Dr Robert Crawhall

Are our innovation strategies aligned with the medium-term needs of our economy?

By Dr Robert Crawhall

In the past few years, Canada and the provinces have made major strides in funding university research. They have been focusing on commercialization and laying the strategic foundations for our economic future through strategic investments in innovation in the areas of biotechnology, nanotechnology and, despite major market disruptions, in information technology (IT). But the service sector, which accounts for 65% of our national value-add and 75% of jobs, has been under-represented in the innovation dialogue. This is not a uniquely Canadian phenomenon, as demonstrated in the October 2005 publication by the OECD, entitled Promoting Innovation in Services.

Why is this important? The success of the service sector is directly related to quality of life. In addition to providing a livelihood for three quarters of the workforce, the service sector plays a vital role in shaping everything from health and education to leisure activities and financial management.

Over the next decade, the service sector will become an even more dominant portion of our economy. It will offset challenges to our manufacturing sector by foreign competition and off-shoring, and the lead times before the biotech and nanotech sectors can account for a substantial percentage of the national economic performance. It seems prudent for the service sector to be given more emphasis in national innovation policy.

How do we increase the engagement of the service sector in the innovation agenda? A starting point is to recognize a policy gap and actively engage the service sector business leadership, suppliers and investors in a dialogue around the importance of aggressive innovation. Another is to look at one of our major instruments of economic development policy - investments in university and college research - to ensure the needs of the service sector are being addressed.

For many people, the service sector is synonymous with the fast food industry. In reality it encompasses a diverse set of sophisticated markets including wholesale and retail trade, restaurants and hotels, transportation, communications, finance, health services, government, insurance, real estate and business services. Companies range in size from some of our largest institutions such as the national banks to thousands of small and medium enterprises (SMEs).

Meaningful metrics for innovation in the service sector are hard to come by. Economists continue to debate the validity of labour productivity growth factors but they are one of the few broad-based statistics available. Over the past decade, the Canadian service sector outside government and communications services had labour productivity growth at only half that of the US (0.9% vs. 1.8%).

The service sector already hires many of our highly skilled graduates. However, direct academic research funding that addresses service sector innovation is limited. and much has been off-shoots from investments in information and computing technologies (ICT). Until recently, most major ICT research programs were driven and shaped by the needs of a few large high-tech companies. These firms had significant internal innovation and receptor capacity, working on technology roadmaps that plotted the next decade or so of requirements - a comfortable timeframe for integrating the traditional university research cycle from inspiration to commercialization.

These programs are facing their own challenges as the onus for innovation - even in the ICT sector - is moving to SMEs. Some have developed business models that effectively leverage academic research, but most have few resources to address issues beyond next quarter's earnings. Technology and process innovations for an SME must generally be brought much closer to product-readiness than for a large corporation if they are to be effectively incorporated into their business. This requires a willingness by the academic community to devote more resources to multi-disciplinary proof-of-concept projects.

Service sector SMEs are therefore facing a double challenge - a shortage of innovation programs aimed at their markets and research programs whose structure is often incompatible with their size and resources.

The OECD document identifies four key differences between manufacturing-oriented and service-oriented innovation:

1) Service-sector innovation depends less on formal R&D than knowledge gained through collaboration and acquisition of new equipment;

2) Access to highly qualified personnel with appropriate skills is especially important for the service sector;

3) Small service firms tend to be less innovative than larger ones but the role of newly established firms in innovative activity is greater in services than in manufacturing; and,

4) Service sector firms are particularly sensitive to policy regimes related to software and business process patents.

The National Capital Institute of Telecommunications has participated in two major research projects over the past five years involving academia, the private sector and the federal laboratories. The first was an IT research initiative that survived the disruption of the telecommunications market by working to meet the needs of SMEs. The second is a large project in electronic commerce of particular interest to large and small service sector firms. The experience gained through these projects is consistent with the observations in the OECD report.

There are opportunities to make the university and college research programs more effective policy instruments for service sector innovation. These include increasing the leverage of SME cash for matching grants, providing proof-of-concept funds for following up to research activities, providing support for business process patents, encouraging cross-faculty graduate work that emphasizes the service sector and incentives for small companies to hire graduate students as part of their studies. However, the first step is to start the dialogue between business leaders in the service sector and researchers to develop an understanding that would engage them in the innovation research process.

Dr Robert Crawhall is president & CEO of the National Capital Institute of Telecommunications and executive director of the Ontario Research Network in Electronic Commerce. He was formerly director of Disruptive Network Technologies and Advanced Technology Strategic Planning at Nortel Networks with global responsibility for university research programs.