Three Quick Lessons for Driving Innovation in Canada

April 8, 2016
Kristine St-Laurent

Many scholars and business analysts would agree that the U.S. does it right when it comes to supporting technology and innovation. Alongside a unique combination of government-funded R&D initiatives and policies, our southern neighbour also drives innovation through world-class research universities, extensive industry-academic partnerships, a plentiful supply of risk-taking capital, and an enviable record of growing high-impact firms. Canada has all the tools to do the same—but the U.S. continues to outperform us on every level. Here are three key lessons from the 2016 Economic Report of the President[1] to help improve Canada’s lacklustre performance on innovation.

1. Pursue disruption

The U.S. is ahead of Canada in enabling and leveraging disruptive technologies. Whether incremental or transformative, technologies and innovations are critical to enhancing productivity and driving growth. Disruptive technologies and/or the possible entry of start-ups based on new technologies create competition within the system. Competition is a key to stimulating innovation: it pushes firms to be creative, invest in and use new technology, reduce costs, and improve products and services, all of which leads to greater consumer welfare. The U.S. government is quick to embrace and capitalize on technological disruption; some of the most transformative technologies began as government-funded projects (supercomputers, smartphone technologies, Google search engine, the Human Genome Project, to name a few). In comparison to Canada, the U.S. is swift to adapt policies and other supports to foster a competitive business environment.

2. Reduce red tape

Growing an industry is a multi-party affair. For the technology and innovation cluster to grow, the collaboration of government, entrepreneurs, venture capitalists, professional service providers and academics is required. Turning research into a sellable product or service can be a daunting and timely process. The U.S. excels at reducing the barriers that often slow commercialization. From supporting R&D to enabling entrepreneurial firms to access high-risk capital and reducing wait times for patents, the American system makes great efforts to be first and say, “We’re open for business.” Canada could stand to make improvements in this area. According to a 2015 Business Development Bank of Canada (BDC) study on developing high-impact firms, 58% of small to mid-sized firms in Canada report struggling to secure higher-risk financing, compared to 36% of their American counterparts.[2] In 2015, the total venture dollars received by Canadian entrepreneurs was $2.3 billion[3]—proportionately well below the $58 billion invested in the U.S.[4] Canadian entrepreneurs also point to challenges in bringing research to commercialization, decreasing public and private investment in innovation, and limited support for innovative technologies and products in government and wider public sector procurement programs.

3. Scale-up the start-ups

Size matters. It’s important to support made-in-Canada innovation and, particularly, firms that are showing signs of high-growth—these are the businesses that punch above their weight in driving productivity and job creation. Multiple reports indicate a sizable productivity gap between the Canadian and American business sectors, owing principally to the smaller size of Canadian firms.[5] In order to encourage business growth, it is necessary to look at whether the policy toolkit is actually designed to support it. More than other developed countries, Canada supports business innovation overwhelmingly through the tax system with scientific research-and-development tax credits.[6] There are doubts about the efficacy of this approach to funding and fostering business innovation, with some going so far as to say it is a main reason why Canada does relatively poorly on innovation and productivity.[7]

Canada might want to consider adopting more elements of the American model, which makes greater use of both direct supports to the technology and innovation sector, typically delivered on a competitive basis, and investment tax credits that reduce the cost of investing in productivity-enhancing machinery, equipment and technology.

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