Canada falls behind countries like Singapore, pictured here, whose national innovation strategy is prized in the global economy.Getty Images
The seventh in an eight-part series of challenges facing Canada's foreign trade. This week's challenge: Canada's innovation
Canadian exporters rely heavily on our natural resource wealth but the intensely competitive global economy prizes research, development and innovation, and on those counts we seem to be perennially behind the competition.
The challenge for Canada, the country in which the BlackBerry was invented, is to build a culture of innovation that will add value to existing products, create new ones and boost productivity. Out of 17 nations that belong to the Organisation for Economic Co-operation and Development (OECD), surveyed by the Conference Board of Canada, Canada ranked 14th. Governments are trying harder than ever to foster innovation, says Glen Hodgson, but the private sector has been slow to rise to the challenge.
Glen Hodgson, the Conference Board's senior vice-president and chief economist, has spent years studying Canada's struggles to innovate, and says the situation is at last beginning to turn.
You hear many definitions of innovation. What is innovation?
For me innovation is really simple. It's small changes that create value. I don't like these highfalutin definitions. It's really a commitment to small change to create value within an organization. Innovation is not the BlackBerry. That's an invention. Innovation is a willingness to bring about change every day in how organizations operate, in ways that add value. It's really a series of very small steps that when you put them all together creates a whole movement of constant change.
For economists, innovation is a black box. I'm trying to take apart that black box and understand it. It is a cultural thing. I'm not sure it can be imposed from outside. The culture is embracing change.
I have a hypothesis that some of the structural forces are changing around us right now. We may be at an inflection point where we're actually changing the curve on innovation.
What do you mean?
Look at what's happening right now in terms of machinery and equipment investment in our economy. The last two quarters, Statistics Canada has shown the [machinery and equipment]investment rate is taking off. We've had spectacular growth rates for two quarters. We have a big current accounts deficit because imports are strong - we're importing machinery and equipment. That for me is symptomatic of an economy that may be going through a real re-thinking of innovation. Innovation gets converted into hard things through investment. Right now our economy is investing very quickly in new technology, new process. I think that's very much driven by the strong dollar and by the fact that our biggest trading partner is going through a really tough patch. And that's compelling firms to reinvent their business model on the fly.
But it seems Canada has always been behind. Why?
We didn't innovate much because we didn't have to. We were able to use either high commodity prices or soft currency or cheap and plentiful labour to be as competitive as we had to be. I can probably take us back to the Borden decision on tariffs in 1918 or 1919 that led to the creation of the branch plant economy, as forming that culture. A non-innovation culture. We didn't really build a strong business entrepreneurial class in Canada. We tended to manage American capital right up to the Free Trade Agreement. Over many generations we weren't building an innovation culture in Canada. Arguably that should have started to change with the FTA, which was in 1989, but we then went through a period when the currency was weak and we continued exporting to the U.S. relying on a cheap dollar. None of that contributes to an innovation culture.
I'm hoping we're at a tipping point where global conditions are changing. We see China as a competitor, but also as a cheap input into whatever we're manufacturing within Canada. I think the strong dollar is going to compel us to think very differently about business strategy, the way it does the Swiss: a chronically strong currency country which has to innovate because if they don't, they die.
The latest figures on research and development spending as a percentage of Gross Domestic Product in the OECD show we are trending down when pretty much everyone else is trending up.
We're a leading-edge spender when it comes to the public sector but our private sector is not a big spender on R&D.
What is going on when the rest of the world is going up, even in difficult times, and we're not?
That's an excellent question and I don't have an answer. That's a symptom of the absence of innovation in our economy. Historically, we have not been big spenders on new ideas. Or the spending happens on campus and never gets converted into the marketplace. And all our research confirms that we're really lousy at commercialization: Taking ideas out of the lab, putting them into the market and making money on them.
Where should we be focusing our attention to turn things around?
Clearly this is the time for the private sector to step up in a much bigger way. They have to take a lot more responsibility for generation of new ideas and commercialization of those ideas and they have to become the leader on the innovation file. I think to a great degree our governments have done the right thing. We've had all the adjustments in business taxation, elimination of capital taxes, [Finance]Minister [James]Flaherty wants to bring down corporation taxation, the provinces do, too, even things like the HST are designed to make a more competitive tax base for Canada. Our governments are spending a lot on R&D. The ball is really being passed to business.
Can you name some countries that go beyond their natural resources and develop new, innovative industries?
Singapore and Israel are the poster children of countries that have really developed a national innovation agenda. Because they had to. Singapore is a unique place, a city state of 2 million people. If you're going to raise incomes in a country with no resources, you have to use your brainpower. They've done that in many ways, from financial services to being the logistics pivot point within Asia.
Israel is a very different case. It's a country that has always been threatened by its neighbours. Innovation is really the driver of Israel's economy. There's a good book out about Israel called Start-up Nation: The Story of Israel's Economic Miracle. Israel is physically constrained. It's in a permanent state of conflict. It's developed systems that have led it to have an incredible share of new ideas. Through patents and the generation of new ideas. There's a strong linkage between Israel, Silicon valley and other dominant idea centres in the world.
The question is, are they special cases or do they actually do something that can be replicated in Canada?
What's the answer?
They may well be special cases but I do think the conditions are changing here right now. Or we could be like the Dutch and just go out of business. Dutch disease is an expression that was coined in the Netherlands in the 1970s when they found gas offshore in the North sea. And just like Canada, that put chronic upward pressure on their currency, having these huge reserves and huge foreign exchange earnings, and that challenged all of Dutch manufacturing. Many companies did not adapt very well and they disappeared. It contributed to the deindustrialization of the Netherlands during that period.
Our trade is based today not on digging ore out of the ground and shipping goods, either finished products or commodities; it's really part of an integrative process. We want to be as competitive as possible in that integrative world. We can't rely on the currency. We're going to have to start using our brainpower.
We haven't been until now?
A: We have a productivity gap compared to almost everybody else among the major industrialized countries that leaves us almost $7,000 poorer than the average American. That didn't happen overnight. That wasn't the consequence of a financial crisis. It was a 25-year process. All roads come back to innovation.
Maybe adversity is a necessary precondition for innovation?
A: I'm really struck by the fact that there's a lot less whinging and moaning out of the business community than there was three years ago. When the dollar broke through par last time, my goodness, the screaming! You could hear the screaming across the country. People were really suffering. Government made certain adjustments like accelerated depreciation allowances. Then we had the recession. Now we're back to where we were in 2007-08. A lot less moaning this time. It really sounds like business is getting it: that the rules really have changed, and they've got to roll up their sleeves. And maybe that's the precondition to creating an innovation culture in Canada.
For insights and perspectives on addressing this challenge, read the upcoming solutions article later this week.