Confronting Canada's innovation problem

By David Crane

If there's one thing that policymakers agree on it is that Canada has a serious innovation problem, and that this threatens our future well-being as a country. Innovation is what drives productivity, and productivity becomes even more important as society ages. Canada's poor innovation performance — notably in the business sector — explains why Canada's productivity gap with the US and other countries has widened significantly over the past couple of decades and why our future well-being is at risk. Why is this happening and what do we do about it?

A recent symposium on innovation at Waterloo's Perimeter Institute — sponsored by the Bank of Montreal and the Institute for Research on Public Policy — brought together business representatives, university presidents, policy wonks and community leaders to come up with answers. They had an important audience — Finance minister Jim Flaherty and Science and Technology minister Gary Goodyear were present for the entire symposium.

Both ministers voiced concern that business spending on R&D, adjusted for inflation, had declined since 2006. Flaherty noted that businesses in countries like Sweden, Finland and Israel are far more committed to R&D and warned that "we are at risk of being left behind." He called on businesses to use part of their record levels of cash to commit to more R&D. "Canadian business should demonstrate its confidence in our economy," he said. Echoing Flaherty, Goodyear said more businesses "must begin to prioritize innovation in their business strategies," adding that "if businesses are doing the same thing today that they were doing five years ago, they are in serious trouble."

One problem, Open Text executive chairman Tom Jenkins argued, is that important sectors — such as financial services, telecommunications and transportation — are shielded from competition. Competition leads to innovation, which leads to productivity gains, he said. But if firms are making high profits in a sheltered environment there is no incentive to innovate. Jenkins also chairs the expert panel reviewing federal support for R&D. The report is due in mid October.

More scathing criticism came from Bill Currie, vice chair of Deloitte Canada. In a new report — The future of productivity: An eight-step game plan for Canada — he identified six key issues facing Canada: business leader risk aversion; inefficient and insufficient support for innovation; lack of risk-capital for start-up companies; chronic under-investment in machinery and equipment; sheltering of the Canadian economy; and, increasing competition for human capital.

Canadians, he said, are "fat and happy", but in fact the country is falling behind with the risk that today's children will not have the same standard of living as their parents.

The symposium had no trouble agreeing that the country has a serious innovation challenge and that our business community has to play a much greater role in addressing the challenge. Universities and colleges are adopting a more global mindset, focussing on engineering, business and science skills that are important for innovation. But business has to take a stronger lead.

Although the summit shied away from specifics, it was clear there were some important policies Canada could adopt. There was a consensus that much of our future innovation will come from small- and mid-size businesses — innovative entrepreneurs or high-growth companies — and government can do more to support their innovation and growth.

First, give a major boost to the base funding of the Industrial Research and Assistance Program and transform it into an arm's length agency with its own accountable president and board of directors. IRAP's record of assisting SMEs is exemplary. Despite its importance in boosting innovation, it is seriously underfunded and most years runs out of money well before the fiscal year is over.

Second, enable more companies to monetize their unused SR&ED tax credits. At present, only small Canadian-controlled private companies can get refundable credits. SMEs forced to go public to raise capital, or which bring in a minority foreign partner or investor, are immediately penalized by no longer benefiting from the refundable credit.

Third, look at the BC investment tax credit program, which provides a 30% refundable tax credit for investments of up to $200,000 annually in eligible small businesses or venture funds, provided the money is deployed for at least five years. The program has paid for itself several times over in tax revenues from growing businesses and their employees.

Fourth, consider taking an idea from the Ontario Liberal platform to provide a tax benefit to companies investing in venture capital. The Canadian private sector is sitting on an unprecedented pool of liquid assets of about $400 billion, while venture funds have dried up. There is a need to get some of that money into the hands of innovative entrepreneurs.

Provinces are initiating some steps on their own, as the BC and Ontario examples show. But it is also important that federal and provincial measures be aligned so that they are mutually reinforcing. Indeed, an effective innovation nation strategy requires a high level of federal-provincial collaboration for maximum effectiveness. Governments of different political stripes need to work together. Innovation cannot be seen as a zero-sum game, where one province's gain is seen as another's loss. A boost in innovative activity in any province benefits the entire country.

There is another challenge. The ongoing foreign takeover of Canada's innovative tech companies — Zarlink, DALSA and Tundra Semiconductor being recent examples — is seriously hampering Canada's ability to create more world-scale companies with the capacity to profit from globalization. No one at the symposium had an answer to this problem — the fact that we may simply be creating the seed corn for foreign multinationals, or as one of Ottawa's former top officials has put it, "growing guppies to feed the sharks."

The Canadian experience shows that we have the enterprising talent (native-born and immigrant) to launch highly innovative companies. What we lack is the ability to grow them to become big companies.

The Waterloo symposium on the innovation nation clearly helped to advance the dialogue. The next chapter will come when the Jenkins report is delivered next month. We will then need close and quick federal-provincial collaboration for a rapid follow-up. While governments are focussed on deficit reduction, the slowdown in economic growth means we may need a bit more stimulus, and advancing the innovation agenda would be a constructive way to do this.

David Crane can be reached at crane@interlog.com.