IN THE MEDIA ~ The Hill Times ~ Canada falling behind global competitors when it comes to innovation

Canada falling behind global competitors when it comes to innovation

As the government looks to spur productivity through tax credits, opponents say it's time to invest in key drivers of innovation.

Chris Plecash

Despite having one of the most stable G7 economies since the global recession of 2009, Canada continues to fall behind other countries when it comes to innovation. The government has focused on tax credits as a means to incentivizing private sector research and development, but opposition critics say that the complexities of Canada’s innovation deficit require broader initiatives.

“Quite frankly, we have unacceptably low levels of support for R&D and innovation in many parts of the Canadian private sector,” acknowledged Finance Minister Jim Flaherty (Whitby-Oshawa, Ont.) at the Policy Options sponsored Innovation Nation Symposium in Waterloo on Sept. 16. The event, hosted by the Perimeter Institute for Theoretical Physics, aimed to foster innovation by bringing together business, government and universities.

“Our future success depends on the ability and willingness of the private sector to innovate and commercialize ideas. Accelerating the transfer of knowledge from research institutions in universities and government to the marketplace will help build a culture of innovation in business,” said Mr. Flaherty, who went on to warn that Canada’s failure to compete in the digital economy could lead reactive economic and social policy making in the future.

Prior to the latest quarter in which GDP declined by -1 per cent, Canada’s economy has grown gradually since coming out of the last recession in the fall of 2009, yet over that same period Canada has drifted out of the World Economic Forum’s ranking of the 10 most competitive national economies.

In its summary report of the World Economic Forum’s 2011-2012 Global Competitiveness Index findings, the Conference Board of Canada reports that since the beginning of the economic downturn in 2009, Canada’s global competitiveness ranking has dropped from 9th to 12th place among 142 nations. The Conference Board’s summary report, Treading Water: Canada is Gradually Losing Its Competitive Edge, notes that although Canada has performed well coming out of the recession, it’s being surpassed by nations such as the U.K, Denmark, and the Netherlands.

The World Economic Forum’s index takes into consideration infrastructure, education, market efficiencies, and other key indicators in determining its rankings. When it comes to innovation, the Conference Board notes that although Canada boasts an efficient, skilled and educated labour force, “its ability to turn this knowledge and expertise into commercially viable products or services is limited.”

Canadians’ skills and industriousness are going to waste. The country ranks 71st among 142 countries when it comes to competitive advantage. “Canadians continue to be excellent hewers of wood and exporters of the country’s natural resources but we need to take advantage of people’s skills and expertise to develop other lucrative value-added products, services, and markets,” the report states.

It’s not just one bad report card. According to the Toronto-based Institute for Competitiveness & Prosperity, Canada under performs when it comes to productivity and innovation—two interconnected factors. Despite working the same average number of hours as their American counterparts, Canadian workers’ enjoy a significantly lower level of prosperity. The institute’s 2011 study, Canada’s Innovation Imperative, reports that Canada’s per capita GDP is estimated to be $10,000 lower than that of the United States.

“Canadian businesses continue to trail their U.S. counterparts in investing in machinery, equipment, and software to make their workers more productive,” the report notes, citing under investment in information communications technology as a barrier to greater innovation within Canadian workplaces.

While businesses have indirectly undercut workplace innovation by limiting spending on equipment, the report finds that the private sector has also limited innovation directly by under investing in research and development. As a result, Canadian companies are producing fewer patents, which means less made-in-Canada commercialized innovations. The World Economic Forum ranks Canada 11th when it comes to securing patents.

Industry Minister Christian Paradis (Mégantic-L’Érable, Que.) acknowledges this “innovation gap” in this week’s issue of The Hill Times. Minister Paradis writes that the government is focused on promoting commercialization of research and private sector investment in telecommunications.

“Businesses in other countries spend more on research and development,” adds Minister of State Gary Goodyear (Cambridge – Dumfries, Ont.). “Put simply, we need our private sector to prioritize innovation and better integrate into business strategies.”

This month a federally appointed panel chaired by Open Text chief strategy officer Tom Jenkins is expected to release an assessment of the government’s $7-billion in annual investment in “business and commercially oriented R&D,” which includes the SR&ED tax credit, federal grants programs, and the public financing of research by government agencies and post-secondary institutions.

The Scientific Research & Experimental Development (SR&ED) tax credit accounts for nearly half of the government’s $7-billion in annual R&D investment. The program provides businesses with a 35 per cent tax credit on the first $3-million of R&D investments, and 20 per cent on all additional R&D investments.

Despite the generosity, capital for early-stage innovation investment remains scarce. Canadian investors have long been risk averse, as the Science, Technology and Innovation Council (STIC) notes in its 2010 State of the Nation report. The federally funded advisory committee found that the private sector invests only one per cent of GDP—$15-billion—in research and development.

The forthcoming Jenkins Report may recommend an increase in the percentage of the SR&ED tax credit, or extend the credit to a greater amount of R&D investment, but this alone is unlikely to entice Canadian companies into becoming substantially more productive and innovative. According to the STIC’s report, Canadian businesses have underinvested in R&D for 40 years.

“One approach to stimulating more investment at that level would be something like an Angel investment tax credit,” says Andrew Dunn, lead expert on Canada’s tax system for Deloitte, which is currently advising the Canadian government on its deficit elimination plan. British Columbia already has such a system in place. Similar to the SR&ED tax credit, B.C.’s Investment Tax Credit program provides British Columbia residents a 30 per cent tax credit on investments of up to $200,000.

Mr. Dunn told The Hill Times that Canada’s recent economic stability has coincided with a slide in innovation because of breaks from historical trends. “Canada once had a relatively low dollar that provided a cost advantage to invest in Canada and trigger further productivity. That’s an advantage that is far less prevalent today, but prior to the high dollar that was a factor that provided incentive.”

In addition to the benefits of a low dollar, Canadian exporters have also historically enjoyed privileged access to a demanding U.S. market, which further incentivized innovations by Canadian manufacturers. “We still have access to the U.S. market, but that market isn’t what it used to be,” observed Mr. Dunn, who is doubtful that either the Canadian dollar or U.S. demand would return to their historical levels any time in the near future.

The debate between the government and the opposition on improving Canada’s innovation record follows the lines of the current debate on the economy. While the government is committed to further corporate tax cuts as a means to stimulating private sector R&D, critics have proposed additional measures with the potential to spur innovation by investing in Canada’s human capital.

NDP Industry, Science and Technology critic Peter Julian (Burnaby-New Westminster, B.C.) emphasizes investment in Canada’s telecommunications infrastructure and post-secondary institutions. Both measures would have the potential to boost productivity, and facilitate further innovation by improving linkages within Canada’s knowledge-based economy.

Green Party Leader Elizabeth May (Saanich-Gulf Islands, B.C.) describes Canada as having a “patch-work of uncertain and inconvenient day care options” that make raising a family unaffordable for low-income earners. Reliable, publicly-funded day care would provide a boost to Canada’s slow growing population. Statistics Canada reports that Canada’s population grew by an average rate of 1.1 per cent in the last decade, and projects that rate to decline in coming years, which threatens to provide a further drag on Canada’s innovation record.

“The important question is, what are our priorities?” asks Liberal MP Geoff Regan (Halifax West, N.S.), who serves as his party’s critic for industry and consumer affairs. Mr. Regan said that the government has the opportunity to invest in education, particularly aboriginal education, at a time when the economy is in need of continued stimulus.

“It’s very disconcerting that at a time when our productivity has been falling, we see the government looking at a variety of cuts and not really investing the way they need to,” said Mr. Regan, who questioned the government’s commitment to scientific research.

“I don’t think it’s enough of a priority for this government. If you look at their attitude towards the census or climate change, many members of the Conservative caucus seem to have antipathy towards science in general,” Mr. Regan added, citing the recently introduced omnibus crime bill as an example of the Conservatives’ apparent disregard for research.

It will take innovative policy making to adequately address Canada’s innovation gap. A range of factors have contributed to Canada losing some of its competitive edge, including the high value of the Canadian dollar, the country’s low population growth rate, low population density, inadequate telecommunications infrastructure, and inherently risk-averse investors.

“Innovation is a means to increasing productivity, and ultimately productivity generates a higher standard of living and better infrastructure throughout the country, which further reinforces growth and productivity,” explains Andrew Dunn.

“There’s no silver bullet here. There’s no single factor that is going to resolve this,” Mr. Dunn observes, adding the importance of innovation clusters to the list of factors contributing to a nation’s innovation record. “Nothing can happen instantaneously. Even if we do six things, that only creates the conditions in which innovation can play out.”

The Hill Times