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Innovation Canada: A Call to Action

3. Overview of Programs to Support Business R&D

The Panel was asked to review three types of federal programs intended to support research and development (R&D) that is undertaken by business or that is commercially oriented. These include (i) the Scientific Research and Experimental Development (SR&ED) tax credit, (ii) programs that support business R&D through direct expenditure (which may be of general application or targeted to sectors or regions) and (iii) programs funded through the federal granting councils, departments and agencies that support commercially focussed R&D, often performed by academic institutions. The purpose of this descriptive chapter is to introduce and characterize the suite of programs analysed by the Panel. First, it is important to recall the reasons why governments create programs that provide support for business innovation and R&D.

Rationale for Government Support of Business Innovation

The fundamental motivation for government intervention in private sector commercial activity is to improve market outcomes for the betterment of society at large. There are conditions under which markets do not allocate resources efficiently, and governments intervene to try to correct or at least diminish "market failures" — for example, to guard against monopoly, to protect property rights, to provide public goods such as basic research that generate benefits for society at large or to overcome problems of inadequate information. Interventions may also be motivated by a concern for equity — for example, provision of a social safety net or, where international agreement cannot be reached, to level the playing field in situations where subsidies provided in other countries put domestic firms at a competitive disadvantage.

In the context of this review, the most fundamental motivation for government programs to foster business R&D is the desire to improve Canada's productivity growth by encouraging more business innovation. Specifically in the case of R&D, there is abundant empirical evidence that an individual firm cannot capture all the benefit of its investment in R&D (see, for example, Parsons and Phillips 2007). Some of the knowledge generated is picked up "for free" by other firms and is eventually used, by some at least, to improve their productivity. The existence of such spillovers means that a dollar of R&D investment by a firm returns greater value to the economy at large, and not just to the investing firm alone. For this reason, governments provide incentives such as tax credits, grants and advisory services to induce firms to perform more R&D than they otherwise would.

There are other motivations to intervene. A number of programs to encourage greater business innovation are designed to help overcome the disadvantage of small scale or to lower the barriers to getting started. For example, student internships in business can provide the crucial first experience. In addition, many smaller R&D-focussed companies cannot afford to maintain in-house all the specialized expertise and infrastructure they need, and must rely on public sector labs and advisory services such as the Industrial Research Assistance Program (IRAP). Government as a lead customer may also help a young innovative business achieve the production scale and credibility to compete in the wider market. Moreover, public sector contributions to seed and venture capital may be needed to risk-share in the early stages of a company's development and thereby enable many technology-based companies in Canada to grow to a viable size.

Public intervention has costs as well as benefits. The taxes raised to fund government programs diminish economic performance through adverse effects on incentives to work, save and invest. All programs generate costs of administration and compliance, which must be netted against the benefits. Just as there are market failures, there may also be "government failures." These may be due to inadequate information or to political pressure — for example, favouring certain vested interests, creating too many small-scale programs or continuing to support activities that should be terminated.

All of these considerations need to be borne in mind when deciding whether government intervention to correct a perceived market failure is warranted. These issues are addressed concretely in subsequent chapters. The remainder of this chapter describes the universe of programs addressed by the Panel.

Profile of Federal Government Support for Business R&D

The federal government supports business and commercially oriented R&D through a broad array of programs,1 each of which varies across a number of salient features:

  • input supported — ideas and knowledge; talented, educated and entrepreneurial people; networks, collaborations and linkages; and capital and financing
  • type of activity supported — basic research, applied research, experimental development and commercialization
  • 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
  • eligible recipient — support provided directly to a business versus support to other organizations conducting commercially oriented R&D activities
  • size — program budget, number of projects supported, amount of administrative staff and maximum assistance provided
  • scope — national, sectoral and regional.

To capture this variety, the Panel established a government-wide program database covering 60 programs, delivered by 17 federal entities (Figure 3.1).2 The Panel's findings are limited to the 60 programs, which encompass most but not all federally supported business and commercially oriented R&D (Box 3.1). This exercise is the first of its kind, and is an essential step toward conceptualizing the diversity of federal business R&D programs as an overall portfolio of support.

Box 3.1 Expenditure Reviewed by the Panel

The Panel was mandated to review federal expenditure encouraging business R&D. Based on figures provided by departments and agencies, it is estimated that expenditure in support of business innovation was approximately $6.44 billion in fiscal year 2010–11, which comprises more than 100 programs and institutes.

Expenditure in Support of Business R&D, 2010–11 – ($ billion, including federal program administration costs)
Figure 3.1 Expenditure in Support of Business R&D, 2010-11 - ($ billion, including federal program administration costs)

Source: Based on figures provided by departments and agencies.

Of this amount, the Panel reviewed 60 programs and institutes totalling $5.14 billion (or $4.96 billion when federal program administration costs are removed). These programs were drawn largely from an illustrative list that accompanied the Panel's mandate letter. The Panel had the flexibility to choose the programs for review. It refined the initial list by removing a limited number of programs whose primary purpose was not to support business innovation. In addition, it added others to ensure representative coverage of the diversity of instruments in the portfolio. The resulting list (Annex A) captures key programs and the majority (about 80 percent) of federal R&D expenditure supporting business innovation.

In the 2010–11 fiscal year, the 60 programs in of approximately $4.96 billion (excluding federal the review — hereafter referred to collectively as program administration costs).3 Of this the "envelope" — had estimated expenditure amount, about 70 percent ($3.47 billion) is the projected contribution of the SR&ED tax credit,4 with the balance of 30 percent ($1.5 billion) coming from 59 direct expenditure programs.

The distribution of expenditure across the many direct spending programs is highly skewed: the largest five represent about 40 percent of direct expenditure, while the largest 15 account for about 72 percent (Figure 3.2). Only one program — IRAP — accounted for more than 15 percent of direct expenditure in 2010–11, while more than 50 percent of the programs each spent less than 1 percent of the $1.5 billion direct expenditure total.

There is considerable diversity among the direct programs, as the examples below show.

  • IRAP is a broad-based program that provides advisory services and contribution funding to support high-risk R&D projects by small and medium-sized enterprises (SMEs). It also provides support to non-profit and post-secondary institutions for the provision of technical and commercialization advice to SMEs.
  • Sector-focussed initiatives include the National Research Council's (NRC) Institute for Aerospace Research, which performs collaborative R&D with business, in addition to licensing and fee-for-service arrangements. Examples of arm's-length delivery of business innovation support include FPInnovations, a public–private partnership with the forest products sector, and Sustainable Development Technology Canada, a federally funded non-profit corporation that provides funding for environmental technology initiatives.
  • The Strategic Aerospace and Defence Initiative (SADI) is the second largest direct spending program and, as announced in Budget 2011, will be part of a specific review of all federal policies and programs related to the aerospace industry. The Panel consequently did not reach specific findings regarding SADI, although it welcomes the opportunity to provide advice and any other assistance in support of the review.
  • Seventeen NRC institutes, including the Industrial Materials Institute and the above-mentioned Institute for Aerospace Research, undertake a great variety of basic and applied research for business and public sector clients. Expenditure of appropriated funds by these institutes was $276 million in 2010–11, about 19 percent of federal direct spending in support of R&D.
  • The Atlantic Innovation Fund, the Western Diversification Program and the Business and Regional Growth Program (Quebec) are regional development programs. (Smaller programs, not shown among the 15 largest in Figure 3.2, are provided by the Ontario regional agencies FedNor and FedDev ON.) The regional agencies, which collectively accounted for about 14 percent of direct expenditure in support of business innovation in 2010–11, generally provide repayable support to businesses and non-repayable support to not-for-profit entities.
  • Several programs link the post-secondary education sector to business innovation. For example, the Networks of Centres of Excellence and Strategic Network Grants fund large-scale, multisectoral collaborative research, and the Collaborative R&D Grants aim to support joint research projects among businesses, universities and researchers.
Figure 3.1 Total Enveloe Expenditurea – $ million, excluding federal program administration costs)
  2007–08 2008–09 2009–10 2010–11 % 2010–11 Direct Expenditure

a BDC venture capital investments are not included above. SR&ED tax expenditures are projections for 2009 and 2010. SR&ED values are for taxation years and not fiscal years. Some of the programs listed as "repayable contribution programs" also provide non-repayable assistance, notably to not-for-profit entities. NRC expenditure for the Technology Clusters Program and expenditure in support of Automotive Partnership Canada are included in the NRC institute totals. The programs listed under "federally performed R&D — other" all have a grant and contribution component in addition to federally performed R&D — these activity totals are reported separately in the table. Subtotals may be subject to rounding. See List of Acronyms (page x) for the full name of sponsoring bodies (in parentheses). (Return to text)

b The 2007 figure for the SR&ED tax credit reported in Tax Expenditures and Evaluations 2010 is slightly higher at $3.35 billion (Department of Finance 2010b). That figure is based on updated data obtained after the Panel began its analysis. (Return to text)

c NA indicates a program did not exist in that particular fiscal year. (Return to text)

d Figures for the NRC institutes refer to the expenditure of appropriated funds. (Return to text)

Source: Based on figures provided by departments and agencies.

Total envelope expenditure 4184.1 4567.6 4668 4962.9
Total indirect expenditure: SR&ED tax credit (FIN and CRA) 3256.0b 3485 3280 3470
Total direct expenditure 928.1 1082.6 1388 1492.9 100.0%
Direct expenditure: repayable contribution programs (amounts given to businesses in parentheses)
Strategic Aerospace and Defence Initiative (IC) 9.7 33.7 61.5 112.7 7.6%
(9.70)    (33.70)    (61.50)    (112.70)  
Atlantic Innovation Fund (ACOA) 59 58.1 57.6 66.2 4.4%
(24.70) (25.00) (28.60) (28.00)  
Business and Regional Growth Program (CED-Q) 3.1 13.1 38.0 51.2 3.4%
(2.1) (5.5) (15.7) (22.7)  
Business Development Program (ACOA) 17.7 15.6 16.7 13.4 0.9%
(9.9) (11.3) (12.1) (11.4)  
Northern Ontario Development Program (IC – FedNor) 5.4 12.4 6.1 5.1 0.3%
(0.5) (1.3) (0.7) (0.4)  
Investing in Business Innovation Program (FedDev ON) NAc NA NA 0.1 0.0%
(NA) (NA) (NA) (0.1)  
Automotive Innovation Fund (IC) NA 0.0 0.0 0.0 0.0%
(NA) 0.0 0.0 0.0  
Subtotal 94.9 132.9 179.9 248.7 16.7%
Direct expenditure: non-repayable grant and contribution programs
Industrial Research Assistance Program (NRC) 86.1 86.5 231 237.3 15.9%
Networks of Centres of Excellence Program (Tri-Council) 72.4 75.7 68.3 78.4 5.3%
FPInnovations (NRCan) 28.6 28.4 48.8 78.3 5.2%
SD Tech Fund (SDTC) 53.8 101.7 109.8 76.8 5.1%
Western Diversification Program (WD) 63.7 69.8 82.7 73.3 4.9%
Strategic Project Grants (NSERC) 67 73.6 61.1 57 3.8%
Collaborative Research and Development Grants (NSERC) 44.4 50.3 52.5 55.5 3.7%
Centres of Excellence for Commercialization and Research Program (Tri-Council) 0 10.9 30.9 49.8 3.3%
Strategic Network Grants (NSERC) 16.5 22.6 31.8 33.5 2.2%
Industrial Research Chairs (NSERC) 22 23.4 27 26.6 1.8%
College and Community Innovation (NSERC) NA 2.1 14.6 28 1.9%
Agricultural Bioproducts Innovation Program (AAFC) 0.6 7.3 20.5 15.7 1.1%
Collaborative Health Research Projects (NSERC) 9.2 9.1 11.7 13.7 0.9%
Canadian Agri-Science Clusters (AAFC) NA NA 1.3 12.6 0.8%
Engage Grants (NSERC) NA NA 1.4 11.6 0.8%
Industrial R&D Internship Program (Tri-Council) NA 3.2 6.3 7.3 0.5%
Idea to Innovation (NSERC) 5.5 7.4 6.3 5.7 0.4%
Proof of Principle Program (CIHR) 6.6 4.4 1.8 5.4 0.4%
Industrial Postgraduate Scholarships (NSERC) 6 5.6 5.1 5.3 0.4%
Developing Innovative Agri-Products (AAFC) NA NA 1.4 5.2 0.4%
Automotive Partnership Canada (Tri-Council, CFI and NRC) NA NA 0.2 5.1 0.3%
Industrial R&D Fellowships (NSERC) 3.7 3.7 4.6 4.7 0.3%
Industry Partnered Collaborative Research Program (CIHR) 8 8.6 6.2 4.5 0.3%
Business-led Networks of Centres of Excellence Program (Tri-Council) NA 0 4 4.3 0.3%
Industrial Undergraduate Students Research Awards (NSERC) 3.4 3.4 3.3 3.9 0.3%
Applied Research and Commercialization Initiative (FedDev ON) NA NA NA 0.9 0.1%
Partnership Workshops Program (NSERC) 0.1 0.4 0.2 0.3 0.0%
Interaction Grants Program (NSERC) NA NA 0.1 0.2 0.0%
Technology Development Program (FedDev ON) NA NA NA 0 0.0%
Subtotal 497.5 598.1 832.6 901 60.4%
Direct expenditure: procurement programs
Technology Demonstration Program (DRDC) 31.2 30.1 23.4 23.5 1.6%
Space Technology Development Program (CSA) 14.6 9.7 15.3 7.7 0.5%
Subtotal 45.8 39.8 38.7 31.2 2.1%
Direct expenditure: federally performed R&D – National Research Council institutesd
Industrial Materials Institute (NRC) 25.1 34 37.1 33.8 2.3%
Institute for Aerospace Research (NRC) 36.7 28.7 33.1 30.1 2.0%
Biotechnology Research Institute (NRC) 28 27.6 32.1 27 1.8%
Institute for Research in Construction (NRC) 26.3 29.3 29.6 26.8 1.8%
Institute for Microstructural Sciences (NRC) 24.1 25.1 25.9 24.3 1.6%
Institute for Information Technology (NRC) 22.1 21 21.8 20.1 1.3%
Institute for Marine Biosciences (NRC) 16.3 18.4 18.6 16.6 1.1%
Plant Biotechnology Institute (NRC) 14.7 14.7 15.1 13.7 0.9%
Institute for Biological Sciences (NRC) 15.3 14.9 16.1 13.4 0.9%
Institute for Biodiagnostics (NRC) 13.3 13.1 15.5 13.3 0.9%
National Institute for Nanotechnology (NRC) 12.5 12.2 12.7 12.3 0.8%
Institute for Fuel Cell Innovation (NRC) 10.7 13 13.8 11.8 0.8%
Steacie Institute for Molecular Sciences (NRC) 13.1 12.1 12.8 11 0.7%
Institute for Chemical Process and Environmental Technology (NRC) 10.6 12.1 12.3 10.3 0.7%
Institute for Ocean Technology (NRC) 10.9 10.4 11 10.1 0.7%
Centre for Surface Transportation Technology (NRC) 1.3 1.6 1.9 1.1 0.1%
Canadian Hydraulics Centre (NRC) 1 0.6 0.6 0.5 0.0%
Subtotal 281.9 288.9 310.1 276.3 18.5%
Direct expenditure: federally performed R&D – other
Agricultural Bioproducts Innovation Program (AAFC) 1.7 16.6 17.2 15.4 1.0%
Canadian Agri-Science Clusters (AAFC) 0 0 0.9 6.7 0.4%
Developing Innovative Agri-Products (AAFC) 0 0 0.5 5.8 0.4%
FPInnovations – Canadian Wood Fibre Centre (NRCan) 6.4 6.4 8.2 7.9 0.5%
Subtotal 8.1 23 26.8 35.8 2.4%
Figure 3.2 The Largest Direct Expenditure Programs in the Envelope, 2010–11
Figure 3.2 The Largest Direct Expenditure Programs in the Envelope, 2010–11

1 "Programs" are broadly defined in this review and include tax credit support, direct spending programs, venture capital investments and federally performed R&D. (Return to text)

2 Program expenditure information in the database and cited throughout this report is based on figures provided in July 2011 by the departments and agencies that administer the programs within this review. Program expenditure information was available for 58 of the 60 programs. (Return to text)

3 Business Development Bank of Canada (BDC) venture capital is excluded from this total, since BDC disbursements are investments rather than expenditures. In addition, while the government capitalizes BDC, it does not provide specific funding on a regular basis for this specific activity. As of the third quarter of 2010, the BDC venture capital portfolio commitment for direct investments was about $550 million and was about $267 million for fund investments. Note as well that the federal tax credit provided to individuals for the acquisition of shares in labour-sponsored venture capital corporations costs the federal government $125 million a year. (Return to text)

4 Note that the 2010 amount for the SR&ED tax credit is a projection for the 2010 taxation year (see Department of Finance 2010b). (Return to text)