Business Innovation and Strategy: A Canadian Perspective

Table of Contents

• Executive Summary
• Section 1 – Why is innovation important for enterprises in Canada?
• Section 2 – How do enterprises in Canada position themselves in the marketplace?
• Section 3 – How are enterprises in Canada changing the way they are connected to the world economy?
• Section 4 – How do enterprises in Canada compete in the marketplace?
• Section 5 – How do enterprises in Canada innovate and adopt new technologies?
• Section 6 – Conclusion
• Appendix 1 – Survey description
• Appendix 2 – Selected SIBS tables

Survey of Innovation and Business Strategy

Executive Summary

Innovation is widely recognized as a key determinant of productivity performance, which is critical to the advancement of living standards over the long-term. For this reason, low levels of business innovation observed in Canada represent a significant concern as to the ability of domestic businesses to improve competitiveness and productivity. Further evidence for this concern is apparent in Canada's poor productivity performance relative to many of its counterparts in the OECD as well as the fact that the productivity gap with the United States continues to widen.

In November 2010, Industry Canada released the Survey of Innovation and Business Strategy (SIBS) in partnership with Foreign Affairs and International Trade Canada and Statistics Canada; it was sent to a sample of 6,233 enterprises across Canada spanning 67 industries. SIBS represents the first Canadian survey to cover a broad array of interrelated factors that influence an enterprise's decision to innovate such as strategic orientation, management practices, including global value chain management, the use of technology, ownership structure, and marketplace and competitive environments. Before SIBS, other surveys and reports assessed these factors in isolation, which did not provide comprehensive views of the issues involved from the perspective of the business.

This summary report presents some of the key findings from the initial analysis of the SIBS data. Specifically, it sets out to provide insight into the innovative activities of enterprises based in Canada by providing answers to the following set of questions:

1. Why is innovation important for enterprises in Canada?
2. How do enterprises in Canada position themselves in the marketplace?
3. How are enterprises in Canada changing the way they are connected to the world economy?
4. How do enterprises in Canada compete in the marketplace?
5. How do enterprises in Canada innovate and adopt new technologies?

In attempting to answer these questions, the initial analysis of the SIBS results yielded a number of significant findings. The analysis provided support for the widely held view that innovation involves many factors and is a complex process. Furthermore, enterprises based in Canada have recognized the importance of innovation and have incorporated it into their business strategies to a large extent.

Highlights of the survey include:

• Most enterprises report product positioning, rather than cost leadership as their long-term business strategy.
• International markets are strategically important, as half of all manufacturing enterprises in Canada reported having some business activities outside of the country.
• Between 2007 and 2009, five percent of enterprises relocated and ten percent outsourced business activities outside Canada.
  • By far, the most frequently displaced business activity was production of goods, mostly to or from the U.S. and China.
• Although a majority of enterprises indicated that their principal market is local, competition intensity is strong in Canada, as most enterprises reported facing numerous competitors, including multinational enterprises.
• Manufacturing enterprises in Canada primarily respond to new competition by changing product prices.
  • High-tech manufacturing enterprises are also likely to respond by adopting new technologies and introducing new innovations.
• Approximately two out of three enterprises in Canada, and four out of five manufacturing enterprises, report having innovated during 2007–09.
• The introduction of an innovation by an enterprise often required changes to some business activities and may lead to other innovations.
• Most manufacturing enterprises in Canada acquired advanced technologies by purchasing them off-the-shelf, but customization and development of new technologies are also important.
• Uncertainty and risk, lack of skills, and internal financing were reported as the most significant obstacles to innovation by enterprises in Canada.

The production of the SIBS has established an extensive dataset that will allow researchers and analysts to conduct relevant studies on the innovative activities and strategic decisions of enterprises in Canada. Further, it will assist the policy community in the development of evidence-based policy by addressing the drivers of and barriers to business innovation in Canada from the perspective of business themselves.

Section 1

Why is innovation important for enterprises in Canada?

Business innovation is important to the sustained growth of the Canadian economy and of Canadian living standards. Economics literature links productivity growth and business investment in innovation — which is not restricted to traditional investment in research and development (R&D) and equipment, but also to other knowledge-generating activities such as management and organizational practices, and other "intangibles."

Moreover, with the advent of globalization via advanced information and communication technologies (ICTs) and reduced international trade barriers, there are fewer obstacles to relocating or outsourcing business activities to emerging countries such as China and India. With many Canadian enterprises competing globally, innovation and innovative strategies present avenues to get ahead of the competition.

The recent appreciation of the Canadian dollar against most major currencies places further competitive pressure on enterprises in Canada to innovate and invest, while at the same time making it cheaper for domestic producers to purchase state-of-the-art machinery and equipment.

Several intertwined factors can influence the decision to choose an innovative business strategy — characteristics such as ownership structure, the state of competition, public policy incentives and the degree of entrepreneurship of enterprises. A number of recent surveys and reports assess the different factors affecting innovation and business strategy,^{Footnote 1}, ^{Footnote 2} but there has been no comprehensive view of the issues involved from the perspective of business.

What is the Survey of Innovation and Business Strategy?

The Survey of Innovation and Business Strategy (SIBS) is a comprehensive new survey that covers the factors that influence enterprise strategies — not only explicitly related to innovation, but also to other strategies. It is a joint project, initiated in 2007–08 by Industry Canada, Foreign Affairs and International Trade Canada and Statistics Canada, to better understand the market and policy factors that encourage or discourage the adoption of growth and innovation-oriented business strategies.

SIBS provides detailed information about various business strategies and practices that determine business innovation, such as an enterprise's strategic orientation, its management practices, its use of advanced technology and its marketplace and competitive environment. The survey also provides detailed information about global value chain management practices and activities in Canada, such as which activities an enterprise will relocate to other countries and which it will outsource to external suppliers.

A sample of 6,233 enterprises in Canada, each with more than 20 employees and revenues above $250,000, were surveyed. These enterprises spanned 67 industries.

Structure of the report

Section 2 identifies enterprises' most important long-term business strategies and the strategic focus of their products and activities. Then, to provide a better understanding of the scope of business activities in Canada, the section describes the various activities that enterprises perform. It focuses on how an enterprise positions itself in the marketplace by looking at its main product and principal market, the type and location of business activities it performs, as well as its decision structure.

Section 3 looks at how enterprises in Canada have integrated global value chains (GVC) and international markets. This is seen as an important business strategy for enterprises in Canada as they seek new markets for their products and expand the scale of their domestic market segments.

Section 4 assesses whether enterprises in Canada operate in a competitive environment. By asking enterprises to define their own markets, SIBS findings overcome the important problem of market definition by directly measuring the competition intensity that enterprises perceive.

Section 5 looks at enterprises' technology adoption and innovation strategies. Concepts of complementarity in innovation and co-innovation are discussed to highlight the complexity of bringing new ideas to the market.

Section 6 presents the conclusions. Additionally, a survey description and more detailed tables (by industry and size of the enterprise) are provided in the appendices.

Key Findings of the Report

• Most enterprises focus on product positioning instead of cost leadership as their long-term business strategy.
• A majority of enterprises report that the principal market for their main product is local.
  • 70 percent of non-manufacturing enterprises report that their principal market is local as opposed to 33 percent for manufacturing enterprises.
• Almost 50 percent of manufacturing enterprises in Canada undertook business activities outside of Canada between 2007 and 2009.
• During the same period, 5 percent relocated abroad and 10 percent outsourced business activities that were initially performed in Canada.
  • Enterprises usually displaced their business activities to the United States (U.S.), China, and India. The most relocated or outsourced business activity was the production of goods.
• Contrary to the popular perception, SIBS results suggest that competition intensity in Canada is strong as enterprises report facing numerous competitors, including multinational enterprises.
  • Manufacturing enterprises report that they primarily respond to new competition by changing prices.
  • High-tech manufacturing enterprises are also likely to respond by adopting new technologies or by introducing new innovations.
• Two out of three enterprises in Canada, and four out of five manufacturing enterprises, report having innovated in 2007–09.
• Co-innovation (e.g., a product innovation that requires the introduction of a new process) is common in enterprises in Canada, illustrating the complex nature of the innovation process.
• Most manufacturing enterprises in Canada adopt advanced technologies by purchasing them off-the-shelf.
  • User-driven innovation (customizing or developing new advanced technology) is also pervasive among large manufacturing enterprises.
• Overall, about 90 percent of manufacturing enterprises took measures to mitigate the obstacles to innovation they faced in 2007–09.
  • Between 35 percent and 60 percent of these manufacturing enterprises report that these measures were successful.
  • Between 10 percent and 30 percent of these manufacturing enterprises reported using government programs to overcome these obstacles.

Section 2

How do enterprises in Canada position themselves in the marketplace?

Key Findings of this Section

• Most enterprises focus on product positioning rather than cost leadership as their long-term business strategy.
• The strategic focus of enterprises is more often geared toward maximizing sales of existing products and optimizing current activities than introducing new products and practices.
• A majority of enterprises report that the principal market for their main product is local.
• Enterprises performed their business activities in Canada either by themselves, or by outsourcing them to other enterprises in Canada.
• Decisions about business activities are primarily made in Canada, although up to one third of large enterprises report that a foreign parent is involved in some way.

A majority of enterprises in Canada focus on product positioning rather than cost leadership.

Innovative strategies come in many different forms and will likely be influenced by the enterprise's long-term market strategy. For example, an enterprise could introduce product and marketing innovations to differentiate its main product(s), or introduce process and organizational innovations to lower costs.

A long-standing hypothesis is that enterprises in Canada derive most of their productivity gains by mass-producing commodities or low value-added goods and services. This would imply that they mainly try to innovate by minimizing their input costs to take advantage of scale economies. However, contrary to this hypothesis, SIBS results (Figure 2.1 below and Table A1 in Appendix 2) show that most enterprises report product positioning (e.g., product leadership, market segmentation, product diversification, improving quality) as the focus of their long-term strategy rather than cost leadership.

Figure 2.1: Enterprise long-term business strategy in 2009 – Percentage of enterprises

Source: Survey of Innovation and Business Strategy 2009

However, the observed focus on product positioning over cost leadership may be a recent development. Most enterprises in both the manufacturing and non-manufacturing sectors report that they had implemented their current long-term strategy within the last seven years (Figure 2.2). While this does not necessarily imply a shift from cost minimization to product differentiation, it is consistent with the hypothesis that enterprises in Canada have recently aligned their strategic focus towards product positioning to face external factors such as currency appreciation or increased pressures from globalization.

Figure 2.2: Enterprise current long-term business strategy by year of implementation – Percentage of enterprises

Source: Survey of Innovation and Business Strategy 2009

Enterprises' main strategic focus is on existing products or activities rather than on new ones.

While the long-term strategy of most enterprises is more geared toward product positioning than cost leadership, the strategic focus of the majority of enterprises in Canada is oriented toward exploiting current products and activities rather than developing new or significantly improved ones (Figure 2.3 below and Table A2 in Appendix 2).

A majority of enterprises report that their strategic focus is to maintain or expand the sales of existing products (77 percent), maintain or intensify existing marketing practices (55 percent), maintain or optimize current operations and business activities (59 percent) and maintain or optimize current organizational and management practices (60 percent).

Figure 2.3: Enterprise main strategic focus for different activities in 2009^{Footnote a} - Percentage of enterprises

Source: Survey of Innovation and Business Strategy 2009

The percentage of enterprises reporting a strategic focus on new or significantly improved products varies by industry (Figure 2.4). Enterprises in the manufacturing sector are more likely to focus on new or significantly improved products than enterprises outside the sector. Further, a strategic focus on new or improved products is more prevalent among enterprises in high-tech industries relative to other manufacturing and non-manufacturing industries.

Figure 2.4: Enterprises with a main strategic focus on new or significantly improved products in selected industries in 2009 – Percentage of enterprises

Source: Survey of Innovation and Business Strategy 2009

The principal market of a majority of enterprises is local.

SIBS asked questions concerning an enterprise's highest-selling goods or services (henceforth referred to as main product), to collect information on the variety of products offered by enterprises in Canada, to define their principal market, and to acquire information on their competitive environment.

The principal market for an enterprise's main product is defined as the geographic region from which the enterprise derives the highest percentage of its main product total sales revenue^{Footnote 3}. Figure 2.5 (and Table A3 in Appendix 2) shows that, the principal market for enterprises in both the manufacturing and non-manufacturing sectors was domestic in 2009, with a high share of non-manufacturing enterprises principally serving local markets (70 percent).

Figure 2.5: Sales from enterprise's main product by region in 2009 – Percentage of sales

Source: Survey of Innovation and Business Strategy, 2009

However, international markets are more important for manufacturing enterprises. On average, across manufacturing industries, 28 percent of revenues from main products come from abroad, of which 77 percent of revenues are from the U.S. This share is higher for large (45 percent) and medium-sized (39 percent) manufacturing enterprises compared to small (24 percent) ones.

SIBS also reveals that 60 percent of all enterprises consider their main product to be a product line (78 percent and 56 percent in the manufacturing and non-manufacturing sectors, respectively). This suggests that a majority of enterprises in many Canadian industries respond to different market segment demands by producing differentiated products.

Domestic outsourcing is limited to a small number of business activities.

Depending on the nature of the enterprises and the strategy they pursue, enterprises will perform different kinds of business activities. Figure 2.6 shows that for enterprises undertaking a given business activity, that activity was performed in-house by at least 70 percent of enterprises in 2009, with the exception of legal services and software development.

Put differently, Figure 2.6 shows that activities more likely to be outsourced outside of the enterprise but still within Canada are legal services (63 percent), software development (48 percent), information and communication technology services (30 percent) and engineering and related technical services (30 percent). Section 4 presents more detail on how enterprises integrate activities into global markets.

Figure 2.6: Business activities undertaken in Canada in 2009^{Footnote c}

Source: Survey of Innovation and Business Strategy 2009

Business Activities not Performed by Enterprises

The percentages in Figure 2.6 represent enterprises reporting that they undertook a given business activity, either by themselves or by outsourcing it. The SIBS questionnaire also asked which activities were not relevant for the enterprise. For instance, a majority of enterprises reported that they do not perform: engineering and related technical services (51 percent); software development (54 percent); R&D activities (57 percent); or operate call and help centres (62 percent). Figure 2.6 data points have been recalculated to exclude enterprises that do not perform a given activity.

Overall, decisions about business activities are usually made in Canada, but the picture is more blurred for large enterprises with foreign headquarters.

Although they generally represent a small percentage of enterprises in Canada, evidence suggests that large multinational enterprises invest more in innovation and are more productive than Canadian-owned enterprises.^{Footnote 4} The Competition Policy Review Panel (CPRP 2008) highlighted the importance of head offices being located in Canada because they are a source of high-skilled, high-paid jobs and can attract high-value business services. In contrast, the Expert Panel on Business Innovation (CCA 2009) suggested that Canada benefits from the presence of large enterprises, irrespective of their country of control, since there is no guarantee that Canada would generate enough large Canadian enterprises to replace them.

Results from SIBS show that 41 percent of large enterprises in the manufacturing sector report that their head office is located abroad, primarily in the U.S., followed by Europe (Figure 2.7). For non-manufacturing enterprises, the share of large enterprises with a head office located abroad is lower at 17 percent, with most of those located in the U.S.

Figure 2.7: Location of enterprise head office in 2009 – Percentage of large enterprises

Source: Survey of Innovation and Business Strategy, 2009

SIBS results also reveal that large enterprises report that most decisions about their business activities are taken in Canada. Overall, at least 65 percent of large enterprises report that decisions about business activities are primarily made in Canada, either at the Canadian head office or at the establishment level..^{Footnote 5} In comparison, between 90 percent and 95 percent of all enterprises (for all sizes and locations of head offices) report that decisions regarding business activities are made in Canada. Decisions more likely to be made primarily by foreign parents are: location of and focus on R&D; location of production facilities; and financial arrangements (Figure 2.8).

Figure 2.8: Location of decision-making for business activities in 2009^{Footnote d} – Percentage of large enterprises that made that type of decision

Source: Survey of Innovation and Business Strategy, 2009

Section 3

How are enterprises in Canada changing the way they are connected to the world economy?

Key Findings of this Section

• Almost 50 percent of manufacturing enterprises in Canada were engaged in activities abroad between 2007 and 2009.
• During the same period, 5 percent relocated abroad and 10 percent outsourced business activities that were initially performed in Canada.
• Manufacturing enterprises most commonly relocated or outsourced the production of goods from Canada to another country, as compared to other business activities.
  • Production is also the most common business activity relocated from another country into Canada.
• Manufacturing enterprises outsourced activities from Canada primarily to the U.S. and China, while activities relocated back to Canada were largely from the U.S.
• Obstacles to outsourcing or relocating (e.g., language and culture) are different than those for exporting (e.g., cost requirements, distance to consumers).

Although they typically perform their business activities in Canada, integration into the global value chain is important for enterprises in Canada. Figure 3.1 (and Table A4 in Appendix 2) shows that 48 percent of manufacturing enterprises report they had conducted business activities outside of Canada between 2007 and 2009. The figure also shows that the percentage of enterprises with activities abroad varies significantly by industry.

SIBS also collected information on changes implemented by enterprises in the location of their business activities between 2007 and 2009. Questions distinguished between the relocation and outsourcing of business activities. An enterprise that relocated business activities abroad kept the activities within the enterprise (e.g., through a foreign subsidiary), while an enterprise that outsourced or contracted out an activity abroad moved the activity outside of the enterprise (e.g., to a third-party supplier).

Figure 3.1: Enterprises with activities outside of Canada in selected industries in 2007–09 – Percentage of manufacturing enterprises

Source: Survey of Innovation and Business Strategy, 2009

Figure 3.2 (and Table A4 in Appendix 2) shows that about 70 percent of large and medium-sized manufacturing enterprises exported or attempted to export products between 2007 and 2009. Fewer non-manufacturing enterprises did so, although the numbers vary by industry. For example, 54 percent of software publishers exported or attempted to export goods or services.

Figure 3.2: Enterprises that exported or attempted to export products in 2007–09 — Percentage of enterprises

Source: Survey of Innovation and Business Strategy, 2009

Overall, 5 percent of manufacturing enterprises relocated business activities that were initially performed in Canada to another country, and 10 percent of manufacturing enterprises reported outsourcing activities abroad between 2007 and 2009. Figure 3.3 (and Table A4 in Appendix 2) shows that large manufacturing enterprises (19 percent) were more likely to outsource business activities outside of Canada compared to medium-sized (16 percent) and small enterprises (8 percent).

Figure 3.3: Enterprises that relocated or outsourced business activities abroad in 2007–09 – Percentage of manufacturing enterprises

Source: Survey of Innovation and Business Strategy, 2009

Business activities were mainly outsourced to the United States and China between 2007 and 2009, and the most frequently displaced business activity was the production of goods.

The production of goods was by far the most frequently relocated or outsourced activity by manufacturing enterprises between 2007 and 2009 (Figure 3.4). It was displaced by about 80 percent of manufacturing enterprises that relocated or outsourced business activities. Distribution and logistics, marketing, sales and after-sales service and the provision of services are also among the most frequently displaced business activities, although the incidence of displacing these activities (around 20 percent of manufacturing enterprises) is much lower than for the production of goods.

Figure 3.4: Business activities relocated or outsourced abroad in 2007–09 — Percentage of manufacturing enterprises^{Footnote e}

Source: Survey of Innovation and Business Strategy, 2009

The most often cited (39 percent) destination for outsourced business activities by manufacturing enterprises is the U.S. (Figure 3.5). China is another important destination for outsourced activities, as 31 percent of manufacturing enterprises displaced their activities abroad to that country. India and Mexico were third and fourth respectively.

Figure 3.5: Country of destination of business activities outsourced abroad in 2007–09^{Footnote f} — Percentage of manufacturing enterprises that outsourced business activities abroad

Source: Survey of Innovation and Business Strategy, 2009

Lower labour costs in emerging economies are often cited as the main reason for enterprises to outsource their business activities. This is supported by SIBS evidence, as 50 percent of manufacturing enterprises cited the reduction of labour and other costs as the most important reasons for relocating or outsourcing business activities (Figure 3.6). Access to new markets is the third most frequently cited reason for enterprises to outsource their business activities, as reported by nearly 30 percent of manufacturing enterprises.

Figure 3.6: Reasons for relocating or outsourcing business activities abroad in 2007–09 — Percentage of manufacturing enterprises that relocated or outsourced business activities abroad and reported the importance of the reason as high

Source: Survey of Innovation and Business Strategy, 2009

Enterprises in Canada face different obstacles to exporting compared to relocating or outsourcing business activities.

A comparison of Figures 3.7 and 3.8 suggests that relocating or outsourcing business activities to another country is a different process compared to exporting goods. The lack of financing, Canadian legal or administrative obstacles, and linguistic and cultural obstacles are important impediments to relocating and outsourcing business activities (Figure 3.7), but are among the least frequently cited obstacles to exporting goods (Figure 3.8). In contrast, meeting the cost requirements of customers, the distance to customers, foreign tariffs and trade barriers, and border security issues are among the most frequently reported obstacles for manufacturing exporters.

Figure 3.7: Obstacles to relocating or outsourcing business activities abroad in 2007–09 — Percentage of manufacturing enterprises that reported the importance of the obstacle as high^{Footnote g}

Source: Survey of Innovation and Business Strategy, 2009

Figure 3.8: Obstacles to exporting in 2007–09 —Percentage of manufacturing enterprises that exported or attempted to export products and reported the importance of the obstacle as high

Source: Survey of Innovation and Business Strategy, 2009

About 5 percent of manufacturing enterprises relocated business activities from another country into Canada between 2007 and 2009, primarily from the U.S.

In contrast with the perception that relocation or outsourcing are mainly focused abroad, 5 percent of enterprises operating in Canada returned business activities from other countries into Canada between 2007 and 2009. Figure 3.9 (and Table A4 in Appendix 2) presents the percentage of manufacturing enterprises that relocated business activities into Canada for a number of industries with the highest incidences of relocation. These are typically high-tech industries such as telecommunications, aerospace and pharmaceutical manufacturing.

Figure 3.9: Enterprises that relocated business activities from abroad into Canada in selected manufacturing industries in 2007–09 — Percentage of manufacturing enterprises

Source: Survey of Innovation and Business Strategy, 2009

About 85 percent of manufacturing enterprises that relocated business activities into Canada between 2007 and 2009 relocated the production of goods (Figure 3.10). Similar to the business activities that were relocated or outsourced from Canada abroad (Figure 3.4), distribution and logistics, marketing, sales and after-sales service and the provision of services are the next three most frequently reported business activities relocated into Canada.

Figure 3.10: Business activities relocated from abroad into Canada in 2007–09 — Percentage of manufacturing enterprises that relocated business activities into Canada

Source: Survey of Innovation and Business Strategy, 2009

Finally, Figure 3.11 shows that almost half of manufacturing enterprises that relocated business activities into Canada report that they moved these activities from the U.S. followed by China, the United Kingdom, and Mexico with shares lower than 5 percent each.

Figure 3.11: Country of origin of business activities relocated from abroad into Canada in 2007–09 — Percentage of manufacturing enterprises that relocated business activities into Canada^{Footnote h}

Source: Survey of Innovation and Business Strategy, 2009

Section 4

How do enterprises in Canada compete in the marketplace?

Key Findings of this Section

• Competition intensity in Canada appears to be strong, as enterprises report facing a large number of competitors, including multinational enterprises, and experienced entry of new competitors in 2009.
  • This result holds across industries and enterprise size.
• Manufacturing enterprises in Canada primarily respond to new competition by changing product prices.
  • There is considerable variation in responses by industry. In industries where quality or perceived quality determines market shares, enterprises respond differently (e.g., by introducing a new good or service, or by adopting new technologies).

Economics literature suggests that competition often plays an important role as a driver of productivity growth and strategic business innovation. "Weak" competition intensity and "business complacency" are often prominently featured as drivers of lagging business innovation in Canada.^{Footnote 6} "Weak" competition intensity in Canada is often attributed to the concentrated nature of Canadian industries and regulations governing sectors such as telecommunications or banking.

Evidence suggests that competition among enterprises is high in Canada.

Figure 4.1 shows that Canadian manufacturing enterprises reported holding, on average, 35 percent market share for their highest selling product in its principal market (note that for most enterprises, their principal market is local). Industries with enterprises reporting the highest market share are in the construction industry and in some utilities and transportation industries (e.g., rail transportation). Small enterprises in non-manufacturing industries report holding a relatively high market share, which is consistent with another SIBS finding that the reported principal market of small enterprises is usually smaller and local.

Figure 4.1: Enterprise market share for their main product in their principal market in 2009—Market share

Source: Survey of Innovation and Business Strategy, 2009

Enterprises also reported that they face a large number of competitors in their principal market (Figure 4.2 and Table A5 in Appendix 2). Over 20 percent of manufacturing and non-manufacturing enterprises reported that they competed against at least 20 competitors in 2009, and around 80 percent reported competing against at least four competitors.^{Footnote 7} This result extends to industries that are generally seen as highly concentrated or non-competitive due to public policy and regulations. Wired and wireless telecommunication carriers, for example, follow the overall pattern with more than 75 percent of all enterprises reporting more than four competitors.

Figure 4.2: Number of competitors reported by the enterprise in their principal market for their main product in 2009—Percentage of enterprises

Source: Survey of Innovation and Business Strategy, 2009

Following a number of free trade agreements, such as the North American Free Trade Agreement, Canada is considered to be an open economy that is highly integrated into the global value chain (as shown in Section 3). Enterprises in Canada face competition from foreign enterprises, which in turn, will affect the degree of competition intensity they experience.

A majority of Canadian manufacturing enterprises reported that they competed against multinational enterprises (MNEs) in their principal market in 2009. Specifically, 67 percent of manufacturing and 46 percent of non-manufacturing enterprises reported competing against MNEs. This result also holds across all enterprise sizes for manufacturing sector enterprises (Figure 4.3 and Table A6 in Appendix 2). Over 60 percent of small manufacturing enterprises reported facing an MNE, even though they primarily operate domestically. Exceptions to the overall trends included industries that are protected from foreign competition and industries that are highly localized — utilities, construction, and some transportation industries (not shown in figures).

Figure 4.3: Enterprises that competed against multinational enterprises in their principal market for their main product in 2009 — Percentage of manufacturing enterprises

Source: Survey of Innovation and Business Strategy, 2009

One third of manufacturing enterprises in Canada faced a new entrant in their principal market in 2009 (Figure 4.4). This was less pronounced for large enterprises (26 percent) than medium (29 percent) and small (32 percent) enterprises.

Figure 4.4: Enterprises that faced entry of new competitors in their principal market for their main product in 2009

Source: Survey of Innovation and Business Strategy, 2009

The main response of enterprises to the entry of new competitors in their principal market is to change the price of their products.

The way in which enterprises respond to new competition could be an important indicator of their innovativeness. An element of the Canadian "business complacency" argument is that enterprises in Canada do not adapt best practices under competitive pressure.

SIBS results show that, for the manufacturing sector as a whole, the majority of enterprises responded to new competitors by adjusting product prices (Figure 4.5 and Table A7 in Appendix 2). The figure also shows that the response of enterprises to new competition varied by industry. In industries where quality or perceived quality plays a role in gaining market share (e.g., aerospace, computer and electronic parts), enterprises responded in more innovative ways. For instance, nearly 70 percent of aerospace-related enterprises adopted a new technology or process in response to the entry of a new competitor, and over 70 percent of computer and electronic product manufacturing enterprises introduced a new good or service when facing a new entry.

Figure 4.5: Response of enterprises to the entry of new competitors in their principal market for their main product in 2009 — Percentage of manufacturing enterprises that faced entry

Source: Survey of Innovation and Business Strategy, 2009

Section 5

How do enterprises in Canada innovate and adopt new technologies?

Key Findings of this Section

• Between 2007 and 2009, 67 percent of all enterprises in Canada introduced at least one innovation.
• Co-innovation (e.g., a product innovation that requires the introduction of a new process) is common in enterprises in Canada, illustrating the complex nature of the innovation process.
• The method most used by manufacturing enterprises to acquire advanced technologies is by purchasing them off-the-shelf, but customization and development are also important.
• Tax credits, grants and training programs were the government programs most used by enterprises to support innovation in 2007–09.
• The main obstacles to innovation faced by enterprises in Canada in 2009 were uncertainty and risk, lack of skills and internal financing.
• About 90 percent of manufacturing enterprises that faced obstacles to innovation took measures to mitigate them.
  • Between 35 percent and 60 percent of these manufacturing enterprises report that these measures were successful.
  • Between 10 percent and 30 percent of these manufacturing enterprises report that they used government programs to overcome these obstacles.

About two out of three enterprises in Canada introduced innovation between 2007 and 2009.

SIBS classifies innovation into four categories: process, organizational, product and marketing innovation^{Footnote 8}. These categories are based on the Oslo Manual to allow proper international comparison^{Footnote 9}. They have been designed to capture the contribution of intangible economic activities to innovation such as branding, marketing and organizational changes, in particular in the non-manufacturing sector.

Using this broad concept of innovation, 67 percent of all enterprises in Canada introduced at least one innovation between 2007 and 2009. For the manufacturing sector, this proportion increases to 81 percent. Enterprises are as likely to introduce product or process innovations as they are to introduce marketing or organizational innovations (Figure 5.1). Manufacturing enterprises reported higher incidences of introducing any type of innovation than the other enterprises in Canada.^{Footnote 10}

Figure 5.1: Type of innovation introduced by enterprises in 2007–09 — Percentage of enterprises

Source: Survey of Innovation and Business Strategy, 2009

Further investigation suggests that innovation is a complex process and the types of innovations are interrelated. The introduction of a new production process might involve changes in the enterprise's support activities, such as organizational activities (complementarity). Moreover, the introduction of a given innovation might also require the introduction of another type of innovation (co-innovation). Using evidence from SIBS, the next subsections will illustrate these two concepts and assess their incidence within enterprises in Canada.

Evidence shows that complementarity is common in Canada.

Figure 5.2 illustrates complementarities between innovation types and required changes in other support activities between 2007 and 2009. For instance, 80 percent of all process innovators reported that introducing process innovations within their enterprises required changes to their operational activities; 27 percent reported changes in their marketing activities; and 55 percent needed to modify some organizational activities. In the same way, the figure also shows the presence of complementarities between product and marketing innovations and support activities.

Figure 5.2: Complementarity between innovation and business activities in 2007-09 - Percentage of process, product or organizational innovators

Source: Survey of Innovation and Business Strategy, 2009

Although not shown, the complementarities in the manufacturing and non-manufacturing sector are similar to the ones presented for all enterprises in Figure 5.2.

Co-innovation is a more demanding condition than complementarity.

When the introduction of an innovation involves changes to other business activities that are significant enough, it can lead to another innovation. Figure 5.3 (and Table A10 in Appendix 2) shows that co-innovation regularly occurs in Canada. Overall, 34 percent of marketing innovators reported that their marketing innovations involved a new product. Likewise, 50 percent of product innovators indicated that their product innovations required the introduction of new processes. The product–process co-innovation is more prevalent than marketing–product in both manufacturing and non-manufacturing sectors, although co-innovation incidence is far from uniform across industries, as illustrated in Figure 5.3.

Figure 5.3: Co-innovation between types of innovation in 2007–09 — Percentage of marketing or product innovators^{Footnote i}

Source: Survey of Innovation and Business Strategy 2009

New products and services introduced in Canada have innovative features.

Different questions were posed in SIBS to better understand product innovation. One of those questions related to the "uniqueness" of an enterprise's most innovative product. The concept of "uniqueness" refers to the innovative features of the product and the presence, or not, of full or partial substitutes for this innovative feature.

Figure 5.4 shows that for product innovators in the manufacturing sector, 27 percent had at least one highly innovative product (unique innovative features with no or few substitutes), while the remaining 73 percent of product innovations had some unique features and substitutes (50 percent) or features that can be widely available in the market (23 percent).

Results from Figure 5.4 (and Table A11 in Appendix 2) also suggest that innovative enterprises in the manufacturing industries were slightly more unique than the selected services industries for their most innovative product.^{Footnote 11}

Figure 5.4: Enterprise's most innovative product by degree of novelty in selected industries in 2007–09 — Percentage of enterprises

Source: Survey of Innovation and Business Strategy, 2009

Although purchasing off-the-shelf technology is the most used mode of acquisition, customizing and developing advanced technologies are also important.

SIBS defined advanced technologies as new technologies (equipment or software) that perform a new function or improve some function significantly better than commonly used technologies in the industry or by competitors. This aspect of "above industry standards," combined with the information on types of advanced technologies used, allows better identification of an advanced technology because a new technology in one industry can be common practice in another one.

Figure 5.5 shows that manufacturing enterprises were more likely than non-manufacturing enterprises to adopt advanced technologies in 2009. One exception is advanced communication technologies where a higher percentage of non-manufacturing enterprises used these advanced technologies compared to manufacturing enterprises.

Figure 5.5: Use of selected advanced technologies in 2009 – Percentage of enterprises

Source: Survey of Innovation and Business Strategy, 2009

Enterprises acquire new technologies by different means (e.g., purchasing them, leasing them or through licences). Those advanced technologies would then be integrated in the production of goods and services. Enterprises can go a step further and transform these new technologies by customizing them or developing new ones to better reflect their production needs.

About 75 percent of manufacturing enterprises using at least one advanced technology reported purchasing it off-the-shelf (Figure 5.6 and Table A12 in Appendix 2). Customizing and developing new technologies are also pervasive among manufacturing enterprises, more so for large ones compared to small and medium-sized enterprises.

Figure 5.6: Mode of acquisition of advanced technologies in 2009 – Percentage of manufacturing enterprises that used advanced technologies

Source: Survey of Innovation and Business Strategy, 2009

The main government programs used by enterprises in Canada to support their innovation-related activities are tax credits, grants and training programs.

Government programs support innovation activities in Canada both directly and indirectly in order to stimulate private investments in innovation.

Tax credits, grants and training programs were the most commonly used government support programs in 2009 (Figure 5.7)^{Footnote 12}. When combining federal, provincial and municipal program supports, 51 percent of manufacturing enterprises reported using tax credits, 25 percent grants and 22 percent training programs. The use of the other government support programs for innovation-related activities was markedly smaller, especially in non-manufacturing industries.

Figure 5.7: Use of government support programs for innovation-related activities in 2007–09 — Percentage of enterprises

Source: Survey of Innovation and Business Strategy, 2009

The main obstacles to innovation faced by enterprises in Canada are uncertainty and risk, lack of skills and internal financing. Only a few enterprises use government programs to mitigate obstacles to innovation.

In their effort to innovate, enterprises reported a range of obstacles. Some were financial; others were related to the structure of the market or to the enterprise's level of risk aversion. Overall, the three main obstacles to innovation were: risk and uncertainty (37 percent), lack of skills within the enterprise (26 percent) and internal financing (23 percent). In contrast, intellectual property protection (5 percent) and government competition policy (4 percent) were the two least reported obstacles to innovation as reported by all enterprises (Figure 5.8 and Table A13 in Appendix 2).

Figure 5.8: Obstacles to innovation faced by enterprises in 2009 — Percentage of enterprises

Source: Survey of Innovation and Business Strategy, 2009

Once enterprises have recognized the obstacles to innovation, SIBS asked whether they try to overcome them by their own means or by taking advantage of government support programs. The percentage of enterprises taking measures to mitigate obstacles to innovation is high.

About 90 percent of manufacturing enterprises reported that they have taken measures to mitigate the effects of identified obstacles to innovation. Among these enterprises, the success rate of these measures ranges from 35 percent to 60 percent depending on the obstacle (Figure 5.9). While few enterprises identified intellectual property (IP) protection as an obstacle, more than 60 percent of enterprises facing IP-related obstacles reported being successful in mitigating this particular issue. In contrast, enterprises facing market size obstacles were less likely (35 percent) to report being successful in mitigating this obstacle. Figure 5.9 also shows that between 10 percent and 30 percent of manufacturing enterprises that took measures to mitigate obstacles to innovation used government programs.

It is noteworthy that the success rate of measures to mitigate uncertainty and risk, which is the most important obstacle to innovation, is among the lowest, but that the success rates for lack of skills and internal financial obstacles are among the highest.

Figure 5.9: Success rate of measures taken and use of government support programs to mitigate the obstacles to innovation in 2009 — Percentage of manufacturing enterprises that faced that type of obstacle and took measures to mitigate it

Source: Survey of Innovation and Business Strategy, 2009

Section 6

Conclusion

SIBS provides a rich environment for the analysis of different factors that influence the innovative behaviour and performance of enterprises in Canada, including business strategies and activities, enterprise structure, and the competitiveness of the market environment. A better understanding of the drivers of business innovation and enterprise growth will inform policy design in Canada.

Enterprises report that they are more likely to focus on product positioning than cost leadership for their long-term business strategies. Many enterprises also report adjusting their strategic focus in the late 2000s, when external pressures on businesses included currency appreciation and increased pressure from globalization.

The report also shows that innovation is a complex process. Over 2007–09, many enterprises in Canada introduced different forms of innovation (product, process, marketing or organizational), which often required significant changes to other business and innovation-related activities within the enterprise. Moreover, enterprises — in particular, those in the high-tech sector — reported introducing a product innovation or adopting a new technology to face increased competition, suggesting that technology and innovation are important strategic assets that enterprises in Canada employ to remain competitive in the changing marketplace.

The production of the SIBS has established an extensive dataset that will allow researchers and academics to conduct relevant studies on the innovative activities and strategic decisions of enterprises in Canada. Further, it will assist the policy community in the development of evidence-based policy by addressing critical data gaps in our understanding of the drivers and barriers of business innovation in Canada.