ARCHIVE: INSIDE OUTLOOK

Canada’s Innovation Gap: At a Positive Tipping Point?

Glen Hodgson, Senior Vice-President and Chief Economist, Forecasting and Analysis

January 24, 2011

Canada does not have a culture of innovation that underpins strong and sustained productivity growth. Canada ranked 14th in innovation among 17 major Organisation for Economic Co-operation and Development nations in The Conference Board of Canada’s most recent report card, How Canada Performs. Governments are trying harder than ever to foster innovation, but the private sector has been slow to rise to the challenge. The situation, however, may at last be beginning to change.

Defining Innovation

For me, defining innovation is quite simple. Innovation is changes—both large and small—that create value. Innovation is not the BlackBerry—that is an invention. Innovation is a willingness to bring about change every day in the way organizations operate. It is a series of small steps and larger bold initiatives. When put together, they generate constant value creation.

Innovation requires an organizational culture that embraces change. Such a culture is hard to measure and estimate, but it clearly exists in some organizations and is absent in others. A culture of innovation cannot be imposed from the outside; it is something that both leaders and employees must embrace and put into action. For the most part, Canadian organizations have not demonstrated a strong innovation culture.

A culture of innovation cannot be imposed from the outside; it is something that both leaders and employees must embrace and put into action.

Why has Canada not been more innovative? Because we have not had to be. We have been able to rely on solid commodity prices, or a soft currency, or the absence of strong domestic competition, or plentiful labour to be only as competitive as required. Decisions made over 130 years ago to implement protective tariffs eventually led to the creation of a branch plant economy, resulting in the absence of a strong Canadian entrepreneurial class and helping to form a non-innovation culture. Canadians tended to manage American capital and firms in Canada, rather than creating our own. Arguably, Canadians’ attitudes toward innovation should have started to change after the Canada–U.S. Free Trade Agreement (FTA) took effect in 1989. But the Canadian dollar weakened in the years following the FTA and we continued to export to the U.S. by relying on a cheap currency.

Reaching a Tipping Point

All of a sudden, Canada may be at a tipping point on innovation. Strong structural forces are demanding that Canadian organizations innovate or be pushed aside. We see four major drivers behind this possible innovation tipping point:

today’s strong Canadian dollar, which makes exports less competitive but imports cheaper;
a demanding period of adjustment for our biggest trading partner, the United States;
the “China factor,” meaning increased global competition from major emerging markets, but also more opportunities for diverse business inputs and foreign sales; and
the prospect of slower workforce growth.

Together, these factors are compelling many firms to reinvent their business model on the fly.
Canada’s international business today is no longer based only on trade in goods, either finished products or commodities; many firms are part of a larger global integrative process. Firms need to be as competitive as possible in this “integrative trade” world. They cannot rely on a soft currency to compete any longer—Canadians will have to start using their brainpower for competitive advantage.

Strong structural forces are demanding that Canadian organizations innovate or be pushed aside.

Is there economic evidence of a tipping point? Statistics Canada figures for the last three quarters show that investment in machinery and equipment (M&E) is taking off. The Conference Board’s Canadian Outlook expects M&E investment to grow by nearly 15 per cent annually in both 2010 and 2011. As a result, Canada had a large current account deficit in some recent months because M&E imports were very strong. Rapid growth in M&E investment and related imports is a symptom of an economy that is trying to stay competitive by boosting productivity. The number of patents filed by Canadian businesses was also up significantly in 2010, increasing by 20 per cent. A real rethinking of innovation could be under way.

Private Sector Needs to Step Up

Canadian governments have gone a long way toward enabling innovation, through such efforts as changing business taxes by eliminating capital taxes, lowering corporate income tax rates, and harmonizing sales taxes in some provinces. These reforms will create a more competitive tax system for Canada. Governments are also spending significant sums on research and development.

Clearly, now is the time for the private sector to step up in a much bigger way. Business has to take more responsibility for generating and commercializing new ideas.

When the Canadian dollar was last at par with the U.S. dollar three years ago, businesses across the country called out for assistance from government. This time around, there is a lot less public complaining about the strong loonie. Businesses may finally be getting it; they may now understand that the rules really have changed and they have to begin to innovate and adapt to the forces of globalization. This understanding is the critical precondition to creating an innovation culture in Canada.

We will need more evidence than three quarters of data, but if current M&E investment growth trends continue through 2011, Canada may eventually reach a positive tipping point on innovation.

Glen Hodgson
Senior Vice-President
and Chief Economist,
Forecasting and Analysis