How governments can improve their support of innovation

Yogi Schulz has more than 40 years of information technology experience in various industries, including the energy industry; his specialties include IT strategy, web strategy and systems project management. His new book, co-authored by Jocelyn Schulz Lapointe, is “A Project Sponsor’s Warp-Speed Guide: Improving Project Performance.”

Nurturing innovation is crucial to Canada's need to boost economic growth and improve the living standards Canadians aspire to enjoy. These goals, plus the following issues, are pressuring all three levels of government to improve their support of innovation:

• The affordability crisis that Canadians are experiencing can only be addressed with higher-paying jobs.
• The influx of immigrants, who all want better jobs, can only avoid unemployment or underemployment through a growing economy.
• The need to boost Canada's lagging productivity to remain competitive in global markets.
• The desire to address climate change through the energy transition at an affordable cost.
• The need to increase tax receipts to fund programs and return to balanced budgets.

The federal government recently cancelled the Canada Digital Adoption Program (CDAP) after managing to spend only one-fifth of its $4-billion budget.

This unfortunate outcome suggests the federal government and likely other levels of government can improve their performance in encouraging innovation throughout the Canadian economy.

CDAP suffered from the following issues:

• The CDAP application process was cumbersome and time-consuming.
• Applicants could engage only government-approved consultants.
• Consultants were restricted to providing specific kinds of advice.
• All digital adoption plans had to follow a single standard template, regardless of industry, organization size or state of digital adoption.
• CDAP's rules turned off many consultants.
• A shortage of approved consultants annoyed applicants.
• Applicants were disappointed by the lack of consultants with experience in their industry.

Ways to improve government innovation performance

Here are some ideas for improving the innovation performance of governments. This article uses the term innovators to refer to startup leaders, venture capitalists, private equity investors and general business investors.

1.      Maintain attractive urban environments

Innovators are attracted to urban regions that exhibit many of the following characteristics:

• Presence of multiple credible postsecondary education institutions.
• A significant population with advanced degrees.
• A substantial community of experienced technical professionals.
• A first-class airport with direct connections to many cities elsewhere on the planet.
• A high-speed, highly available telecommunications infrastructure.
• A culture of respect and acceptance.
• Widespread use of the English language.
• Proximity to many outdoor amenities such as the Rocky Mountains or the Laurentian Shield.
• Well-functioning cities with reliable utilities, superior transportation alternatives, clean air, affordable schools and low crime.
• Immediate access to superior health care.
• Affordable housing and land prices.
• Availability of first-class office space at a modest rental cost.
• Availability of a wide range of cultural amenities.

The following examples of how to chase away innovators have occurred in some cities:

• Keeping taxes so low that the infrastructure, schools and utilities deteriorate.
• Raising taxes so high that innovators and business investment move elsewhere.
• Allowing power and wealth to shift to local elites to the extent that inequality increases sufficiently to exacerbate social tensions.
• Strangling development to cause housing prices to skyrocket.

2.      Improve the business climate

Innovators view Canada's business climate as less attractive than the United States and more appealing than Western Europe. Canada's business climate varies considerably across provinces.

Desirable elements of the business climate include:

• The rule of law, especially related to enforcing contracts.
• Vibrant capital markets.
• Modest taxes.
• No capital controls.
• A predictable and reasonable regulatory regime.
• No diversity, equity, inclusivity (DEI) regulations.
• Few barriers to interprovincial and international trade.
• Ease of resolving insolvency.

Unfortunately, Canada's rank on the World Bank's Ease of Doing Business (EDB) Index has deteriorated over the past six years. Canada also ranks well below the United States, whose rank has also fallen.

An excellent recent example of what not to do is Hong Kong. Following the takeover by the People's Republic of China, the business climate has deteriorated due to the suppression of civil liberties and the introduction of an unpredictable regulatory regime.

Provinces dominated by centre-left parties are less open to innovators and private companies. Sometimes, they even become suspicious of companies and favour Crown corporations.

These provinces also prefer public spending over business investment. As a result, they experience a more complex regulatory environment, slower growth, higher debt and less innovation.

3.      Strengthen the macroeconomy

The performance of the Canadian economy in the aftermath of the COVID-19 pandemic has been sluggish. That lowers innovator interest.

Governments can improve the attractiveness of Canada for investment by:

• Balancing operating budgets.
• Lowering public debt.
• Not spending money on subsidies, grants and special tax breaks for specific companies.
• Abandoning their excessive and costly focus on a rapid energy transition.

These actions lead to lower inflation and interest rates that attract innovators. Avoiding these issues keeps Canada from growing economically, adding jobs and improving its competitive advantages.

One indicator that the Canadian macroeconomy could use strengthening is the business enterprise expenditure on R&D (BERD). Canada ranks 21^st among OECD countries for BERD, at 0.93 percent of GDP. The OECD average is double that at 1.99 percent of GDP.

Another indicator is that "Canadian pensions are underinvested in the country's public markets, starving domestic companies of capital and exposing them to foreign takeovers," said François Carrier, head of capital markets at Desjardins Group.

To increase these investments, we must improve the Canadian economy's performance. Pension funds have a fiduciary duty to maximize returns at modest levels of risk. They find that combination more often outside of Canada.

4.      Reduce the regulatory burden

Sometimes, the best action governments can take to nurture innovation is to get out of the way.

All Canadians benefit when governments support startups and responsible development of Canada's abundant natural resources. Sometimes, governments are deterred by some who aggressively promote weird ideological anti-business views.

Unfortunately, Canadian examples of what not to do include:

• Complex, costly and unpredictable regulations for resource and industrial development project approval.
• Apparent government favouritism for in-vogue industries.
• Ambiguous and demanding greenhouse gas emissions reporting requirements to multiple agencies.
• Lengthy funding applications with extended approval periods.

These burdens cost startups and other businesses money, distract from improving operations and stifle innovation. Sometimes, government leaders seem surprised when business investment decreases as a result.

5.      Avoid bets on companies or technologies

Governments should avoid funding product development. That's the domain of business.

The losses can be significant when governments bet on specific companies or technologies with grants, subsidies or exclusive deals. Such actions also create a reputation that the playing field is unfair and favours the politically well-connected. These perceptions undermine innovation.

Unfortunately, various provinces and the federal government have made multiple investments with the best intentions, only to lose significant amounts of taxpayer money. The latest federal examples are grants, tax breaks and subsidies to electric vehicle and battery manufacturers.

For another example, read a University of Calgary School of Public Policy research paper summarizing the losses the Alberta government experienced when it bet on specific companies, The Siren Song of Economic Diversification: Alberta's Legacy of Loss by Ted Morton and Meredith McDonald.

Don't subsidize investment in industries where Canada can't compete or doesn't have strengths. Good examples are shipbuilding, aircraft manufacturing and steel production.

6.      Fund basic research

Governments can positively impact long-term innovation by funding basic research.

Recent blockbuster examples are the mRNA vaccines for COVID-19 and Semaglutide for treating type 2 diabetes and obesity.

In both cases, decades of basic research preceded the pharmaceutical successes. Similarly, discovering how to produce salable crude oil from oilsands profitably required decades of research.

7.      Accept failures as normal

Government departments work hard to avoid failures, knowing that the opposition parties and the media gleefully trumpet such failures across the land with much exaggeration.

Unfortunately, innovation is typically associated with more failures than successes. We forget too quickly that knowing what won't work is also valuable. The adage to "fail fast" is essential to continually refocus innovation efforts and minimize wasted resources.

When governments improve their support of innovation through the actions described above, innovation can flourish to strengthen public finances, competitiveness and the standard of living of Canadians.

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