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Jeffrey Simpson

Can Ottawa spark innovation? It hasn't yet Add to ...

When Canada negotiated its free-trade agreement with the United States more than two decades ago, proponents insisted it would improve Canada’s productivity.

The deal would force Canadian companies to be more competitive. Foreign-owned multinationals would give their Canadian affiliates (branch plants) “world product mandates” to specialize in one or two product lines. Companies would get bigger, stronger and more productive.

It didn’t happen, or at least not to the extent proponents believed. The honest among them have admitted that whatever other gains that deal brought, it did not improve Canada’s productivity.

That improvement has eluded a series of federal governments. Now, Stephen Harper’s Conservatives, with a majority in Parliament, are going to give it another try. We can only hope that these efforts succeed, because the flip side of the debate about the affordability of social programs for an aging population – a debate already off to an ill-focused, raucous start over Old Age Security – is how to make the economy more competitive.

With fewer people working to support more who are retired, those who are working have to be more productive, or the revenues won’t be there. Every Western industrialized country faces this dilemma, and few have found any lasting answers.

By one count, the federal government has – count ’em – more than 100 programs, institutes and regional development agencies to support business. That figure doesn’t include an array of tax incentives, the largest of which is the Scientific Research and Experimental Development (SR&ED) tax credit. All together, these business programs cost $6.44-billion in the fiscal year 2010-2011.

Head-scratchers in Ottawa have long wondered about these programs, to which every government wants to add more. They are certainly costly and numerous, but they don’t seem to have achieved the bang for the buck, at least not judging by the amount of innovation they spark. And innovation lies at the core of enhanced productivity.

What perplexes policy-makers further is that for several decades, governments have adopted many of the policies that textbooks suggest should enhance productivity. They’ve run (until recently) intelligent fiscal policies, lowered taxes, tried to reduce regulations, entered into liberalized trade deals, privatized Crown corporations, invested in research and skills training – and yet productivity remains low by international standards.

Many smart people have thrown their energies into recommending ways of improving productivity. Three reports to the Harper government, chaired respectively by Red Wilson, Howard Alper and Tom Jenkins, have had a go, and now it would appear the government is prepared to act.

The Jenkins report, a group chaired by the head of Open Text Corp., that also included University of Toronto president David Naylor, provided a thorough, accessible and somewhat alarming overview of Canada’s record. Of 31 OECD countries, Canada stood 18th for business expenditure on research and development as a share of GDP. No Canadian province was above the OECD average, although Quebec came close. The prairie provinces and Atlantic Canada were miles behind.

Having appointed the Jenkins group, the Harper government has apparently taken its suggestions to heart. So in the next budget, there will likely be an Innovation Council to try to co-ordinate programs better. The SR&ED tax credit program will be modified and shrunk with some funds being spent on direct grants. The National Research Council will be shaken up.

Will all this do any good? The Harper government, like its predecessors, is sufficiently dismayed by lagging productivity that it is willing to shuffle programs around and create new structures. Whether government programs are at the heart of the problem is doubtful, given that the R&D tax credits have been among the most generous in the world.

Canada has industries that just don’t do much research and development, of which the resource extractive ones, especially oil and gas, are at the top of the list. The economy has never fully recovered from the collapse of Nortel, which was the largest private-sector generator of R&D in Canada. Now, Research In Motion, the newest flagship for high-tech R&D, is staggering.

Creative mid-sized Canadian firms are often sold to foreign interests. They become cogs in a big corporate machine that tends to do the bulk of its research in the home country, the classic example being Microsoft, which sells its products everywhere in Canada, sucks up talent from Canadian universities, especially Waterloo, but does no serious R&D in Canada.

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