Differing Views of Innovation in Canada

Do concerns regarding the effectiveness of Canada’s SR+ED Program stem from an incomplete understanding of the state of innovation in Canada?

 As recently as September 9th of 2013, the Conference Board warned that “Canada’s economy is on a ‘path to mediocrity’ as innovation lags”. At about the same time the Startup Genome was reaching a much different conclusion. Their dataset was heavily skewed towards early stage startups. The report was co-authored by a number of entrepreneurs, included contributions from Steve Blank (Stanford University) and Ron Berman (UC Berkeley), and was supported by Telefónica Digital – a global business division of Telefónica S.A.

According to STARTUP GENOME study, Toronto, Vancouver and Waterloo are 8th, 9th, and 16th respectively in terms of their importance as global technology hubs. If this is true – and I expect that it is – it may be in large part due to our generous tax incentives. While the US dominates with 6 recognized technology hubs, Canada is clearly performing well with 3 in the top 20.

In their view the greatest challenge facing early stage technology companies is clearly access to capital for commercialization:

Excerpts from STARTUP ECOSYSTEM REPORT 2012:

  • “If Toronto does not improve its funding climate, entrepreneurs may relocate to the nearby Startup Ecosystems of NYC and Boston where funding prospects are much better.”
  • “Toronto’s startup ecosystem is self-sufficient. However, policy makers can help closing the funding gap by attracting late-stage venture funds through tax breaks and incentives, and investor-friendly policies.”
  • “The funding climate for startups in Vancouver is insufficient, with startups receiving 80% less funding than startups in SV. They receive 72% less in Stage 2 (Validation) and 97% in stage 4 (Scale).  The late stage funding market basically doesn’t exist for Vancouver startups.”

Perhaps the Startup Genome’s perspective is different because they are closer to the action and focused more on start-ups than the Conference Board of Canada. Certainly companies at this very early stage lack resources and experience. As a result, in some ways they actually need more sophisticated help than their later stage counterparts.

In any event it is important to recognize our successes and I believe that Canada’s SR&ED incentive program continues to be a success. The emergence of Toronto, Vancouver and Waterloo as global technology hubs certainly owes a debt to the SR&ED program.

In recent years there has been a great deal of discussion about Canada’s inability to leverage our investment in R&D incentives to improve productivity. I believe that it is the lack of venture capital for commercialization that is the real culprit. However there are certainly some ‘intellectuals’ who have an almost religious aversion to government incentives of any kind. In fact we shouldn’t forget that our current prime minister is a former head of the National Citizens Coalition – a right wing ‘think tank’ that closely resembles the Tea Party in the US.

 CONCERNS WITH THE EFFECTIVENESS OF THE SR&ED PROGRAM

The SR&ED program was originally introduced by Canada’s progressive conservatives in 1985. At the time Canadians were viewed primarily as ‘hewers of wood and drawers of water’ and R&D was done in the corporate headquarters of US-based multinationals.

Recently concerns in Ottawa around the effectiveness of the SR&ED program culminated with the Jenkins Report that made the same mistake that the Conference Board made in September of 2013″

…from the Jenkins Report (2011):

“the panel believes the government should rebalance the mix of direct and indirect funding by decreasing spending through the SR&ED program and directing the savings to complementary initiatives strategically focused on serving the needs of innovative Canadian firms, especially small and medium-sized enterprises”

…from the Conference Board of Canada (2013):

“The federal government recognizes that, despite its high level of federal R&D support, Canada continues to lag other countries in business R&D spending, rates of commercialization of new products and services, and productivity growth”’

The notion of reducing or eliminating the $3.6 billion SR&ED program sits very well with a government that detests taxation – particularly leading up to an election year. But don’t hold your breath waiting for Jenkins’ “complementary initiatives strategically focused on serving the needs of innovative Canadian firms, especially small and medium-sized enterprises”. These kind of direct funding initiatives will clearly not make it before the election budget is delivered, since the beneficiaries are too far removed from – and misunderstood by – middle class voters that all politicians are trying to appeal to.

For traditionalists perhaps it is comforting to realize that Canada is once again becoming a primarily resource-based economy. We appear to have pinned our hopes on the oil sands in Alberta and liquefied natural gas in BC – to the dismay of manufacturers in Ontario and Quebec. Canadians can now choose to firmly embrace the 19th century and ignore those troubling ‘left-wing” notions of climate change and evolution – that our avowedly fundamentalist prime minister seems to have such difficulty with.

Published by Rob Farrow

accountant, entrepreneur, former chef, occasional artist, angel investor, business advisor, corporate tax specialist

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