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Shopify Inc. recently joined the $1-billion-valuation club after a wildly popular IPO earlier this year. Canada has one of the most generous tax-incentive programs to support research-and-development spending. (Kevin Van Paassen/Bloomberg)
Shopify Inc. recently joined the $1-billion-valuation club after a wildly popular IPO earlier this year. Canada has one of the most generous tax-incentive programs to support research-and-development spending. (Kevin Van Paassen/Bloomberg)

Canada’s R&D tax breaks can’t replace strategic innovation policy Add to ...

All of us who have experienced the joys of parenthood have passed through the adolescent years, when our children refuse to accept advice. Most teenagers pass through this stage and go back to being able to learn. Sadly, when it comes to innovation policy, both Ottawa and the leaders of our main political parties have never outgrown their adolescent phase.

When we look at Canada’s performance on a wide range of innovation scorecards, both domestic and international, the failure to absorb any of the lessons that can be learned on how to improve our performance has led to results that are all too predictable. The latest warning in a report that, if anything, paints too rosy a picture, comes from the Conference Board of Canada, and notes that despite improvement on some measures, Canada is fast falling further behind the most innovative countries.

Most notable, and most troubling, among the areas in which we are failing is business spending on research and development. Some observers suggest that this performance is the outcome of our junior partnership in the broader North American economy. They argue that we defer to the senior partner to lead the way, while focusing on the easier part of adapting already existing products and services for sale in the U.S. market and extracting commodities. Unfortunately, the world economy is rapidly changing, and our complacency with this low innovation performance is accelerating our decline.

To compound this concern, there is an even more troubling fact. Canada is among the biggest public spenders on research and development. Not only do we have one of the highest levels of spending on research in the world by our postsecondary institutions, but Canada also has one of the most generous tax-incentive programs to support research-and-development spending. In fact, this is the key area where our leaders have failed. Instead of having an effective innovation policy, they have continued to rely on, more and more, tax incentives. Indeed, Canada is a global leader in proportions of R&D funding by tax incentives as opposed to direct spending programs. There is a problem with this approach: Tax incentives are the least effective tool to spur the creation of new technologies and new industries. At best, they may stimulate a moderate increase in R&D spending.

For anyone who cares about the future, looking at our innovation policies is an exercise in frustration. On the one side, we are international leaders in many scientific fields. On the other, we are failing to exploit our world-leading research by turning it into commercial products and intellectual property sold by Canadian companies around the globe. Worse, we are unable to take this enormous innovative capacity and utilize it to create the new technologies, firms and industries of the future – the precise thing we need to ensure our future, providing the sources of new good jobs and economic growth.

We must recognize that having ever-growing R&D tax incentives cannot replace a comprehensive innovation policy, which we lack. Tax incentives are a very blunt policy instrument. They apply equally to all firms who meet the legal criteria, regardless of the relative size and age of the firm, the industrial sector in which it is located or the degree to which its products and services are marketed globally or largely sold in the domestic market. Worse, they are of no help in spurring the growth of new companies aiming to create new products and services, since at the very stage of their growth, in which new companies need the most help, they rarely have profits, and hence, cannot make use of tax incentives. To be as blunt as our tax incentives, what Canada calls innovation policy has largely become another subsidy to already established, but not-so-innovative companies.

If our aim is to create new industries, or spur the growth of high-potential sectors, tax incentives are the wrong approach. It is virtually impossible to direct tax incentives at new and emerging technologies and products, or to make big bets on emerging economic sectors. Our comparative studies of countries who improved their economic performance most dramatically on the innovation front suggest that this has been achieved through smart strategic innovation policies, including direct investments in key technologies and firms. Let us be clear in our argument, countries such as Israel, Finland and Taiwan – which successfully spurred high-tech growth miracles – did it by spending much less than Canada currently does, but in a more strategic way. We outspent them, they outsmarted us.

In this coming election, we have only one request of those who wish to be our political leaders: Please get beyond the adolescent phase and accept some adult advice.

Dan Breznitz is the Munk chair of Innovation Studies and co-director of the Innovation Policy Lab at the Munk School of Global Affairs at the University of Toronto. David Wolfe is a the co-director of the Innovation Policy Lab at the Munk School of Global Affairs at U of T.

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