Canada needs a more competitive landscape for R&D to thrive

Theglobeandmail.com
June 12, 2016
By Barrie Mckenna

Prime Minister Justin Trudeau and Ontario Premier Kathleen Wynne were giddy with excitement as they rode an all-electric Bolt into General Motors’ announcement of roughly 700 new research jobs in Canada.

The event, held last week at GM’s research centre in Oshawa, Ont., offered up a buffet of buzzwords - from connected vehicles and mobility systems to clusters and ecosystems.

Mr. Trudeau said GM’s investment in engineering dovetails perfectly with his government’s strategy to make Canada “the most innovative country in the world.”

But it’s not at all clear where the government fits into GM’s plans, which include opening a new software development centre in Markham, Ont., and overhauling a cold-weather testing facility in Kapuskasing, Ont. There were no immediate announcements of federal or provincial cash for the auto maker, though both governments have poured billions into the company over the years.

The event had the feel-good aura of innovation at work, and Mr. Trudeau and Ms. Wynne clearly wanted to bask in the glow.

Nearly five years after a watershed federal review of government research-and-development efforts, Ottawa is still struggling to figure out its place in helping to reverse the country’s lagging innovation performance.

The 2011 expert panel, headed by Open Text Corp. chairman Tom Jenkins, called for an overhaul of the billions of dollars a year the government spends to spur business innovation. The Conservatives implemented many of the panel’s main recommendations in the ensuing years. The government tightened the rules of its signature R&D tax-break program, shifted more money into direct business grants and restructured the National Research Council to emphasize more industry-focused research.

Regrettably, none of these efforts has fundamentally altered the innovation landscape. Nearly five years after the Jenkins report, Canada remains a laggard, particularly when it comes to business investment in R&D. Business R&D as a percentage of gross domestic product has continued to decline. Indeed, total spending by Canadian businesses was lower in 2015 ($15.5-billion) than it was in 2010 ($15.8-billion).

A new Institute for Research on Public Policy report suggests that governments will continue to play at the margins of the innovation game unless they get at the root causes of the problem.

In a nutshell, too many sectors of the Canadian economy are overregulated and shielded from full competition, according to the report’s author, Andrei Sulzenko, a former top official at Industry Canada and a fellow at the University of Calgary’s School of Public Policy. As a result, he argues that too many companies have little incentive to innovate.

“The lack of serious, sustained competitive pressure in many key sectors of the Canadian economy has made it rational for businesses to underinvest in a range of riskier innovation activities, including R&D,” the report said.

In an interview, Mr. Sulzenko was even blunter: “Companies don’t have to innovate to make money.”

The report identifies telecommunications, airlines, financial services and the supply managed agriculture sectors as prime examples of the problem. It also points to the “pay-to-play” auto and aerospace sectors, where R&D efforts are often heavily subsidized by government.

As evidence of the lack of competition, Mr. Sulzenko points to studies showing that corporate profits as a percentage of GDP were higher in Canada than the United States every single year from 1988 to 2014. This suggests that many Canadian companies are simply too fat and happy to bother with innovation.

“One of things you have to get right is the competitive environment in which Canadian businesses operate,” he said. “In some respects, they’ve had it relatively easy and that’s why they’ve been comfortable in their low innovation equilibrium.”

Getting Ottawa to move on foreign-ownership rules and other regulatory issues won’t be easy, Mr. Sulzenko acknowledged. The losers will fight hard for the status quo.

There is greater urgency to get the policy right this time. For decades, Canada’s economy has been able to do pretty well on the strength of expanded trade, high resource prices and a growing labour force.

Unfortunately, these traditional drivers of growth have stalled. And most experts say innovation, and more specifically, productivity growth will have to do the heavy lifting going forward.

Tinkering with the relatively small sums that Ottawa spends on R&D - as the Tories did - did not drive corporate behaviour.

Mr. Trudeau’s pitch to multinationals that Canada wants to be a global innovation hub is a nice sentiment.

But they are all just nice-sounding buzzwords until the government injects some substance into its promised innovation agenda.