Canada ignores innovation potential of service sector at its peril: report

Canadian policy makers are neglecting the potential of the service-producing sector by focusing primarily on the goods-producing sector and encouraging existing R&D performers to increase their spending, states a new report. Entitled Improving Canada's Business Innovation Performance, the report argues that increasing the participation rate of service sector firms — particularly in areas where higher levels of R&D are expected — would have a significant positive impact on Canada's innovation performance. The service sector accounts for 70% of gross domestic product.

"Any innovation strategy needs to address the participation rate disparities of the goods and service sectors, to develop programs geared to service sector innovation, and eliminate obvious barriers," states the report. "With the right tools in place it should be easier to stimulate R&D growth in (the service) sector than in the goods-producing sector."

Of the roughly 25,000 firms that conduct R&D, less than half are from the service sector, suggesting much greater potential to increase R&D output if participation rates are increased. Yet policy makers seem unconcerned or unaware of the potential.

"Governments are not listening. People are fixated on the small stuff they can get their heads around and are not prepared to ask the larger questions," says report author Ron Freedman, principal with The Impact Group. "We need to do research and, when we understand the sector better, develop specific programs for the sector. We did it for digital media."

The service sectors that hold the most potential for increased participation are finance, insurance and real estate, transportation and warehousing and healthcare and social assistance. The sectors currently have an R&D intensity (R&D as a percentage of sector GDP) of barely 0.5%.

Freedman notes that most service sector firms get their innovation from activities classified as social sciences and humanities, but those types of activities are excluded from most business assistance programs and tax credits like the scientific research and experimental development program.

"The government could consider direct funding programs like IRAP (Industrial Research Assistance Program) to be used for social sciences innovation," says Freedman. "First we need to understand the sectors better — their structure and dynamics — and look for growth opportunities on a sectoral basis and particular leverage points ... As a country we seem unable to re-look at fundamental assumptions. We tinker at the margins."

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