Next federal government must make innovation, productivity and competitiveness top priorities

Innovation, productivity and competitiveness must be top priorities for Canada’s next federal government, says the Centre for Canadian Innovation and Competitiveness.

The bad news is that incrementalism, partisanship and short-term thinking seem to be the dominant features in Canadian politics, the Centre says in a new report. The Centre is an affiliate of the Information Technology &  Innovation Foundation (ITIF), a Washington-D.C.-based policy think tank.

Businesses speak with many voices, not one, labour still seeks its own deal, and virtually no civil society groups show any interest in solving Canada’s techno-economic challenges, according to the report.

“As such, making innovation, productivity and competitiveness top priorities for government, rather than side notes or vague aspirations to be addressed with lip service, will be critical if Canada is to remain a strong industrialized economy,” the report says.

The authors of the report, A Techno-Economic Agenda for Canada’s Next Federal Government, are Robert D. Atkinson (photo at left) and Lawrence Zhang (photo at right). They are, respectively, founder and president of ITIF, and head of policy at ITIF’s Centre for Canadian Innovation and Competitiveness.

Canada has reached an inflection point, they argue. For the last 150 years, the country’s growth has largely matched that of the world leaders, including European nations, the U.K. and the U.S.

“But absent serious policy changes, Canada now faces a future of becoming a stagnant, middle-income country that specializes in natural resource extraction.”

The report offers a techno-economic policy agenda with 10 key recommendations for the next federal government:

Establish a productivity commissioner:

Stagnant productivity won’t be solved without a deep, sectoral and technology-focused whole-of-government productivity strategy, according to the report. “A few tweaks to the tax code or a few more skilled workers will not do the trick.”

The next government should appoint a productivity commissioner to formulate and implement a productivity strategy, the report recommends.

The commissioner should employ a small staff of “productionists” – individuals who have a deep understanding of firm, industry and technology dynamics – not the kind of neoclassical economists employed by productivity commissions such as those in Australia and New Zealand, which focus principally on economy-wide factors.

Improve tax incentives for innovation:

After years of deliberation, studies and tinkering along the margins, it is past time for the federal government to overhaul the Scientific Research and Experimental Development (SR&ED) tax credit, the report says.

As currently structured, the SR&ED program is less than fully effective. The new credit should be modelled after the U.K. and U.S. credits: It should be structured quasi-incrementally (as a credit not on all expenditures, but only a share); it should be firm-size neutral; and it should function as an actual tax credit “rather than a government grant disguised as a tax credit.”

The federal government also should introduce a “patent box” that lowers tax rates on businesses that innovate and produce in Canada, the report recommends.

Introduce a time-limited tax credit for capital investment:

It has long been recognized that Canadian firms chronically underinvest in machinery, equipment and software, say report authors Atkinson and Zhang.

 “Because more and better ‘tools’ matter most in productivity, underinvestment is a recipe for decline. Small-scale and bureaucracy-heavy interventions like capital adoption grants for small companies will not do the trick.”

Instead, introducing a capital investment tax credit will lower the after-tax cost of investing in new machinery, equipment and software, and spur faster adoption of existing and emerging technologies, the report says.

Making this tax credit time-limited (for example, five years) will encourage more immediate uptake by businesses while minimizing the long-term fiscal impact of the tax credit on government revenues.

Make Canadian colleges and universities engines of R&D commercialization:

Canada is among the highest spenders on post-secondary sector R&D in among Organisation for Economic Co-operation and Development countries as a percentage of GDP, but it performs poorly in converting those investments into results that benefit Canada, the report notes.

“The reason is simple: Policymakers continue to embrace a linear model of innovation, assuming that funding basic research and simply imploring universities to focus on commercialization will automatically lead to tangible outcomes for Canada. In a hyper-competitive global economy, that model no longer works.”

It is time for the federal government to challenge this longstanding model and incorporate funding bonuses for successful commercialization and technology transfers into the 10 percent of revenue that colleges and universities derive from federal funding, the report says.

Colleges and universities that do a better job of commercializing new innovations (such as spinning off startups, establishing industry partnerships, licensing patents to Canadian firms, etc.) will receive more federal money, and those that do a worse job will receive less.

“As long as the incentives are to conduct research and publish journal articles on whatever topics interest faculty, they will keep doing that,” the report says. “But if even modest incentives are put in place to align faculty and university efforts to the interests of Canada’s innovation economy, most colleges and universities will respond.”

Create three or four “Manufacturing Canada” institutes:

Canadian manufacturing, especially in sectors outside of agriculture and other natural resources, has been hollowed out, according to the report.

One solution is to establish “Manufacturing Canada” institutes as public-private partnerships that support advanced manufacturing capabilities in specific technology areas, allowing for early-stage research to be used by a group of companies in the same or similar industries.

These institutes should be industry-led and at least one-third funded by industry, the report says. The U.S. Manufacturing USA institute network should serve as a model.

To ensure Canada’s institutes are maximally effective, Innovation, Science and Economic Development Canada should create institutes that the U.S. doesn’t currently have, the report recommends. Then, both governments should sign a reciprocity agreement wherein Canadian firms can participate in U.S. institutes (such as Manufacturing USA’s institutes for robotics, 3D manufacturing, or biopharmaceuticals), while U.S. firms can participate in Canadian institutes.

“This way, Canadian manufacturers would have access to the technology and capabilities being developed in the United States as well as Canada.”

The new Manufacturing Canada institutes would be additive to, but different than, the existing global innovation clusters program [which includes the Ontario-based NGen cluster for advanced manufacturing] as they would focus on specialized technology areas and industries rather than broad topics or regions, the report says.

Other actions needed on regulations, procurement and Canadian innovation agency

Develop an innovation-friendly regulatory system:

Canada needs to ensure that laws and regulations covering technologies and industries are crafted to prioritize innovation, the report says.

“Canada can no longer afford to make the EU-style precautionary principle its guiding star for technology regulation; that is the path to reduced Canadian innovation strength.”

It is time for policymakers to shift their focus toward promoting new technologies and innovations instead of controlling them, the report’s authors argue.

To that end, the federal government should establish an Office of Innovation Policy Review to assess all new legislative and regulatory proposals to determine how they affect innovation and competitiveness.

Pursue regulatory interoperability with Canadian trade partners:

The report points out that as the risk of global trade fragmentation increases, the federal government should work to minimize regulatory difficulties between Canada and its major trading partners to maximize Canadian firms’ opportunities to succeed abroad

Given the relative size of the Canadian economy compared with larger markets, Canadian firms that need to develop separate compliance strategies for different regulatory regimes will be at a disadvantage relative to foreign firms that will opt not to do business in Canada based on its regulatory regime.

Canada must work with its partners, starting with the U.S., to ensure that regulations in key areas such as AI, telecommunications and intellectual property are interoperable, the report recommends.

Set robust AI adoption milestones for the federal government:

The federal government should leverage AI tools to improve public services and increase productivity, the report says.

Areas such as benefits delivery, environmental protection, transportation and veterans’ affairs all have pertinent AI applications that could create a more effective and responsive government.

Since Canada’s private sector lags behind other developed economies in its adoption of AI and other new technologies, widescale federal adoption of AI would leverage the government’s purchasing power to provide a market that drives innovation and growth for AI firms in Canada, and have further spillover effects that spur Canadian business adoption.

Build an independent Canadian Innovation Agency:

The next federal government should follow through on the government’s commitment in previous years to establish an independent Canada Innovation Agency [now called the Canada Innovation Corporation] with a mandate and funding to spur Canadian private-sector innovation and productivity, the report recommends.

The agency should be led by individuals with deep private-sector expertise on innovation and scaling businesses. By bringing that mix of funding and expertise to bear in reinvigorating business R&D and increasing innovation capacity across Canada, this agency could play a significant role in building innovative and world-leading Canadian firms.

The report says creating this agency would also provide the opportunity to move federal support for innovation activities under one easily accessible umbrella, outside the reach of the short-term whims and potential conflicts of interest in government.

The agency should also be allowed to take equity stakes and earn financial returns from other investments in Canadian firms to help ensure that it has a steady flow of capital to reinvest in more firms.

Pilot a federal information technologies procurement innovation testbed:

Federal procurement and adoption of new software and technology could boost public sector productivity and improve citizens’ customer experience with government, the report says.

However, it notes that IT procurement has long been an area where the federal government has struggled to find success, primarily due to misaligned incentives and internal processes.

To begin to address this problem, the federal government should give one small department or agency a one-time capital grant to replace legacy hardware and software, and in doing so exempt it from virtually all procurement rules, thereby allowing it to become a testbed for best practices and digital transformation, the report recommends.

The pilot program should be evaluated after three years. Ideally, successes could then be replicated across the federal government and even provincial governments.

“Sea change” in economic thinking required

Beyond the 10 recommendations, elevating innovation, productivity and competitiveness to the top of the federal government’s agenda also requires a sea change in economic thinking, the report says.

This starts with recognizing that Canadian firms and industries need to be globally competitive – and to that end, they must be able to operate efficiently at scale.

Yet, across all political parties, small businesses have long been seen as beneficial and inherently good, whereas their large counterparts are often vilified, the report notes. “This is an economically destructive way of thinking, because large businesses in Canada, on average, pay their workers more, have higher exports, and higher productivity.”

As such, it’s time for the Canadian government to embrace size neutrality in its policies, while at the same time ensuring that its policies incentivize firms to grow as big as they need to be efficient, the report says.

“As a relatively small economy, Canada simply cannot afford low levels of industry concentration, because that prevents firms from achieving the economies of scale they need.” So, among other things, the next federal government should review all business programs and regulations to ensure they are size-neutral.

The new government also should abandon the current focus on antitrust to try to reduce the size of Canadian firms, report authors Atkinson and Zhang say. “That is a path to lower productivity and higher prices.”

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