Canada needs a real innovation strategy

We invent, but don’t have an adequate system to take ideas to the next step

Dan Breznitz is a professor and the Munk Chair of Innovation Studies, in the Munk School of Global Affairs & Public Policy at University of Toronto, and the author of Innovation in Real Places.

Daniel Trefler is the Douglas and Ruth Grant Chair in Competitiveness and Prosperity at Rotman School of Management, University of Toronto.

Innovation is back in this year’s election cycle. Sadly, in the worst possible form. One can guess this from the latest innovation buzzword: DARPA, short for the Defense Advanced Research Project Agency of the U.S. Department of Defence. Before we explain why this is such a bad idea, let’s start with two alarmingly simple questions.

Why do we want innovation?

We want innovation because it is the driver of improved living standards. Furthermore, for rich countries such as Canada, it is the only way to create and sustain high-paying jobs. But high-paying jobs for whom? Which takes us to our second question.

What kind of society do we want? As Canadians we want a healthy society built on an economy that generates good jobs for all, rather than extremely high-paying jobs for the few. This is essential to remember since too often in Canada when we talk about innovation, we mean the Silicon Valley model, the ultimate inequality-generating machine. The endpoint for any discussion of Canadian innovation policy must be good jobs for all.

The starting point is an explanation of Canada’s failings as an innovator country. The reason is simple: Canada invents but does not innovate. Invention is the process of coming up with a new idea. Innovation is the actualization of that idea.

For example, consider Canada’s own Ronald Cape, who established the world’s first biotechnology company. He finished his Canadian education with a McGill University PhD, but when it came to actualizing his ideas he set up his company in the United States, where he built the team that discovered PCR, a crucial technology for COVID-19 testing and for the development of mRNA vaccines. A great Canadian inventor. A brilliant American innovator.

Innovation involves four stages: creation of the idea, development of the product, constant improvement of the product, and production. Canada only has the first stage down pat. As a result, in every election cycle we engage in ritualized pulling of the hair about our inability to move into stages 2 through 4.

Spoiler alert: DARPA is yet more of Stage 1.

The Conservative and Liberal parties want to build a Canadian DARPA they named CARPA. DARPA is an American policy for encouraging the best of Stage 1 innovation.

As a stand-alone, it is of little value. What gives it legs is that behind it stands the world largest procuring organization (the U.S. military). Further and unlike Canada, the U.S. possesses an abundance of companies that have the capabilities to

run with DARPA’s ideas, that is to take them from a barely working technological prototype into viable commercial products, which they then produce. Canada’s CARPA will have legs … long legs that will carry our ideas south to the U.S. and east to China where they will be commercialized and produced.

Worse, CARPA will not solve our main innovation failure: that our business sector just does not innovate.

Canada’s failure to engage with innovation stages 2 to 4 is reflected in our statistics on business research and development expenditures, or

BERD. Canadian BERD is an abysmal 0.7 per cent of GDP.

To get a sense of how bad that is, we rank just below Poland and embarrassingly behind both the OECD leader (Israel at 4.4 per cent) and the U.S. (at 2.3 per cent).

We are stuck at 0.7 per cent because this is a very comfortable position for Canadian business. They do not need to innovate because their competition is not innovating. Mr. Cape saw this.

Ask yourself why a COVID-19 vaccine was not developed in Canada. To fully innovate an mRNA vaccine, you start by inventing the molecule. Canada is perfectly capable of this Stage 1 activity. But to bring the vaccine to market, you also need suppliers that figure out new ways to produce it at scale, sophisticated glass makers that develop new delivery vials, distributors who work out new refrigeration logistics, and so on down the supply chain.

In countries with healthy innovation ecosystems, all those suppliers must innovate because they are part of an innovating business sector. In Canada, all those suppliers have been starving to death for the past 30 years.

What kind of society do we want? As Canadians we want a healthy society built on an economy that generates good jobs for all, rather than extremely high-paying jobs for the few. This is essential to remember since too often in Canada when we talk about innovation, we mean the Silicon Valley model, the ultimate inequality-generating machine.

In economics, we call this a bad equilibrium. In politics, we call this a Canadian innovation strategy.

Conservatives and Liberals alike are advancing policies that double down on Stage 1 government spending. Our politicians are smarter than this, and we need to ask more from them. They need to recognize that the innovation ecosystem we play in is increasingly a global innovation system. It is a system that is fragmented into multiple stages.

This leads to a crucial question: Where do we want to play in the global value chain?

Let us think about successful economies that use innovation as a tool to create good jobs for all.

Taiwan did not invent the semi-conductor, but became a world leader by focusing on the development, improvement and production of semi-conductors (innovation stages 2 to 4). Shenzhen, China, did not invent consumer electronics, but they dominate through relentless improvement and production (stages 3 and 4). High fashion remains in Italy because Italian designers backed stages 2 and 3 innovations in clothing, shoes and furniture.

In not a single one of these cases did a DARPAlike organization play a role. And all have steered clear of the Stage 1, Silicon Valley model that generates good jobs for the few.

It is impossible to briefly explain exactly what Canada should do. For that, read Dan Breznitz’s new book Innovation in Real Places. However, we can offer some insights. CARPA supporters are right that we need a government innovation agency focused exclusively on maximizing business innovation. This cannot happen when annual budget cycles are used to direct long-term innovation. A Canadian innovation agency must have a long-term outlook and an independent governance structure to match. For that insight we applaud the idea of CARPA. But only as governance structure, not as a full model of the innovation agency Canada desperately needs.

It is time we follow other successful societies, from Denmark and Finland to Taiwan, by rethinking how innovation policies are developed and by choosing the ones that best fit our economy, society and public goals.

It’s election time and Canadians are back on the merry go-round of failed innovation policies. Stop the ride. It is high time we get this right.