State of the Nation 2014

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

Chapter 2:
An innovative private sector

Key Findings

  • Canada invested significantly less in business research and development (R&D) as a share of gross domestic product (GDP) than many other advanced economies, falling from 18th position in 2006 to 26th in 2013.
  • Canada was in the middle of the pack in information and communications technologies investment intensity, ranking 13th out of 30 countries in 2013.
  • Canada performed poorly in absorbing science, technology and innovation talent into the labour force, ranking 22nd out of 43 countries in science and technology-related occupations throughout the economy.
  • In 2013, Canada ranked 10th in government funding of business R&D (as a share of GDP). Its 4th-place ranking in indirect funding and 28th in direct funding reflected the federal government's greater reliance on indirect funding mechanisms.
  • Low investment in business innovation hurt Canada's global competitiveness, as demonstrated by lower productivity growth.

An innovative private sector is critical to harnessing Canada's investments in knowledge and talent, and translating them into productivity gains and marketable products that bring prosperity and a high standard of living to Canadians.

To assess Canada's business innovation performance, three components that drive success and define leadership are examined:

  • private-sector investment in innovation, as demonstrated through aspirational indicators related to investment in:
    • research and development (R&D);
    • information and communications technologies (ICT); and
    • talent;
  • the funding environment for business innovation, including both government and venture capital funding; and
  • introduction of product and process innovations.

The chapter concludes by considering the impact of Canada's business innovation performance on its global competitiveness.

Business Investment in Research and Development and Other Knowledge Assets

The decline in Canada's berd intensity between 2006 and 2013 was among the most significant of advanced economies.

Business innovation is essential to extract value from knowledge. It requires committed investments in R&D, ICT and talent, as well as downstream investments in areas such as advanced design, intellectual property, and mineral exploration and development. A lack of reliable, internationally comparable data limits the ability to assess private-sector performance in these downstream activities. However, available data on innovation investments show that Canada's private sector is not investing in R&D and other knowledge assets at a globally competitive level. This is particularly concerning given that the higher Canadian dollar and low interest rates1 over the past several years favoured increased investment by firms in Canada.

Business Investment in Research and Development

Business enterprise expenditures on research and development (berd) intensity (i.e., berd as a share of gross domestic product (GDP)) is an important gauge of business investment in innovation. On this aspirational indicator, Canada's performance has declined markedly against that of key competitor countries since the Science, Technology and Innovation Council (STIC) started tracking it in State of the Nation 2008. In contrast, most countries increased their investments over the period. As a result, many improved their berd intensity and overtook Canada in the international ranking.

The decline in Canada's berd intensity between 2006 and 2013 was among the most significant of advanced economies (Figure 2-1). As a result, Canada fell from 18th position in 2006 to 26th in 2013 (of 41 countries). At 0.82 percent, Canada's berd intensity in 2013 was less than half that of 11th place United States (U.S.) (1.96 percent). Canada performed at only 36 percent (down from 48 percent in 2006) of the level needed to break into the ranks of the top five performers, Israel, Korea, Japan, Chinese Taipei and Finland, all of which are widely regarded as global innovation leaders.

Figure 2-1: berd as a Percentage of GDP, 2006 and 2013

Bar chart of business enterprise expenditures on R&D as a percentage of GDP, 2006 and 2013 (the long description is located below the image)

Source: oecd, Main Science and Technology Indicators, January 2015.

Description of figure 2-1

International comparison of business research and development intensity by industry

Industry-level data reveal those areas where Canada's challenge is particularly acute. In 2009 (the most recent year for which data are available), Canadian industries such as computer, electronic and optical products, ICT, and coke and refined petroleum products had an investment intensity (measured here as berd as a share of value added) above, or near, the level of their peers abroad. Other industries, however, had berd intensities below those of their peers, including industries that typically have a high berd intensity globally, such as pharmaceuticals, electrical equipment and motor vehicles. Canada performed at only 38 percent of the U.S. intensity for total manufacturing industries and 35 percent of the intensity of a group of other countries for which Organisation for Economic Co-operation and Development (oecd) data are available.2

Some observers attribute Canada's low overall berd intensity to the relatively large size of its natural resources industry — an industry that tends to have a low berd intensity across all countries. Most countries that rank ahead of Canada in berd intensity have considerably smaller natural resources industries (i.e., natural resources rents as a share of GDP). However, of those countries with a berd intensity similar to or greater than that of Canada, Australia, China and Norway have larger natural resources industries (as a share of GDP).3 This suggests that a large natural resources industry is not necessarily an obstacle to achieving a higher berd intensity.

Characteristics of business research and development in Canada

Statistics Canada data provide a more detailed and timely picture of the state of business R&D in Canada, showing a wide variation in R&D expenditures and trends across industries. From 2007 to 2015, Canada's overall business investment in R&D dropped by over $1 billion (see Annex 2 for information on Canada's berd performance since 2000),4 with substantial declines in a number of key industries (Figure 2-2). In particular, business R&D investment fell by 55 percent in pharmaceuticals and medicine manufacturing; 50 percent in motor vehicles and parts; 48 percent in finance, insurance and real estate; 36 percent in ICT manufacturing; and 14 percent in information and cultural industries.

Conversely, over the same period, business R&D investment increased by 63 percent in aerospace products and parts manufacturing, 41 percent in scientific R&D services and 38 percent in wholesale trade. While the mining, quarrying, and oil and gas extraction industry has typically had a relatively low R&D intensity, R&D investments in the industry increased by 74 percent from 2007 to 2015. Over the past 16 years, R&D investment in the oil and gas extraction industry rose dramatically, increasing almost fourteen fold from 1999 to 2015.5

Figure 2-2: berd by Industry in Canada, 2007 and 2015

Bar chart of business enterprise expenditures on R&D by industry in Canada, 2007 and 2015 (the long description is located below the image)

Source: Statistics Canada, Table 358-0024 (accessed July 16, 2015).

* Within ICT manufacturing, STIC includes NAICS 3341-3346.
** Within wood products, paper and printing, STIC includes NAICS 321-323.

Description of figure 2-2

Investment in Information and Communications Technologies

Investment in machinery and equipment embodying new technologies, especially ICT, is critical to driving innovation and enhancing employees' skills, thereby contributing to firms' productivity and competitiveness.

Within the business sector, Canada's ICT investment per worker in 2013 was 51 percent of that in the U.S.6 Historically, Canada invests less than the U.S. on this measure. Differences in industry structure may account for a meaningful share of the Canada–U.S. ICT investment gap as Canada specializes more in industries that are generally less ICT-intensive in both countries, such as mining, oil and gas.7

On the broader aspirational indicator of ICT investment intensity across the economy (the ratio of ICT investment to GDP; Figure 2-3), Canada ranked 13th out of 30 countries in 2013. Occupying this middle tier, Canada's investment intensity was 71 percent of that of the top five performers — Switzerland, the Czech Republic, Japan, Sweden and the U.S.8 That said, Canada's ICT investment intensity was on par with that of France, and higher than that of Finland and Germany.

Figure 2-3: ICT Investment as a Percentage of GDP, 2013

Bar chart of ICT investment as a percentage of GDP for 2013 (the long description is located below the image)

Source: oecd, Science, Technology and Industry Scoreboard, 2015.

* Note: Data for Iceland, Israel, Mexico, New Zealand and the Slovak Republic were incomplete and only represent the asset for which data were available.

Description of figure 2-3

Next-Generation Automotive Lightweight Materials
Next-Generation Automotive Lightweight Materials
Dr. Sooky Winkler, Dana Canada, discusses tooling development with University of Waterloo team members Kyu Bin Han, Ryan George and Dr. Michael Worswick (left to right) in front of the warm-forming pilot line.

Market factors, such as higher fuel economy and emission standards, are driving automotive suppliers to build parts that are thinner, lighter and stronger to remain competitive in the global economy. In response, Dana Canada Corporation and the University of Waterloo are collaborating on development, assessment and commercialization of next-generation, lightweight, thermal-management systems.

The primary business of Dana, an auto parts company based in Oakville, Ontario, involves developing and manufacturing heat exchangers for car and light-truck applications in engine, transmission, battery, fuel and power-steering cooling systems. Aluminum alloys are attractive engineering materials because of their light weight and corrosion-resistant properties. However, aluminum alloys have limitations when producing thin-gauged, complex shapes using conventional methods. Forming aluminum at increased temperatures is one way to improve formability. With the support of the Natural Sciences and Engineering Research Council of Canada and Automotive Partnership Canada, Dana is working with the University of Waterloo to develop warm-forming technology.

In Phase 1, the strong commercialization potential of warm forming was demonstrated on a laboratory bench scale. Phase 2 focuses on developing and realizing commercial-scale capability of warm-forming technology for application in Dana's manufacturing system. A pilot manufacturing line developed at the university will demonstrate its feasibility under production-simulated conditions. Additional mechanical testing and residual stress analysis will be carried out at Canmetmaterials' technology laboratory in Hamilton, Ontario, which is also home to a unique pilot-scale metal-forming laboratory. "At the end of three years, we will have the computer modelling and process worked out to implement this technology in full production," says Dr. Michael Worswick, lead researcher on the project at the University of Waterloo. "I'm not aware of any university in North America doing such work at this scale."

Business Investment in Talent

Talent plays a key role in business innovation, and the importance of talent begins at the top of the organization. To succeed in the modern global economy, firms need leaders who understand the importance of innovation to competitiveness. With the right knowledge and the right skills, business leaders in Canada can have a better understanding of leading-edge technologies and business practice developments, and they can be more comfortable adopting these developments — and thus more likely to choose innovation-based business strategies that drive their competitiveness.

Senior managers influence a firm's innovation culture by shaping its vision and values. Innovative firms require individuals across all areas of the organization who can actively and effectively manage innovation. Conference Board of Canada research suggests that, on a variety of financial measures, firms in Canada that actively manage innovation outperform those with no innovation management.9 Yet almost half of surveyed firms had no formal innovation management process.10

Figure 2-4: Science and Technology-Related Occupations as a Percentage of Total Employment, 2011

Bar chart of science and technology-related occupations as a percentage of total employment for the year 2011 (the long description is located below the image)

Source: oecd, Science, Technology and Industry Outlook, 2012.

Description of figure 2-4

Firms also need advanced research talent (including PhD graduates) to conceive and create new knowledge, products and processes through R&D and other innovation activities, and to make effective use of ICT to improve productivity. While Canada has made significant progress in growing the number of PhD graduates in science and engineering (as noted in Chapter 4), we have not made the same progress in effectively absorbing advanced research talent into the private sector.

In 2012, the number of business enterprise researchers per thousand employment in Canada was 6.6, down from 6.9 in 2006. This helped drive a decline in Canada's international rank from 7th position in 2006 to 15th position in 2012.11 (This decline was also partially accounted for by the addition to the 2012 dataset of Israel and the U.S. (both of which ranked above Canada), data for which were not available for the 2006 baseline year.12) Canada also moved farther away from the threshold of the top five performers, falling from 85 percent to 66 percent.

Canada's poor performance in private-sector absorption of research talent was mirrored at the broader level in the aspirational indicator of science and technology (S&T)-related occupations across the economy. In 2011, S&T-related occupations accounted for 30 percent of total employment in Canada, which positioned Canada at 22nd out of 43 countries (Figure 2-4). This performance was close to that of others in the middle tier of countries, Italy, Israel and New Zealand, and better than that of the United Kingdom (U.K.) and Korea. However, Canada trailed the majority of advanced economies, at 78 percent of the threshold of the top five performers (Luxembourg, Sweden, Switzerland, Denmark and Iceland).

Funding Environment for Business Innovation

The decision to pursue a business strategy focused on innovation clearly rests with firms. However, firms need an environment that provides reliable access to talent, knowledge and capital to support activities to develop and commercialize ideas. Both the federal and provincial governments support business innovation by providing financial resources to firms, directly and indirectly.

In 2013, Canada ranked 10th (of 37 countries) in total (direct and indirect) government funding of business R&D as a share of GDP, performing at 66 percent of the threshold of the top five performers (Figure 2-5). Total government support of business R&D was 0.18 percent of GDP, down from 0.24 percent in 2008, when Canada ranked second (of 30 countries).13 A number of countries pulled ahead of Canada over the period, including France, the U.S., Belgium, Austria and Ireland.

Breaking this down, the data show that Canada relied significantly more on indirect support (through the Scientific Research and Experimental Development Tax Incentive Program) than other countries. At 0.18 percent, Canada's indirect support-to-GDP ratio was the fourth highest among those countries for which comparable data were available.14 Only France, Korea and Belgium ranked higher. This compares with 2008, when Canada's indirect support as a share of GDP was 0.22 percent and Canada ranked first on this measure.

Figure 2-5: Government Funding of Business R&D, 2013 (percentage of GDP)

Bar chart of Government funding of business R&D, 2013 (percentage of GDP)  (the long description is located below the image)

Source: oecd, Science, Technology and Industry Scoreboard, 2015.

* Note: Indirect support estimates are not available for Israel and Poland.

Description of figure 2-5

Saltworks Technologies Inc. Innovates with Government Research and Development Support
Photo showing the ElectroChem EDR-RO hybrid plant operating in the field.
ElectroChem EDR-RO hybrid plant operating in the field.

Founded in 2008 and based in Vancouver, Saltworks Technologies Inc. is a cleantech firm providing advanced water treatment, desalination and brine management solutions. Saltworks has invented systems for some of the world's most demanding applications that require fresh water from highly impaired saline water sources. The company's technologies target global water scarcity issues, either by using saline water sources instead of freshwater sources or by reusing waste waters or produced waters.

Saltworks has received direct R&D funding from government organizations, including Sustainable Development Technology Canada (sdtc), the Industrial Research Assistance Program (IRAP) and Natural Resources Canada (NRCan). This support has been leveraged with private investment and profit re-investment from company sales. "Support from sdtc, IRAP and NRCan has enabled Saltworks to pilot its technology on waste waters from various industries and has generated valuable intellectual property, know-how and highly skilled jobs," explains Ben Sparrow, the firm's Chief Executive Officer.

In the Alberta oil sands, Saltworks is using its SaltMaker, a low temperature evaporator crystallizer, to produce fresh water from Steam Assisted Gravity Drainage (sagd) evaporator blowdown waste water. Successful SaltMaker pilots were completed with Suncor Energy and Cenovus Energy, demonstrating true Zero Liquid Discharge of sagd waste water. The reliable crystallizer plant concentrates the blowdown to produce a solid waste for landfill disposal and high quality fresh water for reuse by the oil and gas industry. The results are reduced wastewater discharge, freshwater withdrawal and greenhouse gas emissions in comparison with conventional treatment technologies.

In recent years, there has been some effort in Canada to shift towards more direct support for business innovation, reflected in a marginal increase in direct support as a share of GDP from 0.02 percent in 2008 to 0.03 percent in 2013. Nonetheless, Canada ranked 28th in direct government funding of business R&D as a share of GDP in 2013 (compared with 27th in 2008), tied with Japan. Canada significantly trailed a number of competitors, including the U.S., Germany, the U.K. and the Scandinavian countries.

Venture capital, a form of equity financing, is another key source of funding for business innovation, particularly for young firms with innovation and growth potential, but untested business models and a limited track record. In 2014, Canada was among the top five performers in venture capital investment as a percentage of GDP, ranking third out of 32 countries. Its share (0.08 percent) was exceeded only by Israel (0.38 percent) and second-place U.S. (0.28 percent), both of which have very mature venture capital markets.15

Venture capital investment in Canada increased significantly in 2014 over previous years, almost reaching $2.4 billion, higher than pre-2008 recession investment levels. Fundraising remained fairly steady, dropping in 2014 to $1.2 billion from $1.4 billion in 2013. Government-backed sources accounted for more than two thirds of total commitments in 2014.16

Introduction of Product and Process Innovations

Firms transform investments in R&D and other knowledge assets into product, process, marketing and organizational innovations. The most recent Canada-only data from Statistics Canada's Survey of Innovation and Business Strategy suggest that, between 2010 and 2012, about 35 percent of firms introduced a product innovation (comparable to the period between 2007 and 2009), while 29 percent introduced a process innovation (down from about 34 percent between 2007 and 2009). While the manufacturing industry was among the leaders in Canada in introducing product and process innovations, the share of manufacturing firms introducing these innovations declined between the periods 2007–2009 and 2010–2012. (For further analysis on the introduction of product and process innovations, see Annex 2.)

In an international comparison of firms introducing product or process innovations between 2010 and 2012, Canada's performance against 34 other countries was divided along firm size lines (Figure 2-6).17 Small and medium-sized enterprises (SMEs) in Canada were among the world's leaders on this measure — about 53 percent of them introduced a product or process innovation during the period, exceeded only by SMEs in Australia, Germany and Switzerland. In fourth position, Canada performed at 112 percent of the threshold of the top five performers.

Conversely, a smaller share of Canada's large firms introduced innovations than their peers abroad. Canada ranked 19th, with about 65 percent of large firms introducing a product or process innovation, compared with about 76 percent in 5th-ranked Austria (putting Canada at 85 percent of the threshold of the top five performers). While Canada's large firms outperformed their peers in the U.K. and Japan, a number of key countries ranked higher than Canada, including Germany, Finland, Australia, Sweden and France.

Figure 2-6: Share of Firms that Introduced a Product and/or Process Innovation between 2010 and 2012

Bar chart of the share of firms that introduced a product and/or process innovation, between 2010 and 2012 (the long description is located below the image)

Source: oecd, Science, Technology and Industry Scoreboard, 2015.

Description of figure 2-6

Consistent with this finding, no Canadian company appeared on Boston Consulting Group's 2014 list of the world's 50 most innovative companies, a list dominated by large firms that have no equivalents in Canada.18 The lack of large innovative firms may have a negative impact on business innovation in Canada. Through their pivotal role in supply chains, these firms can drive innovation in smaller firms. Their presence is critical to anchor innovation clusters and can help foster a more deeply engrained innovation culture among other cluster members. Large firms also have more resources with which to invest, innovate and export, and they tend to be more productive than small firms. Therefore, they can have a significant economic impact, driving competitiveness and job creation.

Canada's Innovation Performance and Global Competitiveness

Firms' investments in innovation reap rewards when they translate into enhanced competitiveness and success in the marketplace, especially the global marketplace. Intuitively, it can be surmised that firms that invest in innovation will be more profitable and thus contribute to the strength of the Canadian economy. The impact of Canada's business innovation performance on our global competitiveness is assessed through productivity growth and export market share in R&D-intensive industries. International comparisons reveal that Canada's performance generally lagged on these measures.

Productivity

Innovation is widely considered to be a driver of productivity, which is, in turn, essential for increased wages, profitability for investors and improved economic well-being in the long term. The most common measure of productivity is labour productivity, which measures the amount of goods and services produced in one hour of labour. Labour productivity levels in the business sector in Canada have significantly trailed those in the U.S. In 2014, Canada was at 71 percent of the U.S. level.19 Since 2003, Canada has consistently performed below 80 percent of the U.S.

The lack of large innovative firms may have a negative impact on business innovation in Canada.

A key factor in Canada's poor labour productivity performance has been Canada's declining multifactor productivity (MFP) growth.20. MFP is reflective of innovation because it captures factors such as use of new technologies, managerial skills and changes in the organization of production, as well as economies of scale.21

In assessing productivity growth, it is more meaningful to examine long periods rather than specific years. Over the period 1995–2013, Canada's average annual MFP growth was 0.6 percent, placing Canada 12th out of 19 countries. Over this period, Canada performed at 60 percent of the threshold of the top five performers (Korea, Ireland, Finland, the U.S. and Sweden) (see Figure 2C in Annex 2).22

Export Market Share

On export market share in globally R&D-intensive industries, Canada's global ranking stagnated or declined between 2006 and 2013 and the gap between Canada and the top five performers widened (see Figure 2D in Annex 2). Canada fell from 15th to 17th position (of 41 countries) in the pharmaceutical industry and was at 15 percent of the threshold of the top five performers (down from 19 percent in 2006). In the computer, electronic and optical industry, Canada fell from 15th to 19th position and sat at 12 percent of the threshold of the top five performers (down from 16 percent). Conversely, Canada ranked fifth in 2013 in the aerospace industry (unchanged from 2006).

Conclusions

While there is variation across industries, Canada's private sector overall is not investing in R&D and other knowledge assets at a globally competitive level. Of particular concern, with business investment in R&D dropping, Canada's berd intensity fell 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 performers. 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 threshold of the top five performers. On a positive note, data suggest that Canada's SMEs were at the forefront in introducing product and process innovations. However, our large companies lagged global competitors, positioning Canada 19th on this measure. Finally, while there has been some shift in government funding towards more direct support for business R&D, Canada continued to be out of step with its international competitors in the balance between direct and indirect support.


1 Malick Souare and Weimin Wang, "R&D Spending and M&E Investment in Canadian Manufacturing Industries," Industry Canada, Economic Research and Policy Analysis Branch, Working Paper 2009-02. Return to text

2 STIC calculations based upon data from Statistics Canada and the oecd Structural Analysis Database using the International Standard Industrial Classification of All Economic Activities (ISIC) Revision 4. Other economies with data available through the oecd are Austria, Belgium, the Czech Republic, Denmark, Finland, France, Germany, Hungary, Italy, Korea, Netherlands, Norway, Slovenia and Sweden. Return to text

3 World Bank, Total Natural Resources Rents (% of GDP), 2014. Return to text

4 2007, rather than 2006, is used as the baseline year for this indicator because industry-level data for the aerospace industry are suppressed for 2006. Return to text

5 Statistics Canada, Industrial Research and Development: Intentions 2015, Catalogue no. 88-202-X. Return to text

6 Centre for the Study of Living Standards, Database of Information and Communication Technology (ICT) Investment and Capital Stock Trends: Canada vs United States, January 2014. Return to text

7 Statistics Canada, "Study: Investment Intensity in Canada and the United States, 1990 to 2011/cite>," The Daily, October 21, 2014. Return to text

8 An international comparison of ICT as a share of GDP over time is not possible due to a lack of longitudinal data on this measure. Return to text

9 These measures include a five-year compound annual growth rate; growth in earnings before interest, taxes, depreciation and amortization; and market capitalization growth (for public companies). Return to text

10 Sorin Cohn and Bruce Good, "Metrics for Firm-Level Business Innovation in Canada," The Conference Board of Canada, December 2013. Return to text

11 oecd, Main Science and Technology Indicators (accessed February 4, 2015). Return to text

12 oecd, Main Science and Technology Indicators (accessed February 4, 2015). Return to text

13 oecd, Science, Technology and Industry Scoreboard, 2015; and oecd, Science, Technology and Industry Outlook, 2010. Return to text

14 Indirect support data do not include estimates of R&D tax incentives at the sub-national (e.g., provincial) level. Return to text

15 oecd, Science, Technology and Industry Scoreboard, 2015. Due to sizeable fluctuations in the data reported by the oecd over time, a comparator year is not used for the international venture capital data. Return to text

16 Industry Canada, Venture Capital Monitor, Q4 2014. Return to text

17 Care must be taken when comparing countries because the reference period is not the same for all countries. As well, coverage of activities and firms is not the same for all countries. For example, data for Canada only include firms with 20 or more employees and revenues of $250,000 or more. Return to text

18 The Boston Consulting Group, The Most Innovative Companies 2014: Breaking through is Hard to Do, October 2014. Return to text

19 Centre for the Study of Living Standards, Aggregate Income and Productivity Trends, Canada vs. United States, May 2015. Return to text

20 John R. Baldwin, Wulong Gu, Ryan Macdonald and Beiling Yan, "The Canadian Productivity Review: Productivity: What is it? How is it measured? What has Canada's performance been over the period 1961 to 2012?," Statistics Canada, Catalogue 15-206-X, no. 38, 2014. Return to text

21 John R. Baldwin, Wulong Gu and Beiling Yan, "The Canadian Productivity Review: User Guide for Statistics Canada's Annual Multifactor Productivity Program," Statistics Canada, Catalogue 15-206XIE, no. 14, 2007. Return to text

22 oecd, Growth in GDP per capita, productivity and unit labour cost (ULC) (accessed October 22, 2015). Return to text