Is Canada's Innovation Performance Really So Bad?

Posted on Harvard Business Review: June 3, 2011 10:30 AM

On June 1st, Canada's Institute for Competitiveness and Prosperity released a new, large report on Canada's Innovation Imperative. The report came from a task force led by Rotman School of Management Dean and HBR contributor Roger Martin. It paints a worrying picture of Canadian innovation. As Martin wrote, "This comes from a poor innovation record. For a variety of reasons, we are not leading the world in creating innovative products, services, and processes in our businesses and workplaces." As a consequence, the report is a call for the Canadian government to address Canada's productivity gap by encouraging innovation and human capital investments.

As I am about to move from Australia (a country the report uses as a peer economy) to Canada, I wanted to take a closer look. One of the things that interested me is how similar the report was to recommendations that many (including myself) have been making for Australia for many years.

The report focuses on some statistics that do show that Canada lags behind in R&D spending and also possibly in patents secured by businesses. But in my research on this topic, I had long regarded Canada as a solid performer, especially compared with Australia. My research was based on an econometric methodology (initially design by Michael Porter and Scott Stern, but refined by myself and Richard Hayes) designed to forecast a country's innovative capacity—that is, not what innovation is taking place but instead what innovation is likely to occur in the future.

So let me describe our broader approach. Rather than focus on a specific result, such as patent performance, this research derives an index from broader fundamentals. When the experience of many nations is pooled, it becomes clear that certain factors play a robust and persistent role in innovation. These include inputs into R&D (including capital and labor) and, more surprisingly, the public share of education in gross domestic product expenditure (rather than overall education), the level of intellectual property protection (stronger is better), R&D funded by industry (as opposed to government) but performed within universities, and the degree of specialization.

Isolating and updating our measures of these factors allows us to calculate an index that shows each nation's capacity to innovate. It is not a measure of how well they are performing right now but of how well they are likely to perform in the future.

The following graph plots the resulting innovation index for Australia, the U.S. and Canada over time. The lines—U.S. (Blue), Australian (Green), and Canada (Red)—how each country's predicted patents per capita three years hence (so the most recent number for 2008 is a prediction for 2011). While both Canada and Australia have lower innovative capacity than the U.S. (although the trend for each is persistently upward), Canada's potential is much higher than Australia despite many similarities between their economies.

Indeed, compared to other OECD countries, Canada's innovation index puts it at the very top of second tier innovators and at number seven in the world. (The top ten comprises the U.S., Finland, Japan, Switzerland, Sweden, Denmark, Canada, Germany, Iceland, and Norway.) While this does not suggest that Canada should be complacent, it does suggest that the gap emphasized in Canada's Institute for Competitiveness and Prosperity report is not as worrying as it might appear. Canada has innovation challenges but they are not at the level faced by Australia.

If I had to speculate—I have not yet examined the underlying numbers for Canada—I would posit that the gap is related to trade and to Canada's proximity to the U.S.. Canadian businesses, especially innovative ones, focus on the U.S. market; further, it is likely that the best innovations get snapped up by U.S. firms. To be sure, this is a perfectly legitimate commercialization strategy—selling out to established firms—but it is the sort of thing that shows up poorly in aggregate statistics. If that is the case, the issue may not be Canada's encouraging more innovation but ensuring that Canadian policies are consistent with facilitating export in ideas as much as export in physical products.

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