Yesterday, we looked at what actually constitutes Innovation Policy. Today, I want to talk about what an ideal innovation policy would look like. I apologize in advance for the length of the post.

So, the first ingredient in innovation policy is skills. But this term needs to be understood in some specific ways. It certainly means having a large number of what are called “Highly Qualified Personnel”, which usually but not always means PhDs, across many fields. Part of the deal with innovation is that generating new ideas means having people who are at the cutting edge of science, engineering and social science. In turn, this means spending reasonably big on scientific research because otherwise the good grad students will go elsewhere.

That’s the easy bit. The trickier bit is developing an education system that supports diffusion of new ideas. Innovation is not just about developing new products; it’s about making firms (and public bodies, too) more efficient through the adoption of new technologies and processes. The problem is literally no one knows how to do this. Is it about having a strong secondary school system with high standards? Probably. Can’t hurt, anyway. Does it mean very high levels of university participation? Not clear: Switzerland seems to do very well without this; but arguably it works for Korea and Finland. Does it mean high levels of technical education? Possibly: seems to work for Switzerland and Germany. But Canada has pretty much the highest levels of non-university higher education in the world and it doesn’t seem to work as well for us. So is it something about skills mixes? Does more STEM education (or, God forbid, “training coders”) help you become more innovative? Not really. The US, which despite everything is still seen as an innovation leader, has the lowest rates of STEM graduation (as a proportion of total degrees awarded) in the G7; Italy and France do far better.

So is it something in the way people are educated, something in the pedagogy? Maybe. Is it something non-cognitive, something cultural? Probably. But no one really knows how to change this. That doesn’t mean experiments in skills for innovation are doomed to failure, it’s just to acknowledge that there is a substantial amount of groping around in the dark here. A good innovation policy would acknowledge this. So it would have money set aside for real experimentation in education and training, much like the FutureSkills Lab proposal, albeit with the crucial proviso that in a federal state you really need both levels of government working co-operatively and consultatively (not – repeat NOT – unilaterally) to make this work. And if there’s an area where we should start, it’s in our business schools – we need to better understand why we have a dearth of managers with the skills to boost exports and manage growth.

OK, so that’s education. What next? Rules and Incentives. Barriers to market entry need to be dismantled, cartels smashed: anything that increases competition or reduces barriers to new products getting to market should – barring some reasonable measures around product safety – be adopted. If you want to know why serious innovation policy types laugh at the current Liberal government, it’s due to their total lack of interest in doing anything in these areas while simultaneously proclaiming to be “pro-innovation”. A country which cannot dismantle a dairy cartel cannot be considered an Innovation Nation. Also: let companies get big. There is no earthly reason why Canada taxes big businesses more than small ones. It’s a terrible idea. There are others, but those are the big ones.

The third big one is funding: how do we make sure funds get to innovative new companies?  This is a tough one, not just because of the potential for rent-seeking, but also because it’s genuinely hard to pick winning companies and/or get banks to change policies to lend to younger, more speculative ventures.  The consensus in the Innovation policy world is that Israel seems to do this pretty well, but exporting models like this isn’t easy.  I’m absolutely no expert in the area and so won’t comment further, but just know this is a big issue and any effective Innovation Policy needs to address it.

The fourth and final area is what is often called “innovation ecosystems”. Now this is a slightly fraught term because frankly it can be used to justify pretty much any old thing, and a lot of it is junk.  But the basic insight is this: innovation doesn’t happen in isolation. Firms’ ability to create innovative processes and products depends on their access to finance, talent, and knowledge, (sometimes but not always universities), and their interactions with other firms and with customers. To some degree, this is aided by proximity, which is why people get excited about the role of geographical clusters in innovation.  But to reduce it to proximity is overly reductionist, innovation is not simply a matter of co-location. Networks matter, but not all networks are local.

In fact one of the most obvious gaps in Canadian government policy thinking around innovation is the role of transnational networks in innovation. This simply makes sense: not many production/value chains are located within a single country any more. Among mid-sized countries, the ones that have done best in exploiting new technologies have been those that have worked out niches in global value chains. This has practical implications for policy. Canada may be good at Artificial Intelligence (whatever that means these days), but it’s probably never going to develop many companies that are going to be global players. So the goal of policy should really be to figure out how Canada can develop companies that can thrive as partners to other, larger companies or networks located outside Canada. Think about the automotive industry: Canadian attempts to have full-fledged automobile companies have been disastrous (Bricklin!) but we do pretty well in autoparts (Magna).

I’m not saying it is easy to develop government interventions that foster these kind of connection. But it is easy enough to get rid of rules that inhibit collaboration. For instance, there are rules in tri-council funding which impede collaboration with foreign scholars (and I’m not just talking about making foreign scholars fill in the Canadian Common CV). These rules actually get in the way of long-term partnerships and foreign source of income, like the US National Institute of Health (NIH). And in turn, that restricts knowledge generation in Canada – knowledge that might flow into new products or processes.

To summarize: innovation is a fairly diffuse idea, and our knowledge about how to promote it is patchy at best.  But what we do know is that it is a very multi-dimensional process.  It is certainly not just about hi tech industries.  Equally certainly, it is not just about knowledge generation.  Universities may have been conditioned to think that all research = innovation (in retrospect, the name “CFI” probably was not the most felicitous name choice), but that’s not true either.  It only becomes innovation when it leads to tangible change, which requires knowledge to be adopted outside the institution.

That’s not to say higher education has no role in innovation; the provision of skills and the generation of knowledge are both an important part of the puzzle: so more money for basic research, doctoral studies are definitely in order, as are fewer barriers to international research collaboration.  But so too is a lot of reflection on what makes individual people – particularly those who end up as business leaders – better problem-solvers and innovators.  If universities really want to be part of the solution, they need to be thinking about how pedagogies need to change, not just how other people can write them bigger cheques.  Some do, of course, but it’s far from central to the discourse.  That needs to change.