New report calls for greater education investment and more sophisticated innovation policies to ensure future prosperity

The latest annual report from the Institute for Competitiveness & Prosperity (IC&P) argues that Canada must increase its investment in education and develop innovation strategies that go beyond the traditional focus on scientific invention or risk falling further behind other knowledge-intensive jurisdictions. The report says the current period of recovery from the recession offers opportunities to rectify the situation by implementing robust, outward looking policies that strengthen international collaboration and better harness Canadian creativity and entrepreneurship.

IC&P says that directing more resources to education is critical to regain ground lost in the 1990s when cuts to federal transfers to the provinces and similar moves at the provincial level prompted either/or decisions between education and health care. Many studies have noted the positive correlation between investment in education and resulting higher labour quality with per capita economic growth rates, as well as significant regional spillover benefits that result in increased economic activity.

The report singles out Ontario for its recent efforts to boost post secondary education through its Reaching Higher program and concludes that wider access and more master's graduates are priorities for the future. The difference in Canadian and US graduate rates is almost completely due to Canada's lower levels of master's grads, significantly contributing to the $9,300 gap between GDP per capita between the two nations.

At the same time, the report warns against reversing the current trend towards lower corporate taxation, adding that if increased taxation is absolutely necessary, government should boost the goods and services tax which most economists contend will have little impact on productivity or competitiveness.

Public policy on innovation must also change to reflect the diversity of factors that impact competitiveness and prosperity, the report argues. The current policy orientation towards the hard sciences in the granting councils results in many key disciplines not being properly funded. It singles out fellowship programs which do not apply to graduates from business education programs and the "insignificant portion" of funding through the Social Sciences and Humanities Research Council devoted to academics associated with the nation's business schools.

"Leading technology firms are founded by science and engineering graduates. But successful innovation requires a balance of science and other skills such as management problem solving and communication. These other skills are important to achieve a successful transition from start-up to thriving businesses," states the report.

"Our public innovation strategies need to become more sophisticated and balanced. We need to recognize that supporting science for new inventions is not enough; we need to create an environment where business people draw on new science and many other disciplines to innovate, creating new products, services and processes."

— IC&P Report on Canada 2010

"Until our federal and provincial governments recognize the need for a balance between the hard sciences and the humanities and between science and engineering and management skills, their efforts will lead to more inventions but inadequate business innovation in the Canadian market."

The report says that while the federal government appears to consider innovation policy as a priority, it characterizes the innovation-related initiatives of the latest federal Budget as "misguided" and "flawed" with an "excessive focus on building our capacity for scientific invention".

The report contends that the persistent gap in US and Canadian business investment in machinery and equipment has closed in recent years as the value of the Canadian dollar gained in relation to its US counterpart. The gap (measured in investment per worker) stood at 23% for all machinery, equipment and software, rising to 34% in 2000 and declining after 2002 until it reached 18% in 2009.

While the decrease is viewed as positive, the report points out that the remaining gap is almost entirely in investment in information and communications technology (ICT), which stood at 37% or $1506 per worker. For all other machinery and equipment the gap was just $78 or 2%. It notes that recent federal moves to eliminate tariffs on manufacturing machines and equipment by 2015 will further reduce the gap and open up opportunities for expanding trade with other nations.

Closing the ICT gap is viewed as a major opportunity to close the prosperity gap between the two countries, although the report acknowledges that Canada fares extremely well when compared to the most prosperous of its international peers. Canada currently ranks 4th after the US, Netherlands and Australia and ahead of Germany, Belgium, the UK, France, Japan and Italy.

The report concludes that the two factors discouraging business investment in technology (including R&D) have been relatively high taxation rates on capital investment and lack of competitive pressure on Canadian businesses. Both factors should be assisted by recent decisions in Ontario and British Columbia to significantly restructure their taxation of business investment and the opening up of trade with China, Europe and other jurisdictions. The report concludes with an extensive examination of China's economy, the production of skilled workers and progress on becoming more innovative.

Overcoming traditional attitudes that encourage risk aversion and stifle an outward perspective is a key challenge, according to the report, which says embracing tolerance, talent and technology (3Ts) is critical to "generating sustained economic growth and prosperity". The assertion reflects the contributions being made to IC&P research by the affiliated Martin Prosperity Institute headed by Dr Richard Florida (R$, December 23/08).

Now in its 10th year, the IC&P has expanded its focus to include the work of Florida, who gained an international reputation for his research into the benefits of the so-called creative class in fostering innovation and enhancing competitiveness.

The report's general policy thrust, however, is towards open markets and resistance of the temptation to follow the US lead and embrace protectionism. That includes erecting barriers to block foreign takeovers of Canadian firms. It notes that the recommendations of the 2008 Competition Policy Review Panel are consistent with the work of IC&P.

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