State of the Nation 2012

Chapter 7: Conclusion and the Way Forward

To a significant extent, Canada’s success in the 21st century will be determined by our ability to harness science, technology and innovation (STI) to drive economic prosperity and enhance societal well-being. STI is key to increasing productivity growth, generating high-value jobs, creating and growing firms, and addressing pressing health, environmental and social challenges.

State of the Nation 2012 confirms what we learned in our 2010 and 2008 reports—that Canada has strong STI fundamentals related to the high quality of our talent and our strength in generating new knowledge. But we cannot be satisfied with the status quo, or incremental progress. Other countries are strategically planning and investing to improve their STI ecosystems, and our latest report shows they are starting to reap the rewards.

We believe that Canada must strive not only for excellence in STI but also for global leadership, so that we might reap the resulting economic and societal benefits. In State of the Nation 2012 we have gone beyond examining Organisation for Economic Co-operation and Development (OECD) and other comparator countries (as we did in previous reports) to identify the threshold that Canada would have to attain in order to break into the ranks of the world’s top five performing countries on key indicators.


Canada must strive not only for excellence in STI but also for global leadership.

In concluding this State of the Nation 2012 report, we want to go still further, by highlighting five of these indicators in particular where Canada should aspire to join the ranks of the world’s top five performing countries. Improved performance in these five “aspirational” indicators will help secure Canada’s future as a global STI leader and make an enormous contribution to our country’s success. Failure to do better in these five areas will significantly constrain our ability to move into an STI leadership position and to harness STI advances for the economic and societal well-being of Canadians. In future reports, we will track progress on these five indicators and continue to promote better performance in these areas. These five “aspirational” indicators span the three key pillars underpinning Canada’s STI ecosystem—business, knowledge and talent. While they serve distinct purposes, they also mutually reinforce one another in maximizing Canada’s STI potential. They include:

  • business enterprise expenditures on research and development (BERD) as a share of gross domestic product (GDP);
  • business investment in information and communications technologies (ICT);
  • higher education expenditures on R&D (HERD) as a share of GDP;
  • science and engineering doctoral degrees granted per 100,000 population; and
  • share of human resources in science and technology (HRST).

The first two of these five indicators relate to the extent to which Canadian companies embrace innovation as a competitiveness strategy, as reflected in BERD as a share of GDP and business ICT investment intensity, both described in Chapter 4. We believe concerted efforts must be directed at enhancing BERD and ICT investment as they are both closely linked to product and process innovation and thus to productivity growth. Enhanced productivity will serve to enhance Canada’s global competitiveness and drive economic growth.

As reported in Chapter 4, Canada’s BERD intensity has almost continuously declined for the past decade, and Canada has fallen to 25th out of 41 economies in the OECD’s 2011 rankings. This is less than 40 percent of the threshold of the top five performers. Where Canadian business has performed better is in its funding of R&D in the higher education sector. On this measure, Canada ranked seventh among comparator economies, with significantly better performance than the United States (U.S.) and Japan.

In business ICT investment intensity, while Canadian investment is growing, Canada still ranks in the middle of OECD comparator countries. On this indicator, Canada performs at approximately 70 percent of the threshold of the world’s top five performers.

To improve Canada’s performance on these indicators, companies must more actively pursue innovation as a competitiveness strategy, including greater investment in research and development (R&D) and productivity-enhancing machinery and equipment (M&E), especially ICT. While evidence shows that firms are investing a smaller share of their profits in R&D and M&E, the current economic climate would suggest that Canadian companies should be putting their money to work.

All levels of government in Canada have a role to play in supporting companies’ pursuit of enhanced innovation. At the federal level, we strongly encourage the government to make progress in redressing the imbalance between its direct and indirect support for business R&D. As noted in Chapter 3, the balance of Canada’s business R&D support is heavily weighted to indirect funding, in stark contrast to most other countries. Among the world’s top 10 innovative countries (as measured by BERD-to-GDP and gross domestic expenditures on research and development (GERD)-to-GDP), direct support in 2010 consisted of an average of approximately 70 percent of total government support for business R&D, while in Canada it consisted of only approximately 12 percent.

While recent changes to the Industrial Research Assistance Program and the launch of the Digital Technology Adoption Pilot Program are encouraging, more direct funding in support of business innovation in Canada is needed. For instance, the federal government could signal through its procurement activities that it is prepared to be a lead user for innovative products. Governments around the world are increasingly using procurement to stimulate business innovation and address the commercialization gap. The Canadian Innovation Commercialization Program, introduced in 2010, was an excellent beginning. Now the program must be expanded to reach businesses of all sizes across Canada.

The lack of venture capital (VC) in Canada remains a key challenge facing the growth of innovative companies, and may hinder improvements in BERD intensity. Data presented in Chapter 4 show that Canada trails many of its international peers in terms of VC as a share of GDP, and there is a significant VC investment gap with the U.S. Recently, the federal government took a positive step towards addressing this deficiency by announcing the deployment of $400 million in new capital through the Venture Capital Action Plan.201 The government should use this as a springboard to launch other initiatives, which could include a review of government policies to further encourage VC activity and new measures to address other gaps, such as the shortage of serial entrepreneurs.

The higher education sector in Canada can also play an important role in fostering enhanced business innovation, by adopting further initiatives to support “knowledge transfer on two feet.” This means closer collaboration with industry in long-term, discovery-oriented research and in applied research closer to the market. It also means expanding programs that support work-integrated learning for STI students and graduates, and developing curricula to fill the gaps between science and business skills.

The third indicator where Canada should aspire to join the ranks of the world’s top five performing countries relates to Canada’s commitment to the generation of new knowledge, reflected in HERD as a share of GDP. We singled out this indicator because the development of new knowledge is fundamental to the strength and vitality of the whole STI ecosystem.

As noted in Chapter 5, although growing in dollar terms, HERD funding has fluctuated over the last decade in relation to the size of the economy. Canada’s relative position in terms of HERD as a share of GDP is deteriorating against the broad comparator group, with Canada ranking 9th out of 41 economies in 2011, down from 4th place in 2008 and 3rd in 2006. Canada’s HERD-to-GDP performance was 87.9 percent of the threshold of the top five performers in 2011, although it came in significantly above that of the U.S., which stood at 55.8 percent of the top five economies.

Research in the higher education sector generates the discoveries that underpin new products, processes and policies and that help address our society’s most pressing challenges, whether health in an aging population, sustainable means to extract natural resources, or improving living standards for all Canadians.

Through collaboration with industry and practical application of research findings, the research activities undertaken by our universities and colleges also hold enormous potential for stimulating business innovation. Applied research collaborations with colleges and universities are particularly important to small and medium-sized enterprises, which often lack the resources to invest in innovation projects. Canada’s relatively strong international performance in HERD as a share of GDP highlights an important achievement in knowledge development that should be sustained and expanded, particularly in a world where other countries are investing aggressively in higher education and research.

The remaining two “aspirational” indicators relate to our talent advantage. The ability to produce and deploy top research talent is critical in a world where the creation and application of new knowledge drives economic growth and societal advances. Thus we point to the need to improve our performance in producing doctoral graduates, as reflected in science and engineering doctoral degrees granted per 100,000 population. Increasing the number of doctoral graduates in Canada will enhance our capacity to undertake cutting-edge research and to train successive generations of talent.

As reported in Chapter 6, in 2010 Canada placed 15th among OECD countries on science and engineering doctoral degrees granted per 100,000 population, and performed at approximately 64 percent of the threshold of the top five global performers. On a more encouraging note, between 2006 and 2010, Canada experienced about 49 percent growth in science doctoral degrees granted and about 39 percent growth in engineering doctoral degrees—growth rates surpassing those of many comparator countries. To continue this growth, we need to foster a greater “science and innovation culture” in Canada to increase interest among young people, as early as elementary school, in pursuing advanced studies and successful careers in STI-related fields.

The ability to deploy our talent to best advantage—to maximize the impact of people’s knowledge and skills in our labour force and our society—is equally important. Thus our list of five “aspirational” indicators is rounded out with the share of human resources in S&T in the labour force. On this measure, Canada’s performance continues to lag that of key competitor countries. As noted in Chapter 6, in the services sector, Canada’s performance is mediocre when compared to other OECD countries. In manufacturing, the picture is dismal—the HRST share of the manufacturing labour force is among the lowest in the OECD. More public and private sector support for work-integrated learning initiatives would help transition STI graduates into productive employment in the labour force and would serve to demonstrate to prospective employers the value that this talent can bring to their organizations.

Canada has strong STI foundations on which to build, but we must do better—in some areas, much better. The five “aspirational” indicators we have identified will be a measure of our success. The responsibility is shared: all participants in our STI ecosystem have a role to play in driving enhanced performance and lifting Canada into the ranks of the world’s leading innovative economies. It is not just about investing more, but about investing more strategically and coherently, focusing our resources and efforts, learning from the experience of global STI leaders and improving agility to seize emerging opportunities. That is how Canada will truly be able to “run with the best.”

201Prime Minister of Canada, “Venture Capital Action Plan,” Backgrounders (2013).