In a setting that defines innovation — the Perimeter Institute for Theoretical Physics located in Waterloo’s high-tech community — a recent summit on innovation found near-universal agreement that Canada has a serious innovation problem, and that this threatens our future well-being as a country. By almost any measure, Canada lags when it comes to innovation.
It is innovation that drives productivity, and it is through sustained growth in productivity that a nation’s economic well-being is sustained. Productivity becomes even more important as society ages. Canada’s poor innovation performance — notably in the business sector — explains why Canada’s productivity gap with the United States and other countries has widened significantly over the past couple of decades.
Why is this happening and what do we do about it? These were the questions asked at the symposium on Canada as an innovation nation, sponsored by the BMO Financial Group and Policy Options/IRPP, which brought together business representatives, university presidents, policy wonks and community leaders to come up with answers. They had an important audience — Finance Minister Jim Flaherty and Science and Technology Minister Gary Goodyear spoke and were present for the entire symposium.
Both Flaherty and Goodyear voiced concern that business spending on R&D, adjusted for inflation, had declined since 2006. Flaherty noted that businesses in countries like Sweden, Finland and Israel are much more committed to R&D and warned that “we are at risk of being left behind.” He called on businesses to use part of their record levels of cash to commit to more R&D.
“Canadian business should demonstrate its confidence in our economy,” he said. Echoing Flaherty, Goodyear said more businesses “must begin to prioritize innovation in their business strategies,” adding that “if businesses are doing the same thing today that they were doing five years ago, they are in serious trouble.”
One problem, Open Text Executive Chairman Tom Jenkins argued, is that important sectors in the Canadian economy — financial services, telecommunications and transportation, for example — are shielded from competition. Competition leads to innovation, which leads to productivity gains, he said. But if companies are making high profits in a sheltered environment there is no incentive to innovate. Jenkins also chaired the expert panel reviewing federal policies that support R&D, which reported on October 17.
More scathing criticism came from Bill Currie, vice-chair of Deloitte Canada. In a new report — “The Future of Productivity: An Eight-Step Game Plan for Canada” — he identified six key issues facing Canada: business leader risk aversion; inefficient and insufficient support for innovation; lack of risk capital for start-up companies; chronic under-investment in machinery and equipment; sheltering of the Canadian economy; and increasing competition for human capital.
Canadians, he said, are “fat and happy,” but in fact the country is falling behind with the risk that today’s children will not have the same standard of living as their parents. Currie offered an eight-point agenda to improve Canada’s performance: ensure our education system fosters entrepreneurship and innovation at all levels; re-tool the immigration system to attract and fully utilize skilled immigrants; improve the effectiveness of R&D; bolster the pool of risk capital for new and growing businesses; create a national clustering strategy; boost business investment in machinery and equipment; encourage the flow of foreign investment; reduce trade barriers and pursue new markets.
Symposium participants had no trouble agreeing that the country has a serious innovation challenge and that our business community has to play a much greater role in addressing the challenge. Risk aversion, though, is an issue in our business community and public complacency is also a problem. Universities and colleges are becoming more international and focusing on engineering, business and science skills that are important for innovation. But business has to take a stronger lead since much innovation has to be business-driven.
Although the summit shied away from specifics, it was clear there were some important policies Canada could adopt to stimulate business investment in innovation. There was a consensus that much of our future innovation will come from small and midsized businesses — innovative entrepreneurs or high-growth companies — and government can do more to support their innovation and growth, including addressing the Valley of Death problem (the financing of an innovation from concept to commercial introduction).
Universities recognized they had to do a better job of linking with industry to help companies innovate, in addition to graduating a skilled and flexible workforce and advancing the frontiers of knowledge. Feridun Hamdullahpur, president of the University of Waterloo, explained that while Waterloo and other universities were working hard to improve their capabilities, other countries may be moving faster than Canada. He also stressed that the university was trying to give all its students a global mindset. Elizabeth Cannon, president of the University of Calgary, argued that since countries such as China are graduating far greater numbers of engineers than Canada, Canada has to focus on quality and, as she put it, push the knowledge envelope in disciplines that are the feedstock of the knowledge economy.
Within universities, Ryerson University president Sheldon Levy said, there is a large and energetic current of innovation that can be tapped. He pointed to the Digital Media Zone at his own university where undergraduates, graduates, faculty and business mentors are helping to create a future generation of businesses — companies that are doing everything from developing wireless mapping systems for airports, subway systems and commuter rail or easy-to-use e-health records to new RFID devices to prevent shoplifting, creating a brain-controlled prosthetic and designing an Internet system allowing artists and art-directors to interact.
As well, there was a recognition that there are some modest but high-yielding ways in which Canada can boost innovation in small and midsized companies, or generate new sources of angel and venture funding, although, as Suzanne Fortier, president of the Natural Sciences and Engineering Research Council said, we also need cultural change.
First, we could give a major boost to the base funding of the Industrial Research and Assistance Program (IRAP) ansform it into an arm’s length agency separate from the National Research Council where it currently resides, with its own accountable president and board of directors. IRAP’s record in assisting SMEs pursue innovation is exemplary. Despite its importance in boosting innovation in companies, it is seriously underfunded and most years runs out of money well before the fiscal year is over, leaving many innovation projects in business stranded.
Second, by enabling more companies to monetize their unused SR&ED tax credits, companies would have stronger cash flow and greater ability to grow their businesses through innovation. At present, only small Canadian-controlled private companies can get refundable credits. SMEs that are forced to go public to raise capital or that bring in a minority foreign partner or investor are immediately penalized because they no longer can receive the refundable credit.
There are other examples of how to get more money into the hands of innovative entrepreneurs. The BC investment tax credit program provides a 30 percent refundable tax credit for investments of up to $200,000 annually in eligible small businesses or venture funds, provided the money is deployed for at least five years. The program has paid for itself several times over in tax revenues from growing businesses and their employees.
There was a consensus that much of our future innovation will come from small and midsized businesses — innovative entrepreneurs or high-growth companies — and government can do more to support their innovation and growth, including addressing the Valley of Death problem (the financing of an innovation from concept to commercial introduction).
Canada could also consider an idea in the Ontario Liberal platform, to provide a tax benefit to companies investing in venture capital. Right now, the Canadian private sector is sitting on an unprecedented pool of liquid assets, in the range of $400 billion, while venture funds have dried up. There is a need to get some of that money into the hands of innovative entrepreneurs.
Provinces are initiating some steps on their own, as the BC and Ontario examples show. But it is also important that federal and provincial measures be aligned. An effective innovation nation strategy requires a high level of federal-provincial collaboration for maximum effectiveness. That means that governments of different political stripes have to be able to work together. Innovation cannot be seen as a zero-sum game, in which one province’s gain is seen as another’s loss. A boost in innovative activity in any province benefits the entire country.
There is another challenge. The ongoing foreign takeover of Canada’s innovative tech companies — Zarlink, DALSA and Tundra Semiconductor being recent examples — is seriously hampering Canada`s ability to create more world-scale companies with the capacity to profit from globalization and underwrite the risks in serious innovation. No one at the symposium had an answer to this problem — the fact that we may simply be creating the seed corn for foreign multinationals, or as one of Ottawa’s former top officials has put it, “growing guppies to feed the sharks.”
But given how few multinationals we have been able to grow in recent decades — Magna International, Bombardier, CAE, RIM and Open Text are among the few examples — Canada will be handicapped in establishing a big presence in growth markets such as Asia. If our future Magnas and RIMs are sold early in their business lives, we will have a problem.
The Canadian experience shows that we have the enterprising talent — native-born and immigrant — to launch highly innovative companies. There are literally thousands of examples. The Waterloo summit heard from one of them Ali Asaria, who in 2007 left a good job at RIM to start his own company, Well.ca, which has become one of Canada’s fastest-growing e-commerce companies, dealing in health and beauty products. What we lack is the ability to grow small companies into big companies.
The Waterloo symposium enabled the airing of issues. But there is an urgent need for action. Other countries are active in pushing innovation, especially the US. In a federation such as Canada, this can best be accomplished through close federal-provincial collaboration. While governments are focused on deficit reduction, the fears of a slowdown in economic growth or even a return to recession means we may need a bit more stimulus, and advancing the innovation agenda would be a constructive way to do this.