Report urges governments to develop more robust models for supporting commercialization and innovation

Government policy makers must adopt more robust models for commercialization and innovation if Canada is to close the prosperity gap with competing jurisdictions. That’s the conclusion of the most recent working paper from Ontario’s Institute for Competitiveness and Prosperity (ICP). The paper argues that current models are far too narrowly defined and lean towards a support model that over-emphasizes traditional R&D and the hard sciences. It proposes instead an emphasis on support and pressure factors that it contends will stimulate companies to innovate.

The report is the first by the ICP with a strong emphasis on commercialization following a directive by the provincial Liberals to expand its research focus. It builds on a previous working paper released during the summer that called for “a higher level and quality of specialized support and a more intensely competitive environment (to) encourage firms and individuals to take decisive action to achieve higher performance and stronger clusters and structures”.

The ICP argues that , by addressing these factors, local competition will intensify and make customers more demanding and sophisticated in the products and processes they require.

“Throwing more money into programs with bad returns is not a good thing to do … Great R&D capacity won’t help if other markets are more sophisticated,” says James Milway, ICP’s executive director. “This helps to explain why pharma, for example, is not investing as much as it does in other countries.”

The report is critical of many of the innovation and commercialization initiatives in the federal and Ontario arsenals, singling out programs such as Ontario’s Access To Opportunities Program (ATOP), tax-assisted support for labour-sponsored venture capital funds (LSVCF’s) and the Canada Foundation for Innovation’s weak record funding Canada’s business schools.

The ATOP program exemplifies how a program’s good intentions can be derailed if improperly positioned. ATOP was created in 1998 by the Ontario government in response to a “double the pipeline” campaign by the high technology industry and spearheaded by the Canadian Advanced Technology Alliance (R$, May 13/98). The ICP report says that while its objective of increasing the quantity of undergraduates in computer science and engineering has been successful, there was no evidence to support the need for more undergraduates. In fact, evidence shows that industry needs more people with graduate degrees and the report argues that quality rather than quantity should have guided the decisions of policy makers.

“The Ontario government responded to a felt need (but) it has to do a better job of looking at the data,” says Milway. “The science and engineering data were available when ATOP was created and if it had looked at it then perhaps ATOP may have been a different program.”

A similar quantity-quality dynamic informs governments’ support of the venture capital (VC) industry. The ICP report says Ontario’s supply of VC is adequate when compared to other “peer states” but its returns are far below those jurisdictions. In the past five years, the VC industry has experienced a return of only 1.8 per cent compared to 22.8% for its peers. The poor performance is largely attributed to LSVCFs which comprised 67% of all VC funds raised in Canada in 2003. LSVCFs experienced a median return of minus 2% over the same five-year period – a track record the report says cost the Ontario and federal governments $3.3 billion in forgone revenue between 1999 and 2002.

The report cites a recent study that is even more critical, charging that LSVCFs have crowded out other funds, leading to a net reduction in the VC pool. “The structure of LSFs (labour sponsored funds) is designed for the retail investor which makes it difficult to exercise discipline on investments,” says Milway. “The province is currently looking at LSFs. They’re under review.”

The report concludes by suggesting that, rather than generous tax incentives for investors, the VC industry may be better served by lower corporate income and capital gains taxes.

The ICP’s view of LSVCFs was corroborated by a report it commissioned by The Strategic Counsel, which interviewed 27 founders/senior executives of successful innovative firms. Its report — Assessing the Experience of Successful Innovative Firms in Ontario — found that the “innovation market” and the VC market were less developed in Canada, with the latter characterized as risk averse and lacking depth and experience.

The report also says that company founders and executives have difficulty securing experienced managerial talent.

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