Canada’s research-centric approach to innovation has failed. We need to orient our support programs to other success factors when they’re necessary.
by Ron Freedman. Originally published on Policy Options
September 3, 2022
Four different policy truisms – we would argue they are myths – are at the heart of Canada’s disappointing innovation policy performance. Decades of woe-is-us policy reports, studies and commentary often explain Canada’s innovation underperformance by pointing the finger at business owners and managers for not investing sufficiently in research. Billions of public dollars annually in grants, contributions and tax concessions are spent in pursuit of the Canadian business-needs-more-research objective. It is time to acknowledge the obvious – that approach has not worked.
It’s a distressing state of affairs for many people, including Daniel Munro, Darius Ornston and David A. Wolfe, authors of a recent Policy Options article, “Breaking Canada’s innovation inertia.”
But it’s not because corporate owners and managers don’t understand what’s good for them – more research. What is the ideal level of corporate research? Most policy-makers would say Canadian businesses should double research and development (R&D) spending to reach the OECD average.
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Most business leaders would say that the proper amount of spending is the minimum amount needed for a firm to maintain or secure an advantage over competitors. Anything more is simply wasted spending. (Sadly, few in the analytical community look at the number of R&D performers – the number of firms “in the game” – which is an equally important innovation indicator.)
It is time to challenge some deep-seated policy beliefs that underlie our failed policy approaches.
The ideal of the “innovation chain”
First among them is the “innovation chain.”
This idealized model of firm growth presupposes that basic research leads to applied research and on to prototype development, product development, sales, exports, market share and so on.
For decades, the innovation chain model has implicitly and explicitly underpinned innovation policy and programming, which presumes that research is uniformly vital to corporate growth. It also suggests that firms should do more basic and applied research in the expectation that it will lead to new corporate sales and profits, and expanded GDP.
Innovation-chain proponents have an implicit belief that business firm growth – and ultimately national growth – are dependent on achieving “breakthrough” research that sweeps aside their product and process precursors.
But the vast majority of business firm growth and development is in fact incremental. It relies on small but notable improvements in products and processes that meet customer needs, and that distinguish products or services in the market, rather than scientific or technological revolutions. Ideas for those improvements come from staff, customers, suppliers and competitors, and not primarily from research. It’s hardly ever from university, government or corporate basic or applied research.
Yet current federal and provincial innovation policies and programs are almost exclusively designed to reward research, and not product or service development or evolution, let alone technology adoption – the latter being a huge challenge for many firms.
Certainly, in our view, firms should engage in research if necessary, but not artificially to the extent their business investment decisions and outcomes are skewed. A side effect of this misplaced emphasis on scientific research is that firms struggle to portray their innovation activities as research-based to qualify for available public funds. This distorts funding programs, wastes resources and produces an industry of third-party enablers (grant and tax consultants). These consultants’ role is to shoehorn legitimate non-research business activities into a research framework.
Again, this is not to say that policy should not support basic or applied research where firms deem it to be in their interest. Quantum computers, biotechnology, modular nuclear reactors and advanced batteries are examples of technologies and industries that will clearly rely on both on basic and applied research. But they are not typical of the challenges facing most companies or industries. Most companies require assistance with adopting and adapting new technologies, not with research by itself.
Gap-filling: a flawed approach
The innovation-chain truism spawns a second policy orthodoxy – the gap-filling approach to innovation policy. This myth posits that the “problem” with innovation policy is that there are funding and incentive “gaps” in the innovation system and that the role of public policy is to fill those gaps. Accordingly, an “ideal” innovation policy consists of a panoply of initiatives designed to fill policy gaps. The problem with the gap-filling approach is that inevitably the next identified gap is a smaller and less important than the previous gaps. Filling it is the epitome of declining marginal returns. Ultimately, gap-filling policy produces not a coherent approach to innovation but a set of program “patches,” akin to a heavily patched inner tube.
SMEs and the “casino” approach
A third prevailing policy orthodoxy that desperately needs to be challenged is that innovation policy should focus primarily on SMEs – small and medium-sized enterprises. In fact, most government programs concentrate on supporting small firms – under 100 employees – and not on their medium-sized counterparts with 100-500 employees. This could best be characterized as a “casino” approach to economic development. In other words, bet small amounts of taxpayers’ money on a large number of start-up and early-stage firms in the hope that one of the bets will eventually pay off in a successful large multinational enterprise.
What is usually ignored is that venture capital companies’ experience shows that 90 per cent of even their best-informed bets will fail in the short term, another eight per cent might return the original investment, and one or two per cent will meet expectations for strong firm growth. Should policy-makers be investing in firms with a predictable 90 per cent failure rate? They might be better off investing the available funds in GICs.
Instead, the policy and program focus should be on medium-sized firms that have endured the start-up and early-stage gauntlet and have established themselves. By definition, it is medium-sized firms that will comprise the multinational enterprises of the future. An important Business Development Bank of Canada study says we ignore them at our peril.
Organic growth is not the fast track
A fourth myth is the implicit belief that business growth is organic – that companies grow organically, starting out as small firms, evolving into medium-sized enterprises and ultimately end up as multinational enterprises (MNEs) as revenues and profits increase over time. That does happen occasionally, but usually over the course of decades rather than years.
For many fast-growing firms, accelerated growth relies on mergers and acquisitions of competing firms, which provide instant access to new customers, products, processes and markets. Search in vain for a Canadian innovation program that supports acquisitions, let alone a discussion in the policy community of this key growth mechanism. Yet every day we pay the price when foreign companies acquire their Canadian competitors and stunned policy-makers cry foul. Time to turn the tables.
There are additional beliefs that need to be addressed before Canada can turn around its innovation performance, but this is a good starting point. Let’s begin by acknowledging that our research-centric approach to innovation has failed for the most part. We need to start from scratch and understand what firms truly need to succeed.
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Where that involves scientific research, by all means let public resources support research. When other success factors are necessary, such as technology adoption and adaptation, and mergers and acquisitions, let us adapt our support programs accordingly. What we cannot do – if we expect better outcomes – is to double down on our current approaches.
This article first appeared on Policy Options and is republished here under a Creative Commons license.
