Innovation at the top

How government supports innovation, and where the smart money goes

By John Banigan

In October 1994, then finance minister Paul Martin released a document entitled “A New Framework for Economic Policy.” In the introduction to the paper, he stated: “the framework will guide what we do in the future and what we won’t do. Every decision will be consistent with the principles underlying the framework, including the difficult decisions that will be required in developing the 1995 budget.”

The central theme of the paper is that more and better jobs for Canadians can only flow from sustained economic growth. The key to stronger growth is increased productivity through more innovation and efficient combinations of people, ideas, capital and resources. Building a more productive economy requires that Canadians be equipped with the right skills; that businesses and individuals be ready to take advantage of new opportunities; and that Canada offer an attractive environment for investors and entrepreneurs, an essential condition for which to restore the government to fiscal health.

At that time, the new finance minister faced a daunting $37 billion deficit, some 7% of the Gross Domestic Product (GDP) and a net external debt to GDP ratio of 44%, the highest in the G-7 by a wide margin. Canada was also a laggard on national spending on research and development amongst the G-7, second last at only 1.5% of GDP.             

The federal government has been consistent in its adherence to these principles of increasing productivity through innovation over the past decade. The February 2004 Speech From the Throne contains similar language about the importance of innovation, even though the fiscal health of the country has significantly improved over the decade. The depth of the convictions held by our political leaders about the importance of innovation to Canada’s economic and social well being is noteworthy. Not only have they stood the test of time, but in the deficit reduction years in the mid-1990s, additional expenditure reductions were triggered to enable increased spending on innovation.

Although the government of the day was politically savvy in its support of such an initiative, Canada was in good company among developed nations. The Organization for Economic Development and Cooperation offered similar policy advice to its members at that time and continues to do so today. International comparisons of innovation performance are problematic due to structural differences in economies and differing priorities such as defence spending. Nonetheless, public investment in innovation is clearly mainstream economic thought around the industrialized world.     

The federal government supports innovation in many ways. Direct program spending on science and technology was estimated to be $7.4 billion in 2001-2002. The 2003 budget increased this by $2.1 billion on 2002-2003 and another $2.3 billion in 2003-2004. Much of the direct program spending is targeted at the university sector and delivered through the three granting councils — the Canadian Institutes for Health Research, the Natural Sciences and Engineering Research Council of Canada and the Social Sciences and Humanities Research Council of Canada. Additional research support is also delivered to the university sector through the Canada Foundation for Innovation (which supports related capital costs), Canada Research Chairs and Networks of Centres of Excellence.

The Government of Canada is itself a major R&D performer. Regulatory departments like Health, Industry, Agriculture and Agrifood, Environment and Transport conduct research in support of their compliance and product approval roles. National Defence, the Canadian Space Agency, Natural Resources Canada and the National Research Council have mission-oriented research roles, typically delivered in cooperation with the private sector. Technology developed in government laboratories is sometimes licensed to the private sector after the public policy purposes have been satisfied. The government’s track record in commercialization needs to be improved, however.

Direct support to business is less prominent than in the past, although some repayable contributions are available to firms through Technology Partnerships Canada and the Atlantic Innovation Fund. Support to small businesses, typically hands-on engineering help, is provided by the Industrial Research Assistance Program, delivered by NRC in cooperation with universities and colleges. The major instrument of support for innovation in the private sector is the Scientific Research and Experimental Development Tax Credit provisions of the Income Tax Act. Tax-based innovation incentives are generally considered to be more equitable and sector-neutral than discretionary support programs where public servants and their Ministers pick the firms and technologies to be supported. 

Grants and contributions to companies are often controversial as many commentators challenge the necessity of spending public funds in this manner. This poses a dilemma for the Canadian government; grants and research contracts are widely available from governments in other countries to their industry. Globalization trends and the integration of the North American economy force the Canadian government to take a pragmatic approach to supporting firms. Unlike the U.S., where defence spending is a powerful economic engine, the public policy rationale for direct intervention in this country is increasingly underpinned by what economists label “externalities” — i.e., benefits to society beyond the firm being supported. This can be health or environment related — for example, climate change related technology development. Another example is the enabling or spillover benefits to other sectors such as biotechnology, which is transforming not only health care but agriculture, forestry and fisheries, and ultimately some forms of manufacturing and processing.     

Skills development is another major plank in the innovation agenda of the government. Much of the programs mentioned above targeted at the university sector in fact support researchers and graduate students. The Human Resources and Skills Development Department communicates with industry sectors to identify their needs for skills upgrading and maintenance, and through that dialogue crafts tailored training initiatives with firms and educational institutions. Investing in human resources is widely accepted as good public policy as the skills are portable. As well, skills upgrading is believed to foster a learning culture and greater self-reliance amongst workers for their employability.  

Governments dedicate much of their effort to fostering innovation through indirect means as well as direct programming. But, interestingly, improving framework policies often encourages innovative companies to locate and expand in Canada by offering a more attractive investment climate. This starts with sound macro-economic policies to provide investors with a sound fiscal environment in terms of inflation, interest rates and taxation. Other framework policies are often cited as key to the investment climate, such as a transparent and predictable regulatory regime, modern competition policy and protection of intellectual property rights.

The provision of modern infrastructure is another legitimate role for government in encouraging innovation. Infrastructure investments may take a traditional form such as building roads and highways, power and energy, but building broadband connections to facilitate the internet-based economy are also an important aspect of that role.

Governments often justify these policies and expenditures based on the competitive edge they give the country, as well as the social benefits they offer. But global competition for investment by innovative firms is intense and their location decisions are frequently driven more by framework policies and infrastructure than direct government programming or procurement. It will be interesting to see how this government manages this critical aspect of innovation management.

John M Banigan is vice-president of Tactix Government Consulting Inc. He recently left the federal government after a 30-year career, latterly as ADM Industry at Industry Canada.

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