www.scienceadvice.ca Science Advice in the Public Interest CANADA’S INNOVATION GAP ESTIMATING ITS SIZE; EXPLAINING ITS CAUSES by Peter J. Nicholson, President The Council of Canadian Academies Presentation to Socio-Economic Conference 2009 Gatineau, QC 5 May, 2009
THE COUNCIL OF CANADIAN ACADEMIES THE COUNCIL OF CANADIAN ACADEMIES • MISSION : To support independent, assessments (studies) on science that is relevant to issues of public interest • A non-profit corporation, operational since early 2006. (Analogous to the National Research Council of the US National Academies) • Assessments are produced by independent panels of experts, comprised of Canadian and international authorities who serve without compensation • Six assessments completed; two more nearing completion $30M FEDERAL GRANT SUPPORTS CORE OPERATIONS THROUGH 2015 $30M FEDERAL GRANT SUPPORTS CORE OPERATIONS THROUGH 2015
OUTLINE OUTLINE • INTRODUCTION & SUMMARY • MEASURING THE BUSINESS INNOVATION GAP • INNOVATION AS BUSINESS STRATEGY • FACTORS THAT INFLUENCE INNOVATION AS STRATEGY • SOME BROAD PUBLIC POLICY IMPLICATIONS
INTRODUCTION QUESTION: “If innovation is good for business, why is Canadian business less committed to innovation than most policy-makers believe it should be?” • Panel of 18 chaired by Bob Brown – majority were senior business people but also included members from labour, academia and NGO communities. • Panel was asked for a diagnosis, not a policy prescription • Panel’s perspective was long-term, covering many decades, so conclusions remain relevant despite current crisis • Panel analyzed innovation as an economic process, not simply as an S&T activity INNOVATION IS NEW OR BETTER WAYS OF DOING VALUED THINGS INNOVATION IS NEW OR BETTER WAYS OF DOING VALUED THINGS
REPORT IN A NUTSHELL REPORT IN A NUTSHELL 1. Canada’s long-standing productivity growth problem is due to weak business innovation. 2. Business innovation is driven by business strategy. 3. The productivity issue needs to be reframed to focus on the factors that influence businesses to choose – or not to choose – innovation as a key competitive strategy. 4. Public policy has an important role, but the primary challenge is for business to adopt innovation-oriented strategies. NEW PARADIGM LINKING PRODUCTIVITY, INNOVATION AND BUSINESS STRATEGY NEW PARADIGM LINKING PRODUCTIVITY, INNOVATION AND BUSINESS STRAT EGY
OUTPUT, PRODUCTIVITY, INNOVATION OUTPUT, PRODUCTIVITY, INNOVATION GDP/Population = GDP/Hours Worked x Hours Worked/Population OUTPUT PER CAPITA LABOUR PRODUCTIVITY Workforce Composition, Capital Intensity, Multifactor Productivity • Insights of entrepreneurs • Payoff from R&D • Improved business models INNOVATION • Efficient work practices • Continuous improvement • Application of leading-edge technology REPORT FOCUSES ON INNOVATION BY BUSINESS AND AS BROADLY INTERPRETED REPORT FOCUSES ON INNOVATION BY BUSINESS AND AS BROADLY INTERPRE TED
THE U.S. – – CANADA GAP IN PER CAPITA OUTPUT SINCE 1870 CANADA GAP IN PER CAPITA OUTPUT SINCE 1870 THE U.S. CANADA’S GDP PER CAPITA AS PERCENT OF U.S. 100 80 Canada’s Strong Job Growth Able to Offset 60 Weak Productivity 40 20 GDP GDP Hours Worked x = Population Hours Worked Population 0 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 Data Sources: Conference Board & Groningen Growth and Development Centre, 2008; Maddison, 2008 ECONOMIES IN CANADA AND THE U.S. HAVE EVOLVED IN TANDEM ECONOMIES IN CANADA AND THE U.S. HAVE EVOLVED IN TANDEM
CANADA’ ’S RELATIVE PRODUCTIVITY SLIDE S RELATIVE PRODUCTIVITY SLIDE CANADA PRODUCTIVITY IN THE BUSINESS SECTOR - CANADA AS % OF U.S. SINCE 1947 100 Labour productivity difference in percentage terms (U.S. – Canada) 90 Real GDP per Hour Canada as % of U.S. Peak Year – 1984 80 93% (93%) CATCHING UP FALLING BEHIND CATCHING UP FALLING BEHIND 70 60 1947 1951 1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 Data Source: CSLS, 2008a CANADA CANADA’ ’S PRODUCTIVITY GROWTH HAS ALSO LAGGED MOST OECD PEERS S PRODUCTIVITY GROWTH HAS ALSO LAGGED MOST OECD PEERS
CANADA’ ’S PRODUCTIVITY GROWTH LAGS OECD PEERS S PRODUCTIVITY GROWTH LAGS OECD PEERS CANADA LABOUR PRODUCTIVITY GROWTH : 1985-2006 MFP Contribution 4 Capital Deepening Contribution Average Annual Growth Rate (%) 3 2 1 0 Germany Netherlands Italy New Zealand Ireland Canada Japan Finland Sweden France U.K. Belgium Denmark Australia U.S. Austria Spain Switzerland -1 Source: OECD, 2008a WEAK MFP GROWTH IS RESPONSIBLE FOR CANADA’ WEAK MFP GROWTH IS RESPONSIBLE FOR CANADA ’S LOW RANKING S LOW RANKING
ACCOUNTING FOR PRODUCTIVITY GROWTH DIFFERENCES ACCOUNTING FOR PRODUCTIVITY GROWTH DIFFERENCES Labour Productivity Growth LABOUR PRODUCTIVITY GROWTH 3 2.5 2 Period Average Annual Growth Contributions (%) 1.5 1 0.5 0 1961-2006 1961- 80 1980-2006 3 2.5 Capital Deepening CAPITAL DEEPENING 2 1.5 1 0.5 0 3 LABOUR COMPOSITION IMPROVEMENT Labour Composition Improvement 2.5 2 1.5 1 0.5 0 3 MULTIFACTOR PRODUCTIVITY (MFP) GROWTH 2.5 Multifactor Productivity Growth 2 1.5 1 0.5 0 Data Source: Baldwin & Gu, 2007 1961-2006 1961-80 1980-2006 CANADA’ CANADA ’S MFP GROWTH HAS LAGGED U.S. FOR AT LEAST 45 YEARS S MFP GROWTH HAS LAGGED U.S. FOR AT LEAST 45 YEARS
SMOOTHED COMPONENTS OF LABOUR PRODUCTIVITY GROWTH SMOOTHED COMPONENTS OF LABOUR PRODUCTIVITY GROWTH GROWTH RATE DIFFERENCE: CANADA MINUS U.S. 2 Canada growing Growth Rate Difference: Canada minus U.S. faster than U.S. Capital Intensity Capital Intensity 1 Labour Composition Labour Composition 0 U.S. growing faster than Canada Multifactor Productivity (MFP) Multifactor Productivity (MFP) -1 Productivity Gap Productivity Gap -2 Narrowing Widening HP filter (Lamda = 100) -3 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 HP filter (Lamda = 100) Data Source: Statistics Canada, 2007a CAPITAL AND LABOUR QUALITY NO LONGER OFFSETTING CANADA’ CAPITAL AND LABOUR QUALITY NO LONGER OFFSETTING CANADA ’S WEAK MFP S WEAK MFP
WHAT IS “ “MULTIFACTOR PRODUCTIVITY MULTIFACTOR PRODUCTIVITY” ”? ? WHAT IS MFP = The part of GDP per Hour that is NOT explained by Capital Intensity and Workforce “Quality” EXAMPLES OF INNOVATION-BASED MFP GROWTH: Double stacking rail containers Installing a Drive-thru window in a fast food outlet Equipping a sales force with BlackBerries THOUSANDS OF INNOVATIONS, LARGE & SMALL, DRIVE PRODUCTIVITY GROW THOUSANDS OF INNOVATIONS, LARGE & SMALL, DRIVE PRODUCTIVITY GROWTH TH
IS MFP GROWTH THE “ “STATISTICAL SIGNATURE STATISTICAL SIGNATURE” ” OF INNOVATION? OF INNOVATION? IS MFP GROWTH THE The innovation “signal” in MFP comes mixed with a lot of noise. CONFOUNDING FACTORS IMPACT ON CANADA-U.S. MFP GROWTH DIFFERENCE Economic Cycle Averages out over 1961-2006 Economies of Scale Changes since NAFTA should have helped Canada Public Infrastructure Effects likely to be broadly similar in U.S., Canada Slowly-varying Factors Little impact on growth rate differences Measurement / Model Errors Common methodology should minimize effect LONG ‐ LONG ‐ RUN MFP GROWTH RATE IS A GOOD MEASURE OF BROAD INNOVATION RUN MFP GROWTH RATE IS A GOOD MEASURE OF BROAD INNOVATION
INTERACTION OF MFP AND CAPITAL INVESTMENT INTERACTION OF MFP AND CAPITAL INVESTMENT CAPITAL INNOVATION INVESTMENT ACTIVITIES • Machinery & Equipment • Entrepreneurial Insights MFP • Software • New business models Growth • R&D • Structures • Better Products/Processes • Public Infrastructure • Upgraded Skills DISTINCTION BETWEEN MFP GROWTH AND CAPITAL DEEPENING IS SOMEWHAT ARTIFICIAL DISTINCTION BETWEEN MFP GROWTH AND CAPITAL DEEPENING IS SOMEWHAT ARTIFICIAL
ICT DRIVES U.S. ‐ ‐ CANADA INVESTMENT GAP CANADA INVESTMENT GAP ICT DRIVES U.S. M&E ANNUAL INVESTMENT INTENSITY SINCE 1987 Cdn $ Weakening Cdn $ Strengthening 9 Per Cent of Nominal GDP in Business Sector 8 7 NON-ICT M&E 6 5 ICT 4 3 2 1 Peak of Tech Boom M&E = Machinery & Equipment 0 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 Data Source: CSLS, 2008b ICT HAS BEEN A KEY DRIVER OF MFP & PRODUCTIVITY GROWTH IN U.S. ICT HAS BEEN A KEY DRIVER OF MFP & PRODUCTIVITY GROWTH IN U.S.
INNOVATION THROUGH THE LENS OF BUSINESS STRATEGY INNOVATION THROUGH THE LENS OF BUSINESS STRATEGY Climate for Influencing Structural Competitive Public Business New Characteristics Intensity Policies Ambition Factors Ventures INNOVATION AS A Strategy BUSINESS STRATEGY? Choice Inputs to Capital Research & External Human Innovation Investment Development Enablers Capital Activity Innovation New Continuous New & Expanded Outputs Products Improvement Markets Capital Workforce MFP Growth + + Deepening Capability LABOUR PRODUCTIVITY GROWTH Macroeconomic Outcomes INCREASED LIVING STANDARD REFRAMING THE ANALYSIS OF CANADA’ REFRAMING THE ANALYSIS OF CANADA ’S WEAK PRODUCTIVITY GROWTH S WEAK PRODUCTIVITY GROWTH
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