The federal government should create a new business innovation agency to deliver its core national programs and be a centre of expertise in working effectively with entrepreneurs, says a former president of the National Research Council.

Ottawa spends more than $8 billion annually on over 130 federal innovation programs that operate in silos with different rules, timelines and processes, while external and internal constraints underlie federal program design and delivery, Iain Stewart (photo at right), says in a working paper for the Munk School of Global Affairs & Public Policy at the University of Toronto.

“The current system is shaped by incentives that are at times misaligned with the fundamental objective of promoting a more innovative and productive business sector,” says Stewart, a senior fellow at the Munk School. He retired in 2024 after 30 years working in a range of federal departments and agencies.

The misalignment of federal innovation programs reflects administrative constraints, fragmented responsibilities, outdated delivery models, and a persistent emphasis on early-stage R&D over technology adoption, commercialization, and scaling-up successful technology companies, according to his paper.

“Together, these systemic features limit program impact, reduce responsiveness to business needs, contribute to an ongoing pattern of underperformance, and so collectively indicate that the Government of Canada is not  committed to achieving significant business innovation improvements.”

In an email to Research Money, Stewart said his paper is focused on the working-level community within and around federal economic programs and particular innovation programs.

“As I retired from the Government of Canada and exit that community, I thought I should write out what I had observed.  My hope is that it is useful for the central agencies and line departments active in this policy area over time,” he said.

Canadian firms remain chronically less likely than global peers to develop new technologies, commercialize innovations, or invest in the latest advanced production processes and  business software, Stewart notes in his paper. “This under-performance diminishes the productivity gains foundational to long-term economic growth, increased wages, public revenues, and so maintaining a high quality of life for Canadians.”

Federal program designs “prioritize formal oversight and accountability elements over agility and achievement of outcomes – a root problem underlying the suite of federal business innovation programs,” he says.

The federal government also lacks the program evaluation tools and insights needed to evaluate the effectiveness or efficiency of business innovation programs, either individually or in relation to one another, he adds.

Stewart points out that the highest-funded program, the $4.5-billion Scientific Research and Experimental Development (SR&ED) tax credit program, focuses on subsidizing business R&D activity, not the steps leading to commercialization.

The new agency – established as a Crown corporation or, alternatively, a subsidiary of the National Research Council – would have the flexibility to hire private sector expertise at market rates, would do its own procurement, legal, IT, and contracting services, and “so would work to ensure it operates at  the speed of business with the responsiveness and accountability expected by business clients.”

“The new Agency would act as a whole of government program policy hub – developing new approaches for evermore effective programs, testing new delivery and support models through pilot initiatives, and advising other departments and central agencies on needed reforms,” Stewart says.

He says the new agency should deliver all or part of the four “core” federal business innovation programs that:

• directly support individual businesses to incent their investment in R&D and commercialization and related activity.
• are national in focus, available across the whole economy. 
• have sufficient scale and delivery resources to arguably have a noticeable impact on the Canadian economy over time. 

These four core programs are SR&ED, the Industrial Research Assistance Program (IRAP, which provides about $400 million annually), the Strategic Innovation Fund (SIF, which to date has committed a total of $9 billion to 127 individual projects), and the Innovations Solutions Canada (ISC) program, which Stewart says needs to be revitalized “to provide a procurement pathway for Canada to pull on its innovation ecosystem to develop innovation solutions for Canada.”

Budget 2023 announced reductions to departmental contributions to the ISC program, and consultations on whether such a program needed a legislated foundation to support it – the results of which have yet to be made public.

What happened to the Canada Innovation Corporation?

Stewart notes in his paper that Budget 2022 proposed the Canada Innovation Corporation (CIC) – a new Crown corporation focused on improving business-facing innovation support.

The CIC was recommended by the federal Advisory Panel on the Federal Research Support System, chaired by Frédéric Bouchard, Dean of the Faculty of Arts and Sciences and professor of philosophy at the Université de Montréal, in its report (the “Bouchard report).”

The CIC as announced was to build on IRAP and include a broader mandate to experiment, adapt and scale programs that were demonstrably effective.

“The rationale for CIC was clear: to consolidate expertise, improve delivery, and create a centre of excellence for business innovation support,” Stewart says.

As a Crown corporation, CIC would not be subject to all internal controls that bind line departments, it would not have to use federal common service providers, and it would be free to go to market for expert staff with private sector technology commercialization and business experience, allowing it to operate  more flexibly and at a pace aligned with private sector realities. 

However, Chrystia Freeland, the then Minister of Finance, announced in late 2023, and reiterated in Budget 2024, that the implementation of CIC would be delayed, at that time stated as until no later than 2026-27.

This delay was positioned as providing additional supporting time for a seamless transfer of IRAP from the National Research Council to CIC and to allow for related consultations about the CIC.

“Speculation suggests it [the delay] may also contribute to [federal] expenditure reduction objectives by delaying the need to find the core funding the agency would require for functions in addition to IRAP delivery,” Stewart says.

If CIC proceeds, he says “there is a strong case” for transferring the delivery of all or parts of the four core federal innovation programs into its mandate to integrate program requirements and facilitate client movement from one program to another as their needs evolve, professionalize CIC’s delivery team with expert staff, and compile program data to become a centre of expertise for both core programs and any initiatives the government wishes to  advance at a national scale.

Strengthening business innovation support in Canada requires sustained attention to  delivery design, staff capabilities, policy integration and governance, Stewart says.

“A more coherent system, informed by user needs and grounded in real-world constraints, will be essential to realizing the full potential of public investment in innovation,” he says.

“Establishing an agency to act as a federal centre of expertise and as the guiding hand for all or parts of the core business innovation programs, staffed by people with private sector experience, seems like the essential heart of an agenda to improve program outcomes.”

Either proceeding with the CIC as proposed in Budget 2022, or with a new agency as he suggests in his paper, “would help,” Stewart said in his email.

He said the bulk of the resources of a new agency should come from transferring existing budgets and people from current programs – so funding and staff from IRAP, ISC, and the related components of SIF – plus support from the Canadian Revenue Agency for assisting with federal government’s SR&ED review.

“There will be some administrative efficiencies from a single intake, common tooling and delegated authorities reduce duplication as well,” Stewart said. “But additional funding is required to increase impact.”

More government procurement Canadian technologies needed

The underlying economic rationale for the role of government in subsidizing business innovation and international trade law has created a body of acceptable norms within the federal public service, according to Stewart’s paper.

These norms have led to a persistent program policy imbalance: firms are supported in generating new ideas but receive less help in bringing those ideas to market or adopting and adapting the innovations of others.

Current understandings of trade commitments also influence the use of procurement to stimulate Canadian innovation, he says. “Procurement processes may emphasize open calls for proposals and selecting lowest cost proposals rather than most innovative solutions.”

“Canada’s cautious interpretation of subsidy rules risks leaving promising technologies stranded in the laboratory or half-launched startups,” Stewart says. “It is time for a  refreshed understanding for federal program designers on what is in fact possible.”

Commercialization support is essential for innovation outcomes, and other OECD countries have found ways to support these activities without running afoul of trade obligations, he notes.

Stewart says the new agency should lead a policy dialogue, in collaboration with Innovation, Science and Economic Development,  Global Affairs Canada, and the Treasury Board Secretariat, to build a policy case – grounded in contemporary economic thinking and comparative international practice – for expanding support into these downstream areas, and propose a renewed Policy on Transfers to Treasury Board ministers for approval. 

As the system stands now, he says, internal federal processes prioritize administrative control over client responsiveness. Treasury Board policies, central agency oversight, and mandatory use of common services create delivery models that are risk-averse, slow and fragmented.  

“The result: programs that entrepreneurs describe as bureaucratic and unresponsive rather than strategic enablers; application processes that take many months for major funding awards; and negotiated contribution agreements that hold companies to terms that cannot be easily adjusted to respond to project developments.”

Firms spend weeks assembling complex program applications and submissions, only to face unpredictable timelines and what can seem like arbitrary rejections. “And the Government of Canada appears to be indifferent to using innovative new products developed in Canada.”

Businesses need to adopt more homegrown technologies and services

The new federal agency could examine ways to expand federal program support beyond building innovations in Canada to include technology adoption and adaptation, Stewart says.

Most productivity gains come from firms adopting the latest innovations rather than developing their own new ones, he points out.

However, current federal innovation programs almost exclusively support the “build”  strategy while ignoring the “buy” approach that could benefit many Canadian companies, he says. In addition to international innovations, the new agency could identify world-leading Canadian technologies and supporting their diffusion into government and large scale Canadian enterprises.  

“In a globally competitive environment, a balanced innovation policy would benefit from sustained attention not only to the creation of new technologies, but also to their timely uptake,” Stewart says.

“Canada needs creativity in program development to speed up the diffusion process throughout the economy and regions of the country so Canadian firms better keep pace with the best business technology (e.g., production machinery, business software) wherever it may be found.”

The new agency will have a unique opportunity to provide informed intelligence to guide the evolution of its programs and to support other federal departments and decision-makers with unique intelligence and advice, Stewart says.

The agency will have continuous staff engagement with clients. It could also run ongoing survey work with clients. “And most powerfully, it can create pooled client data across its program suite and mine and query this data.”

“By knowing what leading-edge innovation firms are currently working on (through their project files), the agency will be able to see ahead and ‘predict’ and so prepare its programming to respond and support the success of innovators.”

The new agency would provide an expert platform for programs intended to challenge the Canadian private sector to bring forward “dual-use” innovations that build  Canada’s capacity to meet sovereign defence, security and related mandates, he says.

“If the federal government is going invest substantially in subsidizing business and its programs are going to be successful in influencing individual business decision-makers, the core programs must target their actual business needs, and be designed and delivered to achieve the objective: more private sector innovation.”

Also, if Canada is to improve its long-term economic performance, individual Canadian companies need to decide to invest more in competing through innovation, Stewart says.

Addressing chronic shortage of domestic growth capital

Stewart points out that Canada’s chronic shortage of domestic growth capital remains a fundamental barrier to firms being able to scale up. “The ongoing absence of large-scale, follow-on, domestic scale-up funding continues to  nudge Canadian firms into the arms of American sources of capital.”

Anecdotally, investment by US. firms in growing Canadian companies is a constant source of inducement and pressure for companies to migrate south of the border, along with their intellectual property, talent and subsequent value creation, he says.

“Reliance on U.S. capital, in the absence of domestic alternatives, is therefore a continuing constraint on Canada realizing the full, beneficial impact of federal innovation spending, whether directly on Canadian firms and more generally on the research and business innovation eco-system.”

Stewart suggests that possible solutions could include:

• expanding the role of federal entities such as the Business Development Bank of Canada and Export Development Canada.

In 2024, BDC provided over 3,000 advisory mandates, $234 million in direct equity in companies,  and $172 million in indirect equity into other VC funds, according to BDC’s 2024 annual report.

• requiring Canadian pension funds to increase their share of investment in Canadian companies, specifically including providing risk capital for investment in innovation-based SMEs.
• introducing new tax expenditure vehicles, such as a flow-through shares program for innovation companies.
• launching a new round of “VCAP (Venture Capital Action Plan)-like” initiatives for increasing later-stage Canadian funds.

A federal subsidy initiative could be used to encourage more late-stage growth funding for Canadian technology startups, Stewart says. This could leverage private sector players by building on the example of the successful VCAP and Venture Capital Catalyst Initiative models.

The expert staff in the new business innovation agency, working closely with Finance Canada, could take on design and delivery of a call for proposals and support Finance with the selection process to pick the best private sector proposals for Finance Canada to then fund.

Alternatively, Stewart says, the government could provide loan guarantees for scale-up borrowing with some of the loan forgivable eventually, but requiring immediate full repayment if controlling ownership leaves Canada.

The “ongoing hemorrhage of Canadian talent, IP, and promising start-up companies is a fundamental constraint on the success of federal business innovation support programs,” Stewart says.

“A coherent strategy supporting innovation from conception to commercialization at-scale therefore must address this issue, or Canada will continue to leak talent, IP, and promising firms into the U.S.

The new agency, working closely with clients and Canadian experts should develop a new growth capital agenda for Innovation, Science and Economic Development, along with Finance, as an essential component for the success of the overall federal business innovation agenda, Stewart says.

Stewart said in his email that if Canada doesn’t change the way it supports innovation and commercialization, “there is a strong risk that we continue to experience continued weak business innovation and so productivity under‑performance and slower wage growth, and so a declining ability to provide Canadians with the quality of life they deserve.” 

“In the absence of change, we can expect to watch the ongoing loss of Canadian IP, talent, and promising firms to the U.S.”

In contrast, the new dedicated agency could lay the foundation for a more responsive, coherent, and effective business innovation strategy over the long term, he says. “This would represent a shift from fragmented program delivery to focused institutional learning – a strategic investment in Canada’s capacity to innovate, grow, and compete in the global economy.”

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