Editor’s Note: This is a more detailed, expanded synopsis of a C. D. Howe Institute study that Research Money initially reported here (The Short Report: August 13, 2025).

Government-supported innovation programs help companies overcome innovation barriers and other barriers to success, based on the limited available evidence, according to a study from the C. D. Howe Institute.

But there remains a significant gap regarding the mechanisms through which firms utilize government support programs and their effectiveness in overcoming specific innovation barriers, says the report by Catherine Beaudry (photo at left), fellow-in-residence at the C. D. Howe Institute.

Beaudry points out that as Bronwyn Hall, professor emerita in economics at the University of California, Berkeley and co-authors noted in a 2016 study, “There is relatively little knowledge about what makes an organization innovate, which conditions favour the rise of such organizations and whether certain socio-economic environments and policies can support their development in both manufacturing and service industries.”

Critical areas requiring investigation include program utilization patterns across firm types, success metrics for different support mechanisms, impact analysis of barrier mitigation programs, and comparative effectiveness across policy instruments, Beaudry said.

Understanding the relationship between government innovation-support mechanisms and firms’ capacity to overcome innovation barriers is essential to assessing program effectiveness and identifying future policy design, she said.

“It is crucial to determine which combination of support mechanisms proves most effective for different types of firms facing various innovation challenges. Both the direct and indirect effects of government support programs need to be assessed.”

Beaudry’s study and analysis offers the first systematic assessment of government innovation-support programs’ effectiveness in addressing specific innovation barriers within the context of firm-level mitigation efforts.

While programs may directly address specific barriers, they may also help firms develop capabilities that make them better able to overcome other obstacles, Beaudry pointed out.

This multiplicative effect suggests potential benefits from coordinated policy approaches that address multiple barriers simultaneously while supporting firms’ overall innovation capabilities.

This understanding becomes particularly important in the context of limited public resources and the need to maximize the impact of government support programs, Beaudry noted.

Her study’s econometric analysis found that financial obstacles significantly impede corporate innovation – with important implications for innovation policy design.

First, financial obstacles, both internal and external combined, demonstrate a clear deterring effect on innovation activities, consistent with findings of prior studies on cost-based innovation barriers.

Compared with firms that did not face these financial constraints, firms that did are 43.1 percent less likely to innovate. This relationship remains stable even when controlling for other innovation obstacles, highlighting the fundamental nature of financial constraints in the innovation process.

Second, Beaudry’s analysis revealed an important nuance regarding firms’ adaptive responses to financial constraints. While mitigation efforts do help, they do not fully offset the negative impact.

Firms that faced financial constraints but failed in their mitigation efforts were 33 percent less likely to innovate compared to those without such constraints. Even firms that successfully addressed these challenges remained 23 percent less likely to innovate.

“This 10-percentage-point improvement shows the importance of effective financial management strategies – but also makes clear that such efforts fall short of fully neutralizing the constraints,” Beaudry said.

Beyond financial obstacles, the analysis identified that skills shortages, risk/uncertainty concerns and, to a lesser extent, market-size limitations and regulatory constraints all exhibit deterring effects on innovation.

The persistent negative impact of financial constraints, even after mitigation attempts, suggests the potential value of direct innovation funding support, particularly in a period of financial crisis and immediately thereafter, Beaudry said.

The effectiveness differential between successful and unsuccessful mitigation measures indicates the importance of building firm-level financial management capabilities, she said.

[Editor’s note: The federal government uses both direct instruments, such as R&D grants and contributions, and indirect instruments, such as the R&D tax credits in the Scientific Research and Experimental Development Program (SR&ED) to support innovation.

However, the bulk of federal support is provided through indirect instruments. There have been calls by stakeholders in the innovation ecosystem, including startup founders, for Ottawa to shift to more demand-side, direct and targeted instruments rather than indirect support.]

Combining government support with private measures yields the most positive outcomes

The multifaceted nature of innovation barriers suggests the need for coordinated policy responses that address both financial and non-financial constraints, Beaudry said.

Use of government programs by companies shows a clear positive effect in partially mitigating financial constraints, though it does not fully offset when compared to firms that did not face such burdens, according to Beaudry’s study.

Notably, only a small share of firms – 6.6 percent with unsuccessful mitigation measures and 11.4 percent with successful measures – reported using government programs specifically for financial barrier mitigation. “This adds to the notion that while government support can help ease financial constraints, it does not fully eliminate them.”

The results indicate a slight improvement in the probability of innovating when firms ask for help, Beaudry said. Firms that took successful measures to address financial barriers, when also backed by government support programs, increased their probability of innovating by nearly 6.5 percentage points compared to financially unconstrained firms.

For market-size barriers, government program utilization shows clear positive effects, with successfully implemented non-governmental measures combined with government support demonstrating the strongest positive impact, Beaudry noted.

Firms that took successful measures and used government programs to overcome market-based innovation barriers increased their probability of innovating by 13.7 percent compared with firms that did not face such barriers.

These findings, combined with data on government innovation program usage, suggest several important considerations for innovation policy design, Beaudry said.

First, evidence indicates a disconnect between firms’ perceived purpose of government programs and their actual effectiveness in mitigating barriers to innovation.

Second, the strongest positive outcomes often emerge from combining successful private measures with government support, suggesting the importance of program designs that complement private initiatives.

The empirical evidence demonstrates positive innovation effects from both training programs and graduate hiring initiatives, according to the study.

These human capital-focused interventions show statistically significant positive associations with innovation propensity: firms that used government training programs increased their probability of innovating by 6.4 percent, while those that accessed programs designed to help them hire recent graduates increased their likelihood of innovating by 10.5 percent compared to firms that did not.

“Government grants and tax credits emerge as foundational elements of the innovation-support landscape, as they are designed to help mitigate the complex and uncertain nature of the innovation process,” Beaudry said.

While they only partially mitigate financial constraints, these instruments demonstrate consistent positive effects on innovation propensity.

“The analysis supports previous research indicating that high-performing Canadian firms often benefit from combined support through SR&ED tax credits and direct funding mechanisms.” The firms in the analysis that have used such programs have increased their probability of innovating by 11.3 percent (tax credits) and 11.8 percent (direct grants).

Access to government research facilities and export-support programs show positive effects

Access to government research facilities, although seldom used by firms (3.6 percent of the sample) demonstrates a strong positive impact on innovation propensity. “The network of the National Research Council facilities and regional research centres appears to provide meaningful support for industrial innovation.”

Similarly, export-support programs, despite limited uptake at the time (4.1 percent of firms sampled), show significant positive effects on innovation outcomes for participating firms.

Government information and technical assistance programs, as well as market information services programs, both demonstrate a positive association with an increased innovation propensity for firms that use this support, though the latter show weaker significance, according to the report.

Public procurement, while theoretically promising for innovation acceleration, shows no significant impact in the analysis, Beaudry said. This finding likely reflects the early stage of innovative procurement policies in 2009-2012 and potential measurement challenges in distinguishing between traditional and innovation-oriented activities.

[Editor’s Note: This finding on government procurement is surprising given the Council of Canadian Innovators’ (CCI) research and advocacy in this area. The CCI has called for a significant overhaul of government procurement processes, arguing that the current system hinders the growth of Canadian tech companies and limits their ability to scale. The CCI says that strategic government procurement is a powerful tool for driving economic growth and has proposed several reforms. Startup founders and CEOs also maintain that roadblocks in government procurement must be dismantled.]

Previous innovative procurement programs have been shown elsewhere to accelerate the adoption and diffusion of innovation, Beaudry said.

The value of research infrastructure access – shown to have a strong positive effect – as a complement to direct financial support needs further investigation, she said.

The potential for expanded export-support programs, given their positive impact despite limited current utilization, show promise as both an incentive to innovate and to explore new markets, Beaudry said. “The latter is particularly important in the current geopolitical climate.”

“These findings suggest several important considerations for innovation policy design – for example, the need to maintain and potentially expand successful traditional support mechanisms,” Beaudry said.

Moreover, where the results show less significance, one must decide whether the program should be improved or dropped, she said.

“Carefully calibrated” policy approaches required

Beaudry said the study’s analysis reveals valuable insights about the interplay between private initiatives and public support in fostering innovation capacity.

The periods studied – 2007-2009 and 2010-2012 (during and immediately after a financial crisis) – are directly relevant to today’s post-pandemic, post-inflationary, and post-high interest rate period, she said.

The findings show that during times of a financial crisis, firms never manage to completely mitigate financial constraints to improve their probability of innovating to be on par with that of unconstrained firms.

The analysis also reveals that firms exhibit significant agency in addressing innovation barriers, particularly financial constraints. Proactive firms demonstrate an increased capacity for innovation compared to their peers. This effect strengthens significantly when mitigation efforts succeed.

Government support programs play an important complementary role, though their effectiveness varies significantly across intervention types. This finding suggests a complementary relationship between private initiatives and public support, with neither serving as a complete or standalone solution.

Traditional instruments such as R&D tax credits and subsidies yield broad positive impacts, while newer mechanisms like public procurement show more limited results, according to the study.

“This variation suggests the need for carefully calibrated policy approaches that recognize the heterogeneous nature of innovation barriers and firm responses,” Beaudry said.

First, innovation-support programs should be designed to complement and reinforce private mitigation efforts rather than operate in isolation, she said.

Second, more targeted interventions may be needed for specific barrier types, particularly those showing persistent deterring effects.

Third, there is a need for improving coordination among different support instruments to maximize their combined impact.

In a time of budget constraints and geopolitical uncertainty, governments must make tough decisions about maintaining domestic programs while monitoring global events, Beaudry said.

“Our research highlights the value of evidence-based program evaluation. Programs that effectively drive innovation, especially those that align with private efforts, deserve top priority for continued funding and expansion.”

Need to “decompartmentalize” government programs

The study makes several recommendations:

Recommendation 1: Improve coordination of innovation support:

• Recommendation 1.1: Coordinate and de-compartmentalize government programs to support innovation activities. To address the challenges faced by businesses, improve coordination and collaboration among program organizations. Collaboration among these organizations, with shared resources and databases, could lead to the elimination of redundancies, maximizing business support.
• Recommendation 1.2: Encourage companies to take steps to reduce or overcome non-financial barriers. They would benefit from being coached and mentored to improve the success of their endeavours to overcome these challenges.
• Recommendation 1.3: Promote and focus on innovation-support programs that increase the propensity to innovate. The next step is to identify specific programs that outperform expectations. In-depth studies can help governments choose which innovation-support programs to enhance. Effective governance is crucial for companies to overcome barriers and innovate beyond expectations. Government agencies must clarify their roles and responsibilities to ensure seamless coordination.
• Recommendation 1.4: Coordinate non-governmental support and government programs to support innovation activities, focusing on financial constraints. Aligning innovation-support programs to effectively eliminate financial constraints for companies is important. The government can play an effective complementary role alongside the private sector without replacing private initiatives that should remain the main driver.

Recommendation 2: Raise awareness of and improve programs for reducing innovation risks.

• Recommendation 2.1: Take advantage of public procurement.

Risks and uncertainties hindered innovation for more than 40 percent of innovative companies. Removing these risks is crucial.

In these earlier samples (2009, 2012), public procurement’s impact on innovation propensity was minimal (non-significant) despite being used by 4.2 percent and seven percent of firms in 2007-2009 and 2010-2012, respectively.

It is doubtful results will have changed much with utilization in more recent surveys (2015-2017, 2017-2019, and 2020-2022), dropping to 1.9 percent to 2.2 percent.

Nonetheless, in sectors where the public sector is an early adopter, such as construction, transport and healthcare, testing and validating technology in the public sector reduces innovation risks. In these sectors, public procurement should be used to mitigate some risks and uncertainties related to emerging technologies.

• Recommendation 2.2: Continue to modernize the regulatory system.

Regulation plays an important role in many innovative sectors. Increased collaboration in both the early and upstream phases of innovation is not only desirable but can also improve and accelerate the development and deployment of innovation.

Recommendation 3: Understand why companies fail to innovate.

• Recommendation 3.1: Understand why some companies do not try to overcome innovation barriers.
• Recommendation 3.2: Understand why certain measures taken by companies fail, whether they are governmental or non-governmental in nature.
• Recommendation 3.3: Equip businesses and innovation intermediaries with the necessary resources to address obstacles to their innovation potential.

Beaudry said her study could not find information on the organizations or groups that help firms navigate government programs. More detailed questionnaires and interviews are needed to address this issue. This form of innovation survey, combined with business strategies, has a promising future in differentiating government innovation-support programs from other company actions to overcome innovation obstacles.

• Recommendation 3.4: Match government programs and measures used by companies in databases.

The fact that surveys generally fail to match specific suites of government programs with the barriers they have helped to alleviate hampers the understanding of how businesses overcome them.

Beaudry said that in light of the study’s results and the questions raised by them, it is imperative that the community interested in these issues – including industry leaders, policymakers, and academics – identify the programs that work, the impact of their combined effect, how to improve those that partially achieve their objectives, while studying the behaviour of companies and the support they obtain from their ecosystem when they try to innovate.

Beaudry said her study advocates for a unified strategy that combines government innovation programs, enhances business-led innovation efforts, and leverages robust innovation systems. “This approach will drive Canadian innovations to global markets, including beyond the U.S. market.”

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