Business Innovation in Canada: Some Lessons from History

1. BUSINESS INNOVATION IN CANADA:
SOME LESSONS FROM HISTORY
North American Climate Policy Forum
Presentation by
Peter Nicholson
Ottawa 22 June, 2016

2. CANADA’S LOW‐INNOVATION EQUILIBRIUM
“Since 1916, the main objective of Canadian science policy has
been to promote technological innovation by industry….Almost
every decade since the 1920s has witnessed renewed attempts by
successive governments to achieve it, but on the whole they have
all failed.”
‐‐Lamontagne Committee Report, 1970
What has sustained a low‐innovation equilibrium in Canada?
What are the prospects that it will finally be disrupted?

3. LAST 25 YEARS IMPLEMENTING THE “RIGHT” POLICIES
 Cut Tax Rates—Lowest corporate rates in the G‐7
 Embraced Fiscal Prudence—Lowest government Net Debt/GDP in G‐7
 Liberalized Trade—FTA; NAFTA; CETA; TPP (?)
 Stopped Trying to Pick Winners—Tax‐based R&D support (SR&ED)
 Liberalized Foreign Ownership Rules; Privatized (Many) Crowns
 Generously supported university research and HQP training
Canada has taken all the conventional “market‐centric” policy prescriptions
A STAR PUPIL, BUT WITH A FAILING GRADE ON “INNOVATION”

4. CANADA’S INNOVATION METRICS HAVE DISAPPOINTED
0.0
0.5
1.0
1.5
2.0
2.5
1981 1986 1991 1996 2001 2006 2011
Business Expenditure on R&D (%GDP)
CANADA
USA
65
70
75
80
85
90
95
100
1980 1985 1990 1995 2000 2005 2010
Labour Productivity (Canada as % US)
NAFTA
Decline is due to lagging innovation
 Business R&D declining
from already low levels
 Productivity growth
has been anemic
 M&E investment (ex O&G)
has stagnated
 Non‐resource‐based exports
depend on a weak $C
Canada’s Productivity Gap

5. 0
500
1,000
1,500
2,000
2,500
‐200
0
200
400
600
800
1988 1992 1996 2000 2004 2008 2012
CORPORATE PROFIT: 1988‐2014
$Billion Pre‐Tax
CANADA (Left Axis: $C)
USA (Right Axis: $US)
0
20
40
60
80
100
1992 1996 2000 2004 2008 2012
GDP PER CAPITA: CANADA AS % USA
Canada’s weak productivity offset
by stronger job growth than the US
BUT… CANADA’S BOTTOM LINE HAS BEEN MATCHING THE US
SO … CANADIAN BUSINESS HAS BEEN ABOUT AS INNOVATIVE AS IT HAS NEEDED TO BE
GDP/Cap = GDP/Worker X Workers/Cap

6. CANADA
Limited global
trade further
reduces pressure
to innovate
UNITED STATES
Huge domestic
market encourages
innovation by
mitigating its risk
Complementary Business Strategies
Downstream:
Full‐spectrum, end‐user‐
focused innovation strategies
Upstream:
Truncated, branch‐plant
Innovation strategies
Resource
extraction
Processing Assembly Marketing Sophisticated
end products
SUSTAINING CANADA’S LOW‐INNOVATION EQUILIBRIUM
BUSINESS BEHAVIOUR WILL NOT CHANGE UNLESS THE SUCCESS FACTORS CHANGE

7. PERSPECTIVE FROM V.O. MARQUEZ‐‐1972
It is uncertain whether any incentive plan to
stimulate the growth of domestic technology and
innovation, or to make corporations expand
aggressively into foreign markets, can achieve
significant success when it is applied to companies in
which the drive to do these things has not already
been forced to emerge because of exposure to a real
stimulus from the economic environment. What we
seem to need in Canada are “small catastrophes”.
‐‐Business Quarterly 37(4); 1972
C.E.O. Northern Electric (forerunner of Nortel)

8. DISRUPTING THE LOW‐INNOVATION EQUILIBRIUM
FOUR GAME‐CHANGERS THAT DEMAND INNOVATIVE RESPONSES
 “EMERGING” MARKETS More opportunity; more competition
 INFORMATION TECHNOLOGY Challenging every business model
 SUSTAINABILITY Imperative + Opportunity
 AGEING POPULATIONS Productivity alone will determine growth

9. RECAP: WHAT CANADA’S INNOVATION HISTORY TELLS US
 Canadian business strategies (on average) have never emphasized innovation
 Economic integration with the US has enabled this successful strategy
 Policies to encourage business innovation have had little impact on the whole
 Business behaviour will not change unless the success factors change
 Globalization, IT, Sustainability, and Demographics demand innovative responses
 Innovation policies will become more effective when business realizes the need
POLICY MEASURES MUST BE POTENT & SUSTAINED TO HAVE SIGNIFICANT IMPACT