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Economic Viewpoint

Public Policy to Promote Innovation in Canada: Lessons Learned from the World’s Leading Countries

October 4, 2023
Randall Bartlett, Senior Director of Canadian Economics • Kari Norman, Economist

Canada lags the G7 and much of the OECD in innovation and productivity and has for some time. This has been the leading cause of stagnation in real GDP per capita over the past decade and is putting Canada’s high standard of living at risk.

We live in an age of disruption. But Canada’s patchwork of innovation policies has proven ineffective at closing the innovation gap with other countries. And even though the federal government has focused on innovation since 2015, it has failed to close or even maintain the gap with Canada’s international peers. At best, it has merely slowed the decline.

Research shows that the prevalence of small- and medium‑sized enterprises (SMEs) in Canada is a key part of the explanation. Canadian SMEs are less productive than both larger companies and their US counterparts. And since SMEs in Canada make up a much larger share of domestic employment than in the US, their lower productivity is borne out at the national level.

But while Canada is in line with other advanced economies in launching start‑ups, where it falls short is in growing them to scale through supporting the commercialization of their innovations. In this context, one area where public policy can improve seems to be refocusing support toward fast‑growing businesses. Current policy provides a disincentive for businesses to scale up, while not sufficiently assisting those growth‑oriented companies that want to expand.

Canada’s innovation policy needs to be expanded to support growth, commercialization and early‑stage investment in addition to research and development. In this regard, lessons can be learned from countries that are getting innovation policy right, including the US, Israel and South Korea. They have individually demonstrated leadership in policy areas such as legal and regulatory frameworks, human capital, innovation ecosystems, risk taking and leveraging comparative advantages.

Lessons from other countries demonstrate that policy needs to attract and retain top research talent, accelerate the development of innovation networks, fund research in a targeted way that solves real‑world problems, create a tax environment that rewards growth over size, and underpin an investment environment that would make Canada the envy of the world. Policy also needs to be supported by a long‑term vision that is stable and independent of politics.

All levels of government have roles to play in supporting Canadian firms in the creation and adoption of disruptive innovations. This isn’t the next government’s problem but one that needs to be addressed now. The living standards of all Canadians today and in the future depend on it.