What Canada's new innovation agency can learn from the rest of the world

Canada’s new innovation agency will need political autonomy, be free to take risks in picking  companies and sectors for funding, and have strong private sector support in order to succeed, innovation and policy experts told Research Money.

The federal government said the Canada Innovation and Investment Agency, announced in Budget 2022, will be “operationally independent” and modelled on successful innovation agencies in Finland and Israel.

The main reason Canada performs so poorly internationally in innovation and productivity is that the country has a business market failure in innovation, said Dan Breznitz, chair of innovation studies and co-director of the Innovation Policy Lab at the Munk School of Global Affairs & Policy at the University of Toronto.

“This is the sickness of the Canadian economy,” he said in an interview.

Canadian businesses invest just 0.8 per cent of the country’s GDP in R&D, compared with the G7 average of 1.6 per cent.

Given Canada’s uncompetitive economic environment with the most highly educated workforce in the world, businesses don’t need to innovate or upgrade their technologies and equipment to maximize their profits, Breznitz said.

Instead, companies use highly skilled labour to make sure they don’t need to innovate or spend on new machinery and equipment, he said. “Not only do Canadians work for less money, but the quality of their jobs is actually much worse than what it should be or could be.”

“This new innovation agency aims to fix that market failure, which is a private business market failure to engage in innovation and new technology,” said Breznitz, who is advising the government on the agency’s design.

Thirty years ago, Finland and Israel, like Canada, had some of the lowest business expenditures on R&D among OECD countries, he said.

But for the last 20 years, Israel has been considered the most innovative economy in the world. And Finland has infused a huge amount of innovation in its resource-based industries such as forestry and pulp and paper — “things that Canada has as well,” he said.

To significantly improve innovation and productivity, Breznitz suggested, the governments in both countries created quasi-independent agencies whose mission was maximizing innovation in the private business sector. As in Finland and Israel, “maximizing business R&D should be one of the main missions of Canada’s new innovation agency.”

Compared with those countries, Canada is so geographically big and diverse that the strategies used by the new innovation agency in, for example, Vancouver, Montreal or Greater Toronto, probably will not work for the rest of the country, he added.

“That’s actually an opportunity. We can have multiple models in multiple places and multiple industries focusing on different stages [of innovation],” Breznitz said.

New innovation agency draws skepticism

But other innovation and policy experts argued the Canada Investment and Innovation Agency faces daunting challenges, and they remain skeptical the agency can achieve its mission. They portray Finland and Israel as much smaller countries —both geographically and in population — with unitary governments, as opposed to Canada’s multiple-jurisdiction federation.

On top of that, the proposed new agency “came out of nowhere,” according to Robert Asselin, senior vice-president, policy, at the Business Council of Canada.

“I know of no association, no business group, no one from academia in civil society who said, ‘We should do this, this is really important,’” he said.

Canada already has many innovation agencies and programs trying to achieve the same goal set for the new agency — increasing business R&D investment and innovation, Asselin said.

The list includes the Strategic Innovation Fund, Net Zero Accelerator Fund, Industrial Research Assistance Program, Business Development Bank, Export Development Canada, Sustainable Development Technology Canada, and the Scientific Research and Experimental Development tax incentive program.

“If that was the trick — only to give subsidies to companies and suddenly innovation would happen — we would have solved the innovation problem in Canada a long time ago,” Asselin said.

Canada’s innovation problem is due to the country having no intersection of the bridge between academic intellectual capital and private firms, and no focus on industrial research at scale, Asselin maintained. The National Research Council, Canadian Institutes of Health Research, Natural Sciences and Engineering Research Council, and the Social Sciences and Humanities Research Council “don’t fund breakthrough technology or radical innovation, so that will never or rarely happen with the current mechanisms.”

Germany’s Fraunhofer model is closer to the U.S. Defense Advanced Research Projects Agency than Finland’s and Israel’s innovation agencies and would have been a better model for Canada, he said. The Fraunhofer-Gesellschaft, Europe’s largest a research organization, plays a major role in the innovation process, with 76 institutes and research units spread throughout Germany, each focusing on different fields of applied research.

In order to stimulate business investment in R&D, Canada needs to pick and invest in the areas the country is good at, such as agri-tech, cleantech and biotech, Asselin said. If that does not happen, he added, “I’m afraid that companies in the current economy will just do what they do and maximize their profits because they don’t need to invest more.”

More competitive economy, stronger private sector leadership needed

Canada has a very oligopolistic structure with a market shared by a small number of producers or sellers, said Peter Josty, executive director of The Centre for Innovation Studies based in Calgary. “That’s not the kind of environment in which people want to innovate and do R&D and really take risks.”

“If they [the federal government] are really serious about wanting to increase business R&D, we have to make the economy more competitive,” he said. The Commissioner of the Competition Bureau has called for updating the Competition Act to create a more competitive economy, he noted.

It will be crucial for Canada’s new innovation agency to be staffed by people — from both the private and public sectors — who have deep expertise and experience in innovation ecosystems, Josty said.

He and other innovation and policy experts said there’s also a role for provincial governments in incentivizing more business R&D investment through public-private partnerships.

Josty and Asselin both pointed to the Alberta Oil Sands Technology and Research Authority (AOSTRA), a provincial crown corporation formed in 1974 that worked closely and co-invested with the oil industry — and supported research at Canadian universities — to develop and commercialize Alberta’s oil sands.

“If the provinces were to give some thought to what AOSTRA-type projects they could have in their own areas, that would make a huge difference,” Josty said.

Paul Dufour, a senior fellow at the Institute for Science, Society and Policy at the University of Ottawa, said unlike Canada, Finland and Israel have well-integrated innovation ecosystems.

“They link up all of their agencies and they actually have national strategies along which they blend in all the major parties that need to drive innovation and research in those respective countries,” he said. “In this country, we do stuff in a very piecemeal fashion.”

In creating the Canada Innovation and Investment Agency, Dufour explained, the federal government needs to pay a lot more attention to consulting with the broader, pan-Canadian innovation ecosystem.

“We have to adapt and model good practice from other countries, yes, nothing wrong with that. But pay attention to our own ecosystem and build it [the new agency] and integrate it properly,” he said.

For example, Dufour added, Canada already has a national innovation agency, the National Research Council, that has a current annual budget of nearly $1.6 billion, laboratories across the country, a successful industrial business support program for R&D, and extensive networks around the world.

"At the end of the day, I'm surprised nobody raised the issue of 'What do we do about the National Research Council?'" he said.

The key element the new innovation agency needs, especially if it wants to change ingrained behavioural problems in the business community, is strong leadership from the private sector, Dufour said. “We have to have more investment by the private sector in innovation, venture capital and procurement that demonstrates we value our intellectual assets in this country.”

Asselin, Josty and Dufour also questioned whether the $200 million per year over five years for the new agency is sufficient to move the needle on Canada’s innovation.

In comparison, Finland’s innovation agency spent Cdn$1.01 billion just in 2021, the Israel Innovation Authority has an annual budget of Cdn$630 million, and Germany’s Fraunhofer-Gesellschaft has an annual research budget of Cdn$3.9 billion.

Breznitz disagreed that money is a key issue. "Instead of worrying whether or not we have enough budget, we should worry whether or not it [the new agency] will be structured in a way that allows it to succeed," he said.

Current approach to innovation does not work

Canada has tried for decades to grow an innovation system with neutral, horizontal, basic research and across-the-board tax incentives, said Darius Ornston, associate professor at the Munk School of Global Affairs & Public Policy at the University of Toronto and an expert on Nordic innovation policy.

“It sounds great, but it hasn’t worked in the Canadian case. It hasn’t worked in other cases,” he said.

Finland’s TEKES innovation agency and the Office of the Chief Scientist in Israel (now the Israeli Innovation Authority), are “great places to look for inspiration,” Ornston said.

For example, TEKES’s use of direct, targeted instruments (mostly grants) and of networking — in order to receive funding, large firms need to collaborate with SMEs, universities and research institutes — are strategies that would benefit Canada, he said.

As for Israel being a model, it is ranked number one globally in private R&D expenditure as percentage of GDP, with its businesses spending more than three times that of Canadian firms.

In creating the Canada Innovation and Investment agency, Ornston said, “It’s important to have bipartisan or cross-partisan support for innovation in Canada, and a recognition that the Scientific Research & Experimental Development tax credits alone or investment in basic research aren’t cutting it.”

However, it will be a challenge for the new agency to secure the support of the business community, which is very diverse and heterogenous and doesn’t speak with a single voice, he acknowledged.

Also, given the powerful structural forces in Canada’s resource-based economy that discourage business investment in R&D, if the new innovation agency doesn’t result in business R&D increasing, that could be used to discredit the agency, Ornston said.

The agency should be given at least a decade to operate to see what its impacts are, he said, adding: “For an innovation agency with a budget like this, it’s not necessarily going to transform the entire economy.”

Breznitz agreed, saying: “We’re talking about fixing behavioural structural problems. I do not expect to see any changes in less than five years.”

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