Analysis: Is Canadian business as innovative as it needs to be? By Peter Nicholson

While the definition of innovation is fuzzy around the edges, there is no doubt that Canadian business, on the whole, is an innovation laggard by all the standard indicators, such as R&D as a share of revenue, patents per capita, proportion of scientists and engineers in the labour force, etc. This has been the case for decades, indeed as far back as our statistical records go. Yet Canada's businesses, large and small, have been among the world's most successful.

In short, Canadian business has prospered without being particularly innovative by the standard measures. Moreover, this has not been due just to the good fortune of our resource endowment, the prices of which until recent years had been on a long-term declining trend.

We have prospered primarily because we have effectively been integrated in a North American (i.e. US-centered) economy that for much of the past century has been the most dynamic in the world. (This integration long precedes the FTA/NAFTA.) For reasons of history and endowment, Canada's role in the North American economy has been primarily at the "upstream" end of integrated value chains dominated largely by US firms such as automotive, information technology, aerospace, chemicals, machinery, and even many of the big resource producers in forestry, mining and oil & gas.

As up-stream producers, Canadian companies specialized in delivering on specs set further down-stream in the value chain, and usually employing technology and management methods (i.e. innovation) developed in the US and elsewhere. Many Canadian companies have nevertheless been excellent "plant floor" innovators, continuously tweaking their own operations to meet tighter cost and quality specs. But this kind of activity does not tend to show up in the standard innovation indicators.

The bottom line is that Canadian business is not very innovative because it hasn't had to be. This has nothing to do with greed or incompetence. While such vices may sometimes explain the behaviour of individual companies, they do not explain the decades-long behaviour of the economy as a whole. Canadian business has responded rationally to the incentives it has faced. Meanwhile, the impact of government "innovation" policies has been relatively weak when compared with continental market forces.

The big unanswered question is whether the future will be pretty much like the past in terms of the incentives facing business in Canada. It seems not. As Asia rises, the US will decline in relative terms. As the population ages, labour will become scarcer and more expensive, putting a greater premium on innovation that leads to productivity increases.

As resource prices sustain a relatively high C$, the rest of the trade-exposed economy must become more innovative to stay in business. In short, Canadian business is now feeling forces in the market that will require it to become much more focused on global markets and on innovation as a core strategy.

For many, this demands a very significant change in mindset and business culture. There are government policies that can help, but mostly it will be up to businesses themselves to meet the challenge. With some casualties along the way, I believe that Canadian business, as a whole, will be up to it.

Peter Nicholson is the former president of the Council of Canadian Academies and a former senior executive in both government and industry.