Improving Canada’s Innovation Performance

The classic definition of innovation is the improvement of existing, or the creation of entirely new, products, processes, services, and business or organizational models. McKinsey has defined it as the systematic practice of developing and marketing breakthrough products and services for adoption by customers. Simply put, innovation is about the creation of new value for the world. Or, as the innovation evangelist John Kao says, innovation refers to the transformation of existing conditions into desired ones.

Does Canada have an “innovation” problem? Per the 2023 Global Innovation Index Report, we ranked 15th out of 132 nations that were part of the study. That’s pretty good, isn’t it? The WIPO rankings over the last 4 years indicate that Canada has retained its fairly impressive position but not really improved on any of the axes. Not too shabby, eh?

The real problem and the real reason behind the need for a national conversation around innovation may lie somewhere else though. Our GDP growth has lagged behind our peers. According to the September 2024 numbers released by Statistics Canada (GDP, at Basic Prices), our GDP growth has been hovering around 1% since 2019. Most importantly, there’s been almost no growth in the core sectors of Manufacturing, Agriculture (and related areas) Natural Resources (and related areas) and Energy. Information Technology and Professional/Technical Services are the only two that have recorded a CAGR of 5% or near-abouts.

Innovation is vital as it serves as the cornerstone for long-term global economic growth and enhancements in quality of life and living standards. According to the U.S. Department of Commerce, in 2010, technological innovation was associated with 75% of the U.S. growth rate since World War II. Another study estimates that around 50% of the annual increases in U.S. gross domestic product (GDP) can be attributed to innovation. Likewise, a separate study suggests that innovation was responsible for two-thirds of the productivity growth in the UK’s private sector between 2000 and 2007.

Therefore, it is evident that innovation plays a crucial role in the global economy. To fully harness the potential of innovation, two essential conditions must be met: First, there should be effective policies in place to optimize innovation output. Second, the global economic and trade framework must support innovation-driven industries by facilitating access to expansive international markets, addressing excessive non-market competition, and ensuring strong protections for intellectual property (IP).

Will our GDP be onward upward and spurred if we improve our Innovation Index? While it may not be the sole driver, there’s no doubt that it will be a major contributory factor. At least, intuition and empirical data do suggest so.

Many impactful moves (policy and otherwise) have been made in Canada over the last couple of decades to get us to the state we are in, as far as innovation is concerned. Our IP protection framework, the Collaborative Tax Credits (in Ontario), Patent Box (in Quebec) are great examples of our progressive thinking in the past. However, these measures need to be augmented by other timely ones, as we enter 2025.

Innovation by itself, will not be able to produce the effect we are hoping for, unless we create environments that lead to rapid and meaningful commercialization of ideas. That means providing not only infrastructure for creation, development, and protection of ideas and inventions, but also significant upsides at the end of commercialization journeys. Towards that end, here’s a quick list of a few moves that could make a big difference.

On the more tactical front:

Creation of angels network for easy seed and working capital solutions

While there already exists a host of government initiatives at Federal and Province levels to provide grants, often on a non-dilutive basis, to SMEs across industries, a better public-private partnership in setting up easier access to seed and working capital solutions will go a long way in helping inventors and innovators commercialize their ideas.

Making it easier to start businesses and shut them down

Experimentation and associated failures go hand-in-hand with the whole innovation / commercialization world. We must encourage people willing to experiment and take significant risks by making it easier to start and shut down business ventures. The processes, particularly on the “shut down” side must be cheap, speedy and involve minimal paperwork.

More strategic moves can include:

Regulations that protect but do not create roadblocks

Regulations around process and compliance act as a deterrent to many would-be entrepreneurs today. At Federal and Provincial levels, we need newer ways to increase velocity, cut-down paperwork and encourage risk-taking. Sure, the need to protect consumers will always be there, and that need may be particularly high in sectors like FinTech and Life Sciences. However, entrepreneurs need protection, incentives and nurturing too. A more balanced approach may see a lot more people willing to take the plunge and try and make something out of their innovative products and ideas.

Revamp of our immigration policies

People innovate and commercialize their innovations. As a nation, we have been attracting a large, diverse group of immigrants for decades now. While in the past our focus was on letting in young(er) people, can we now put higher emphasis on people’s educational background, training and expertise? If we attract the best, through our higher education and immigration schemes, we will boost innovation in time, as these are the folks who will have the ideas, the expertise to pursue them diligently, and the discipline to stay the course of the commercialization journey. Of course, just revamping the immigration norms may not do the trick completely. We must take adequate measures to help the best and brightest coming in, to assimilate quickly and effectively. The internet lores around the GTA having the highest number of Uber drivers with Ph.Ds. are probably untrue but they do highlight the fact that highly skilled immigrants have difficulty finding desired work in our country.

Making it easy for academic inventors and innovators retain rights to their work

Our policies must allow creators and inventors associated with academic institutions to retain a significant amount of ownership of their work. That way they can have meaningful opportunities to commercialize their innovation efforts. There are already a few universities that are allowing this flexibility to their academic staff. We need all institutes of higher learning to follow suit.

Alignment of financial incentives

Payoffs at the end of the commercialization journey must be disproportionately large to encourage entrepreneurship. Our tax regime should not dampen the entrepreneurial spirit. The June 2024 Capital Gains tax rate increase is an example of a move that’s likely to cause significant concern among would-be entrepreneurs. And, that can never be good for innovation.

Finally, no discourse on a national conversation around innovation will be complete without a discussion on our “productivity problem”, because our ultimate goal is to grow our economy. On a GDP per person basis, we lag behind many peer nations. While some reports indicate smaller average firm size in Canada as the principal problem, this is likely a more nuanced issue. Canadian policy does need to focus on increasing productivity and bolstering firm sizes. We also need to remove regulatory barriers that come in the way of trade and competition.

Let’s be clear about this, though. Productivity increase will positively impact the rate at which value is added to our economy. We still need that pipeline of ideas, products and services and the policies that guide their creation, development and commercialization. That’s what makes this national conversation around innovation supremely important in these times.