Lack of business ambition undercutting Canada's aim to become a more innovative and productive economy: CCA

Most businesses in Canada lack the ambition to adopt innovative practices with too many successful companies behaving like income trusts rather than venture capitalists says a high-level, 18 member expert panel assembled by the Council of Canadian of Academies (CCA). The consequence is a serious productivity problem that the panel's new report warns could threaten Canada's future prosperity in the face on new competitive forces such as India and China.

Led by CAE Inc president and CEO Robert Brown, the Expert Panel on Business Innovation's zeroed in on the determinants of business strategy as its contribution to the extensive literature on Canada's poor R&D, productivity and innovation performance. It concluded that Canadian businesses suffer from a variety of ills including the nation's reliance on natural resources, too often leading to over-emphasis on the North American market, insufficient value-add and weak contact with the end-user.

"The evidence is overwhelming that we are continuing to fall behind in productivity ... The businesses that appear to be most innovative are those that are vibrating with the customer … People trying to find innovative ways to meet the needs of the customer," says Brown, who leads $1-billion plus technology company that sells into dozens of markets around the world. "Competition is good and should be encouraged. We need a mindset that relates to that if we are going to be successful. Other nations are more commercial than we are."

Entitled Innovation & Business Strategy: Why Canada Falls Short, the report says that history helps to explain why Canadian businesses tend to innovate less than the US or even smaller nations such as Sweden and Finland. The branch plant status of many of Canada's larger firms over the decades has meant that technology adoption rather than technology creation has defined most corporate behaviour. The large US market to the south has also mitigated against the need to go global.

The negative ramifications of such a seemingly widespread attitude of dependency have long been recognized, with the report drawing on observations made by V.O. Marquez, CEO for Northern Electric (now Nortel) nearly 40 years ago.

"Canada's problem is that technology and innovation from parent companies (but also from other easily accessible foreign sources) have been so broadly available ... that the growth of systematic, broad-based indigenous innovative and technological capability has been severely inhibited," wrote Marquez in a 1972 edition of Business Quarterly. "We lack, above all, the entrepreneurial initiative achieved by others, not because their people have greater potential than Canadians, but because their corporations and their countries have been forced to develop more vigorous responses by exposure to severe conditions from which we have been insulated. Technology is not a prime mover; entrepreneurship is."

lagging productivity

The consequences of Canadian business attitudes can be measured in several ways but perhaps the most troubling is Canada's lagging productivity. Canadian companies spend less on new machinery and equipment (M&E) than most of its OECD counterparts and invests less in information and communications technologies (ICT) — the two most effective tools in raising a firm's productivity.

Between 1984 and 2007, Canadian productivity slid from 90% of the US level to 76%. That has contributed to a decline in multifactor productivity (MFP) – factors that contribute to productivity outside of the influences of a firm's capital intensity and the quality of the workforce.

"There's a real depth of analysis and experience on this panel The report will have to be chewed over. It's not a one-day wonder with a bumper sticker message" — Dr Peter Nicholson, president of the Council of Canadian Academies

"Productivity is down 20% between 2001 and 2006. We've lagged behind in machinery and equipment and our use of ICT is 60% of the US level," says Brown. "Companies have to embrace innovation as a central focus of their business strategy … Every business can be innovative whether it's in processes, distribution, manufacturing, design or development."

The CCA was asked to study the issue of low business productivity and examine the factors influencing relatively low investment by Canadian businesses in R&D and advanced technologies in 2007, one of several policy commitments made in the S&T Strategy. The original intention was to examine the issue on a sector-by-sector basis, as many past studies examined the issue at too high a level of aggregation.

four-fold mandate

The mandate was subsequently refined and four questions were posed:

* how should innovation performance of Canadian firms be assessed?;

* how innovative are Canadian firms, and what do we know about their innovation performance on a national, regional and sector level?;

* why is our business demand for innovation inputs (R&D, M&E, skilled workers) weaker than in most OECD countries; and, what are the contributing factors?: and,

* what is the relative importance of these contributing factors?

The panel examined the automotive industry, life sciences sector, banking services and ICT sectors.

CCA president Dr Peter Nicholson says the report benefited from a collection of highly respected panel members who focused on the nature of the problem in all its complexity and detail.

"In the past, we haven't thought big and hard enough about what the nature of the problem is. Previous reports have usually been too simplistic," says Nicholson. "We're turning the telescope around the other way. When you look at the quality and diversity and experience on this panel, you have a unique perspective on this issue … The report will have to be chewed over. It's not a one-day wonder with a bumper sticker message."

While the report intimates that the primary responsibility of increasing innovative behaviour lies with the firms themselves, it addresses the issue of government policy, programs and incentives. The panel notes that Canada stands alone in its heavy reliance on tax incentives — the Scientific Research and Experimental Development (SR&ED) tax credit program. SR&ED costs more than $4 billion in foregone tax revenue and generates about $400 million in benefit s to the economy each year. But the panel states that a fully refundable credit "would strengthen the incentive for larger firms to sustain the pace and continuity of R&D through downturns" and questions whether it should be used in a mix of other mechanisms.

Brown, whose company has lobbied for full SR&ED refundability, says other nations like the US deliver the bulk of its business R&D assistance through direct support. Canadian firms suffering from the financial crisis have no such support.

"If support is delivered directly, there tends to be criticism in Canada," he says. "If there's an economic crisis or exchange rates that affect profitability, the ability to get cash back is impaired. When Nortel had its crisis, they had $2 billion in tax credits on the books that they were not able to translate into cash."

There are other instances where government assistance has done more harm than good. The use of labour-sponsored tax credits created a thriving venture capital industry in Canada that was strong on cash but weak on investment expertise. The result has been a crippled VC industry that has virtually withdrawn from investing in early-stage tech companies.

bottom line message

Despite the wealth of detail contained in the panel's report, the overriding message is both clear and concise: Canada's productitivy problem is overwhelmingly an innovation problems, compounded by too many upstream industries with little contact with customers and a small fragmented market offering smaller rewards for innovation and attracting fewer competitors.

"There are exceptions like Sweden and Finland which built markets all over the world but we've had a different history," says Nicholson. "We're more comfortable upstream in North American value chains and we innovate in processes and ways to meet specifications at continually lower costs ... The report's message is, innovation interpreted broadly is at the heart of Canada's productivity challenge. If you want to understand innovation, you have to understand the reasons for why companies adopt or do not adopt innovation strategies."

The full 246-page version of the report will be available in the coming weeks once translation is completed.

Note: The on-line issue of this article contains a list of the 18 expert panel members.

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