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Innovation Canada: A Call to Action

1. Motivation and Mandate

Canadians enjoy an enviable standard of living, but sustaining our prosperity depends on maintaining economic competitiveness in a global context both filled with opportunities and fraught with challenges. Among these is increased competition due to a convergence of factors, including vastly more powerful communications technologies that have shrunk "economic space" and virtually overnight transformed the scope and intensity of competition. The emerging competitors — China, India, Brazil and many others in the wings or already on stage — are no longer merely the low-cost suppliers of services and manufactured goods. They are using education, research and development (R&D), and the commitment of their governments to innovate and rapidly ascend the value chain. The challenge for highly developed countries like Canada, accustomed to generations atop the global economic league tables, is clear.

Equally clear is the prospect that the emergent economies, already home to more than half the world's population, will convert their burgeoning prosperity into the greatest market opportunities ever. But these are not available simply for the asking. The winners will be the companies that can provide products matched to the culture, priorities and state of development of the new customers — for example, medical devices that perform at close to state-of-the-art but for a small fraction of the cost. The fact is that the emerging markets already include large and rapidly growing populations of middle and upper income consumers equipped with both spending power and new generations of infrastructure such as advanced wireless networks. In short, to seize the opportunities and to meet the challenges of today's economy, Canadian businesses need to adopt a thoroughly global outlook coupled with a focus on innovation. This will require, for many, a significant shift in habit, perspective and strategy.

Perhaps the greatest risk is complacency. Canadians can be justly proud of the way the country has fared during the recent crisis years. A sound banking system, buoyant demand for many of our natural resources, ready access to the world's greatest market on our southern border, and years of prudent fiscal management have served Canada well and will continue to do so. But a strong Canadian currency and stubborn economic weakness in the United States, our dominant export market, challenge Canadian businesses to become much more innovative.

Being more innovative is also what is needed to take advantage of leading-edge technologies like biotechnology, nanotechnology and information technology. These are giving rise to entirely new markets and are providing novel approaches to the pressing challenges of our era — such as how economies can continue to grow in ways that are environmentally sustainable, or how health care expectations can be met in ways that are fiscally sustainable.

At the same time, the ageing of the baby-boom generation means that the share of Canada's population that is of working age will decline, thus increasing the competition for workers and skills and requiring more output per worker — that is, greater productivity — to support a growing proportion of dependants.

Taken together, these realities imply that Canada's prosperity will depend, more than ever, on an innovative economy. Innovation drives our ability to create more economic value from an hour of work. The resulting productivity growth increases economic output per worker, creating the potential for rising wages and incomes, and thus for a higher standard of living. It is for this reason that business innovation delivers great benefit, not only for individual firms, but also for society as a whole.

Countries around the world have recognized the importance of business innovation as the ultimate source of competitive advantage and increasing prosperity. Many governments are therefore increasing support for innovation even as they struggle to balance overall budgets. Significant efforts are being devoted to the development of new and more effective ways to encourage and support business innovation. In fact, just as businesses are challenged to become more innovative, so too are public policy-makers.

The federal and provincial governments play an important role in fostering an economic climate that encourages business innovation — for example, by supporting basic and applied research and related training of highly qualified, skilled people, and by providing substantial funding through tax incentives and program support to directly enhance business R&D.

For decades, Canadian business spending on R&D — a key input to many kinds of innovation — maintained a steady up-trend, evidence of the country's economic and technological progress. Other highly industrialized countries were doing the same, so R&D spending by Canadian businesses remained near the middle of the pack of our peer group of member countries of the Organisation for Economic Co-operation and Development (OECD), and well behind leaders like the United States, Japan, Germany, Sweden and Finland (OECD 2011). But until the collapse of the "tech bubble" in 2001, our R&D gap, relative to the OECD average, had begun to narrow, driven by exceptionally strong R&D spending in the telecommunications equipment sector as Internet and wireless infrastructure was rapidly built out. Then, suddenly, the decades-long up- trend of business R&D in Canada stalled. In fact, business R&D spending (adjusted for inflation) has been falling since 2006 and is now below its level in 2001 (Figure 1.1).

Research and development is a key ingredient in a great deal of business innovation and is also an essential contributor to Canada's international competitiveness and productivity growth. The fact that Canada's business R&D momentum stalled a decade ago and has not resumed is both alarming and unacceptable. It is urgent that business R&D in Canada start growing strongly again.

Recognizing this, Budget 2010, Leading the Way on Jobs and Growth, announced a comprehensive review of federal support to R&D in order to optimize federal contributions to innovation and to economic opportunities for business (Department of Finance 2010a). The decision to undertake this review came in the wake of a series of reports — including State of the Nation 2008 (since updated for 2010) by the Science, Technology and Innovation Council (STIC 2011), and Innovation and Business Strategy: Why Canada Falls Short, by the Council of Canadian Academies (CCA 2009) — which provided in-depth analyses of Canada's weak performance in the interrelated areas of business R&D, business innovation and productivity growth.

Figure 1.1 Canadian Business Expenditure on Research and Development (BERD), 1985–2010 (billions of 2000 constant dollars)
Figure 1.1  Canadian Business Expenditure on Research and Development (BERD),
1985–2010 (billions of 2000 constant dollars)

On October 14, 2010, the government appointed an independent panel to undertake the review. The members of our Panel are:

  • Thomas Jenkins (Chair), Executive Chairman and Chief Strategy Officer, Open Text Corp.
  • Bev Dahlby, Professor of Economics, University of Alberta
  • Arvind Gupta, Chief Executive Officer and
  • Scientific Director, MITACS Inc.
  • Monique F. Leroux, Chair of the Board, President and Chief Executive Officer, Desjardins Group
  • David Naylor, President, University of Toronto
  • Nobina Robinson, Chief Executive Officer, Polytechnics Canada.

This report is the culmination of the ensuing year-long review — an exercise focussed on enhancing federal government programming to foster a more innovative Canadian economy, thereby improving the competitiveness of Canadian firms and the productivity of the economy.

The Panel's Mandate

Building on the foundational work of the CCA and STIC, we were asked to conduct an assessment of key programs within the government's portfolio of initiatives in support of business and commercially oriented R&D — specifically, the following:

  • tax incentive programs such as the Scientific Research and Experimental Development (SR&ED) program
  • programs that support innovative business R&D, including general support, sector support and regional support
  • programs that support business-focussed R&D through federal granting councils and other departments and agencies, including research performed in universities and colleges that fosters support for business R&D, such as the Centres of Excellence for Commercialization and Research program.

We were given the latitude to consider other federal initiatives relevant to the review's scope. However, the review was to exclude: (i) research conducted in federal laboratories to fulfil their regulatory mandates and (ii) basic research conducted in institutions of higher education and not intended to foster support for business R&D.

We were asked specifically to provide advice related to the following questions:

  • What federal initiatives are most effective in increasing business R&D and facilitating commercially relevant R&D partnerships?
  • Is the current mix and design of tax incentives and direct support for business R&D and business-focussed R&D appropriate?
  • What, if any, gaps are evident in the current suite of programming, and what might be done to fill these gaps?

Consistent with our mandate, we were asked to address any and all federal programs that have an impact on business or commercially oriented R&D, as well as how such programs fit within the larger innovation context. The mandate specified furthermore that our recommendations should not result in an increase or decrease in the overall level of funding required for federal R&D initiatives. Where we have recommended measures that would yield savings, we have also identified areas in need of the funds that would be freed up. Our primary objective has been to advise on how the government's existing outlays in support of business and commercially oriented R&D can be deployed more effectively to promote innovation, productivity growth and increased prosperity for Canadians. Therefore, while the immediate effect of our recommendations is meant to be budget neutral, the ultimate impact will be a more productive economy and a stronger fiscal position.

The Panel's Approach

In fulfilment of our mandate, we have, with the aid of a secretariat seconded from the federal government, overseen a thorough process of research, program assessment and consultation. The research included expert briefings, an extensive literature review and other technical background work by, or on behalf of, the secretariat. The program assessment, which is described more fully in Chapter 3, encompassed a set of 60 programs covering the gamut of federal initiatives to foster business R&D.

Our consultation phase began with the issue of a public consultation paper in December 2010. This elicited 228 submissions — 96 from companies, 80 from organizations and associations, 38 from academic institutions, seven from governments or governmental organizations, and seven from individuals. To supplement written submissions, face-to-face consultations were held in Vancouver, Calgary, Winnipeg, Waterloo, Toronto, Ottawa, Montréal, Québec and Halifax. We met a total of 164 participants during the course of 32 sessions, each of which focussed on a theme or sector of relevance to the host region. Meetings were also held with senior officials from many federal departments and agencies and from all provinces.

We extended the scope of in-person consultations beyond Canada to learn about international perspectives on issues germane to this review. Meetings took place in Australia, Germany, Singapore, the United Kingdom and the United States, and with officials of the OECD and Tekes1 in Paris.

We complemented our face-to-face consultations with a survey conducted by EKOS Research Associates Inc. of more than a thousand R&D-performing businesses of varying sizes, sectors and provinces. The survey results provided us with a rich base of data, from the client perspective, on the impact, strengths and weaknesses of federal support for business R&D.

This extensive process of consultations, research and program assessment, supplemented by our own deliberations and analyses, formed the basis upon which we developed our advice for the government.


1 Tekes is a Finnish funding agency for technology and innovation. (Return to reference 1)