Effective innovation starts with reliable measures

If Alberta is serious about diversifying its economy, it needs to rethink how it measure innovative activity

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EDMONTON, AB Oct. 1, 2015/ Troy Media/ – It is not news that Alberta is seeking to diversify its economy. It has been seeking to do so for some time, and with some success.

It has embraced the forest sector, supported the growth of information and communications technology (ICT) and has spurred the growth of the bio-economy, nanotechnology and genomics. Alberta also has a vibrant agriculture sector, a strong construction and retail sector, a growing and creative culture and design sector and a world-class education system. The energy sector, of course, still dominates.

But when comparing our advantage with other jurisdictions, we could do much more. Canada is 15th, and falling, in competitiveness in the world. We have infrastructure deficits (the need to add capacity and strengthen infrastructure to account for population growth), productivity challenges and access to capital issues. More critically, Canada in general, and Alberta in particular, need to strengthen the adaptive capacity of firms – their ability to adopt and adapt with new technology, new business processes and new ways of managing value and supply chains.

Innovation is difficult for small firms even though they form the backbone of the economy. They represent 95 per cent of firms in Alberta, employ 35 per cent of all private sector employees and contribute 25 per cent of Alberta’s GDP. And yet, they tend to be led by product specialists, have weak financial and marketing skills and are “in a grove” for their development.

In the ICT sector, for example, most small firms seek to grow their business to a point at which a larger firm will buy it so that the founders can exit the business with cash in their pocket. It is a similar story in other sectors.

The province does a lot to support innovation in companies – vouchers, grants for marketing and scientific support, technological support for product development, support for business process improvement and productivity gains, and serious investments in new technologies. There are also a number of venture capital and angel groups willing to support small- and medium-sized businesses. Despite the constant cry that there is poor access to capital for innovators, venture capital investors suggest that the issue is much more about the quality of deals and the lack of mentored leadership.

The wrong measures of innovation can lead to a waste of money, time and energy. Patent filings are a good example. Most patents are worth very little in terms of jobs created and revenue earned. The cost of filing and securing a patent often exceeds its value.

When the issue of patents was reviewed by the Government of Alberta in 2007, one respondent said, “If the value of the product being protected is less than the cost of having to defend a patent against pirates then the patent is not worth the effort.”

Indeed, research councils have agreed that the research community needs to move toward much more openness about discovery and innovation. Researchers should be required to make their research freely available after a year of publication in peer review journals. The thinking is that publicly funded research belongs to the people, not the researcher.

The key measures for innovation should focus on outcomes and impacts, not process. The number of new products in the marketplace; local, regional, national and international sales; the number of jobs created as a result of innovation investments; new business partnerships leading to sales; product refinements leading to increased sales and shortened time to market for new products are all measures that matter.

More significantly, we need to see more gazelles – high-growth companies that increase revenues from sales by at least 20 per cent annually for four years or more, starting from a revenue base of at least $1 million. Too many measures of innovation focus on “soft” measures (e.g. number of patents, number of start-ups and spin-offs) rather than the hard measures of sales growth and employment.

The role of government in stimulating innovation is important but it is not the driver. What matters is the ratio of public/private investment. In high performing jurisdictions, a ratio of $3 private funds to $1 of public funds produces the highest returns from innovation. In Alberta, it is more likely that these numbers are closer to $3 of public funds to $1 of private investment.

Innovation is a complicated business. How we think about it makes a difference to the outcome of innovation investments. If we are serious about diversifying the economy, we need to rethink how we measure innovative activity in Alberta.

Troy Media columnist Stephen Murgatroyd is a consultant in innovative business and education practices with a PhD in psychology.

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