State of the Nation 2010

7. Conclusion

An excellent talent pool and increased efforts by government, higher education and some industries are not preventing stagnation in Canada's overall innovation performance. This assessment is based on an evaluation of indicators that measure more than R&D expenditure and is reflected in slowing productivity growth in many industries.

Despite an overall economic performance the past two years that has exceeded that of its major trading partners, the current level of effort by all performing sectors has not been sufficient to bring Canada's expenditures in R&D to the G7 average. As a country we have seen our R&D to GDP ratio decline. Expenditures on R&D in China and Korea have outpaced strong GDP growth in those countries (Figure 2).

In real terms, R&D expenditures by the higher education sector have been increasing. Funding to higher education is the largest component of federal R&D expenditures and this component continues to increase in real terms (Figure 7).

Canada's low private sector research and development participation limits overall innovation performance. While higher education R&D continues to increase, business R&D expenditures have been decreasing in real terms since 2006 (Figure 4). Canada's business R&D spending in many industries is also low by international standards. OECD data in 2005 indicate that, in 8 of 16 industries it tracks, Canadian businesses' performance of R&D falls below the OECD average in the same industry. Canada's lagging business R&D is a function of both its industrial structure, in which research-based industries comprise a relatively small part of the economy, and of the relatively lower R&D expenditures of other industries.

Canadian industry also tends to invest significantly less in ICT equipment than selected comparator countries — exceptions being in utilities, post and telecommunications, wood manufacturing, and public administration and defence. R&D and investment in ICT both contribute to productivity-enhancing innovation.

While investment in ICT by Canadian industries generally lags such investments in other countries, some Canadian sectors, such as the finance and insurance sector and the mining and quarrying sector, seem to purchase more IT services compared with the same sectors in other countries. Some companies may benefit from ICTs through the purchase of IT services, as well as investment in ICT capital. This indicator bears watching.

Industry clusters are a promising area for building paths for knowledge transfer and product development. Large companies play a smaller role in funding R&D in Canada than in other leading innovative countries. This may indicate a weak receptor capacity for spotting and using R&D or inadequate consideration of innovation opportunities in corporate strategies. Small technology intensive companies have strong receptor capacity and could benefit from the marketing and financing know-how in large companies. Both large and small companies can source talent and ideas by building strategic relationships with higher education institutions and with each other.

Current best efforts are not getting us to where we want to be. Looking ahead to a period of government restraint around the globe, Canada has the best opportunities to move forward provided industry seizes leadership in doing so. The job of those who partner with industry (including governments and higher education and research institutions) is to enable performance gains by adapting, consolidating and simplifying the policy instruments and mechanisms for collaborating with the private sector on innovation. The 2012 State of the Nation report will measure the outcomes of these efforts.