State of the Nation 2014

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

Chapter 5: Conclusion — shaping canada's future through science, technology and innovation

Science, technology and innovation (ST&I) drive productivity and competitiveness, and generate solutions to health, environmental and social challenges. Proactively pursuing and achieving a sustainable competitive advantage in ST&I and joining the ranks of the world's top performers is the path to higher living standards and a superior quality of life for Canadians.

State of the Nation 2014 confirms what previous State of the Nation reports have found: Canada has a solid foundation in its educated population and the quality of its knowledge production. Canadians can rightfully be proud of this, but we must not be complacent about it. Maintaining and enhancing excellence requires investment. In recent years, other countries have been increasing their research and development (R&D) funding at a faster pace than Canada — a reality reflected in the erosion of Canada's relative ranking, i.e., its competitiveness, on R&D funding indicators. Canada must keep pace by boosting its investments, to protect and grow our knowledge and talent advantages.

Canada is not globally competitive in business innovation. In the components that define success in this area, Canada is falling further behind its global competitors…

It is in relation to business innovation that Canada faces its most profound and urgent ST&I challenge. The analysis in this report confirms a disturbing conclusion: Canada is not globally competitive in business innovation. In the components that define success in this area, Canada is falling further behind its global competitors and facing a widening gap with the world's top five performing countries.

Business innovation is crucial to translating our knowledge and talent advantages into the productivity gains and marketable products that bring prosperity. Canada must increase the number of firms that embrace and effectively manage innovation as a competitiveness and growth strategy. However, our collective efforts to address poor business innovation performance appear to have had little or no impact. It is clear that doing the same things in the same ways will not work; we must significantly change our approach if we are to make material gains in improving Canada's business innovation performance.

Responsibility for reversing Canada's poor business innovation performance and growing its knowledge and talent advantages rests with all players. The ST&I ecosystem is characterized by a complex, dynamic, interdependent web of competition and collaboration. 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. This is not simply a matter of collaborating more; it is about better integrating organizations, activities and funding mechanisms into a more coherent, coordinated whole. It is about governments, higher education institutions (HEIs) and firms developing and using programs and policies more strategically. By adopting a "systems" approach, we can realize more impact from the ST&I investments we make.

Informed action to enhance Canada's ST&I performance requires an in-depth understanding of our ST&I progress, challenges and opportunities. As noted throughout this report, a lack of reliable Canadian and international data on some components constrains this understanding. Thus collection and analysis of Canadian and international ST&I data need to be significantly improved. In health care, for example, the federal government established the Canadian Institute for Health Information, which collects relevant and useful data in a standardized format from all provinces and territories. This information provides a better understanding of the state of Canadian health care, i.e., areas for improvement and intervention, and progress made towards a better system. It is time to establish a similar initiative on ST&I data collection and analysis, to provide meaningful and relevant measures of Canada's performance. What is not measured cannot be managed.

The Way Forward

Business Innovation

Canada's top ST&I priority must be to increase the number of firms that embrace and effectively manage innovation as a competitiveness and growth strategy.

Canada's top ST&I priority must be to increase the number of firms that embrace and effectively manage innovation as a competitiveness and growth strategy. This is, first and foremost, the responsibility of the private sector, but governments play an important role in incenting innovation. To be effective in fostering innovation, governments themselves must build their own internal culture of innovation and embrace the importance of ST&I.

Three core strategies should drive action to enhance Canada's business innovation performance:

Close the gap on firms' investment in innovation

In the increasingly competitive knowledge-based economy, innovation is the key to expanding market share and boosting profits. It is business enterprise expenditures on research and development (BERD) that is most closely linked to product and process innovation; thus it is critical that Canada's private sector significantly increase its investment in R&D (reflected in the aspirational indicator of BERD intensity). As demonstrated in Chapter 2, a large natural resources industry is not an obstacle to achieving a higher BERD intensity. In fact, given the strength and strategic importance of Canada's natural resources industry, this should be an area of ST&I leadership for Canada.

Business investment in information and communications technologies (ICT) must also increase (reflected in the aspirational indicator of ICT investment intensity), as ICT enables innovation and contributes to productivity growth. Increased investments in R&D and ICT will, in turn, drive more demand in industry for advanced talent and enhance firms' capacity to use that talent to the best advantage. This will be reflected in improved Canadian performance on the aspirational indicator of human resources in science and technology and the subset of researchers in industry.

Canada's business associations should be more proactive in helping member firms understand the role of innovation and how to effectively manage it, and in providing networks and tools to support it. Specific initiatives could include:

  • "matchmaking" services to encourage large firms to procure new technologies from innovative small and medium-sized enterprises (SMEs);
  • mentoring, where experienced business people provide hands-on guidance to entrepreneurs and SMEs on commercializing ideas and growing innovative companies; and
  • "bridging" opportunities to help firms (especially SMEs) identify and hire ST&I talent.
Redress the imbalance of direct and indirect government funding for business R&D

While the decision to invest in innovation rests with firms, governments can use their direct and indirect R&D support mechanisms to support and incent private-sector R&D. While both direct and indirect support are important, Canada relies far more on indirect support, i.e., the tax system, than other countries. The federal and provincial governments should redress the imbalance of direct and indirect support, to provide more direct support to firms for high-risk, high-reward R&D projects. Through direct support, governments can share risk with the private sector in the pursuit of next-generation products and processes. Direct support, allocated on the basis of competitive excellence, can also better incent innovation by rewarding only the most innovative firms.

In redressing the imbalance of direct and indirect funding for business R&D, governments should focus incremental support where it will have the most impact. At the industry level, this means focusing on industries of economic significance to Canada, building on existing R&D and innovation strengths. At the firm level, governments need to study more closely the performance of large firms and SMEs in introducing product and process innovations. Data indicate that Canada's large firms lag their international competitors, while our SMEs are among the world's leaders. This suggests that governments in Canada should focus on improving the innovation performance of large firms and supporting and incenting the growth of innovative SMEs. 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 inherently demands that firms become less averse to risk and more ambitious. Underpinning this approach is the capacity to understand and to comprehensively and effectively manage innovation through all phases of firm growth.

Again, this responsibility ultimately lies with firms, but others in the ST&I ecosystem can help drive it. Canada's home-grown venture capital industry can help foster a business innovation culture of intelligent risk taking and ambition by more aggressively backing high-potential Canadian firms with innovative ideas and mentoring them through the innovation process. As noted above, the federal and provincial governments can encourage ambition by helping to mitigate the risks associated with R&D through increased direct support for high-risk, high-reward projects. For governments to effectively support innovation in industry, they must embrace innovation. In particular, the federal and provincial governments can help drive innovation and ambition in firms through more innovative, risk-tolerant use of procurement. For inspiration, Canadian governments can look to managers at the United States' Defense Advanced Research Projects Agency, who are not only encouraged but also mandated to pursue high-risk technologies even where there is a reasonable chance of failure.

Education is fundamental to nurturing the type of innovation culture necessary for securing Canada's competitiveness. Innovation and entrepreneurship should be required core competencies at all levels of education. Educational institutions, working in close concert with the private sector, should develop curricula that integrate science and technology knowledge with a broader set of business, entrepreneurship and commercialization skills, and that nurture creativity, intelligent risk taking and ambition. Formal learning should be complemented by "hands-on," work-integrated learning that only employers can offer. Governments at all levels should enhance incentives that encourage firms to provide work-integrated learning opportunities to students and graduates and that offer "bridging" opportunities to help firms, especially SMEs, hire ST&I talent.

Knowledge and Talent

While urgently addressing Canada's business innovation challenge, we cannot be complacent about the other two key pillars of our ST&I ecosystem: we can and must do more to protect and grow our knowledge and talent advantages. Two core strategies should drive action in this area:

Boost higher education expenditures on research and development (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 and at a faster rate. Our governments must renew their commitment to higher education R&D. This commitment, manifested in the aspirational indicator of herd intensity, is vital to ensuring the "intellectual infrastructure" required to keep Canada competitive in the knowledge-based economy.

Invest strategically

It is not just about investing more. The type of improved ST&I performance that the Science, Technology and Innovation Council (STIC) is calling for requires investing differently, in a more strategic and coherent way that will maximize the impact of investments across the ST&I ecosystem. This begins with a fundamental shift in attitude and approach.

Firstly, given Canada's limited size, targeted investments are required to build globally competitive scale and capacity in key areas of strength and opportunity. While the principle of excellence must always be respected, this nonetheless requires a sharper focus on priorities, and hard decisions on reallocation of some existing resources to areas where they will have the greatest impact.

Some promising federal initiatives have been introduced in recent years that may contribute to enhancing capacity in key areas. Notable examples include the Canada Excellence Research Chairs and the Canada First Research Excellence Fund, both designed to support world-class researchers and ambitious research programs at HEIs. However, while these initiatives are an important step, they are not sufficient to achieve the scale that Canada needs to be truly competitive internationally. More is required, including increasing investment in those universities with the greatest potential of joining the ranks of the world's top research institutions.

Secondly, investing differently is grounded in the "systems" approach described above, in integrating organizations, activities and funding mechanisms across the ST&I ecosystem in a more coherent way. Each government in Canada should ensure that its own R&D and innovation support programs are designed to link research, talent, infrastructure and commercialization mechanisms to reinforce and build upon one another. The federal and provincial governments should work more closely together to design and deliver R&D and innovation support programs focused on outcomes. In addition, government programs should both enable and compel collaboration among academic, industrial and government researchers, with funding mechanisms that do not impose (sometimes unintended) hurdles to partnerships. This type of "systems" approach should be mirrored at the program user level. Each HEI should plan strategically across its institution, using government programs to expand capacity in areas where it can make a substantial difference. HEIs should also reach across institutional boundaries to collaborate more with one another and with researchers in both industry and government.

Conclusions

A robust and vibrant ST&I ecosystem is critical to Canada's economic prosperity and high quality of life. 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. STIC believes that Canada must, and can, rise to the challenge.