I have always thought of Canada as an innovation nation.
We have many entrepreneurs with great ideas who start companies and grow them to be successful businesses. Our governments and businesses invest in research and development to drive more innovation. Businesses rely on innovation to increase sales and profit.
So why are many of Canada’s corporate research and development leaders misreading changes in their market and not developing the innovative products or services their customers are looking for? Nortel, BlackBerry and now Bombardier are all examples of Canadian corporate leaders that didn’t adjust to major changes in their industries and lost their competitiveness.
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Until 2008, Nortel was the largest corporate investor in R&D in Canada, according to Research Infosource’s annual reports. In 2000, Nortel spent more than $5 billion on research, six times the amount of the No. 2 Canadian company, and revolutionized telecommunications. But the company missed key shifts in the telecom market to optical and wireless products, leaving it playing catch-up despite the fact it invested more in R&D than any of its competitors.
From 2009 to 2011, BlackBerry was Canada’s largest investor in R&D. But its focus on enterprise users caused it to completely miss the consumerization of the smartphone on which Apple and then Android focused. BlackBerry’s revenue has fallen from $19 billion in 2010 to less than $3 billion in 2015. Currently, it is struggling to reinvent itself and stay in business. (Full disclosure: I am a dedicated BlackBerry user and hope it succeeds.)
Now Bombardier is struggling to recover from failing to see the market change to more fuel-efficient and larger-capacity regional jets. From 2012 to 2014, Bombardier was the largest investor in R&D in Canada. Bombardier invented the regional jet market with the CRJ, an evolution of the Challenger business jet. The CRJ dominated the regional jet market with planes that carry fewer than 100 passengers. Bombardier’s main innovation for more than a decade was to extend airframes to increase the passenger volume from 50 to 70 and then 90.
In 2004, Embraer, Bombardier’s largest competitor, revolutionized the regional jet approach when the company designed a new airplane, the E-Jet, with two-by-two seating, 18.5-inch seats and larger overhead bins than on the smaller, cramped CRJs and ERJs. Bombardier’s CRJ sales plummeted despite the release of new models.
It took Bombardier until 2009 to announce its new aircraft to compete, the C Series. So far, however, the new plane has still not been completed and Bombardier is still relying on the old CRJ for sales. The firm had a very poor fiscal 2014 and president and CEO Pierre Beaudoin announced this year he was stepping down. The company unveiled plans to raise $600 million in new equity and $1.5 billion in new debt and asked both the Quebec and federal governments for billions in loans and grants.
Nortel, BlackBerry and Bombardier were once all true world leaders in innovation. However, they were slow to recognize changes in the marketplace, and when they did, their level of innovation was below what the market expected. Their first reactions were to deny the market had changed. When they finally did recognize that painful fact, they were years behind and struggling to catch up. Their reaction was very consistent: the companies changed leadership, brought in outsiders to take over, announced big recovery plans and spent a lot of money to be followers rather than market leaders.
Why do so many of Canada’s leading R&D companies miss major market changes, despite their massive investments in research and innovation? Is there too much of a focus on incremental innovation and not enough on disruptive innovation?
Research and development investment by governments is done mostly through research-granting councils, with a focus on peer-reviewed academic research that is not linked to an industrial strategy. More than 60 per cent of government R&D investments go to health-related projects, but corporations are investing more than 70 per cent of their research budgets in technology-related projects.
The result is a complete mismatch of government and academic research and corporate research. This is a concern to government R&D investors if they expect to achieve commercial success from their investments, because the majority of their investments do not align with our industrial research focus.
Canadian businesses, for the most part, rely on internal research teams to drive innovation. The challenge is that research tax credits through the Scientific Research and Experimental Development program reward science-focused research activities, and that drives how our corporations invest in R&D.
SR&ED has been a great funding program for startups, and many will tell you they would not have survived without the program. However, in larger companies, SR&ED has mainly driven spending rather than innovation. Most large Canadian companies overinvest in technology research and underinvest in market research. Our companies are known for great technology, but not so much for knowing how to market it.
But changing our research-granting system and the SR&ED program is like trying to amend the constitution. We know changes are needed, but no one wants to open that discussion because there are so many widely varying views and entrenched positions. I have thick skin, so I’ll start.
Due to our increasingly limited government research funds and the need to continue funding academic research to develop skilled talent, we need to align government investments to national and provincial industrial strategies. Business will need to be more involved in these discussions and in setting the direction for government investments. We must continue to rely on our academic institutions to lead focused research initiatives, but we must require them to develop closer linkages with corporate partners on most of these projects.
The SR&ED program, which was implemented in its current form in 1986, has undergone dozens of incremental changes but remains largely the same. It provides very different benefits to companies at each of their stages of growth. For startups it is a source of funding; for growing companies it helps offset investment costs; and for mature companies, it influences how expenses are categorized and accounted for.
The original purpose of the program was to encourage Canadian business to invest in advanced research activities as a way to boost their global competitiveness. While the SR&ED program is still very important to Canadian businesses, it is no longer the principal driver for globally competitive research.
The SR&ED program needs to be broken down into different components to achieve different results: first, a non-refundable program for startups to offset a portion of their initial development costs; second, a program offsetting tax and other levies for research initiatives linked to new product or service developments; and third, a generous corporate granting program that supports our industrial strategy and requires an academic and corporate partnership for the development of disruptive innovation.
The success or failure of any changes to our research framework will be measured by how we effectively manage the transition from the current structure to a new structure without a major negative impact to both our academic and corporate sectors. Smarter people than me will be needed to design and implement a new program.
Our nation’s goal should be to provide Canadian businesses with every advantage possible to make them global innovation leaders. Right now, our R&D programs are failing.
Jeffrey Dale is the president of Snowy Cloud and the former president of the Ottawa Centre for Research and Innovation.