Canada needs a targeted industrial strategy to improve innovation performance, experts say

NOTE: This feature story was published along with an accompanying story, “Canadian universities part of international alliance working to integrate basic and applied research.” Read that story here.

Canada’s continued poor performance in innovation and productivity is due to a failure to link publicly funded research and innovation programs to an industrial strategy based on the country’s strengths, innovation experts say.

Federal policy makers for the last four decades have been preoccupied with providing “inputs,” including various types of research funding, tax credits and other incentives, into the innovation ecosystem, several experts told Research Money. But they said that hasn’t resulted in an effective innovation strategy that produces “outputs," which are new technologies and products that are purchased domestically and exported to global markets.

“We are a big per-capita spender on research and innovation . . . The overall pot of money is there [but] we’re not focused on outcomes,” said Dr. Arvind Gupta, PhD, professor of computer science at the University of Toronto and former president of the University of British Columbia.

To increase business productivity and export earnings, Canada needs to leverage its existing industrial base and link innovation to things the country does well and can improve upon, such as building high-tech infrastructure, Gupta said.

Canada ranks 9th among nations on the World Intellectual Property Organization’s Global Innovation Index 2020 list when it comes to innovation inputs such as institutions, human capital and research and infrastructure, said Suzanne Grant, CEO of the Canadian Advanced Technology Alliance. But when it comes to knowledge, technology and creative outputs (including creative goods and services), Canada doesn’t place in the top 20 countries.

“We’re not getting the returns out of the investment in what we do,” Grant said. “One of the fundamental pieces that we miss in Canada is buying from our innovators, buying our own technology and our own innovations, whether it be from private sector or government."

“We have to focus more on a demand-driven approach,” said Robert Asselin, senior vice president of policy at the Business Council of Canada. Government needs to be more engaged not only in procurement but in creating demand and markets for innovative new products and services, he said.

There is an array of federal programs aimed at encouraging innovation and technology commercialization, such as the $1.26-billion Strategic Innovation Fund, the $3-billion Scientific Research and Experimental Development tax credit, the National Research Council’s $700-million Industrial Research Assistance Program and the $916-million superclusters initiative.

Despite these programs, Canada hasn’t successfully integrated industry with academia to generate applied research that creates new products and markets in the way the U.S. has done through large and well-funded institutions such as the Defense Advanced Research Projects Agency (DARPA), the National Aeronautics and Space Administration (NASA) and other organizations, Asselin said.

Canada needs a DARPA-like entity, he added. “[Canada’s approach to innovation] is not a coherent industrial strategy linked to doubling down on fast-rising sectors where we think we can double-down,” Asselin said.

The country needs an industrial strategy that aligns policy frameworks around challenges such as climate change, public health and aging demographics, and smart cities and communities, Asselin and co-authors Sean Speer and Royce Mendes wrote in a 2020 Public Policy Forum report.

Steady decline in Canadian government and business R&D spending

How much Canada spends on R&D and the sectors in which that spending occurs also is an important factor behind Canada’s innovation performance and productivity, said Ömer Kaya, vice-president, research and business development at Global Advantage Consulting Group.

The Ottawa-based consulting firm looked at Canada’s gross expenditures on R&D (public, academic and private sectors) as a percentage of GDP from 1981 to 2018. Gross expenditures grew over 20 years from 1981 to 2001, but have been steadily declining since, they found.

There is now a gap of $18 billion per year between Canada’s total R&D spending of $35.5 billion (in 2019) compared with the average amount spent on R&D annually by Organisation for Economic Co-operation and Development (OECD) countries, Kaya said.

R&D expenditures by the Canadian business sector are now only 48 percent of the OECD average. Government R&D expenditures have deteriorated steadily over 35 years, and are now only 46 percent of the OECD average.

However, R&D spending in Canada’s higher education sector has “grown enormously” since 1988 and is now nearly 500 percent greater than Canadian government R&D spending, Global Advantage’s study found.

Higher education spending on R&D totalled $14.65 billion in 2018. That is 59 percent above the OECD average and 81 percent above higher education R&D spending in the U.S.

"The overall pot of money is there [but] we’re not focused on outcomes,” — Dr. Arvind Gupta, professor of computer science at the University of Toronto and former president of the University of British Columbia

“We seem to be skewed so far to the academic and discovery [research] end of the innovation scale,” Kaya said.

Canada, like the UK and other countries, needs a long-term vision with a commitment to spend a certain percentage of GDP (such as the OECD average of 2.4 percent) on R&D, he said.

Despite the $14.65 billion invested in higher education R&D in 2018, intellectual property (IP) licensing revenues earned by Canadian universities amounted to $54.4 million, or less than 0.4 percent, according to the most recent data from AUTM (previously known as the Association of University Technology Managers). More than half the IP licensing revenue came from foreign companies, according to Statistics Canada.

“It would appear that we are using public money and assets to subsidize foreign innovation, and often these firms compete then against their Canadian counterparts,” Kaya said.

Canada has a poor record of owning the ideas generated by domestic firms and turning publicly funded research into IP for Canada’s economic benefit, said Benjamin Bergen, executive director of the Council of Canadian Innovators. “Far too often we give taxpayer-funded ideas away for free to foreign tech companies to commercialize, and then they charge Canadians for using those technologies.”

“Until we learn that ownership of ideas is a precondition to commercialization of research, tinkering with how we allocate research funding will not meaningfully change Canada’s overall performance in the global innovation economy,” Bergen said.

Innovation agenda hampering basic research

The federal government’s focus since the early 1980s on innovation and applied, industry-driven research and commercialization has had a detrimental impact on basic, investigator-led research at academic institutions, according to studies by University of Toronto researchers.

“The push on innovation has reduced the funding available for basic research and researcher-driven research,” said Emina Veletanlić, a PhD student in higher education at the University of Toronto.

A 2020 study by Veletanlić and Dr. Creso Sá, PhD, distinguished professor of science policy, higher education and innovation at the University of Toronto, examined how the Natural Sciences and Engineering Research Council of Canada (NSERC) has allocated research funding between 1991 and 2016 in response to federal innovation priorities. They found that NSERC’s funding dedicated to supporting basic research declined to 40 percent of its budget in 2015-16, from nearly 53 percent in the early 1990s.

While NSERC’s overall budget increased during the 25-year period, funding for applied research aimed at commercialization grew by 79 percent, compared with only 27 percent growth for basic research funding. At the same time, the number of scientists applying for NSERC funding has increased.

During the same period, the average annual NSERC Discovery Grant paid to active researchers has declined, with the mean annual installment of $33,350 in fiscal year 2015-16 being “well under the going rate for one postdoctoral stipend ($44,000),” their study found.

“Far too often we give taxpayer-funded ideas away for free to foreign tech companies to commercialize, and then they charge Canadians for using those technologies.” — Ömer Kaya, vice-president, research and business development at Global Advantage Consulting Group

In a 2018 study, Veletanlić and Sá looked at two of NSERC’s longstanding programs, Strategic Partnership Grants (SPG) and Collaborative Research and Development (CRD), that support R&D activities between universities and industry to build innovation partnerships.

While the aim of the programs is to develop new innovative companies and diversify the economy, their study found that large Canadian firms in traditional industries (including oil and gas, metals, minerals, energy and forestry), along with subsidiaries of well-established foreign companies, have received the bulk of NSERC funding. For example, 3M Canada, Suncor Energy, General Motors of Canada, IBM Canada and Syncrude Canada were all among the partners in CRD projects for nearly every year over the 25-year span.

“There are clear mismatches between the programmatic ideas guiding the design of the SPG and CRD programs and the underlying problem of industrial innovation in Canada,” their study noted.

Also, with the increasing emphasis on having an industry partner, researchers feel like their freedom to pursue research without an industry partner is becoming severely limited, Veletanlić told Research Money. “The more research is pushed by the [government’s] innovation agenda, the less innovative it actually is," she said.

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