Report: To reverse Canada's competitive decline, eliminate SR&ED and focus on commercialization

Despite substantial direct and indirect support for public-sector research and private-sector R&D, Canada's innovation economy is declining relative to other OECD countries. The latest report from The Impact Centre at the University of Toronto, titled The Myth of a Better Mousetrap, offers some striking observations on Canada’s competitive shortcomings and makes several radical suggestions to improve our performance.

The report’s author, Impact Centre senior fellow Charles Plant, presents five key opportunities for policymakers:

1) Focus on Commercialization: Through an analysis of federal budget documents since 1993, Plant argues that the Government of Canada places very little emphasis on commercialization compared to research and development. To compensate, Plant suggests that Ottawa should focus more support on marketing and sales (M&S). Canada doesn’t have an indicator that captures business expenditures on M&S, while it does have one for R&D, he writes. Hence the title of the report: "This thinking is analogous to the myth of the better mousetrap, that a better product is all that is needed for commercial success."

There’s not enough conversation in Canada about the importance of M&S for innovation competitiveness, Plant said in an interview with RE$EARCH MONEY. “It’s a real problem, because this stuff doesn’t sell itself.” The U.S. does a much better job cultivating M&S, Plant said, and this competitive edge has contributed to the failure of many Canadian companies to enter American markets.

2) Establish Strategic Objectives: Plant congratulates ISED on the focus of its 2019-20 Departmental Plan, which uses performance indicators that are results-driven rather than activity-driven, and includes an increasing number of initiatives that focus on commercialization. Even so, Plant argues that many of ISED’s programs lack targets and measurement of current results for their performance indicators, which speaks to a dearth of strategic objectives. “Without measurable objectives and strategies, a portfolio of random programs can have individual goals that can be met easily by a government wishing to claim success at economic development,” Plant writes. His solution is to develop concrete plans for an overarching set of objectives, whose success can be measured in relation to those objectives.

3) Focus on Demand Creation: Demand creation is the most acute challenge that Canada faces in developing an innovation economy, says Plant. Canadian companies need experience selling into a competitive local market in order to successfully export into foreign markets, and they’re not getting it. The problem is exacerbated when we protect Canadian industries from foreign competition. While Innovative Solutions Canada (ISC) seeks to build local demand, Canada should implement more demand creation programs to help domestic companies succeed.

4) Improve Program Design Through Rigorous Research and Evaluation: A critical problem with how ISED assesses issues in the innovation economy is its reliance on opinion-based research, argues Plant. Solicited through surveys and interviews, the opinions obtained from industry members can offer valuable insights, but they need to be corroborated by other sources of evidence. "People's opinions might be correct, or there might be something behind that opinion, and you have to ask why," says Plant. "You have to dig into these things to understand if they're valid." A company executive who complains about skills shortage or lack of capital might not be acknowledging other unique challenges they are experiencing, such as within their own organization. There should be more research into the underlying causes of the challenges described in opinion-based research, writes Plant.

5) Eliminate Scientific Research and Experimental Development (SR&ED) Tax Credits: Plant’s most radical suggestion is to scrap the SR&ED tax incentive administered by the CRA. Companies don’t report results that may have been generated from this year’s or any prior year’s expenses, so “there is no way for the government to determine whether there is any net benefit to Canada through the development of new products or services, new revenue associated with these credits, any exporting, or effectively any other direct results,” he writes. Statistics Canada surveys the scientific activities of Canadian businesses but devotes few questions to the results from R&D undertaken. In essence, we don’t even know if the SR&ED credit is working in the way we want it to. “It is our contention that the time for this program has passed, and that the entire program should be phased out and eventually eliminated,” Plant writes. Instead of spending all that money on indirect incentives, the government should commit to other opportunities, he argues: namely, marketing and sales, and demand creation.

In all these suggestions, Plant is trying to prompt a set of conversations that he believes aren't yet taking place, or not adequately. The stakes couldn't be higher, he argues: "Without radical changes, we are doomed to continue this slow decline in competitiveness and productivity until it is too late."

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