Diana Carney

Issues: Productivity and Innovation

February 15, 2012

Productivity growth is essential to maintaining, or increasing, our standard of living. It is especially critical at the present time, due to the lack of labour force growth in Canada (a demographic reality).

Canada’s productivity problem is well established.

Between 1984 and 2007 relative Canadian productivity fell from 90% of the US level to 76%. We now stand in the middle of OECD rankings of productivity growth, well behind countries such as the US, the UK and Japan. We also have well below our `fair share’ of companies that can be classified as global innovation leaders.

The challenge is to identify and address the reason for this demise. We do, after all, have a sound macro-economic base and apparently business-friendly policies in place.

The many different parts of the innovation system are performing at different levels:

  • University research is thriving, after changes in the support system in the 1990s, but commercialization (whether by the universities themselves, or otherwise) still lags.
  • On the corporate side, both R&D spend and investment in machinery and information and communications technology (ICT) (especially) are low by comparison with other countries.
  • Financing for innovation (venture capital and angel investment) remains a concern with domestic sources being under-developed.
  • Canada generally has a well-educated workforce, though we may have a skills mismatch with current and future requirements (e.g. in the energy sector). However, we certainly have a significant deficit, compared to the US, in sales and marketing leadership.
  • Public sector innovation is at a very low ebb due to fiscal austerity, intense press scrutiny leading to fear of failure, heightened concerns about accountability and ideological beliefs about the appropriate role of the state.

As we seek to address the problem, there are several questions that we must answer. These include:

  • What role does (or should) the federal government play in supporting productivity growth and developing the innovation system? Are there particular impediments to progress that need to be removed?
  • To what extent is our productivity and innovation deficit a direct consequence of our `retreat’ to becoming, once again, a resource economy? (Resource-extraction companies tend to invest below average amounts in R&D. They are also very poor at investing in  ICT (e.g between 2000 and 2007 Canadian mining companies invested only about a third of what their counterparts in the US were investing) and are grappling with ever more difficult extraction of non-renewable resources.
  • How do we overcome the fact that much of Canada’s industrial base is effectively `branch manufacturing’ for the US and therefore not a hotbed for innovation (especially since the two markets do not tend to require significantly different products, meaning that Canada-specific research may not be required)?
  • Do the limitations of the Canadian venture capital and angel investment markets matter? How easily can Canadian firms access US sources of finance, and what prevents US investors from coming here? How can angel investors be better incentivized in Canada and how can we attract more US capital?
  • We have relied for the last two decades at least on increasing deregulation and free market policies to increase our business competitiveness and productivity. Is this working for us? Or would we be better off if government were to play a more deliberate role in markets, supporting certain sectors and actively promoting favourable outcomes?
  • How can public sector innovation be encouraged in a way that is both cost effective (thereby staving off cuts in this time of fiscal austerity) and that acts as a catalyst for business sector productivity gains?

Innovation and productivity growth can take place both within corporations and within the public sector itself. Both are critical and both are affected by public policy. It is therefore essential to find answers to the questions above and to turn those answers into viable policy options that will help Canada move forward as strong and innovative economy.


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