The IPL newsletter: Volume 12, Issue 246

INTRODUCTION

This newsletter is published by The Innovation Policy Lab at the Munk School of Global Affairs, University of Toronto, and sponsored by the Ministry of Research and Innovation. The views and ideas expressed in this newsletter do not necessarily reflect the views and policies of the Ontario Government.

Growing the Economy from the Bottom Up

Bruce Katz, The Brookings Institution
In the absence of federal leadership on the economy, a new wave of innovation in economic development is emerging at the state and regional scale. New York State, under the leadership of Governor Andrew Cuomo, is at the vanguard of this encouraging movement.  For the past four months, 10 regional councils in New York — public-private partnerships of corporate, civic, university, labor, environmental and political leaders — crafted strategic plans for their regions to compete for $200 million in state funding.  I participated on a 5-member Strategic Plan Review Committee to provide an independent assessment of each plan according to a series of published and well publicized criteria. Last week, the state concluded this intensive competition by selecting four “best in class” plans. Additional resources for particular projects in other regions were also allocated via a consolidated funding application. The New York Regional Economic Development Council initiative has serious implications for a state that has traditionally had prescriptive, fragmented and rigid economic development policy and practice.

Canada as a Competitive Innovation Nation: What Needs to be Done

CATAAlliance
It is commonly considered that Canada has a critical “Innovation Gap” and that other countries are more effectively pouring funds into leveraging innovation to the advantage of their respective economies, through both direct and indirect interventions. Both the World Economic Forum and the Conference Board of Canada place Canada well down the list in terms of being an “innovation economy”. But is this perception really correct?

Fundamentally, CATA considers innovation to be a natural resource that needs to be developed, harvested, used and commercialized for economic and social benefits. The more we process this raw natural resource into finished products and services and the more we commercialize them globally, the better will be Canada’s position as a competitive Innovation Nation in the world.

This White Paper argues that Canada has traditionally focused on the “R” side of research and technology – and not enough on creating environments that promote and reward commercialization successes. Specific proposals for new initiatives aimed at improving the investment climate for commercialization and the support for commercialization are outlined as part of boosting Canada’s innovation & competiveness rankings as an Innovation Nation. Of mission critical importance, is the identification of efficiency gains that can be made to the Scientific Research & Experimental Development Program.  Not only could the effectiveness of the tax credits as incentives be significantly improved, but perhaps a billion dollars or more of the current spending on SR&ED could be freed up for redistribution.

CATA’S SUGGESTIONS

Are there significant refinements that can be made to SR&ED which do not “throw the baby out with the bath water”? The paper thinks so, but needsconvincing to believe that simply going to a labour based approach as proposed in the Jenkins report, along with decreasing the refundable portion of the credit over time are all that is needed to free up the monies and make the SR&ED incentives a truly effective instrument. Without new sources of financing, reducing the refundable portion for new technology intensive companies in the current financing environment will be counterproductive, because now they rely heavily on this aspect of SR&ED to help fund initial product development. On the other hand, moving to labour based claims could be a start to simplifying administration, but we are unsure that much will be gained.

1. Eliminate retrospective SR&ED claims and look for a 20% to 30% efficiency gainA much more efficient SR&ED Program should and can be achieved than that envisaged by the Jenkins Panel by eliminating retrospective claims. Almost one-third of the claims received by the CRA in any given year are retrospective claims being filed for previous years. A significant portion of these claims appear to be of a speculative nature and, while providing windfall revenues to businesses and consultants when their claims are successful, they are, at most, of questionable value as incentives for the claimed SR&ED. In order to introduce more discipline into the SR&ED system, CATA suggests looking at the elimination of retrospective claims. The development and filing of claims should be more closely linked to the SR&ED projects or SR&ED programs. Companies could be required to file an initial submission when their projects or programs are conceived or started (or shortly thereafter) and to submit annual updates with their year end returns.

   CATA would like to see tabled as soon as possible a careful analysis of:

   • the opportunities for refining and better targeting SR&ED beyond the labour based proposals;
   • what savings can be gained from them to start a process of SR&ED refinement this year; and
   • what other significant efficiency gains might also be identified to make the SR&ED Program truly effective.

   These efficiency gains in the SR&ED Program could be tied into a common service platform for federal business innovation support programs such as the IRIC proposed by the Jenkins report and redirected to other support programs for innovation.

2. Implement the Industrial Research and Innovation Council (IRIC) proposed by the Jenkins report

   The Jenkins report proposes creating an Industrial Research and Innovation Council (IRIC) as an “’arms length’ agency… [to] become the common service platform for all appropriate federal business innovation support programs”, reporting to Parliament through the proposed Minister for Innovation. CATA strongly supports this concept. This is a sound approach as long as there is strong authoritative business people involved with its leadership. The IRIC must be lithe, responsive, and accountable for it to be successful – not just a new bureaucracy, and its accountability should be based on true economic values.

   Regardless of whether the proposed council is created, CATA strongly recommends that the Government move to a common service platform for all appropriate federal business innovation support programs, including the SR&ED Program, to rationalize services and thereby reducing government and private sector costs. Eliminating existing overlapping / duplicative / repetitive government administration and private sector user application and reporting requirements should result in significant efficiency gains and savings. Savings should be formally identified and reinvested in efficient and effective support for innovation.

   Specifically, with respect to SR&ED, at a minimum, the council should have overall responsibility for:

   • in conjunction with the Department of Finance Canada, maximizing the effectiveness of the SR&ED incentives, as well as the effectiveness of other indirect mechanisms;
   • evaluating the results and making appropriate changes to see that the SR&ED credits deliver the intended economic benefits cost effectively; and
   • determining what is eligible SR&ED and what is included in the work elements.
3. Address SR&ED administration issues, simplifying SR&ED

   We agree with the Jenkins report that simplifying the SR&ED Program and lowering the related overheads incurred by the Government and users of these credits is a must. However, simply moving to a labour based approach to the tax credits cannot be effective unless the issues related to:

   • the determination of what is SR&ED; and
   • what is eligible work associated with the SR&ED

   CATA believes that the CRA’s de facto re-orientation of Canada’s largest program of support for innovation needs to be corrected immediately so that the full spectrum of technological based advancements is supported and that SR&ED can be effectively claimed when it is conducted in conjunction with the highly integrated commercially-oriented development efforts that Canadian companies need to apply in order to be competitive and efficient, and respond to world markets.

4. Rebalancing Canada’s indirect support

   CATA found support for its views in the arguments presented in the Mowat Centre study and C.D. Howe commentary about the importance of rebalancing the indirect tax based mechanism to better achieve successful commercialization in Canada. Further, these reports imply that there needs to be a much closer look at how indirect support can be more effective than has yet occurred and how the monies can be better spent. Both reports challenge the status quo of the SR&ED Program and imply that improvements can be made. The Jenkins report notes that in 2007 there was an internal cost-benefit analysis of the SR&ED program carried out. However, it has been many years since there was a full review of the SR&ED Program, which is clearly required at this point. Given that the Jenkins Panel’s prescriptions in this area were very broad, we strongly encourage the Government to work with independent leading tax experts and table a commitment with the 2012 Budget on how to most effectively shape our indirect support to business, including steps to provide a better balance between direct and indirect support. The target should be to provide environments that foster successful Canadian commercialization efforts and the retention of the results within Canada, adequately supporting innovative SMEs.

   We again suggest that the target should be a 20% to 30% efficiency gain in SR&ED, as described in suggestion # 1 above, and the more effective redistribution of these monies. In respect to indirect support and its redistribution, CATA finds the concept of a Patent Box to be very appealing. This approach received no attention in the Jenkins Panel’s report.CATA recommends that the Government look closely not only at this concept, but also at the possibility of extending this approach to a Commercialization Box and that consideration be given to providing a commercialization tax credit for activities carried out in the box.

5. Enhance IRAP, as recommended by the Jenkins report

   The Industrial Research Assistance Program (IRAP) is one of the most industry-valued federal programs. CATA strongly endorses the Jenkins Panel’s recommendation that IRAP could be enhanced to support a greater spectrum of innovation and commercialization activities. The IRAP Program should be adjusted to catalyze competitiveness through strategic “smart support” for enhanced business collaboration through partnerships and alliances complementing the native strengths of typical Canadian SME enterprises. The key should be responsiveness and flexibility with a focus on demonstrable, successful leveraging of technology. Accountability should be judged on tangible industrial measures like start-up tech company survival rates after three and five years, number of new products and services brought to market annually by companies that IRAP supported, and overall ROI after three or five years.

6. Create the “Commercialization Research and Preparedness Assistance (CRPA)” Program

   CATA further recommends that consideration be given to creating a complementary program to IRAP to specifically promote commercialization efforts. A company’s success in the marketplace is predicated both on having a product ready and acceptable to the market and on being fully prepared for its commercialization efforts in the market. Traditionally, most attention in Canadian government support has been given to technology and product readiness, with scant attention being paid to the fact that without proper commercialization strengths a large number of Canadian start-ups have died or have been acquired for a pittance by foreign businesses which then proceeded to harvest the economic benefits for the innovations initially developed by Canadian companies.

   Focused on what is normally termed the “pre-commercial” phase, before a new product is broadly available on the market, the “Commercialization Research and Preparedness Assistance (CRPA) Program would provide support to companies for innovation in commercialization and market preparedness measures to achieve higher levels of business success. Whereas the existing Industrial Research Assistance program (IRAP) would be focused on helping companies achieve a higher level of technology and management readiness, the CRPA Program would help them achieve commercial readiness for actual business success. In this way, the focus of IRAP would not be diluted.

7. Government Procurement of Canadian Innovations – make CICP permanent and enhanced

   CATA strongly supports the Jenkins Panel’s recommendation on making the Canadian Innovation Commercialization Program (CICP) a permanent one and having it enhanced manifold to reap the potentially immense benefits of such a program.

   The CICP program should be focused on enhancing Canadian industry competitiveness through more extensive federal government purchases of Canadian innovations and the directed provision of lead customer support and commercial references to innovative Canadian companies. However, unlike the present “pilot” program which invites all companies with any new pre-commercial product to apply for its innovation to be trialled within government, the CICP should catalyze Canadian competitiveness through “smart assistance” by focusing on addressing the identified future needs of government agencies and departments through closer collaboration with federal agencies and industry associations.

   Accountability should be measured on the basis of tangible industrial values, e.g., business viability 3 years after CICP purchase, along with demonstrated success in meeting client (government agency) needs.

8. Risk capital – create an effective financing ecosystem supporting the full spectrum of growth in Canada

   CATA is pleased that the Jenkins Panel has recognized the seriousness of this problem. Essentially, the “financing ecosystem” needed for the development and survival of technology firms in Canada is broken, and urgent action is required. The Jenkins Panel’s report offers two possible approaches. We believe there are other opportunities as well to address this challenge.

   Through this combination of:

   • encouraging private investors and experienced Angel investors to put their money and talent into the early start-up phase for such companies, and
   • creating new VC Funds to provide for the more costly later stage investments tech companies require to reach global stature and profitability, Canadian firms will once again have a reasonable prospect of success.

   The result would be a much more complete, and CATA believes, effective and competitive financing ecosystem.

9. Create vibrant, collaborative, synergistic environments for growth

   The CATA study on Commercialization of Innovations highlights the fact that Canada suffers from a weak culture of collaboration. Resolving this is of paramount importance, especially for small- and mid-size enterprises which cannot afford to hire all the industrial and technical expertise, the managerial, operational and marketing skills, and the market connections to customers necessary for competitiveness in the global market.

   In today’s globalized, competitive marketplace, Canadian firms must collaborate with effective partners to survive and become viable businesses with chances of winning leading positions in the market. Canadian companies must think global while acting locally in approaching specific geographic and political territories with the appropriate partners for local success. The Government needs to encourage not only the usual technical collaboration but also the market-oriented collaboration through a variety of direct and indirect means. Supporting industry “clusters” that work together and with the NRC institutes to share technical experience and tools is certainly a positive step, but not sufficient for achieving the necessary levels of market penetration.

   CATA believes that market-oriented collaborations models should be evaluated and measures should be taken to incent more companies in Canada to act as anchor companies and to encourage more SME companies to cluster around large anchor ones with good reach into the global markets. CATA proposes that an expert industry-government panel be created to research and propose the most appropriate direct and indirect incentives for enhancing effective collaborations among Canadian companies to promote commercialization results and speedier industrial developments.

10. Better leveraging of Canada’s academic and research institutions to promote economic growth

    While Canada has emphasized unbridled academic research, some other countries have adopted more “applied” research programs in direct support of strategic industrial initiatives. This different focus has been associated with significant success in economic and social terms, and contributed to these countries’ advancement in their global level of competitiveness.

    CATA is a strong supporter of continued Canadian efforts in research, provided a greater portion of academic research is contingent on linkages with industrial objectives where the pull of the business community is significantly manifested. In this respect, the approach proposed by the Jenkins Panel of separating from the National Research Council a number of its existing technology institutes into a constellation of large-scale, sectoral, collaborative R&D centres involving business, the university sector and the provinces is an important proposal. Done right, this refocusing could greatly assist in achieving a closer linkage and synergism of research with industrial needs. This refocusing would require careful study and implementation to ensure the valuable contributions of the existing institutes that may not be consistent with a more commercially focused approach are protected and transferred to other institutions.

11. Educate for business success

    Of utmost importance must be the drive towards a better education for business success in Canada. Business management, including marketing, project management and customer relations should be made a compulsory subject for all Science and Technology students, and be made available as an option to all other students in Canadian universities and colleges. Studnets should be enabled and encouraged to gather industry understanding and gain work experience.

    In general, the Canadian education system must be adjusted to nurture economic value-creation competencies (business, marketing, sales and relationships) from early years in school and throughout university studies, and thus build confidence, a spirit of leadership, and competitiveness in the future generation of Canadians.