There is no reason for Canada to be an innovation and productivity laggard. Governments can and should play a leadership role, and it is not all about spending – part of their role is framing the questions and convening the players.  

Business, university and labour all need to be part of the innovation leadership imperative. We need to make the question, “what will it take for Canada to build an innovative and productive economy?” part of our ongoing public discourse, as well as the continued focus of future budgets.

We are in the midst of a changing world order. Structural trends are reshaping economies, societies, and politics and the economic centre of gravity is shifting to Asia. The demographics of aging are putting an incredible premium on skilled workers. This is a world where productivity and innovation are at the root of the new competitiveness.

Innovation is the ability to create new products, produce existing products in new ways, and develop new markets. It drives productivity. A more productive economy grows faster, adapts better, and supports higher wages, more jobs and improved living standards. It helps answer the question of how a high-wage economy like Canada’s can compete with those of emerging countries.

Herein lies Canada’s challenge: we are a sophisticated economy, with a well-educated and multicultural workforce, but a chronic under-performer in innovation and productivity. In fact, Canada’s business productivity level is now only 72 percent of the U.S. Moreover, our business spending on R&D is one percent of GDP, half of what U.S. businesses spend, and places us 20th among OECD countries.

In a world where competitiveness is increasingly defined by creativity and flexibility, Canada cannot sustain above-average living standards and below-average innovation investment, especially with a Canadian dollar around parity, weak U.S. and European demand, and growing demographic pressures.

When speaking with businesses and researchers about our innovation challenge, eight factors frequently surface as elements to be considered in attempting to make Canadian business, universities and government more productive and innovative. We will use these as a framework to look at the 2012 Budget through an innovation lens.

  • Leadership, creating a better understanding of why productivity and innovation are in everyone’s interest – business, workers, unions, civil society government;
  • Shifting to more direct innovation support, with greater sectoral targeting and critical mass, and away from Canada’s excessive reliance on indirect support for private sector innovation;
  • Retooling the financing for innovation, particularly building a viable and effective venture capital sector;
  • Strengthening our university research underpinnings, with a relentless focus on global excellence and better commercialization;
  • Expanding public-private innovation partnerships, because both bring essential insights to the innovation table;
  • Increasing market competition and regulatory flexibility, to stimulate new ways of doing things;
  • Retooling our education norms, to equip new graduates for success in the global marketplace of tomorrow; and
  • Moving to greater market diversification, particularly towards the dynamic emerging economies of Asia and the Americas.

A number of these elements were touched upon in the recent federal Budget, a welcome sign that the government recognizes the importance of innovation to our long-term competitiveness and prosperity.  There was the beginning of a shift to more streamlined indirect innovation support and a redirection of tax expenditures to more direct support.

This Budget is changing the way the Scientific Research and Experimental Development (SR&ED) tax incentive works in two ways. First, for greater simplicity, capital will be removed from the expenditure base and there is a commitment to improve the design, predictability and flexibility of the program. Second, there will be a reduction in the general tax credit and resources will be shifted to direct forms of support, including the Industrial Research Assistance Program (IRAP).  

Financing for innovation, especially venture capital, is an area where Canada lags other economies, and this clearly inhibits our ability to create and build innovation-driven firms. The 2012 Budget committed to make funds available for venture capital in several ways: to help increase private sector investments in early-stage risk capital; to support the creation of larger-scale private sector venture capital funds; and to support BDC’s venture capital activities.  

Business-linked university research was a feature of the budget. Funding was allocated to the Canadian Foundation for Innovation to support Canada’s advanced research infrastructure and to the granting councils to enhance their support for industry-academic research partnerships. Public-private innovation partnerships support innovation because they align applied research resources on issues critical to business. The Budget committed funding to double the size of the Industrial Research and Development Internship program, which helps graduate students undertake hands-on research in innovative firms. As well, it allocated funds to the National Research Council to refocus on business-led, relevant research and doubled support to the IRAP.  

Companies often become more innovative by necessity – when they are forced by competition. The government took some initial steps in the area of increasing competition and improving regulatory flexibility by announcing the introduction of targeted improvements to the foreign ownership review process and legislative amendments to lift foreign investment restrictions in parts of the telecommunications sector.

The Budget laid out the priority the government places on market diversification, particularly toward dynamic emerging economies. It promised to intensify Canada’s pursuit of new and deeper trading relationships with emerging markets in Asia and elsewhere. As well, it proposed to refresh the Global Commerce Strategy, to align our trade and investment objectives with specific high-growth priority markets and ensure Canada is branded to the best advantage.

And, to support firms to compete globally, Canada needs to ensure our education norms meet the needs of the new global marketplace, including languages and cultures, entrepreneurship, and international business skills. The 2011 Budget announced an expert Advisory Panel tasked with recommendations to deepen educational links between Canada and international institutions. A start, but much more needs to be done by governments at all levels to foster a next generation workforce that is more innovative, collaborative, multilingual and creative.

Kevin G. Lynch is vice-chair of BMO Financial Group and a former Clerk of the Privy Council. Karen Miske is a senior advisor with BMO Financial Group.