DISRUPTING CANADA’S
LOW-INNOVATION EQUILIBRIUM
Presentation to Research Money Conference
by
Peter J Nicholson
Ottawa, 17 May, 2012
CANADA’S INNOVATION PARADOX
Conventional wisdom: Business innovation is the
principal driver of firm competitiveness and
long-run economic prosperity
The Canadian business
sector is an innovation
laggard—e.g.
 Feeble MFP growth
 Low R&D spending
 Middling up-grading
 Few tech-based MNEs
…but Canada’s economy
continues to produce one of
the world’s highest standards
of living; and Canada’s
business profitability, in
aggregate, matches that of
the US.
This benign state of affairs has
persisted for decades…
through good times and bad.
Canada’s “low-innovation” business behaviour has delivered
GDP PER CAPITA: CANADA AS % US
1870-2005
WHAT CREATED THE LOW-INNOVATION EQUILIBRIUM?
I. Canada’s small and fragmented domestic market is:
(a) less attractive to foreign competitors who go first
where opportunities are greatest;
(b) less likely to reward the risk of investment in major
innovation.
…but what about Finland, Sweden, Taiwan, Switzerland?
II. Canada’s Upstream Role in North American Value Chains
U.S.: Full-spectrum,
end-user-focused
innovation strategies
Canada: Truncated, branchplant innovation strategies
Resource
extraction
Processing
Assembly
Sophisticated
End Products
Profitable linkages with the US have powerfully shaped business strategy and culture
CANADA LACKS A “SERIOUS” INNOVATION POLICY
Federal governments, of both parties, have never
sustained the commitment needed to encourage
Canadian business out of its low-innovation equilibrium
 Innovation policy largely an R&D policy with academic intermediaries
 Innovation file always assigned to a junior Minister
 PM’s Science Advisor never gained traction—compare Korea, Japan, US
 Revolving door of S&T agencies and advisory bodies
 Government S&T establishment largely ignored as an economic asset
 SR & ED tax credit is innovation policy on auto-pilot
The low-innovation equilibrium has been working—so why really try to “fix” it ?
LONG-RUN PERSPECTIVE ON GROWTH
GDP PER CAPITA: 1870-2005 (US $ 000 at PPP)
35
30
The Canadian and the US
economies have been
“joined at the hip” …
Will the future mimic the past?
25
20
USA
Canada
15
10
China
5
0
1870
1885
1900
1915
1930
1945
1960
1975
1990
2005
DISRUPTING THE LOW-INNOVATION EQUILIBRIUM
Commodity-Driven $C Soars
Jobs & Productivity Diverge
(Canada as % US)
120
110
1.10
Employment to Population Ratio
1.00
100
PAR
0.90
90
0.80
80
Labour Productivity
70
0.70
60
0.60
50
0.50
1976
1981
1986
1991
1996
2001
2006
2011
Min US 63.7 cents
1982
1987
1992
1997
2002
2007
Unit Labour Cost Surges, Eroding Competitiveness of Many Canadian Businesses
140
Index in $US at PPP: 2005=100
130
120
US
110
100
90
80
CANADA
70
60
50
Source: OECD
40
1994
1996
1998
2000
2002
2004
2006
2008
2010
FUNDAMENTAL STRUCTURE-DISRUPTING FORCES
GLOBAL ECONOMIC REBALANCING
Emerging markets opportunities
versus continued US focus
RESOURCES DEMAND AND SUPPLY
AGEING POPULATIONS
Continued strong $C for now but
intensifying global R&D for substitutes
Tightening labour supply implies rising
labour cost—productivity imperative
TRANSFORMATIONAL ICT
Profound and continuing disruption of
markets and business models
These forces are already making Canada’s low-innovation equilibrium untenable
WHAT ROLE FOR PUBLIC POLICY?
The structure-disrupting forces will (eventually) force Canadian business to
be much more innovative.
Wise and potent policies can make the transformation faster, more efficient
and of greater overall benefit for Canadians.
ADDRESS TRANSFORMATIVE FORCES
For example:
*Major push into emerging
markets (and not only China)
*Hypercharge the “Digital Economy
Strategy” (remember that?)
*Strengthen the “innovation
intermediaries” between ideas
and markets
MAKE INNOVATION A REAL PRIORITY
For example:
*Upgrade the “file” and go
beyond the R&D ghetto
*Rebuild internal capacity
to engage with business
*Work co-operatively with
Provinces and cities. Make
it a truly national endeavour
…but the old habits of both business and governments will not easily be changed
ANNEX SLIDES
CONVERTING “RESEARCH” INTO “INNOVATION”
Trained People; Promising Ideas
Research Problem Identification
Priority setting
Universities
& Colleges
• Tech Transfer Offices
Commercial
Businesses
Degree of Focus
Degree of Focus
Problem Solving, Mentoring, Financing…
• Public Research
Institutions & Programs
• Incubators
• Angels & VCs
Basic
Research
Knowledge Translation & Mobilization
(Innovation Intermediaries)
Development
& Marketing
Need more business ‘demand-pull’ to complement ‘research-push’
THE CHALLENGE OF MULTI-INSTITUTIONAL COLLABORATION
UNIVERSITIES
Research
Motivation
Create and
share knowledge
TRANSLATION &
MOBILIZATION
Ideas to
Innovation
BUSINESSES
Use and control
knowledge
Time
Horizon
Mid-to-Long
Variable
Short-to-Mid
Individual
Rewards/
Incentives
Tenure, promotion and
professional
recognition
Variable
(Major challenge for
organizational design)
Money and
authority in the
firm
Institutional
Temperament
Institutional
continuity,
organizationally-loose
Ranges from
bureaucratic to
entrepreneurial
Goal-focused,
organizationallytight
Organizational innovation needed to meld cultures and incentives
BUSINESS INNOVATION SUPPORT IN BUDGET 2012
IRAP
R&D Internships
Business-led NCEs
2012-13
2013-14
2014-15
2015-16
110
7
12
110
7
12
25
37
110
?
12
35
37
110
?
12
35
37
110
?
12
40
37
?
?
?
550
14
60
135
185
67
60
?
241
194
194
199
1071
-35
-315
-480
-500
-1330
206
-121
-286
-301
-259
Procurement
Business-Academic Collaboration
Re-focussing NRC
Genomics Research
37
67
10
50
Western Innovation Program
TOTAL NEW TARGETED SPENDING
243
Reduction in SRED
NET INCREASE (DECREASE) IN
SUPPORT
243
2016-17 5-Year Total
Source: Estimates from text and tables in Budget Plan
INNOVATION POLICIES VS. STRUCTURAL CONDITIONS
Business R&D as Percent of GDP
1.4
BERD as % of GDP
1.2
1.0
Tech Boom
Collapse
0.8
Prosperity
Initiative
Canada-U.S. Free
Trade Agreement
0.6
Strategic Aerospace
& Defence Initiative
Technology
Partnerships Canada
0.4 “Modern” version of
R&D Tax Credit
Canada’s
Innovation Strategy
Creation of
NABST
0.2
NAFTA
0
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Data Source: OECD, 2008c
Only the tech boom and collapse have had any major impact on BERD ratio
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Disrupting Canadas Low-Innovation Equilibrium