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Innovation is the engine for prosperity

May 21, 2007

Toronto Star
Business - Global Issues

by DAVID CRANE

It's not long ago that our dollar was trading at about 65 U.S. cents. Now it is in the 92-cent range, a gain of nearly 40 percent against the U.S. dollar. That's bound to hurt our export industries, forcing some to shift production overseas and lay off Canadian workers.

So what's the answer?

For some, it's to have the Bank of Canada stop worrying about inflation and focus instead on the dollar by lowering interest rates. But this would drive up the inflation rate and, like the Canadian dollar, boost costs for Canadian companies. Moreover, any benefit would be temporary, for the Bank of Canada would eventually be forced to bring inflation back under control, probably causing a recession in the process.

Instead, the focus in our companies, and in government policies, has to be to encourage innovation. It is here that Canada has plenty of room for improvement. A new report from the Economist Intelligence Unit on innovation argues that this, rather than relying on old-style cost-cutting, is the most important way for countries and companies today to maintain their competitiveness.

"The reaction of consumers to such products as the iPod and the Blackberry suggests that companies can grow faster if they innovate," the report says, adding that as part of this "increasing research and development activity would seem to be a winning corporate strategy."

Based on performance in 2002-2006, Japan, Switzerland the United States, Sweden and Finland are the top five innovative nations, according to the report. Canada ranked 13th, just behind France.

Projections for the next five years 2007-2011, suggest the same four nations will remain at the top of the list while Germany will displace Finland as the 5th most innovative. Canada could move up to 11th place.

Innovation is at the centre of the process Joseph Schumpeter called "creative destruction." And this is well illustrated in a research project at Statistics Canada, which documented over the 40 years leading to 1999 the elimination of nearly 900,000 manufacturing jobs from plant closings as offset by 1.3 million new jobs from new plant openings.

In that 40-year period, "Canada's manufacturing economy has effectively turned over. It is almost completely renewed," the researchers found. It is the investment in new plants to do new things or old thing better that generates jobs. And innovation is as much about new ways of doing things as it is about new products or services.

The Economist Intelligence Unit finds that for a country, "there is no real substitute for a good education--and a good education system." It also finds that an advanced level of investment in information technologies and communications infrastructure makes a big difference, while "sizable spending on R&D" is likely to pay off in new products and services.

While companies ultimately have to deliver innovation, "there is much that governments can do to kick-start the process," the Economist report contends. "In the end, it is public policy that determines much of the environment within which firms can be innovative."

Interestingly, countries don't have to be big to be highly innovative. In fact, 15 of the top 25 countries in innovative performance have populations of fewer than 10 million people. Being part of a cluster of competitive companies and strong universities stimulates innovation as well.

While R&D is not a magic button for success, it is important because it enables companies to meet the demand from customers for improved products and services and also provides the ability to adopt new technologies from the outside. This is where Canadian companies are weak.

Canadian companies spend an amount equivalent to about 1.07 per cent of gross domestic product on R&D, ranking 15th in the world. In manufacturing, R&D spending is about 3.9 per cent of value-added, compared to double that in the U.S. and 15.2 percent in Sweden, with Canada ranking 12th.

Canada's real challenge may be to improve the quality of people running our businesses so that they better know how to manage innovation. It is not clear our business schools teach this very well. Weak management and underperforming companies may explain many foreign takeovers.

Canada won't build a strong economy for the future by driving down the value of the Canadian dollar. It will only achieve better jobs, higher productivity and greater prosperity through innovation, which the Economist Intelligence Unit defines as "the application of knowledge in a novel way, primarily for economic benefit."

David Crane can be reached by email at crane@interlog.com.

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