Shifting the innovation conversation to prosperity

In order for Canada to shift its focus from R&D to prosperity, post-secondary institutions have to better prepare young people to excel in commerce on a human level.

By H. Douglas Barber and Jeffrey Crelinsten

Research intensity – the percentage of GDP a country spends on R&D – is the traditional indicator that policy-makers use to assess the vitality of a nation’s knowledge-based economy. This is the measure that has dominated innovation policy in Canada for decades. Unfortunately, it is a faulty one, if our goal is commerce-based, sustainable prosperity.

With the current federal government committed to crafting a national innovation strategy, we believe it is important to change the conversation. In our view, the focus on R&D is a major distraction from the real issue – prosperity.

The engine of a country’s prosperity is export trade, particularly for small countries. In the resource economy, value is created from what we have, and Canada, with its abundant natural resources, is a big country. In the knowledge economy, value is created from what we know, and Canada, with its small population, is tiny (2 percent globally). To grow our knowledge-based export trade, we need more successful Canadian firms that create value from what they know and sell it globally.

In an expanded version of this paper, we demonstrate that from 1994 to 2006, the number of firms doing R&D in Canada doubled, but their total revenue increased more slowly. This suggests that policies encouraging R&D spending were successful, in that more companies performed R&D. However, the larger goal of enhanced economic performance was not met, as there was no corresponding increase in business success as measured by average revenue per firm.

Canada’s inability to generate significant revenue growth from its innovative R&D-intensive firms is clear evidence that we are failing in knowledge-based global commerce.

The traditional explanation that Canadian firms do not do enough R&D or innovate enough misses the core problem – an inability to grow and sustain medium and large R&D-intensive firms that successfully dominate global markets. Most firms stay small; or if they reach significant sales revenues, they sell to foreign interests without establishing themselves as global leaders in their market niche.

The key for Canadian entrepreneurs is to identify niche markets that they can dominate globally without attracting the interest of large multinational players because, for them, the markets are too small. For example, Gennum Corporation, a Hamilton-based microchip manufacturer, specialized in microchips for hearing aids as well as for high-speed digital signal transport for the world’s 20,000 television content-creation studios. The percentage of any population with hearing impairments is small, as is the number of television content-creation studios. Gennum built a $100 million global business in those niches and was the number one player in the world in both. They did it by understanding the needs of their customers and their customers’ customers and continually innovating and creating value for them.

Canada’s post-secondary education (PSE) institutions have a critical role to play in helping young people develop these skills and attitudes for value creation. However, it will require sustained effort and courage to create a supportive culture in these institutions.

Root causes: talent, culture and aspirations

The national discussion around Canada’s innovation agenda has seen business leaders in R&D-intensive firms and their investors highlighting, in the media and in submissions to government, a severe talent gap in new Canadian hires. Graduates from Canadian PSE institutions are unprepared on a human level to excel in commerce. They haven’t learned how to work to make an enterprise successful. More specifically, they lack human experience and skills in sales, marketing, management and communications. They are top-notch in technical knowledge and skills, but are not ready to help grow and scale companies.

Large multinational firms can afford to hire, coach and train such technically skilled employees in these human skills: and they do, luring Canada’s best graduates with attractive compensation and living packages. Canadian firms are at a disadvantage. Most of the graduates who stay have not been acculturated to value the human skills required in commercial enterprises, so Canadian firms struggle to recruit experienced sales, marketing and management people from the US and abroad.

Commerce is a value exchange. To do it well requires a broad range of human experience and skills. Canadian PSE institutions focus almost exclusively on technical knowledge and do not provide these broader experiences.  In fact, the dominant research culture excludes and marginalizes the experiential learning necessary to build and nurture entrepreneurial attitudes, experiences and skills in their students.

The federal government exerts enormous influence on Canada’s PSE institutions through the billions of dollars it provides to fund research. This largesse reinforces a PSE environment in which faculty and students value research and publishing above anything else. Entrepreneurial attitudes and relevant experiential learning are not rewarded. Merit and promotion for faculty rest almost exclusively on research publications and citations.

PSE institutions use detailed metrics and analytics to quantify their research output. They use these metrics for promotion and tenure decisions, and granting councils use them for evaluating grant proposals. Little effort goes to measuring the societal and economic impact of research. Relevance is perceived as counter-productive in quality research. The peer review process entrenches the use of these metrics, because faculty members who have succeeded in this research-focused culture populate evaluation committees. This practice represents a large and significant shift in research culture that has taken place since the founding of the Natural Sciences and Engineering Research Council of Canada in 1978.

As a result, Canadian firms find it difficult to find graduates who have any experience with entrepreneurship and value creation for society. Company executives consistently report that graduates with domain specific technical skills are world class, but few excel in sales, marketing, customer intelligence, team-building, management and other enterprise-relevant skills.

Some PSE institutions are addressing the need to develop entrepreneurial attitudes and skills among their students, but these efforts are piecemeal and struggle to be heard within the prevalent research culture.

Most graduates who become entrepreneurs do so shaped by the dominant research culture from their post-secondary education years. Many Canadian entrepreneurs focus on technology, spending too much time on product development before engaging potential customers. A preoccupation with financing leads many to seek angel and venture capital financing too early, locking into a path to a quick exit for their investors. (See our paper on why Canadian R&D-intensive firms disappear.) Selling early at relatively low valuations is the norm in Canada, perpetuating the dearth of medium and large Canadian innovative firms and R&D leaders. Relatively few Canadian entrepreneurs aspire to build and scale large firms that are sustainable, global leaders in their sector.

Fixing the problem

Worrying about Canada’s low business R&D is looking into the wrong end of the telescope – research. If we look through the proper end, the real problem comes into focus – lack of ability and aspiration to build and scale R&D-intensive firms that export knowledge-based goods and services.

In the knowledge economy, new solutions emerge all the time. The need to seek intelligence and information from potential customers around the globe — their likes and dislikes, their needs, and  their culture — is ever-present. The skills and experience needed to excel in this kind of intelligence-gathering and communication are largely ignored and unsupported in Canada’s leading research PSE institutions.

It is time that Canadian PSE institutions, and the granting agencies that support and fund them, accept their responsibility to provide broader learning experiences to students so that they are better equipped to excel in global knowledge-based value exchange.

There is some recognition of this need. In 2015, the Business Council of Canada launched the Business/Higher Education Roundtable to “support young Canadians as they transition from education to the workplace, strengthen research collaboration between industry and institutions, and help Canadian employers as they adapt to the economy of the future.” The roundtable is focusing on piloting work-integrated learning projects in specific industry sectors (e.g., fintech in Toronto) and building trusting relationships between PSEs and the private sector, in order to increase the number and quality of research partnerships between PSEs and industry.

In its 2016 budget, the federal government announced a program to support work-integrated learning in Canada’s PSEs. The government earmarked $73 million over four years, starting in 2016-17, to “support partnerships between employers and willing post-secondary educational institutions to better align what is taught with the needs of employers.” The initiative will also support new co-op placements and work-integrated learning opportunities for young Canadians, with a focus on high-demand fields, such as science, technology, engineering, mathematics and business.

Some provincial governments are addressing the issue as well. For example, British Columbia has earmarked 25 percent of its funding to its 24 PSEs for focused training on skills identified by industry. Any new technology program proposed must now include co-ops.

While each of these initiatives is important and timely, they risk being diluted by the dominant research culture in Canadian PSE institutions. That culture has affected all of the graduates who have gone to work in industry, government, law, accounting, medicine, health and education. More academy-industry research collaborations will give students valuable experience, but if the focus is on research, then the predominant culture will prevail.  Young people need to understand that without global trade, we cannot survive.

Export trade is based on a value exchange that requires a broader view of innovation outcomes than simply bringing ideas to market or commercializing research results. To provide solutions to global problems, Canadians will need to have a deep understanding of and respect for other cultures, the creativity to develop innovative solutions, and effective business models to deliver these solutions globally, ethically and sustainably.

This article was original published by Policy Options.

Read the complete report: "Changing the Innovation Conversation: From Research to Global Value Exchange".