Canada’s place in a global innovation economy…

The 2013 Global Innovation Index, co-published by Cornell University, INSEAD, and the World Intellectual Property Organization (WIPO), was released this week. And while Canada saw its overall ranking nudge up a spot from 12th to 11th, the report underlines some significant issues that continue to inhibit economic growth and innovation in the Canadian economy.

In particular, business research and development spending (BERD) remains significantly below pre-economic crisis levels. The same is true for gross spending on R&D (GERD) indicating that institutional and government spending isn’t picking up that slack. Business spending on R&D is found to be 12% lower than pre-crisis, while gross spending is down 7%.

Moreover, while Canada gets high marks for its institutional factors such as the ease of starting a business and the overall regulatory environment, as well as infrastructure and market sophistication, it does relatively poorly on human capital and research. In particular, Canada comes in 52nd (!) on total expenditure on education as a percentage of gross national income and 23rd on gross expenditure on research and development (GERD). To put this in context, Sweden, Norway, New Zealand and Ireland all spend between 6.2 and 7% of GNI on education, Canada in contrast spends 4.69%. Similarly, our spending on R&D is half that spent by the top five – Israel, Finland, Korea, Sweden and Japan – and significantly less than similar industrial economies such as Germany and the United States.

Given the integral role of both factors (education and research) in underpinning long-run innovation and competitiveness, these rankings highlight significant weaknesses in Canada’s economic fabric. Canada’s subsequently middling performance on measures of technology/knowledge outputs isn’t surprising. Here Canada ranks 27th in terms of high-tech manufactured goods as a percentage of total manufacturing, and 32nd in terms of high-tech exports as a share of total exports. Again, this represents a significant lag against similar jurisdictions, notably approximately 30% less high-tech intensity than Germany, Japan and Korea, and approximately 25% less than the US, China and Mexico.

Given the increasingly tech-intensive nature of contemporary, non-resource, economic growth , and given the links present between manufacturing and long-run innovation, Canada’s underperformance on these metrics indicate both present and future difficulties.

Addressing these issues requires significant policy attention. Business investment in research and development, and general spending on technology, must increase. Catalyzing this from a policy standpoint is, however, quite tricky. Business R&D in Canada already enjoys extremely generous tax treatment, and despite corporate bank accounts that are generally flush with cash, spending on research continues to lag. As Anthony and I argue in our latest report, facilitating better relationships between industry and academia, providing research financing for research for SMEs, and reforming tax incentives to focus on growth rather than company size are all part of the answer.

Ultimately, as the Global Innovation Index notes, across jurisdictions the question or challenge remains the same: “Where will future growth come from to drive the global economy? Where will future jobs come from? In this context, the importance of innovation cannot be emphasized enough. It is the policies fostering long-term output growth—especially policies that promote innovation—that can lay the foundation for future growth, improved productivity, and better jobs.”

And if Canada wants to come out as a winner in this global challenge, it’s going to need to change how it plays the game.

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Read more about Canada’s innovation ecosystem:

Employment, Innovation and Growth: Analyzing the Health of Canada’s Economic Ecosystem http://deepcentre.com/wordpress/wp-content/uploads/2013/04/DEEP-Centre-Employment-Innovation-Growth-April-2013.pdf

Driving Canadian Growth and Innovation: Five Challenges Holding Back Small and Medium-Sized Enterprises in Canada http://deepcentre.com/wordpress/wp-content/uploads/2013/03/DEEP-Centre-May-2013-Driving-Canadian-Growth-and-Innovation.pdf

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