The second premise of “Paradox Lost” is the basis for Myth #4:

In order to get a better handle on Business Enterprise Research and Development (BERD) spending, you really need to understand what is going on in the global economy at the macro-economic level. One of the key macro-economic drivers of change in the world today is what I refer to as “Business Model Migration” (actually more of a stampede now than migration). Prior to the Great Recession of 2008 the dominant business model was the large, hierarchical, multi-national companies acting as an anchor to a cluster of supply companies. The emergent business model is built around a distributed, networked and much flatter ecology of micro-multinationals (global small businesses). “Business Model Migration” is extremely important consideration when measuring BERD. The impact of Business Model Migration on BERD is that now the majority of BERD spending is over numerous Micro-Multinationals (small companies) rather than centralized in the top 10 or 20 large multinational companies.

There are a few key considerations related specifically to Canada that are also important macro-economic conditions related to BERD:

1) The manufacturing sector in Canada has been in decline or stagnant for a decade.

2) Most knowledge-based BERD spend is related to the manufacturing sector.

3) The manufacturing sector was 80% of total exports in 2003 and is 70% of total exports today.

4) The absolute value of manufacturing exports has not recovered to 2003 levels.

Data source: Statistics Canada

My concern is that researchers reporting on Canadian BERD spend are making a number of critical errors that distort the results of Canadian BERD spending. OECD (SCIENCE AND INNOVATION: CANADA) is often quoted on their metrics related to Canadian BERD. The first issue I have with these metrics is that OECD is measuring the top 500 firms to gauge Canada BERD spending. When one considers the effect of “Business Model Migration” and its impact on BERD spending (ex: Nortel and BlackBerry) the OECD metrics have not evolved to match the global macro-economic changes in the world today. BERD spending really needs to be measured over all businesses (top 5,000,000) and not just the top 500 firms. It is particularly important to capture the new and emerging small businesses that will make up the vast majority of BERD spending in Canada in the near future.

The monitoring of Canadian BERD spending is looking in the rear-view mirror rather than toward the future as long as the top 500 firms are used as the metric for R&D spending. Those engaged in policy related to R&D spending need to develop more useful and comprehensive methodologies for measuring Canadian BERD spending.

Canadian SMEs are very innovative, with lower levels of BERD spending per capita yet more production of triadic patents. Canadian SMEs are forced to be innovative due to a general lack of working capital available to new and high risk self-funded companies. Canadian Businesses also produce trademark rates on top of the OECD countries’ median which may indicate a more rapid shift toward IP and knowledge-based industries.

In conclusion:

1) BERD spending has changed dramatically and Canadian measurements are not keeping pace.

2) Out of necessity, Canadian SMEs are very innovative.

Next post in this series will be conclusions, recommendations and framework for establishing an integrated innovation ecosystem.