Technology diffusion is needed to solve Canada’s productivity problem

Peter Josty is Executive Director of the Centre for Innovation Studies in Calgary.

Canada has a big productivity problem. The current approach to tackle this is to double down on the supply side (i.e. producing technology) rather than the demand side (i.e. diffusing technology throughout the economy). That is a mistake.

The productivity problem is well known. Canada’s productivity has fallen to 73.3 per cent of the U.S. rate, down from over 90 per cent in the 1980s.

Why does this matter? First of all, productivity is needed to maintain our standard of living. Secondly, there are several looming areas where we will have to spend a lot more money in future decades – healthcare (for the aging population), the military (for the deteriorating geopolitical situation) and climate change.  Higher productivity will enable this spending.

Most of Canada’s large support programs for innovation are currently on the supply side – Scientific Research and Experimental Development (SR&ED) tax credit, Global Innovation Clusters, and the now postponed Canada Innovation Corporation.

Lack of attention to demand side of innovation

The lack of attention to the demand side of innovation has been pointed out in a number of reports:

• A report by the Council of Canadian Academies notes that Canada’s innovation policy has historically prioritized the supply side of the innovation process, minimizing the importance of demand-side strategies for technology diffusion and adoption by industry.
• A report from the Institute for Research on Public Policy states that Canada’s innovation policy is overly focused on the generation of knowledge, technology and innovation, and it does not directly address the issues of business readiness and the market’s ability to absorb innovations. Government must acknowledge the need to intervene on the demand side to accelerate diffusion, adoption and market creation, and must act on it.
• The Business Council of Canada says that we need to focus less on the supply side and more on the demand side of the equation so that we can harness the tremendous advantage Canada maintains over its competitors – that is, a highly skilled and educated workforce.
• A report from the Brookfield Institute for Innovation + Entrepreneurship calls for unleashing the power of demand-side instruments. Government measures such as procurement, tax incentives, pricing negative externalities, standard-setting and regulations all have crucial roles in the transition to new behaviours and technologies, and in shaping consumer behaviour and market demand.

It has been well documented that while we pay most attention to the generation of technology, it is its diffusion through the economy that really creates the economic impact.

Why do we need a fresh approach?

We have to face up to the fact that our current approach to innovation policy isn’t working, and we have to try something new. Here are some facts:

• Canada has fallen from 6^th richest country to 15^th richest since the 1980s
• Canada is projected to have the slowest growth in per capita GDP in the OECD out to 2060.
• Despite a generous SR&ED program business spending on R&D is now less than half the OECD average, as a percentage of GDP, and declining.
• 37 per cent of Canadian companies were looking at ways of using ChatGPT – a productivity enhancer – in their business, compared with 65 per cent of U.S. companies.
• 35 per cent of Canadian companies are using artificial intelligence in their operations compared with 72 per cent of U.S. companies.
• Canada’s productivity has fallen to 73.3 per cent of the U.S. level, compared with over 90 per cent in the 1980s.
• Canada lags other industrialized countries when it comes to digitization and the adoption of advanced manufacturing.
• Business investment in machinery and equipment – a key factor in diffusion of technology – has declined by half since 2000. (See graphic below. Source: Centre for Future Work).

A useful framework for combining supply side and demand side thinking about this is provided by Neil Lee in his book, Innovation for the Masses. He sees three types of institution being needed for a successful economy:

Generative Institutions – those that create new technologies – for example: universities, science parks, incubators and accelerators, venture capital, government funding of leading sectors, angel investors, R&D tax credits, patent agents.

Diffusive Institutions – those that spread technology through the economy – for example: networks of small firms, vocational skills systems, worker training, business networks that help diffuse technologies, a competitive marketplace, government procurement, agricultural extension offices, standard setting.

Redistributive Institutions – those that offset some of the inequality effects of new technologies – for example: minimum wages, progressive taxation, welfare state.

What are the solutions?

The key, according to Lee, is to have an appropriate balance between the three kinds of institution – generative, diffusive and distributive. Canada already has reasonable generative institutions – with strong showing in academic papers. It has good redistributive institutions, but the country has relatively weak diffusive institutions. So we need to strengthen the distributive institutions.

One of the most powerful ways to incentivize diffusion of technology throughout the economy is to make Canada’s economy more competitive. Companies would be forced to adopt new technologies and become more competitive to stay in business.

A wide variety of other approaches have been proposed:

• public-private cooperation
• government procurement
• pro-competition policies
• improving workforce training
• encouraging spending on machinery and equipment (that often incorporates new technology)
• encouraging adoption of digital technologies and artificial intelligence
• availability of testing and prototyping facilities to reduce the risks of adopting new technology.

Conclusion

Canada needs to strengthen its diffusive institutions to accelerate the diffusion of new technology through the economy. This will create a better balance between generative, diffusive and distributive institutions – and lead to better productivity.

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