yet, theBlackBerry. Today’s relatively inexpensivewireless capital equipment has amplifiedgreatly the value of each field employee, notonly through more efficient allocation oftime but also through more timely and co-ordinated service for customers. Whilesome of the added value comes from newinvestment in equipment, most is measuredas an increase in MFP.

Micro-examples like these can be multipliedendlessly. In each case, we see an innovation thatmay be based on science and technology (e.g. theBlackBerry) or on some very simple engineeringcombined with entrepreneurial insight (e.g., thedrive-through window). The economic impactof thousands upon thousands of such innova-tions, large and small, is huge.

There is an important interaction betweennew capital investment (which ‘‘embodies”innovation) and MFP since successive genera-tions of capital induce complementary, andoften highly innovative, changes in the organi-zation of work and the training of employees —e.g. as the adoption of computer and communi-cations technologies has done, or as the electricmotor did in an earlier era. Thus the distinctionbetween the component of productivity growthascribed to more and better capital, and thecomponent ascribed to MFP, can be somewhatartificial. The impact of innovation on produc-tivity growth enters jointly through both chan-nels (Rao, Tang and Wang, 2008).

Since MFP is the residual after improve-ments in labour quality and capital intensityhave been accounted for, it reflects all otherfactors that affect labour productivity. So theinnovation signal in MFP growth comes mixedwith a lot of “noise”. These other confounding

factors include, prominently, changes in capac-ity utilization caused by booms and recessions,and changes in economies of scale that mightbe due to opening up of big new markets. Thebusiness cycle effect averages out over suffi-ciently long time periods, as in Chart 2. MFPderived purely from scale effects might arisefrom growing markets, as would typically occurafter trade liberalization (e.g. NAFTA). Cana-dian MFP should have benefited from thisincreased scale to a greater extent than theUnited States has s ince the 1980s . Thuschanges in scale economies can not explain theslower MFP growth in Canada — in fact, theeffect of scale economies since the 1980s wouldbe expected to be the opposite. The analysissummarized in Chart 2 applies the same proce-dures to both Canadian and U.S. data, mini-mizing the effect (on estimates of differences ingrowth rates) of methodological differences orerrors in model specification.

The panel concluded that the rate of MFPgrowth over suitably long periods is primarilydue to business innovation — interpretedbroadly to include better organization ofwork, improved business models, the efficientincorporation of new technology, the payofffrom R&D and the insights of entrepreneurs.Since the long-term analyses by StatisticsCanada (and also by the OECD) show thatCanada’s relatively poor productivity growthis due almost entirely to weak MFP growth,the panel concluded that Canada’s weak pro-ductivity growth is largely due to weak businessinnovation performance.

The Central Role of Business Strategy

Business strategy drives innovative behaviour.Explaining business innovation performance inCanada therefore comes down to explaining thebusiness strategy choices of Canadian firms. Thisrequires a shift of perspective away from innovation

56 NU M B E R 18 , S P R I N G 2009

�

CapitalInvestment

Research &Development

ExternalEnablers

HumanCapital

New &ExpandedMarkets

Increased Standardof Living

NewProducts

INNOVATION AS ABUSINESS STRATEGY?

WorkforceCapability

CapitalDeepening

MFPGrowth

StructuralCharacteristics

CompetitiveIntensity

Climate forNew

Ventures

BusinessAmbition

Public PoliciesFactors

Outputs ofInnovation Activity

Outcomes ofInnovation Activity

Growth AccountingFramework �

Inputs toInnovation Activity

that influence

ContinuousImprovement

Firm’s Choice of Innovationas a Business Strategy

Labour Productivity Growth

measured by

which analyzes

leading to

which drives

activities themselves — e.g. inputs like R&D andinvestment in M&E — to a focus instead on the fac-tors that influence the choice of business strategy.This reframing of the innovation puzzle is the mostimportant contribution of the panel’s analysis.

What are the factors that principally influencefirms in Canada to choose, or not to choose,business strategies based around innovation?

The five factors that are, in the panel’s view, ofgreatest importance are those at the top of Chart3 which serves as the conceptual framework forthe panel’s analysis.• Structural characteristics — For example, is

the firm in a sector of the economy that typ-ically does little in-house innovation, rely-ing instead on technology embodied in

Chart 3Logic Map of the Business Innovation Process

I N T E R N A T I O N A L P R O D U C T I V I T Y MO N I T O R 57

capital equipment and/or on production ofrelatively standard goods or services? Or isthe firm foreign controlled with most inno-vation originating in the home country?

• Competitive intensity — Is the pressurefrom competitors so intense that innova-tion is needed to maintain profitabilityand/or market share? This would be thecase in many export markets, and particu-larly in those where technology or cus-t o m e r r e q u i r e m e n t s o r t a s t e s a r echanging.

• Climate for new ventures — Is sophisticatedearly-stage venture financing available? Arethere research universities nearby to providepotential innovation partners and highlytrained graduates? Is there a local “ecosys-tem” of supplier firms to help carry an inno-vation from concept to success in themarket?

• Public policies — Are government policies inrespect of tax, regulations, targeted assis-tance programs or public procurementfavourable to innovation, or not?

• Business ambition — Is the business dedicatedto market expansion and prepared to takethe required risks? Business ambition, inthis context, reflects the extent of entrepre-neurship and drive.

Once a firm has decided on an innovation strat-egy, it assembles the enabling inputs. Theseinclude the appropriate mix of highly qualifiedemployees; investment in the necessary capitalequipment and training; an R&D program ifneeded; and retention of consultants and variousexternal suppliers, including licensing arrange-ments and partnerships with other firms. Whilethese inputs, and R&D spending in particular,can be regarded as indicators of innovation, theyare actually the consequences of the degree of com-mitment to innovation as a business strategy.

To the extent that Canadian businesses lag inrespect of innovation, the reasons lie primarily

in some combination of the primary influencingfactors outlined above. Business ambition willbe a key factor in almost every case. For would-be radical innovators in new markets, the othersignificant influencing factors will be the cli-mate for new ventures and perhaps some sup-portive public policies. For firms in establishedmarkets, the innovation strategy choice is likelyto be most influenced by the state of competi-tion, by specific features of public policy or bysome industry characteristic such as the firm’ssector or its domicile of control.

For policy-makers, the concern is the extentto which the factors that influence the innova-tion strategies of businesses can be affected bypublic policy. Clearly some can be — taxes, reg-ulations, procurement, assistance programs, for-eign investment rules and certain aspects ofcompetition. Policy has much less impact on fac-tors such as industry structure and the ambitionof business leaders, though business attitude cancertainly be affected by competitive intensity,which is amenable to policy influence.

The five key influencing factors in Chart 3 arethemselves influenced by certain long-standingfeatures of Canada’s economy, of which the twomost significant appear to be the following:• Canada is “upstream” in many North

American industries. This positioning isthe result of the nation’s resource endow-ment and development history as a com-modity supplier and technology adopter.Canada’s upstream position in many conti-nentally integrated value chains limits con-tact with ultimate end-customers — who area strong source of motivation and directionfor innovation — and shapes the nature ofbusiness ambition in many sectors.

• Canada’s domestic market is relativelysmall and geographically fragmented.Small markets offer lower potential rewardfor undertaking the risk of innovation andtend to attract fewer competitors, thus pro-

58 NU M B E R 18 , S P R I N G 2009

0

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1981 1986 1991 1996 2001 2006

Peak of theTech Boom

Finland OECD Canada United States

viding less incentive for a business to inno-vate in order to survive. Of course, theinnovation success of countries like Finlandand Sweden shows that the disadvantage of asmall domestic market can be offset by astrong orientation toward innovation-inten-sive exports.

The following sections present a highlyabridged account of the panel’s analysis andcommentary on the five factors considered tohave the greatest influence on business innova-tion strategy.

Industry Structure Characteristics

The effect of structural factors (particularlysector mix and foreign ownership) on businessstrategy choice is most readily seen throughanalysis of the gaps between Canada and theUnited States in respect of R&D spending andICT investment. Since the collapse of the tech-

nology boom in 2001, Canada’s business expen-d i ture on R&D (BERD) , expres sed a s apercentage of GDP, has been declining (Chart4). Although the gap between Canada and theUnited States narrowed significantly betweenthe mid-1980s and the peak of the technologyboom, it has since begun to open up again.Structural factors are part of the explanation ofthe gap, but only part.

Sector mixA sector by sector analysis of the overall

U.S.-Canada R&D gap (Table 1) shows thatgenerally lower Canadian R&D spendingwithin the same sectors in both the UnitedStates and Canada accounts for a greater por-tion of the gap (the precise share of which var-ies from year to year) than does Canada’sadverse sector mix — i.e., the greater weightin Canada’s economy of resource-related andother activities that have inherently low R&Dspending. (Resource-based industr ies doinvest heavily in innovation, though via theindirect route of its embodiment in advancedcapital equipment.)

Chart 5 traces the evolution, by sector, of theU.S.-Canada BERD intensity gap over 16 yearsfrom 1987 through 2002 (the latest year forwhich a reasonably complete sector breakdownwas available in the OECD data). The total gapdiminished from about 1.7 percentage points inthe 1988-91 period to about one percentagepoint in 2001-02, though it has increased some-what since then. The most significant drivers ofthe long-run trend have been (i) a sharp reduc-tion in the contribution of the manufacturingsector to the Canada-U.S. gap; versus (ii) anincreasing gap in business services R&D (partic-ularly wholesale and retail trade). The broadshift of output and employment toward services,and the application of ICT in service sectors, hasbeen occurring more rapidly in the UnitedStates than in Canada.

Chart 4Business Expenditure on Research and Development Intensity, 1981-2006(BERD as per cent of GDP)

Note: BERD intensity in Canada declined by 20 per cent between 2001 and2007 reflecting the pull back in Canada’s large telecom equipment sector.The commitment of Finland to innovation-led growth accelerated sharplyin the wake of a severe banking crisis in 1991, exacerbated by weaknessin Finland’s traditional exports following the collapse of the USSR.

Source: OECD (2008a).

I N T E R N A T I O N A L P R O D U C T I V I T Y MO N I T O R 59

Foreign controlThe extent of foreign control of several major

Canadian sectors is well known to be part of theexplanation for low R&D intensity — e.g.

accounting for very low Canadian R&D in theautomotive and chemicals industries. Thisreflects the traditional tendency of global corpo-rations to conduct most innovation activity near

Table 1U.S.-Canada Business Expenditure on Research and Development Intensity Gap by Sector, 2002

1) Excludes agriculture, primary forestry and fishing and real estate services (largely the imputed value of owner-occupied housing). Thedefinition of Business GDP ($715 billion in 2002) differs from the Statistics Canada breakout for that sector ($873 billion in 2002) whichthe panel believes to be largely due to real estate services.

2) The contribution to the gap is calculated as: “Sector share of BERD intensity times sector share of GDP” for the United States, minusthe analogous product for Canada. For example, for manufacturing the contribution is: (8.03 x .219)-(4.16 x .27)=0.634. Negative con-tributions to the BI gap — i.e., those numbers in parentheses in the final column of the table — are associated with sectors where theratio of Canada’s BERD to total GDP exceeds that of the United States — i.e., sectors that reduce the gap.

3) n.e.c. = not elsewhere classified.

4) An omnibus group of subsectors (including precision instruments among others) that is not further broken down in the OECD database.

Data Source: Panel calculations based on the OECD STAN Database.

Sector Share of Nominal Business Sector GDP (%)

BERD Intensity (BI)

Contribution to BI Gap (U.S.-Can)

Canada U.S. Canada U.S. GAP(2)

BUSINESS SECTOR (1) 100.0 100.0 1.87 2.90 1.034

Manufacturing 27.0 21.9 4.16 8.03 0.634

Motor vehicles and parts 3.4 1.7 1.88 13.41 0.166

Pharmaceuticals 0.5 1.0 27.17 21.16 0.066

Chemicals (excl. pharmaceuticals) 1.5 1.5 2.01 6.45 0.066

Office accounting and computing machinery 0.1 0.4 65.01 32.80 0.053

Machinery and equipment n.e.c.(3) 1.8 1.5 2.70 6.59 0.048

Food, beverages and tobacco 3.3 2.6 0.45 1.28 0.018

Aircraft and spacecraft 0.8 0.8 15.41 18.49 0.018

Rubber and plastics products 1.4 1.0 0.73 2.32 0.013

Other non-metallic mineral products 0.7 0.6 0.29 0.98 0.004

Electrical machinery & apparatus n.e.c. 0.4 0.6 7.20 5.46 (0.001)

Pulp & paper, paper products printing and publishing 4.1 3.2 1.29 1.52 (0.004)

Textiles, leather and footwear 0.9 0.7 1.44 0.53 (0.010)

Fabricated metal products 2.0 1.6 1.61 1.24 (0.011)

Basic metals 1.6 0.6 2.04 1.14 (0.025)

Radio, TV & communication equipment 0.7 1.1 53.67 29.52 (0.054)

Other manufacturing (4) 3.8 3.0 1.88 11.80 0.288

Business services 53.4 66.2 1.26 1.71 0.457

Wholesale and retail trade 17.1 20.5 0.53 1.83 0.285

Other business services 19.0 28.9 2.85 2.49 0.181

Transport and storage 6.2 4.6 0.10 0.11 (0.001)

Financial intermediation 11.0 12.3 0.33 0.23 (0.007)

Mining and quarrying 7.5 1.6 0.64 0.68 (0.037)

Utilities 4.0 3.2 0.46 0.06 (0.016)

Construction 8.1 7.2 0.08 0.03 (0.004)

60 NU M B E R 18 , S P R I N G 2009

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Business Services Utilities & Primary Resources

Motor Vehicles Pharmaceuticals

Chemicals (excl. Pharma) Aerospace

Office Accounting & Computing Machinery All other Manufacturing

1987 1989 1991 1993 1995 1997 1999 2001

their headquarters. But foreign control does notautomatically imply low R&D activity. In fact,foreign subsidiaries in several sectors — e.g.pharmaceuticals and computers — have beenmajor contributors to Canadian R&D and havehad R&D intensities that actually exceed theU.S. average for these sectors. Moreover, if theforeign-controlled facilities were not here, thereis no guarantee that Canada would have devel-oped a “replacement set” of domestically ownedR&D performers. Analyses of individual firms,based on R&D spending data and innovationsurveys, reveal a common pattern and produce athree-tiered structure (relative to ownership) ofR&D and innovation behaviour in Canada(Baldwin and Gu, 2005):• Canadian-owned multinationals are the

most likely to engage in product innovationand R&D spending.

• Canadian subsidiaries of foreign multina-tionals are second, with generally lowerR&D intensity than Canadian-owned mul-tinationals, but higher than purely domesticCanadian firms.

• Canadian firms with only domestic opera-tions have both the lowest incidence ofR&D spending and the lowest BERDintensity.

This underlines the fact that Canada’s fail-ure to develop a greater number of innovativeCanadian-based multinationals has been a keycontributor to the country’s overall R&Dweakness.

Investment in machinery and equipment

Investment in machinery and equipment(M&E) is a principal channel through which

Chart 5Evolution of the U.S.-Canada BERD Intensity Gap, 1987-2002(percentage point)

* BERD Intensity = Business Expenditure on R&D as a per cent of GDP.

Note: This chart traces the evolution of the most important sectoral components of the R&D intensity gap. The nar-rowing of the manufacturing gap (at least through 2002) has been due entirely to the aerospace sector as the U.S.industry down-sized after the Cold War and due to commercial competition from Airbus. The business services gaphas meanwhile widened since the mid-90s. Much more work is needed to improve data on sub-sectors of businessservices.

Source: Panel calculations based on the OECD STAN database.

I N T E R N A T I O N A L P R O D U C T I V I T Y MO N I T O R 61

1987 1991 1995 1999 2003 2007

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innovation drives productivity growth becausesuch investment “embodies” the prior innova-tion of producers of capital goods, includingsoftware. M&E investment also stimulates inno-vative changes in processes and work organiza-tion to take best advantage of the new capital.(The productivity improvement resulting fromsuch changes is captured statistically withinMFP growth.) Investment in M&E (as a per-centage of GDP) by Canadian business has notalways lagged the United States as has been thecase with R&D, though a gap has opened upsince the early 1990s (Chart 6). The M&Einvestment gap has been mostly due to Canada’spersistently weaker investment in ICT. AverageICT investment per worker in Canada was onlyabout 60 per cent of the U.S. level in 2007. Thisis a serious shortcoming since the productionand application of ICT have been the key driversof innovation and resulting productivity growthin the United States and several other countries.

Empirical studies suggest that only about 20per cent of the U.S.-Canada gap in ICT invest-ment can be explained by structural characteris-t i c s re l a ted to sec tor mix and f i rm-s i zedistribution. Further study is needed to deter-mine definitively the other factors that accountfor this perplexing gap. For now, it can only besaid that relatively low ICT adoption is consistentwith a view that Canadian businesses on thewhole, but always with notable exceptions, aretechnology followers, not leaders (Sharpe, 2005).

Competitive IntensityIn the 1940s Joseph Schumpeter argued that

large firms with market power were more likelyto innovate than small firms. Almost all of therecent empirical analysis contradicts Schum-peter and shows that (i) too much concentrationinhibits innovation by removing the incentivecreated by competitive rivalry, and (ii) smallfirms with specialized expertise can be the mostinnovative.

Is the state of competition in Canada a signif-icant cause of the country’s weak productivityand innovation performance? The evidencedoes not permit a definitive answer in view of (i)the difficulty in measuring the intensity of com-petition; and (ii) the great variety of market situ-ations throughout the economy, some of whichare intensely competitive and others not. Thefollowing general observations are germane.

Export-oriented Sectors: For sectors where themarket for the product is North American orglobal, the competitive intensity faced by Cana-dian firms is essentially identical to that faced bycompetitors in other countries, and most indica-tors suggest that Canadian firms achieve compa-rable levels of innovation and competitiveness.Assessments of innovation activity at the firmlevel demonstrate that exporting firms are morelikely to invest in R&D and to manifest innova-tive behaviour (Baldwin and Gu, 2004).

Chart 6Business Sector M&E Investment Intensity, 1987-2007(per cent of nominal GDP)

Note: Since ICT prices per unit of performance have fallen substantially (espe-cially for microelectronics and optical communications), the performance-adjusted “volume” of ICT investment would be much greater than the chartsuggests. Note that Canada’s non-ICT investment ratio increased from 1993to 1998, despite Canadian dollar weakness (which increased the cost ofimported capital goods), and has been flat to declining since 2002 even asthe dollar strengthened.

Source: Centre for the Study of Living Standards (2008b).

62 NU M B E R 18 , S P R I N G 2009

Sectors Where Competition is Curtailed: Thereare some important sectors in Canada — e.g. tele-communications services, broadcasting, air trans-port and certain agri-foods — where regulationseffectively curtail foreign entrants, thus limitingcompetition. Innovation tends to be dampened inthose situations than might otherwise be the casebecause there is very little incentive for the well-established incumbents to compete for domesticmarket share via innovation.

Indirect Evidence of Competitive Intensity: Thereis a great deal of anecdotal evidence that theintensity of competition in the U.S. domesticmarket is far greater than in comparable sectorsin Canada. For example, the generally lowerlevel of business profit (relative to the size of theeconomy) in the United States as compared withCanada is indirect evidence of stiffer competi-tion in the U.S. market.

The Effect of Canada’s Market Size: The rela-tively small size of Canada’s domestic market —made even smaller by regional fragmentation —tends to limit both competitive intensity and thereturns to innovation in domestic sectors, whichunderlines the importance of increasing Can-ada’s presence in global export markets for inno-vation-intensive goods and services. Innovationis needed to move from a domestic to a globalgrowth strategy. Reciprocally, a heavy invest-ment in innovation usually requires Canadianbusinesses to go for the scale of global markets.Canadian businesses, on the whole, have so farfailed to aggressively grasp the opportunitiescreated by globalization, a shortcoming that isdemonstrated by the relative lack of innovation-oriented Canadian-based multinationals.

The Climate For New VenturesNew ventures are the “green shoots” of the

innovation system, bringing new ideas to marketand creating new competition. Despite somedynamic clusters — such as in Waterloo and inthe largest Canadian cities — Canada needs to do

better in creating the conditions to enable moreof the country’s impressive number of startups tobecome viable, growing businesses still based inCanada. The following three key conditionsdetermine the quality of the environment in Can-ada for the support of such businesses.

Financing new venturesA vibrant “angel investor” community is the

key to bridging the “valley of death” thatseparates a promising idea from a viablestartup business. (Angels are produced wheninnovative entrepreneurs succeed and thusgenerate both the financial resources and theexperienced mentors to stimulate or guide anew generation of innovators.) The limiteddata ava i lable on “ informal” investmentsources in Canada suggest that they are muchl e s s e x t e n s i v e , i n r e l a t i v e t e r m s , t h a ncomparable sources in the United States.Canadian governments have sought to addressthe early-stage gap in f inancing throughvarious initiatives. For example, the BusinessDeve lopment Bank o f Canada ha s beendirecting a growing share of its resources toseed-stage and startup companies. Whilehelpful , such programs do not f i l l othercritically important aspects of the role ofangel investors — experience, contacts andmentorship. To address that gap, a number ofincubation centres have been created to assistsmall companies in their earliest stages ofgrowth — e .g . , the Reg iona l EconomicIntervention Fund established by the Quebecgovernment, the Centre for Drug Researchand Development in British Columbia and theAccelerator Centre in Waterloo.

Venture capital (VC) is the post-angel stageof funding when the basics of the businessproposition have already been developed andlarger sums are needed to ramp up to com-mercial scale. There are reasons to be con-cerned about the state of venture capital in

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Canada United States

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Canada. Fundraising for Canadian VC firmshas been fall ing — 2007 marked the fifthdecline in the prior six years. By contrast,there were five consecutive years of growth inthe United States. The generally weak perfor-mance of Canada’s VC industry (Chart 7) isdue to the fact that the industry is still rela-tively young and thus has not yet developedsufficient depth of experience to select andmentor the best potential investment candi-dates. It is also the case that the VC activitiesof tax-advantaged Labour Sponsored Invest-ment Funds (particularly outside Québec)have negatively affected incentives and per-formance in the industry.

There is no quick or easy fix for the CanadianVC industry. Attracting sufficient capital tobecome self-sustaining will require VC firms todemonstrate they have the skills and experienceto generate acceptable returns. The dilemma isthat the industry requires access to sustainablepools of investment capital to develop a criticalmass of investing skills. It is encouraging thatrecent government policy initiatives at both theprovincial and federal levels have been designedto support the growth of market-based venturefirms that will be judged, and will succeed ornot, based solely on their performance.

Commercializing university research

Canada’s record of university-based researchactivity is strong and ranks among the bestamong OECD countries, but the commercial-ization of university research in Canada hasbeen, on the whole, disappointing. The princi-pal causes relate to:• the shortage of commercial receptor capac-

ity in Canada, due to the fact that relativelyfew established firms in this country arecommitted to research-based innovation(and would therefore be in a position totransact with universities)

• the relative weakness of new venture financ-ing in Canada at both the angel and later VCstages; and

• the inherent differences in the incentivesand professional values of the university andthe business firm, an issue not unique toCanada.

The situation could be helped through betterinfrastructure for identifying and mobilizingpotentially commercializable knowledge as itemerges from university-based research. In manycases this will involve well-designed partnershipsbetween universities and private-sector businessesor government labs. The implication is that com-mercialization of research-based ideas is morelikely to occur if the surrounding business environ-ment is rich in firms that are committed to scienceand technology-based innovation as a major busi-ness objective — i.e., more “market pull” is neededin Canada to complement “research push”.

Chart 7Venture Capital PerformanceNet Return* on Previous 10 Years for 2001-07(per cent internal rate of return)

Note: The financial underperformance of aggregate VC investment in Canadais clear. (Some individual funds may of course perform well). There hasbeen a decline in the 10-year rate of return for VC funds in both the UnitedStates and Canada following the end of the tech boom, but the fall-off wassteeper in Canada and from a much lower level to begin with.

Source: Canadian Venture Capital Association (2007) and National VentureCapital Association (2008).

64 NU M B E R 18 , S P R I N G 2009

Supporting innovation clustersInnovation is fostered by the close personal and

supplier linkages that occur in certain geographicconcentrations, creating local innovation ecosys-tems. Public policies designed to create such clus-ters from scratch have yet to demonstrate muchsuccess in Canada or elsewhere, though contin-ued learning from initiatives like MaRS in Tor-onto will aid the design of supportive policies.The Waterloo success story is one good exampleand shows that cluster development may requireboth considerable time to mature and the conver-gence of several favourable features that are typi-cally specific to the locality.

The Public Policy Environment

Canada has provided a progressively moreencouraging environment for business inno-vation, at least in respect of those factors overwhich public policy has direct influence — forexample, prudent fiscal and monetary policies,a trend of lower tax rates and support for uni-versity research. But Canada’s other bench-mark competitors are not standing still andglobalization and ICT are changing the way inwhich a great deal of business innovation isconducted. Most important, Canada’s innova-tion performance is still far from where itneeds to be so there is still much work to do.

International tradeThe general liberalizing trend of trade pol-

icy, until very recently at least, has favouredinnovation strategies both to counter importcompetition and to take advantage of newmarkets. The concern looking forward — par-ticularly in view of the severe economic stressin most countries — is the risk of increasedprotectionism. This would reduce the size ofthe addressable market for many Canadianbusinesses and thus the potential return froman investment in innovation. As a relatively

small open economy, Canada is particularlyexposed to the vicissitudes of global marketsand especially to conditions in the UnitedStates. While Canada’s prudent macroeco-nomic policy over the past 15 years has pro-vided some capacity to absorb shocks, furtherinsulation depends on bui lding a base ofexport industries at the leading edge of inno-vation in order to be among the last to losemarket share if customers retrench.

Human capitalEducation and the quality of human capital is

one of Canada’s most significant strengths andtherefore offers little by way of explanation forthe long-term relative weakness in productivitygrowth or business innovation. The federal gov-ernment’s commitment to the support of univer-sity research has been strong since the mid-to-late 1990s, which has increased the supply ofleading-edge skills and, other things beingequal, made Canada a more attractive locationfor innovative business. The competition fromChina and India, among others, for knowledge-intensive activity has meanwhile increasedsharply as those countries have also succeeded inrapidly expanding their production of skilledpeople. The accumulation of human capabilitiesis a race without a finish line.

Of particular significance for innovation per-formance is the fact that Canadian businessmanagers are, on average, not as well trained asthose in the United States. This education gapmay leave many Canadian managers less awarethan their U.S. counterparts of developments atthe leading edge of technology and businesspractice, and thus less likely to choose businessstrategies that emphasize innovation.

RegulationThe impact of regulatory policies is usually

sector-specific, thus few generalizations canbe made. Moreover, the effect of regulation

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on business innovation may either be stultify-ing or encouraging. Regulations often inspireinnovation to meet the rules (e.g. auto emis-sion limits and fuel efficiency standards) or todesign around them (e.g. refrigerant substi-tutes for CFCs to avoid ozone depletion). Theintensifying pressure on virtually all aspects ofthe natural environment due to populationand economic growth in general, and energyuse in particular, requires an unprecedentedinnovative response, elements of which willneed to be encouraged by well-designed regu-lation in all countries. While Canada has somecompanies that have been successful innova-tors in various fields of environmental tech-n o l o g y ( e . g . f u e l c e l l s a n d w a s t e w a t e rtreatment), it has not generally been an area ofcomparat ive g lobal s trength for Canadadespite this country’s outstanding researchcompetence in many fields of environmentalscience (Committee on The State of Science& Technology in Canada, 2006).

TaxationMany studies over the years have pointed to a

relatively high rate of business taxation in Can-ada, particularly as it affects the after-tax cost ofM&E investment. This reduced the incentivefor firms to accumulate M&E and, because ofthe strong linkages among M&E, R&D andinnovation generally, would explain some part ofCanada’s weak productivity performance.According to estimates by the C.D. Howe Insti-tute, Canada’s marginal effective tax rate(METR) for medium and large companies wasthe highest in the OECD in 2005 and 2006,though the comparable rate in the United Statesw a s o n l y s l i g h t l y l o w e r ( M i n t z , C h e n ,Guillemette and Poschmann, 2005, Chen andMintz, 2008). The federal government hasmeanwhile been steadily reducing corporate taxrates of various kinds, and in Budget 2009 com-mitted to continue with measures projected to

give Canada the G7’s lowest overall tax rate onnew investment by 2010.

R&D incentives: The Scientific Research andExperimental Development (SR&ED) taxincentive provides by far the largest direct finan-cial support for business innovation in Canada— representing about $4 billion of federal taxforegone in 2007. Although there is good evi-dence that the tax credit has a positive net bene-fit (Parsons and Phillips, 2007), many businessleaders believe that the program should beimproved — e.g. by extending the “refundabil-ity” of the credit beyond small businesses toR&D performers of any size. While Canada’stotal government support for business R&D (taxand direct spending combined) is somewhatlarger, relative to GDP, than that of the UnitedStates and the United Kingdom, it is noteworthythat Canada’s reliance on the tax assistancechannel to stimulate R&D is unusually heavy(Chart 8). Although most countries have beenincreasing the use of tax credits in their R&D

Chart 8Government Funding of Business R&D*(per cent of GDP)

* 2005 or last available year.

Source: OECD (2008c).

66 NU M B E R 18 , S P R I N G 2009

support programs, more evaluation is needed todetermine the right mix.

Sector strategiesThe ICT sector, among others such as aero-

space, provides several examples of the govern-ment’s catalytic role in enabling innovativeactivities to take root and build scale to the pointwhere commercial viability emerges. This initi-ating influence has taken many forms — earlyprocurement (for example, stimulating IBM’ssubstantial presence in Canada); public-privatecommercial partnerships in support of a nationalmission (for example, creation of Telesat in1969); and research support through targeteduniversity funding and sector-oriented govern-ment R&D facilities and programs.

Business AmbitionThe intangibles that make up Canada’s busi-

ness culture are believed by many to reduce thesupply of entrepreneurial talent, the appetite forrisk, the urge to grow and the propensity toinnovate. This issue is frequently the subject ofsurveys and commentaries in which there aretwo contradictory threads. One is based on sur-veys of the general population and contends thatCanadians are not that much different fromAmericans when it comes to attitudes regardingrisk and entrepreneurship, and therefore anyexplanation of innovation shortcomings basedon public attitude and “business culture” is a redherring (Institute for Competitiveness and Pros-perity, 2003).

A contrary view, often voiced by members ofthe Canadian business community, usually basedon personal experience, is that there is an inbredpropensity among U.S. business people to maxi-mize the economic heft of their enterprise — toalways go for growth. In Canada and Europe,“good enough” appears more often to bereached at a lower level. Put another way, thereappears to be a deficiency of business ambition

in Canada. Too many successful Canadian busi-nesses would rather behave like an “incometrust” than like a “venture capitalist”. On theother hand, Canadians have been bold andentrepreneurial in domains where the countryhas had long experience and deep knowledgeflowing from the particular opportunities andchallenges the country has faced — mineralexploration and project engineering being goodexamples. Canadian business, on the whole, hasacquired much less experience at the frontiers ofscience and technology, and has thus been lessable to gauge the risks and opportunities inmany of these domains. Fewer Canadian compa-nies have therefore been prepared to adopt strat-egies based on technological innovation.

Related to this is a persistent concern that toomany innovative startups fail to mature in Can-ada with the most promising often acquired andeventually relocated to the United States. Thegreater supply and sophistication of venturecapital investors in the United States and imme-diate proximity to a larger market can be irre-sistible attractions for young, technology-basedfirms. This underlines the importance ofimproving the climate for new ventures as dis-cussed earlier.

The key question is whether Canadian busi-nesses are aggressive enough and sufficientlyoutward-looking to compete in global marketsbeyond the huge and accessible U.S. market?Clearly, the many Canadians who have built suc-cessful global businesses have what it takes. Butthe issue is whether there are enough of them toensure the long-term prosperity of the entireeconomy. The panel’s view is that today, thereare not. This is not due to any lack of innatecapacities of Canadian business people — it isnot in the “DNA”, so to speak, but rather comesdown to the incentives embedded in the eco-nomic environment.

Canadian business as a whole has been prof-itable despite its mediocre innovation record

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— pre-tax business profit in Canada, as a per-centage of GDP, has exceeded that of theUnited States in most years since 1961. So thebehaviour of Canadian business is unlikely tochange unless i t s c i rcumstances change.Those circumstances are, in fact, changingradically due not only to the current turmoilin the world economy but, more fundamen-tally in the long run, to a massive reallocationof the share of global economic activity asChina and others become full participants inworld commerce. The demographics of theCanadian business community are also chang-ing as immigrants and a younger generation ofentrepreneurs, unencumbered by traditionalattitudes, expand their presence. So whetherby necessity or inclination, there is reason toexpect that Canadian business will becomemore ambitious and innovative.

Sectoral Perspectives on Innovation

No one industry is “average” and there is noone-size-fits-all explanation for Canada’s inno-vation shortcomings. Four sectors — automo-tive, life sciences, banking and ICT — werechosen by the panel for “mini-case studies” toillustrate the diversity of the innovation prob-lematique in Canada and the variety of strategicresponses to it. Innovation also occurs in Can-ada’s resource-based sectors though mostinvolves process improvements, the adaptationof foreign-sourced M&E and techniques toCanadian circumstances, mineral exploration,and the financing and engineering of resourceprojects at all scales. With very few exceptions,Canadian firms have not been at the forefrontof innovation in capital equipment for resourceindustries or in the development of the mostsophisticated materials and products derivedfrom the nation’s resources — further evidenceof Canada’s characteristic upstream, commod-ity-oriented position in global value chains.

Following are summaries of the panel’s viewsas to some of the lessons for business innovationstrategy in each of the four sectors.

The automotive industry — weak R&D but strong productivity• The innovation strategies adopted by Cana-

dian auto sector firms have been influencedheavily by structural characteristics — spe-cifically the integration of the North Amer-ican market and the ro le o f fore ign-controlled assemblers. But the global suc-cess o f par t s makers l i ke Magna andLinamar proves that ambitious Canadianfirms can expand from their base in a Can-ada-U.S. supply chain to serve the worldmarket.

• Canada’s auto industry shows that it is possi-ble to build a competitive industry without astrong base of domestic R&D. The struc-ture of the sector in Canada has instead ledto innovation strategies that focus on pro-cess efficiency and workplace practices. Thisraises the question as to whether public pol-icies could be designed to foster more suchgains in productivity, including in resourceindustries where process innovation is alsothe prominent strategy.

• Innovation policies in Canada should notbe focused only on the more typical mea-sures such as R&D spending. These donot adequate ly take into account theCanadian context with its unusually highreliance on sectors that are components ofglobal supply chains and that may not relyon R&D spending to achieve greater pro-ductivity.

• Canada’s automotive policy will need tobecome more flexible and proactive. Foster-ing Canadian-based innovation by bothvehicle assemblers and parts makers shouldbe a goal of a new Canadian auto strategythat emerges from the industry’s crisis.

68 NU M B E R 18 , S P R I N G 2009

Life sciences — great promise but mixed results• The strategies of life sciences companies are

strongly science-based and thus are heavilyinfluenced by public policies that supportR&D as well as research and training in uni-versities. Public policies in respect of healthprocurement and regulation are also of greatimportance, particularly for multinationalpharmaceutical firms where there is fiercecompetition among national affiliates forinnovation and product mandates. Thestrategies of the smaller, biotechnology-based companies are very heavily influencedboth by the availability of patient early-stagefinance and mentorship, and by their abilityto strike collaborative arrangements withglobal pharmas.

• The experience of life sciences demon-strates what can and cannot be accomplishedthrough a targeted government policy. Thefederal government set out to generateincreased R&D spending in the life sciencesin Canada and it worked, but it has not yetproduced the expected follow-on benefits,either of a growing pharmaceutical sector ora clearly sustainable biotech industry.

• Additional protection of intellectual prop-erty (IP) could strengthen Canada’s positionas an R&D location. But, more important isthe fact that, with the exception of Quebec,governments do not view life sciences as agenuinely high economic priority and thushave not ensured that procurement practicesare harmonized with industry developmentobjectives.

• Canada’s single-payer health care systemcreates an opportunity to establish a leadingrole in using health innovation to improvethe productivity and quality of the healthcare system. An exceptionally promising ini-tiative is the partnership among the federaland provincial/territorial governments

through Canada Health Infoway to acceler-ate development of an electronic healthrecord.

Banking services — trade-off between stability and radical innovation• The innovation strategies of the major

Canadian-owned banks strongly reflect thenature of domestic competition which hasmilitated against a focus on product innova-tion leadership, being content instead withearly adoption.

• The generally conservative banking andregulatory practices prevailing in Canadahave kept Canadian banks off the “bleedingedge” of innovation in the design and distri-bution of the most sophisticated financialinstruments. This has substantially insu-lated them from the global financial melt-down and made Canada’s banks currentlyamong the world’s strongest (InternationalMonetary Fund, 2008 and World EconomicForum, 2008).

• The success of Canadian banks over manyyears may have dulled their business ambi-tion. With limited exceptions, Canadianbanks were, until fairly recently, content tofocus on the domestic market and to restricttheir international activity primarily tocommodity-type wholesale banking as par-ties to international lending consortia. NowCanada’s banks have become more aggres-sively and creatively outward-looking withmany examples of large investments toestablish a substantive presence abroad.

• The recent turmoil in the banking indus-try g loba l ly has created a window ofopportunity for Toronto to become one ofthe major North American, if not world-wide, innovation centres for the financialservices industry. Canadian banks haveeconomic and strategic decisions to make

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as to where to locate their product andservice development, software program-ming, data centres and other innovativeactivities going forward. With the rightbusiness climate, Toronto has the poten-tial to emerge as a centre not only forthese activities, but also to attract special-ists from around the world to create finan-cial industry products and services.

ICT — A Catalytic Role for Government

The ICT sector is a heterogeneous collec-tion of industries encompassing many differ-ent innovation strategies as the followingexamples illustrate.• The fact that several large players in the

computer industry in Canada are foreigncontrolled has not stunted Canada-basedproduct innovation activity, as has been thecase, for example, in the automotive indus-try. The prospect of government procure-m e n t c o n t r a c t s f o r I C T f i r m s t h a testablished a substantial presence in Canadaprovided — notably in the case of IBM — aninitial attraction that grew into major activ-ities with global product mandates. Thisshows that government’s role as lead cus-tomer can, under the right conditions, pro-v ide the impetus to k ick-s tar t a newindustry. The case of ICT procurement,which catalyzed substantial economic devel-opment, stands in contrast to the very differ-e n t p h i l o s o p h y o f h e a l t h s e c t o rprocurement that has prevailed for pharma-ceutical products.

• Canada became an early leader in satellite andmicrowave communications technology inorder to communicate across a vast geography,a mission that was initially supported by tar-geted government research and enterprise.For example, Telesat was founded in 1969 as ajoint government-private-sector business.

• The climate for new ICT ventures (hard-ware, software, systems and services) inCanada has been quite favourable in viewof (i) a strong base of research and trainingin universities and colleges, and in majorplayers like Nortel, IBM and RIM; (ii)government supports such as the SR&EDtax credit and various laboratories andprograms; and (iii) supportive clusters ofICT subsector activity in several centresacross Canada. The many successes haveproduced numerous role models and angelinvestors, and bred confidence in youngICT entrepreneurs that they could suc-ceed in Canada. Business ambition hasbeen in ample supply although lack of astrong base of leading-edge ICT custom-ers in Canada continues to be a significantdrawback . Unfor tuna te l y, the sha rpdecline in the telecommunications tech-nology sector since 2001 (now exacer-bated by the global recession) has hitCanada particularly hard in view of thiscountry’s specialization in several of themost heavily affected market segments.Canada’s hard-won advantages are now atrisk.

A theme running strongly through theforegoing examples is the key influence ofgovernment, at least at the outset. The roleof government in ICT sectors has typicallybeen catalytic, enabling an innovative line ofactivity to take root and to build scale to thep o i n t w h e r e c o m m e r c i a l v i a b i l i t y h a semerged.

Addressing Canada’s Business Innovation Challenge

Canada has a serious productivity growthproblem. The panel believes that Canadiansshould be concerned about the productivity ofour export-oriented economy as competitionfrom China and other emerging economies

70 NU M B E R 18 , S P R I N G 2009

intensifies. The panel also believes that Canadi-ans should be concerned about the long-runconsequences of continued weak productivityperformance in the domestic economy as thepopulation ages and competition intensifiesamong the mature economies for the besthuman skills, and particularly for entrepreneur-ial talent.

Because Canada’s productivity problem is actuallya business innovation problem, the discussionabout what has to be done to improve productiv-ity in Canada needs to focus on the factors thatencourage, or discourage, the adoption of inno-vation-based business strategies. This is a com-plex challenge because the mix of relevantfactors varies from sector to sector and requiresa broader conception of innovation than theconventional R&D-centred view, which, whileimportant, is far too limiting.

Because there is no single cause of the innova-tion problem in Canada, nor any one-size-fits-all remedy, public policy needs to be informedby a deep understanding of the factors that influ-ence business decision makers, sector by sector.This clearly requires extensive consultation withbusiness people themselves as well as the furtherdevelopment of innovation surveys and otherforms of micro-analysis of the innovation pro-cess.

Overarching the sector-specific factors thatinfluence innovation strategies are certain issuesof pervasive influence identified in the panel’sanalysis that suggest the need for proactive pub-lic policies to:• encourage investment in advanced M&E in

general, and in ICT in particular (suchincentives should be designed only in lightof a more thorough understanding of thereasons for the relatively slow adoption ofICT in Canada to date);

• sharpen the incentive for innovation-ori-ented business strategies by increasingexposure to competition and by promoting a

stronger export orientation on the part ofCanadian firms, particularly in goods andservices that are downstream in the valuechain and thus close to end-users;

• improve the climate for new ventures so asto better translate opportunities arisingfrom Canada’s university research excel-lence into viable Canadian-based growthbusinesses, bearing in mind that betterearly-stage financing and experienced men-torship hold the key; and

• support areas of particular Canadianstrength and opportunity through focused,sector-oriented strategies, such as was donein the past in, for example, the automotive,aerospace and ICT industries.

Fortunately, the many successes of Canadianbusinesses in the hyper-competitive global mar-ketplace show that there is nothing innate orinevitable in the national character that preventsCanada’s businesses from being just as innova-tive and productive as those of other nations.

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