Q&A: Finance Canada's Dan Breznitz on his prescription for innovation in Canada
April 20, 2022
Canada has long mistaken invention for innovation, says Dan Breznitz. Today, his fingerprints are all over Budget 2022, especially the creation of a new Canadian Innovation and Investment Agency (CIIA).
Breznitz's titles are many: he’s the Munk Chair of Innovation Studies at the University of Toronto’s Munk School of Global Affairs & Public Policy, a professor in the university’s department of political science and the co-director of the Munk School’s Innovation Policy Lab. He’s also a fellow of the Canadian Institute for Advanced Research where he co-founded and co-directs the program on Innovation, Equity and the Future of Prosperity.
Most recently, however, he was appointed as the Clifford Clark Visiting Economist at the federal Department of Finance Canada to advise on innovation policy. His advice may have made an impact. In her Budget speech, Finance Minister Chrystia Freeland acknowledged Canada’s failing performance on economic productivity — a situation she described as “insidious” and an obstacle to the government’s growth agenda.
The Budget’s announcement of the CIIA coincided with an abandonment of a program modelled on the U.S. Defense Advanced Research Projects Agency (DARPA). Breznitz has praised the change in direction and argued that Canada’s most pressing need isn’t so much cutting-edge research but the use of existing technologies by the business sector. “(CIIA) will be an experimental agency to try to find policies that work … It can work very quickly because it’s independent and can decide to stop things that don’t work, which is important,” he told Research Money.
In his book Innovation in Real Places: Strategies for Prosperity in an Unforgiving World, Breznitz spells out four stages of innovation, roughly defined as the creation of the product, design, constant improvement of the product, and production and assembly. He argues that Canada has been too focused on the first stage, which has led to continuous failure in innovation.
With a foot in theory and another in the inner workings of government, he’s an ideal policy expert to explain Canada’s innovation challenges. After the federal budget was released, Research Money caught Breznitz for a phone interview about his book and how Budget 2022 could be making his policy prescriptions a reality.
I want to ask you about the budget first. Instead of funding for CARPA, we’re getting a Canadian Innovation and Investment Agency to spur the rate of private investment. You’ve criticized the idea of a DARPA lookalike in the past. Why is this new agency a better use of resources?
Canada made a pragmatic decision about how we will have innovation in this country. There has been a massive investment in education and research, and a very reactive system, mostly built around SR&ED, which was somehow supposed to create demand for this. The reality, and again, in Research Money you have talked about it constantly, is for at least 20 years now, we have a BERD [Business Expenditure on R&D] that is going down year by year. It's now the lowest in the whole OECD.
Together with that, it's not just R&D but engagement with new technologies by the Canadian business sector is abysmal. For a country that wants to move into the green economy and not become poorer in it — energy and other stuff are our main exports — it's impossible to do as long as your business sector does not engage with it.
[The federal budget] says we have a systemic, complex problem, and we're committed to do anything in our power, experimenting the hell out of it, until we find something that works, so our children ... will have a better life than we do.
Dan Breznitz, Clifford Clark Visiting Economist, Finance Canada
That has been our failure for 20 or some years, while at the same time Canadian labour has become the most educated in the world… The number and quality of Canadian inventions and ideas surpasses any nation on earth, but they become innovation, growth, welfare, prosperity, out of Canada. The reason is not only that the business sector doesn't do R&D, but by now, after 20 something years, the gap between the capacity of our business sector to actually deal with new technologies and R&D and the quality of our cutting-edge research is so high that that is a serious systemic problem. Into that system — there's no vacuum when you have great ideas in a global economy — comes the multinationals. They grab all of our inventions and make them into innovations.
The critical thing that you have to do in such a system is to change the trend of the business sector. That's massive and systemic behaviour change. What this budget has done is finally publicly admit that that's our problem, and publicly admit that this is a very complex problem.
For that, [they] created an independent innovation agency whose main role, if you actually look at the money, is to experiment and find things that work. I would see it as a culmination of a process that started with the clusters, the Strategic Innovation Fund — all of those, if you look at what has happened since this government started, is understanding that something is wrong but not yet fully admitting it.
Which then answers your question about why CARPA was abandoned… We have realized that over 20 years we have poured a huge amount of money into invention and research, and we continue to do that, but if you don't fix [the capacity] of the business sector, it will not turn into innovation for Canada. That's a serious problem because for the past 46 years, we've become the most educated labour force in the world but our median wages have stagnated. Basically, two and a bit generations didn't have significant growth in the quality of their life and their salaries, while they are significantly more highly educated than their grandparents or even their parents.
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Let's talk about your book. What does it mean for Canada to mistake invention for innovation?
Innovation is not invention. Invention is that you and I will go back to a lab at a university, for example, and develop a new molecule that can cure cancer, OK? And we'll even show that it might work and might even get three or four patents. That's still invention. Innovation is the actualization of ideas, the implementation of ideas into the economy in order to create new or improved products and services. It comes from all stages: from bringing a new molecule and actually creating drugs from it, to improving production to recombining technologies, to figuring out how to make them cheaper and more reliable, to do after-service on it.
Let's talk about an example of a technology we all use now thanks to COVID, and that's Zoom, Teams and teleconferencing. Since you are in the media, you might remember that 10 years ago, if we needed to do teleconferencing, both of us will try to avoid it like the plague because it means we'll have to go to a special room that will cost god only knows how much—both the room and using the room — and the quality will be awful. Today, or since COVID, all of us open Zoom or Teams or whatever, and immediately we do teleconferencing in a reasonable quality. In a good quality. More importantly, it works on any computer, laptop or tablet that you have, and we don't even think about the cost.
That has happened and that's completely transforming human welfare when that happens. And that happens not because someone invented teleconferencing. That's a very, very old technology. It happens because you have millions of engineers' hours on constantly improving algorithm efficiency, data communication, CPU transfer, cameras, everything until you reach a point where you take it for granted and the whole world changes.
In your book, you spell out four stages of innovation: the creation of the product, design, constant improvement of the product, and production and assembly. Can you talk about what you think is essential to understand in these stages?
Today, as soon as Apple comes out with an idea for a new product and stabilizes it as a blueprint, it's being shipped to somewhere else. And the way that the global system now works—and people in Canada finally understood that, because we suddenly don't have semiconductors, for example — is that whole industries are now fragmented into very specific stages. If you look at places around the world, they specialize not just in an industry but in a stage of that industry.
Multiple places have focused their innovation capacity around different stages, and if you look at the fortunes of most people in the U.S. versus most people in Taiwan, it is not at all clear that what you want is a Silicon Valley instead of TSMC [a Taiwanese multinational semiconductor manufacturer] and Hsinchu Park [Hsinchu Science Park, an industrial park established by Taiwan's government]. Silicon Valley is completely focused on quick financial exits, because that's what venture capital needs in order to make money. In that model, you have the peak elites, which are the graduates of the best universities, their financiers, and a few celebrity chefs because everybody is a foodie now.
[They] make a huge amount of money in salaries and then they have a lottery ticket called stock options, which might allow them to become a billionaire. But there are zero positive spill-overs to the rest of the [population] that actually find it more and more difficult to even live around those people, because prices go up.
In your book, you outline a few areas that defy the Silicon Valley stereotype, including Taiwan, but also Tel Aviv in Israel, the Riviera del Brenta in Italy and Shenzhen in China. Are there commonalities to these places that understand innovation and place to their strengths?
Yes, there are two kinds. One, they actually understand what is innovation and what is invention. Two, they actually understand that we are talking about a global system, and in order to excel in a global system you have to understand what your companies give to the global system. Multinational companies will come to your region looking for that. And how you also institutionalize the flows so you have the knowledge, both of the new technologies but also the trends. And then they figure out how you create a system that actually sustains their competitive advantage in that stage. Instead of just copying stuff that looks cool because it's American — venture capital and DARPA — they actually look and say 'OK, here is what we need in order to excel.' Even if we take a model like a science park or VC, we're going to tailor and change it so it will help our kind of business models and develop our kind of skills, our kind of companies.
The second is that they actually had a reasonable, pragmatic vision of what it means to be successful. When I mean reasonable, pragmatic vision, I don't mean 'oh, we want to be really innovative and have a lot of patents and a lot of VCs.' They said, if we're successful, those are the kinds of companies that we're going to have. Those are what they're going to supply the global networks. And that's how our society and economy is going to look in 10 or 15 years. Now that we have this [vision], let's reverse engineer. And innovation policy is one of the tools of getting there.
Most of the other places that failed, even if they tried innovation—some just failed because they couldn't understand it—but those that tried and failed, they understood that innovation is cool and therefore they need to do something about it. But they had no idea how it would help them reach a very pragmatic goal. They wanted to be the Silicon Valley of the north and then, awesome, what does that mean? What kind of companies do you have? What kind of people do you employ? What kind of business model? What kind of financing? None of those questions were answered, and the result, when you do such a thing, is always failure.
The 2022 budget mentions innovation agencies in Finland and Israel. Is it correct to read your influence there?
I would like to think so.
What are the lessons from Finland and Israel we should take from?
Everyone here in Canada talks about Israel, and for a good reason. But I think we should look at Finland much, much more. It's a northern, big country with a relatively low population. And more importantly, highly reliant on a resource economy. Until the 1980s, it was as bad if not worse than what Canada is today. It was reliant mostly on bilateral trade with the USSR. It has managed — and that's why I want us to learn from Finland and not just Israel or the US — to use public policy leadership to completely transform their economy.
It has completely transformed its pulp and paper and forestry industry. By 2000, all of that industry was what we now call the industry 4.0. It was completely wireless, completely IT controlled and automated. Finland's companies who developed these technologies, with government help, now lead the world in oils made from natural resources.
This was a transformation that made the whole industry, both the resource industries, the traditional industries and the new industries, more innovative. And Finland is one of the most educated countries in the world. If you look at PISA, the educational K-12 [rankings], you'll see that at the top of PISA, there's a country called Finland and a country called Canada. They have done what we have done, but they have also managed to do a complete transformation on innovation. And, I want to repeat, in all industries. Canada is a huge country and we need an innovation policy — or innovation policies — that work for all of Canada, not just for Vancouver, Montreal and Toronto.
As we close, what is your overall view on this budget?
The most important thing in this budget is that Canada now admits what works and what doesn't work for innovation. And therefore, where, if not necessarily how, where the government should focus if it wants all of us to have a better Canada. And by that, I mean innovation that creates local prosperity and not just massive profits. If you look at the budget, humility is important here. The budget, unlike other budgets, does not say we have ready-made answers and that we have already found the solutions.
Instead, it says we have a systemic, complex problem, and we're committed to do anything in our power, experimenting the hell out of it, until we find something that works, so our children — remember, I'm saying our children so I'm talking long-term here — will have a better life than we do. I think that is a paradigmatic change.
This interview has been condensed and edited for clarity.