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August 27, 2013

Innovation and growth – two peas in an underperforming pod.

Does Canada have an innovation problem or a corporate growth problem?

Another week goes by and another tree gives it life to a story about Canada’s ongoing innovation problem. Case in point is this story in the Globe and Mail which notes that “Despite bright spots in Waterloo, Ont., and Ottawa, the country’s performance on most of the important benchmarks of innovation has been deteriorating for years.”

To put why this matters in perspective, here’s the recently released 2013 Forbes list of Most Innovative Companies. Of 100 companies on the list, just 1 makes it home in Canada. That company, Valeant Pharmaceuticals (formerly Biovail) is a generic drug maker. By way of comparison, there are 39 US companies on the list, 13 Japanese, 7 French, and 5 from both Germany and the UK.

Note: The methodology used to compile the Forbes list is unique and somewhat debatable as it is based on an “innovation premium” that measures the difference between a company’s market capitalization and a net present value of cash flows from existing businesses.  One could argue that this biases the results towards higher volume exchanges but we’ll set that aside.

If one wanted to do a more detailed look at this “geography of innovation,” one might break the list down on a per capita basis. Based on GDP, Canada ranks dead last amongst the 20 countries measured, significantly behind comparatively similar economies in the UK, France and Germany. By population, ditto, as we saddle up beside Spain and watch every other comparable economy race past us.

No matter how you cut it, the end result is the same – Canada ranks dismally on a relative scale of innovation prowess. This despite government spending on R&D that is amongst the highest in the OECD, and despite consistently high scores on  measures of startup activity (see here and here). So what gives?

As Anthony and I write in our May 2013 report on “Driving Canadian Growth and Innovation,” Canada’s innovation problem is tied directly to an equally significant growth problem. We do a poor job graduating small firms into large, innovative ones. And so while the funnel of entrepreneurial startups may be wide, our success at channeling them into billion-dollar global leaders is weak.

This is tied to five key challenges that have so far undermined the ability of small businesses to graduate into world-class firms:

– A lack of incentives to pursue growth and international expansion;

– A shortage of management skills required to achieve high growth;

– Under-investment in technology to enhance productivity and growth;

– A lack of investment in R&D to drive innovation; and

– Insufficient access to capital to finance growth (including investments in technology, R&D and management capacity).

Together these challenges have coalesced to significantly dampen the number of Canadian firms with the capacity to expand their operations and contribute meaningfully to both employment and economic growth.

To be sure, other issues are certainly present, for example what Eric Reguly calls our “sellout culture”. {This is tied, however, atleast in part, to the inability of corporate directors to fend off unrequited takeover efforts and thus an issue for securities regulators and the potential adoption of ‘poison pill’ legislation that would allow directors to say no.} However for the bulk of companies, the issue is not selling out but rather insufficient growth, and tied to it, insufficient investment in the factors that lead to innovation and growth.

What’s the solution? Read our conclusion here:  “DEEP Centre May 2013: Driving Canadian Growth and Innovation.”

 

 

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