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SR&ED and Innovation in Canada

SR&ED and Innovation in Canada

Canada’s innovation came under the microscope in a 2012 Library of Parliament report called The Business of Innovation in Canada: Challenges and ResponsesThe background paper looks at the state of innovation in Canada and makes suggestions for how to improve it.

Although the document makes scarce mention of SR&ED, tax credits are a part of innovation in Canada. There is a debate brewing between public intellectuals as to whether government is qualified enough to pick appropriate industries for which to provide tax credits, and if tax credits do generate jobs.

On the other hand, though, every dollar a company does not need to spend is money that it can instead use for the business. For firms, SR&ED and other tax credits can provide badly needed support as well as an incentive to spend their money on developing new technology that will improve the Canadian economy. SR&ED innovation in Canada is necessary for businesses.

This article summarizes the Library of Parliament document below.

How Canada is Performing

Canada is not doing well when compared with the competition, the report states.

“Unfortunately, for decades, Canada has lagged behind its major trading partners (e.g., the United States) in this area; specifically, at 0.6%, Canada’s labour productivity growth was less than half of the OECD average of 1.5% for the years 2000 to 2009,” it says.

“If the challenge of poor productivity growth is not addressed, Canada’s future economic growth and relatively high standard of living will be in jeopardy. Hence, innovation is a very important public policy concern, and in recent years, the Federal government has placed increased focus on trying to improve Canada’s innovation performance.”

Measuring Sticks

The report cautions that it is difficult to measure innovation across different jurisdictions as there is no one accepted measuring stick to chart how well it is doing. With that being said, there are certain yardsticks that are useful when performing international comparisons. These include the following:

  • Percentage of country’s gross domestic product dedicated to research and development (R&D);
  • Value of total business investment in R&D as a percentage of GDP;
  • Investment in information and communications technology as a percentage of total commercial capital investment;
  • Percentage of high and medium-high technology patents as a part of all patenting activity.

Statistics quoted in the article show that Canada is performing below the OECD average in the first three metrics, but above average when it comes to patents.

Minding the Gap

One major step to addressing the problem came from Canada’s 2007 Science and Technology Strategy, according to the report. In part, the strategy says that “Canada can and must do more to turn our ideas into innovations that provide solutions to environmental, health and other important social challenges, and to improve our economic competitiveness.”

Policy goals of the strategy include transforming inventions into products, fostering Canada’s knowledge sector and making the country attractive for people to settle here and to bring their skills over as well. As of the time the report was issued in 2012, the government had spent about $8 billion on these strategies since 2006.

Recent Reports on Canada’s Competitiveness

The Library of Canada paper subsequently published the results of several reports intended to examine Canada’s competitiveness, and how to make innovation more effective in the country in the years to come. Some of the findings include:

  • Report of the Science and Technology Innovation Council (2010). Canada is lagging in research and development spending worldwide and is worse in its performance than in 2006. Canadian businesses spent 50% less in information and communications technology, and 75% less in machinery and equipment, than the United States between 2000 and 2007, but the report mentions there are several areas where Canada spends above the average (such as pulp and paper, or wholesale and retail trade.) Another bright spot: the government’s SR&ED program (at $4 billion in expenditures annually) is among the most generous of its type worldwide, the council stated. The report recommended Canadian companies emphasize innovation in their business plans, and that the Canadian government must think the same way when formulating policy.
  • Council of Canadian Academies: Report of the Expert Panel on Business Innovation (2009). Said Canada’s productivity was a “business innovation problem”. Canada is more focused on “upstream” economic activity such as processing raw material, rather than “downstream” work such as assembly and manufacturing. Further, Canada’s marketplace is too small for its businesses to increase innovation given the population and large landmass. The report recommends new sources of venture financing and innovation commercialization, and working to strengthen business managers’ knowledge of research. On a side note, the report also pays tribute to the strength of Canada’s regional “clusters” of industry, but warns there are not enough of those to make a difference on Canada’s innovation levels yet.
  • Report of the Expert Panel on the Review of Federal Support to Research and Development (2011). Better known as the Jenkins Report, it criticized Canada’s “subpar productivity growth”, which it says is due to “relatively weak business innovation.” Its recommendations included simplifying SR&ED to include labour costs only; creating an Industrial Research and Innovation Council by putting 60 federal business innovation programs under one umbrella; and changing the National Research Council to a collection of non-profit centres that work with businesses, provinces and universities in specific innovation areas.

Federal Support of Innovation

The report noted that Federal spending on science and technology has increased 47% between fiscal years 1999-2000 and 2009-2010, even adjusting for inflation.

In Budget 2012 alone, the government has committed to spend more than $900 million in areas such as venture capital funding, forestry innovation and business-focused partnerships with organizations such as Genome Canada and the Natural Sciences and Engineering Research Council.

In the same budget, SR&ED was announced to have changes such as improving the predictability of funding for applicants, and removing capital as an eligible expense.

Science and technology spending overall will fall to $11.3 billion in 2011-12, down $600 million from the last year. The difference is mainly due to the end of stimulus spending, the report stated.

The report concluded by saying these Federal government initiatives could help Canada’s innovation, especially in areas where academic research can be transformed into innovative products. The forestry sector is one area where this concept has seen success, the report stated, particularly by putting innovation first “earlier in the value chain.” Further specifics were not provided.

This article is based upon a Library of Parliament report: The Business of Innovation in Canada: Challenges and Responses. The report was written by Dillan Theckedath, who is with the Industry, Infrastructure and Resources Division of the Parliamentary Information and Research Service.

 

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