GLOBE SERIES

Narrowing Canada`s innovation gap

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Source: GLOBE SERIES

The federal government's 2012 budget - Budget 2012 - introduces a number of initiatives designed to promote innovation and sustainable job creation and to support innovation in Canada using a markedly different funding model.

Governments at all levels routinely use their annual budgets as vehicles to stimulate job creation initiatives. During the recent recession, for example, Canada joined with many of its OECD partners in using stimulus spending to generate job creation as part of its economic recovery program.

But the federal government's goal in Budget 2012 was focussed more on creating long term sustainable jobs, which required dealing with some troublesome systemic issues that lay at the root of earlier job creation and investment promotion strategies.

In 2007, the Canadian economy was bullish. The TSX was close to 14,000 and the Canadian dollar was above par with the U.S greenback. Solid growth was reinforced by an all-time low unemployment rate.

But the hourly output of Canada's business sector was lagging the U.S. and the investment in the latest technology such as computers and communications was less than many other countries. In short, Canada had a serious productivity growth problem. Business spending on research and development was down 20 percent from its peak in 2001. For an economy to succeed, growth in this critical area was essential.

The then federal government decided to act and ordered an examination of Canada's mediocre innovation record from the  Council of Canadian Academies  (CCA).  The Council's June 2009 report 'Innovation and Business Strategy: Why Canada Falls Short'  recommended many of the reforms that found expression in the spring 2012 budget.

Budget 2012  includes measures that shift how federal money is distributed for business research and development. Instead of providing almost half a billion dollars in tax credits to private businesses, Ottawa proposes to provide grants totalling $165 million over two years to companies conducting research and development that lead to new jobs.

One of the more controversial measures announced was a shift in focus for the  National Research Council of Canada  (NRC). The NRC is to focus its research on innovative and marketable products that lead to new companies and job creation. To this end the government's plan is to inject $67 million into the NRC for 2012-13 with orders to 'refocus on business-led, industry-relevant research.' Basic or 'blue-sky' research is to be folded into universities and other research institutes, while scientists at NRC labs will be directed towards R&D projects that support industry innovation.

The government will continue to support advanced research at universities and other leading research institutions by providing direct support to granting councils, genomics research, international research and infrastructure investment for Canadian universities, colleges, research hospitals and other not-for-profit research institutes across Canada.

Another shift in innovation research funding involves streamlining the  Scientific Research and Experimental Development Tax Incentive Program.   The program provides almost $4 billion in tax credits for business innovation. Budget 2012 is acting on the CCA report's recommendations for improving the program 'by extending the 'refundability' of the credit beyond small businesses to R&D performers of any size.'

The government also plans to invest $400 million to help increase private sector investments in early-stage risk capital, and to support the creation of large-scale venture capital funds led by the private sector.

These measures are designed to help to create enabling conditions to develop new companies from concept to sustainable business. The investments will encourage access to mentoring, business experience, commercial networks and entrepreneurial skill development.

The government added $100 million to the Business Development Bank of Canada to support its existing venture capital program. That program already focuses on innovative technology-based Canadian companies with high growth potential. Ballard Power Systems and Metrowerks are examples of BDC investments that have either succeeded on their own or been acquired by a larger company like Motorola.

The Budget also acts on a key recommendation of the CCA report for increased funding of the National Research Council's Industrial Research Assistance Program (IRAP). This program is well-regarded by technology-oriented smaller firms, but it lags the impact that a similar program in the U.S. has enjoyed.

To enable the Industrial Research Assistance Program to enhance the depth and frequency of its interaction with the commercial world, the government has added $110 million to IRAP, in effect doubling its budget.

Another government initiative focused on innovation, the Canadian Innovation Commercialization Program, is to receive an infusion of $95 million over three years, starting in 2013-14, and $40 million per year thereafter. Created in 2010, this program is to become permanent.

The program helps early-stage companies in the environment, safety and security, health and enabling technologies bridge the pre-commercialization gap by awarding contracts for their products and services. The government will now add a military component to the program.

According to the GLOBE Advisors West Coast Clean Economy Report, public sector leadership by leveraging its purchasing power to support early adoption of innovative new technology is essential. Such progressive public procurement policies allow for clean technology enterprises to accelerate their growth and encourage downstream expansion capital.

Funding for Sustainable Development Technology Canada (SDTC) was not affected by the budget. This highly successful arms-length federal agency was set up by the government in 2001 with almost $600 million to finance and support innovative clean technologies.

While there are many other changes proposed in Budget 2012 that have generated controversy, the innovation oriented provisions could do much to remedy Canada's poor record relative to other countries with respect to private sector investment in R&D.

More importantly on the longer term it could prove to be a valuable stimulus to the commercialization of research into products and processes that create high-value jobs.

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