This article was first published in the Globe and Mail's Report on Business.
Stimulating innovation in the Canadian economy has proven to be one of the hardest things for governments to achieve. For a generation, most attempts have barely moved the needle.
But a recent idea floated by Navdeep Bains, the Minister of Innovation, Science and Economic Development – namely, using government procurement as a tool to promote innovation – suggests that new thinking is in the air in Ottawa.
For nearly a generation, Canada has followed the standard policy menu to stimulate innovation. Governments have reduced marginal tax rates on business and workers; invested in university-based research, postsecondary education, training/skills development and infrastructure; opened Canada’s markets to international trade and investment; and provided generous research and development tax incentives.
The results have been disappointing. Canada’s productivity growth, which is highly dependent on innovation, remains stagnant, at about 1 per cent a year. New approaches and new policy tools are needed to break this logjam. One such tool is government buying power: procurement. And defence procurement is particularly well suited in this connection.
The defence industry operates in a managed global marketplace in which governments are the main if not sole customers. In the defence market, governments also have policy levers at their disposal and wider discretion to achieve their objectives than in other markets. Defence procurement, for example, is not nearly as constrained by trade agreements as other economic sectors.
For this and other reasons, many of our allies have for decades used military procurement to drive innovation in their economies. The British, U.S., French and Swedish economies, for example, would not be nearly as innovative today had they not approached military procurement with a focus on developing key defence technologies and innovations at home that often to lead to wider commercial applications and then exporting them abroad. Canada has not traditionally been in that game.
But since the 2014 introduction of the federal Defence Procurement Strategy, we have had a new tool in the policy tool box: “Industrial and technological benefits” (ITBs) and, in particular, the “value proposition” part of that program. The value proposition principle can require bidders on defence projects to make commitments to R&D and intellectual property transfer to Canada, both of which are key drivers of innovation. This principle, still in its infancy, needs to be embraced and used systematically and strategically going forward to enhance innovation in Canada’s defence industrial base.
This would not mean creating an innovative domestic defence industry out of nothing. Rather, it is a case of building upon a solid foundation.
A recently completed Innovation, Science and Economic Development/Statistics Canada survey concludes that the Canadian-based defence industry generates 60 per cent of its revenue from exports, which is 20 per cent higher than the overall Canadian manufacturing industry. An export intensity of that magnitude is an indicator of an innovative industry, especially given the highly regulated and protected international marketplace where defence companies operate.
The survey also reported that more than 30 per cent of employment in the Canadian defence industry is concentrated among highly skilled engineers, scientists, researchers, technicians and technologists, and the sector outpaced the overall Canadian manufacturing average in employee compensation, all of which are innovation indicators.
But to really achieve the result the government is looking for, an effort should be made to marry the innovation agenda with the recently announced defence review. Together, these provide the opportunity to make practical changes to improve the process of defence procurement while enhancing innovation.
Canada should take a page from the playbooks of its allies, which have addressed the industrial dimensions of military procurement in their defence reviews. The Australians, for example, have just published a defence white paper accompanied by a defence industrial policy focused on innovation in that sector.
The notion of using government procurement to move beyond the textbook innovation policy menu would be a welcome innovation in and of itself. The test case for this new approach should be the defence sector, in which Ottawa already possesses innovation policy instruments and is less constrained by trade agreements.
Canada’s defence industrial base can be a real source of innovation-led growth over the next few years. All it takes is government and industry working co-operatively and strategically toward that goal.