Across the world, governments are striving to stimulate innovation to help accelerate economic growth, increase productivity and reduce the environmental impact of industrial and other types of human activity.
In a modern economy, innovation ultimately shows up in the form of higher productivity. More (and better) goods and services are produced, for a given quantum of “inputs” such as labour and capital. Economists believe innovation is the key to long-run productivity growth, which itself is the foundation for realizing higher material living standards.
A diverse mix of policies and policy instruments are available to encourage innovation. Some are targeted at increasing the rate of adoption of or the demand for new innovations used in production processes. Others aim to crank up the supply of innovation. Countries differ in the particular mix of policies and programs deployed to support innovation, and also in whether the main focus is on the demand or supply sides of the equation.
A new paper by economists Nicholas Bloom, John Van Reenen and Heidi Williams canvasses the principal policies that governments have used to nurture innovation. They include the following:
- direct grants to companies that undertake research and development (R&D);
- tax credits to motivate companies to pursue R&D;
- adopting “patent boxes” (lower corporate tax rates on profits linked to patents);
- attracting skilled immigrants;
- increasing the number of university and college graduates from science, technology, engineering and mathematics (STEM) programs;
- using intellectual property policy to stimulate/reward innovation;
- government funding for post-secondary research that leads to the commercialization of new products and technologies;
- outward-looking trade policies, including participating in trade agreements that open new markets for domestic firms; and
- encouraging the co-location of technology-based small and medium-sized enterprises (SMEs), such as in industrial parks and accelerators.
To the above list we can add two other policy approaches that may help increase innovation. One is support for “strategic clusters” consisting of firms (and sometimes non-profit entities like universities) within a defined industry sector. The federal government’s new “supercluster” program is an example. Another way to foster innovation is to implement microeconomic reforms designed to reduce barriers to competition in product and service markets.
The hard truth is that Canada’s innovation record is decidedly mediocre. The accompanying table shows where Canada ranks in recent global surveys of innovation. It’s clear we fall well short of being a top-tier performer judged against peer jurisdictions.
Canada’s innovation policy tool kit has relied heavily on indirect tax support, through R&D tax credits that are particularly generous to very small firms. The results, as suggested by the table, can only be described as disappointing – especially given the vast sums allocated for this purpose over the last decade. Governments have also put a high priority on university research as a “supply side” means to create a more innovative and productive business sector, again with mixed results.
A recent C.D. Howe Institute report by Daniel Schwanen examines Canada’s innovation track record. He calls for more attention to elements of the policy tool kit that influence the demand for innovation by firms. Some ways to bolster the demand for innovation are: promoting intense product market competition; modernizing regulatory regimes to take advantage of digital technologies and leverage data; using public-sector procurement to establish market access opportunities for Canadian SMEs; and working to attract the full spectrum of immigrant talent needed to drive private-sector innovation – not just STEM workers and researchers but also people with higher-level business and marketing skills.
Other steps Canada could consider to bolster innovation include modifying tax support for business R&D to truly reward growth and commercialization and bringing intellectual property policies into closer alignment with those of affluent countries that score above us on innovation outcomes.
In the end, there is no magic formula for building a more innovative economy. Some degree of policy experimentation is necessary. A challenge for policy-makers is that the Canadian private sector, taken as a whole, long ago settled into a comfortable “low-innovation equilibrium,” as described by scholar Peter Nicholson. At a time of widespread technological disruption and growing competitive pressure, sticking with the low-innovation equilibrium is unlikely to be a recipe for future economic or business success.•
Jock Finlayson is the Business Council of British Columbia’s executive vice-president and chief policy officer; Ken Peacock is the council’s chief economist.
As published in Business in Vancouver.