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Expert Panel Consultation Paper: Section 3

Federal Role and Programs

The role of government

As noted above, a primary role of government in fostering innovation is the provision of marketplace policy and regulatory frameworks that structure the climate for private-sector competition and investment. Another key role — and the focus of this Review — is providing appropriate support for business and commercially oriented R&D, whether it be through indirect tax measures, direct assistance to businesses, or funding for public sector or non-profit bodies conducting research of relevance to the private sector. Such support can be targeted to industries, activities, inputs or actors that may be considered areas of strength and opportunity, or on "weak links" of the innovation system that need to be shored up.

Governments have to be mindful that, through trade agreements, they accept obligations that discipline the provision of assistance to businesses. At the same time, they can still support areas such as R&D, regional economic development, assistance to small- and medium-sized enterprises (SMEs), and defence and security.

What we are reviewing

This Review examines the effectiveness of federal initiatives, hereafter referred to as "programs," that support business and commercially oriented R&D. This includes a wide variety of programs, of which an illustrative list is attached in Appendix 2. The programs include such diverse examples as:

  • The SR&ED Tax Incentive Program, which seeks to encourage Canadian businesses of all sizes and in all sectors to conduct R&D in Canada. The largest program in the scope of this Review by a considerable margin, it provides two types of incentives for firms undertaking R&D: (1) an income tax deduction; and (2) an investment tax credit, which is partially or fully refundable for small Canadian-controlled private corporations.
  • The Industrial Research Assistance Program, delivered through a network of industrial technology advisors, which provides, in addition to technical advice, non-repayable contributions to small- and medium-sized enterprises for eligible R&D costs.
  • The Atlantic Innovation Fund, a regional development program for Atlantic Canada, which provides non-repayable contributions to university-led innovation projects and repayable support for business-led projects, reviewed by an arms-length advisory board.
  • The Centres of Excellence for Commercialization and Research program, which supports the operating and commercialization expenses of non-profit centres of commercialization and research expertise.
  • The Industrial Postgraduate Scholarships Program, which provides financial support for highly qualified science and engineering graduates, allowing them to gain research experience in industry while undertaking advanced studies in Canada.
  • The Space Technologies Development Program, which formulates, implements, and manages contracted out R&D projects in response to identified needs and opportunities.

As the examples above show, federal support for business R&D is provided through a diverse array of programs. Their design features can vary considerably in relation to factors such as the following:

  • size (program budget, number of projects supported, amount of administrative staff, and maximum assistance provided);
  • scope (general support open to all businesses versus support targeted to industrial sectors, research areas, or regions);
  • recipient (support provided directly to a business versus support to other organizations conducting commercially relevant R&D activities);
  • input supported (ideas and knowledge; talented, educated, and entrepreneurial people; networks, collaborations, and linkages; and capital and financing);
  • activity supported (basic research, applied research, experimental development, or commercialization); and
  • form of support (tax incentives; repayable or non-repayable grants and contributions; provision of services; and procurement of research and of innovative goods and services).

Defining program effectiveness

For the purposes of program evaluation, the Treasury Board of Canada defines effectiveness as "the extent to which a program is achieving expected outcomes."28

The Review will therefore seek to examine the effectiveness of programs in increasing business R&D and facilitating commercially relevant R&D partnerships in order to bolster business innovation and productivity in Canadian firms. Since the government's ultimate objective is to increase living standards, a natural extension could be to consider the net economic benefit of individual programs.

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Balance among programs

In its forthcoming report on business innovation policies, the OECD notes that the "combination of demand-side and supply-side policies is an important consideration for the policy mix. Neither supply-side nor demand-side policies are likely to be effective in isolation. Fostering innovation requires addressing the entire innovation chain."29 The report also notes balance-related considerations pertaining to the number of policy instruments deployed. It states that the "trade-off involved here is on the one hand to have a set of instruments that is sufficiently differentiated to meet the needs of complex innovations systems. On the other hand, the policy mix needs to avoid inefficiencies arising from operating too many schemes at too small a scale."30 As regards this Review, it is therefore important to come to an understanding of the right mix and balance among programs.

The mix between direct and indirect support measures is another important consideration. In State of the Nation 2008, the STIC observes that, as a percentage of GDP, government support for business R&D in Canada is among the most generous in the world. STIC further underscores that, relative to comparator countries, that support is heavily weighted toward tax incentives as opposed to direct support measures.31 Of particular note, the US spends significantly more on direct support measures in comparison to support through tax incentives. Furthermore, Sweden, Finland, and Germany offer no R&D tax credits as incentives to companies conducting R&D, preferring direct support measures exclusively.32

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Program delivery

Delivering programs requires human and financial resources. Resource requirements can vary depending on the form of support, the program's scope, the scale of its objectives, and other factors. That said, all programs require some measure of support for administrative activities such as the following:

  • undertaking outreach activities aimed at the target community;
  • providing information and assistance to program applicants;
  • reviewing project proposals to ensure adherence to program criteria;
  • conducting merit review and selection processes;
  • performing audit, evaluation, and risk management activities; and
  • reporting on progress and results.

Beyond program staff, businesses applying for support must also devote time and resources to complete application forms and proposals, meet with officials, prepare reports, and undergo audits and evaluations. Reporting, audit, and evaluation activities have been areas of enhanced emphasis in recent years due to the growing importance that Canadians place on ensuring transparency and accountability in the use of public funds.

Another consideration related to program administration is whether the program is delivered directly by a federal department or agency (e.g., the Industrial Research Assistance Program and the Strategic Aerospace and Defence Initiative) or by a third-party organization (e.g., Sustainable Development Technology Canada and FPInnovations).

For further information about the topics covered in Section 3, please refer to the Reference Documents that will posted on the Panel's website from time to time, starting in January 2011 (www.rdreview-examenrd.ca).

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Consultation questions

  1. With which federal programs supporting business or commercially oriented R&D in Canada do you have direct experience and knowledge? In your view:
    1. Which of these programs are working, and why?
    2. Which programs are not working, and why not?
  2. If you have direct experience and knowledge of the SR&ED tax credit, what are your views in relation to the following:
    1. Does the current structure of the SR&ED tax credit encourage incremental investment in R&D? Does it free up capital to invest in other aspects of innovation activities in the firm? Does this vary by size, ownership, sector or nationality of firm?
    2. What are the strengths and weaknesses of the refundable portion of the SR&ED tax credit for Canadian-controlled private corporations and to what extent does it encourage the growth and commercial success of SMEs?
    3. Bearing in mind the improvements being made by the Canada Revenue Agency, are there additional opportunities for change to simplify the administration of the SR&ED tax credit and facilitate the applications process?
  3. How could the Government of Canada lighten the administration requirements of its programs on recipients and improve outreach to business?
  4. How could the Government of Canada be more innovative and responsive to meet new needs or opportunities, and try alternative service delivery-approaches in its programs?
  5. Are there any gaps in the Government of Canada's support to business and commercially-oriented R&D? Do firms performing R&D in other countries have an advantage over Canadian firms because of access to programs that are not available in Canada? What would be the principal features of new programming to fill these gaps?
  6. What lessons and best practices can be taken from provincial business and commercially oriented R&D programs, and how should the two orders of government align their programming?
  7. Is there a difference between R&D and innovation? If yes, how are they different? Should government focus on R&D or Innovation? What should the balance be?