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Has our innovation future changed color in the last election?

Again the writing is on the wall:  we are facing another wave of disruption and we are not ready.


Montreal, 28 November 2015

After a blue wave, an orange crush and a red tide, are we getting readier in Canada to face a digital economy driven by technology, digital infrastructures and new business models?   As with the case of manufacturing in 2001, we are at risk of underestimating the next competitive wave as the digital economy should take hold from 2020 onwards. We can draw lessons from the Japanese challenge in the 80s-90s and the rising capabilities of China.

Around the mid 1970s, Japan overtook the USA in patent applications.   At the time much was said of the poor quality of Japanese patents, their inability to properly invent new technologies, and their positioning in the low and middle tech segments of the period. ‘Made in Japan’ labels were often seen as derisory statements. True high tech, it was believed, resided within the realms of the American and European labs. Yet by 1978 Japan was already making 50% of television sets (then classified as middle tech) in the world as opposed to 25% for America. The TV industry, with all its technology and processes, was slipping away from the Americans, proper inventors of the television. American TV producers were late to improve quality, to automate production and to develop advanced designs. And more competitive pressure was to come.

The Japanese assault began in the early 1980s, a bare 5 years after the patent signal. Various industries in computers, chips, electronics and cars saw fierce rivals and competitors emerge and capture whole swaths of markets and technologies.   In many industries, Western leaders fell off to a sizzling bundle of performance, quality and lower costs from Japanese competitors. The intensity of the ‘Catch up with the West’ was remarkable within the Japanese Kaishas, as the emerging champions were then called. Japan shook the Western economies until their self inflicted financial crisis of 1990 literally stopped them in their tracks, to the great relief of Western nations.

1990 thus proved a great year for the West: The fall of the Berlin wall ended the cold war on the political side, and the stock market crash in Tokyo put an end to the Japanese economic threat. The ensuing 1990s can be described as a rather loose decade in the West, fueled by galloping consumption and deregulation in a wide range of industries such as airlines, telecoms and financial services. With the economy running at 4%, the Clinton administration even managed to register an unprecedented string of budget surpluses from 1997-2000. There appeared to be few visible clouds on the horizon.

Up North, the Canadian economy recovered with the help of a weaker C$ and Nafta. During the 1990 decade, the gains of Nafta were essentially recycled to cut down federal deficits and pull down the national debt. This was well necessary and looked prescient enough at the time. But little of the gains from Nafta were recycled into making domestic industries more competitive. When China muscled into world trade from 2001 onwards, we started bleeding a steady loss of 500,000 manufacturing jobs in Canada (5M in the USA) during the next decade. We somehow comforted ourselves that we at least held the high pitch of the high tech mound, compensating for losses in low and middle tech. The lesson of the previous Japanese challenge were quickly forgotten: That it is difficult for companies to move up market in value added, relocate factories, improve on design, service and client experience all the while your margins are under attack. It takes 5-10 years to make and build these adjustments with plenty of sustained efforts. As such technology innovation becomes a critical part of the answer. We had 10 years to prepare for China but preciously little was accomplished. With hindsight, it looks like the West vastly wasted its peace dividend and is now paying the price.

Forty years after the Japanese did so, the Chinese have now ominously overtaken the USA in patent applications, in 2014. We can also read the same headlines:   poor quality in patent applications, the Chinese are not really innovators but imitators, they pluck tech secrets by cyber hacking unguarded treasure troves, local Chinese engineers do not match westerners, and so forth. Yet the picture is also becoming clearer. China announced last May their 10-year plan ‘Made in China 2025’ calling for a national drive on 10 key high tech sectors. China is directly and openly challenging the 3 major incumbents in technology: USA, Japan, Germany.   If for a second you think this is wishful thinking on the part of China, consider the latest McKinsey Global Institute report on ‘The China effect on global innovation’ (136 pp). Any lingering doubt will evaporate or else you will be standing at the end of wishful thinking.

Prepare for a renewed assault from China. The country has already built a formidable trade and tech platform:

  • 15 free trade zones
  • 32 special economic development zones
  • 53 high tech parks
  • over 1250 multinational R&D labs
  • 1300 private universities and growing
  • 30,000 PhDs graduating every year
  • an estimated 0.6-1.0 M engineers graduating every year
  • top engineers and scientists cost about 50% less than in the West
  • 820,000 patent applications processed last year

In the meantime, our own scorecard on tech innovation has remained thin since 2001. The OECD, Conference Board, World Economic Forum, and our own government have adamantly produced reports showing our gradual and steady slide in the innovation rankings. We are not doing bad, but as the tech game picks up speed, we are at risk of missing an important turn. Politicians happily promote free trade agreements, infrastructure programs and the urgent need to export. This is all in reaction to the last 10 years and the beatings we have taken in manufacturing and the recent drop in commodity prices. However there is little thought about the forthcoming tech wave and what should be done to prepare for impact on business models, and the organization and culture of work. Yet consider the following stats reflecting a lower tech intensity in our economy:

  • R&D as % of GDP has gone from 2.0% in 2001 to 1.7% in 2012 in the nation
  • the R&D budgets of the top 10 Canadian companies dropped by 10% from $7.2 B to $6.5B, from 2013 to 2014; in general, R&D as % of sales is dropping in our larger companies
  • in telecoms, the fall of Nortel and RIM have weakened our tech position in a critical industry
  • in pharmaceuticals, a significant bundle of R&D centers of multinationals were reallocated to the BRIC nations following the financial crisis of 2007-08; pharmaceutical R&D dropped from US$ 620 M to $320M from 2000 to 2013 in Canada
  • our position in aerospace technology now looks wobblier with the Bombardier crisis
  • our SMEs consistently under invest in new equipment, IT and other technologies
  • R&D budgets have been dropping in the Canadian government labs as an estimated 30/40,000 scientists were removed from the Federal payroll during the Harper administration.
  • we have a resurgence in tech start-ups, but often they fall prey to acquisitions from outsiders thereby foregoing the upside potential of future champions.

We used to be second best under the American umbrella, surfing upon their global expansion and their fundamental research for 60 years after World War II. During this period, Canadian scientists were considered world class and the country could capture a decent piece of the pie of multinational R&D. By extension we somehow lived under the public impression (and in good part a policy) that science labs were the lynchpin to produce innovations. Alas, we have a track record in Canada of too many great home-based inventions whose commercial realizations were ultimately captured South of the border. But the hard reality is that it is first and foremost companies that produce and drive innovations. Innovators are connected to their markets and customer needs. They use and package technology to create new products.   Today this growth competence still remains mostly underdeveloped within Canadian corporations, despite the fact that some 60% of the total R&D spending in Canada is done in private and business hands. We are not getting the innovation bang for the R&D buck that we spend. This is why the loss of Nortel is leaving a deep scar in our innovation landscape. They were champions in creating new generations of products.

Government policies and trade associations have so far failed to produce the strategic visions to make the breakthroughs in a world where trade and technology is tilting towards Asia. Dropping out the top 20 in the innovation rankings will be the next alarm bell. The painting is on the wall.


André Du Sault, MPA Harvard

References: WEF, Cirano, Globe and Mail, McKinsey, interviews


Posted in Innovation & organisation, Management ideas, Strategy & globalisation.

5 Responses

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  1. Louis says

    Excellent reading of the current situation. We do not lack of creativity talent. We need to improve our “Go to the market” talent.

  2. andrea caulfield says

    “But the hard reality is that it is first and foremost companies that produce and drive innovations” Agreed, and to push the thinking…it’s the people in those companies, working as individuals and small teams that make innovation happen. People and teams need the skills and the organizational and cultural support to be “allowed and enabled” to innovate.
    This is where the juice is.

  3. Richard Drolet says

    Considering the pace at which China is building a modern economy and their focus on developing engineers and PhD’s, the wake-up call for Canada may be too late.

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