Analysis by David Crane: Budget fails to find solution to innovation gap

By David Crane

There are provisions in the 2012 Budget that will clearly help Canadian enterprise become more innovative and hence better able to compete in the global marketplace. It is through innovative new activities — in the form of successful new businesses or new activities within existing businesses — that new wealth and jobs will be created, so it is imperative that public policies are strongly focussed on innovation and the knowledge economy.

Yet the most recent Budget proposals are more about reallocating existing resources to business-focussed activities than adding to levels of public support. Moreover, despite the Harper government's recognition that Canada lags in innovation — a key factor in our poor productivity performance — it has not articulated its own analysis of why Canada has an innovation gap in the first place. That makes it tough to determine whether its policies to close the innovation gap will do so. Its innovation strategy consists largely of incremental changes in program design and innovation budgets.

To the extent that the Harper government has a vision of Canada's future, it is that of Canada as an "energy superpower", an exporter of raw materials with the result that the value-added application of these activities takes place in the nations consuming our raw materials rather than in Canada. While extracting energy and other resources in an environmentally clean manner requires innovation, this is not the path to a knowledge-based economy providing leading-edge goods and services for the global marketplace. Moreover, even in the most optimistic scenario, this focus on raw materials will not provide the wealth and good jobs needed to sustain and grow a prosperous national economy. That has to come from value-added activities.

To be sure, the Harper government has sustained many of the innovation programs expanded or introduced during the Chrétien/Martin era — support for the Canada Foundation for Innovation and the granting councils as well as Genome Canada, the Networks of Centres of Excellence (NCE), the Industrial Research Assistance Program (IRAP), repayable funding for the aerospace and automotive industries, direct funding of venture capital and Canada's program of research chairs.

In addition, the Harper government has introduced new programs, such as the Business-led NCE program, faster tax write-offs for investment in technology, the Canadian Innovation and Commercialization Program and the Digital Technology Adoption Program. On the other hand it has cut the R&D tax incentive, which will have its biggest impact on large research-intensive Canadian companies like Research in Motion, Magna International, or CAE and the subsidiaries of foreign multinationals who may find Canada a less attractive venue for R&D.

Overall, though, while the 2012 Budget says the total fiscal cost for its innovation programs will increase by $306 million this year and $215 million in 2013-14, these increases will be offset by an estimated annual saving of $500 million from lowered tax incentives for R&D.

But the bigger question is what kind of difference does the government believe the 2012 and earlier budgets will realistically make to Canada's innovation performance? "Despite strong policy fundamentals to support innovation in Canada, Canadian businesses do not take full advantage," the 2012 budget complains. "Canada continues to lag behind peer countries in terms of overall innovation performance, including private sector investment in research and development, and the commercialization of research into products and processes that create high-value jobs and economic growth."

It puts the onus on industry to act. "It is important that Canadian business begin to address this gap in order to drive the innovation that leads to success in a competitive global marketplace," the Budget asserts. Hence it emphasizes, at the National Research Council and elsewhere, that programs will shift to "demand-driven applied research" to better meet business needs.

There's no doubt that business could use more help, which is why the increase in funding for IRAP and the focussed use of public procurement to help create a launch base for new technologies developed by Canadian companies are positive steps. But demand-driven support is not a panacea and some innovation policy experts like Nathan Rosenberg and David Mowery, see this is a relatively minor part of the innovation process.

The supply side of new knowledge is also a critical factor, for example, along with the culture, institutions and supply of high-quality workers, as well as the capacity for patient capital to support long-term growth.

Patient capital, which is much different from short-term venture capital, matters. It has taken OpenText, for example, 25 years to become a $1 billion company. Serious innovation for long-term growth requires scale, and that requires stable shareholder support. Few small and midsize Canadian companies have that, which is why so many become easy takeover targets by foreign corporations roaming the world for desirable acquisitions. Think DALSA, Gennum, Tundra Semiconductor and Kobe for recent examples of foreign takeovers.

So how do we build large-scale Canadian companies that can afford to make high-risk investments in new technologies or have the receptor capacity to pick up the new knowledge from our universities and research organizations? This is a major challenge. Since innovation is high-risk and hard work, we need companies with sufficient scale to be strong innovators.

The real questions, then, that the Harper government needs to answer are these: How and to what extent does it genuinely believe its current and past budget measures will close the innovation gap which it has highlighted, and in what ways will this gap be closed? In fact, does it know the answers?

While the Harper government deserves credit for some of the changes it has made, and for sustaining the initiatives of previous governments, it is unlikely that it has done enough, so it is unlikely to have found the solution yet to Canada's innovation gap. This task is becoming more urgent in a more competitive world and one where Canada's capacity for productivity gains though innovation becomes more urgent as our population ages. Shipping out higher volumes of raw materials won't solve that, no matter how innovative the resource extraction.

David Crane is a veteran business journalist. He can be reached at crane@interlog.com.