State of the Nation 2008

2. Overall Assessment of Indicators

Section 2 summarizes the assessment of sets of indicators presented in the Digest of Key Indicators found in Section 4.

2.1 Business Innovation Indicators Assessment

More companies need to recognize the important role that technology and innovation can play in their business strategy and performance. An entrepreneurial culture is important in fostering innovation at all levels of society, from the scientists and managers who bring science to the market in the form of new products, to the workers on factory shop floors who devise more efficient ways of running their production lines and find new applications for their equipment. Those Canadian firms that do more research and development (R&D) have greater sales of new products and are also more productive.

In general, Canadian firms have increased their R&D investments, but in relative terms, we are falling behind our major competitors, and the gap is growing. Previous studies have shown only a few industrial sectors account for the low aggregate business R&D intensity in Canada relative to the United States (U.S.). In these studies, almost the total gap is accounted for by low business R&D intensity in the services sector and the motor vehicle industry. However, sectoral differences in business R&D intensity and the reasons for differences between comparable Canadian and U.S. industry sectors are not particularly well understood.

Recent analysis by Statistics Canada has shown that when industry structure is taken into account for machinery and equipment investment, most Canadian industrial sectors are less capital intensive than those in the U.S. In the case of machinery and equipment investment that is not related to information and communications technologies (ICT), the gap with the U.S. is about 12 percent. The deficit is more pronounced for ICT investments — about 33 percent.

Amongst the countries compared, Canada ranks 7th for the percentage of Gross Domestic Product (GDP) invested in venture capital. This is expected to worsen because of the current global credit crunch.

Not only does Canada spend less on machinery and equipment, but we do not, as a rule, develop the equipment in Canada. More than 55 percent of manufacturing plants that introduce advanced technologies to the market in Canada are most likely to be technology purchasers. There is considerable user-driven innovation taking place with 42 percent of firms either modifying the technology they purchased or developing technology themselves in-house.

The Organisation for Economic Co-operation and Development (OECD) has begun to compare total direct versus indirect support by government of business R&D for the 13 OECD countries for which data are available. Their findings show that when direct support is added to the value of indirect support of business R&D, Canada has the richest government support of business R&D, as a percentage of GDP, just edging out the U.S.

Canada's government support of business R&D in 2005 was equal to 0.23 percent of GDP, just ahead of the U.S., where government support of business R&D was equal to 0.22 percent of GDP. While the total (i.e. indirect plus direct) government support of business R&D is similar, 90 percent of Canadian support was for indirect measures (the business R&D tax credit), while 80 percent of government support in the U.S. was for direct government funding of Business Enterprise Research and Development (BERD), and only 20 percent of U.S. government support of business R&D went for indirect measures. Direct government funding of business R&D, coupled with effective procurement policies, have proven successful for economic development in knowledge-based societies like Finland, the U.S. and Korea.

Finally, open innovation is growing as firms increasingly collaborate with their customers, suppliers and research institutions to source new innovative ideas, products and services. Canada's poor performance on a range of indicators, including examining the percentage of firms collaborating with each other or with other research organizations in innovative activities, is troubling.