New synthesis report on Canadian innovation warns of future challenges

Paradox Lost

Canadian businesses are only as innovative as they need to be but dramatic changes will be necessary if they are to successfully compete with powerful forces that threaten the nation's continued prosperity. That was one observation of a new report from the Council of Canadian Academies (CCA) that distills the work and conclusion of seven previously published reports on Canadian S&T and innovation.

Entitled Paradox Lost: Explaining Canada's Research Strength and Innovation Weakness, the brief document provides several powerful, previously made observations but updated to the current environment and viewed through the lens of three of Canada's foremost business policy leaders. What the report adds is the identification of at least two paradoxes that help explain why Canada's strong academic research base has not enhanced business innovation and how the Canadian economy has remained strong in the face of low productivity and lagging innovation performance.

Paradox Lost was unveiled in Ottawa last week by Dr Peter Nicholson, an expert on business innovation and former CCA president. Authored by Nicholson, Dr Bob Fessenden and Marcel Côté, the paper concludes that unless Canadian businesses adapt to four emerging megatrends which are "changing profoundly" the business innovation environment (see chart), their track record of low R&D spending and poor productivity will persist, negatively impacting their ability to compete globally.

"These megatrends have changed the game. Canadian business is, for the most part, ill prepared to compete," states the report. "Canada's fundamental challenge is to transform its commodity-based economy to one based on providing a greatly expanded number of markets with an increased variety of goods and services where firms must compete primarily through product and marketing innovation."

"Our challenge was to boil down 1,000 or so pages into something people wanted to read. I think a novel and relevant message emerged over its 25 pages. The primary audience is the innovation policy community but also includes the academic research community," says Nicholson, the report's "primary pen holder" who was directly engaged in three of the reports covered by the synthesis document. "

From a policy perspective, Canadian policy makers must shift from a research pull to a demand pull paradigm to effectively craft policies and programs that assist businesses in their quest to remain competitive. The report says the necessity for companies to enhance their innovation strategies offers an opportunity for policy makers to adjust their business innovation support programs so that "innovation policy objectives and business motivation will be finally aligned".

The report's main observations of Canadian research and business innovation are well-known, widely accepted and the focus of two of the CCA's most recent expert panel reports: The State of Science and Technology in Canada (R$, October 10/12) and The State of Industrial R&D (R$, September 10/13). What the latest report adds is the identification of two paradoxes: research strength has not translated into greater business innovation, yet the Canadian economy has demonstrated resiliency despite low productivity and innovation performance.

The basis of the first paradox is the persistent belief that innovation is a linear process — a contention the report labels "crude and misleading". The second paradox is explained with the conclusion that "Canadian firms have been as competitive as they have needed to be", bolstered historically by a lower dollar relative to the US, an ample labour supply and proximity to the US — the largest, most innovative economy on the planet.

When the low dollar vanished as a competitive advantage, Canadian business benefitted from a commodities boom spurred by skyrocketing demand from China and other emerging nations.

disrupting Canada's low-innovation equilibrium

Canada's "low-innovation equilibrium" is now being challenged by other powerful trends and the onus is on business and policy makers to respond in ways that enhance the ability of companies to succeed globally.

"A high-wage economy like Canada cannot sustain its prosperity indefinitely without healthy productivity growth and its necessary prerequisite — an aggressively innovative business sector," states the report.

Over the past 30 years, the productivity gap between Canada and the US has continued to widen and the report cites Canada's multi-factor productivity as the main culprit. "This is where Canada falls down. It's the best proxy we have for our disembodied innovation," says Nicholson.

Weak business R&D is also cited as a major source of Canada's chronic productivity weakness. Nicholson says low R&D intensity in the manufacturing sector is the primary cause of the gap in R&D intensity between Canada and most of its competitors. In manufacturing, the US dominates in high- and medium-level manufacturing activities whereas Canada dominates at the lower end.

"That's all you need to know about low business R&D," he says. "It worked for more than 100 years. It's easier and cheaper for Canadian companies to acquire US innovation."

But the report is quick to note that R&D is only one of several factors contributing to the problem. The report's authors embrace a firm-centric, innovation ecosystem approach to address the issue — one that was fleshed out in the CCA's 2009 report, Innovation and Business Strategy: Why Canada Falls Short (R$, April 30/09) .

"Canada needs to start thinking about innovation in ecosystem terms and the difficulty is, innovation systems are a complex animal that cuts across jurisdictions," says Nicholson, who laments the decision by Statistics Canada to eliminate innovation surveys that would help with this type of complex analysis. "Operationalizing policy is tough but it (innovation ecosystems) is the right paradigm ... No one really knows what the right measurements are and Statistics Canada is being fiscally constrained."

Nicholson also argues that Canadian policy makers appear to have forgotten much of the previous work on innovation and industrial policy which remain prescient from today's perspective. He says one policy report that looms large over all others is 1970's A Science Policy for Canada, a.k.a. the Lamontagne Report after its author Maurice Lamontagne, an economist, academic and DM in the mid-1950s government of prime minister Louis Saint Laurent. The massive four-volume report from the Special Committee of the Senate on Science Policy was released between 1970 and 1977.

"It's still very relevant. Lamontagne went back four or five decades to the beginning of the National Research Council in 1916 and we also need to go back to the historical record. The amount of academic writing on innovation and the economy is not as good as it was in the 1950s and 1960s which is why this synthesis report puts an emphasis on the historical record," says Nicholson.

Much of the current work on innovation and S&T policy has been undertaken by the CCA, which Paradox Lost distills, highlighting the contributions to the field on academic research, industrial R&D and associated measurement and indicators.

The report draws on the 2012 CCA report on the state of Canadian S&T (a follow-up to a 2006 report), particularly its unique methodology for assessing research strength in nearly 200 fields of research and technology. That report incorporated original research into the quality and reputation of Canadian S&T and devised a multi-lens methodology which was applied to 22 major fields and 176 sub-fields covering the complete research spectrum including the social sciences and humanities.

"The CCA has developed a really outstanding methodology ... There's a wealth of information at a very fine grain but in a sense, who's listening," says Nicholson. "People in these fields should take a look at it to see how they stack up. Go back to the CCA database which is very detailed.. By self-examination, that will have a positive effect on the development of academic research over time. It's an important methodology and we need to build on it."

For industrial R&D, Paradox Lost highlights the CCA's work of examining the historical development of corporate R&D including proximity to the US, Canada's wealth of natural resources and the impact of landmark US legislation breaking up the monopoly of AT&T. It highlights observations made by Vernon Oswald Marquez, CERO of Northern Electric (1967-71) on the motivations for business R&D and innovation:

"Canada's problem is that technology and innovation from parent corporations, but also from other easily accessible foreign sources, have been so readily available, so economically attractive in the short term, that the growth of systematic, broad-based, indigenous innovative and technological capability has been severely inhibited, said Marquez in 1972. "It is uncertain whether any incentive plan to stimulate the growth of domestic technology and innovation, or to make corporations expand aggressively into foreign markets, can achieve significant success when it is applied to companies in which the drive to do these things has not already been forced to emerge because of exposure to a real stimulus from the economic environment. What we seem to need in Canada are ‘small catastrophes'".

Nicholson says that if Nortel had not been cut off from its major source of innovation, it would never have been compelled to conduct its own R&D, leading to the first digital switch and major breakthroughs in fibre optics that drove the corporation to unprecedented heights in global markets.

But reaching back to capture past wisdom is only one of the challenges facing Canadian innovation. Reports such as Paradox Lost typically enjoy a short public profile before being relegated to the bookshelf. Nicholson says it's imperative that the report's findings receive wide exposure.

"Too much good work is not effectively marketed. This report needs promotion," he says. "It's important for certain leaders in the private sector to provide leadership. If they speak up, their colleagues will listen."

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