Innovation: Opportunities without frontiers

©REUTERS/Chris Wattie

Canada is home to some well-known technology companies, but is the country innovative enough? The picture is mixed, with resisting complacency being among the challenges to face.

When the business magazine Forbes cast off from US shores two years ago to seek out, for the first time, non-US firms to include in its list of the world’s 100 fastest growing companies, its first sighting was not the ports of Europe or Asia or South America, but the northern bank of the St Lawrence River.

Waterloo, Ontario is the headquarters of Research in Motion (RIM), the manufacturer of the Blackberry smartphone. In just three years, the Canadian firm’s profits had grown by 84% and its revenues by 77%. The famous handset, which is used widely by OECD staff, is known not only for its versatility, but for its clever branding. Innovative thought went into both the technology and the marketing.

“Some say that Canadians are not risk-takers,” says Ilse Treurnicht, CEO of MaRS, a Toronto-based innovation centre. “Frankly, I don’t buy it. We certainly do not see that at MaRS, not among younger entrepreneurs, many of whom are new Canadians.”

MaRS (“Medical and Related Sciences”–the acronym stuck even after it ventured into other areas of innovation) is a public-private corporation offering advice, customer market intelligence and seed capital to entrepreneurs. Established in 2000, MaRS is a not-forprofit charity created to stimulate innovation in the life sciences, digital media and ICT, clean technology, healthcare and “social-purpose” enterprises. To date, it has worked with more than 1,300 Canadian firms.

But for many experts, Canada ought to be much more fertile ground for innovative businesses. After all, entrepreneurs face few hurdles in setting up a business, while bank credit is relatively easy to obtain. Overall tax rates are also among the lowest of the major OECD countries. “Canadian businesses have been very profitable, more so than their US counterparts,” says Ms Treurnicht, and cites a CCA (Council of Canadian Academies)/Nicholson report. “And our resources have been in strong demand.”

Canada wants to position itself as a leader with fresh ideas, not least on the international policy front. During the 1990s, the Internet confounded policymakers, who were trying to decide how such matters as taxation should be treated in global online commercial transactions. In 1998, Canada hosted a major OECD conference at Ottawa. That meeting laid the groundwork for today’s policy consensus: remove the barriers to e-commerce to allow Internet to flourish internationally.

But at home, it must do more to live up to its innovative billing. There is certainly no dearth of intellectual resources in Canada, and its spending on higher education as a percentage of GDP surpasses that of France, Germany, Italy, Japan, the UK and the US. Businesses too are keen to reap the harvest; their investment in higher education is above the OECD average. In general, Canadians are highly educated. Over 55% of the population between the ages of 25 and 34 has attained a tertiary-level education, as has 45% between the ages of 35 and 45.

Why then, with this low-hanging fruit in scientific competence, entrepreneurship and federal support, did the government, in its presentation of the 2010 budget, state that Canada lagged behind other advanced economies in terms of innovation?

“Our biggest barrier may be complacency,” says Ms Treurnicht. “National growth fuelled by an abundance of natural resource assets does not require us to be innovative leaders in a highly competitive global environment. Perhaps the need to innovate for survival and prosperity has not been a burning platform for Canadian businesses.”

One thing that fledgling businesses lack, she says, is venture capital. “The limited availability of risk capital at all stages of the growth cycle often impedes our ability to grow global companies from Canada.”

OECD figures support her. Among seven countries studied in 2008 (Australia, Canada, Denmark, Finland, the Netherlands, Norway and the UK), venture capital for Canadian start-ups, 0.08% of GDP, was the lowest of the group. This may be part of the reason that, despite the ease of entry, new firms made up only 8% of all registered firms in Canada in 2007, compared to 18% in the UK.

In research and development (R&D), which is a commonly used, though by no means complete, measure of innovation, Canada lags too. Spending by governments and businesses on R&D is known as BERD (“business expenditures on research and development”). In Canada, BERD accounted for just over 1% of GDP in 2008, below the OECD average of 1.6%.

Productivity effect
But does BERD impact on labour productivity? The OECD believes it does. “Productivity gains and GDP growth are strongly linked to new technologies and investment in a wide range of intellectual assets,” says Andrew Wyckoff, Director of the OECD Directorate for Science, Technology and Industry. “The advent of personal computers, the worldwide web and its offspring, and broadband communications networks, all play a key role driving efficiency gains, new business models and new firm creation.”

The May 2010 ministerial report on the OECD Innovation Strategy found that investment in intangible assets, including BERD, raised labour productivity in Austria, Finland, Sweden, the UK and the US by as much as a full percentage point. The slump in productivity and the widening gap between US and Canadian performance prompted the Canadian government in its 2010 budget to undertake a review of federal support for R&D, to improve opportunities for new businesses and to stimulate innovation.

“We need to recognise that young high-growth firms create the majority of new jobs in modern economies,” says Ms Treurnicht. “These firms also catalyse and spur the creation of future industries. Governments need to differentiate the needs of these gazelles within public policy frameworks designed to serve the general SME population, to ensure fertile conditions for their growth. Because these young firms also represent important sources of new ideas, entrepreneurial talent and future growth for more established firms, the private sector needs to invest in them and in the ecosystem that fosters their growth.”

Most R&D is carried out by big companies; the OECD Innovation Strategy noted that some 700 firms account for almost half of all R&D expenditure in the world. Canada is no exception: just 10 companies conducted a third of all R&D over the last two decades, and yet 98% of Canadian firms are small and medium-size businesses (SMEs) which employ some 5 million people, about half of the private sector. Unleashing this potential is one of the government’s aims set out in the 2010 budget.

To do this, it created the SME Innovation Commercialisation Program, which will allot CAN$40 million over two years to 20 projects and organise regional trade shows where SMEs can showcase their innovations. Canadian SMEs are eager. Compared to big Canadian firms, which earmark only 1% of their revenue to innovation, a limited number of innovative smaller firms may exceptionally invest far more than that.

But for innovation to take off, this spending should not all be targeted at R&D, which is only one key part of the innovation equation. Indeed some innovative firms undertake no R&D at all. “R&D is a powerful driver of innovation,” says Mr Wyckoff, “but it’s not the only one. Globalisation has changed the way economies transform knowledge into market value–the definition of innovation. That process now takes place increasingly outside the lab. New approaches to design, marketing and organisations are powerful drivers of growth.” Mr Wyckoff underlines what for the OECD is a key point: innovation is about implementing new and better ways of doing things, about how skills, ideas and technology are harnessed to raise productivity and potential. Such “intangible assets” account for between 5-12% of GDP in some OECD countries.

Unfortunately the economic crisis forced many firms to postpone or cancel innovative spending, which risks holding back growth. The CEO of MaRs is nevertheless optimistic. “Canada has a small local market,” says Ms Treurnicht, “and we have benefitted tremendously from the insatiable US appetite for our new products and services. Given that this market has become sluggish in recent years, Canadians are increasingly looking at new partnerships and new opportunities in emerging, high-growth markets. This will drive more innovation in the future.”

Innovation thrives in big spaces, and not only within wide geographical borders, but in the global forum of ideas. Companies with wider international contacts innovate more. “Skills, networks and trading knowledge,” says Mr Wyckoff, “are vital to competing efficiently in today’s economy where information travels in real time. Companies increasingly collaborate to reduce the cost and risk of bringing new ideas to market by tapping expertise around the globe.”

In this, Canada is no laggard. Funding from abroad accounted for almost 10% of combined government and business expenditures on R&D in 2009. The percentage of Canadian manufacturers who collaborate internationally on innovative projects is above the OECD average. This is a positive trend: according to the OECD, companies that collaborate invest more in innovation than less gregarious firms. Nor are Canadian firms jealous guardians of their innovations. A 2007 study by Statistics Canada revealed that 42% of manufacturers had developed their own technologies or had modified those purchased from other companies. These innovations were in their turn freely shared by 18% of companies, and often at no charge.

Ms Treurnicht is not surprised. “New models of innovation increasingly involve collaboration,” she says. “They involve collaboration across disciplines, geographic boundaries and even across the cultural divide between the public and private sector.

“Because of our vast geography, modest population and middle power status in the world, Canadians have a cultural disposition towards collaborative approaches and some experience in building these types of knowledge networks.” That’s experience from which both Canada and its OECD partners will no doubt benefit.


OECD (2010), The OECD Innovation Strategy: Getting a Head Start on Tomorrow.

OECD (2010), Measuring Innovation: A New Perspective?, read at

Public Works and Government Services, Canada (2010), “Review of Federal Support to Research and Development, Expert Panel Consultation Paper,” see

Wyckoff A.(2009), “Innovating a Recovery”, OECD Observer No. 273, June 2009

Council of Canadian Academies (2009), “Innovation and Business Strategy: Why Canada Falls Short, Expert Panel on Business Innovation”.

©OECD Observer No 284, Q1 2011

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