Canadian Innovation Policy: An Analysis and Critique
Since the industrial revolution, innovation has consistently been the driving force behind the growth and development of nations. The countries who innovate lead progress, while those who do not are left behind. Governments have the ability to influence innovation within their country through policies that encourage and incentivise research and commercialization. What is challenging is finding effective policies within financial and cultural restraints. When the right policies are found, world class companies emerge. When they are not, a country is left to rely on natural resources and decaying businesses to provide economic prosperity. Canada is currently one of the nations suffering from the latter. Canada needs to adjust its current policies to create a better environment for innovation in order to stay competitive in the 21st century. This paper will analyze Canada’s current innovation policies. Next, the policy choices of other countries similar to Canada will be analyzed. Finally, recommendations regarding the direction of future Canadian policies will be made.
To begin, innovation should be defined. Within the 2015 Global Innovation Index, innovation is given a broad definition:
An innovation is the implementation of a new or significantly improved product (good or service), a new process, a new marketing method, or a new organizational method in business practices, workplace organization, or external relations. (Cornell University, 2015)
This definition is broader than traditional ideas of innovation, which focus solely on Research and Development (R&D) as an expenditure. This definition accounts for innovative ideas that not only affect the product, but also the process.
The Global Innovation index includes an innovation efficiency ratio. This ratio compares innovation inputs to their resultant outputs. In 2015, Canada scored 9th overall on innovation inputs yet in terms of efficient outputs from those inputs, Canada scored 70th in the world (Cornell University, 2015). While Canada has been recognized as one of the best promoters of innovation in the world, this promotion is not translating into efficient results. This inefficiency represents wasted tax dollars and wasted time — time when other nations could be surpassing Canada in science and technology research.
Why does this efficiency gap occur? Present innovation policies rest on two pillars. The first pillar is direct investment. Direct investment is the financial support of specific projects a company or researcher is undertaking. Direct support arises in the form of grants and project targeted subsidies (Creutzberg, 2011). When properly distributed, direct support tends to effectively produce innovation. The second pillar, indirect support, occurs in the form of tax credits through which companies can write off “R&D” expenses (Creutzberg, 2011). Indirect support occurs through income tax deductions of up to three million dollars for businesses based on research expenses for a given year (Jenkins, 2011). Accounting for 55% of research funding in 2011, indirect support exists in the form of the Scientific Research and Experimental Development (SR&ED) program. As a percentage of Gross Domestic Product, Canadian taxpayers spend the most on indirect tax incentives in the world (Jenkins, 2011). This incentive system is out of date and is the main burden on the Canadian R&D system.
In a 2011 analysis of Canada’s innovation practices known as the Jenkins report, a panel of economists, business leaders and academics argued that the SR&ED program had too broad of a mandate to produce the innovation it aimed to achieve. This program helps already established companies write off routine R&D expenses, but it fails to support new innovative companies. Since the SR&ED program is based on tax of profit, it can miss small innovative firms that have yet to turn a profit (Jenkins, 2011). Canada does not need to subsidize the R&D expense of an established corporation. Rather, Canada should help small businesses develop into multinational organizations (Creutzberg, 2011).
The question that arises is: how can this efficiency gap be resolved? By analyzing the policies of other developed nations similar to Canada in terms of demographics and economics, some light will be shed on alternatives to the tax credit program that is currently wasting Canadians’ money and precious development time.
According to the Global Innovation Index, Switzerland is the most innovative country in the world (Cornell University, 2015). In 2007 Switzerland had the largest number of patents per capita of any industrialized country (Iwulska, 2012). Further, 45% of the population is actively employed in science and technology (Iwulska, 2012). Rather than providing subsidies for companies the Swiss innovation system is based on research and business-academia integration. First, the Swiss focus heavily on primary generic research. Second, they utilize formal institutions to promote cooperation between the public and private sector. This leads to heavy investment in universities and a conscious effort to translate basic research into science-based products and companies.
The university system, the first pillar of Swiss success, is the second best funded tertiary system in the world (Iwulska, 2012). With a population of only 8 million, Switzerland hosts four universities in the top 100 of the Times Higher Education Ranking. The system has two distinct branches, which cooperate to produce innovation. First, there are universities that focus strictly on pure research. The second branch is universities focused on applied research. These institutions attempt to connect primary research to everyday life. They do so through product development and a strong relationship with the private sector. A clear division of responsibilities between branches creates a pseudo two-step innovative process. This enables academics, businesses and students to work with the institution that will best accomplish their goals with the least amount of bureaucracy.
The second pillar is perhaps the defining aspect of the Swiss system. That is, the use of formal institutions to connect the public university system to the private sector. An example of such an institution is the Commission of Technology and Innovation (CTI), which was created to serve: “as a catalyst for innovation by bringing companies into contact with research institutes via innovation projects” (SERI, n.d.). The commission funds projects it deems innovative to the marketplace, connects researchers with companies, and promotes entrepreneurial ventures to the established private sector (SERI, n.d.). The CTI amongst other similar organizations represent the Swiss model of innovation. By encouraging cooperation between the public and private sector, academic research does not go to waste and companies are able to source out the great minds they need to develop innovative products. Any country can have a great education system but it is an economic waste if that system does not translate into real results for society.
Canada has a similar organization titled: The Canadian Foundation for Innovation (CFI). This foundation provides grants to hospitals, and research institutions to purchase research infrastructure (Canadian Foundation for Innovation, n.d.). The issue is, this funding stops after the infrastructure is built. The CFI does not support the specific research projects which take advantage of the infrastructure (Canadian Foundation for Innovation, n.d.). By moving funding from the SR&ED program, the CFI could begin sponsoring the proposals which produce innovative results.
A second example of an extremely innovative country is Sweden. Sweden is now ranked as the third most innovative country in the world (Cornell University, 2015). In 2015 Sweden scored first in the world for international patents filed per capita and second in the world for information communication and technology use (Cornell University, 2015).
Sweden’s success stems from a culture that embraces constant change. Beginning in preschool, Sweden promotes the Snilleblixtarna (‘flashes of genius’) program, which aims to foster an interest in science and technology in children. When ‘flash of genius’ ends in grade 5, Finn Up, a nationwide elementary school inventors contest, begins. Finally, innovation is promoted through the post-secondary Ung Företagsamhet (‘young entrepreneurship’) program (Swedish Institute, 2015). Because of early introduction, programs such as these have fostered a culture that places a high value on science and innovation. Canada currently lacks a formal national education strategy which makes innovation a priority within public education (C21, n.d.). Instigating programs similar to the Swedish model will begin the early fostering of entrepreneurial spirit.
Beyond elementary school, Sweden recognizes that in today’s constantly changing world, lifelong education is always necessary to stay at the forefront of innovation ( Swedish Ministry of Enterprise, Energy and Communications, 2013). Since the early 1950’s, Sweden has followed a labour model adopted by economists Gösta Rehn and Rudolf Meidner. The Rehn and Meidner model: “emphasise[s] the role of public authorities in taking over responsibility for reintegrating people into the open labour market by providing help to be more mobile, further training and education, guidance and other measures” (Magnusson, 2007). Rather than leaving those with out of date skills to their own devices, the state endorses and encourages retraining. A culture of constant education has allowed Sweden to create a workforce that is willing to adapt to the constantly changing worldwide economic climate. While Canada’s federal Employment Insurance (EI) program can put money back in the pockets of the unemployed it is a band aid solution. Retraining on the other hand, addresses the root causes associated with unemployment and prepares workers for the future.
What lessons can Canada learn from these top innovators? First and foremost, it is clear the SR&ED tax credit needs to be revoked. This incentive system is failing to produce the innovation Canada needs to remain a leader. Where should the difference of funding be redirected to? The answer lies on two distinct pillars: Culture and connection. First, fostering a culture of innovation is the foundation to producing cutting edge technologies. Similar to the Swedes, this needs to start at the elementary school level. Science, technology and inventiveness need to be incorporated into school curriculums. Going into the later years of school, funding should be directed to promoting opportunities for students to create their own products and companies. Further, unemployment should be viewed as an opportunity for change, as opposed to an economic failure. Government unemployment programs should focus on retraining with a future outlook. Rather than helping people return to an out of date job they already lost, they should be trained for the jobs of the future. The second pillar is connection. Canada should extend the reach of the CFI. Supported projects should be selected based on novelty, feasibility and potential for commercial success. The CFI should connect the private sector and research institutions so as to create products that are actually marketable.
The Canadian Innovation system is currently not working; however, it can be repaired. This is not from a lack of interest; Canadians recognize the importance of dedicating their tax dollars to innovation. Rather, our current system is inefficient at producing the results that will make Canada a worldwide leader in the progression of human knowledge. The SR&ED tax scheme is subsidizing the routine R&D of large corporations and is failing to help small businesses grow. Going forward, Canada should redirect the funding of the SR&ED tax credit to two different schemes. First, Canada should adopt the Swiss model of connectivity to bring together researchers and business leaders to create products that will be competitive on the worldwide market. Second, Canada should develop a culture that embraces innovation. Canada could learn from the Swedish model. This includes focusing on integrating innovation culture within the public school system as well as creating job retraining programs that bring the skills of the unemployed in-line with those necessary for the modern world. Canada could be a worldwide leader in innovation. Innovation is not a matter of luck or special knowledge. It is a reflection of the policies a nation chooses to follow. With the right policies Canada could lead the world into the future and create continued prosperity for all our citizens.
Swedish Ministry of Enterprise, Energy and Communications. (2013). The Swedish Innovation Strategy. Government Offices of Sweden.
C21. (n.d.). Organizational Goal. Retrieved from Canadians for 21st Century Learning and Innovation: http://www.c21canada.org/mission/
Canadian Foundation for Innovation. (n.d.). Our Funds. Retrieved from Innovation.ca: http://www.innovation.ca/en/OurFunds
Cornell University, I. a. (2015). The Global Innovation Index 2015: Effective Innovation Policies for Development. Fontainebleau, Ithaca, and Geneva: World Intellectual Property Organization.
Creutzberg, T. (2011). Canada’s Innovation Underperformance: Whose Policy Problem is it? Toronto: Mowat Centre for Policy Innovation.
Iwulska, A. (2012). Golden Growth: Restoring the Luster of the European Economic Model. World Bank.
Jenkins, T. (2011). Innovation Canada: A Call to Action. Ottawa: Industry Canada.
Magnusson, L. (2007). The Swedish Labour Market Model in a Globalised World . Stockholm: Friedrich-Ebert-Stiftung Foundation.
SERI. (n.d.). National Institutions for Research and Innovation Promotion. Retrieved from State Secretariat for Education, Research and Innovation: http://www.sbfi.admin.ch/themen/01367/01676/index.html?lang=en
Swedish Institute. (2015, September 24). Innovation in Sweden. Retrieved from Sweden Sverige: https://sweden.se/business/innovation-in-sweden/