Canadian innovation low now

TORONTO—There is this persistent Canadian idea that we are poised to become one of the top five innovation nations in the world. When he was industry minister, Navdeep Bains boasted his policies would accomplish this. His successor, François-Philippe Champagne, talks in similar boastful terms.

Yet, we seem stuck much lower in global innovation rankings despite the accomplishments we do have, and the efforts of Canadian talent and entrepreneurs to do better. It will take much, much more than our politicians and policymakers have ever acknowledged to get even close.

In one measure of innovation potential—spending on research and development as a share of GDP—we don’t even make it into the top 15 (we are 19th). And in the World Intellectual Property Organization’s global innovation ranking we are 15th. We are far from being a world leader. But this, ultimately, is about our standard of living.

To have been among the top five nations in R&D in 2021, for example, we would have had to double spending from more than $46.9-billion to more than $90-billion. Since business accounts for roughly half of the total R&D spending, it would have had to boost spending by nearly $22-billion to about $44-billion. Where would the money come from? And equally important: where would we have found the scientists and engineers to carry out this level of R&D, or the Canadian companies to commercialize the R&D results? These are still the questions?

But no one, it seems, has actually calculated what it would take to make Canada a world leader in innovation.

So where to start? First, we need to much better understand the world in which we operate. In their 2018 book, Capitalism Without Capital, economists Jonathan Haskel and Stian Westlake argue that we are in a new world where investments in intangibles—such as R&D, intellectual property, software, branding, business organization, and skills—are the big drivers of economic growth.

Yet much of our policy seems to be still based on supports for an industrial economy built on tangibles—notably buildings and machinery—hence the continuing call for lower corporate taxes and increased incentives for investment in tangibles. Wulong Gu argues in a recent Statistics Canada paper, however, that business tax cuts of the Chrétien, Harper, and Trudeau years do not seem to have done much as investment per worker actually declined. “The decline in business tax rates over this period should have increased business investment,” Gu says. But it didn’t.

We still need tangibles investments, but as Haskel and Westlake make clear, intangibles investment will be the driver. But “there is something fundamentally different about intangible investment,” and this affects innovation and growth, the role of management, and financial and policy reform. Investment drives economic growth. However, investment in intangibles requires new institutions and incentives.

To set the basis for a coherent and sustainable innovation strategy we need a new independent institution—a Productivity Commission or Economic Council—to provide the framework, conduct studies on aspects of innovation for better policy, and track progress.

Next, we need to examine the financing needs of an intangibles economy—they are different from the financing needs of an economy based on tangibles. This means greater reliance on equity rather than debt financing for young companies with access to patient equity capital so that they have the opportunity to scale up and grow into significant Canadian-owned corporations for future prosperity. We have lots of money in Canada—in our pension funds, for example. But today we are major exporters of capital rather than investing more at home. So what incentives, institutions, investment packages do we need to change this? This is a major challenge if we are to commercialize Canadian innovations, and to build large companies from small ones.

Canada provides tax incentives and subsidies to help companies develop intellectual property, spending close to $5-billion a year in R&D tax incentives alone. But more is needed to ensure this funding benefits mainly domestic firms. Today, much of it benefits business in other countries. Industry Canada official Mark Schaan has acknowledged that while we don’t not know the percentage of IP developed in Canada by foreign multinational enterprises, “it could be significant considering the strong presence of MNEs in the Canadian market, and their extensive research activity.”

Paradoxically, while these Canadian tax policies are hugely useful to foreign MNEs, they actually limit the investment and growth of our leading-edge tech companies.

The Council of Canadian Innovators, which represents Canada’s high-tech firms, argues the existing tax incentive for R&D—the Scientific Research and Experimental Development tax credit— provides through the 35 per cent refundable tax credit for small Canadian-controlled companies is an important source of capital. But Canada discourages the scaling up of these same homegrown businesses by progressively reducing the size of the credit and cancelling it altogether when taxable capital reaches just $50-million.

As a first step, the council says, it should be boosted to $70-million, something Finance Minister Chrystia Freeland could easily do in her April 16 budget. Smaller Canadian firms urgently need more R&D capital if they are to stay here and scale up. The same tax credit should also help fund continuing R&D, since technology improvements must continue, and help Canadian companies gain patent protection and the freedom to operate abroad by owning or licensing the intellectual property that makes their exports unique and hence of higher value.

Canadian ownership needs to have a much higher priority. Ownership matters. Our open-door policy on foreign takeovers of our best tech-based startups means that we are simply creating seed corn for international corporations with the main benefits realized abroad.

There is something else that Freeland should do in her forthcoming budget: raise the stipends for PhD candidates and post-doctoral researchers in our universities and research hospitals. These are the people who will make needed new discoveries, and help commercialize them. But low stipends mean some of our best, emerging researchers leave Canada for better careers elsewhere while we fail to attract foreign candidates here. These stipends have not been raised since 1993. We need talented people if we are to build the talent base for future innovation

So these are some first steps for a more successful future Canada. We don’t really have a choice. We have to become a nation of innovators. We are not today, so it’s time to get serious.