Operational and governance changes are more crucial than ever before to modernize the way government supports the needs of Canada’s high-growth firms.
Budget 2012 proclaimed a “new approach to supporting entrepreneurs, innovators and world-class researchers.” Speculation and expectations had mounted in the months and weeks preceding the budget, particularly in the wake of the recommendations found in a key review of federal support to business innovation called Innovation Canada: A Call to Action — also known as the “Jenkins Report.” This October 2011 report called for bold action and a fundamental rethink of how government support for business innovation is structured and delivered given the withering performance of Canadian business in investing in research and development (R&D), with regard to finding commercial value through the creation and sale of new products, goods and services. In the innovation space in this country, made up of a multitude and diversity of stakeholders and actors (small, medium and large firms; universities, colleges and polytechnics; private R&D firms, public laboratories, accounting firms; policy experts; and government program managers), hopes — and fears — had grown that the federal budget would radically change the innovation landscape.
So what was new in the federal budget? What has really changed? What are some underlying messages that we should take from Budget 2012 about future directions for Canadian innovation? How much is left to accomplish?
The budget document itself sets out succinctly the perennial conundrum that has faced Canada: while our investment in higher-education research puts Canada at the top of OECD country rankings, the performance of our business sector in research and development is shockingly low (figures 1 and 2). This reality holds true despite having one of the most generous tax credits in the world. (Such credits are used widely to encourage incremental private-sector R&D in the OECD countries, as well as emerging economies.) In addition, Canada has over 500 programs — federal and provincial — in support of science, technology and business R&D. While we spend considerable sums, we have the well-documented innovation lag that has persisted over decades. And labour productivity remains a problem we cannot get our heads around. Among the many questions posed to the Jenkins Panel was whether we have the right mix of federal support programs for business R&D: indirect and direct measures. Budget 2012 begins to answer that question.
The causes of the weak performance of Canada’s private sector in R&D have been studied to death with a cottage industry of “experts” diagnosing the problem and suggesting a myriad of prescriptions. Today, with our fragile economic recovery, high Canadian dollar, shifting demographics, looming skills shortages, lagging productivity and heavy reliance on natural resources it is paramount that we get the innovation supports right. Our challenges are specific to Canada, but they’re not unique to Canada. The United States, Australia, the UK, Scandinavia, Japan and others share most or all of the same problems as us, at a time when new players such as Russia, Brazil, China, India and Korea are upping their innovation activity in order to compete in an increasingly intensive global economy.
Report upon report has focused on the historical overreliance upon the (then) low Canadian dollar, the resource economy and the lack of sufficient access to capital and the risk-averse business culture of Canada’s private sector. The prevailing logic is to blame industry for the lack of receptor capacity for the ideas and inventions being generated by fundamental discovery-based research. (Federal basic research programs were specifically outside the mandate of the Jenkins Panel.) The confounding question is whether there are public policy levers available to government to adequately enable improved business R&D performance, to spur innovation in Canada. Given the over $5 billion per year of federal support to business innovation through a range of direct support programs and through a 35-year-old tax credit incentive, this question is not inconsequential. In a time of government fiscal restraint, this question becomes all the more urgent.
Ministers of the federal government have emphasized that they accept the guiding principles of the Jenkins Report, namely that to grow our industrial sector into high growth and high R&D performing firms, we must find ways to encourage small firms to grow into large firms. To do that, we must have transformative, large-scale programs that focus on commercialization, as well as the ability to consolidate similar programs and eliminate the ineffective ones. A new system design may be needed that enables Canadian companies to put innovation at the heart of their business strategy.
Specifically the R&D Report found that our challenges are these:
- There are too many government programs spread too thinly across too many government departments, making it hard for companies to locate the program that’s right for them.
- Our Scientific Research and Experimental Development (SR&ED) tax credit is too complex, too unpredictable in what research qualifies for a credit and too costly for claimants, and may not be entirely stimulating the R&D it was intended to foster.
- We do not leverage procurement for innovation in the same way that other countries have successfully done.
- There is no federal R&D agency with a single-minded focus on supporting business R&D.
- There is a lack of access to financing at both the early and late stages of bringing a product or service to market.
- We do not have the leadership we need in Canada to oversee a broad strategy for business innovation.
Six recommendations and about 20 subrecommendations constitute the essence of the Jenkins Report (box 1). There appears to be unanimous consensus among all stakeholders on this diagnosis. Yet acting on these recommendations takes leadership, time and resources. Many hope that with a majority government, we have all three and that we are now in the process of seeing that reset button finally pressed.
The budgetary (spending) aspects of the Jenkins Report are indeed being implemented through a slew of announcements for Innovation (box 2).
The government has understood that the Jenkins Panel made recommendations in two broad categories: budgetary and operational. Any quick comparison between the Jenkins Report and the budgetary announcements for innovation leads to the conclusion that the government took surprisingly swift action on spending programs related to capital, procurement and the R&D tax credit, as well as support for small business.
But the operational proposals relating to governance, accountability and delivery of federal support programs for R&D are yet to come. Gary Goodyear, the minister responsible for R&D, himself acknowledged after the budget was tabled that further options are being considered that could lead to consolidation of the suite of programs that support business innovation. “The government will announce actions in the coming months and the next federal budget in 2013. This is the first of two or three steps, in a nine or 10 step process,” he said.
Immediate reaction from the community at large focused mainly on the boldness of the will to tackle the long-standing SR&ED tax credit and to partially address the key recommendation of the Jenkins Report.
By doing so, the government sent a message to industry: SR&ED must act as a true incentive for increased R&D; those who need to use the tax credit as a proxy for capital (notably small and midsized firms) will now find a new and more direct solution in early and late stage capital. The one program that supports small business marketing R&D needs, the Industrial Research Assistance Program, or IRAP, has been significantly enhanced with new funds and a new service to clients. Many other stakeholders were relieved, if not buoyed, to see that federal funding for science and technology and for a range of innovation programs would either continue or see modest increases.
However, there are several other underlying messages for Canada’s innovation players in Budget 2012, which are worth reflecting on. Taken together these messages hint at more change to come and it would be short-sighted to think that this is all there is or will be. Most importantly, the federal government has signalled that it is ready to tackle the R&D conundrum head on. There is clarity of thinking in the statement that the government is “pursuing active business-led initiatives that focus resources on better meeting private sector needs.” This is a dramatic shift in focus. The budget document points to re-aligning savings from the tax credit to direct programs, revealing a willingness to sharpen the objectives of direct grants and contributions programs to meet the needs of their users: Canada’s innovative firms.
Implicit in Budget 2012 is an inalienable fact: Canada’s industrial base is made up of small and midsized enterprises (SMEs). Only 20,000 of Canada’s 1.1 million SMEs use the SR&ED tax credit. That’s less than 2 percent of all SMEs investing in R&D activities for their own improved commercial outcomes. Canada’s challenge is to grow small firms into midsized firms, and to encourage more small firms to enter the R&D space. To do so, SMEs need timely access to federal support programs, access to capital and access to opportunity and markets. Equally the message to Canadian industry is that companies can use the federal supports if they are seriously committed to R&D. The winners are those firms ready to go to market with a high value good or service. High-growth firms create wealth and so create high-value jobs. Canada needs more high-growth firms in all sectors.
Any quick comparison between the Jenkins Report and the budgetary announcements for innovation leads to the conclusion that the government took surprisingly swift action on spending programs related to capital, procurement and the R&D tax credit, as well as support for small business.
For decades now, federal programs have been underpinned by the “idea-push” logic, conflating “invention” with “innovation.” Current federal innovation programs are actually science and technology programs, focused predominantly on the search for new Nortel-like breakthroughs. These programs are generally unresponsive to firms that innovate in processing, services or creating consumer products. The assumption is that innovation is a linear activity with ideas born in labs and academia that must be pushed on to industry “receptors.” However, small firms with very specific and near-to-market innovation needs do not have the luxury of time that working with university researchers generally requires. When obtaining financing from banks, venture capitalists or backers is most pressing for a firm, the firm cannot wait for the knowledge generation of the academic enterprise to yield the practical result needed now. The budget’s proposed concierge service through the National Research Council, or NRC, IRAP program to help small firms make more effective use of innovation programs is a clear-cut acceptance of one of the Jenkins Report’s subrecommendations.
Other budget emphases on “collaborative research partnerships with postsecondary institutions,” knowledge transfer, applied research and financing for commercialization would indicate that the government is taking the Jenkins Panel’s advice seriously and investing in programs that translate research into market use. That colleges are now seen as key to applied research and technology translation is an important recognition that government’s role is to enable companies to access solutions that meet their needs (figure 3). We need more of this: collaboration and commercialization to help our research and development make it to market. It does not diminish the importance of investing in science. Quite the opposite; it shows that we have the capacity to invent and innovate in order to make our lives better and our economy more productive.
Proponents of “demand-driven” innovation should take encouragement from the first-ever signals that the federal government is willing to use government procurement as a spur to innovation and that a major rethink of the mandate and functions of the century-old NRC will be driven by a new logic, making it industry-responsive and industry-relevant. Yet these announcements are aspirational at best, given that only one small program for procurement through innovation has been made permanent, and that changes to the way the NRC interacts with industry and academia will involve fundamental culture change. The budget also indicated that the government is willing to consider alternative delivery mechanisms for administering programs, such as the Industrial Research and Development Internship, which was a long-standing talent support program at the Natural Science and Engineering Research Council. Taken together, these changes hint that the government is prepared to modernize the mission and mandate of some R&D focused agencies.
A close read of Budget 2012 also indicates that the government needs more time to think through the “reset” button on innovation. Thus, the budget commits to more consultations on changes to the NRC, the research granting councils and the SR&ED tax credit administration. This, at a time when other reviews are also ongoing, most notably the Aerospace Review, along with a slew of other internal government studies on science and technology programs, industrial R&D and the ongoing fiscal and spending reviews. Further, major changes to the way the tax credit program works are not planned until a year from now, indicating a recognition that both government and the private sector will need time to adjust to new changes. This allows the government some skating room to address remaining recommendations of the Jenkins Report.
Frankly, adjusting and altering spending programs without taking a look at policy and program design — the tool kit — will not result in measurably improved outcomes. Budget 2012 does not yet change the tools, the mechanisms that the government has at its disposal to assist business innovation. No federal business support program was cancelled; in fact, many received funds for ongoing activity.
Adjusting and altering spending programs without taking a look at policy and program design — the tool kit — will not result in measurably improved outcomes. Budget 2012 does not yet change the tools, the mechanisms that the government has at its disposal to assist business innovation.
What’s wrong with the tool kit anyway? In addition to the complexities and inefficiencies identified with SR&ED and the industry support from the NRC, there are a few other critical impediments that the Jenkins Report identified. These are the following:
- Programs are subscale and operate within the silos of numerous federal departments. The alphabet soup of the direct support programs for federally funded R&D support programs is confusing, inaccessible and not meeting the needs of these firms — the vast majority of whom do not even know these other programs exist!
- The research granting councils — also known as the TriCouncil — have suffered mission drift, blurring the lines between basic academic research and industry focused applied research.
- Programs that purport to focus on commercialization actually assist academia and not those companies whose core purpose is to commercialize ideas for the market.
- National outcomes for federal R&D support have never been set. Innovation in one part of our country is not considered the same as innovation in another. We have no means of measuring, evaluating, updating, consolidating or, when justified, ending these programs.
- Our R&D talent programs have narrowly focused only on graduate and postgraduate student supply seemingly on the belief that “best and brightest” means highest trained thinkers and managers, and not necessarily highly qualified skilled doers. A survey for the Jenkins Panel showed that only 18 percent of R&D performing firms have doctoral graduates as R&D staff. The vast majority of R&D employees have master’s or bachelor’s degrees or are technicians and technologists graduated from the college sector. Yet the innovation programs focus only on the elite “knowledge workers” rather than recognizing that innovation is a team sport, requiring a skilled multidisciplinary team of R&D performers to bring a product or service to market.
- No one minister has full accountability in cabinet over business innovation spending or outcomes.
- And finally, we do not have an Innovation Strategy, only a Science and Technology Strategy.
In short, many implements in our innovation tool kit are not working, are underutilized and are developed from an outdated understanding of business innovation needs. These problems have accrued over several years, even decades. What dismayed me through the year of the panel’s work was the creeping realization that there is no quick fix — nor can there be. But without some fundamental rethink of policies and programs now, there will never be a fix.
So what remains to be done? As Minister Goodyear has hinted, Budget 2012 was a first step in perhaps a 10-step program of change. Program consolidation with one reporting minister and an oversight arm’s-length council, for example an industrial research innovation council, would help. (Most G7 and OECD competitors have such mechanisms; why not Canada?) We need to remove duplication and reallocate funding to fill the pressing gaps in the commercialization space. Until and unless we prune, yes even “kill,” some older ineffective programs, any new spending simply gets spread like peanut butter across the country and does not reward or motivate innovation.
Canada still has no talent strategy for innovation: we have programs for skills and training, we have funding for education and research, and we have funding for internships for university (not college), but none of these has building an innovation-ready workforce as its primary objective. Fitting programs into the existing Science and Technology Strategy rubric continues the “idea push” model. Until we have an innovation strategy that shifts our thinking to “demand-driven innovation” we will not see radical change. A complement to the Science and Technology Strategy, such an innovation strategy would provide the missing governance and direction over industry programs and help to deepen a culture of business innovation and competitiveness in Canada.
Restructuring our supports for business innovation is the equivalent to changing the oil in a car while driving down the highway. It’s not impossible, but it’s not going to be easy, and we need the right tools.
The most pressing rethink that should happen is to measure programs with appropriate metrics. Part of our collective malaise results from applying the wrong metrics to the wrong programs; basic research has metrics that differ vastly from the commercialization of research, and we need to speak clearly about that.
Above all, policy-makers and government officials must appreciate this simple, but profound, difference. Remember the adage: what gets measured gets done!
These changes relate to governance, what some refer to as “machinery” changes. There is optimism that these changes could yet materialize through policy announcements, a possible cabinet shuffle or a Speech from the Throne. It might take yet another federal budget.
After dozens of reports and studies, we can all agree that the “innovation ecosystem” has grown this dysfunctional through decades of Band-Aid solutions, conflicting mandates, boutique programs that serve a specific purpose but never go away, and zero emphasis on outcomes for investments, all in search of the Holy Grail of topping the world’s innovation rankings. Sadly, we must all agree that the system cannot be changed overnight. The 2012 budget was a first and dramatic step in the right direction, but much more remains to be done.
Restructuring our supports for business innovation is the equivalent to changing the oil in a car while driving down the highway. It’s not impossible, but it’s not going to be easy, and we need the right tools. Canadian businesses can’t wait for the government to hit the reset button and start from scratch, and our global competitors won’t wait either.
All innovation stakeholders must encourage the government to take more action in fleshing out this “new approach to innovation, entrepreneurship and world-class research.” All sectors and all actors should help to support the further changes that government will need to make, and provide their ideas and sweat equity to the urgent national effort. Budget 2012 sets on us a better path, but only time and further action will tell if we have updated our blueprints for better action on innovation.