State of the Nation 2014

Canada's Science, Technology and Innovation System: Canada's Innovation Challenges and Opportunities

Executive summary

Snapshot

Science, technology and innovation (ST&I) drive economic prosperity and fuel advances that improve societal well-being. A sustainable competitive advantage in ST&I is the path to success in the global knowledge-based economy.

Despite ongoing efforts to improve Canada's lagging business innovation performance, it has continued to deteriorate. Canada has fallen further behind its global competitors on key performance indicators, reflected most tellingly in private-sector investment in research and development (R&D). Canada's business enterprise expenditures on R&D (BERD) intensity (i.e., BERD as a share of gross domestic product) dropped further between 2006 and 2013, to the point where Canada ranked 26th among international competitors and sat at 36 percent of the threshold of the top five performing countries. Canada's most profound and urgent ST&I challenge lies in increasing the number of firms that embrace and effectively manage innovation as a competitiveness and growth strategy.

Canada maintains a solid foundation in the quality of knowledge production and its educated population. However, we cannot be complacent. Maintaining and enhancing excellence requires that our investments keep pace with those of competitor countries.

Responsibility for reversing Canada's poor business innovation performance and growing its knowledge and talent advantages rests with all players in the ST&I ecosystem — working together, working differently, in a "systems" approach characterized by collaboration, integration and strategic investment. To address Canada's ST&I performance challenges and build on our strengths, the Science, Technology and Innovation Council recommends that Canada:

  • close the gap on firms' investment in innovation;
  • redress the imbalance of direct and indirect government funding for business R&D, to provide greater direct support for high-risk, high-reward business R&D;
  • embrace risk and ambition;
  • boost higher education expenditures on R&D to keep pace with other countries' support for "intellectual infrastructure"; and
  • invest strategically, further focusing government funds to build globally competitive critical mass in targeted areas.

Science, technology and innovation (ST&I) excellence is critical to Canada's wealth and well-being. Through ST&I, firms enhance their productivity and competitiveness, and transform ideas and inventions into new goods and services that power markets. With increased profitability through innovation, firms create more high-value jobs for Canadians and contribute to increased national wealth. At the same time, advances in ST&I drive solutions to society's perennial challenges, whether related to health care, the environment, hunger or poverty.

The Government of Canada mandated the Science, Technology and Innovation Council (STIC) to regularly assess and report on Canada's ST&I performance against competitor countries. In this fourth State of the Nation report, STIC builds on its work since the baseline 2008 report to analyze Canada's ST&I performance and progress. Most importantly, State of the Nation 2014 addresses the way forward to position Canada as a world leader in ST&I.

As in previous State of the Nation reports, State of the Nation 2014 is structured around the understanding that a robust and vibrant ST&I ecosystem is built on three pillars:

  • i) skilled and creative talent,
  • ii) high-quality knowledge, and
  • iii) an innovative private sector.

Talented people generate and enhance knowledge. An innovative private sector converts knowledge into new products and processes that generate wealth. State of the Nation 2014 assesses Canada's ST&I performance by examining the components that drive success and define leadership in each of these three pillars. For each component, internationally accepted indicators are used to compare Canada's performance with that of competitor countries. Following the practice introduced in State of the Nation 2012, the analysis notes the world's top five performing countries on each indicator and the threshold that Canada must reach to break into their ranks.

The Performance Story

The central conclusion of the State of the Nation 2014 analysis is disturbing: despite efforts to improve Canada's lagging business innovation performance, it has continued to deteriorate. Canada has fallen further behind comparator countries on key business innovation performance indicators, and the gap between Canada and the world's top five performers has widened.

An innovative private sector is underpinned by investments in research and development (R&D) and other knowledge assets, including talent and information and communications technologies (ICT). Canada's private sector is not investing in these assets at a globally competitive level. Of particular concern, with business investment in R&D dropping, Canada's business enterprise expenditures on R&D (BERD) intensity (i.e., BERD as a share of gross domestic product (GDP)) fell between 2006 and 2013, to the point where Canada ranked 26th among international competitors and sat at only 36 percent of the threshold of the top five performers. In addition, Canada was in the middle of the pack in ICT investment intensity (i.e., ICT investment as a share of GDP). In parallel, private sector take-up of ST&I talent was weak, with Canada ranking 15th in 2012 and positioned at 66 percent of the top five threshold in terms of researchers in industry. This was a substantial drop from seventh position in 2006.

On a positive note, data suggest that Canada's small and medium-sized enterprises (SMEs) were at the forefront internationally in introducing product and process innovations, positioning Canada fourth on this measure. In contrast, our large companies lagged global competitors, resulting in Canada's 19th position in this ranking. Finally, Canada continued to be out of step with its international competitors in the balance between direct and indirect government support for business R&D.

While business innovation lagged, Canada maintained a solid knowledge and talent foundation. Canada continued to exhibit strength in the quality of knowledge production: our universities were competitive in a second tier of countries in the global rankings; we enjoyed real "star power" in hosting leading researchers; and we continued to perform above the world average on research citation counts (relative impact index).

Canada's talent base also continued to be an asset: in 2012, we led the Organisation for Economic Co-operation and Development in the proportion of the population with a post-secondary education (due significantly to the role of colleges in Canada's education system). Although our Programme for International Student Assessment rankings slipped marginally, Canadian 15-year-olds continued to perform well in reading, math and science. In 2013, Canadian adults scored just shy of the top five threshold in literacy, numeracy and problem solving in technology-rich environments. While still underperforming competitors, Canada doubled the number of doctoral degrees granted in science and engineering (per 100,000 population) between 2006 and 2012, moving from 19th to 17th position in international rankings. Climbing from 41 percent to 69 percent of the threshold of the top five performers, this was a notable improvement in Canada's performance on this indicator.

On R&D funding indicators, however, Canada's relative ranking (i.e., its competitiveness) showed signs of erosion. Canada's total funding of R&D activities (i.e., gross domestic expenditures on R&D (GERD)) remained essentially unchanged between 2008 and 2014, while other countries increased their funding. Canada's global ranking on GERD intensity (i.e., GERD as a share of GDP) fell from 16th in 2006 to 24th in 2013. Although Canada's higher education expenditures on R&D (HERD) increased over time, its competitiveness on HERD intensity (i.e., HERD as a share of GDP) declined, from third position in 2006 to eighth in 2013, as other countries increased their spending more.

The Way Forward

Addressing Canada's business innovation performance gap is critical to this country's future. Canada must increase the number of firms that embrace and effectively manage innovation as a competitiveness and growth strategy. At the same time, Canada cannot afford to be complacent about its knowledge and talent advantages. Canada must keep pace with other countries that have been increasing their support for R&D at a faster rate.

All ST&I players share responsibility to reverse Canada's poor business innovation performance and grow its knowledge and talent advantages. While success requires that all players pursue excellence in their respective roles, at the same time all players must work more closely together, as a "system," to effect change.

To address Canada's ST&I performance challenges and build on our strengths, the Science, Technology and Innovation Council recommends that Canada:

Close the gap on firms' investment in innovation

It is business enterprise expenditures on R&D that is most closely linked to product and process innovation; thus it is critical that Canada's private sector significantly increase its investment in this area. A large natural resources industry is not an obstacle to achieving a higher BERD intensity. In fact, given the strategic importance of Canada's natural resources industry, this should be an area of ST&I leadership for Canada. Increased R&D investment must be accompanied by enhanced investments in other knowledge assets, especially talent and ICT.

Redress the imbalance of direct and indirect government funding for business R&D

Governments play an important role in supporting and incenting business innovation. While both direct and indirect R&D support are important, data show that Canada relies far more on indirect support than other countries. Governments in Canada should redress this imbalance, to provide more direct support for high-risk, high-reward business R&D, especially in industries of economic significance to Canada. The approach should be strategic, focused on fostering innovation in large firms and in high-growth SMEs with the potential to grow into significant players. Canada must increase the number of large, innovative firms to enhance future competitiveness and job growth, as larger firms are often more productive and tend to invest and to export more than smaller firms.

Embrace risk and ambition

Adopting innovation as a competitiveness and growth strategy demands that firms become less averse to risk and more ambitious. Canada's venture capital industry can support this by more aggressively backing high-potential Canadian firms with innovative ideas and mentoring them through the innovation process. For governments to effectively support business innovation, they must be more innovative themselves, particularly in their procurement practices, where a culture of intelligent risk taking could help stimulate product and process innovation in firms. Educational institutions, for their part, should work more closely with industry to develop curricula that better integrate science and technology knowledge with a broader set of business, entrepreneurship and commercialization skills and that nurture creativity, intelligent risk taking and ambition.

Boost HERD investment levels

Investments in R&D and talent in the higher education sector help build a strong knowledge foundation for all sectors of Canada's ST&I ecosystem. Although federal and provincial funding levels for HERD have continued to increase, growth has not been sufficient to keep pace with other countries that are committing more resources at a faster rate. Our governments must renew their commitment to investing in the "intellectual infrastructure" required to keep Canada competitive in the knowledge-based economy.

Invest strategically

Enhancing Canada's ST&I performance requires investing differently, in a more strategic and coherent way to maximize the impact of investments across the ST&I ecosystem. This means targeting investments to build globally competitive scale and capacity in key areas of strength and opportunity. This also means integrating organizations, activities and funding mechanisms across the ST&I ecosystem. Each government in Canada should ensure that its innovation support programs are designed to reinforce and build upon one another, while also enabling and compelling collaboration across the innovation ecosystem. Each higher education institution should plan strategically across its institution, using government programs to expand capacity in areas where it can make a substantial difference.

Conclusions

A robust and vibrant ST&I ecosystem is critical to Canada's economic prosperity and high quality of life. Canada's weak business innovation performance threatens our global competitiveness. Our knowledge and talent foundation continues to be solid, but our investments to maintain these assets are slipping. All ST&I players share responsibility to reverse Canada's poor business innovation performance and grow its knowledge and talent advantages. Effecting change is demanding and complicated; but the need is urgent and compelling. Only with concerted action can Canada achieve the ST&I success needed to secure our future. STIC believes that Canada must, and can, rise to the challenge.