Ron Freedman

Unfinished business — A R$ conference primer

By Ron Freedman

While the country is still trying to dissect recent federal and provincial government budgets to see where innovation policy is headed (the May 16-17 RE$EARCH MONEY conference will tackle this matter head-on) it is useful to reflect on some of the big issues that we are failing, on the whole, to address. Issues that fly under the policy radar and yet are important to progress. Here is an admittedly idiosyncratic to-do list. RE$EARCH MONEY readers can surely think of others.

SRED

The March 2012 federal Budget made changes to the Scientific Research & Experimental Development tax program. These changes — billed as "administrative improvements" — were mostly either red herrings (phasing out claims for capital expenditures) or outright tax grabs (lowering the nominal overhead rate from 65% to 60%). Far more important is to redefine the activities that qualify for SRED. SRED uses a 1960s model to define innovation (based on the OECD Frascati Manual) and an implicit but out-of-date model of industrial research (large in-house corporate labs) as the qualifying venue for research. In contrast, the National Research Council's IRAP program has modernized its view of industrial research and is an effective program. The SRED eligibility guidelines need to be brought into conformity with the IRAP guidelines.

Leveraging the Healthcare System

Canada spends vast amounts of money on health research. How many made-in-Canada drugs have been commercialized in the past 20 years? What about medical devices? Surgical procedures? Gene therapies? We could go on. One impediment is that the publicly-financed healthcare system — which should be a substantial driver of economic growth — is simply not supporting the commercialization or adoption of publicly financed health research. There is a huge disconnect between the two endeavours that we need to bridge. Nobody's talking about this important issue.

Role of Federal Labs

Federal government labs are stuck in policy limbo. Government is reluctant to invest in federal labs and for over a decade the labs have seen investment flowing into the higher education sector. But the real issue isn't money, it's role; specifically, articulating the role of the modern federal labs and how they work with other elements of the innovation system. Internal red tape often inhibits collaboration with other federal and private investments. We need a mature discussion of this issue.

Diversification vs specialization

Can you name a more diversified national economy than Canada's? Is China more diversified than Canada? How about India? The UK? France? Certainly the US is more diversified, but after that the list of countries is small or non-existent. Why then do our economic and innovation strategies emphasize "diversification". The fact is that Canada's economy is arguably too diverse — spread over too many business activities and truly excellent in too few. I would argue that our real challenge is to specialize. This is important because we're supporting too much research at too low levels across too many industries, technologies and sectors.

Infatuation with SMEs

Federal and provincial governments are enamoured with small- and medium-sized enterprises (SMEs). Most of our innovation resources are directed at startup and early stage companies, in the expectation that some will eventually become corporate behemoths. This is a "casino-style" economic development strategy: put an infinite number of loonies into an infinite number of startup slot machines and surely there will be a RIM at the end of the rainbow. Other governments like Singapore eschew the focus on startups. They want to work with companies that have the capacity to develop and commercialize new products and services and who can create hundreds or thousands of jobs overnight. Yet, we've got an in-built bias against larger firms, either believing "they don't need our help" or "we've already supported them". If the SME route really offers the best payoff for public investment, how is it that Canadian venture capital has posted such terrible returns in the past 15 years (not unlike the US VCs)?

Program Fragmentation

The Babel's Tower of federal, provincial and municipal government innovation programs has been talked about forever. The federal budget has tasked the NRC to create a "concierge service" that will provide information and assistance to SMEs to help them make effective use of federal innovation programs. (Notice the reference to SMEs exclusively?). Adding another layer of administration is going to do nothing to defrag the system. We need to find a way to use boots that are already on the ground — whomever they belong to — to get the job done. And by the way, large companies are equally mystified about the program clutter.

The Service Economy

StatsCan's latest (April 2012) review of industrial R&D (see page 6) reports that "the share of industrial R&D spending in the services sector has been increasing. The services sector accounted for 28% of total industrial R&D performed by Canadian industry from 1998 through 2000. Beginning in 2001 and continuing through the decade, however, a shift towards the services sector occurred, as its share of R&D spending increased, while industrial R&D spending decreased in the manufacturing sector. By 2008, the services sector accounted for 45% ($7.4 billion) of total industrial R&D ($16.4 billion), almost equal to the share of the manufacturing sector."

And yet, Canada has no innovation strategy for services; we haven't even discussed the issue. Most of our program bets are on manufacturing. The service sector derives a large part of its knowledge advantage from the social sciences and humanities. And yet SRED explicitly discriminates against services R&D (because of its outmoded concept of industrial research). Talk about shooting yourself in the foot.

A Final Word

You may love (or hate) any or all of these items of unfinished business, but that's not the point. When was the last time we had an explicit discussion of them? Let's talk at the RE$EARCH MONEY conference.

Ron Freedman (ron@impactg.com) is a partner with The Impact Group and co-publisher of RE$EARCH MONEY