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The Globe and Mail

Canada's sorry state of innovation

If this were 100 years ago, John Manley would no doubt be suggesting we combat the onslaught of the automobile with legislation to make it easier to own more horses.

Charla Jones

As if Canada didn't already suffer from a big enough complex about our neighbours to the south, here's another reason to feel inferior: This country holds just 1.36 per cent of patents filed worldwide, compared to 30 per cent for the United States.

Why does it matter? According to the Conference Board of Canada, patents are a solid measure of a country's capacity to innovate, since filing one is the first step toward commercializing new technologies.

In its 2009 report on the state of innovation, the Conference Board - which tracks not just patent filings, but also scientific articles, R&D spending and high-tech exports - gave Canada a D. It pointed out that, while we have world-class universities, teaching hospitals and research institutes, we're doing a poor job of turning that science into marketable products - particularly exportable ones.

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Which means that in ranking after ranking - from the World Economic Forum, The Economist and others - we are chronically behind innovation leaders like Sweden, Finland, Switzerland and, of course, the U.S.

Experts who've studied the country's innovation deficit agree that a big part of the problem is a low appetite for risk that permeates our culture, from the private sector and governments right on down to lenders and educational institutions.

"Innovation by definition requires taking a risk," says William Polushin, an adjunct professor at McGill's Desautels Faculty of Management and director of its international competitiveness program. "We are uber-conservative." Indeed, when he asks his McGill University business students how many of them plan to start their own companies after graduation, typically only a couple of hands shoot up.

That worries John Manley, head of the Canadian Council of Chief Executives.

"We need a national focus on this, and we need to really pull up our socks," says the former finance minister, who is part of a private sector coalition looking at ways to boost innovation.

"There's been way too much complacency and contentment - especially coming out of the recession and the financial crisis - that Canada has done well," Mr. Manley says. "If we don't get a handle on our innovation and productivity challenge, then we're going to see our standard of living decline relative to others."

That's easier said than done.

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Successive federal governments have thrown gobs of money at the problem. In its most recent budget, for instance, the Harper government dedicated what little new spending it announced to innovation initiatives: cash for research grants; tariff and tax breaks for manufacturers and smaller companies; and programs to speed up commercialization of academic research.

One incentive alone - the federal Scientific Research and Experimental Development tax credit (SR&ED) - is worth $3-billion a year.

In theory, smaller firms love the SR&ED, since it's refundable to them - if they qualify, they get a cash infusion even if they don't have any taxable income. But the application process is so complex, many don't bother to apply.

For bigger companies, the credit isn't refundable, which means that when they have no taxable income, it's a wash.

Jay Myers, president of industrial lobby group Canadian Manufacturers & Exporters, thinks a more effective incentive would be extending the accelerated capital cost allowance, which is set to expire at the end of 2011. The allowance makes it easy for businesses to write off investments in new machinery and equipment.

"The key thing here is certainty," Mr. Myers says. "As a business investing in innovation and technology, you need to be able to write your costs off as quickly as possible. That's a huge addition to cash flow, and it's cash flow that drives investment."

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Government initiatives alone won't solve the problem, says Joseph D'Cruz, a professor of strategic management at the University of Toronto's Rotman School of Management. "The challenge is for the private sector."

When the tech boom collapsed, private sector R&D spending started to slip, and it has fallen even further over the past two years - putting Canada in the middle of the pack among the Organization for Economic Co-operation and Development nations.

On top of that, Canada has a "pitiful" record of doing its own R&D, says Gilles Rhéaume, the Conference Board's vice-president of public policy.

Signature industries, such as forestry, often rely on imported technology, impeding their ability to produce value-added products.

Prof. D'Cruz says what's really lacking in Canada is a thriving "innovation ecosystem" - clusters where research institutions and companies feed off each other.

The most successful ecosystems are built around homegrown multinationals - companies like Research In Motion, Bombardier and SNC-Lavalin. But Canada has few of these global players. Our economy is dominated by foreign companies, which are far less likely to invest heavily in R&D, Prof. D'Cruz says.

Our universities aren't optimized for innovation, either.

Shirley Tilghman, a Canadian-born molecular biologist and president of Princeton University, says Canada continues to dole out research grants to too many scientists based on "the equalitarian spirit." Instead, we should be following the Princeton model: Identifying the brightest stars and "making sure they have everything they need."

That includes giving them the tools to commercialize and patent their innovations, Ms. Tilghman says. Like most leading U.S. research schools, Princeton has an intellectual property lawyer on staff, along with a team of technology transfer experts.

That's not the case here in Canada. And executives often complain that when they go to universities to help them commercialize research, they often face a tug of war over who owns the intellectual property. Another complaint: Universities, which are more used to doing "frontier research," don't run at the same speed as the private sector's bottom-line needs.

One of the country's most successful tech incubators is the University of Waterloo (which helped spawn our biggest high-tech global success story, Research In Motion). The reason: It's one of the few institutions that claims no interest in money made from research developed on the campus. It also emphasizes co-op placements, which give researchers a foot inside the business world.

Ottawa is trying to make the Waterloo model more the norm than the exception. It also doubled funding for applied research at community colleges, in a nod to their ability to help businesses innovate more seamlessly, even if what they're doing likely won't produce the next RIM.

Software maker Open Text is another company that got its start at the University of Waterloo - in the same tech park that spawned RIM. Executive chairman Tom Jenkins says his company got a huge boost from government initiatives like the Industrial Research Assistance Program, a sort of mentoring program, and the SR&ED, which has given the multinational reason to do more of its R&D in Canada.

"There isn't a silver bullet, where once we do it, we've figured it all out," Mr. Jenkins says. "But we've got to keep taking incremental steps to get better at this, because that's what all the other countries are doing."

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