Canada’s Marketing and Sales Challenge

Our national “productivity gap” has spurred analyses, reports, and media articles for decades. While public debate in Canada has focused on productivity improvement for over 50 years, we have made limited progress. Fresh thinking is required.

While Innovation through R&D is certainly important to productivity growth – and has preoccupied the federal government over the last half century – there is also a connection between firm size and productivity. The larger the firm, the more productive it typically is. Logically then – and the research supports this proposition – one way to increase our productivity is to grow our firms from small and medium, to large-size. Something we have failed to do.

And one clear factor keeping our firms from growing like those south of the border is that Canadian firms spend less on marketing and sales (M&S) than US firms as a percentage of revenue. A related issue is that Canadian firms have difficulty finding local M&S executives and must hire for this role internationally.

The stark fact is Canada has the lowest number of manufacturing companies with over 250 employees per 1 million in population in the OECD. While progress has been made on some fronts, we lag behind our competitors. Solving Canada’s perennial productivity problem will partially be addressed by creating companies that scale from start-up to world-class status.

There are a number of explanations as to why Canadian companies have issues doing so, but the fundamental factor comes down to marketing and sales.

As they start, our companies enter smaller markets than those entered by US firms, thus limiting their rate of growth and potential long-term size. Then as they grow, firms founded in Canada wait until later to raise capital, raise smaller rounds and raise less than US firms and, as a result, grow more slowly. While a lack of funding in Canada is often mentioned as a challenge, firms have significant access to foreign capital even at earlier stages of development but receive less money and grow slower when accessing Canadian funders.

When it comes to how Canadian firms allocate their expenditures, our scaling firms spend more on R&D than US firms as a percentage of revenue, but this has yet to result in higher growth despite innovation often being touted as the most critical factor in driving growth.

In addition, the data do not show that patenting is a factor. For example, Canadian software firms that engage in patenting take out more patents per firm and more patents per dollar invested than their US counterparts.

The net result of these challenges is that firms that grow slower than comparable US firms at a later stage of scaling up and are unable to access the large amounts of capital necessary to propel them to world class status. Typically, they are sold first.

Various levels of government also focus too heavily on research and innovation and productivity improvement in small firms – not enough on the creation of larger firms. And what is keeping our firms smaller and growing slower is the lack of resources, experience, and talent for commercialization – that is, the domain of marketing and sales.

Our challenges in market size, M&S personnel, and M&S spending are all related to marketing as a function. M&S is a significant factor for companies in driving growth and thus helping create the large firms necessary to increase our country’s productivity. However, M&S is the area in which Canada has its most significant challenges, making the biggest area for policy to play a role.

A focus on R&D is necessary but not sufficient. Perhaps after years of focusing on R&D and not seeing expected changes in productivity, the government might experiment with improving the ability of firms to compete on the international stage with enhancements to programming for M&S. Such changes may include:

·         Setting productivity goals and measuring results.

·         Moving the national conversation away from just focusing on research and patenting towards more discussion of the role that M&S has to play in creating large companies.

·         Reducing the focus on STEM careers and promoting careers in M&S.

·         Decreasing SRED credits on internal productivity and increasing credits for new product creation.

·         Streamlining the many programs devoted to IP creation and protection and implementing programs that partially fund export oriented M&S activities.

After years of marginal improvements to productivity, it is time to change our thinking. Instead of focusing only on R&D and seeing limited results, we should acknowledge the role that M&S plays in creating large firms and experiment with policies and programs that focus on their growth. This is the missing ingredient.

(This is a re-print of an article I wrote for The Globe and Mail. It in turn is a summary of a commentary I wrote for the CD Howe Institute.)

A New Understanding of Intellectual Property

Technology, government and university leaders need a new understanding of intellectual property. It’s no longer enough to think of Technical IP in isolation. To succeed today, we need to take a broader view in which Marketing IP and Process IP are recognized as intellectual property and, along with Technical IP, are equally valued and integrated within a new IP framework—IP 2.0.

While governments and companies may not have been thinking of IP in this manner, venture capital investors in technology startups and scaleups have been doing so for many years. VCs evaluate a prospective investment using three criteria:

  • Technology
  • Market
  • Team

Intellectual Property in the area of technology is comprised of three elements: those technical product features or manufacturing or distribution processes that give the firm a competitive advantage (trade secrets); the features of that competitive advantage that is protected by copyright or patent (patents); and regulatory approvals that the firm has been able to secure.

If Technical IP is table stakes, so is Market IP. Market IP is the knowledge that comes from identifying a large market that is ripe for disruption, understanding the needs of that market, and understanding the competition. Good Technical IP is not enough, one must have Market IP if one is to have a hope of developing a major firm.

When we look at Process IP, we are looking at the team. Do they have the knowledge and experience to take a firm to success? Do they understand the commercialization process? It is often claimed that serial entrepreneurs do better than first timers. However, research has proven this not to be the case. Research from the Centre for European Economic Research looked at 8,400 entrepreneurial ventures in Germany. They determined that “previously successful entrepreneurs were no more likely to succeed in their next venture, and that previously failed founders were more likely to fail than novice entrepreneurs.” So, there may not be Process IP owned by the entrepreneur but there are three forms of Process IP, the ownership of which can accelerate a company’s growth.

The innovation economy has forever altered the way in which companies need to develop intellectual property. To be successful entrepreneurs need to develop plans and strategies, not just for the development of Technical IP but also for the development of Market IP and Process IP. Technical IP is now only table stakes, necessary but not sufficient for success. When married though with Market and Process IP, a firm has the chance to build a highly successful business and potentially dominate world markets.

To read the white paper on A New Understanding of Intellectual Property, please click here.

Innovation Spending in a Recession

Recent recessions in 2001 and 2008 can give us valuable insight into what we should do to optimize the results from innovation spending in a recession. There is a pattern to what successful firms have done in past recessions and it is as follows:

  • Successful firms maintained profits or limited losses by reducing expenses in areas that brought operational efficiency.
  • They kept innovation spending constant as a percent of revenue.
  • Firms that exited these recessions as winners explored lower risk opportunities in adjacent markets or through incremental innovation instead of dramatic technological change.
  • They collaborated with customers, suppliers, and smaller firms to reduce risk and uncertainty.

From an operational perspective, firms need to focus their attention on opportunities with less uncertain market potential and a high net promoter score. In these markets they need to drive product differentiation and improve unit economics.

For a full white paper on Innovation Spending in a Recession click here.

Canada’s Patent Puzzle

We keep seeing data on what we call Canada’s Patent Puzzle. The prevalent Canadian narrative is that as a country, we struggle to compete in the global innovation economy. This conclusion is based on three frequently cited and well-known metrics that have shaped our industrial research and development (R&D) strategy and policy conversation for decades: 

  1. expenditures on research and development,
  2. the number of patents granted, and
  3. multifactor productivity.

In this Brief, we look more closely at Canada’s performance in the numbers of patents granted. When blended with other metrics, patents are thought to be an effective measure of a country’s ability to convert knowledge into novel inventions that allow it to reap the commercial benefits of the newly protected intellectual property (IP). But Canada has fared poorly on this specific indicator: the Conference Board of Canada has given us a “D” grade, placing Canada 14th out of 16 peer countries in the number of triadic patents (Conference Board of Canada’s Patents Index, 2010). Triadic patents are defined as patents issued for the same patent family in three major jurisdictions: the US, Europe, and Japan.

Although there are drawbacks with using triadic patent counts in the assessment of innovation, they are generally considered the gold standard for IP-related metrics and continue to be used liberally. 

But, by examining individual firm behaviour, comparing patenting practices of small and large firms, and the issuance of patents in Canada’s largest market (the US), we can demonstrate that the way we have looked at patents so far has been fundamentally flawed.

Triadic Patents

Triadic patents largely reflect the patenting of multinational firms with operations in all three sectors of the globe. We found a high degree of correlation between the number of large technology companies headquartered in a particular country (expressed in terms of business revenue as a percentage of the country’s gross domestic product [GDP]) and a country’s triadic patent ranking. Therefore, triadic patents are in part an indication of industry structure and scale—rather than innovativeness. Since this finding also points to a shortage of world-class Canadian companies that are capable of pursuing markets and IP protection around the world, it suggests a problem of commercialization and scale, and not a problem of R&D.

Canadian Patents in the US

Canada’s success in obtaining patent grants in the US has improved by 143% over the last ten years. The number of patents with one or more Canadian inventors climbed from 3,661 in 2005 to 8,903 patents in 2015, placing us eighth on a per GDP basis against competitor countries in 2015 and in terms of our growth rate over 10 years.

However, of the patents granted to Canadian inventors by the US Patent Office in 2016, 58% were assigned to companies domiciled in other countries.  This is up from 45% in 2005. This means that Canada earns a return through commercialization for less than half of the patents granted in the US to Canadian inventors. Therefore, Canada’s critical issue is not an inability to turn invention into innovation. Our challenge is to ensure that Canada retains some of the economic and social benefits from our innovation activities.

Role of Leading Canadian R&D Firms

Of the top 50 R&D spenders in Canada in 2015, 17 were subsidiaries of foreign companies (including Ericsson, IBM, Cisco, and PMC Sierra.) The subsidiaries represented 32% of all patents granted in the US to the 50 leading Canadian R&D firms. However, 96% of the patents granted to the foreign subsidiaries were assigned to parent companies in another country.

Subsidiaries of foreign companies conducting R&D in Canada are also eligible for a scientific research and experimental development (SR&ED) tax credit equal to 15% of eligible expenditures (subject to stringent rules.)  But if the benefits of Canadian R&D are transferred to other countries through patenting practices, are Canadian taxpayers subsidizing research whose long-term impact is felt elsewhere?

Patents as a Metric

Using granted patents as a measure of innovativeness is also exacerbated by the fact that patents are an input metric; they do not correlate well with results-oriented measures such as revenue. Patents also range significantly in the quality and nature of the underlying invention (i.e., process versus product IP) that must be accounted for in the analysis.

Although using patents as a metric for how well we are performing internationally may have worked in the industrial economy, it does not work in an internationalized knowledge economy. Patenting is an international, not a local activity; and the nuances of the process must be considered before the numbers are aggregated into a single indicator for the purpose of policy making. If we are serious about improving our ability to compete internationally using R&D as a base for international growth, then we need to ensure that we use appropriate metrics rooted in strong and valid assumptions. Otherwise, our efforts will most likely remain misdirected or ineffective.

Read more on Canada’s Patent Puzzle.

Canada’s Innovation Culture

Canada’s Innovation Culture may not be the problem people think it is. While many commentators claim that Canada lags behind the United States in its ability to innovate, we found no evidence of this in our recent study on corporate culture. Through a series of studies the Impact Center is examining Canadian attitudes, beliefs and practices in innovation. Our prior study looked at attitudes towards innovation and found undeniable differences in Canadians willingness to take risks. This study set out to determine whether there is a difference in Canadian and American corporate innovation culture.

We set out to examine three dimensions of corporate culture including:

  • Receptivity to new ideas
  • The factors which pressure companies to innovate
  • Employee beliefs as to internal capabilities to innovate

To conduct the study, we asked 1,000 knowledge workers about their attitudes towards innovation, receiving responses from 600 Americans and 400 Canadians.

And while we expected to find differences between Canada’s innovation culture and that in the US, when we looked at the data we found it difficult to identify any real differences. In many cases, the responses came back with such similar numbers. The only consistent trend that we found is an increased likelihood of Americans to be polarized in their opinions; more likely to answer “Strongly Agree” or “Strongly Disagree” than Canadians are.

Our study found that 69% of both American and Canadian knowledge workers believe their companies to possess positive innovation cultures.

  • There was less than a 5% difference in Canadian and American responses for nine out of the twelve questions.
  • Americans are 11% more likely than Canadians to identify problems at work.
  • Americans were 13% more likely to think that their culture makes it easy to put forward new ideas.

Corporate innovation culture plays an important role in fostering or inhibiting the development of new innovative ideas. Culture sets the tone for an organization and permeate employee lives on a daily basis. This in turn affects a country’s ability to create and foster an innovation economy.

While these results may appear inconsequential, they allow us to eliminate a potential cause of Canadian innovation problems by highlighting the similarities in the Canadian and American beliefs about a culture of innovation.

Canada’s R&D Expenditures – Losing Count

The Myth of Canadian Industry’s Poor R&D Performance

Canada’s R&D Expenditures have been underreported for quite some time. Numerous reports on Canada’s innovation economy have noted Canada’s poor record of private sector spending on research and development (R&D) relative to other Organization for Economic Cooperation and Development (OECD) countries. While we are among the middle of the pack on public R&D spending, we rank near the bottom when measuring Canada’s R&D expenditures (BERD).

However, these statistics may all be incorrect. Because of the way that the data has been collected, it appears that Canada’s BERD may have been significantly underreported over an extended period of time.

Until very recently, annual spending on R&D by Canadian businesses has been reported only for work that meets  the definition of Scientific Research and Experimental Development (SR&ED) in the Income Tax Act. The definition of R&D used by most OECD countries is substantially different; it uses the current Frascati model that includes R&D in the humanities and the social sciences, and product development based on existing knowledge.

Because of these differences in definitions, Canada may have been underreporting its expenditures on R&D since 1997. It is difficult to estimate the level of underreporting spread out over nearly two decades, but we tried to gauge the extent of the problem by looking at salaries spent on R&D. We tabulated the differences between the total salaries spent on personnel involved in R&D activities and the amount allowed to be claimed for SRED purposes for a sample of ten companies. Although measuring total R&D salaries will overreport the amount that would be allowed under the Frascati definition, it is indicative of the problem that the differences in definitions have created. Our conclusion is that the R&D for our sample of companies may be underreported by up to 73%.

Are Business Expenditures on Research and Development Declining?

Numerous reports on Canada’s innovation economy have pointed out not only that Canada’s BERD expenditures are lower than the OECD average but also that they appear to be declining over time.

In recent years, the administration of the SR&ED program has become more structured, and expectations have been set for private sector R&D work to include formal experimental procedures and complete evidence records. According to program users, it is more difficult to get SR&ED credits approved now than in the past.

This may mean that not all R&D that was reported by companies in past years is captured with the tightening of the SR&ED program. Hence, if SR&ED is the number used by Statistics Canada for R&D reporting nationally, then R&D expenditures would have declined as the program was tightened.

Policy Implications

But if we are using an incomplete definition of R&D that leads to erroneous conclusions, then have we been developing flawed R&D policies and expenditure programs?

And if our R&D spending has been higher than reported, why aren’t we doing better?

Unfortunately, without a substantial amount of work, it is unlikely that we will ever know how much business has actually been spending on R&D. Thus we may have lost critical time that could have been productively used to develop a more targeted innovation policy. We can only hope that recent changes to data collection by Statistics Canada will enable us to rectify these problems.