Budget to promote innovation

Policy-makers have talked about business innovation endlessly — now the Harper government says it is determined to do something about it.

OTTAWA — Policy-makers have talked about business innovation endlessly — now the Harper government says it is determined to do something about it.

Prime Minister Stephen Harper’s pledge last week to make innovation a key element of the upcoming budget opens the window to the first comprehensive rethink in many years on the way Ottawa doles out more than $6 billion to stimulate research and development, say experts.

And depending on how seriously Harper and Finance Minister Jim Flaherty take to the task, they add, the project has the potential to achieve the lofty goal the prime minister is assigning it: sustaining the economy as the workforce ages and shrinks.

“Canada’s choice will be, with clarity and urgency, to seize and to master our future, to be a model of confidence, growth and prosperity in the 21st century,” Harper told the attendees at the World Economic Forum in Davos last week.

Improving innovation and competitiveness, however, has been the goal of governments long before Harper came to office, and according to a 2010 measure, Canada still ranks 14 of 17 peer countries.

This despite Canadian governments having been among the most generous in funding for research and development.

“It’s easier to talk about the problem than do something. I don’t think a single budget is going to solve the problem, this is a long-term project,” said Jack Mintz of the University of Calgary’s School of Public Policy, one of Canada’s most influential economists.

The government-commissioned Tom Jenkins report released in the fall will guide some of the coming changes, but not all.

Mintz said he believes Ottawa is giving close consideration to a recommendation made in the report known as “smart procurement,” which would call on companies bidding for federal contracts to demonstrate innovation. The process, which requires experts to assess firms’ innovation practices, is already in place in the United States.

The budget is also certain to tackle the much criticized Scientific Research and Experimental Development program, which hands out $3.5 billion in tax credits each year to some 25,000 companies. The intent is to tie funding more closely to results in terms of commercial products.

In an interview on CBC on Wednesday, Flaherty said he was interested in the Jenkins proposal to help start-ups access risk capital, which is often supplied by foreign sources and results in successful firms leaving the country.

Speaking from Israel, he said the Mideast country has had success in helping start-ups obtain capital.

“We have a lot of start-ups, but we tend to lose our start-ups to Americans and others,” he said. Jenkins recommended the Business Development Bank work with investor groups to develop late-stage risk capital for promising start-ups.

Those changes would help, many experts agree, but changing the mindset of the way businesses operate in Canada will require more than tinkering.

For instance, while Canadian governments have been generous, businesses themselves are near the bottom in spending their own money on R&D.

That’s partly explained by the relatively large number of small firms in Canada, those with assets under $15 million, that can’t afford to spend on research.

Oddly, a often-cited drawback — the high number of branch plants in Canada — is not supported by the evidence. Foreign-owned firms tend to spend more on innovation than Canadian-owned ones, in part because of government inducements to do so.

The trouble, said Mintz, is they tend to take their research results home to do product development, where most of the jobs are.

One of the endemic problems, believes Jim Milway, director of Toronto-based Institute for Competitiveness and Prosperity, is lack of competition in Canada.

The country still has too many restrictions, particularly foreign ownership rules that limit competition in telecommunications, transportation, publishing and health care delivery services, he said.

“One way of getting at that is through more international trade, to put more pressure on firms to perform or go out of business,” he said.

Ironically, that view seems to be shared by business leaders themselves.

In research conducted by the Conference Board as part of the World Economic Forum’s Global Competitiveness Survey, many business leaders themselves reported they did not feel the pressure to innovate.

“Many Canadian business leaders felt that competitive pressures are not strong enough to motivate innovation, capital markets are too weak, and the tax burden is too high,” said Daniel Munro, a top researcher for the Ottawa-based think-tank.

They may be right about venture capital markets, Munro said, but they are wrong about taxes. Leaders cited high taxes as a disincentive, although the business rate is one of the lowest of major competitors.

The report from the Conference Board this week is the first in a series that will try to break down Canada’s innovation puzzle. On Friday, the think-tank is launching a five-year research program under the newly-established Centre for Business Innovation to formulate strategies for companies and governments.

One of the puzzles is: if Canada is doing so badly, why is the economy among the best performing in the world and living standards so high? A partial answer is that natural resources wealth insulates Canadians from the harsh dog-eat-dog world.

Another, says Milway, is that Canadians work more than most. Canadians are at or near the top in labour participation and work longer hours than in most peer countries, except the U.S.

“We’re definitely one of the most prosperous countries in the world, but we get that prosperity by working more,” he said. “If we worried about demographics and the aging baby boomers, and we want to be healthy, wealthy and wise, we need to be innovative.”

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