The Myth of a Better Mousetrap

Commonly used productivity and innovation indicators show Canada’s innovation economy declining relative to other countries. Despite large public investments, Canada still trails most of the Organisation for Economic Co-operation and Development (OECD) countries on productivity.

The Canadian government has played a significant role in efforts to reverse this decline. For more than five decades, we have seen the proliferation of new programs at the federal and provincial levels aiming to spur productivity and the growth of an innovation economy—yet without significant improvements in country-level data.   

This Impact Brief lays out five opportunities for the federal government to change the nature of its programming to reverse the decline. To arrive at our conclusions, we have reviewed over 25 years of federal government budgets and documents prepared by the key innovation department: Innovation, Science and Economic Development Canada (ISED) and its predecessor, Industry Canada.

Commonly used productivity and innovation indicators show Canada’s innovation economy declining relative to other countries. Despite large public investments, Canada still trails most of the Organisation for Economic Co-operation and Development (OECD) countries on productivity.

The Canadian government has played a significant role in efforts to reverse this decline. For more than five decades, we have seen the proliferation of new programs at the federal and provincial levels aiming to spur productivity and the growth of an innovation economy—yet without significant improvements in country-level data.   

This Impact Brief lays out five opportunities for the federal government to change the nature of its programming to reverse the decline. To arrive at our conclusions, we have reviewed over 25 years of federal government budgets and documents prepared by the key innovation department: Innovation, Science and Economic Development Canada (ISED) and its predecessor, Industry Canada.

Opportunity 1. Focus on Commercialization

Budgetary documents show a continued and strong focus on research and development (R&D). Although innovation is emphasized increasingly, commercialization of research remains neglected. This thinking is analogous to the myth of the better mousetrap, that a better product is all that is needed for commercial success. The first opportunity for the government is to revamp their activities to increase their focus on commercialization and related functions, such as marketing and sales.

Opportunity 2. Establish Strategic Objectives

As the key department in the promotion of innovation for the federal government, ISED’s own strategy plays an instrumental role in advancing Canada’s innovation agenda. Although ISED may have an overarching objective guiding its
operations, none of the documentation that we have reviewed pointed to a clear purpose. A significant opportunity is to develop an overarching objective (or set of objectives) for Canada’s central innovation department and turn this into concrete plans whose success can be measured in relation to those objectives.

Opportunity 3. Focus on Demand Creation

Of the challenges that Canada is facing in developing an innovation economy, demand creation is perhaps the most acute. It is likely that we will never have the sufficient local demand to enable our companies to gain experience selling at home before learning how to export. The lack of demand creation programs is a  glaring weakness in government programming and one with the greatest potential for positive change and improved results.

Opportunity 4. Improve Program Design Through Rigorous Research and Evaluation

Our innovation-related programs face two key design issues. First, much of the background work done to identify problems in the innovation economy and to inform program design is carried out through opinion-based
research that rarely touches on the underlying reasons for the problems at hand. Second, once programs are
in place, policy-making and program development tend to set unrealistic targets requiring success rates in excess of what is practical. Innovation programs require more rigorous research during design and more realistic targets during implementation. 

Opportunity 5. Eliminate Scientific Research and Experimental Development (SR&ED) Tax Credits

The Canada Revenue Agency (CRA) administers the $3-billion SR&ED program, which uses a tax incentive to encourage Canadian businesses of all sizes and in all sectors to conduct R&D in Canada. However, the SR&ED filings and surveys currently conducted by the CRA and other federal agencies (e.g. Statistics Canada) do not allow us to capture net benefits beyond expenditures and simple indicators. In the absence of strong evidence, it is time to seriously evaluate whether Canada actually benefits from the SR&ED program. It is our contention that the time for this program has passed, and that the entire program should be phased out and eventually eliminated.

With such a bold and ambitious move, the federal government could free up to $3 billion a year to focus on demand creation, an area in which Canada has the greatest problem and a large need that is inadequately addressed. It could marry this demand creation to social needs and fund new purchases in areas like health care and clean technology.

In conclusion, if we are to stem the slow erosion of our innovation capabilities, then we must look to opportunities such as those identified above to recast how ISED and other departments (e.g. Finance Canada) provide support to the innovation economy. Without radical changes, we are doomed to continue this slow decline in competitiveness and productivity until
it is too late.

Growth or Profit – What is the Market Saying?

This year’s crop of IPOs has had lacklustre returns. So much so, in fact that people have begun to suggest that the market is moving away from valuing growth over profit. Of course, given a chance to play with stats instead of working, I picked stats and proceeded to look to see if there is any merit to the claim.

First let’s look at what happened to the 10 biggest tech IPOs of the year in terms of their change in value since opening day close. The following chart shows the dismal returns I was talking about. Only two of the ten have gone up since the end of opening day. In fact Lyft and Slack have plummeted (but in the case of Slack, it has only fallen back to its issue price.)

In terms of Revenue Growth Rates, this is for the most part, a great crop of IPOs.

But at the same time, every single one of these companies is still losing money. And we’re not talking about a little money, but a lot. Gobs and gobs of losses in fact.

And how are they doing? Just fine thanks. In fact they all have very healthy revenue multiples (In fact Crowdstrike’s is frankly obscene.)

And what is the relationship between these factors? There isn’t one and let me tell you I tried to find one. I graphed them all and put in trendlines. I calculated correlations. I even changed my method of analysis to use rankings instead of absolute numbers and I couldn’t get any correlation worth talking about other than between losses and growth. As we know the more you lose the more you can grow.

But as to the assertion made by analysts that the market has forsaken growth in favour of companies that might be able to make money some day? Nope, this data doesn’t say that. What it says is absolutely nothing. (And to think I wrote a blog about statistics that don’t show anything.) Whatever…go back to work and grow, grow, grow. The big stats still show that growth is the best driver of shareholder value so lose away and wait till the next downturn when we might have a new normal.