Competitive disadvantage

Canada’s position among global innovators is an ironic one. A recent World Economic Forum report on global competitiveness ranked us 12th out of 142 countries.

November 4, 2011   by Matt Powell

Canada’s position among global innovators is an ironic one. A recent World Economic Forum report on global competitiveness ranked us 12th out of 142 countries. That looks pretty good on the surface yet countries (such as Denmark and Finland) with much smaller populations, less venture capital and lower ranked education systems outperform us.

Our education grade is seventh, but when it comes to innovation performance we’re ranked 14 out of 17 while our capacity for innovation places us in 24th place and 71st in the nature for competitive advantage category.

So why are we racking up a creative deficit and sliding down the innovation ladder? One reason is the competition. China and India are expanding their competitive advantages from low wage to higher value. Both have both ramped up R&D efforts and formed numerous joint ventures with other international companies. China, for instance, has formed a 50-50 venture valued at $84.5 million between state-owned Shanghai Automotive Industry Corp. (SAIC) and General Motors’ new technology centre – a 65,000 square-metre facility. Once completed, the facility will have 62 test labs and nine research labs that employ more than 300 people.

“The Chinese are smart. Whenever they get a project like this coming into their country, they make sure it’s a joint-venture,” says Niles Billou, an assistant professor at the University of Western Ontario’s Ivey School of Business. “For the past 20 to 30 years, they’ve been slowly picking up these technology skills from companies around the world.”

Billou says it’s inevitable China will start climbing the value chain, putting the heat on Canada to boost its innovation commercialization efforts.

“Innovation is not the same as research and unfortunately a lot of people equate the two,” says Peter Fries, CEO of AUTO21, a University of Windsor research agency focused on developing innovative relations between academics and industry. “In my book, research is a function of innovation, but the innovation process hasn’t been completed until a process or a product is commercialized, or it’s creating jobs. Otherwise it’s just new knowledge.”

Innovation requires knowledge deployment and while Canada’s universities haven proven to be great sources of new knowledge, there continues to be a disconnect between the knowledge and applying it to something that will actually make it into the marketplace.

“We create about 4% of the world’s new knowledge, but we don’t do very well in the metrics of innovation related to job creation, wealth creation and progress for our companies, which essentially drive the economy,” says Fries.

The Conference Board of Canada’s 2010 Innovation Catalysts and Accelerators report suggests Canada’s businesses continue to struggle to acquire capital and suggest government help is insufficient to support both R&D and innovation efforts.

Of the 181 firms surveyed, 54% of them said they’ve struggled to acquire sufficient capital to invest in innovation, 24% said there’s not enough in-house talent and 24% say government subsidies aren’t enough.

Billou suggests those numbers are an issue for Canadian firms when it comes to securing funding from willing venture capitalists.

“If you go to an American venture capitalist and ask for $10 million, the likelihood of you getting that money to build and commercialize a product or service is pretty good,” he says. “In Canada, a lot of investors will ask ‘well do you really need $10 million? How about we give you $5 million?’”

Canada, he says, is very much like Europe. Businesses depend on governments to provide tax breaks, subsidies and incentives. The US has a much better track record because the money to get innovations to market flows more freely.

“Canada struggles significantly when it comes to getting its innovations to market, and that relates to a lack of capital. We’re an intelligent population with a lot of great ideas, but you have to look at the system as a whole,” he says. “In the US, especially when it comes to dealing with universities, there’s a greater incentive for schools and companies to partner because of the strong technology transfer practices US universities have.”

American universities typically work deals with companies to get in on the financial pay-off once the product or service is commercialized.

Technology investments needed
Another impediment to Canadian innovation is a lack of technology investments, says Jim Milway, executive director at the University of Toronto’s Institute for Competitiveness and Prosperity.

“If you’re going to be more innovative and productive, you need to bring in technology – it’s like a virtual circle.”

Investments in technology have fallen by 37% in the last 10 years, according to Canadian Manufacturers & Exporters’ (CME’s) Invest to Grow report.

Milway suggests this lack of investment reflects manufacturing scale. Investing in technology seems simple enough for bigger facilities that produce more, but it requires a significant bankroll to spend on improving processes, buying new equipment, creating new jobs and training workers.

“If you don’t have the technology, it’s hard to justify having a big plant, but if you don’t have a big plant, it’s hard to invest in technology. It’s a logjam more Canadian businesses are having to deal with that comes from increased competition from international markets,” he says.

Canadian businesses also have difficulty acquiring the capital needed for R&D and technology from either venture capitalists or government sources.

“A lot of these people responsible for innovation aren’t asking for subsidies, they’re indirectly asking for investors to assume the risk involved with bringing these products to market, which a lot of Canadian firms struggle to find,” says Martin Lavoie, CME’s director of manufacturing, competitiveness and innovation policy.

Canada is ranked at 21 out of the 23 OECD countries when it comes to direct support for private R&D funding, and Lavoie says that’s a major problem.

Part of the solution may be getting universities and colleges to share the risk of bringing Canadian innovations to market.

“A lot of companies say it’s hard to work with universities because they don’t own the technology, taking all the risk out of their hands,” he says. “Creating a situation where the university has to assume some of the risk may actually increase a business’s willingness to get more involved with our education system, which has proven to be one of the best in the world.”

Lavoie says the Canada Revenue Agency’s (CRA) Scientific Research and Experimental Development (SRED) tax credit is becoming increasingly useless because firms can’t access it when its needed most, and the rules are narrowing on the scope of eligible R&D activities.

Indeed, the CRA recently proposed changes to the SR&ED that would ding private sector R&D because it narrows the definition of technological advancement to core technologies, calling for the exclusion of virtual prototyping and evaluation processes.

But incremental improvements in engineering are necessary to continue process and product innovation and productivity growth.

Lavoie says making SR&ED more difficult to access will never resolve the issue of private R&D in Canada. “And last time I checked, we were still lagging most other OECD countries.”

Milway suggests that Canadian firms need to focus more on developing export strategies to enhance productivity and create flexibility when it comes to expanding into new markets, much like China has done with GM.

Becoming big players
“If you look at Canada’s biggest players, they were exporting within five years,” he says. “Nowadays, if you go to a venture capitalist with an idea, you better have an export plan as well because you won’t be very successful if you don’t.”

So what needs to be done to overcome all these impediments to more advanced innovation? Here are some suggestions from the experts:

• Competitive taxes. In a report for C.D. Howe, Mark Parsons suggests governments focus on market “pull” factors by ensuring taxes on income derived from intellectual property and the production of new products are kept at internationally competitive levels.

“The government needs to set the table and create an environment that ensures Canada is as competitive as it can be; to force firms to innovate, or they die out,” says Milway.

• Tax credits. The CRA needs to avoid narrowing the scope of what is considered technological advancement and use the review of the current system as an opportunity to drive innovation and productivity, according to Meyers in an open letter to the CRA.

He says without the review, accumulated tax credits will be useless, sending much of Canada’s R&D efforts offshore. Canada will end up as a black spot on the world’s innovation map for large multinational companies looking to invest here.

“Tax credits like SR&ED are important,” says Lavoie. “This is the only program remaining that supports private sector R&D in Canada except for the Strategic Aerospace and Defense Initiative (SADI), which is only accessible to the aerospace and defence sectors.”

• Increase global partnerships. Like China, develop joint ventures focused on innovation that would drive productivity in Canada’s plants.

“Innovation isn’t just about the new product, it’s not just about producing the next Blackberry,” says Watt. “Incremental innovation is more important to the functioning of the economy.”

Milway says increasing the global scope of Canadian business would also open more opportunities for firms looking to acquire capital for investment in technology that increases productivity and boosts innovation.

“If you have a business plan that doesn’t explain how you’re going to take over the world, you won’t be very successful in today’s circumstances,” he says. “And I suspect you’ll have a rough go raising funds. The good firms are going to find the venture capital and they’ll succeed.”

• Post-secondary research. Canadian companies need to take advantage of Canada’s relatively strong post-secondary research programs, but at the same time find a way for the government to force universities to assume some of the risk associated with developing new products to drive innovation.

“It’s difficult for a company to directly invest in the innovation process because it won’t know where the people innovating will end up – it’s extremely risky,” says Fries.

Canada certainly has the foundation and the tools – with a bit of tweaking – to improve its global position as an innovator nation. The simple answer is to bring industry, the universities and government  together and devise a strategy that harmonizes the key elements necessary to consistently shepherd great ideas evolving from a few scribbles on a napkin to R&D and, finally, a marketable product that the world can embrace. It all comes down to the players and their willingness to work together, invest in technology and stare down the risks. Not that there’s a lot of time to think it over. Nations further down the value chain like China and India are coming up fast and will not hesitate to step on the maple leaf to occupy a more forward position as innovation leaders.

Matt Powell is an online reporter with E-mail

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