Business Innovation in Canada

Canada is weak at business innovation. Our weakness is a major part of the reason why our national productivity performance is mediocre, year-in and year-out. Poor productivity, in turn, harms our competitive position in the world and affects our standard of living.

The international evidence for innovation performance consistently shows Canada, as benchmarked against its peers, ranking in the middle of the pack, or worse. Both the Conference Board’s annual Report Card on Canada and the World Economic Forum’s World Competitiveness Report have highlighted the fact that the problem stems largely from poor business innovation performance by firms. The case for action to transform our firm-level innovation to world-leading status is compelling.

Many explanations for poor innovation performance have been proposed over the years, by academics, industry groups, think-tanks and government bodies. Most have focused on public policies such as taxation, R&D tax credits, regulations, or on market structural issues. Some organizations have argued that there is a lack of sufficient risk capital, scientists, engineers, or qualified business managers. Others have looked at firm and entrepreneurial behaviour, such as management willingness to take risks or to build globally competitive large corporations. But these studies have been limited by a lack of sufficient data and information. Consequently, more conclusions have been reached from beliefs and opinions than from actual evidence.

Where and how to take action? Some major attempts at solutions have already been tried. For example, great progress has been made in reducing the business tax burden in recent years. However, we have not seen hoped for gains in business innovation performance.

Is it because the tax changes were not focused on innovative firms? Did regulatory and other public policy roadblocks get in the way? Did Canadian firms fail to adapt quickly enough to the forces of globalization, by internationalizing their business through the development of global value chains and greater openness to the use of foreign direct investment? Or is it because there are internal issues within Canadian firms that are preventing them from taking advantage of lower taxes to become more innovative?

Currently, firms appear to be under investing in innovation related technologies. For example, investments in information and communication technologies—“embodied innovations”—have lagged in Canada compared with the United States, and there is evidence that these investments boost productivity. So why are we not seeing more Canadian businesses investing in these technologies—especially given the strong Canadian dollar and growing global competition?

So far, there are no conclusive answers—or solutions—to these firm-level issues. A major roadblock for business and government is the lack of comprehensive data and information for diagnosing the problem. Once that solid evidence is obtained, the next steps will be to create firm-level strategies and reinvigorate the policy environment to encourage firms to innovate.

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