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'Innovation-friendly' budget targets reluctant R&D

Minister of State for Science and Technology Gary Goodyear.

Dave Chan/dave chan The Globe and Mail

Open Text Corp. chairman Tom Jenkins helped draft the blueprint for fixing Canada's lagging innovation performance.

Finance Minister Jim Flaherty mentioned him in his budget speech Thursday. The findings of his October task force report on federal research and development spending also figure prominently in the 498-page budget plan.

Even so, Mr. Jenkins is hesitant to say Ottawa's prescription will do the trick in delivering better business research and innovation. He worries, for example, about the effect a cut in the signature Scientific Research and Experimental Development tax credit will have on the behaviour of major R&D players, including his own company.

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"Time will tell," Mr. Jenkins said in an interview. "We're moving big pieces of the machinery of government here. It's one thing to have a vision. Implementation is much more difficult. It has to be done in a measured way."

Indeed, in the quest to spur innovation in business, Canada's Minister of State for Science and Technology Gary Goodyear himself acknowledges that Thursday's budget is merely a starting point of a long process to get a better "bang" from the billions of federal dollars invested in business R&D.

"There are still changes to come," Mr. Goodyear said in an interview Friday. "This is the first two or three steps in a nine or 10-step process."

For example, he said the government will consult broadly with industry on how to spend a $400-million commitment in the budget to spur more venture capital. He said he'll also continue investigating the hefty contingency fees that many consultants charge companies to claim R&D tax credits.

"The world is changing," Mr. Goodyear said. "It's not static. We are putting forth programs that have the flexibility to be modified."

The government launched a shift in this week's budget, taking roughly $500-million a year out of the $3.6-billion-a-year SR&ED program and reinvesting the savings in direct funding of company research and incentives to get government suppliers to develop new innovative products.

Still missing from the federal government, experts say, is a more co-ordinated federal innovation strategy. And the SR&ED program could become more complex, rather than less, when the planned federal changes go into effect in 2014 – including the removal of capital expenditures from eligible expenses and limiting of contract research.

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For Mr. Jenkins, going off-script from the recommendations in his report could cost his company millions of dollars a year.

The Jenkins report had urged a scaling back of the generous 35 per cent tax break available to small Canadian-owned private companies. Ottawa opted instead to cut the rate for larger companies, arguing that the incentive has become too rich in the wake of recent reductions in the overall corporate tax rate.

Still, Mr. Jenkins and former top federal civil servant Kevin Lynch, now vice-chairman of Bank of Montreal, said the government is moving in the right direction with an "innovation-friendly" budget.

But he said it's now up to businesses, universities and workers to step up to the plate. "Now is the time for all of us to act, not to debate and delay," Mr. Lynch said.

The quandary for Canada is that it has generous R&D incentives and invests more in higher education than most other developed countries. And yet businesses are doing less R&D than they were in 2005. And relative to the size of the economy, business R&D spending has been falling since 2001, to levels well below the average of Organization for Economic Co-operation and Development countries. And lack of access to risk capital is a frequent complaint of startups and small companies with promising products.

It's unlikely that the relatively modest changes contained in Thursday's budget will fundamentally alter the trend.

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Mr. Jenkins, for example, pointed out that Ottawa is moving in the right direction by shifting its R&D spending from indirect tax incentives (tax breaks) to direct incentives, including grants.

But he worries that key structural problems remain, including a lack of foreign competition in several protected domestic industries, including airlines, telecom, financial services and media.

"One of the great incentives for innovation is competition," Mr. Jenkins argued.

"If you have to compete for that customer, you're more likely to innovate ... We have sectors that are not really competitive on the world stage."

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