Canada Falls Out of Top 20 Countries in Bloomberg 2018 Innovation Index

May 15, 2018 SRED

What does the Bloomberg 2018 Innovation Index mean for Canadian innovation?

While Trudeau’s Liberal, federal government has been championing an innovation agenda since being elected in 2015, the Bloomberg 2018 Innovation Index shows that Canada has fallen behind other nations in innovation. In the Index, Canada fell two places from last year’s ranking in the top 20, to 22^nd place.¹ South Korea, Sweden, and Singapore were ranked first, second and third respectively.²

The Bloomberg 2018 Innovation Index

The index scores the performance of 80 countries using seven criteria, including research and development (R&D) spending, and the concentration of high-tech public companies.³ Robert D. Atkinson, president of the Information Technology & Innovation Foundation, discussed the United States’ fall out of the top ten in a Bloomberg article, and suggested this was because “other nations have responded with smart, well-funded innovation policies [such as] better R&D tax incentives, more government funding for research, [and] more funding for technology commercialization initiatives.” ⁴ The Naylor Report made similar criticisms of Canada’s R&D funding programs, specifically the SR&ED program, and that university research funding comes primarily from the institutions themselves, and less than 25% of university R&D funding comes from the Canadian government.⁵

Canadian Innovation: Particular Weaknesses

University R&D

In the Index, Canada’s performance in “Tertiary Efficiency” was particularly poor. The Tertiary Efficiency category includes the share of new science and engineering graduates in the labour force, and Canada ranked 45^th among 80 countries that were included in the index.⁶

Federal government funding for professors and students engaging in independent research has been reduced by 35% between 2006 and 2014, which may have contributed to Canada’s low ranking in this category.⁷ We discussed the challenges facing Canadian university research in more detail in our article, University Research Report Paints Grim Picture of R&D Spending in Canada (2017).

Manufacturing R&D

In addition to University R&D, Canada ranked poorly in the “Manufacturing value-added” category in the Bloomberg Index. Manufacturing Value-Added (MVA) is “a measure of manufacturing output as share of a country’s economy.” ⁸ Canada ranked 32^nd in this category;⁹ however, a report published in 2013 titled The State of Industrial R&D in Canada, made the following observations:

The IR&D [Industrial Research and Development] intensity gap between Canada and the United States is largely driven by Canada’s low IR&D intensity in the manufacturing sector. [… Some] of Canada’s high-technology manufacturing industries, such as semiconductor and computer equipment manufacturing, form a smaller share of the economy in Canada than in the United States. This smaller size drags down the manufacturing sector’s aggregate IR&D intensity.¹⁰

Canadian firms repeatedly report relatively high levels of innovation in contrast to their relatively low expenditures on IR&D. This suggests that Canadian firms do not rely on IR&D to generate innovation as much as firms in other countries. Innovation comes from other sources such as organizational change.¹¹

These points from the 2013 report could go some way in explaining Canada’s poor performance in Manufacturing R&D; although government spending on industrial, or manufacturing R&D, is comparatively low in the Bloomberg Index, Canadian companies may still foster innovation in other ways.

Canadian Risk Aversion

Canada is often criticized as being risk-averse, which we have discussed previously in our article, Is Canadian R&D Too Risk Averse? In the index, an aversion to risk as a factor in poor innovation performance is discussed by Prinn Panitchpakdi, head of a brokerage and investment group, who states that “innovation lags in countries where the culture emphasizes risk avoidance and where R&D is seen [as being] purely an expense, not an investment.” ¹² In 2015, an internal note to then-Finance Minister Joe Oliver, also stated Canadian firms were “shunning” innovation, and one possible reason was “the higher risk aversion of Canadians.” ¹³

However, as was highlighted in The State of Industrial R&D in Canada report, The State of Canada’s Tech Sector 2016 report also noted that:

While BERD [Business Enterprise R&D] is an indication of a firm’s overall commitment to innovation, it is important to note that there is not necessarily a perfect relationship between [BERD and innovation]. It is not unusual for firms to innovate without any formal R&D and results from R&D are not always guaranteed.¹⁴

This further suggests that traditional R&D and innovation may not be as tightly linked as previously thought, as one is not necessarily the definitive result of the other.

Canada Isn’t the Only Country to Fall Behind

Canada was not the only country that saw a decline in ranking in this year’s Innovation Index. As already noted, the United States fell from being in ninth place in 2017, to 11^th in 2018. Similarly to Canada, this fall in innovation was linked to poor performance in tertiary efficiency and MVA. The United States’ gains in productivity, from 10^th place in 2017 ¹⁵, to 6^th place in 2018, were not enough to keep it in the top ten.¹⁶

Summary

If the Bloomberg 2018 Innovation Index is the deciding factor on how innovative a country is, then Canada’s innovation efforts are not keeping up. South Korea, the Index’s most innovative country, has created an ecosystem of Korean suppliers and partners as part of the Samsung Electronics Corporation. This is similar to the infrastructure Japan, the 6^th most innovative country on the Index, developed around the Sony and Toyota Motor Corporations.¹⁷

The Index appears to support what previous studies have shown – that Canada needs more funding in innovation. However, one of Canada’s successes on the index is it’s ranking in 16^th place for “Researcher Concentration.” This is the amount of research professionals, including postgraduate PhD students who are “engaged in R&D per million population.” ¹⁸ This, and the increase in technology jobs in Canada, making it the “fastest-growing tech market in North America,” ¹⁹ show that research and innovation are happening in Canada.

Although industry reports in the High-Tech and Industrial sectors suggest that innovation in Canada may not be coming from traditional R&D, if the government wants to perform well in ranking tables next to other countries, it may be time to offer greater incentives for commercialization and further encourage traditional R&D among research institutions.