Ottawa's innovation shake up off to rocky start

OTTAWA: Ottawa's latest and most comprehensive answer to a question that has bedevilled governments for years—why aren't Canadian firms more innovative?—is already off to a rocky start.

The latest federal budget devotes 21 pages to the issue of innovation and productivity, describing the failure in stark terms and proposing a slew of changes that refocuses the venerable National Research Council and reshuffles how about $12 billion in annual research and development funds are doled out.

But corporate Canada, which will ultimately determine if the fix will work, is expressing doubt and bewilderment.

"The proof is in the pudding, but the changes to the Scientific Research and Experimental Development (SRED) program is actually going to erode investment for larger companies," said Jayson Myers, head of the Canadian Manufacturers and Exporters group.

The Canadian Council of Chief Executives, representing the country's biggest firms, is still studying the implications, but issued a quick assessment that the SRED proposal "may reduce Canada's attractiveness as a location for research and development."

The issue is at the heart of whether Canada will succeed in the future or not, says Anne Golden, president of the Conference Board of Canada, an Ottawa-based economic research group that has established a multi-year innovation centre to study the complex issue.

Innovation is essentially being seen as the process of generating new ideas to create new marketable products or systems to improve productivity. Innovation is generally considered a key to improving productivity, which is the ability to increase the level of output achieved with the available resources.

"We're very good at coming up with good ideas, where we are not good is at cashing in on our creativity," she said. "Everybody agrees that SRED was not working.''

But Myers says the proposals to fix the program make no sense. The budget cut the tax credit for investment to 15% from 20, disqualifies spending on research-related equipment and facilities and diminishes inducements in other areas. The cumulative total will cost larger firms $1.4 billion over three years in tax credits, he says.

The problem, says Myers, is that as dismal as private sector investment in R&D has been in Canada, one of the reasons it wasn't worse can be traced to the program Ottawa is cutting.

The changes will help smaller firms with profits of less than $800,000 a year, and start ups, since most of that $1.4 billion will be reshuffled to support risky start-ups and direct grants to small and medium-sized firms through the Industrial Research Assistance Program.

"It's going to help smaller companies and start-ups, but most of the R&D in Canada is done by bigger companies, or even mid-sized existing companies," he explained. "I know what the government is thinking. These bigger companies will make the investments anyway and that's true. The question is will they make them in Canada? These companies can invest anywhere."

Responding to the growing push-back, Finance Minister Jim Flaherty defended the approach Friday, saying the government had poured billions (about $3.5 billion annually) in SRED and the "results have been less than stellar."

"We're taking some of the SRED resources and using it in a direct grant program particularly for smaller businesses. There will be more to come on that ... in next few months," he said.

Economist Jack Mintz also doubts the wisdom of the move, saying it discriminates against companies whose R&D requires large investments in capital, such as labs or heavy equipment. This will particularly impact manufacturers or the aerospace industry which, in Canada, includes Bombardier Inc.

Mintz, who is chair at the School of Public Policy in Calgary, also objects to smaller firms getting a larger credit—35%—wondering why Ottawa feels R&D at small firms is more valuable than at larger. It's not, he says.

But after calling for Ottawa to act for years, Mintz and many others are reluctant to blast the government for at least trying to move the goal posts on the difficult issue.

©The Canadian Press