October 14, 2011
Whose Policy Problem is it?
Canadian firms are regularly outperformed in terms of innovation. This is now conventional wisdom and governments have invested significant funds trying to remedy this failing with little impact.
This paper argues that Canadian federalism is at least part of the problem. In light of the impending release of the federal government’s Research and Development (R&D) Review Panel Report, a refocusing of our public investments is needed.
Executive Summary
Canadian firms are regularly outperformed in terms of innovation. This is now conventional wisdom and governments have invested significant funds trying to remedy this failing with little impact. This paper argues that Canadian federalism is at least part of the problem. In light of the impending release of the federal government’s Research and Development (R&D) Review Panel Report, a refocusing of our public investments is needed.
Government investment in innovation can be understood as either indirect or direct. Indirect investments focus on the framework conditions that enable innovation, including tax incentives, favourable tax rates, the regulatory environment, and support for research and post-secondary education. Direct supports include government programs that are generic (such as general support for commercialization), programs that focus on particular sectors (such as the Strategic Aerospace and Defence Initiative), or programs that focus on particular firms. The latter investments are dismissed in some circles as “picking winners.”
The federal government makes enormous investments in indirect support for innovation, particularly through the Scientific Research and Experimental Development (SR&ED) Tax Incentive Program, which allows firms to write off part of their research costs. It represents a C$ 4.7 Billion federal tax expenditure.
Direct support to clusters, sectors, industries and firms can be found in hundreds of overlapping and confusing federal and provincial programs delivered by multiple departments with, at times, contradictory and/or overlapping objectives. The result is confusing to industry.
Continue reading
This paper finds that Canada is an extreme outlier in weighting its investment in innovation so heavily toward tax incentives and away from direct support to sectors. This paper argues that these funds would be better used for direct supports to the innovation process and would produce more value-added, world-leading, commercialized products and services.
It also argues for a clearer division of policy roles whereby the federal government confines its support to maintaining the indirect and generic support for the innovation process, while provincial governments focus primarily on strategic investments. This refocusing would significantly simplify the program landscape and ensure greater emphasis is placed on direct investments that align with provincial strategic innovation objectives.
The paper also highlights the emerging global consensus around the need for innovation policies to be place-based, to support the existing comparative advantages of the community, and to take advantage of local and regional networks and knowledge. Taken together, these findings suggest that in addition to withdrawing from direct investments, the federal government should also reduce its expenditures on tax incentives and instead direct these funds to provincial governments to be used for direct incentives.
The federal and provincial governments should negotiate intergovernmental agreements, modeled after the agreements that emerged from the Growing Forward agricultural intergovernmental agreements. Growing Forward allowed the federal government to define overarching objectives and conditions for investments, but empowered provinces to direct funds to suit regional needs, embedded within regional networks, and in a manner consistent with provincial strategies.
Clarification of roles and responsibilities in this policy sector should be seen in the broader context of encouraging the federal government to focus its efforts and funds in areas where they will have the most impact, including reviewing competition policy to make companies more open to global competition and more likely to value and pursue innovation (Jenkins 2011).
Author
Tijs Creutzberg
Release Date
October 14, 2011
ISBN
978-1-927350-05-8
Mowat Publication
No. 34