Clusters’ last stand: regionalism and red tape lost the battle for innovation

The federal government failed to implement the key objective of Canada’s superclusters and needs to overhaul how their performance is evaluated, innovation policy experts say.

Ottawa failed to implement the five superclusters — now rebranded as the Global Innovation Clusters — in a way that would grow geographically concentrated innovation clusters, which was the original intent, they told Research Money.

The impetus for the superclusters initiative was a 2016 report by McKinsey & Company that looked at the nascent digital technology supercluster in the Toronto-Waterloo innovation corridor, says Dr. David Wolfe, PhD, co-director of the Innovation Policy Lab at the Munk School of Global Affairs & Public Policy, University of Toronto.

“The feds put it [the concept] through this consultation-policy formation meat grinder,” Wolfe told Research Money. “And they came up with something that bore no relationship whatsoever to the original idea.”

According to the McKinsey report, “Density is the key for winning clusters: they require the geographic concentration of economic value and large or growing firms.”

“From a cluster perspective, that [objective] just sort of fell off the table,” said Wolfe, who has studied clusters for 25 years.

After the industry-led superclusters were announced in 2018, with $950 million in government funding over five years, Ottawa tied them up in bureaucratic red tape, says Alex Usher, president of Higher Education Strategy Associates, a Toronto-based consultancy, and a Fellow-in-Residence at the C.D. Howe Institute.

As a result, the superclusters’ funding flowed much later than expected and was spent on things other than growing clusters, such as projects in response to the COVID-19 pandemic, Usher said in an interview.

The original concept of the superclusters “quickly got overtaken by regional political logic — the regional politics and the [patronage] spoils system in Ottawa,” he said.

Innovation, Science and Economic Development Canada (ISED) decided there had to be a supercluster in each of Canada’s five regions, and each supercluster had to serve the entire region rather than grow concentrated clusters, he added.

“The real goal of clusters is to have self-sustaining, geographically concentrated networks of innovation. That was never going to happen,” Usher said.

A 2017 report by the Brookfield Institute for Innovation recommended that the federal government establish an independent expert body and relevant performance indicators for tracking cluster policy success. “The government should identify each cluster’s stage of growth, benchmark clusters against global peers, and monitor their growth trajectory,” said the report.

Superclusters performance criteria “flawed,” critics say

ISED hired Ernst & Young (EY) to conduct an economic analysis of the superclusters’ impacts. The March 2022 EY report used performance indicators such as:

• total project spending by the superclusters and industry partners;
• projected number of jobs created;
• number of members in the superclusters’ networks and project participants; and
• intellectual property rights created.

But Wolfe, Usher and other critics argue that those performance indicators are flawed for evaluating capital-intensive, technology-based innovation programs such as the superclusters initiative.

A set of more meaningful performance indicators, Wolfe said, would have metrics such as productivity growth, companies’ sales and exports, and R&D spending by the private sector.

“If we’re not making the effort to measure how these [innovation] spending programs are contributing to increased sales, and how they're contributing to raising the BERD (Business Enterprise R&D spending) ratio for Canada, then we’re going in the wrong direction,” Wolfe said.

Usher agreed, saying: “I think there were so many competing interpretations of what that [supercluster] money was supposed to achieve, that nobody ever came up with a realistic set of objectives and metrics.”

Ottawa originally projected that the superclusters initiative would lead to the creation of 50,000 jobs, increase GDP by $50 billion over 10 years, and accelerate innovation.

The EY report’s short-term projection (FY 2018-19 to FY 2022-23) on jobs created is 23,877 full-time equivalent jobs. This exceeds initial projections of 15,000 direct, indirect and induced jobs created by 2023, according to ISED.

However, Usher noted that EY did not count individual new job positions created. Rather, EY used its proprietary economic contribution model to assess, based on total spending from all supercluster projects, their employment impact.

“Literally all they are doing is putting the amount of dollars spent into an economic calculator and assuming that jobs have been created, because that’s what happens when you spend money on anything” Usher said.

In fact, FY’s full report provided by ISED to Research Money cautions that “one should not take the economic impacts presented in this report at verbatim. We cannot say with certainty that X dollars of capital or operational spending will produce X number of FTE jobs or have an X amount of impact on GDP.”

More precise metrics recommended two years ago

The EY report consists of traditional performance indicators based largely on EY asking supercluster representatives, project partners, industry associations and research institutions whether the clusters are on track, says Dr. Catherine Beaudry, PhD, Canada Research Chair in Management and Economics of Innovation at Polytechnique Montréal.

“I think there’s a very strong buy-in from the individuals involved and they really make an effort for that [program] to work,” Beaudry said in an interview.

However, being able to meaningfully measure the superclusters’ performance requires indicators that detail the relationships among individuals, companies and other organizations participating in the superclusters’ networks and projects, she said.

“We need to go beyond the bean counting to actually measure what’s happening on the ground: who’s working with whom, for what reason, and what is the outcome of that,” Beaudry said.

In a 2020 study for the Institute for Research on Public Policy, Beaudry and co-author Dr. Laurence Solar-Pelletier, PhD urged the federal government and the superclusters to develop more sophisticated indicators — beyond “generic indicators” that “overemphasize basic metrics” — to measure the potential and impact of the clusters’ innovation ecosystems.

Key elements that need to be measured include the nature and links of relationships among ecosystem constituents, the innovative capacity of the people involved, and the extent of knowledge transfer and technology adoption taking place, the co-authors said.

Beaudry told Research Money that there needs to be another evaluation of the Global Innovation Clusters done now, using new and more precise indicators that assess whether the relationships developed by the clusters and among its members will be sustained, transformed and lead to other projects and activities.

“Otherwise, the government will need to constantly feed the superclusters with money, if those relationships don’t last after the money is gone,” Beaudry said.

ISED defends superclusters’ performance

ISED, in an email sent to Research Money by media relations advisor Andréa Daigle, defended the clusters’ performance to date.

“After four years of operations, the [clusters] program has already shown to be on track to meet or exceed targets across key objectives,” Daigle said.

As of June 2022, she said, the five clusters have been involved in 495 projects worth more than $2.19 billion, with 2,320-plus project partners including 1,252 small and medium-size enterprises.

The clusters have leveraged $1.28 billion of the total project funding from industry and other partners. That amounts to a 1.6 ratio for every dollar invested by the clusters, surpassing ISED’s initial target of a 1.2 ratio for increasing industry investment in innovation, according to ISED.

Given that many projects were still underway or in development when EY was collecting data, Daigle said, “EY’s qualitative and quantitative assessments identified both actual and anticipated socioeconomic and economic benefits, highlighting how the Clusters are creating stronger ecosystems, de-risking adoption of technology, maximizing the value of intellectual property, and forging new partnerships that increase firms’ market potential.”

Federal budget 2022 included another $750 million over six years for the re-branded Global Innovation Clusters, starting in 2022-23 and to be allocated on a competitive basis.

The new name highlights the government’s objective to see the clusters expand their international presence and collaborate to deepen their impact on Canada’s economy, Daigle said.

While the clusters’ overall objectives and areas of focus remain consistent, “the program is adding a new lens with missions that focus on identified national priorities: specifically, greening the economy and enhancing supply chain resilience in the context of each Cluster’s ecosystem,” she said.

In competing for the new $750 million in funding, the clusters will have to submit funding proposals to be reviewed by a team of external reviewers and federal officials, Daigle said.

However, Wolfe said the real “dilemma” in Canada’s innovation ecosystem is there’s no dedicated support for scaling companies to grow to a size where they’re globally competitive. Instead, he said, what happens is that firms grow to $100 million to $150 million in sales and then they’re bought at a substantial discount by a foreign entity.

“We need to create a fund, or fund of funds, which focuses on investing in Canadian firms which have the potential to go past the $100 million or $150 million mark in sales,” Wolfe said.

“If we don’t have an investment fund of some type dedicated to keeping those firms in Canadian hands, the scale-up strategy will ultimately fail.”

Role of new Innovation and Investment Agency still uncertain

Budget 2022 also announced $1 billion over five years for a new “operationally independent” federal Innovation and Investment Agency.

Wolfe and Usher both said they have hopes for the new agency, given that Dan Breznitz, the Clifford Clark Visiting Economist at the federal Department of Finance Canada appointed to advise on innovation policy, is helping to design it.

Breznitz, the Munk Chair of Innovation Studies in the Munk School of Global Affairs & Public Policy at the University of Toronto, is the co-author of a series of articles on “peripheral agencies,” such as those in Finland and Israel, that played a transformative role in introducing new science and technology policies and facilitating industrial restructuring.

Usher, however, said the government does not have to wait for the new agency to improve productivity and innovation. Ottawa could do that immediately, he said, by procuring more Canadian-made technology and by making monopolistic sectors, such as the airline, telecommunications and other industries, more competitive.

Beaudry spearheaded the creation of the 4POINT0 Partnership for the Organisation of Innovation and New Technologies, which is exploring how the new innovation agency can be integrated into Canada’s ecosystem to help companies innovate.

Statistics Canada and government funding agencies regularly gather data on companies’ innovation activities. Canada needs an organization that coordinates research and this data, to deliver targeted investment and support aimed at improving firms’ innovation outcomes and growth, Beaudry said. “The only way we are going to succeed in Canada is if we are well integrated and coordinated.”

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