Canadian Manufacturing

Canada lags on business innovation, despite billions of incentive dollars

An internal government memo underlines chronically sluggish business innovation as an area "of great concern" for Canadian productivity



OTTAWA—Spending billions of public dollars over two decades has done little to reverse Canada’s long decline in the key economic category of business innovation, the federal government acknowledges in a newly released document.

The self-assessment, contained in a “secret” memorandum to Finance Minister Joe Oliver, underlines how chronically sluggish business innovation remains “of great concern” for Canadian productivity.

“Canada’s productivity performance, a key determinant of economic growth, continues to lag significantly behind that of the United States, eroding our relative standard of living,” says the October memo, signed by deputy finance minister Paul Rochon.

“The innovation performance of Canadian firms has continued to fall relative to the previous two decades, despite considerable federal efforts in recent years.”

That push included more than $11 billion spent by the Harper government between 2006 and 2014 on new resources to support research and innovation, the document says.

On top of that, the note said the government also pumped $10.9 billion into science, technology and innovation activities and provided another $3.3 billion in tax relief for scientific research. In 2014, the memo said $1.6 billion was dedicated over five years to promote research and innovation.

The reluctance of Canadian companies to allocate more resources into innovation, thereby helping to improve efficiency and create new products, has been a long-running challenge for federal and provincial governments.

With the economy set to become a central issue in the fall election campaign, federal parties have already begun hammering innovation-related planks into their platforms.

The NDP has promised to introduce a tax credit to encourage manufacturers to boost R&D through investments in machinery, equipment and property. In the April budget, the Conservatives earmarked $119 million over two years for research and development activities.

The memo to Oliver also warned how tougher competition in the knowledge-based global economy could leave Canada behind. Boosting innovation, it said, is key to helping Canadian companies create “high-quality, value-added jobs.”

The note, titled “Canadian Business Innovation Landscape,” was obtained by The Canadian Press under the Access to Information Act.

On the positive side, the document said Canadian businesses perform well at the international level when it comes to primary research, but they trail their global counterparts in R&D despite “some of the most generous government incentives by world standards.”

The memo explores the possible reasons why Canadian firms appear to have shunned innovation.

Among the potential explanations, it pointed to findings in a 2013 report by the Council of Canadian Academies: overdependence on high commodity prices and over-reliance on the North American market, which encourages firms to save cash by acquiring innovation from the U.S.

The memo also lists other possibilities, such as the absence of tough competition in Canada, the smaller market here and the higher risk aversion of Canadians.

In general, the document said Canadian companies rely more on “imitation than on innovation” and are less likely to collaborate in R&D with public institutions than firms in other G7 countries.

Several organizations have noted Canada’s weak performance in business innovation.

The Conference Board of Canada, an Ottawa-based economic research group that has carefully studied the issue, has released an innovation report card every few years for the last two decades.

The reports have compared Canada’s performance with 16 “peer” countries on innovation-related indicators.

“Canada’s been a ‘D’ performer basically since the time we started doing this thing,” said Daniel Munro, the board’s principal research associate for public policy.

“We’re just about the bottom of the barrel … our performance since about 2001 has gone in the complete opposite direction of the 16 peer countries that we look at as well as the OECD (Organization for Economic Co-operation and Development) overall.”

One of the biggest changes, Munro said, has been the decline of Canada’s manufacturing industry, which has historically invested significantly in R&D. The void was largely filled by oil, gas and mining sectors, known to spend less on research, he added.

Munro said innovation _ and, by extension, productivity _ help boost per capita gross domestic product, making them key to ensuring Canada can sustain its high standard of living and social programs.

But even if government investments have been unable to halt the decline in innovation, the extra cash may have helped soften the blow, he said.

As a potential solution, Munro suggested Canada consider following leading countries by offering more direct measures to promote innovation, rather than continuing to rely heavily on indirect methods, such as tax credits.

Both the Conference Board and the federal government agree it’s ultimately businesses that will decide whether innovation improves.

“While governments need to provide the right conditions to foster business innovation, private sector decisions by individuals and businesses are the primary determinant of Canada’s innovation performance,” the memo said.

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