The Innovation Equation

Archived Topic Box from the 2004 Fourth Annual Benchmark Report

Innovation provides for the development of new technologies, ideas and business processes – all of which play an integral role in increasing productivity and GDP growth relative to competing jurisdictions. As the world economy becomes more knowledge and information intensive, population growth in developed countries will contribute less to economic growth and innovation will increasingly play a larger role in economic success.

The rate of productivity enhancing innovations in a society is determined by a number of factors including: the level of competition; how small business and entrepreneur 'friendly' a society and its policy structures are; tax and regulatory regimes; supply of risk oriented venture capital; and, the rate at which new ideas and technologies are diffused through the society. The level of research and development (R&D) being conducted is generally seen as one of the key drivers of innovation performance, with R&D intensity considered critical to the ability to innovate, adopt and diffuse new technologies. Studies show a direct correlation between the level of R&D, productivity performance and other frequently used innovation indicators (patents, technology licenses etc.). Research and Development is generally divided into two main categories, public sector and private sector, and positive correlations are even more pronounced between R&D performed by private sector businesses than by those of the public sector. However, to the extent public sector R&D performed in universities and in the government sector has a trickle-down effect on the general level and quality of R&D performed in a society, a simple division between them is not easy to make.

Due to the small relative size of both the BC and Canadian economies the level of R&D performed and innovations that result will never be substantial by global standards. Despite ongoing efforts to increase our economy's R&D performance, Canada continues to slip behind other member nations of the Organization for Economic Cooperation and Development (OECD) in R&D performance. And BC even lags the Canadian average in R&D expenditures as a percentage of GDP.

The reasons for the R&D gap between BC, Canada and key OECD competitors are many. Industrial structure certainly plays a substantial role. Despite recent growth in technology-based enterprise, industries with traditionally low R&D intensity (such as resources) continue to account for a substantial portion of the provincial economy. And even when similar industries are compared, Canadian R&D levels continue to lag those of the U.S. and other competitors. Different regulatory, taxation and general investment environments play a signifi cant role here as does market and fi rm size. The high degree of foreign ownership in the Canadian economy as a whole and the paucity of BC head offi ces is also likely a contributor to BC's lagging R&D track record.

Just as the reasons for lagging R&D expenditure are complex, so too are the solutions. Policies to increase funding for research programs in government and university settings such as designated research departments, "chairs", and centres of excellence are key first steps. While this will have a definite and proven effect on the economy as a whole over time, creating a policy environment that will encourage R&D in the private sector is also essential. Key among the initiatives is a steady supply of well trained and educated students from BC's post secondary institutions. Other factors such as R&D tax credit regimes, access to venture capital, and a tax and regulatory environment will also be essential.

British Columbia has a good supply of ideas as well as talent at University Industry Liason Offi ces but needs more angel and venture capital. Early-stage venture capital is not as strong in BC as it is in Ontario and Quebec, even though it has improved. Late-stage funding, which is needed for BC-based companies to grow into large globallycompetitive entities, has also been problematic.