A grant dump that smothers innovation

What’s the result of the hundreds of billions of dollars the government spends on innovation? Bupkes.

A grant dump that smothers innovation

Mark Blinch/Reuters

For more than 30 years, people have been sounding the alarm at Canada’s disturbing decline in relative productivity, at our appalling lack of innovation, at a record of investment in R & D that can only be described as depraved. And for more than 30 years, governments have been doing something about it.

Have they ever. The federal government helps industry to innovate to the tune of $5 billion every year, delivered through more than 60 programs spread across 17 different agencies: the Industrial Research Assistance Program (IRAP), the Business Development Program (BDP), the Technology Demonstration Program (TDP), the Strategic Aerospace and Defence Initiative (SADI), the Automotive Innovation Fund (AIF), the Strategic Network Grants (SNG), the Centres of Excellence for Commercialization and Research (CECR), the Networks of Centres of Excellence (NCE), the Business-Led Networks of Centres of Excellence (BL-NCE), the Centres for Strategic Research on Innovative Technology Networks (okay, I made that one up), on and acronymically on. And that’s just the feds. There are hundreds more innovation programs at the provincial level, and who knows how many others lurking among the nation’s municipalities and universities. The agricultural sector in Ontario alone requires no fewer than 45 such programs, courtesy of seven federal and provincial departments. All on top of the flagship federal tax incentive, the Scientific Research and Experimental Development (SR&ED) tax credit. Altogether, Canada is reckoned to provide among the most generous systems of R & D support in the world, behind only Spain and France.

And the result of all these hundreds of billions of dollars in support for innovation, this Manhattan Project of industrial research? Bupkes. From 1985 through 2006, Canada’s productivity growth ranked 15th out of 18 countries at comparable levels of development. Business spending on R & D not only has failed to keep up with our international rivals, but has actually been falling for the past decade.

Not only have all of these programs not helped the cause, they seem actively to be retarding it. So many and confusing are the different eligibility conditions and reporting requirements that many firms have taken to hiring third-party consultants to help them through the process. Others have succeeded at “stacking” grants from different agencies and levels of government, enough in some cases to cover more than 100 per cent of the cost of whatever project they originally had in mind. With all of this grantrepreneurship going on, it seems there was little time left for innovation.

But never fear. A raft of new reports have appeared suggesting how we can take these failed and unworkable policies and . . . make them work. From the Independent Panel on Federal Support for Research and Development, headed by businessman Tom Jenkins, a recommendation to consolidate multiple programs under a single Industrial Research and Innovation Council (IRIC). (Also: “engage in dialogue with the provinces.”) From the Mowat Centre, a proposal to scrap tax incentives in favour of “strategic public investments,” which after all “have the advantage of being more strategic.”

We clearly need to disentangle a few concepts. There is a tendency to treat innovation as if it were a piece of industrial machinery in itself: you inject a certain amount of government funding at one end, you get a certain amount of R & D at the other, and you’re done. Not so. While you can find, just, a correlation between Canada’s heroic levels of tax assistance for R & D and actual spending on R & D, there is very little connection between aggregate spending on R & D and innovation, still less with higher output. Some of our splashiest R & D spenders, such as the auto and aerospace industries, are among the biggest sinkholes in the economy.

We begin to be on firmer ground if we understand innovation less as a scientific process, and more as an economic one. As a rather better report by the Council of Canadian Academies puts it, innovation is simply “new or better ways of doing valued things.” It doesn’t typically take the form of the breakthrough technology or gee-whiz invention. It’s doing hundreds of little things better, at every stage of production, often by incorporating existing technologies.

How do we get businesses to do more of that? It’s not actually all that complicated. Businesses will make the needed changes, take the needed risks, incur the needed expenses, if you do two things: a) let them, and b) force them. By letting them, I mean reducing barriers to investment. Chief among these, you will not be surprised to hear, are marginal tax rates. As another recent report, this one for the C. D. Howe Institute, observes, instead of stuffing firms with subsidies to innovate, governments would do better simply to refrain from confiscating so much of the returns when they do.

And the “force them” part? Competition. Competition, competition, competition. What comes out in all of the literature on productivity is the critical importance of “competitive intensity” in creating the incentive for businesses to innovate: or rather, in instilling the fear that the other guy will eat their lunch if they don’t. It’s when managers lie awake at night thinking of all those “little things” that much innovation occurs.

As documented in yet another expert report, from the federal Competition Policy Review Panel headed by former BCE chairman Red Wilson, too few of our managers have to do that, protected as they are from competition by foreign investment controls or domestic regulatory regimes. You want more innovation? Implement the Wilson report.




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A grant dump that smothers innovation

  1. And the result of all these hundreds of billions of dollars in support for innovation, this Manhattan Project of industrial research? Bupkes.

    No.  As you so eloquently detail afterwards, the result was WORSE THAN BUPKES.

  2. Lower marginal tax rates do help to improve the economic “prize” for a business, but for startups working on new technology, programs such as IRAP and SRED do more because they address cash flow concerns which is the major hurdle for small pre and early revenue companies.

    While you are taking on a large topic and I concede some rationalization of the number of programs offered in Canada would be good, there are different needs for businesses depending on the stage, scale and R&D path. 

  3. Dear Mr. Coyne:
    Why are you so eager to have Canada commit seppuku?  I challenge you to write a series of articles that abandon the negative (this is what is wrong) position* and take up the positive stance.  In other words, illustrate for us what you expect would happen if the investment controls are taken off.  I don’t mean putting out a sunshine and roses look how much more competitive we are now puff piece.  I mean tell us how many Canadian corporation will still be in Canadian hands.  What will the job loss/gains be & what quality and where?  Forecast just how little urban Canadians will have to pay for postage compared to those losers out in the country.  Tap into to your inner “I’m alright, Jack”.  Justify for Canadians why having wealth increasingly (and with little prospects of change) concentrated into the hands of a very, very few is better than having it widely distributed.^  Why should all most all the work of previous generations of Canadians be consigned to the dustbin? 

    Macleans wants to talk about innovation.  Bah!  Small potatoes, I say.  Really let loose and give us a Canada 5.0 or what ever #.0 we are at now.  

    What have you got to loose, eh?  You have spent so much time telling us what is wrong with Canada.  Tell us how you’d make it right.  You trust the average Canadian to make the right choice, don’t you???

    * I realize that when you pen a piece as above there is an implicit statement that we’d be better off if the object in question was dismantled.  IMHO that isn’t enough information to trade what we have for what you are suggesting.  

    ^ As opposed to your recent “move along, people, nothing to see here” defense. 

  4. Haven’t corporate tax rates (at least federal – I’m not sure about provincial) fallen dramatically in the last decade?  Almost 50%… we’re about to have the lowest in the G7 no?  And your second solution, increasing competition by reducing controls on foreign investment and domestic regulatory regimes… hasn’t that also been happening at a pretty good clip for a while now? 

    Is there some benefit that correlates to these reductions? Is it too early to tell?  It’s easy to see the reasoning behind your proposals, but subsidizing investment in R&D *sounds* pretty sensible too… and it seems like we’ve already made some pretty big steps in the less tax / more competition direction… It might be good to see how those pan out before going further.

  5. The government wants non-profits to perform more like businesses, and yet they are suffocating businesses with the same ridiculous hoops to jump through that refocus energy from respectively serving communities & discovering new technologies. The similarities are startling. The results are maddening. 

  6. The challenge is that most organizations don’t know how to ‘innovate’. The process of innovation is a combination of both rigour and creativity. The process starts with understanding the type of innovation, the barriers (internal and external) as well as the sources of innovation available to the organization. Then the process of innovation requires criticial thinking ability to work through the rigours of establishing context and outcomes, combined with riding the wild horse of creativity to ensure that at the end of the process there is a result. Either the government needs to provide innovation training or the organziations need to add expertise in the process of innovation and then we may start to see innovation worthy of this level of funding.

  7. Maybe it’s cultural within Canadian business– an simple uninterest in productivity gains. Tax rates have not been so low for Canadian businesses in decades, and the money saved is not reinvested.

  8. The problem with Canadian productivity measures is that it fails to take into account that Canada is is chiefly a producer of raw materials which requires manpower. Many innovations have taken place in the various sectors such as mining and oil production. For example, a company like VAIL INCO produces more kilograms of nickel per man than it did 10, 20, or 30 years ago but it is still a manpower demanding industry. Similarly it has been calculated that tar sand oil production is a major factor when calculating Canadian productivity and there is not much that can done to improve these figures. As for tax incentives, Canadian companies enjoy some of the lowest tax rates in the world and benefit from heavily subsidized costs for infrastructure services such as water, electricity, transportation (roads, air and rail systems) and waste management with no net increase in job creation. We must be careful not to fall into the trap of low corporate taxes in order to give them a free ride as to their civil responsibility for sharing in the costs of providing infrastructures through lax tax measures under the pretense that they need these to improve productivity measures. Companies will not make this happen. We are providing lots of money via our tax system and special programs for them to do this.   

  9. Very interesting to read about this area of potential help for financial assistance for SME’s.What really happens with the federal and provincial assistance grants and financial assistance programs.After being in this field for two years, you get to understand the ‘big’ problems with the assistance programs. IRAP, SR&ED and others, all target ‘new innovations’ ONLY, and only in specialized certain fields, which appeal to there criteria set out by these academics. They are constructed and set-up by academics for academics, but do not cover the bulk of new business ideas out there, not for many of the real business’s which are likely to employ staff in manufacturing. There are even problems for many as to how you find out about these programs and how one apply’s for them.There is a real problem with the system, that many company’s and individuals just give up and for the wrong reasons. I have been through a host of assistance organizations which have been very good to help promote the CEO and key personnel, through various steps of starting a new business which is excellent, but many of these individuals, are already ‘street wise’ to running business’s.
    Assuming one has managed to get through these hurdles, which we did, you then are only eligible for the innovative pert of the whole project so in our case we have designed, developed a whole new concept of a full electric car, the only area we could actually get assistance for was the fitting of the new motors and power-train which was in fact the easiest part of the whole vehicle build. This was the only way we could get any assistance at all. ‘Pathetic’ was what came to mind, (although we were happy to get any help), but just proves the problems with the criteria of helping innovation. 
    The patent was the only other area, which is very important, but a small price in reality to the overall business of developing a new vehicle for global sales.

    We are now at the point by self financing and a very few close friends who have faith, are now in a position to go for real finance with a very successful running prototype as seen in press and TV.
    The real need for company;s like ours is the gaping ‘hole’ between getting an innovation or new idea to market and then raising the needed finance to start the real business of manufacture.
    There is no help here and actually many organizations have said just take it to China.
    Not being a believer in shipping everything abroad and do believe we can actually make ‘stuff’ on our home ground and still be very profitable, was not impressed.
    The Governments should actually have a set of ‘Goal-posts to pass’, in which any company can get to a certain point and then be eligible for further assistance, much like many VC company’s offer as a way of potential funding by stages, which lessens the risk.

    I do hope that the powers that be, do listen to the problems which have been said, over and over again, and actually do take note of what and why the programs are sometimes unsuccessful.
    The gap between ‘Innovation to Development’, to ‘Business Start-up’ is far to big with out any assistance.

    We are thankful for the help we have had over these past two years, although tiny, in comparison to what is actually required, but every little help’s. But to the outsiders which have never been down this road, you may well be surprised as to how you can really get any money at all!
    Many of the programs offer little help to a very small minority of actual, good business ideas.
    To be truly competitive, we have to start thinking about, where does business actually make real money and what is really needed in the marketplace at that point in time. 

    In short I have come across company’s which have had a good idea but can not get any assistance and others which have received far to much but just seem to fit the criteria perfectly and have raised  considerable funds to get know-where.
    There also need to be direct contact to these funds and get away from this stupid on-line system which is totally missing the point of business as any investor will be looking at the people more than the idea sometimes and by meeting these new ‘innovators’ you can determine weather you are wasting your time or not.

    Not all new business people have a degree and science or English which is often expected in applying on-line (a really stupid idea). Saving paper is not clever when you are just about to through serious dollars away. A new perspective is required and geared to real business not just a few innovations which do not lead to jobs or making a ‘quick buck’.

    Thank you for taking the time to read.
    Yours sincerely
    Andrew Mynheer – ‘Von Mynheer Automotive’
    http://www.vonmynheer.com

  10. All these different grants are a make work project for bureaucrats that otherwise would only be qualified for welfare. A politician once told me that 60% of all program spending is eaten up in administration. SO that is where the money goes. Creating new and innovative ways to employ bureaucrats.

  11. Why innovation grants fail:

    1 – for individuals and small businesses the costs of applying for any kind of government assistance outweigh the benefits. Bear in mind that the people judging the applications have expectations set by million dollar productions offered by large companies – and will judge uncle joe’s five page MS-Word effort accordingly.

    2 – those who get smaller grants often find that compliance costs quickly exceed benefits. The lady who does the books is inadequate – compliance expectations require the grant holder to hire a kpmg or comparable name brand accounting services firm.

    3 – big firms don’t innovate because they benefit from stagnation. There are no new issues in selling last year’s product, so innovation only becomes important where Ottawa’s supply management and related non tariff barriers to the introduction of external innovation prove inadequate.

  12. And eliminate regulations. And eliminate employment laws.

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