Consider infrastructure, where Canada earns its highest rank, seventh. It includes 31 statistics that cover various aspects of the country’s telecommunications, education and scientific research systems. By some measures, Canada fares quite well. The country has the highest percentage of 25- to 34-year-olds who have attained post-secondary education, and is in the Top 5 for the quality of its educational institutions, the percentage of science degrees and the amount of basic research conducted, even the kind of collaborative knowledge transfer between companies and universities.

But that’s pretty much it for the good news. By other yardsticks — especially those that more directly translate to economic growth — Canada ranks much worse: the number of patents granted per capita (17th), the number of scientific articles per capita (14th), business R&D as a percentage of GDP (13th), R&D per capita (12th), total R&D as a percentage of GDP (12th) and percentage of high-tech exports (16th). And those scores are still in Canada’s best category.

In government and business efficiency, Canada barely cracks the Top 10, and doesn’t excel in a single statistic. And in economic performance, which is measured by the threat that corporate R&D operations will be relocated elsewhere, Canada ranks fifth-last. In other words, Canada is one of the most likely countries to lose the very thing that sits at the core of an innovative, prosperous economy: businesses investing in R&D.

These latter findings corroborate the Conference Board of Canada’s scathing report card last year, which benchmarked Canada’s socio-economic performance against 16 other top western OECD economies — and graded Canada a big fat D on innovation. The report made particular note of Canada’s low level of business investment in R&D.

The situation isn’t getting better, either. R&D spending by the Top 100 companies declined by 3.8% in 2006 from the previous year — the third decline in the past five years — to $11.4 billion, according to Toronto-based Research Infosource Inc. And it’s not just because of Nortel Networks’ struggles. R&D at the Toronto-based communications equipment manufacturer declined by 2.2%, but strip out its $2.2-billion outlay, and R&D spending by the other 99 companies fell 4.2%. Worse, research intensity — R&D spending as a percentage of revenues — fell even more dramatically by 6.9%.

So what’s the problem? Canada generally appears to have the tools and infrastructure to be innovative, but just, well, isn’t. Is Canada soft, with only a lukewarm fire for risk and adventure burning in its collective belly?

To some degree, yes. Canada has a large proportion of small-business owners, many of whom just get by week to week. Even the successful ones are considered “lifestyle entrepreneurs,” content to run businesses that afford them a big house, nice cars and winter vacations. In other countries, particularly the U.S., but also European nations, the entrepreneurial psyche is geared toward growing as big as possible — and that often requires a greater willingness to aggressively commercialize new products and services through R&D. But even large Canadian companies invest less on R&D on average than foreign-owned firms. The economy’s reliance on natural resources plays a big role. A country such as Switzerland, which placed second in our ranking, has just 7.5 million people and few natural resources, but is situated in the heart of the competitive European marketplace — innovation is a requirement. It ranks first in intellectual property rights, patents granted per capita, and in how basic research enhances long-term economic development.

In Canada, governments and economists have long struggled to replicate that kind of success. As the Conference Board of Canada’s report card last year noted, this country continues to maintain leading tax subsidy rates for business expenditures in R&D, about 32% for small and medium-sized enterprises, and 18% for large firms. But these are no panacea. “In the most innovative countries — Switzerland, Sweden, Finland and Germany — R&D fiscal incentives are virtually nil,” reports the Conference Board. “What will it take to boost business sector in R&D? The answer is not clear. More study is required to determine what causal factors may be at play.”

Of course, that doesn’t mean there aren’t voices calling for more immediate changes. The Scientific Research and Experimental Development (SR&ED) tax credit system is one of the primary means by which the federal government ostensibly encourages businesses to invest in R&D. But trade associations such as the Canadian Advanced Technology Alliance in Ottawa say that SR&ED is in need of an overhaul, both in terms of its actual administration and its policies. In last year’s federal budget, the Conservatives committed to reviewing SR&ED credits, and has since held a series of consultations with businesses and trade associations. But CATA is not optimistic that the credit system will be redesigned enough that, for example, businesses from a broader array of sectors could apply for them.

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