David Crane

Canadian innovation needs more than incrementalism

By David Crane

When 54 leading Canadians get together to draft an action plan to make Canada an innovation nation with good jobs and prosperity, you would expect that they would come up with some bold new ideas. It is bold ideas that we need if we are to do well in the much more competitive world we face. .

But instead, the Coalition for Action on Innovation in Canada - a group that includes business executives, university presidents, venture capitalists and government funding agencies - has produced a modest shopping list of incremental measures which, while useful, will clearly not propel Canada into the front ranks of innovation leaders. Yet that is where we should want to be.

Moreover, the coalition's report, An Action Plan for Prosperity, suggests governments should delay any measures which would have a significant fiscal impact until deficits have eliminated and budget surpluses restored, or unless there are offsetting tax increases or spending cuts elsewhere. But the federal government estimates it will not return to surplus until 2015-16 fiscal year, and barely a surplus at that. This would mean a long delay absent major spending cuts or tax increases elsewhere, which are not likely given plans for new prisons, new fighter aircraft and the like.

While fiscal health is an important consideration, Canada cannot afford to wait that long before embarking on major initiatives to create a new economy for the new normal. We need to act now because others are doing exactly that. Just look at the money the Obama administration is pouring into next-generation technologies. It is penny-wise but pound-foolish to put off urgently needed investments for a more competitive economy and the good jobs it could bring.

The coalition is co-chaired by John Manley, a former minister of industry and of finance and now president of the Canadian Council of Chief Executives (a lobby for Canada's largest corporations) and Paul Lucas, president of the Canadian subsidiary of British pharmaceutical giant GlaxoSmithKline. The group puts its voice behind a number of useful but modest ideas that have been circulating for some time, such as the use of flow-through shares to allow money-losing tech companies to sell their unused R&D tax credits, making the R&D tax incentive more useful for companies planning R&D investments, encouraging governments to use their spending or procurement power to create new markets for innovative Canadian products, seeking new ways to provide risk capital to young companies and finding ways to improve links between business and universities and colleges.

There are also some dubious ideas, such as giving more generous tax treatment to employees cashing in stock options. Since most stock options go to top executives of banks, oil companies and other major corporations, this just looks like a tax break for wealthy taxpayers with little or no impact on innovation.

More glaringly, the coalition report has little to say about manufacturing, which still accounts for the largest share of research and development in Canada, or about raising productivity through innovation in many of our service sectors. It also ignores the importance of sector strategies for next-generation autos, the digital economy, clean-tech, high-speed trains or agri-food.

A key consideration in Canada is that, compared to the United States, we have many more small and midsize companies that are less able to engage in ongoing R&D or to pursue higher-risk innovation. But in many countries, government direct funding of business R&D is much higher than in Canada.

According to the OECD, US government direct funding of R&D is equivalent to 0.18 per cent of GDP. In France and Korea it is 0.15 per cent, in Sweden 0.11 per cent, and Germany and Britain 0.08 per cent. In Canada it is just 0.02 per cent. Canada relies mainly on tax incentives, but this approach is flawed because companies tend to use R&D tax incentives for projects that are almost market-ready whereas direct grants are used to finance riskier and longer-term projects.

Direct support ignored

We have one excellent program in Canada - the Industrial Research Assistance Program - which provides direct grants to help small and midsize companies advance innovation through new technologies. Research in Motion, which gave us the BlackBerry, received two such grants in its early days. However the program is seriously underfunded. But the coalition ignores it. Likewise, Canada had something called Technology Partnerships Canada, which shared the cost of developing high-risk R&D projects with companies of all sizes. It was scrapped, for reasons of ideology, by the Harper government. The coalition ignores the value of such a program. Yet we are going to need much better risk-sharing measures if we are to develop the technologies of the future.

In the US, for example, the Obama administration is pouring more than US$2 billion of grants into advanced battery and electric drive component development. By 2013 it expects to have 20 government-funded battery factories up and running. In addition, the Advanced Technology Vehicles Manufacturing program is providing over $2.4 billion in cheap loans to build three of the first electric car factories in the US. It is providing $8 billion to support high-speed trains between major urban centres. It is providing $6.9 billion to expand the digital economy, investing more than $20 billion in developing health information technology and billions of dollars for smart grids and metering. What can Canada do? The coalition doesn't even ask the question.

Nor does the coalition have an answer to another challenge. Canada is good at starting companies but not good at growing them into global enterprises. Too often, the most promising Canadian companies are snapped up by foreign multinationals that prowl the world looking for acquisitions. This means we grow the seed corn for foreign companies that then scale up production, but often in another country.

While the idea of a Coalition for Action on Innovation is a worthy initiative, it needs to dig much deeper into the challenges we face. It needs to think big. It needs vision, not incrementalism. Give its first try a C-minus and hope it can do better next time.

David Crane is a veteran business journalist. He can be reached at crane@interlog.com.