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Canadian executives know who is to blame for this country's poor track record on innovation: themselves.

In the latest C-Suite survey of corporate executives, three-quarters said an aversion to risk in their own ranks is a key factor that keeps innovation and productivity low. Roughly the same proportion agrees that a culture of complacency dampens the drive to take risks on new products and new markets.

That's a shocking admission at a time when our country should be using its relatively healthy economy to tackle increasingly competitive world markets. Yet productivity numbers are slipping, prompting Bank of Canada Governor Mark Carney to admonish the business community that it does not invest enough in innovation.

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Indeed, Canada's productivity sharply lags that of the United States - ours has increased by less than 1 per cent over the past four years, while growth south of the border was close to 10 per cent.

The problem has been a persistent one. Canada's private sector ranked a lowly 14th among OECD countries in research and development spending in 2007, at just 1 per cent GDP. That was significantly lower than the OECD average and far below such countries as the United States, Sweden and Finland.

It's not just a manufacturing story, either. The services sector, which makes up the bulk of economic activity, spends just 0.6 per cent of its output on research. Companies in the crucial resources sector are also parsimonious when it comes to funding research and development.

Executives recognize the problem, and two-thirds agree with Mr. Carney, according to the C-Suite survey, which gathered the views of 152 senior executives in mid-September. It was conducted for Report on Business and Business News Network by Toronto research firm Gandalf Group.

"I don't think we have a great culture of research and innovation," said Tamara Vrooman, chief executive officer of Vancouver City Savings Credit Union. "We don't have a tradition of celebrating innovation [and]we have under-invested."

Part of the problem is that many companies counted on the low Canadian dollar to keep them competitive, she said, which means "we haven't had to innovate and invest as much as we should."

Canada is falling behind as other countries, in response to the emergence of powerful new players such as India and China, plow more resources into innovation, Ms. Vrooman said. The degree of risk-taking in a Canadian business often increases as a company becomes more international in outlook, said Philip Deck, executive chairman of Waterloo, Ont.-based software firm MKS Inc.

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There is plenty of innovation in many resource or technology businesses that compete in world markets, Mr. Deck said, but "you do find a lack of risk-taking in highly protected segments of the economy [such as]financial services, telecommunications and the media industries."

The key role for government, if it wants to boost competition, is to "deregulate industries and expose them to international competition," he said.

Peter Aceto, CEO of ING Direct Canada, said he, too, sees "a greater sense of conservatism in Canada" and a complacency about innovation because of the country's relative success during the recession.

While the C-Suite survey found that executives place more blame on themselves than on governments for lack of innovation, about two-thirds also say high taxes and inadequate tax credits for research and development are factors dampening productivity.

More than 90 per cent would like to see higher R&D tax credits, and an equal proportion would like to see Ottawa put more money into university research centres.

Tim Granger, CEO of Compton Petroleum Corp. in Calgary, said governments can drive innovation by helping to make research as cost-effective as possible. The best way to do that is through significant R&D tax credits that leave the decisions about the focus of research in the hands of individual companies.

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"I don't think the government should lead innovation," he said. "The private sector is going to be better tuned to answer the needs of [business]and they will do it very efficiently."

Mr. Granger noted that it is not always easy for companies to come up with the resources needed to boost research and development. In the oil patch, fluctuating commodity prices and uncertainty about royalty regimes have made it hard to make long-term commitments, he said.

Overall, executives are waking up to the fact that research and innovation must be at the top of their agendas in the months and years ahead.

The future health of Canadian businesses - and the well-being of all citizens - rests on this, VanCity's Ms. Vrooman suggests: "The numbers are quite stark if we don't get our heads around the productivity gap and understand the link between research and development and innovation."

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About the Author
Reporter, Report on Business

Richard Blackwell has reported on Canadian business for more than three decades. At the Financial Post and the Globe and Mail he has covered technology, transportation, investing, banking, securities and media, among many other subjects. Currently, his focus is on green technology and the economy. More

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