Budget gives business more funds for innovation, shifts policy

In his March 29 federal budget speech, Finance Minister Jim Flaherty concedes that his government needs 'to promote innovation more effectively.' Experts analyze his proposals to do so.

Budget begins policy shift on how innovation is funded

Minister of Finance Jim Flaherty shakes hands with Prime Minister Stephen Harper after delivering the Budget in the House of Commons on Parliament Hill in Ottawa on March 29. Flaherty's budget has $1.6 billion in spending on innovation. (Sean Kilpatrick/Canadian Press)

Federal Finance Minister Jim Flaherty concedes in his March 29 budget speech that his government needs "to promote innovation more effectively."

"In spite of our efforts so far, Canada is not keeping up with other advanced economies on this crucial front," Flaherty said.

In a budget that's more about cuts, there's almost $1.6 billion in spending on innovation, although there's debate about how much of that is new money.

The past year has seen more wringing of Canadian hands about innovation than is usual. Foremost among a number of reports that were issued is the government-appointed Expert Panel Report. Tom Jenkins, the chairman and chief strategy officer at OpenText Corp., chaired that panel.

Tom Jenkins of OpenText Corp. releases the final report of an experts panel on innovation that he chaired, in Ottawa, October 17, 2011. (Adrian Wyld/Canadian Press)

Jenkins likes what he sees on innovation in the budget, and not just the increased spending. The panel had recommended a substantial shift from indirect funding, usually as tax credits, to a more direct approach through grants to the Industrial Research Assistance Program (IRAP), easier access to venture capital and government procurement, and to do so in a targeted way.

"This government has done a great job responding to the panel's recommendations," Jenkins told CBC News in a post-budget interview.

Flaherty announced a doubling of IRAP's support to companies and $400 million for venture capital funding. He singled out the Jenkins report for acknowledgement in his speech.

Canada's R&D spending

The Expert Panel Report, Innovation Canada: A Call to Action, looked at research and development spending in a global context. Using OECD data for 2008, they found that out of 31 countries, Canada ranks:

  • 15th overall
  • 4th in higher education R&D
  • 18th in business R&D spending

The weak link was R&D performed by governments. Canada was at 0.19 per cent of GDP, well below the OECD average of 0.26 per cent.

On top of that poor performance, the renowned science magazine, Nature, criticized the federal government a month ago for "prioritizing message control and showing little understanding of the importance of the free flow of scientific knowledge."

Where's the innovation council?

The panel's key recommendation was for the government to create an innovation council that would operate at arm's length and report to parliament through a proposed Minister for Innovation.

That was not in the budget, but Jenkins said to "keep in mind that this panel reported on something that had not really been changed in 30 years and the panel report was only submitted about four months ago."

The budget does not contain "the full extent of what we recommended," he admitted, but added, "something of that magnitude would have to happen over several years."

Improving Canada's commercialization of innovation

While the impression is out there that Canada is something of a laggard as an innovation nation, that does not capture the whole picture. Canada does not rate badly at innovating but it is not so good on the follow through.

In other words, when it comes to research and development, Canada's good at research but not at development.

This is illustrated by Canada's ranking in the Global Innovation Index. In 2011, Canada ranked eighth in innovation inputs and tenth in outputs but only number 54 in innovation efficiency, between Zimbabwe and Bulgaria.

The old acronym, R&D is giving way to a new one, RDC, for research, development and commercialization. Canada's poor performance at commercialization has long been a concern for Dr. Mehran Anvari.

Anvari is one Canada's innovation stars, both in research and commercialization of that research. His expertise is in minimal access surgery and telerobotic surgery. He heads the Centre for Surgical Invention and Innovation at McMaster University in Hamilton.

The centre is also into innovation at the grassroots level, sponsoring the Innovation Nation Robotics Competition for students.

Anvari likes what this budget does for innovation on a number of fronts, especially on commercialization assistance, which it does by "supporting research which is either in partnership with industry, led by industry or in collaboration and will have some commercial output."

Anvari told CBC News that strengthening the industry-academic partnership "allows each to contribute to each other's goals." Industry will be able to utilize academic research, and that is innovation, he said.

Flaherty's budget also sets aside $100 million a year for five years for the Canada Foundation for Innovation. CFI was created by the government in 1997 to invest in higher education research and innovation to support the private sector.

For Anvari, funding CFI is an important part of developing the necessary infrastructure for innovation.

Financing an idea becoming a commercial product

Just before the budget was introduced, Anvari was at meeting to discuss raising funds for a robotic system he and his team are developing in Hamilton.  As invariably happens, the talk turned to seeking U.S. venture capital, he said.

Now, with the new budget's proposed venture capital funding, there will be a Canadian option to finance the difficult step of going from an idea to a commercial product.

Anvari welcomes the government getting into the venture capital business because "with U.S. venture capitalists, eventually they draw the whole company south of the border and that's the sad part of it, Canada loses control to the U.S."

Problems getting businesses to innovate

Internet and innovation

Today, internet access is a critical component for innovation, especially for research and collaboration.

In a report on the internet economy in the G20 countries, released by the Boston Consulting Group on March 19, Canada was below average. While the internet accounted for three per cent of GDP in Canada in 2010, the average for the two countries was 4.1 per cent. And the report predicts that by 2016, Canada will have fallen further behind.

In Akamai Technologies' latest report on the State of the Internet, no Canadian city placed in the top 80 for average internet speed and only two Canadian cities (Victoria B.C. at 82 and Oakville, Ont. at 97) made the top 100 list.

For economist David Macdonald, the money in the budget for innovation is not a substantial amount on an annual basis.

Macdonald is with the Canadian Centre for Policy Alternatives and has coordinated the Alternative Federal Budget project since 2008.

For Macdonald, the innovation spending in the budget, speaks to a recognition that business has been spending less on R&D, "despite the fact that federal tax rates have been cut in half" and  the corporate sector sits on a big 'cash stash.'

Flaherty and Macdonald may agree that the government's innovation policy hasn't been working but Macdonald told CBC News that what they are doing now is "trying a smattering of smaller programs... that put more money in the hands of corporations." He doesn't "have a lot of faith that that's going to change the overall situation, when $10-12 billion a year couldn't," referring to the cuts in corporate taxes over the last few years.

Canadian Centre for Policy Alternatives Senior Economists Armine Yalnizan and David Macdonald introduce the Alternative Budget during a press conference on Parliament Hill in Ottawa on March 15. (Sean Kilpatrick/Canadian Press)

Macdonald argues that there is a need for capital investment by businesses but when it comes to innovation, he notes that governments can increase spending without relying on the whims of business.

Anvari supports government targeting certain sectors for innovation funding but had expected there would be something on the environment and clean energy.

In the future, Jenkins would like to see the government doing more on the innovation front through procurement, so we can see government more as a customer "rather than as a hand-outer or subsidizer."