Big business debates the merits of government R&D programs and incentives

Sixth Annual RE$EARCH MONEY Conference

When it comes to gauging the effectiveness and advantage of Canada's main R&D tax credit program, it all depends on which company you're talking to. Company-specific issues including business type, country of origin and stage of maturity all factor into the utility of the credits. Some argue that they're irrelevant or too restrictive while others assert that they're an essential tool of innovation policy.

Representatives from three of Canada's biggest R&D performers — IBM Canada, Research in Motion Ltd (RIM) and GM Canada, the Canadian arm of one of the world's largest corporations — weighed in at the March 8 RE$EARCH MONEY Conference in Ottawa to debate the merits of Canada's R&D incentives for business.

Of the three, only RIM ranked the scientific research and experimental development (SR&ED) tax credit program highly among the issues they consider important to growing their businesses in Canada. For IBM and GM, the US tax system negates the impact of SR&ED, making other factors more important when pitching their head offices on the merits of making strategic R&D investments in Canada.

IBM Canada has long been a major R&D performer in Canada, having invested $6 billion in recent years. Its Toronto software laboratories are the third largest in its global corporate stable and it operates a major semiconductor packaging facility in Bromont QC. Whether Canada will continue as a major base of operations for IBM could be thrown into doubt as the pace of globalization accelerates and requests for changes to SR&ED remain unanswered.

risk of leaving canada never greater - IBM

Currently, SR&ED is a not a factor for IBM in making a business case for expanding its Canadian operations. While it would welcome changes in the program's eligibility criteria, the firm places more importance on factors such as government procurement, hard scientific disciplines at the university level, a government commitment to service science and a new National Research Council institute in the greater Toronto area. (Funding for the National Centre for Medical Devices Development was not addressed in last week's federal Budget).

"Government should support collaborative, consortium-based projects," says Garth Isslett, VP manufacturing development operations, IBM Canada Ltd, adding that human capital, university relationships and support from local levels of government feed into IBM's decision-making process. "The risk of IBM leaving Canada has never been higher … Canada is not in the top five for multinationals. Other jurisdictions are more aggressive."

For GM Canada, the business case for increasing its innovative activities in Canada is exacerbated by turmoil within the North American automotive industry and the use of tax incentives by emerging nations competing for GM's business. John Wood, GM Canada's senior S&T advisor, says public-private partnerships such as the recent federal and Ontario funds supporting innovative automotive activity are critical elements in the overall innovation environment.

In 2005, $425 million in support from the federal and Ontario governments triggered the Beacon Project, a $2.5-billion investment by GM that includes major R&D and skills training components and creates a Canadian Automotive Innovation Network of universities and research institutes (R$, March 9/05).

GM wants improved programs

But Wood adds that SR&ED is currently too restrictive and needs to be expanded to include product and process design as eligible activities and more effort must be made to include suppliers in the innovation process. "We need programs to support this up front or we will lose this function in Canada … If we don't do something to bring in the supply chain in Canada for innovative work, it will move elsewhere," he says.

Wood adds that GM is also hindered by the plethora of assistance programs and the length of time it takes to apply to those for which it is eligible. Ready access to assistance when trying to convince head office to situate R&D projects in Canada is essential when the design life cycle of vehicles is down to 18 months and heading towards 15 months. Another key factor is encouraging the automotive supply chain to become more innovative.

"If we don't do something ... it will move elsewhere," says Wood, adding that the federal government must develop a two-track focus that includes commercialization as well as research.

As the only homegrown company, RIM has a dramatically different and more positive perspective on government mechanisms for stimulating R&D and innovation. Starting as a university spin-off in 1984, it first tapped a small Ontario government loan program and has subsequently used Technology Partnerships Canada (TPC) twice as it developed its wireless communications technology base.

RIM has also been a constant beneficiary of SR&ED which was described as "vitally important" by Dave Jaworsky, RIM's director of government and university relations. "(SR&ED) is key to our future growth ... It justifies everything," says Jaworsky, adding that the program is currently in an "antagonistic mode" that needs to change. "It's an incentive to stay local."

Jaworsky also came to the defence of the TPC program, which was recently cancelled by the federal government. He outlined its importance in RIM's evolution from a small start-up to a R&D powerhouse with more than 5,000 employees and significant presence in Ottawa and Mississauga as well as its home base in Waterloo.

"TPC did what it was supposed to do. It gave us our growth strategy and its future could have an impact on future RIM decisions," he says, adding that it supported the early development of RIM's breakthrough product, the Blackberry.

innovation culture

While the three business leaders diverged on which kinds of government incentives were most effective, they coalesced around the need for a strong science and entrepreneurial culture in Canada. They also agreed on the importance of strategic government procurement and the need for government outsourcing of information technology and business processing functions to the private sector. "This would allow Canada to build scale in the private sector," says Jaworsky.

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