State of the Nation 2014

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

Chapter 1: Setting the stage

Canadians' high quality of life depends on remaining competitive in the global knowledge-based economy. In a world where knowledge and technology, and their creative application, drive competitiveness, this demands a robust and vibrant science, technology and innovation (ST&I) ecosystem. The role of ST&I in our economy is direct and profound. Through ST&I, firms develop and implement new processes that lead to increased productivity and competitiveness, and they transform ideas and inventions into new goods and services that power markets. With increased profitability through ST&I, firms create more high-value jobs for Canadians and contribute to increased national wealth that supports public investments in education, health, infrastructure and social programs.

ST&I also directly and profoundly affect Canadians' broader well-being. In health care, for example, new and improved diagnostic techniques, therapies and medicines help combat chronic and infectious diseases and enhance preventative medicine. Advances in environmental technologies empower us to protect our planet, while allowing for responsible exploitation of natural resources. New agricultural techniques improve crop yield while introducing sustainable practices, and new understanding of the root causes of poverty help improve living standards.

Given the critical importance of ST&I to Canadians' wealth and well-being, 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 in business innovation, knowledge and talent.

The central conclusion of this State of the Nation 2014 analysis is disturbing: despite efforts to improve Canada's lagging business innovation performance, it has continued to deteriorate. Canada is falling further behind comparator countries on key business innovation performance measures, and the gap between Canada and the world's top five performing countries is widening. Addressing this performance gap is critical to Canada's future.

At the same time, Canada continues to have a solid ST&I foundation: State of the Nation 2014 reveals that our educated population and the quality of knowledge production continue to be assets. However, we cannot be complacent. Maintaining and enhancing excellence requires investment. Although federal and provincial higher education expenditures on research and development (HERD) have continued to increase, growth has not been sufficient to keep pace with other countries that are committing more resources faster.

With rapid change and escalating pressures in the global environment, ST&I competitiveness assumes increasing importance. Canada remains vulnerable to global economic disruptions, such as appreciable changes in the price of commodities such as oil, fluctuations in the value of our dollar and decreased demand in export markets. This vulnerability is intensified by increasing competition, with the rise of emerging economies, increasing mobility of talented people chasing the best opportunities, and more sophisticated consumer expectations and demands. The pace of change is unprecedented, reflected most dramatically in disruptive technologies and innovations that transform industries and societies. There is growing global demand for natural resources, from oil to fresh water, and increasing urgency to address the environmental challenges associated with resource extraction.

The Science, Technology and Innovation Ecosystem

A robust and vibrant ST&I ecosystem is built upon 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. Governments can play a key role in creating a supportive environment for these pillars and incenting innovation across the economy. It is critical, therefore, that governments themselves be innovative.

Canada's ST&I ecosystem consists of multiple stakeholders, including governments; universities, polytechnics and colleges; firms; non-governmental organizations; communities and individuals. Each player pursues its role while connecting with other actors in a complex, dynamic and interdependent web of competition and collaboration through which knowledge is developed, shared, transferred and applied. The vitality of Canada's ST&I ecosystem is determined by the strength of both its pillars and its players. A healthy ecosystem encourages ideas to thrive, creative people to start innovative firms and existing firms to grow through innovation.

The most active participants in Canada's ST&I ecosystem are the federal and provincial governments, higher education institutions (HEIs) and the private sector.

Federal and Provincial Governments

The federal and provincial governments make significant investments in talent, knowledge and business innovation. The Government of Canada provides substantial funding for universities, polytechnics and colleges to support research projects, associated infrastructure, development of talent and creation of collaborative research and development (R&D) networks. Provincial governments, by funding the operating costs of Canada's HEIs, contribute to the overhead costs associated with research. They also support the direct costs of research and talent through various funding programs. In addition, through direct funding and tax incentives, the federal and provincial governments support R&D, uptake of talent, and commercialization activities in firms and intermediaries.

Governments also help nurture an environment conducive to innovation through policies targeted not only at ST&I specifically but at broader framework conditions. These policies cover numerous areas particularly relevant to business innovation, from competition to foreign investment, trade, immigration, labour mobility, corporate taxation and intellectual property rights.

A healthy ecosystem encourages ideas to thrive, creative people to start innovative firms and existing firms to grow through innovation.

The federal government also conducts its own R&D, oriented largely to supporting policy and regulatory functions and advancing discoveries in areas in which the private sector may not be engaged. The R&D mandates of science-based departments and agencies have been evolving, as demonstrated most visibly in the National Research Council Canada (NRC). In an effort to support business innovation, the NRC has turned to more commercially and industrially oriented R&D and related services.

Higher Education Institutions

At the heart of the innovation process are talented people who generate and enhance knowledge. They are educated and trained at universities, polytechnics and colleges, which provide the disciplinary and technical knowledge underpinning research and innovation, and the business, entrepreneurial and other skills that prepare students to be productive members of the labour force and society.

These higher education institutions also play a vital role in developing and advancing knowledge and its application. R&D has historically been a critical part of universities' mandates, and it has recently taken on more importance in polytechnics and colleges. Much of the knowledge underlying today's innovation has stemmed from research conducted in HEIs.

Although distinctions are becoming increasingly blurred, universities continue to perform a range of R&D and innovation activities from basic to applied research. Firms that partner with universities are often seeking longer term, strategic relationships to identify new, cutting-edge inventions and technologies for the future. In particular, firms are looking for access to potential future employees who can give them an edge over the competition. Polytechnics and colleges tend to engage more in applied research and experimental development through, for example, field and laboratory testing, prototype development and scale-up. Firms look to polytechnics and colleges for small, well-defined projects with short timelines and immediate relevance to product and process improvements.

Canada's HEIs also help connect us to the global pool of knowledge, technology and talent through collaborative research with international partners and attraction of world-class researchers and innovators.

Private Sector

In the private sector, firms contribute to the advancement of knowledge by conducting their own R&D and by funding research and associated infrastructure in other organizations (notably HEIs). Most critically, firms and entrepreneurs translate the discoveries and inventions that emerge from R&D (whether their own or others') into marketable goods and services that generate wealth. They also innovate to develop and implement new processes and organizational and business practices that enhance productivity, and new marketing methods that improve access to markets.

The private sector also plays a vital role in realizing the value of Canada's talent, providing opportunities for highly skilled personnel to unleash their potential. Firms develop and hone the knowledge and skills of their employees by providing them with on-the-job experience, training and learning opportunities. They help prepare students for the labour force by providing them with hands-on experience and a window on the business world through internships and co-operative education programs. Through R&D collaborations with universities, polytechnics and colleges, firms also enhance the business savvy of research faculty.

Benchmarking Canada's Performance

State of the Nation 2014 assesses Canada's ST&I performance by examining the components that drive success and define leadership in each of the three pillars: an innovative private sector, high-quality knowledge and talented people. For each component, internationally accepted indicators are used to compare Canada's performance with that of competitor countries analyzed by the Organisation for Economic Co-operation and Development. 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. It also looks at Canada's position relative to that of the United States, our closest partner and biggest competitor. For some of the components, as noted throughout the report, a lack of reliable data, both Canadian and international, constrains our ability to report on performance in a meaningful way. (See Annex 1 for STIC's definition of innovation and methodological notes.)

State of the Nation 2014 highlights Canada's performance on five "aspirational" indicators identified in State of the Nation 2012 (Figure 1-1). It is in these specific areas that STIC believes Canada should aspire to join the ranks of the world's leading countries — areas where improved performance would have the most appreciable impact on harnessing ST&I for economic and societal benefits. The five indicators are found across the three pillars of Canada's ST&I ecosystem. Each indicator measures the intensity of Canada's investment, thereby allowing comparisons with competitor countries.

Given the urgency of the business innovation challenge, the analysis of Canada's performance begins, in Chapter 2, with an examination of the components that drive an innovative private sector. This is followed by an analysis of knowledge development and transfer in Chapter 3 and talent development in Chapter 4.

Figure 1-1: Aspirational Indicators

Graphic representing Aspirational Indicators (in percentage of top five threshold)
Description of figure 1-1

Finally, and most importantly, Chapter 5 addresses the way forward. All ST&I players share responsibility to reverse Canada's poor business innovation performance and grow its knowledge and talent advantages. STIC identifies five key strategies to drive enhanced ST&I performance. 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. Only with concerted action on these five strategies can Canada achieve the ST&I success and leadership needed to secure our future prosperity and well-being.