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    Innovation Canada: A Call to Action

    Review of Federal Support to Research and Development – Expert Panel Report

    Table of Contents

    1. Motivation and Mandate
    2. The Context of the Review
    3. Overview of Programs to Support Business R&D
    4. Vision and Principles
    5. Program Effectiveness
    6. Program Mix and Design
    7. Filling the Gaps
    8. Leadership for Innovation
    9. Conclusion

    About the Cover

    While the great American inventor Thomas Edison is given credit for "inventing" the light bulb, the story is really one of incremental innovation. In 1810, British chemist Humphry Davy invented the "electric arc," a precursor to the light bulb. A series of innovations followed and, by the 1860s, the race was on to develop a commercially viable light bulb. Joining this race were two Canadians, Henry Woodward, a medical student in Toronto, and Mathew Evans, a hotel keeper. In 1874, they patented a nitrogen-filled light bulb that lasted longer than others of the era. But they could not get financing for their work, and in 1878 were eclipsed by British inventor Joseph Swan and then in 1879 by Thomas Edison. Realizing the commercial viability of the light bulb, Edison was successful in obtaining major financial backers. He used these funds to continue his experiments, but also to buy out many patents, including those of Swan and of Woodward and Evans.

    As we reflected on our consultations held across Canada, during which we heard first-hand of the struggles and successes of Canadian entrepreneurs, we wondered: What if Woodward and Evans had been able to interest investors? What if they had been able to obtain financing to carry on their work and beat out Swan and Edison to be the first to commercialize the light bulb?

    This report lays the foundation for a more innovative economy that supports and welcomes research, development and commercialization. It sets out goals and recommendations to take our country forward and help unleash the potential of entrepreneurs from all over Canada. Our hope is that the next Woodwards and Evanses will have all that they need to bring their ideas to the world and leave a lasting impact for future generations.

    For more information, see: Library and Archives Canada, "Patent no. 3738. Filing year 1874".

    Acknowledgements

    Secretariat

    The Panel was capably supported in its work by a secretariat comprised of officials from the Government of Canada departments with responsibilities for many of the programs within the scope of the review. These officials had expertise in aspects of R&D and innovation, and were seconded to the secretariat for the duration of the review. The secretariat was responsible for a range of activities in support of the Panel, such as providing strategic advice and analysis in support of Panel deliberations, organizing the Panel's consultations, managing its online written submissions process, liaising with the 17 Government of Canada departments and other entities implicated in the review, coordinating the travel of Panel members, coordinating the Panel's program of research with external experts, and managing the review's logistics, schedule and finances.

    Iain Stewart was the secretary to the Panel and head of the secretariat, and was supported by Samuel Millar, the secretariat's executive director. John Lester, Mary Preville and Mélanie Robert served as the secretariat's directors of research, program assessment, and consultations and communications, respectively. Sarah Charette, David Côté, Thomas Ferguson, Alexandre Hamel and Brandon La Carte served as policy advisers. Ana Fierro, Gail Gaudreau and Katherine O'Rourke supported the Panel's administration and logistics. Gladys Fisher provided support in financial administration and contracting.

    Special Advisers

    The Panel wishes to give its thanks to the following special advisers:

    • Peter Nicholson, who wrote the report with David Côté of the secretariat, under the direction of the Panel
    • Andrei Sulzenko, for his work supporting us on procurement advice
    • Paul Berg Dick, for his work supporting our understanding of the Scientific Research and Experimental Development tax credit.

    Other Important Acknowledgements

    The Panel also wishes to thank and acknowledge the many other individuals and organizations that contributed to the review.

    The regional offices of Industry Canada and all of the regional development agencies were instrumental in assisting in the domestic consultations. Similarly, the Canadian missions to Canberra, Sydney, Singapore, Berlin, Munich, London, the Organisation for Economic Co-operation and Development (OECD), New York and Washington provided essential support to the Panel's international fact-finding missions.

    The governments of Australia, Finland, Germany, Singapore, the United Kingdom and the United States contributed important information throughout the international consultation process.

    The Panel would also like to recognize various international organizations for sharing their research and resources over the course of the review, including the Information Technology & Innovation Foundation, Germany's Fraunhofer-Gesellschaft, the US National Academy of Sciences, the OECD, Partnership for New York City, Universities Australia, and the Urban Institute and Brookings Institution's Tax Policy Center.

    In addition, the Panel wishes to acknowledge a range of experts who conducted research on its behalf: Malcolm Bernard, Dan Ciuriak, Ian Currie, John Curtis, Gilles Durué, EKOS Research Associates Inc., Ron Freedman of The Impact Group, Fred Gault, Pat Goodman, Hickling Arthurs Low Corporation, Donald McFetridge, Marshall Moffat, Jacek Warda, Karen Wensley and Science-Metrix.

    Lastly, the Panel would like to thank Industry Canada and the Department of Finance Canada in particular for the data, information, research, analyses and other resources made freely available to the Panel, and the 17 federal departments and agencies for providing time and information in support of our learning about their important programs and initiatives.

    For a full list of all interlocutors who contributed views and expertise to the review, please visit the Panel's website at www.rd-review.ca.

    List of Figures

    1.1
    Canadian Business Expenditure on Research and Development (BERD), 1985–2010 (billions of 2000 constant dollars)
    2.1
    Relative Level of Labour Productivity in the Business Sector, 1947–2009 (Canada as a percentage of the United States)
    2.2
    Sources of Canada–US Gap in Average Annual Labour Productivity Growth (differences in percentage growth rates: Canada minus the US)
    2.3
    Provincial BERD Intensities in Canada, 2008 (business expenditure on R&D as a percentage of provincial GDP)
    2.4
    A Firm-Centric Model of the Business Innovation Process
    2.5
    R&D Expenditure in Canada, 1981–2009 (percentage of GDP)
    2.6
    The Innovation Ecosystem: Converting "Research" into "Innovation"
    2.7
    ICT Investment per Worker in the Business Sector, Canada as a Proportion of the United States, 1987–2009 (current US dollars)
    3.1
    Total Envelope Expenditure ($ million, excluding federal program administration costs)
    3.2
    The Largest Direct Expenditure Programs in the Envelope, 2010–11
    3.3
    Program Envelope, by Form of Support, 2010–11
    3.4
    Envelope Expenditure, by Type of Recipient, Total Direct Expenditure, 2010–11, and SR&ED Tax Credit, 2007
    3.5
    Sectoral Distribution of Direct and Indirect (SR&ED) Expenditure
    5.1
    Types of R&D Performers Employed by Firm
    5.2
    Reasons for Not Participating in R&D Programs
    5.3
    Program from Which Funding Received
    5.4
    Satisfaction with Various Aspects of the Program
    5.5
    Direct Spending Portion of the Envelope, by Activity Supported, 2010–11
    5.6
    Performance Indicators for Comparison of Categories of Like Forms of R&D Support
    6.1
    Direct and Indirect Government Support of Business R&D, 2008 (except as noted) (percentage of GDP)
    6.2
    Tax Subsidy Rates on Investment in R&D for Selected Countries, 2009
    6.3
    Tax Expenditures, by Type of Corporation
    6.4
    Federal and Provincial Tax Credit Rates (%)
    7.1
    Funding Chain by Stage of Development and Size of Investment
    7.2
    Many Gaps Have Resulted in a "Vicious" Cycle in the Canadian Venture Capital Industry
    7.3
    Proposal to Support High-Growth Firms
    8.1
    The Government of Canada's Innovation Machinery

    List of Boxes

    2.1
    Types of Innovation and Their Support by Government
    2.2
    Defining R&D
    2.3
    International Comparisons of R&D Spending
    2.4
    Where Do Businesses Get Their Ideas for Innovation?
    3.1
    Expenditure Reviewed by the Panel
    5.1
    Operating Principles of the Proposed Industrial Research and Innovation Council
    6.1
    Direct Support Versus Indirect Support
    6.2
    Key Parameters of the SR&ED Tax Incentive Program
    6.3
    Stacking of R&D Support
    6.4
    Claiming Overhead Expenses through the SR&ED Program
    7.1
    Use of Procurement to Support SME Innovation
    7.2
    Canadian Innovation Commercialization Program (CICP)
    7.3
    Germany's Fraunhofer-Gesellschaft
    7.4
    Institutes of the National Research Council within the Review
    7.5
    Sectoral Research and Innovation Strategies
    8.1
    Innovation Policy Advisory Bodies

    List of Acronyms

    AAFC
    Agriculture and Agri-Food Canada
    ACOA
    Atlantic Canada Opportunities Agency
    BDC
    Business Development Bank of Canada
    BERD
    business expenditure on research and development
    BIC
    proposed Business Innovation Committee
    CCA
    Council of Canadian Academies
    CCPC
    Canadian-controlled private corporation
    CED-Q
    Canada Economic Development for Quebec Regions
    CICP
    Canadian Innovation Commercialization Program
    CIHR
    Canadian Institutes of Health Research
    CRA
    Canada Revenue Agency
    CSA
    Canadian Space Agency
    CSLS
    Centre for the Study of Living Standards
    CVCA
    Canada's Venture Capital & Private Equity Association
    DRDC
    Defence Research and Development Canada
    EMS
    Expenditure Management System
    FedDev ON
    Federal Economic Development Agency for Southern Ontario
    FedNor
    Federal Economic Development Agency for Northern Ontario
    FIN
    Department of Finance Canada
    GDP
    gross domestic product
    GERD
    gross domestic expenditure on research and development
    GOVERD
    government intramural expenditure on research and development
    HERD
    higher education expenditure on research and development
    IAC
    proposed Innovation Advisory Committee
    IC
    Industry Canada
    ICT
    information and communication technologies
    IP
    intellectual property
    IPR
    intellectual property right
    IRAP
    Industrial Research Assistance Program
    IRB
    Industrial and Regional Benefits
    IRIC
    proposed Industrial Research and Innovation Council
    LSVCF
    labour-sponsored venture capital fund
    MFP
    multifactor productivity
    NRC
    National Research Council Canada
    NRCan
    Natural Resources Canada
    NSERC
    Natural Sciences and Engineering Research Council
    OECD
    Organisation for Economic Co-operation and Development
    R&D
    research and development
    RDA
    regional development agency
    S&T
    science and technology
    SADI
    Strategic Aerospace and Defence Initiative
    SBIC
    Small Business Investment Company program (US)
    SBIR
    Small Business Innovation and Research program (US)
    SDTC
    Sustainable Development Technology Canada
    SME
    small and medium-sized enterprise
    SR&ED
    Scientific Research and Experimental Development
    SRC
    proposed Science and Research Committee
    SSHRC
    Social Sciences and Humanities Research Council
    SSTI
    State Science & Technology Institute
    STIC
    Science, Technology and Innovation Council
    Tri-Council
    the three granting councils: NSERC, SSHRC and CIHR
    TSB
    Technology Strategy Board (UK)
    UK
    United Kingdom
    US
    United States
    VC
    venture capital
    WD
    Western Economic Diversification Canada

    List of Recommendations

    Recommendation 1
    Create an Industrial Research and Innovation Council (IRIC), with a clear business innovation mandate (including delivery of business-facing innovation programs, development of a business innovation talent strategy, and other duties over time), and enhance the impact of programs through consolidation and improved whole-of-government evaluation.

    Recommendation 2
    Simplify the Scientific Research and Experimental Development (SR&ED) program by basing the tax credit for small and medium-sized enterprises (SMEs) on labour-related costs. Redeploy funds from the tax credit to a more complete set of direct support initiatives to help SMEs grow into larger, competitive firms.

    Recommendation 3
    Make business innovation one of the core objectives of procurement, with the supporting initiatives to achieve this objective.

    Recommendation 4
    Transform the institutes of the National Research Council (NRC) into a constellation of large-scale, sectoral collaborative R&D centres involving business, the university sector and the provinces, while transferring NRC public policy-related research activity to the appropriate federal agencies.

    Recommendation 5
    Help high-growth innovative firms access the risk capital they need through the establishment of new funds where gaps exist.

    Recommendation 6
    Establish a clear federal voice for innovation, and engage in a dialogue with the provinces to improve coordination and impact.