Innovation Canada: A Call to Action

Innovation Canada:A Call to ActionReview of Federal Support to Research and Development – Expert Panel Report

About the CoverWhile the great American inventor Thomas Edison is given credit for “inventing” the lightbulb, the story is really one of incremental innovation. In 1810, British chemist HumphryDavy invented the “electric arc,” a precursor to the light bulb. A series of innovationsfollowed and, by the 1860s, the race was on to develop a commercially viable light bulb.Joining this race were two Canadians, Henry Woodward, a medical student in Toronto, andMathew Evans, a hotel keeper. In 1874, they patented a nitrogen-filled light bulb that lastedlonger than others of the era. But they could not get financing for their work, and in 1878were eclipsed by British inventor Joseph Swan and then in 1879 by Thomas Edison. Realizingthe commercial viability of the light bulb, Edison was successful in obtaining major financialbackers. He used these funds to continue his experiments, but also to buy out many patents,including those of Swan and of Woodward and Evans.As we reflected on our consultations held across Canada, during which we heard first-handof the struggles and successes of Canadian entrepreneurs, we wondered: What ifWoodward and Evans had been able to interest investors? What if they had been able toobtain financing to carry on their work and beat out Swan and Edison to be the first tocommercialize the light bulb?This report lays the foundation for a more innovative economy that supports and welcomesresearch, development and commercialization. It sets out goals and recommendations totake our country forward and help unleash the potential of entrepreneurs from all overCanada. Our hope is that the next Woodwards and Evanses will have all that they need tobring their ideas to the world and leave a lasting impact for future generations.For more information, see: Library and Archives Canada, “Patent no. 3738. Filing year 1874,”http://www.collectionscanada.gc.ca/innovations/023020-2710-e.html.

Innovation Canada:A Call to Action

For a print copy of this publication, please contact:Publishing and Depository ServicesPublic Works and Government Services CanadaOttawa ON K1A 0S5Telephone (toll-free): 1-800-635-7943 (Canada and U.S.)Telephone (local): 613-941-5995TTY: 1-800-465-7735Fax (toll-free): 1-800-565-7757 (Canada and U.S.)Fax (local): 613-954-5779Email: publications@tpsgc-pwgsc.gc.caWebsite: www.publications.gc.caThis publication is available upon request in accessible formats. Contact:Multimedia Services SectionCommunications and Marketing BranchIndustry CanadaRoom 441F, East Tower235 Queen StreetOttawa ON K1A 0H5Telephone: 613-947-5177Fax: 613-954-6436Email: production.multimedia@ic.gc.caThis publication is also available online at www.rd-review.ca.Permission to ReproduceExcept as otherwise specifically noted, the information in this publication may be reproduced, in part or in wholeand by any means, without charge or further permission from Industry Canada, provided that due diligence isexercised in ensuring the accuracy of the information reproduced; that Industry Canada is identified as thesource institution; and that the reproduction is not represented as an official version of the informationreproduced, nor as having been made in affiliation with, or with the endorsement of, Industry Canada.For permission to reproduce the information in this publication for commercial redistribution, please emaildroitdauteur.copyright@tpsgc-pwgsc.gc.ca.Opinions and statements in the publication attributed to named authors do not necessarily reflect the policy ofIndustry Canada or the Government of Canada.Cat. No. Iu4-149/2011E-PDFISBN 978-1-100-19384-760957Aussi offert en français sous le titre Innovation Canada : Le pouvoir d’agir.

Dear Minister,Please find attached the report of the Independent Panel on Federal Support toResearch and Development. This report represents the consensus views of all Panelmembers.It is our sincere hope that our report will be of value to you and your colleagues inCabinet as you consider these important issues for the country.The Panel has been ably supported in its work by a talented secretariat, led by IainStewart. We are very grateful to the many Canadians and others who offered ustheir time and opinions as we worked to respond to your charge.Sincerely,Tom Jenkins, ChairBev DahlbyArvind GuptaMonique LerouxDavid NaylorNobina Robinson

AcknowledgementsAcknowledgementsSecretariatThe Panel was capably supported in its work bya secretariat comprised of officials from theGovernment of Canada departments withresponsibilities for many of the programs withinthe scope of the review. These officials hadexpertise in aspects of R&D and innovation, andwere seconded to the secretariat for theduration of the review. The secretariat wasresponsible for a range of activities in support ofthe Panel, such as providing strategic advice andanalysis in support of Panel deliberations,organizing the Panel’s consultations, managingits online written submissions process, liaisingwith the 17 Government of Canadadepartments and other entities implicated in thereview, coordinating the travel of Panelmembers, coordinating the Panel’s program ofresearch with external experts, and managingthe review’s logistics, schedule and finances.Iain Stewart was the secretary to the Panel andhead of the secretariat, and was supported bySamuel Millar, the secretariat’s executivedirector. John Lester, Mary Preville and MélanieRobert served as the secretariat’s directors ofresearch, program assessment, andconsultations and communications, respectively.Sarah Charette, David Côté, Thomas Ferguson,Alexandre Hamel and Brandon La Carte servedas policy advisers. Ana Fierro, Gail Gaudreauand Katherine O’Rourke supported the Panel’sadministration and logistics. Gladys Fisherprovided support in financial administration andcontracting.Special AdvisersThe Panel wishes to give its thanks to thefollowing special advisers:Peter Nicholson, who wrote the report withDavid Côté of the secretariat, under thedirection of the PanelAndrei Sulzenko, for his work supporting uson procurement advicePaul Berg Dick, for his work supporting ourunderstanding of the Scientific Research andExperimental Development tax credit.Other ImportantAcknowledgementsThe Panel also wishes to thank andacknowledge the many other individuals andorganizations that contributed to the review.The regional offices of Industry Canada and allof the regional development agencies wereinstrumental in assisting in the domesticconsultations. Similarly, the Canadian missionsto Canberra, Sydney, Singapore, Berlin, Munich,London, the Organisation for EconomicCo-operation and Development (OECD), NewYork and Washington provided essential supportto the Panel’s international fact-finding missions.The governments of Australia, Finland,Germany, Singapore, the United Kingdom andthe United States contributed importantinformation throughout the internationalconsultation process.v

Innovation Canada: A Call to ActionThe Panel would also like to recognize variousinternational organizations for sharing theirresearch and resources over the course of thereview, including the Information Technology &Innovation Foundation, Germany’s Fraunhofer-Gesellschaft, the US National Academy ofSciences, the OECD, Partnership for New YorkCity, Universities Australia, and the UrbanInstitute and Brookings Institution’s TaxPolicy Center.In addition, the Panel wishes to acknowledge arange of experts who conducted research on itsbehalf: Malcolm Bernard, Dan Ciuriak, IanCurrie, John Curtis, Gilles Duruflé, EKOSResearch Associates Inc., Ron Freedman of TheImpact Group, Fred Gault, Pat Goodman,Hickling Arthurs Low Corporation, DonaldMcFetridge, Marshall Moffat, Jacek Warda,Karen Wensley and Science-Metrix.Lastly, the Panel would like to thank IndustryCanada and the Department of Finance Canadain particular for the data, information, research,analyses and other resources made freelyavailable to the Panel, and the 17 federaldepartments and agencies for providing timeand information in support of our learningabout their important programs and initiatives.For a full list of all interlocutors who contributedviews and expertise to the review, please visitthe Panel’s website at www.rd-review.ca.vi

ContentsContentsExecutive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-1Guiding Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-5Approach to Our Mandate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-7Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-8In Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-141 Motivation and Mandate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-1The Panel’s Mandate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-3The Panel’s Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-42 The Context of the Review . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-1Innovation and Productivity Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-1Innovation and R&D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-4Innovation and Business Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-9Business Innovation: Beyond R&D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-11Innovation Input: Ideas and Knowledge . . . . . . . . . . . . . . . . . . . . . . . . 2-12Innovation Input: Talented, Educated and Entrepreneurial People. . . 2-14Innovation Input: Networks, Collaborations and Linkages. . . . . . . . . . 2-15Innovation Input: Capital and Financing . . . . . . . . . . . . . . . . . . . . . . . . 2-183 Overview of Programs to Support Business R&D . . . . . . . . . 3-1Rationale for Government Support of Business Innovation . . . . . . . . . . 3-1Profile of Federal Government Support for Business R&D . . . . . . . . . . . 3-2In Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-124 Vision and Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-1Guiding Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-1Approach to the Recommendations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-4vii

Innovation Canada: A Call to Action5 Program Effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-1Existing Assessment Procedures for Federal Programs . . . . . . . . . . . . . . 5-1Assessment of Program “Effectiveness”. . . . . . . . . . . . . . . . . . . . . . . . . . 5-2International Practices in Comparative Program Assessment. . . . . . . . . 5-3Consultations with Stakeholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-3Recommendation 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-96 Program Mix and Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-1Changing the Mix: More Direct Support . . . . . . . . . . . . . . . . . . . . . . . . . 6-3Overview of the SR&ED Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-5Net Public Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-7Recommendation 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-107 Filling the Gaps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-1The Procurement Gap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-2Recommendation 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-3The Large-Scale Research Collaboration Gap. . . . . . . . . . . . . . . . . . . . . . 7-6Recommendation 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-9The Risk Capital Gap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-11Recommendation 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-178 Leadership for Innovation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-1Recommendation 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-49 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-1The End Game . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-1The Way Forward. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-2Annexes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1A Programs in the Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1B The Advice of Other Panels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-5C Biographies of Panel Members . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-9References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . R-1viii

ContentsList of Figures1.1 Canadian Business Expenditure on Research and Development (BERD),1985–2010 (billions of 2000 constant dollars) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-32.1 Relative Level of Labour Productivity in the Business Sector, 1947–2009(Canada as a percentage of the United States). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-32.2 Sources of Canada–US Gap in Average Annual Labour Productivity Growth(differences in percentage growth rates: Canada minus the US) . . . . . . . . . . . . . . . . 2-42.3 Provincial BERD Intensities in Canada, 2008 (business expenditure onR&D as a percentage of provincial GDP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-72.4 A Firm-Centric Model of the Business Innovation Process . . . . . . . . . . . . . . . . . . . . . 2-102.5 R&D Expenditure in Canada, 1981–2009 (percentage of GDP) . . . . . . . . . . . . . . . . . 2-122.6 The Innovation Ecosystem: Converting “Research” into “Innovation” . . . . . . . . . . . 2-172.7 ICT Investment per Worker in the Business Sector, Canada as a Proportionof the United States, 1987–2009 (current US dollars) . . . . . . . . . . . . . . . . . . . . . . . . . 2-193.1 Total Envelope Expenditure ($ million, excluding federal programadministration costs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-53.2 The Largest Direct Expenditure Programs in the Envelope, 2010–11 . . . . . . . . . . . . . 3-83.3 Program Envelope, by Form of Support, 2010–11. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-93.4 Envelope Expenditure, by Type of Recipient, Total Direct Expenditure,2010–11, and SR&ED Tax Credit, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-103.5 Sectoral Distribution of Direct and Indirect (SR&ED) Expenditure. . . . . . . . . . . . . . . 3-135.1 Types of R&D Performers Employed by Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-65.2 Reasons for Not Participating in R&D Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-75.3 Program from Which Funding Received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-85.4 Satisfaction with Various Aspects of the Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-95.5 Direct Spending Portion of the Envelope, by Activity Supported, 2010–11 . . . . . . . 5-155.6 Performance Indicators for Comparison of Categories of Like Forms ofR&D Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-176.1 Direct and Indirect Government Support of Business R&D, 2008(except as noted) (percentage of GDP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-26.2 Tax Subsidy Rates on Investment in R&D for Selected Countries, 2009 . . . . . . . . . . . . 6-46.3 Tax Expenditures, by Type of Corporation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-76.4 Federal and Provincial Tax Credit Rates (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-87.1 Funding Chain by Stage of Development and Size of Investment. . . . . . . . . . . . . . . 7-127.2 Many Gaps Have Resulted in a “Vicious” Cycle in the CanadianVenture Capital Industry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-147.3 Proposal to Support High-Growth Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-188.1 The Government of Canada’s Innovation Machinery . . . . . . . . . . . . . . . . . . . . . . . . . . 8-2ix

Innovation Canada: A Call to ActionList of Boxes2.1 Types of Innovation and Their Support by Government . . . . . . . . . . . . . . . . . . . . . . . . 2-22.2 Defining R&D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-52.3 International Comparisons of R&D Spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-62.4 Where Do Businesses Get Their Ideas for Innovation? . . . . . . . . . . . . . . . . . . . . . . . . 2-133.1 Expenditure Reviewed by the Panel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-35.1 Operating Principles of the Proposed Industrial Researchand Innovation Council . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-116.1 Direct Support Versus Indirect Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-36.2 Key Parameters of the SR&ED Tax Incentive Program. . . . . . . . . . . . . . . . . . . . . . . . . . 6-66.3 Stacking of R&D Support. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-96.4 Claiming Overhead Expenses through the SR&ED Program . . . . . . . . . . . . . . . . . . . . 6-117.1 Use of Procurement to Support SME Innovation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-37.2 Canadian Innovation Commercialization Program (CICP). . . . . . . . . . . . . . . . . . . . . . . 7-57.3 Germany’s Fraunhofer-Gesellschaft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-87.4 Institutes of the National Research Council within the Review . . . . . . . . . . . . . . . . . . 7-97.5 Sectoral Research and Innovation Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-118.1 Innovation Policy Advisory Bodies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-3List of AcronymsAAFCACOABDCBERDBICCCACCPCCED-QCICPCIHRCRACSACSLSCVCADRDCEMSFedDev ONFedNorFINAgriculture and Agri-Food CanadaAtlantic Canada Opportunities AgencyBusiness Development Bank of Canadabusiness expenditure on research and developmentproposed Business Innovation CommitteeCouncil of Canadian AcademiesCanadian-controlled private corporationCanada Economic Development for Quebec RegionsCanadian Innovation Commercialization ProgramCanadian Institutes of Health ResearchCanada Revenue AgencyCanadian Space AgencyCentre for the Study of Living StandardsCanada’s Venture Capital & Private Equity AssociationDefence Research and Development CanadaExpenditure Management SystemFederal Economic Development Agency for Southern OntarioFederal Economic Development Agency for Northern OntarioDepartment of Finance Canadax

ContentsGDPGERDGOVERDHERDIACICICTIPIPRIRAPIRBIRICLSVCFMFPNRCNRCanNSERCOECDR&DRDAS&TSADISBICSBIRSDTCSMESR&EDSRCSSHRCSSTISTICTri-CouncilTSBUKUSVCWDgross domestic productgross domestic expenditure on research and developmentgovernment intramural expenditure on research and developmenthigher education expenditure on research and developmentproposed Innovation Advisory CommitteeIndustry Canadainformation and communication technologiesintellectual propertyintellectual property rightIndustrial Research Assistance ProgramIndustrial and Regional Benefitsproposed Industrial Research and Innovation Councillabour-sponsored venture capital fundmultifactor productivityNational Research Council CanadaNatural Resources CanadaNatural Sciences and Engineering Research CouncilOrganisation for Economic Co-operation and Developmentresearch and developmentregional development agencyscience and technologyStrategic Aerospace and Defence InitiativeSmall Business Investment Company program (US)Small Business Innovation and Research program (US)Sustainable Development Technology Canadasmall and medium-sized enterpriseScientific Research and Experimental Developmentproposed Science and Research CommitteeSocial Sciences and Humanities Research CouncilState Science & Technology InstituteScience, Technology and Innovation Councilthe three granting councils: NSERC, SSHRC and CIHRTechnology Strategy Board (UK)United KingdomUnited Statesventure capitalWestern Economic Diversification Canadaxi

Innovation Canada: A Call to ActionList of RecommendationsRecommendation 1Create an Industrial Research and Innovation Council (IRIC), with a clear business innovationmandate (including delivery of business-facing innovation programs, development of abusiness innovation talent strategy, and other duties over time), and enhance the impact ofprograms through consolidation and improved whole-of-government evaluation.Recommendation 2Simplify the Scientific Research and Experimental Development (SR&ED) program by basingthe tax credit for small and medium-sized enterprises (SMEs) on labour-related costs.Redeploy funds from the tax credit to a more complete set of direct support initiatives tohelp SMEs grow into larger, competitive firms.Recommendation 3Make business innovation one of the core objectives of procurement, with the supportinginitiatives to achieve this objective.Recommendation 4Transform the institutes of the National Research Council (NRC) into a constellation of largescale,sectoral collaborative R&D centres involving business, the university sector and theprovinces, while transferring NRC public policy-related research activity to the appropriatefederal agencies.Recommendation 5Help high-growth innovative firms access the risk capital they need through theestablishment of new funds where gaps exist.Recommendation 6Establish a clear federal voice for innovation, and engage in a dialogue with the provincesto improve coordination and impact.xii

Executive SummaryExecutive SummaryInnovation Canada: A Call to ActionCanada has a solid foundation on which tobuild success as a leader in the knowledgeeconomy of tomorrow. We have a strongfinancial sector and attractive corporate taxrates. We have a diverse, well-educatedworkforce and significant natural resourceendowments. We have institutions thatsafeguard the rights of individuals andencourage initiative. Yet, despite thesenotable strengths, challenges remain.Studies have repeatedly documented thatbusiness innovation in Canada lags behindother highly developed countries. This gapis of vital concern because innovation isthe ultimate source of the long-termcompetitiveness of businesses and thequality of life of Canadians. The ability toconjure up new products and services, tofind novel uses for existing products and todevelop new markets — these fruits ofinnovation are the tools that will ensureCanada’s success in the twenty-first century.Recognizing that innovation is paramountto continued prosperity, Budget 2010,Leading the Way on Jobs and Growth,announced a comprehensive review ofsupport for research and development(R&D) in order to optimize the contributionsof the Government of Canada to innovationand related economic opportunities forbusiness. Our Panel was appointed inOctober 2010 and was mandated by theMinister of State (Science and Technology)The Panel’s Advice in aNutshellCreate an Industrial Research and InnovationCouncil (IRIC), with a clear business innovationmandate (including delivery of business-facinginnovation programs, development of abusiness innovation talent strategy, and otherduties over time), and enhance the impact ofprograms through consolidation and improvedwhole-of-government evaluation.Simplify the Scientific Research andExperimental Development (SR&ED) program bybasing the tax credit for small and mediumsizedenterprises (SMEs) on labour-related costs.Redeploy funds from the tax credit to a morecomplete set of direct support initiatives to helpSMEs grow into larger, competitive firms.Make business innovation one of the coreobjectives of procurement, with the supportinginitiatives to achieve this objective.Transform the institutes of the NationalResearch Council (NRC) into a constellation oflarge-scale, sectoral collaborative R&D centresinvolving business, the university sector and theprovinces, while transferring NRC public policyrelatedresearch activity to the appropriatefederal agencies.Help high-growth innovative firms access therisk capital they need through theestablishment of new funds where gaps exist.Establish a clear federal voice for innovation,and engage in a dialogue with the provinces toimprove coordination and impact.E-1

Innovation Canada: A Call to Actionto conduct the review announced in theBudget.This report records our advice to thegovernment on how federal programs thatsupport business and commercially orientedR&D can make an even stronger contribution toa more innovative and prosperous Canada.What We Heard andLearnedDuring our extensive consultations, we learnedabout many Canadian success stories and heardfrom numerous entrepreneurs who said thatfederal programs have served them well. Wealso heard that there is opportunity to enhancethe impact of programs to make them evenbetter. We heard that the government shouldbe more focussed on helping innovative firms togrow and, particularly, on serving the needs ofsmall and medium-sized enterprises (SMEs). Weheard that programs need to be more outcomeoriented as well as more visible and easy toaccess. We heard that whole-of-governmentcoordination must be improved and that thereshould be greater cooperation with provincialprograms, which often share similar objectivesand users. We also learned that innovationsupport is too narrowly focussed on R&D —more support is needed for other activitiesalong the continuum from ideas to commerciallyuseful innovation. This extensive feedback,supplemented by research and analysis andinterpreted in the course of the Panel’s internaldialogue, forms the basis of our advice.A Framework for ActionOur work has been guided by a long-term visionof a Canadian business sector that standsshoulder-to-shoulder with the world’sinnovation leaders — ultimately, this meansa more productive and internationallycompetitive economy that supports rising livingstandards for Canadians. To transform thisvision into reality, we believe that thegovernment must focus its efforts on the goalof growing innovative firms into largerenterprises, rooted in Canada but facingoutward to the world and equipped to competewith the best.Achieving the Panel’s vision requires publicpolicy action on a number of fronts, includingongoing efforts to refine and enhancemarketplace and regulatory policies thatinfluence the climate for private sectorcompetition and investment. While theseframework policies are not within the scope ofthis review, we would emphasize that theimpact of our advice depends ultimately oncomplementary efforts to strengthen thosepolicies — especially as they relate toencouraging the competitive intensity that is acentral motivator of innovation.The core of our advice can be summarized in sixbroad recommendations, the details of whichare elaborated subsequently. Taken together,they provide a framework for action.Industrial Research and Innovation CouncilWe envisage a new, whole-of-governmentprogram delivery vehicle — the IndustrialResearch and Innovation Council (IRIC) —that would be the centrepiece of the federalgovernment’s efforts to help entrepreneursbring their innovative ideas to the marketplaceand grow their companies into internationallysuccessful businesses. To this end, the IRICshould take on at least the following industryfacingactivities:deliver an expanded Industrial ResearchAssistance Program (IRAP) and acommercialization vouchers pilot programthat connects SMEs to providers ofcommercialization supportE-2

Executive Summaryprovide a national “concierge” service andassociated website to help firms find andaccess the support tools they needwork with partners to develop a federalbusiness innovation talent strategy.Moreover, the IRIC could assume the followingresponsibilities: in partnership with the federalgranting agencies, joint oversight of appropriatebusiness-facing programs administered by thoseagencies; technical assessment of the innovationelement of project proposals submitted to theregional development agencies; and oversightof federal support for business-orientedcollaborative research institutes evolved fromthe current institutes of the National ResearchCouncil, as further discussed below.Scientific Research and ExperimentalDevelopment (SR&ED) Tax CreditIn line with feedback from stakeholders, we arerecommending that the SR&ED program shouldbe simplified. Specifically, for SMEs, the base forthe tax credit should be labour-related costs, andthe tax credit rate should be adjusted upward.The current base, which is wider than that usedby many other countries, includes non-labourcosts, such as materials and capital equipment,the calculation of which can be highly complex.This complexity results in excessive compliancecosts for claimants and dissipates a portion ofthe program’s benefit in fees for third-partyconsultants hired to prepare claims.Canada’s program mix is heavily weightedtoward the SR&ED program and, during ourconsultations, we heard many calls for increaseddirect expenditure support. As well, manyleading countries in innovation rely much lessthan Canada on indirect tax incentives asopposed to direct measures. That is why we arerecommending other improvements to theSR&ED program that will generate savingsfor the government. The savings should beredeployed to fund direct support measures forSMEs, as proposed in our otherrecommendations. Specifically, to ensure agreater focus on promoting the growth of firms,the portion of the credit (claimed by SMEs) thatis refundable — that is, paid regardless ofwhether the firm generates taxable income —should be reduced, such that part of the benefitwould depend on the company beingprofitable. Given the central importance of theSR&ED program to firms across the country, ourrecommended changes should be phased inover several years to allow time for adjustment.Risk CapitalInnovative, growing firms require risk capital, yettoo many innovation-based Canadian firms thathave the potential for high growth are unable toaccess the funding needed to realize theirpotential. The government can play animportant role by facilitating access by suchfirms to an increased supply of risk capital atboth the start-up and later stages of theirgrowth. We therefore recommend measures toestablish risk capital funds that target theseareas. The federal government’s contributionto the funds would be delivered through theBusiness Development Bank of Canada (BDC),with incentives and governance designed toensure strong private sector participationand leadership.Collaborative R&D InstitutesCanada needs a fundamentally new approachto building public–private researchcollaborations in areas of strategic importanceand opportunity for the economy. Accordingly,we recommend that the business-orientedinstitutes of the National Research Council(NRC) should become independent collaborativeresearch organizations, intended to be focalpoints for sectoral research and innovationstrategies with the private sector. Those NRCinstitutes that perform primarily fundamentalresearch would become affiliates of universities,E-3

Innovation Canada: A Call to Actionwhile those with core public policy mandateswould be transferred to the most relevantfederal department or agency.Public Sector ProcurementThe government should make better use of itssubstantial purchasing power to createopportunity and demand for leading-edgegoods, services and technologies from Canadiansuppliers. This will foster the development ofinnovative and globally competitive Canadiancompanies connected to global supply chains,while also stimulating innovation and greaterproductivity in the delivery of public goods andservices. We therefore recommend thatencouragement of innovation in the Canadianeconomy should become a stated objective ofprocurement policies and programs. Further tothis end, we recommend, among othermeasures, that the current pilot phase of theCanadian Innovation CommercializationProgram (CICP) evolve into a permanent, largerand effective program that provides incentivesfor solving operational problems identified byfederal departments.Whole-of-Government LeadershipThe responsibility to foster innovation cutsacross many functions of government andrequires a system-wide perspective. For thisreason, the government needs to establishbusiness innovation as a whole-of-governmentpriority. This will require the designation of aminister as the voice for innovation, with astated mandate to put innovation at the centreof the government’s economic strategy and toengage the provinces in a dialogue oninnovation to improve coordination and impact.Effective implementation of our action plan willdepend on an oversight structure that ensuresthe timely achievement of desired outcomes.We recommend that the government’s maintool in that regard should be an externalInnovation Advisory Committee (IAC) — a bodywith a whole-of-government focus that wouldoversee the realization of our proposed actionplan, as well as serve as a permanentmechanism to promote the refinement andimprovement of the government’s businessinnovation programs going forward.E-4

Executive SummaryGuiding PrinciplesIn the course of our consultations and research,we developed a set of broad guiding principles— essentially a philosophy of program design topromote business innovation (see Chapter 4 inour main report). These principles, which arereflected in the foregoing framework for action,can be summarized as follows.Transformative ProgramsPrograms to support business innovation shouldfocus resources where market forces are unlikelyto operate effectively or efficiently and, in thatcontext, address the full range of businessinnovation activities, including research,development, commercialization andcollaboration with other key actors in theinnovation ecosystem. The design and deliveryof federal business innovation programs mustalways strive to result in R&D activity andcommercialization outcomes that meet thehighest global standards.Require Positive Net BenefitThe total benefit of any given program shouldbe greater than the cost of funding,administering and complying with the program.Support programs should reduce the subsidyamount provided — or move to a repayablebasis — the closer the activity being supportedis to market, and therefore the more likely it isthat the recipient firm will capture most of thebenefit for itself. There is also a need forcoordination across the full suite of innovationprograms to avoid excessive “stacking” ofincentives that may result in subsidies that arehigher than needed to achieve policy objectives.Excessive subsidization not only wastes financialresources, but also risks encouraging orsustaining activities that deliver little societalbenefit.Favour National Scope and BroadApplicationThe core of the federal suite of businessinnovation programs should be large nationalprograms of broad application — for example,the SR&ED program and IRAP — that supportbusiness innovation activity generally,empowering firms and entrepreneurs to makemarket-driven investment decisions according totheir own timelines and regardless of sector,technology or region.Build Sector Strategies CollaborativelyBeyond programs of broad application, there isa complementary role for programs tailored tothe needs of specific sectors that thegovernment identifies as being of strategicimportance. For industry sectors that areconcentrated in particular regions, initiativesshould be designed and delivered to workcollaboratively with the relevant provinces andother local interests.Require Commercial Success in RegionalInnovationRegionally oriented programs to supportbusiness innovation should focus on creatingthe capacity of firms in the target region tosucceed in the arena of global competition.That is why it is essential for regional innovationprograms to apply the same high standards ofcommercial potential as are required byprograms of nationwide application.E-5

Innovation Canada: A Call to ActionEstablish Clear Outcome Objectives,Appropriate Scale and a User-OrientedApproachA program to foster business innovation shouldbe designed to address a specific problem forwhich a government initiative is needed as partof the solution. The program should have welldefinedoutcome objectives, be of a scaleappropriate for the problem at hand, be wellknown to its target clientele, and be easy andtimely to access and use.Design for FlexibilityFederal innovation programs should themselvesbe innovative and flexible in their design, settingclear objectives and measurable outcomes, andthen allowing program users to propose novelways of meeting the objectives. For example,where appropriate, programs should invite civilsociety to make proposals to develop newapproaches and to actually deliver programs,rather than relying exclusively on establishedgovernment delivery mechanisms.Assess EffectivenessMore extensive performance managementinformation is required to ensure an outcomedrivenand user-oriented approach to federalsupport for business innovation. This entailsregular public reporting on the outcomes bothof individual programs and of the full suite offederal innovation support. The performanceinformation would inform periodic evaluations,not only against the objectives of programsthemselves, but also of the programs’ relativeeffectiveness within the overall portfolio.E-6

Executive SummaryApproach to Our MandateThe Panel was asked by the government toprovide advice in respect of the effectiveness offederal programs to support business andcommercially oriented R&D, the appropriatenessof the current mix and design of theseprograms, as well as possible gaps in the currentsuite of programs and what might be done tofill them. The mandate specified that ourrecommendations must not result in either anincrease or a decrease in the overall level offunding of federal R&D initiatives. Therefore,where we have identified opportunities forsavings — such as from some reduction in therefundability of the SR&ED tax credit — weexpect the government to reallocate thesavings to provide funds for our otherrecommendations.The year-long process culminating in this reportbegan with foundational briefings from expertsand decision makers in both the federal andprovincial governments. We implemented, inparallel, an ambitious agenda of research andprogram assessment. The latter encompassed aset of 60 programs (worth about $5 billion inthe 2010–11 fiscal year) covering the gamut offederal initiatives to foster business R&D. Ourextensive consultations included 228 writtensubmissions in response to the release of ourconsultation paper in December 2010. Thesewere supplemented by in-person group sessionsin cities from coast to coast: Vancouver, Calgary,Winnipeg, Waterloo, Toronto, Ottawa,Montréal, Québec and Halifax. We extendedthe scope of consultations beyond Canada togather international perspectives on issuesgermane to this review. Meetings tookplace in Australia, Germany, Singapore, theUnited Kingdom and the United States, andwith officials of the Organisation forEconomic Co-operation and Development(OECD) and Tekes 1 in Paris. Finally, wecommissioned a survey of more than athousand R&D-performing businessesrepresentative of the range of sizes, sectorsand provinces.1 Tekes is a Finnish funding agency for technology and innovation.E-7

Innovation Canada: A Call to ActionRecommendationsOur headline advice has been summarized inthe Framework for Action and associatedGuiding Principles sections above. What followsare detailed statements of our recommendations,organized in response to the three specificquestions in the Panel’s mandate.Program EffectivenessThe first question in the Panel’s mandate asks:What federal initiatives are most effective inincreasing business R&D and facilitatingcommercially relevant R&D partnerships?The government regularly evaluates individualprograms against the stated objectives of eachprogram. But these objectives vary widelyamong programs in terms of the outcomesbeing targeted, and the evaluation datacollected for individual programs have generallynot been designed to enable assessment of thecomparative effectiveness of programs. Ouradvice in respect of program effectiveness istherefore based not only on available dataregarding the 60 programs we reviewed butalso, and more particularly, on our consultationsand related research.From what we heard and learned, there is aneed to improve the business expertise ofprogram delivery staff and to achieve greaterscale and efficiency in program implementation.We have concluded that SMEs need enhancedaccess to services and small grant or voucherbasedfunding to assist their innovationactivities. We found that the bewildering arrayof innovation support programs (at both thefederal and provincial levels) made it difficult forcompanies to navigate the landscape to locatethe right programs for their purposes.Our survey of R&D-performing firmsdemonstrated that client awareness of mostprograms is low (with the exception of theSR&ED program and IRAP). We also found thatthe current suite of programs to develop anddeploy the talent needed to meet the needs ofinnovative businesses is a patchwork of largelysubscale initiatives. More generally, we foundthat there are opportunities to improve programefficiency and flexibility by combining smallerinitiatives with similar objectives. Finally, weconcluded that adequate tools do not exist tocomparatively assess relative programeffectiveness. Therefore, the evidence base islacking for a regular and systematic reallocationof resources among programs to achieve themost cost-effective support for businessinnovation.Based on these findings, as detailed inChapter 5 of our main report, we make thefollowing recommendations.E-8

Executive SummaryRecommendation 1Create an Industrial Research andInnovation Council (IRIC), with a clearbusiness innovation mandate (includingdelivery of business-facing innovationprograms, development of a businessinnovation talent strategy, and other dutiesover time), and enhance the impact ofprograms through consolidation andimproved whole-of-governmentevaluation.1.1 Industrial Research and InnovationCouncil (IRIC) — Create an arm’s-lengthfunding and delivery agency — IRIC — witha clear and sharply focussed mission tosupport business innovation. IRIC shouldbecome the common service platform for allappropriate federal business innovationsupport programs. Over time, it should takeon at least the following industry-facingactivities, as further elaborated inRecommendations 1.2 through 1.4:delivery of the Industrial ResearchAssistance Program (IRAP) and acommercialization vouchers pilotprogram (1.2)delivery of a national concierge serviceand related web portal (1.3)development of a federal businessinnovation talent strategy (1.4).1.2 Resources for IRAP andcommercialization vouchers — IncreaseIRAP’s budget to enable it to build on itsproven track record of facilitatinginnovation by SMEs throughout Canada,and create a national commercializationvouchers pilot program, delivered within thesuite of existing support mechanismsoffered through IRAP, to help SMEs connectwith approved providers ofcommercialization services in postsecondary,government, non-profit andprivate organizations.1.3 Innovation concierge service —Establish a national “concierge” service andassociated comprehensive web portal toprovide companies with high-quality, timelyadvice to help identify and access the mostappropriate business innovation assistanceand programs for the individual firm.1.4 Talent — IRIC should lead the developmentof a federal business innovation talentstrategy, working closely with the provincesand relevant federal departmentsand agencies, focussed on increasingbusiness access to, and use of, highlyqualified and skilled personnel.1.5 Program consolidation — Over time,consolidate business innovation programsfocussed on similar outcome areas into asmaller number of larger, more flexibleprograms open to a broader range ofapplicants and approaches.1.6 Program evaluation — Build a federalcapacity to assess the effectiveness of newand existing business innovation programsto enable comparative performanceevaluation and to guide resource allocationgoing forward.Program Mix and DesignThe second question in the Panel’s mandateasks: Is the current mix and design of taxincentives and direct support for business R&Dand business-focussed R&D appropriate?The SR&ED tax credit — which currentlyprovides approximately $3.5 billion annuallytoward the cost of business R&D — is theflagship of federal support for businessinnovation. The program lowers the cost of R&Dfor firms, promotes greater investment in R&D,and makes Canada a more attractive place tolocate R&D activity. It allows almost 24 000firms across all economic sectors and regions ofthe country to make individual, market-drivendecisions about the R&D they need to competeE-9

Innovation Canada: A Call to Actionand succeed. It is essential that this highlyvalued program be made simpler, morepredictable and more cost effective inpromoting business innovation.However, the heavy reliance on the programimplies that federal support for innovation maybe overweighted toward subsidizing the cost ofbusiness R&D rather than other importantaspects of innovation. For this reason, webelieve that the government should rebalancethe mix of direct and indirect funding bydecreasing spending through the SR&EDprogram and directing the savings tocomplementary initiatives outlined in ourother recommendations.For the reasons outlined above, as detailed inChapter 6 of our main report, we make thefollowing recommendations.Recommendation 2Simplify the SR&ED program by basing thetax credit for SMEs on labour-related costs.Redeploy funds from the tax credit to amore complete set of direct supportinitiatives to help SMEs grow into larger,competitive firms.2.1 Simpler compliance andadministration — The tax creditbenefiting small and medium-sizedCanadian-controlled private corporations(CCPCs) should be based on labour-relatedcosts in order to reduce compliance andadministration costs. Because the creditwould be calculated on a smaller cost basethan at present, its rate would be increased.Over time, the government should alsoconsider extending this new labour-basedapproach to all firms, provided it is able toconcurrently provide compensatoryassistance to offset the negative impactsof this approach on large firms with highnon-labour R&D costs.2.2 More predictable qualification —Improve the Canada Revenue Agency’spreclaim project review service to providefirms with pre-approval of their eligibility forthe credit.2.3 More cost effective — Reduce theamount of SR&ED tax credit assistance byintroducing incentives that encourage thegrowth and profitability of small andmedium-sized enterprises (SMEs) whiledecreasing the refundable portion of thecredit over time. Redeploy the savings tofund new and/or enhanced support forinnovation by SMEs, as proposed in thePanel’s other recommendations.2.4 More accountable — Provide data on theperformance of the SR&ED tax credit on aregular basis to permit evaluation of its costeffectivenessin stimulating R&D, innovationand productivity growth.2.5 Phased implementation andconsultation — Adopt the proposedchanges through a phased-in approach togive the business sector time to plan andadjust smoothly. There should be earlyconsultations with the provinces on theproposed changes, given that they maywant to consider adopting the same baseas the federal government.Program GapsThe third question in the Panel’s mandate asks:What, if any, gaps are evident in the currentsuite of programming, and what might be doneto fill these gaps?Based on our consultations, the identificationby the OECD of gaps in Canada’s innovationsystem, and the findings of panels before us —namely, the Competition PolicyE-10

Executive SummaryReview Panel and the Expert Panel onCommercialization — we concluded that threegaps were most significant: (i) the strategic useof public sector procurement to fosterinnovation, (ii) the enhanced use of large-scaleresearch collaboration and (iii) the availability ofrisk capital to finance the development andgrowth of innovative businesses. The followingthree recommendations, as detailed inChapter 7 of our main report, address eachof these gaps in turn.Public Sector ProcurementWe concluded from our consultations andresearch that government support for businessinnovation needs to employ more “demandpull”measures to complement the moretraditional suite of “research-push” measures.To this end, public sector procurement andrelated programming should be used to createopportunity and demand for leading-edgegoods, services and technologies from Canadiansuppliers. This will foster the development ofinnovative and globally competitive Canadiancompanies while also stimulating innovationand greater productivity in the delivery of publicsector goods and services.Recommendation 3Make business innovation one of thecore objectives of procurement, with thesupporting initiatives to achieve thisobjective.3.1 Innovation as an objective — Make theencouragement of innovation in theCanadian economy a stated objective ofprocurement policies and programs.3.2 Scope for innovative proposals —Wherever feasible and appropriate, baseprocurement requests for proposals on adescription of the needs to be met orproblems to be solved, rather than ondetailed technical specifications that leavetoo little opportunity for innovativeproposals.3.3 Demand-pull — Establish targets fordepartments and agencies for contractingout R&D expenditures, including a subtargetfor SMEs, and evolve the current pilotphase of the Canadian InnovationCommercialization Program (CICP) into apermanent, larger program that solicits andfunds the development of solutions tospecific departmental needs so that thegovernment stimulates demand for, andbecomes a first-time user of, innovativeproducts and technologies.3.4 Globally competitive capabilities —Plan and design major Crown procurementsto provide opportunities for Canadiancompanies to become globally competitivesubcontractors.3.5 Working collaboratively — Exploreavenues of collaboration with provincialand municipal governments regarding theuse of procurement to support innovationby Canadian suppliers and to fostergovernments’ adoption of innovativeproducts that will help reduce the cost andimprove the quality of public services.Public–Private Research CollaborationWe believe that public–private researchconsortia in Canada lack the scale needed tohave significant impact on the development ofglobally competitive Canadian companies.Consequently, Canada needs a fundamentallynew approach to building such collaborations inareas of strategic importance and opportunityfor the economy. The existing institutes of theNRC are a unique asset in terms ofinfrastructure, talent and sectoral and regionalcoverage. Consistent with the new directionbeing taken by NRC management, we believethat several of the institutes should be evolvedto become a core national constellation of R&DE-11

Innovation Canada: A Call to Actionand technology institutes mandated tocollaborate closely with business in key sectors.The appropriate individual institutes couldbecome focal points for the development ofR&D and innovation strategies for key sectors,for major enabling technologies and for regionalclusters of innovative firms and supportingservices.Recommendation 4Transform the institutes of the NationalResearch Council (NRC) into a constellationof large-scale, sectoral collaborative R&Dcentres involving business, the universitysector and the provinces, while transferringNRC public policy-related research activityto the appropriate federal agencies.4.1 Evolution of the NRC — Charge the NRCto develop a plan for each of its existinginstitutes and major business units thatwould require their evolution over the nextfive years into one of the following:(a) an industry-oriented non-profitresearch organization mandated toundertake collaborative R&D andcommercialization projects and services,funded by amounts drawn againstexisting NRC appropriations togetherwith revenue earned from collaborativeactivities(b) an institute engaged in basic research tobe affiliated with one or moreuniversities and funded by an amountdrawn against existing NRCappropriations together withcontributions from university and/orprovincial partners(c) a part of a non-profit organizationmandated to manage what are currentlyNRC major science initiatives andpotentially other such researchinfrastructure in Canada(d) an institute or unit providing services insupport of a public policy mandate andto be incorporated within the relevantfederal department or agency.4.2 IRAP — Transfer the Industrial ResearchAssistance Program to the proposedIndustrial Research and InnovationCouncil (IRIC).4.3 Structure and oversight — Institutescould be established as independent nonprofitcorporations, with the federalgovernment’s share of funding managedand overseen by the proposed IRIC forindustry-oriented institutes in category (a)above, and by the Natural Sciences andEngineering Research Council (NSERC) orCanadian Institutes of Health Research(CIHR) for categories (b) and (c) above.(Apart from functions in category (d), anyresidual activities of NRC, or institutes thatare unable to secure adequate funding,would be wound down according to anappropriate transition plan.)Financing Growth of Innovative BusinessesWe heard repeatedly that too many innovativefirms with high growth potential have difficultyattracting sufficient risk capital to finance thepath from an initially promising idea through tocommercial viability. Similar observations havebeen made by earlier panels that haveaddressed the issue. Data demonstrate that thesupply of risk capital for innovation-basedbusinesses is comparatively much smaller inCanada than in the US. Consequently, Canadianstart-ups are less likely to get the capital theyneed to achieve commercial viability. In addition,the preponderance of foreign (mostly US-based)investors in late-stage venture capital andbuyouts of Canadian firms means that theintellectual property is likely to be exploitedprimarily outside Canada.E-12

Executive SummaryRecommendation 5Help high-growth innovative firms accessthe risk capital they need through theestablishment of new funds wheregaps exist.5.1 Start-up stage — Direct the BusinessDevelopment Bank of Canada (BDC) toallocate a larger proportion of its portfolioto start-up stage financing, preferably inthe form of a “sidecar” fund with angelinvestor groups.5.2 Late stage — Provide the BDC with newcapital to support the development oflarger-scale, later-stage venture capitalfunds and growth equity funds in supportof the private venture capital and equityindustry. These funds would specialize indeal sizes of $10 million and above that aremanaged by the private sector and subjectto appropriate governance practices.Whole-of-Government LeadershipInnovation is the principal source of productivitygrowth in the long run, and thus lies at theheart of Canada’s future prosperity. Butinnovation far transcends just the applicationof science and technology and R&D. Aresponsibility to foster innovation cuts acrossmany functions of government and thereforerequires a system-wide perspective and wholeof-governmentpriority. This will requirerestructuring the governance of thegovernment’s business innovation agenda, whiledeveloping a shared and cooperative approachwith provincial and business leaders.Recommendation 6Establish a clear federal voice for innovation,and engage in a dialogue with the provincesto improve coordination and impact.6.1 Assign responsibility — Identify a leadminister responsible for innovation in theGovernment of Canada together with astated mandate to put business innovationat the centre of the government’s strategyfor improving Canada’s economicperformance.6.2 Whole-of-government advice —Transform the Science, Technology andInnovation Council (STIC) to become thegovernment’s external Innovation AdvisoryCommittee (IAC), with a mandate toprovide whole-of-government advice on keygoals, measurement and evaluation ofpolicy and program effectiveness, therequirement for new initiatives respondingto evolving needs and priorities goingforward, and all other matters requiring afocussed external perspective on thegovernment’s innovation agenda. The IACshould act though through two standingsubcommittees: a Business InnovationCommittee (BIC) and a Science andResearch Committee (SRC).6.3 National dialogue on innovation —Through the minister responsible forinnovation, engage provincial and businessleaders in an ongoing national dialogueto promote better business innovationoutcomes through more effectivecollaboration and coordination in respectof program delivery, talent deployment,sectoral initiatives, public sectorprocurement, appropriate tax credit levelsand the availability of risk capital.E-13

Innovation Canada: A Call to ActionIn ConclusionGuided by strong leadership and soundprinciples, and through concerted action, theend result of our recommendations will be arebalanced system of federal assistance forbusiness innovation that provides more effectivesupport to innovative firms, especially SMEs, tohelp them grow and become large competitiveCanadian enterprises. Federal support forbusiness innovation will be outcome oriented,collaborative and innovative in itsimplementation. It will be held to account bystate-of-the-art procedures for evaluation acrossthe suite of programs. The Government ofCanada will have assumed a leadership role byestablishing innovation as a whole-ofgovernmentpriority and by engaging theprovinces, businesses and post-secondaryinstitutions in a national dialogue on innovation.Going forward, the Panel welcomes theopportunity to meet with government officials,business leaders and post-secondary institutionsto discuss our recommendations. The agenda isambitious, but so too is our vision — aCanadian business sector that stands shoulderto-shoulderwith the world’s innovation leaders.While this is a long-term goal, governmentaction must be swift and decisive, because theimpact of the initiatives begun today may takeyears, even decades, to be fully realized.The longest journey begins with the first step,so the time to act is now.E-14

Motivation and MandateChapterMotivation andMandate1Canadians enjoy an enviable standard of living,but sustaining our prosperity depends onmaintaining economic competitiveness in aglobal context both filled with opportunities andfraught with challenges. Among these isincreased competition due to a convergence offactors, including vastly more powerfulcommunications technologies that have shrunk“economic space” and virtually overnighttransformed the scope and intensity ofcompetition. The emerging competitors —China, India, Brazil and many others in thewings or already on stage — are no longermerely the low-cost suppliers of services andmanufactured goods. They are using education,research and development (R&D), and thecommitment of their governments to innovateand rapidly ascend the value chain. Thechallenge for highly developed countries likeCanada, accustomed to generations atop theglobal economic league tables, is clear.Equally clear is the prospect that the emergenteconomies, already home to more than half theworld’s population, will convert theirburgeoning prosperity into the greatest marketopportunities ever. But these are not availablesimply for the asking. The winners will be thecompanies that can provide products matchedto the culture, priorities and state ofdevelopment of the new customers — forexample, medical devices that perform at closeto state-of-the-art but for a small fraction of thecost. The fact is that the emerging marketsalready include large and rapidly growingpopulations of middle and upper incomeconsumers equipped with both spending powerand new generations of infrastructure such asadvanced wireless networks. In short, to seizethe opportunities and to meet the challenges oftoday’s economy, Canadian businesses need toadopt a thoroughly global outlook coupled witha focus on innovation. This will require, formany, a significant shift in habit, perspectiveand strategy.Perhaps the greatest risk is complacency.Canadians can be justly proud of the way thecountry has fared during the recent crisis years.A sound banking system, buoyant demand formany of our natural resources, ready access tothe world’s greatest market on our southernborder, and years of prudent fiscal managementhave served Canada well and will continue todo so. But a strong Canadian currency andstubborn economic weakness in the UnitedStates, our dominant export market, challengeCanadian businesses to become much moreinnovative.Being more innovative is also what is needed totake advantage of leading-edge technologieslike biotechnology, nanotechnology andinformation technology. These are giving rise toentirely new markets and are providing novelapproaches to the pressing challenges of our era— such as how economies can continue togrow in ways that are environmentallysustainable, or how health care expectationscan be met in ways that are fiscally sustainable.1-1

Innovation Canada: A Call to ActionAt the same time, the ageing of the baby-boomgeneration means that the share of Canada’spopulation that is of working age will decline,thus increasing the competition for workers andskills and requiring more output per worker —that is, greater productivity — to support agrowing proportion of dependants.Taken together, these realities imply thatCanada’s prosperity will depend, more thanever, on an innovative economy. Innovationdrives our ability to create more economic valuefrom an hour of work. The resulting productivitygrowth increases economic output per worker,creating the potential for rising wages andincomes, and thus for a higher standard ofliving. It is for this reason that businessinnovation delivers great benefit, not only forindividual firms, but also for society as a whole.Countries around the world have recognized theimportance of business innovation as theultimate source of competitive advantage andincreasing prosperity. Many governments aretherefore increasing support for innovation evenas they struggle to balance overall budgets.Significant efforts are being devoted to thedevelopment of new and more effective ways toencourage and support business innovation. Infact, just as businesses are challenged tobecome more innovative, so too are publicpolicy-makers.The federal and provincial governments play animportant role in fostering an economic climatethat encourages business innovation — forexample, by supporting basic and appliedresearch and related training of highly qualified,skilled people, and by providing substantialfunding through tax incentives and programsupport to directly enhance business R&D.For decades, Canadian business spending onR&D — a key input to many kinds of innovation— maintained a steady up-trend, evidence ofthe country’s economic and technologicalprogress. Other highly industrialized countrieswere doing the same, so R&D spending byCanadian businesses remained near the middleof the pack of our peer group of membercountries of the Organisation for EconomicCo-operation and Development (OECD), andwell behind leaders like the United States,Japan, Germany, Sweden and Finland (OECD2011). But until the collapse of the “techbubble” in 2001, our R&D gap, relative to theOECD average, had begun to narrow, driven byexceptionally strong R&D spending in thetelecommunications equipment sector asInternet and wireless infrastructure was rapidlybuilt out. Then, suddenly, the decades-long uptrendof business R&D in Canada stalled. In fact,business R&D spending (adjusted for inflation)has been falling since 2006 and is now below itslevel in 2001 (Figure 1.1).Research and development is a key ingredient ina great deal of business innovation and is alsoan essential contributor to Canada’sinternational competitiveness and productivitygrowth. The fact that Canada’s business R&Dmomentum stalled a decade ago and has notresumed is both alarming and unacceptable. It isurgent that business R&D in Canada startgrowing strongly again.Recognizing this, Budget 2010, Leading theWay on Jobs and Growth, announced acomprehensive review of federal support to R&Din order to optimize federal contributions toinnovation and to economic opportunities forbusiness (Department of Finance 2010a). Thedecision to undertake this review came in thewake of a series of reports — including State ofthe Nation 2008 (since updated for 2010) bythe Science, Technology and Innovation Council(STIC 2011), and Innovation and BusinessStrategy: Why Canada Falls Short, by theCouncil of Canadian Academies (CCA 2009) —which provided in-depth analyses of Canada’sweak performance in the interrelated areas ofbusiness R&D, business innovation andproductivity growth.1-2

Motivation and MandateFigure 1.1 Canadian Business Expenditure on Research and Development (BERD),1985–2010 (billions of 2000 constant dollars)16141210864201985 1990 1995 2000 2005 2010Source: OECD (2011).On October 14, 2010, the governmentappointed an independent panel to undertakethe review. The members of our Panel are:Thomas Jenkins (Chair), Executive Chairmanand Chief Strategy Officer, Open Text Corp.Bev Dahlby, Professor of Economics,University of AlbertaArvind Gupta, Chief Executive Officer andScientific Director, MITACS Inc.Monique F. Leroux, Chair of the Board,President and Chief Executive Officer,Desjardins GroupDavid Naylor, President, University of TorontoNobina Robinson, Chief Executive Officer,Polytechnics Canada.This report is the culmination of the ensuingyear-long review — an exercise focussed onenhancing federal government programming tofoster a more innovative Canadian economy,thereby improving the competitiveness ofCanadian firms and the productivity of theeconomy.The Panel’s MandateBuilding on the foundational work of the CCAand STIC, we were asked to conduct anassessment of key programs within thegovernment’s portfolio of initiatives in supportof business and commercially oriented R&D —specifically, the following:tax incentive programs such as the ScientificResearch and Experimental Development(SR&ED) programprograms that support innovative businessR&D, including general support, sectorsupport and regional support1-3

Innovation Canada: A Call to Actionprograms that support business-focussedR&D through federal granting councils andother departments and agencies, includingresearch performed in universities andcolleges that fosters support for businessR&D, such as the Centres of Excellence forCommercialization and Research program.We were given the latitude to consider otherfederal initiatives relevant to the review’s scope.However, the review was to exclude: (i) researchconducted in federal laboratories to fulfil theirregulatory mandates and (ii) basic researchconducted in institutions of higher educationand not intended to foster support for businessR&D.We were asked specifically to provide advicerelated to the following questions:What federal initiatives are most effective inincreasing business R&D and facilitatingcommercially relevant R&D partnerships?Is the current mix and design of tax incentivesand direct support for business R&D andbusiness-focussed R&D appropriate?What, if any, gaps are evident in the currentsuite of programming, and what might bedone to fill these gaps?Consistent with our mandate, we were asked toaddress any and all federal programs that havean impact on business or commercially orientedR&D, as well as how such programs fit withinthe larger innovation context. The mandatespecified furthermore that ourrecommendations should not result in anincrease or decrease in the overall level offunding required for federal R&D initiatives.Where we have recommended measures thatwould yield savings, we have also identifiedareas in need of the funds that would be freedup. Our primary objective has been to advise onhow the government’s existing outlays insupport of business and commercially orientedR&D can be deployed more effectively topromote innovation, productivity growth andincreased prosperity for Canadians. Therefore,while the immediate effect of ourrecommendations is meant to be budgetneutral, the ultimate impact will be a moreproductive economy and a stronger fiscalposition.The Panel’s ApproachIn fulfilment of our mandate, we have, with theaid of a secretariat seconded from the federalgovernment, overseen a thorough process ofresearch, program assessment and consultation.The research included expert briefings, anextensive literature review and other technicalbackground work by, or on behalf of, thesecretariat. The program assessment, which isdescribed more fully in Chapter 3, encompasseda set of 60 programs covering the gamut offederal initiatives to foster business R&D.Our consultation phase began with the issue ofa public consultation paper in December 2010.This elicited 228 submissions — 96 fromcompanies, 80 from organizations andassociations, 38 from academic institutions,seven from governments or governmentalorganizations, and seven from individuals. Tosupplement written submissions, face-to-faceconsultations were held in Vancouver, Calgary,Winnipeg, Waterloo, Toronto, Ottawa,Montréal, Québec and Halifax. We met a totalof 164 participants during the course of 32sessions, each of which focussed on a theme orsector of relevance to the host region. Meetingswere also held with senior officials from manyfederal departments and agencies and from allprovinces.We extended the scope of in-personconsultations beyond Canada to learn aboutinternational perspectives on issues germane to1-4

Motivation and Mandatethis review. Meetings took place in Australia,Germany, Singapore, the United Kingdom andthe United States, and with officials of theOECD and Tekes 1 in Paris.We complemented our face-to-faceconsultations with a survey conducted by EKOSResearch Associates Inc. of more than athousand R&D-performing businesses of varyingsizes, sectors and provinces. The survey resultsprovided us with a rich base of data, from theclient perspective, on the impact, strengths andweaknesses of federal support for businessR&D.This extensive process of consultations, researchand program assessment, supplemented by ourown deliberations and analyses, formed thebasis upon which we developed our advice forthe government.1 Tekes is a Finnish funding agency for technology and innovation.1-5

The Context of the ReviewChapterThe Context of theReview2The purpose of this chapter is to provide a briefoverview of the principal concepts as well asfacts and figures regarding business innovationin Canada and in relation to our peer group ofhighly developed countries. It draws on reportsby the Council of Canadian Academies (CCA)and the Science, Technology and InnovationCouncil (STIC), work by Statistics Canada andthe Organisation for Economic Co-operationand Development (OECD), and backgroundresearch conducted for the Panel.Innovation andProductivity GrowthThe material standard of living of a societydepends on productivity — the value of goodsand services produced per hour of work. A highlevel of employment is clearly important, andfavourable movements in the world prices of acountry’s exports — for example, certain naturalresources in Canada’s case — can boostprosperity, at least for a time. But over the longrun, it is labour productivity growth that drivesincreases in average per capita incomes andbusiness competitiveness. Productivity growth,in turn, is primarily the result of innovation.In a phrase, innovation means “new or betterways of doing valued things” (CCA 2009,p. 21). Innovation is not synonymous withinvention, although the spark of inventionor creativity is a necessary precedent forinnovation. Business innovation occurs whena new or improved “something” — a good,a service, a process, a business model, amarketing tool or an organizational initiative —is put into practice in a commercially significantway. In more technical terms, the Oslo Manual(OECD and Eurostat 2005, p. 46) reflects thecurrent international consensus that definesinnovation as “the implementation of a new orsignificantly improved product (good or service),or process, a new marketing method, or a neworganizational method in business practices,workplace organization or external relations”(see also Box 2.1).The means by which an idea or prototype istransformed into a market-ready product isoften referred to as commercialization and is atthe core of the process by which inventionbecomes business innovation — the processfrom “mind to market.” Commercialization is amulti-faceted and multi-stage phenomenonthat, depending on the product, often involvesdesign, engineering, production planning andthe related research and development (R&D).Moreover, it almost always involves capitalinvestment, market assessment and salesplanning as well as financial and legal analysis,among other activities.Some innovations — like the automobile, theInternet or penicillin — are game changers. Butthe vast majority of innovation is incremental —the continuous improvement of products andprocesses. Innovations must of course startsomewhere but, unless and until an innovation2-1

Innovation Canada: A Call to ActionBox 2.1 Types of Innovation andTheir Support by GovernmentThe Oslo Manual (OECD and Eurostat 2005) defines innovation broadly to encompass product,process, organization and market innovation. This four-part typology is elaborated upon by Lynchand Sheikh (2011) as follows.Product innovation. New products (whether goods or services) that move up the value-addedchain or are first to market typically carry higher profit margins because they face less costcompetition than standardized products. New information and communication technologydevices and software or new (pre-generic) pharmaceuticals are typical examples. Productinnovation can be the result of R&D and/or of aggregating existing leading technologies in anew way that better meets customer demands, as illustrated, for example, by the “smartphone” (wireless telephony, GPS, email, camera, etc.).Process innovation. The objective is to change how products are produced and delivered toreduce cost and/or to increase convenience for users. Topical examples include development ofglobal supply chains, and Internet-based shopping. Many Canadian manufacturers have provento be adept “plant floor” process innovators — for example, Canadian auto plants are regularlyrated among the most productive in North America. Innovation by Canadian natural resourcescompanies — in oil and gas, mining and forest products — has also focussed mainly onprocesses as distinct from the development of advanced machinery for resources production orleading-edge products derived from natural resources. A spectacular example of Canadianprocess innovation is the “steam-assisted gravity drainage” (SAGD) method for bitumenrecovery from oil sands.Organization innovation. The capacity to convert creativity, technology and knowledge aboutcustomers into marketable innovations requires a corporate focus on how to best organize andmanage for innovation. Successful business innovation requires the integration of humancapital management and training, technology management and strategic management intostructures that are “innovation supportive.”Market innovation. Examples include entering a new geographical market (e.g., a high-growthemerging market like China, India or Brazil), or addressing a market in an entirely new way(e.g., via the Internet or a smart phone channel). This can shift a firm from fighting for marketshare in existing markets to a temporary “monopoly” position for its particular product in thenew market.Innovations in product, process and market will usually require complementary innovationin organizational form and behaviour in order to be fully effective. While all four types ofbusiness innovation are potentially mutually reinforcing, most government programs thatsupport business innovation address directly product and process innovation and, morespecifically, R&D and related investment in appropriately trained people, as well as risksharing for investment in innovative early-stage companies. (The latter are usually builtaround a novel product or process.)Organizational innovation is highly specific to an individual firm and therefore does not lenditself to direct support by government programs, although such innovation may be fosteredindirectly by any policy or program that encourages business innovation generally. Marketinnovation is also usually firm specific, although there is scope here for government programsupport, particularly to facilitate access to important new geographic markets.2-2

The Context of the Reviewspreads widely, it is of relatively little economicor social significance. In the context ofproductivity growth, the process of innovationdiffusion and adaptation is most important,since most innovation that occurs in any givenarea or jurisdiction is through adaptation ofsignificant innovations originating elsewhere(CCA 2009, p. 27). The adoption/adaptation byan individual enterprise of a new or better wayof doing something is therefore also recognizedas a form of business innovation — indeed, themost common. It often requires substantialcreativity to redesign business processes,organization, training and marketing to takeadvantage of the adopted innovation.Canada has a business innovation problem. Themost telling indicator is Canada’s subparproductivity growth, which has averaged a mere0.6 percent over the 2000–2009 period, or lessthan half the average of 1.5 percent for allOECD countries (OECD productivity database,accessed November 2010). Relative to theUnited States (US), as depicted in Figure 2.1,labour productivity in Canada’s business sectorhas fallen from approximately 93 percent of theUS level in 1984 to 71 percent in 2009 — aquarter-century of relative decline that cannotbe explained by temporary or one-time factors.The Canada–US gap has been analysedstatistically in terms of the three principal factorsthat account for labour productivity growth:workforce composition — changes in thelevel of education, training and experience ofthe workforcecapital deepening — growth in the amountof capital used to support workersmultifactor productivity (MFP) growth —a residual measure that captures all otherfactors that affect productivity. MFP reflectshow effectively labour and capital areemployed jointly to produce output.Investment by businesses in R&D is oneimportant contributor to long-run MFPgrowth.Analysis by Statistics Canada of the evolution ofthese three factors in Canada and the US overthe years from 1961 to 2008 shows conclusivelyFigure 2.1 Relative Level of Labour Productivity in the Business Sector, 1947–2009(Canada as a percentage of the United States)95%90%85%80%75%70%1947 1951 1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007Source: CSLS (2011a).2-3

Innovation Canada: A Call to ActionFigure 2.2 Sources of Canada–US Gap in Average Annual Labour Productivity Growth(differences in percentage growth rates: Canada minus the US) a1961–2008 1961–1980 1980–2000 2000–2008Gap in labourproductivitygrowth -0.3 0.4 -0.4 -1.9(i) Capitaldeepening 0.4 0.8 0.2 0.1(ii) Workforcecomposition 0.2 0.4 0.1 0.1(iii) Multifactorproductivity -0.9 -0.9 -0.6 -2.1aThe numbers in the first line of the table — the difference between Canada and the US in average annual labourproductivity growth — are equal to the sum of lines (i) through (iii), which decompose the productivity growth gap intocomponents related to capital intensity, workforce composition and MFP (subject to rounding).Source: Baldwin and Gu (2009).that Canada’s productivity growth problemis due to persistently weak MFP growth,particularly during the past decade (Baldwinand Gu 2009; also see Figure 2.2). Although amultiplicity of factors is involved, longer-termMFP growth trends reflect the pace of businessinnovation (CCA 2009, pp. 36–44). It followsthat Canada’s subpar productivity growth islargely attributable to relatively weak businessinnovation. (There are of course a great manyhighly innovative Canadian businesses but,relative to many other advanced countries,they play a proportionally smaller role inCanada’s economy.)Innovation and R&DInvestment by businesses in R&D is a key inputto many kinds of innovation (Box 2.2). In viewof the relatively weak R&D spending byCanadian businesses (Box 2.3), it is notsurprising that MFP growth has also been weak.The great majority of business R&D isundertaken to support defined marketobjectives and is thus at the “development” endof the R&D spectrum. (Activities characterizedas “experimental development” make up about80 percent of business R&D spending inCanada; see Statistics Canada 2009.) Althoughthe business sector accounts for a much smallerpercentage of total R&D in Canada than incountries such as the US, Germany, Japan orSweden, business is nonetheless the largestR&D performer in the country, accounting formore than 50 percent of the total (OECD 2011).2-4

The Context of the ReviewBox 2.2 Defining R&DThe Frascati Manual (OECD 2002), first published in 1963, is the basis for the OECD’sdefinition of R&D, which emphasizes the creation and novel use of knowledge. Themeasurement of R&D expenditure includes both current costs (labour costs and non-capitalpurchases of materials, supplies and equipment) and capital costs (land and buildings,instruments and equipment, and computer software) devoted to R&D, which covers threeactivities:Basic research is experimental or theoretical work undertaken primarily to acquire newknowledge of the underlying foundation of phenomena and observable facts, withoutany particular application or use in view. Applied research is also original investigationundertaken in order to acquire new knowledge. It is, however, directed primarilytowards a specific practical aim or objective. Experimental development is systematicwork, drawing on existing knowledge gained from research and/or practical experience,which is directed to producing new materials, products or devices, to installing newprocesses, systems and services, or to improving substantially those already produced orinstalled. (OECD 2002, p. 30)The annual spending on R&D performed by a country’s business sector is referred to as BERD(business expenditure on R&D), while that performed by the higher education sector isreferred to as HERD (higher education expenditure on R&D). Reference is often made to“BERD intensity” or “HERD intensity,” defined as the value of BERD or HERD expressed as aproportion of gross domestic product (GDP).In the above definition of R&D, the emphasis on knowledge creation and novel use hasimportant implications for the classification of scientific activities as “R&D” as distinct from“scientific or technological services.” For example, the search for reserves of oil and gasqualifies as R&D only if new survey methods or techniques have been developed toundertake the search. Similarly, exploratory drilling is not R&D, but there may be caseswhere the development of new drilling methods or techniques would qualify as R&D.While the definition of R&D has remained unchanged since the first edition of the FrascatiManual, its methodological guidelines have expanded and now include greater attention tothe measurement of R&D in services. The Frascati Manual is accepted by consensus of allOECD countries, thus ensuring international agreement on the definition of R&D, as well asthe application of guidelines for its measurement. There is nevertheless still some room fornational differences of interpretation as well as variation in the depth and specificity ofdata collected by statistical agencies for indicators such as HERD and BERD. So while OECDdata allow for meaningful international comparisons of R&D activity, perfect cross-nationalcomparability remains an aspiration and not yet a reality.2-5

Innovation Canada: A Call to ActionBox 2.3 International Comparisons of R&D SpendingCanada is a middle-of-the-pack performer in the OECD with respect to gross domesticexpenditure on R&D (GERD) as a percentage of GDP, ranking 15th in 2008 out of the 31countries for which data are available. Total R&D can be broken down among three principalgroups of performer — business, higher education and government (see also Figure 2.5).In 2008, Canada ranked 18th among 31 OECD countries in respect of business expenditure onR&D (BERD) as a percentage of GDP. (In the figure to the right below, based on 20 comparablecountries in terms of size and degree of development, Canada’s BERD intensity was at thebottom of the third quartile.) At 1 percent of GDP, Canada’s BERD intensity was well below theOECD average of 1.6 percent and, moreover, has declined steadily since the peak of the “techboom” in 2001 (see the figure to the left below). In fact, business R&D spending, adjusted forinflation, has been declining every year since 2006 (Figure 1.1). This trend is both surprising andominous. By contrast, Canada’s higher education sector is a relatively strong R&D performer,ranking fourth in the OECD at 0.68 percent of GDP in 2008, although the trend of this ratio hasbeen fairly flat since 2003. (International rankings fluctuate from year to year and are sensitiveto inevitable inaccuracies in data. General positioning within comparable groups of countriesand trends over time are the more relevant indicators in international comparisons.)The amount of R&D performed by governments in Canada (not to be confused with theamount funded by governments) has been flat to slightly declining as a percentage of GDP formore than 10 years and, at 0.19 percent of GDP in 2008, was well below the OECD average of0.26 percent.BERD Intensity Trends, 1981–2008BERD Intensity of Selected OECDCountries, 20082.52USOECDCanada43.53% of GDP1.51% of GDP2.521.50.5101981 1984 1987 1990 1993 1996 1999 2002 2005 20080.50Source: OECD (2011).IsraelFinlandSwedenJapanKoreaSwitzerlandUnited StatesDenmarkAustriaGermanyAustraliaBelgiumFranceUnited KingdomCanadaIrelandNetherlandsNorwaySpainItaly2-6

The Context of the ReviewIn absolute terms, BERD in Canada is weightedtoward a relatively small number of large firmsin a limited number of sectors. About a third ofBERD is performed by only 25 firms and abouthalf by 75 firms (Statistics Canada 2011).However, while the vast majority of smallerbusinesses throughout the economy do notperform R&D, those that do so tend to be moreR&D intensive than larger firms — that is, theyspend more on R&D as a percentage ofcompany revenue. Statistics Canada’spreliminary data for 2008 indicate that R&Dexpenditure among the largest R&D-performingcompanies (those with revenues exceeding$400 million) represented about1 percent of their revenue, whereas for thesmallest R&D-performing companies (revenueof less than $1 million), the figure was almost40 percent (Statistics Canada 2011).BERD intensities (that is, business R&D as apercentage of GDP) vary widely across sectors,with the most intensive being within the broadmanufacturing sector — particularly computerand electronic products, pharmaceuticals andmedicine, and aerospace products and parts.From a regional perspective, there is alsosignificant variation in BERD intensity (Figure2.3). Ontario and Quebec account for roughly80 percent of Canada’s business R&D (StatisticsCanada 2010b), reflecting the relatively highproportion of R&D-intensive industries such asinformation and communication technologies(ICT), pharmaceuticals and aerospace in thosetwo provinces.Figure 2.3 Provincial BERD Intensities in Canada, 2008(business expenditure on R&D as a percentage of provincial GDP)OECDQuebecOntarioBritish ColumbiaAlbertaNew BrunswickNewfoundland and LabradorManitobaPrince Edward IslandNova ScotiaSaskatchewan0.000.50 1.00 1.50 2.00% of Provincial GDPSource: Statistics Canada (2010b) and OECD (2011).2-7

Innovation Canada: A Call to ActionThe Canada–US BERD GapThe Canada–US gap in respect of BERD intensity(see chart in Box 2.3) had narrowed significantlyby the time of the collapse of the “tech boom”in 2000–01, but has widened considerably since2003. A sector-by-sector analysis of the gapover the 16-year period 1987–2003 (the mostrecent year for which a full set of comparabledata is available) considered the effect oftwo key factors in contributing to the gap:(i) variations in the sectoral composition of theCanadian and US economies and (ii) differingR&D intensities within the same sectors.It concluded that “generally lower CanadianR&D spending within the same sectors in boththe United States and Canada accounts for agreater portion of the gap . . . than doesCanada’s adverse sector mix — i.e., the greaterweight in Canada’s economy of resource-relatedand other activities that have inherently lowR&D spending” (CCA 2009, p. 6). In otherwords, relative to the US, there is a pervasiveweakness in BERD intensity across many sectorsin Canada.Differences between Canada and the US in thedistribution of firm size could affect the businessR&D gap. However, Canada’s greater proportionof small firms does not explain a meaningfulproportion of the gap (CCA 2009, p. 102,drawing on the work of Boothby, Lau andSongsakul 2008). This is because the fraction oftotal R&D performed by small firms — thosewith fewer than 20 employees — is very smalland therefore the US–Canada difference in theproportion of such firms necessarily accounts fora very small part of the R&D gap. To the extentthere is a size effect, it is within the largest firms— those with 500 or more employees. Suchfirms account for a large proportion of totalR&D and Canada’s share of them is relativelylow. (As noted above, small firms that performR&D tend to be more research intensive thanlarger firms; however, the latter have biggerrevenue bases and, despite having loweraverage R&D intensities, account for themajority of total business R&D spending.)The prevalence of foreign-controlled companiesin Canada is also relevant to the BERD gap,since corporations often conduct the majority ofR&D near their headquarters — the autoassembly industry being a prime example ofparticular significance for Canada. Thiscontributes to the proportionately lower volumeof business R&D performed in Canada (CCA2009, pp. 97–102). Several caveats arenevertheless in order. First, a number ofCanadian industries with extensive foreignownership are quite R&D intensive — forexample, pharmaceuticals, aerospace andcomputers. Second, even in instances whereforeign multinationals conduct most of theirR&D abroad, Canadian subsidiaries still benefitfrom R&D embodied in capital equipment andfrom the transfer of other innovative processesand know-how originating in the parentcompany. Finally and most importantly lookingforward, global companies are increasinglydoing R&D in the most advantageous locationsall over the world. The job for Canada thereforeis to create the conditions to attract anincreasing share of the global market for R&D.In summary, the level and pattern of R&Dspending by the business sector in Canada —as well as the gap in BERD intensity betweenCanada and the US — are the result of anextraordinarily complex combination ofinfluences. If there is one overarching factor atplay, it is the lower commitment of Canadianbusinesses, taken as a whole, to innovationbasedstrategies relative to counterparts in theUS and many other economically advancedcountries. Well-designed public policies andprograms can influence the business strategychoice toward a greater role for innovation, butthe more powerful incentive will come from theforces in the marketplace identified in thefollowing section.2-8

The Context of the ReviewInnovation andBusiness StrategyWhat influences the decision of an enterprise tomake innovation the core of its competitivestrategy? What leads some firms and not othersto look constantly for ways to create or enternew markets, to develop new or improvedproducts, to tolerate the disruption ofintroducing more efficient processes andorganization, and to take the (calculated) risksthat innovation always involves? Although thereis no consensus on all the factors that come intoplay, the Panel adopted, as a workinghypothesis, a modified version of the logicmodel developed by the CCA’s Expert Panel onBusiness Innovation (Figure 2.4). According tothis view, a firm’s decision on whether (or not)to adopt an innovation-based strategy dependsprincipally on the following six broad factors,the relative importance of which will vary withthe firm’s specific circumstances.Market opportunities. A successful businessstrategy depends, first and foremost, on anunderstanding of the needs of the customerand the related identification of marketopportunity. Business strategies focussed oninnovation constantly seek better ways tomeet existing customer needs — for example,the overnight courier — or ways to stimulateentirely new sources of demand — forexample, the smart phone.Structural characteristics. Is the firm in asector that is traditionally innovation oriented,such as biotech or computers, or is it involvedin the provision of a more standard productor service? Is the firm a subsidiary of a foreigncompany that conducts most R&D abroad?Does the firm sell its product to the end-user,or does it provide an intermediate input —for example, lightly processed resources —in a global value chain?Competitive intensity. Must the firmcontinuously innovate to survive because itprovides a product or service driven byevolving customer tastes? Is the firm active ina market (domestic or foreign) that is exposedto intense global competition and musttherefore innovate to survive and prosper?Climate for new ventures. Is the firm partof an innovation cluster in which there is areadily available supply of sophisticatedventure financing, cutting-edge knowledge,highly skilled graduates and other firms withcomplementary expertise?Public policies. Are legal and regulatoryframeworks and policies — for example, inareas such as competition, corporate taxation,bankruptcy and intellectual property —conducive, or not, to business innovation?Business ambition. What is the corporateculture of the firm? To what extent is it riskaverse? To what extent is it dedicated toexpansion?It is beyond the scope of this review to addressall of these factors. The Panel’s mandate isfocussed on federal government supportprograms for R&D that is undertaken bybusiness or that is commercially oriented. Theeffectiveness of that support will neverthelessdepend ultimately on the extent to whichbusinesses in Canada are motivated to adoptinnovation-based business strategies thatrequire R&D to be performed. In this regard,competitive intensity provides the strongestmotivation overall. In business, the “necessity”created by competition is often the “mother” ofinnovation. The Panel’s advice in this review willtherefore have much more impact on Canada’seconomic performance if it is complemented bya suite of policies to foster competition asrecommended by the Competition Policy ReviewPanel (2008), also known as the “Wilson panel”(see Annex B). That panel pointed to severalsectors that remain buffered from competitionby various regulations, including restrictive2-9

Innovation Canada: A Call to ActionFigure 2.4 A Firm-Centric Model of the Business Innovation ProcessMARKET OPPORTUNITYFactorsStructuralCharacteristicsCompetitiveIntensityClimate forNew VenturesPublicPoliciesBusinessAmbitionthat influenceFirm’s Choice ofInnovation asBusiness StrategyFirm performing R&D in support of innovationand investing in the following inputswhich drivesInputs toInnovation ActivityKnowledge&IdeasTalented, Educated& EntrepreneurialPeopleNetworks,Collaborations& LinkagesCapital&Financingresulting inOutputs ofInnovation ActivityNew Goodsand ServicesContinuousImprovementNew & ExpandedMarketscontributing toOutput Per HourLabour Productivity Growthwhich drivesOutput Per CapitaIncreased Standard of LivingSource: Based on the logic map of the business innovation process developed by the Council of Canadian Academies’ ExpertPanel on Business Innovation and adjusted in response to stakeholder comments to the Panel (CCA 2009, p. 85).foreign ownership rules. Regulated industriesaccount for about 15 percent of Canada’soverall business sector GDP (Gu and Lafrance2010, p. 50; based on 2006 nominal GDP),which suggests that there is significant scopefor regulatory reform to foster competition and,as a result, innovation and productivity growth.A business strategy focussed on innovation iswhat creates the demand for R&D as a keyinput. On the other hand, the extent of R&Dundertaken by a company will also depend onits cost. Consequently, if government policiesand programs reduce the supply cost of R&D fora business, it will likely undertake more R&Dthan would otherwise be the case. Research and2-10

The Context of the Reviewdevelopment incentives may even be sufficientlyattractive to induce a shift over time in abusiness’s strategy toward a greater focus oninnovation.Business Innovation:Beyond R&DInnovation occurs throughout the economy, inall sectors and in firms of all sizes. Consequently,business innovation involves much more thanR&D. This is abundantly clear in the OECD’sdefinition of innovation cited earlier and inBox 2.1. Innovation is found not only, or evenprimarily, in sectors associated with hightechnology, although the effective use oftechnology continues to be a key driver ofinnovation and productivity growth in moderneconomies. Even in sectors where R&D isprevalent, many innovations are developedwithout it. For example, based on survey datafrom 22 countries (including Canada’smanufacturing sector), a recent OECD reportindicates that “a large share of firms developtheir process, product, organizational ormarketing innovations without carrying outany formal R&D. This holds true even fornew-to-market innovators who successfullyintroduce innovations regarded as‘technological’” (OECD 2010a, p. 23).Research and development is nevertheless ofdisproportionate significance for the economy,since it contributes in an essential way toinnovation in many of the most dynamic firmsand sectors that are at the leading edge of globalgrowth and value creation — for example, firmsthat either produce or intensively use pervasivetechnologies like ICT, biotechnology andadvanced materials. There is usually a closerelationship between activities that are heavilyknowledge based and those that require R&D.Business expenditure on R&D also correlatesstrongly with other standard indicators ofinnovation such as patents, exports oftechnology-intensive products and employmentof people with advanced education. Moreover,the economic benefit of R&D spending is rarelyconfined to the R&D performer alone, andinstead “spills over” to other firms, thusamplifying the economic impact. For all of thesereasons, a thorough survey of the literature bythe US Congressional Budget Office concludedthat “a consensus has formed around the viewthat R&D spending has a significantly positiveeffect on productivity growth,” while allowingthat it is difficult to quantify the effect precisely(2005, p. 1).The Panel, consistent with its mandate toaddress business R&D in the larger context ofinnovation, considered not only thosegovernment programs that foster increasedbusiness R&D investment directly, but also thosethat support the key factors that complementR&D in a firm’s innovation strategy. These arecaptured in Figure 2.4 as the four categoriesof enabling inputs needed to implement aninnovation strategy in cases where R&D is akey component. The four complementaryinnovation inputs are:ideas and knowledge that underpininnovationtalented, educated and entrepreneurialpeople whose imagination and energy drivethe development and implementation ofinnovative business strategiesnetworks, collaborations and linkages thatenable innovation partners to pool staff andresources, and to share information, risks andcostscapital and financing that help entrepreneursbuild a bridge between their innovative ideasand commercial viability.This review is focussed on federal initiatives tohelp businesses develop or access each of theseinputs. To set the context for the Panel’s findingsand recommendations in subsequent chapters,what follows is a discussion of the four2-11

Innovation Canada: A Call to Actionidentified inputs to R&D-based businessinnovation, drawing on recent studies tosummarize the key facts and hypotheses.Innovation Input:Ideas and KnowledgeIn the context of this review, the acquisition bya company of ideas and knowledge refersprimarily to the output of R&D, whetherperformed in-house or sourced externally.There are, of course, many other channels bywhich businesses acquire the ideas thatstimulate innovation. In fact, surveys ofinnovating firms demonstrate consistently thatthe great majority of ideas originate withemployees, customers and other firms (Box 2.4).Nevertheless, converting these ideas intosomething of commercially significant value willoften require R&D to be undertaken, and almostalways when there are technical complexities tobe understood and mastered. Moreover, firmsengaged in R&D and close to the frontier ofrelevant technology are better placed to adoptor adapt innovations that originate elsewhere.The total value of all R&D performed inCanada in 2009 was just under $30 billion,or 1.92 percent of GDP. The business sectoraccounted for the largest portion of this amount($15.2 billion), followed by the higher education($11.1 billion) and government ($3 billion)sectors (OECD 2011). The history of R&Dspending (relative to GDP) of these three majorperforming groups is traced in Figure 2.5.As discussed earlier, the higher education andgovernment sectors are key players in Canada’sinnovation system and complement the role ofbusiness. Universities perform the great majorityof basic research, although basic and appliedresearch activities are increasingly intertwined.The R&D undertaken at colleges andpolytechnics is often focussed on helpingFigure 2.5 R&D Expenditure in Canada, 1981–2009 (percentage of GDP)1.41.2BERD HERD GOVERD1% of GDP0.80.60.40.201981 1985 1990 1995 2000 2005 2009Source: OECD (2011).2-12

The Context of the ReviewBox 2.4 Where Do Businesses Get Their Ideas for Innovation?The Panel undertook a survey of R&D-performing firms in Canada with a sample of more thanone thousand companies randomly selected to be representative along the dimensions of size,region and sector. a A key question in the survey asked: “What are the most important sourcesfor your firm’s innovation ideas?” (respondents were able to identify multiple sources). Morethan a third (37 percent) first mentioned “employees” as the most important source ofinnovation ideas, and an additional 22 percent identified employees in further mentions.The next most important source was “clients/customers” (25 percent of first mentions).No other source of innovation ideas was first mentioned by more than 5 percent of thesurveyed R&D-performing businesses.a Further discussion of the survey is found in Chapter 5.Most Important Sources of Firms’ Innovation Ideas“What are the most important sources for your firm’s innovation ideas?”[Open ended – Multiple responses accepted]EmployeesClients/customersInternet, general researchOther businessesIndustry sources/itself, identified industrial needsMarket research, targeting, competitionMyself, self-directed/imposed/my own creativityUniversities, colleges and polytechnicsR&D research (general)According to need/problems arisingSuppliersLiterature, professional/industry magazines, articlesDid not know/no response22%25%24%5%10%4%17%3%8%3%12%3%2%2%7%2%2%2%3%1%2%1%8%2%0%37%First mentionOther mentions0 20 40 60 80 100Percentn = 1009Source: Results from a survey of firms conducted for the Panel by EKOS Research Associates Inc., 2011.2-13

Innovation Canada: A Call to Actioncompanies address commercializationchallenges by turning those challenges intostudent-led applied research problems. Collegesand polytechnics also directly assist firms withtheir innovation needs — this is the case, forexample, with the long-standing CollegeCentres for the Transfer of Technologiesassociated with Quebec colleges and Cégeps,which assist innovative companies throughtechnical support, technological development,and information and training (see alsoFigure 2.6). Government laboratories,meanwhile, conduct science in support ofpublic policy mandates as well is in relation tocertain commercially oriented activities.Innovation Input:Talented, Educated andEntrepreneurial PeopleCanada’s future as an innovation-basedeconomy depends on ensuring there aresufficient numbers of talented, educated andentrepreneurial people. The primary source ofsuch talent is our public post-secondaryeducation institutions — the universities,polytechnics and community colleges (includingCégeps in Quebec) that produce the innovatorsand those who support innovative activity. Theseinstitutions are primarily funded through theprovinces, although the federal governmentplays a role through transfer payments, studentfinancial assistance and direct support forresearch training and innovation skillsenhancements. The diversity of highereducation institutions with varying missions andmandates provides Canada with the highlyqualified and skilled people who are thebedrock of innovation. Each of these postsecondaryeducation institutions has a uniquerole to play, producing workers for differentcomponents of the innovation ecosystem. Ouruniversity graduate programs produce theadvanced Master’s and PhD degree holders whocan contribute breakthrough ideas that canensure companies stay at the cutting edge ofR&D; our universities and colleges produceBachelor’s degree holders who are often thefront-line innovation performers; and ourcolleges produce technicians and technologiststo facilitate the commercialization efforts ofthe firm. 1It is the interplay among these complementarytypes of talent that builds an innovationeconomy. Since Canada’s innovation gap ispartly an education gap, improving our globalperformance will require the right mix in boththe quantity and quality of talent. This demandsa collaborative approach that brings togetherour post-secondary institutions, federal andprovincial agencies as well as industry and otherpartners to ensure appropriate recruitment,training and deployment for industrialinnovation needs. While Canada ranks first inthe OECD for the percentage of its populationwith post-secondary attainment, it is middle ofthe pack in baccalaureate output and near thebottom for the number of doctoral graduatesper capita. It is nevertheless encouraging thatthe growth in the number of doctoral degreesgranted in Canada has been stronger —particularly in science and engineering — thanin most comparable countries over the 2005–08period, helping to improve our relative position(STIC 2011).The earnings advantage of individuals withadvanced degrees (relative to high schoolgraduates) is less pronounced in Canada than inthe US (Institute for Competitiveness &1 Canada’s rich and diverse landscape of about 250 post-secondary institutions includes 152 colleges, of which about 48 areCégeps in Quebec, some are degree granting, some are known as institutes of technology and some are known aspolytechnics. Many colleges are emerging actors in downstream innovation near the commercialization activities of smalland medium-sized enterprises. There are 95 universities throughout Canada, many of which have world-class researchcapabilities.2-14

The Context of the ReviewProsperity 2010, p. 35). This is one indicator ofrelatively weaker demand by businesses inCanada for people with advanced degrees, anda situation consistent with a weakercommitment to innovation-based strategies byCanadian businesses. Statistics Canada hasfound that up to a fifth of doctoral graduatesintend to leave Canada following completion oftheir degrees (Desjardins and King 2011). Whenthey go, these graduates take with themknowledge and skills that could contribute to amore innovative and prosperous future forCanada.Students learn not only through traditionalclassroom experiences, but also through handsonresearch experience that exposes them to therealities of the business world and teaches theprofessional and entrepreneurship skills neededto fully contribute to their eventual workplaces.Employers see programs that encourage postsecondarystudent participation in researchprojects with business as having a number ofbenefits, including (i) the chance to identify thebest recruits, (ii) the ability to influence curriculato be more industry-relevant, (iii) exposure tonew ideas and specialized equipment ineducational institutions and (iv) access to aflexible workforce.While domestic production of innovationworkers is an imperative, demographic realitiesdictate that this is not sufficient to meet theexpected industry demand; by some estimates,within 20 years there could be almost twomillion vacancies for skilled knowledge workersin Ontario alone (Miner 2010). An immigrationsystem that targets necessary skill sets presentsCanada with an opportunity to leverage theskills, insights and entrepreneurial talents ofthose born in other countries who come toCanada.Innovation Input:Networks, Collaborationsand LinkagesCollaboration among businesses, governmentsand the higher education sector can contributeimportantly to the conception and successfulintroduction of new products and processes.Businesses develop strategic partnerships inorder to connect to global knowledge flows,share research results and R&D risks, pool skilledstaff, commercialize inventions and help toaccess new markets. As a result, social andphysical infrastructure linking collaborators andsupporting networks are important for businessinnovation.Effective collaboration between the businessand higher education sectors depends onlinking the “supply-push” of research anddiscoveries with the “demand-pull” of firmsseeking to exploit the commercial potential ofnew ideas. As depicted schematically inFigure 2.6, this involves not only firms,universities, colleges and polytechnics, but alsoa spectrum of intermediary players that belongto an innovation “ecosystem” characterized byeffective synergies, connections, and flows ofknowledge and ideas. This is a complex mix,not least because of diverging incentives andorganizational cultures among differentinstitutions. These intermediary actors includethe following:technology transfer offices, which providesupport to help bring university-generatedresearch and intellectual property to thecommercial sphere (others also perform thisfunction, such as the Centres of Excellencefor Commercialization and Research)college applied research offices, throughwhich colleges and polytechnics supportfirms with solutions for their specificcommercialization needs2-15

Innovation Canada: A Call to Actionpublic research institutes and programs, suchas government labs, National ResearchCouncil Canada institutes and others that arediscussed in subsequent chaptersincubators, which offer technical expertise,mentorship and other services to helpaccelerate the development ofentrepreneurial firmsangels and venture capitalists, who providethe risk capital that innovative start-up firmsrequire to build a bridge between their newideas and commercial viability.In its overview of public–private collaborations,the STIC (2009, p. 34) explains:While the overall picture is mixed, thebalance of evidence suggests that manyCanadian universities are first-rate scientificinstitutions. But in the context of theknowledge-based economy, it is notconsidered sufficient for a country’suniversities to produce ground-breakingscientific research in isolation . . . effectivelinks between the three principal innovationfunding/performing sectors [business, postsecondaryeducation and government] arean important contributor to a successfulnational innovation system, especially as amechanism for transfer of S&T into thecommercial sphere.Canada ranks above the OECD average inrespect of the percentage of higher educationexpenditure on R&D financed by industry —more than 8 percent in 2008 (OECD 2011).This means that post-secondary institutions areplaying an important role as a resource forbusiness innovation for certain activities andsectors. But the extent of collaboration appearsto be relatively narrowly based, since Canadaranks near the bottom of OECD countries interms of the proportion of businessescollaborating with universities for R&D(STIC 2009, p. 36).Although commercialization of research-basedknowledge is a key activity of public–privatecollaborations, networks and linkages, there aremany other benefits stemming from suchpartnerships, including industry access tospecialized equipment and personnel(particularly, potential future employees), andstimulation of new research questions anddirections arising from problems faced byinnovative firms (Figure 2.6).Some have argued that concerns over thehandling of intellectual property rights (IPRs),as well as restrictions that may be placed bycorporate partners on the publication ofresearch, are inhibiting productive collaborationbetween business and academic researchers.While such concerns may be well justified incertain cases, the vast majority of universityresearch appears in the public domain in a timelyway, allowing full access across the spectrum ofpotential industry users. With regard to IPRs, thePanel is not persuaded that any one model ofownership is best for all circumstances. Rather,negotiations over IPRs seem to be impeded mostoften by divergent valuations of early-stageintellectual property (IP). What inventors andinstitutions often see as an invaluablebreakthrough, businesses may see as needingcostly downstream development.In addition to the above considerations relatedto IPRs, the Panel is concerned that Canada isnot benefiting as much as it should from thevaluable IP being generated in this country.While Canada produces IP in abundance, it isless adept at reaping the commercial benefits;too many of the big ideas it generates wind upgenerating wealth for others. The Panel believesthat the government needs to explore this issuefurther. In particular, there is a need to developthe skills and knowledge of Canadianentrepreneurs regarding the effectivemanagement of their IP.2-16

The Context of the ReviewFigure 2.6 The Innovation Ecosystem: Converting “Research” into “Innovation” aTrained People, Promising IdeasResearch Problem IdentificationProblem Solving,Mentoring, Financing...Degree of FocusPost-secondaryEducationInstitutionsPriority SettingUniversity TechnologyTransfer OfficesCollege Applied Research Officesand Cégep-based College Centres forthe Transfer of TechnologiesAngels and Venture CapitalistsIncubatorsPublic Research Institutionsand ProgramsCommercialBusinessesResearchKnowledge Translation and Mobilization(Collaboration and Partnerships)DevelopmentaThe horizontal axis represents the R&D continuum from curiosity-inspired fundamental research at the left to market-facingexperimental development at the right-hand end. The focus of many post-secondary education institutions declines as R&Dshifts from fundamental research toward development, although these institutions are active in applied areas, and collegesin particular are focussed in the mid-range of the spectrum. The R&D emphasis of business declines as the developmentaland market-facing content diminishes. This creates an inherent structural gap in the mid-range of the R&D spectrum andrequires a variety of intermediary institutions to complement the roles of post-secondary education and businessparticipants in the innovation ecosystem.Source: Adapted from Nicholson (2011).2-17

Innovation Canada: A Call to ActionInnovation Input:Capital and FinancingInnovative start-up firms need access to riskcapital to build a bridge between their newideas and commercial viability. Risk capital cancome from internal earnings or from externalsources. With respect to the latter, it can takethe following forms.Seed and start-up capital to finance thevery early stages of firms’ development —activities such as proof-of-concept, productdevelopment and initial marketing — usuallycomes first from founders, family and friends,then from “angel” investors. The latter aretypically individuals who have succeededas entrepreneurs in technology-basedenterprises and who are consequently ableto provide not only financial investment butalso mentoring of early-stage entrepreneursin the angel’s area of experience.Venture capital provides financing for firmsthat survive the seed and angel-financedstage of development. Venture capital isgenerally provided through professionallymanaged funds combining the resources of agroup of investors, which may also includepublic sector players.Public markets, mergers and acquisitionsenter the picture beyond the early stages ofcommercialization in response to the need forfunds to support expansion, but before thecompany is able to access more conventionalforms of finance such as bank or cooperativefinancial services loans.Without an active presence in Canada ofadequate sources of capital, some of thecommercial benefits of innovations originatingin this country could be exploited by firms inother countries with greater risk investmentcapacity and/or propensity. 2 This and relatedissues are addressed in Chapter 7.The limited data available on angel investmentin Canada suggest that “they are much lessextensive, in relative terms, than comparablesources in the United States” (CCA 2009, p. 8).This has repercussions extending beyond theavailability of financing, since early-stageinvestors are an invaluable source of mentorshipand expertise. Rates of return of Canadianventure capital funds have been well belowthose in the US for both private and tax-assisted(“labour-sponsored”) venture capital funds. Therelatively low returns result from a number offactors, including subscale venture capital fundsand a comparatively young venture capitalindustry in Canada that “has not yet developedsufficient breadth and depth of experience toselect and mentor the best potential investmentcandidates” (CCA 2009, p. 8).Capital investment in machinery and equipmentalso supports innovation within firms, as theseassets embody the latest ideas, technologiesand innovations developed by others. It isparticularly noteworthy that the Canadianbusiness sector has persistently lagged behindits US counterpart in ICT investment per worker(Figure 2.7). Given that the production andapplication of ICT played the central role instimulating very strong productivity growth inthe US over the past decade or more, thelagging ICT investment record of the privatesector in Canada is a source of great concern. 32 For example, a 2009 study published by Canada’s Venture Capital & Private Equity Association states that“US-based funding generally supports later-stage companies and sometimes results in a shift of the company activitiesto the US. Building a strong and innovative technology-based economy in Canada requires a strong Canadian-basedventure capital industry” (Duruflé 2009, p. 41).3 As part of the government’s “Digital Economy Strategy,” Budget 2011 provided $80 million of funding for a pilot initiative,through the Industrial Research Assistance Program (IRAP) and colleges, to boost the adoption of appropriate ICT by smalland medium-sized enterprises (Department of Finance 2011).2-18

The Context of the Review%1151101051009590858075706560555045403530Figure 2.7 ICT Investment per Worker in the Business Sector,Canada as a Proportion of the United States, 1987–2009 (current US dollars)Total ICT InvestmentComputer ICT InvestmentCommunications ICT InvestmentSoftware ICT InvestmentUS = 1001987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Source: CSLS (2011b).The Institute for Competitiveness & Prosperity(2010, pp. 39–40) underlines two mainchallenges that have inhibited the willingness ofCanadian businesses to ramp up investments intechnology: relatively high tax rates on capitalinvestment and a lack of competitive intensity.Significant progress has already been made, andcontinues to be made, on the tax front — forexample, a steady reduction in corporate taxrates, elimination of capital taxes and thefurther harmonization of provincial and federalsales tax regimes. The comparative lack ofcompetitive intensity in Canada is morerecalcitrant and is due primarily to a relativelysmall and geographically fragmented marketand to policies that insulate some sectors frominternational competition. Initiatives to promotecompetition — and specifically, as noted earlier,those recommended by the “Wilson panel” —constitute an essential foundation forinnovation policy in Canada.Having now situated the Panel’s mandate in thewider innovation context, the next chapter drillsdown into the programs at the core of theReview of Federal Support to Research andDevelopment. Thereafter, the Panel presents itsadvice on how the government can enhance theimpact of those programs.2-19

Overview of Programs to Support Business R&DOverview of Programsto Support BusinessR&DChapter3The Panel was asked to review three types offederal programs intended to support researchand development (R&D) that is undertaken bybusiness or that is commercially oriented. Theseinclude (i) the Scientific Research andExperimental Development (SR&ED) tax credit,(ii) programs that support business R&D throughdirect expenditure (which may be of generalapplication or targeted to sectors or regions)and (iii) programs funded through the federalgranting councils, departments and agenciesthat support commercially focussed R&D, oftenperformed by academic institutions. Thepurpose of this descriptive chapter is tointroduce and characterize the suite ofprograms analysed by the Panel. First, it isimportant to recall the reasons whygovernments create programs that providesupport for business innovation and R&D.Rationale for GovernmentSupport of BusinessInnovationThe fundamental motivation for governmentintervention in private sector commercial activityis to improve market outcomes for thebetterment of society at large. There areconditions under which markets do not allocateresources efficiently, and governments interveneto try to correct or at least diminish “marketfailures” — for example, to guard againstmonopoly, to protect property rights, to providepublic goods such as basic research thatgenerate benefits for society at large or toovercome problems of inadequate information.Interventions may also be motivated by aconcern for equity — for example, provision ofa social safety net or, where internationalagreement cannot be reached, to level theplaying field in situations where subsidiesprovided in other countries put domestic firmsat a competitive disadvantage.In the context of this review, the mostfundamental motivation for governmentprograms to foster business R&D is the desireto improve Canada’s productivity growth byencouraging more business innovation.Specifically in the case of R&D, there isabundant empirical evidence that an individualfirm cannot capture all the benefit of itsinvestment in R&D (see, for example, Parsonsand Phillips 2007). Some of the knowledgegenerated is picked up “for free” by other firmsand is eventually used, by some at least, toimprove their productivity. The existence of suchspillovers means that a dollar of R&D investmentby a firm returns greater value to the economyat large, and not just to the investing firm alone.For this reason, governments provide incentivessuch as tax credits, grants and advisory servicesto induce firms to perform more R&D than theyotherwise would.There are other motivations to intervene.A number of programs to encourage greaterbusiness innovation are designed to help3-1

Innovation Canada: A Call to Actionovercome the disadvantage of small scale or tolower the barriers to getting started. Forexample, student internships in business canprovide the crucial first experience. In addition,many smaller R&D-focussed companies cannotafford to maintain in-house all the specializedexpertise and infrastructure they need, andmust rely on public sector labs and advisoryservices such as the Industrial ResearchAssistance Program (IRAP). Government as alead customer may also help a young innovativebusiness achieve the production scale andcredibility to compete in the wider market.Moreover, public sector contributions to seedand venture capital may be needed to risk-sharein the early stages of a company’s developmentand thereby enable many technology-basedcompanies in Canada to grow to a viable size.Public intervention has costs as well as benefits.The taxes raised to fund government programsdiminish economic performance throughadverse effects on incentives to work, save andinvest. All programs generate costs ofadministration and compliance, which must benetted against the benefits. Just as there aremarket failures, there may also be “governmentfailures.” These may be due to inadequateinformation or to political pressure — forexample, favouring certain vested interests,creating too many small-scale programs orcontinuing to support activities that should beterminated.All of these considerations need to be borne inmind when deciding whether governmentintervention to correct a perceived marketfailure is warranted. These issues are addressedconcretely in subsequent chapters. Theremainder of this chapter describes the universeof programs addressed by the Panel.Profile of FederalGovernment Support forBusiness R&DThe federal government supports business andcommercially oriented R&D through a broadarray of programs, 1 each of which varies acrossa number of salient features:input supported — ideas and knowledge;talented, educated and entrepreneurialpeople; networks, collaborations andlinkages; and capital and financingtype of activity supported — basicresearch, applied research, experimentaldevelopment and commercializationform of support — tax incentives, repayableor non-repayable grants and contributions,provision of services, and procurement ofresearch and of innovative goods and serviceseligible recipient — support provideddirectly to a business versus support to otherorganizations conducting commerciallyoriented R&D activitiessize — program budget, number of projectssupported, amount of administrative staffand maximum assistance providedscope — national, sectoral and regional.To capture this variety, the Panel established agovernment-wide program database covering60 programs, delivered by 17 federal entities(Figure 3.1). 2 The Panel’s findings are limited tothe 60 programs, which encompass most butnot all federally supported business andcommercially oriented R&D (Box 3.1). Thisexercise is the first of its kind, and is an essentialstep toward conceptualizing the diversity offederal business R&D programs as an overallportfolio of support.1 “Programs” are broadly defined in this review and include tax credit support, direct spending programs, venture capitalinvestments and federally performed R&D.2 Program expenditure information in the database and cited throughout this report is based on figures provided in July 2011by the departments and agencies that administer the programs within this review. Program expenditure information wasavailable for 58 of the 60 programs.3-2

Overview of Programs to Support Business R&DBox 3.1 Expenditure Reviewed by the PanelThe Panel was mandated to review federal expenditure encouraging business R&D. Based onfigures provided by departments and agencies, it is estimated that expenditure in support ofbusiness innovation was approximately $6.44 billion in fiscal year 2010–11, which comprisesmore than 100 programs and institutes.Expenditure in Support of Business R&D, 2010–11($ billion, including federal program administration costs)SR&ED tax expenditure(2010 projected amount)$1.30Direct support to business R&D$3.53Direct support to public/non-profitcommercially-relevant R&D$0.98Direct support not reviewed by the Panel(based on preliminary estimates)$0.63Source: Based on figures provided by departments and agencies.Of this amount, the Panel reviewed 60 programs and institutes totalling $5.14 billion (or$4.96 billion when federal program administration costs are removed). These programs weredrawn largely from an illustrative list that accompanied the Panel’s mandate letter. The Panel hadthe flexibility to choose the programs for review. It refined the initial list by removing a limitednumber of programs whose primary purpose was not to support business innovation. Inaddition, it added others to ensure representative coverage of the diversity of instruments in theportfolio. The resulting list (Annex A) captures key programs and the majority (about 80 percent)of federal R&D expenditure supporting business innovation.In the 2010–11 fiscal year, the 60 programs inthe review — hereafter referred to collectively asthe “envelope” — had estimated expenditureof approximately $4.96 billion (excluding federalprogram administration costs). 3 Of thisamount, about 70 percent ($3.47 billion) is the3 Business Development Bank of Canada (BDC) venture capital is excluded from this total, since BDC disbursements areinvestments rather than expenditures. In addition, while the government capitalizes BDC, it does not provide specificfunding on a regular basis for this specific activity. As of the third quarter of 2010, the BDC venture capital portfoliocommitment for direct investments was about $550 million and was about $267 million for fund investments. Note as wellthat the federal tax credit provided to individuals for the acquisition of shares in labour-sponsored venture capitalcorporations costs the federal government $125 million a year.3-3

Innovation Canada: A Call to Actionprojected contribution of the SR&ED tax credit, 4with the balance of 30 percent ($1.5 billion)coming from 59 direct expenditure programs.The distribution of expenditure across the manydirect spending programs is highly skewed: thelargest five represent about 40 percent of directexpenditure, while the largest 15 account forabout 72 percent (Figure 3.2). Only oneprogram — IRAP — accounted for more than15 percent of direct expenditure in 2010–11,while more than 50 percent of the programseach spent less than 1 percent of the$1.5 billion direct expenditure total.There is considerable diversity among the directprograms, as the examples below show.IRAP is a broad-based program that providesadvisory services and contribution funding tosupport high-risk R&D projects by small andmedium-sized enterprises (SMEs). It alsoprovides support to non-profit and postsecondaryinstitutions for the provision oftechnical and commercialization advice toSMEs.Sector-focussed initiatives include theNational Research Council’s (NRC) Institute forAerospace Research, which performscollaborative R&D with business, in additionto licensing and fee-for-service arrangements.Examples of arm’s-length delivery of businessinnovation support include FPInnovations, apublic–private partnership with the forestproducts sector, and SustainableDevelopment Technology Canada, a federallyfunded non-profit corporation that providesfunding for environmental technologyinitiatives.The Strategic Aerospace and DefenceInitiative (SADI) is the second largest directspending program and, as announced inBudget 2011, will be part of a specific reviewof all federal policies and programs related tothe aerospace industry. The Panelconsequently did not reach specific findingsregarding SADI, although it welcomes theopportunity to provide advice and any otherassistance in support of the review.Seventeen NRC institutes, including theIndustrial Materials Institute and the abovementionedInstitute for Aerospace Research,undertake a great variety of basic and appliedresearch for business and public sectorclients. Expenditure of appropriated funds bythese institutes was $276 million in 2010–11,about 19 percent of federal direct spendingin support of R&D.The Atlantic Innovation Fund, the WesternDiversification Program and the Business andRegional Growth Program (Quebec) areregional development programs. (Smallerprograms, not shown among the 15 largestin Figure 3.2, are provided by the Ontarioregional agencies FedNor and FedDev ON.)The regional agencies, which collectivelyaccounted for about 14 percent of directexpenditure in support of business innovationin 2010–11, generally provide repayablesupport to businesses and non-repayablesupport to not-for-profit entities.Several programs link the post-secondaryeducation sector to business innovation.For example, the Networks of Centres ofExcellence and Strategic Network Grants fundlarge-scale, multisectoral collaborativeresearch, and the Collaborative R&D Grantsaim to support joint research projects amongbusinesses, universities and researchers.4 Note that the 2010 amount for the SR&ED tax credit is a projection for the 2010 taxation year (see Department of Finance2010b).3-4

Overview of Programs to Support Business R&DFigure 3.1 Total Envelope Expenditure a($ million, excluding federal program administration costs)2007–08 2008–09 2009–10 2010–11 % 2010–11DirectExpenditureTotal envelope expenditure 4184.1 4567.6 4668.0 4962.9 —Total indirect expenditure: SR&EDtax credit (FIN and CRA) 3256.0 b 3485.0 3280.0 3470.0 —Total direct expenditure 928.1 1082.6 1388.0 1492.9 100.0%Direct expenditure: repayable contribution programs (amounts given to businesses in parentheses)Strategic Aerospace and Defence 9.7 33.7 61.5 112.7 7.6%Initiative (IC) (9.7) (33.7) (61.5) (112.7)Atlantic Innovation Fund (ACOA) 59.0 58.1 57.6 66.2 4.4%(24.7) (25.0) (28.6) (28.0)Business and Regional Growth 3.1 13.1 38.0 51.2 3.4%Program (CED-Q) (2.1) (5.5) (15.7) (22.7)Business Development Program (ACOA) 17.7 15.6 16.7 13.4 0.9%(9.9) (11.3) (12.1) (11.4)Northern Ontario Development 5.42 12.41 6.12 5.08 0.3%Program (IC – FedNor) (0.48) (1.32) (0.65) (0.41)Investing in Business Innovation Program NA c NA NA 0.1 0.0%(FedDev ON) (NA) (NA) (NA) (0.1)Automotive Innovation Fund (IC) NA 0.0 0.0 0.0 0.0%(NA) (0.0) (0.0) (0.0)Subtotal 94.9 132.9 179.9 248.7 16.7%Direct expenditure: non-repayable grant and contribution programsIndustrial Research Assistance Program (NRC) 86.1 86.5 231.0 237.3 15.9%Networks of Centres of ExcellenceProgram (Tri-Council) 72.4 75.7 68.3 78.4 5.3%FPInnovations (NRCan) 28.6 28.4 48.8 78.3 5.2%SD Tech Fund (SDTC) 53.8 101.7 109.8 76.8 5.1%Western Diversification Program (WD) 63.7 69.8 82.7 73.3 4.9%Strategic Project Grants (NSERC) 67.0 73.6 61.1 57.0 3.8%Collaborative Research and DevelopmentGrants (NSERC) 44.4 50.3 52.5 55.5 3.7%Centres of Excellence for Commercializationand Research Program (Tri-Council) 0.0 10.9 30.9 49.8 3.3%Strategic Network Grants (NSERC) 16.5 22.6 31.8 33.5 2.2%Industrial Research Chairs (NSERC) 22.0 23.4 27.0 26.6 1.8%College and Community Innovation (NSERC) NA 2.1 14.6 28.0 1.9%Agricultural Bioproducts InnovationProgram (AAFC) 0.6 7.3 20.5 15.7 1.1%3-5

Innovation Canada: A Call to ActionFigure 3.1 Total Envelope Expenditure a($ million, excluding federal program administration costs) (cont.)2007–08 2008–09 2009–10 2010–11 % 2010–11DirectExpenditureCollaborative Health Research Projects (NSERC) 9.2 9.1 11.7 13.7 0.9%Canadian Agri-Science Clusters (AAFC) NA NA 1.3 12.6 0.8%Engage Grants (NSERC) NA NA 1.4 11.6 0.8%Industrial R&D Internship Program(Tri-Council) NA 3.2 6.3 7.3 0.5%Idea to Innovation (NSERC) 5.5 7.4 6.3 5.7 0.4%Proof of Principle Program (CIHR) 6.6 4.4 1.8 5.4 0.4%Industrial Postgraduate Scholarships (NSERC) 6.0 5.6 5.1 5.3 0.4%Developing Innovative Agri-Products (AAFC) NA NA 1.4 5.2 0.4%Automotive Partnership Canada(Tri-Council, CFI and NRC) NA NA 0.2 5.1 0.3%Industrial R&D Fellowships (NSERC) 3.7 3.7 4.6 4.7 0.3%Industry Partnered Collaborative ResearchProgram (CIHR) 8.0 8.6 6.2 4.5 0.3%Business-led Networks of Centres ofExcellence Program (Tri-Council) NA 0.0 4.0 4.3 0.3%Industrial Undergraduate StudentsResearch Awards (NSERC) 3.4 3.4 3.3 3.9 0.3%Applied Research and CommercializationInitiative (FedDev ON) NA NA NA 0.9 0.1%Partnership Workshops Program (NSERC) 0.1 0.4 0.2 0.3 0.0%Interaction Grants Program (NSERC) NA NA 0.1 0.2 0.0%Technology Development Program (FedDev ON) NA NA NA 0.0 0.0%Subtotal 497.5 598.1 832.6 901.0 60.4%Direct expenditure: procurement programsTechnology Demonstration Program (DRDC) 31.2 30.1 23.4 23.5 1.6%Space Technology Development Program (CSA) 14.6 9.7 15.3 7.7 0.5%Subtotal 45.8 39.8 38.7 31.2 2.1%Direct expenditure: federally performed R&D – National Research Council institutes dIndustrial Materials Institute (NRC) 25.1 34.0 37.1 33.8 2.3%Institute for Aerospace Research (NRC) 36.7 28.7 33.1 30.1 2.0%Biotechnology Research Institute (NRC) 28.0 27.6 32.1 27.0 1.8%Institute for Research in Construction (NRC) 26.3 29.3 29.6 26.8 1.8%Institute for Microstructural Sciences (NRC) 24.1 25.1 25.9 24.3 1.6%Institute for Information Technology (NRC) 22.1 21.0 21.8 20.1 1.3%3-6

Overview of Programs to Support Business R&DFigure 3.1 Total Envelope Expenditure a($ million, excluding federal program administration costs) (cont.)2007–08 2008–09 2009–10 2010–11 % 2010–11DirectExpenditureInstitute for Marine Biosciences (NRC) 16.3 18.4 18.6 16.6 1.1%Plant Biotechnology Institute (NRC) 14.7 14.7 15.1 13.7 0.9%Institute for Biological Sciences (NRC) 15.3 14.9 16.1 13.4 0.9%Institute for Biodiagnostics (NRC) 13.3 13.1 15.5 13.3 0.9%National Institute for Nanotechnology (NRC) 12.5 12.2 12.7 12.3 0.8%Institute for Fuel Cell Innovation (NRC) 10.7 13.0 13.8 11.8 0.8%Steacie Institute for Molecular Sciences (NRC) 13.1 12.1 12.8 11.0 0.7%Institute for Chemical Process andEnvironmental Technology (NRC) 10.6 12.1 12.3 10.3 0.7%Institute for Ocean Technology (NRC) 10.9 10.4 11.0 10.1 0.7%Centre for Surface TransportationTechnology (NRC) 1.3 1.6 1.9 1.1 0.1%Canadian Hydraulics Centre (NRC) 1.0 0.6 0.6 0.5 0.0%Subtotal 281.9 288.9 310.1 276.3 18.5%Direct expenditure: federally performed R&D – otherAgricultural Bioproducts InnovationProgram (AAFC) 1.7 16.6 17.2 15.4 1.0%Canadian Agri-Science Clusters (AAFC) 0.0 0.0 0.9 6.7 0.4%Developing Innovative Agri-Products (AAFC) 0.0 0.0 0.5 5.8 0.4%FPInnovations – Canadian Wood FibreCentre (NRCan) 6.4 6.4 8.2 7.9 0.5%Subtotal 8.1 23.0 26.8 35.8 2.4%a BDC venture capital investments are not included above. SR&ED tax expenditures are projections for 2009 and 2010.SR&ED values are for taxation years and not fiscal years. Some of the programs listed as “repayable contribution programs”also provide non-repayable assistance, notably to not-for-profit entities. NRC expenditure for the Technology ClustersProgram and expenditure in support of Automotive Partnership Canada are included in the NRC institute totals. Theprograms listed under “federally performed R&D – other” all have a grant and contribution component in addition tofederally performed R&D — these activity totals are reported separately in the table. Subtotals may be subject to rounding.See List of Acronyms (page x) for the full name of sponsoring bodies (in parentheses).bcdThe 2007 figure for the SR&ED tax credit reported in Tax Expenditures and Evaluations 2010 is slightly higher at$3.35 billion (Department of Finance 2010b). That figure is based on updated data obtained after the Panel began itsanalysis.NA indicates a program did not exist in that particular fiscal year.Figures for the NRC institutes refer to the expenditure of appropriated funds.Source: Based on figures provided by departments and agencies.3-7

Innovation Canada: A Call to ActionFigure 3.2 The Largest Direct Expenditure Programs in the Envelope, 2010–1118%16%14%12%10%8%6%4%2%0%Largest 5 programs: 40%of expendituresLargest 15 programs(shown at right): 72%Industrial Research Assistance Program (NRC)Strategic Aerospace and Defence Initiative (IC)Support for FPInnovations (NRCan)Networks of Centres of Excellence (Tri-Council)SD Tech Fund (SDTC)Western Diversification Program (WD)Atlantic Innovation Fund (ACOA)Strategic Project Grants (NSERC)Collaborative Research and Development Grants (NSERC)Business and Regional Growth Program (CED-Q)Centres of Excellence for Commercialization and Research (Tri-Council)Industrial Materials Institute (NRC)Strategic Network Grants (NSERC)Agricultural Bioproducts Innovation Program (AAFC)Institute for Aerospace Research (NRC)0% 2% 4% 6% 8% 10% 12% 14% 16% 18%Source: Based on figures provided by departments and agencies.Envelope Expenditure by Form of SupportThe SR&ED tax credit is by far the largestprogram of federal support for business R&D,projected to comprise about 70 percent ofenvelope expenditure (Figure 3.3).In the category of direct expenditure, nonrepayablegrant and contribution programsmake up the largest proportion — $901 millionin 2010–11, or 60 percent of the directexpenditure category. IRAP is by far the largest,with 2010–11 expenditure of $237.3 million,although it should be noted that this reflects asubstantial two-year increase in budget as partof the government’s stimulus program. (IRAPexpenditure in each of 2007–08 and 2008–09was about $86 million, or only a little more thana third of its 2010–11 budget, and about8–9 percent of direct expenditure in thoseyears.) There is a total of 29 programs orprogram components in the non-repayablegrant and contribution group.Programs providing repayable contributions aresmaller — $248.7 million in 2010–11, or about17 percent of direct spending. The StrategicAerospace and Defence Initiative (SADI) is thelargest of these programs, with 2010–11expenditure of $112.7 million, although thisannual amount will rise substantially as theprogram ramps up. There are seven programs inthis group, with the remaining total largelydelivered by the regional development agencies(see Figure 3.1).Envelope Expenditure by Type of RecipientFigure 3.4 breaks down total expenditure byrecipient and shows that 81 percent is projectedto go to businesses, with the great majoritymade available through the SR&ED program.Much of the direct support for large businessesis repayable. The allocation of expenditure fromdirect programs in 2010–11 was roughly asfollows: 11 percent to large businesses,26 percent to small businesses, 27 percent to3-8

Overview of Programs to Support Business R&DFigure 3.3 Program Envelope, by Form of Support, 2010–11 a5%1% 6% 1%Tax credit support18%70%Non-repayable grants andcontribution programsRepayable contributionprogramsProcurement programs(contract R&D)Federally-peformed R&Dexpenditure – NRC institutesFederally-peformed R&Dexpenditure – otheraAmounts do not add up due to rounding. The value of tax credit support is a projection for the 2010 taxation year.Source: Based on figures provided by departments and agencies.the academic sector (including students),21 percent to NRC institutes and other federallyperformed R&D, 12 percent to Canadian nonprofits,and 3 percent to “other” recipients(including provincial and municipalgovernments, foreign performers and otherCanadian performers). The breakdown ofindirect expenditure in 2007 — the latest yearfor which a breakdown by recipients is available— was as follows: 56 percent to largebusinesses, 40 percent to small Canadiancontrolledprivate corporations (CCPCs), and4 percent to other businesses, that is, smallnon-CCPCs and CCPCs in expenditure limitphase-out range. 5Envelope Expenditure by SectorFigure 3.5 (at the end of this chapter) lays outthe allocation of both direct and SR&ED taxcredit expenditure across all goods and servicesproducing industries. In the case of the directprograms, a sectoral breakdown is providedfor the $1.5 billion in 2010–11 expenditure.In the case of the SR&ED tax credit, the sectoralallocation of about $3.3 billion is for 2007,the most recent year for which a sectoraldistribution is available. The following are somekey observations around the envelopeexpenditure by sector.Direct expenditure. Direct expenditureprograms, in total, are heavily orientedtoward goods-producing industries (about72 percent), reflecting primarily a focus onmanufacturing. Approximately 27 percentof direct spending programs support servicesproducers, notably the professional, scientificand technical services subsector (about12 percent) and information and culturalindustries (about 5 percent). While direct5 The definitions of small and large businesses used by the SR&ED program and the direct programs are not fullycomparable. In the case of many direct programs, the business’s number of employees is used to define the size of thebusiness. For the purposes of the SR&ED program, a “small CCPC” is one with prior-year taxable income of $500 000 orless and prior-year taxable capital of $10 million or less. These companies receive a refundable tax credit on their first$3 million of eligible expenses.3-9

Innovation Canada: A Call to ActionFigure 3.4 Envelope Expenditure, by Type of Recipient,Total Direct Expenditure, 2010–11, and SR&ED Tax Credit, 2007Total Direct Expenditure, FY 2010-11 SR&ED Tax Credit, 20074%3%12%21%26%11%For 2010:About 81%of allexpenditures(direct andindirect)are projected togo to business.56%40%6%21%Small businessesLarge businessesResearchers, fellows and studentsat universities and collegesUniversities and collegesCanadian non-profitsOtherNRC institutes and other federallyperformedR&DAbout 86% ofthis amountis projected tobe deliveredthrough theSR&EDprogram and14% throughdirectprograms.Small CCPCsLarge businesses(CCPCs and non-CCPCs)Other (small non-CCPCs andCCPCs in expenditure limitphase-out range)Source: Based on figures provided by departments and agencies.program expenditure has increased by over$550 million from 2007–08 to 2010–11(Figure 3.1), the sectoral allocations haveremained relatively similar over that period.Indirect expenditure. The estimatedallocation of the SR&ED tax expenditure isspread more evenly across sectors and, aswould be expected given its base ofcalculation, mirrors more closely the sectoraldistribution of Canada’s total businessexpenditure on R&D (BERD). For example,approximately 56 percent of SR&ED creditswere associated with goods producers, agroup that performed about 58 percent ofBERD (the services shares are thecomplements).It should be noted that the program expenditurein Figure 3.5 cannot be interpreted simply asfunding a portion of the BERD total. While someprograms transfer cash directly to business —notably the refundable amounts from theSR&ED program and the various grant andcontribution programs (some of which areintended to be repaid) — other directexpenditure is by federal entities such asNRC or goes to academic institutions andnot-for-profits.Envelope Expenditure by ProvinceIt was difficult on the basis of available data todetermine accurately the geographic distributionof SR&ED tax credits. For example, from 2000 to2007, some 40–50 percent of the SR&ED creditswere claimed by multi-jurisdiction firms, buttypically reported by location of head office. As aresult, it was not possible to determine preciselyin which region these firms are performing theirSR&ED activities, and consequently to draw an3-10

Overview of Programs to Support Business R&Doverall conclusion about the distribution ofSR&ED claims by region. Subject to theseimportant caveats, the Panel’s analysis has shownthat, for the years 2000–07, the estimatedaverage distribution of SR&ED tax expenditure forthe firms operating in a single jurisdictionappears to correspond closely with the averageprovincial distribution of BERD — that is, mostlyin Ontario and Quebec, with moderate amountsin the four western provinces and some in theAtlantic provinces.The distribution of the direct expenditure total ismore nearly in line with provincial populationshares, 6 though with a significantly largerproportion in the Atlantic provinces (about12 percent of direct expenditure comparedwith slightly more than 7 percent of Canada’spopulation) and somewhat less than proportionalper capita in British Columbia, Alberta, Manitobaand Ontario.Envelope Expenditure by Activity SupportedThe great majority of R&D performed by businessis for “experimental development” (StatisticsCanada 2009), which the Frascati Manual definesas “systematic work, drawing on existingknowledge gained from research and/or practicalexperience, which is directed to producing newmaterials, products or devices, to installing newprocesses, systems and services, or to improvingsubstantially those already produced or installed”(OECD 2002, p. 30). Allocation of the SR&ED taxcredit, averaged over 2000–07, is estimated to bemostly in support of experimental development.Direct expenditure programs were more evenlyspread, with 38 percent of 2010–11 expenditureestimated to be in support of experimentaldevelopment, a roughly equal amount of35 percent for applied research, 13 percent forbasic research and 11 percent for“commercialization” (planning, marketing andproduction support, which are not eligible forSR&ED credits). Three percent of direct supportwas not categorized.When direct and indirect programs arecombined, it is estimated that the majority offederal support for business and commerciallyoriented R&D is directed to experimentaldevelopment. This activity is usually very close tothe market and therefore is less conducive tocollaboration and partnership with other playersin the innovation system. There also appears tobe less spillover to the economy at large fromthis “close-to-market” R&D, the benefit ofwhich is likely to be more fully appropriated bythe R&D-performing business than would be thecase for basic and applied research, which isusually more widely shared and also subject tomore wide-ranging application.6 With the exception of Ontario and Quebec, provinces have a slightly smaller share of BERD relative to their share ofCanada’s population.3-11

Innovation Canada: A Call to ActionIn SummaryThe picture conveyed by the envelope of businessR&D support programs is one of dramaticallycontrasting scales. The great majority of supportis delivered by one program, the SR&ED taxcredit, which accounts for about 70 percent ofthe envelope, is not sectorally targeted andsupports business R&D spending explicitly. The 59programs in the direct expenditure envelope areextremely heterogeneous as to target, deliveryvehicle and administering agent. IRAP is by farthe largest and in 2010–11 accounted for about16 percent of direct expenditure, although thisreflects an extraordinarily increased allocation aspart of the government’s economic stimulusexpenditure. The great majority of the otherdirect spending programs each account for lessthan 2 percent of the direct total, and may insome cases be too small to have significantimpact. Moreover, the combination of small sizeand sheer number virtually ensures that there willbe little awareness among potential businesssector beneficiaries of many of the programs.This challenge is exacerbated by the largeadditional number of business innovationsupport programs delivered by provincialgovernments.The Panel believes, for reasons presented inChapter 5, that rationalization of programs isrequired to increase scale, reduce duplication,improve delivery efficiency and create muchgreater awareness among potential businesssector clients.3-12

Overview of Programs to Support Business R&DFigure 3.5 Sectoral Distribution of Direct and Indirect (SR&ED) ExpenditureDirect SR&ED BERDSector (2010–11) (2007) (2007)Goods IndustriesAgriculture, Forestry, Fishing and Hunting 9.8% 1.4% 1.0%Manufacturing a 52.7% 44.5% 49.2%Construction 2.3% 1.1% 0.6%Utilities 3.1% 0.3% 1.6%Oil and Gas and Mining b 3.8% 8.7% 5.3%Subtotal - goods industries 71.7% 55.80% 57.7%Services IndustriesTransportation and Warehousing 0.8% 0.7% 0.4%Information and Cultural Industries 4.9% 11.2% 8.8%Wholesale Trade 1.0% 0.1% 5.9%Retail Trade 0.7% 0.6% 0.3%Finance and Insurance, Real Estateand Rental and Leasing 0.1% 2.0% 2.7%Professional, Scientific and Technical Services 11.6% 23.6% 18.7%Other Services 8.0% 5.7% 5.4%Subtotal - services industries 27.0% 44.0% 42.3%Unclassified 1.2% 0.2% 0.0%Total - all industries 100.0% 100.0% 100.0%abThe total for manufacturing does not include petroleum and coal product manufacturing, which is instead included as partof oil and gas and mining (see note b, below).Includes mining, quarrying, oil and gas extraction and petroleum and coal product manufacturing.Source: Based on figures provided by departments and agencies; and Statistics Canada (2011) for the sectoral allocationof BERD.3-13

Vision and PrinciplesChapterVision and Principles4The preceding chapters provide backgroundinformation on business innovation andpresent an overview of the federal programsat the core of this review. With the contextthus established, the remainder of this reportfocusses on the Panel’s advice to theGovernment of Canada.This advice is shaped by the Panel’s ultimatevision of a Canadian business sector that standsshoulder-to-shoulder with the world’sinnovation leaders. To turn this vision intoreality, the Panel believes that Canada mustfocus its efforts on growing innovative firms intolarger enterprises, rooted in Canada but facingoutward to the world. This goal is key forCanada’s companies to compete with the best.Consequently, it is a primary considerationunderpinning the Panel’s recommendations.Achieving the Panel’s vision requires publicpolicy action on a number of fronts, includingongoing efforts to refine and enhancemarketplace policy and regulatory frameworksthat influence the climate for private sectorcompetition and investment. The Paneltherefore emphasizes that the impact of itsadvice depends ultimately on complementaryefforts to strengthen those policies — especiallyas they relate to encouraging the competitiveintensity that is a central motivator ofinnovation.Guiding PrinciplesThe subsequent chapters set out the Panel’sadvice to improve the impact of federalprogramming in support of business innovation.This advice reflects a set of broad principles —essentially a philosophy of program design topromote business innovation — that the Panelhas developed as a result of its consultations,research and internal dialogue. These guidingprinciples are as follows.Transformative ProgramsFederal programs to foster business innovationplay an important role in the government’sstrategy to boost Canada’s lagging productivitygrowth. These programs should focus resourceswhere market forces are unlikely to operateeffectively or efficiently and, in that context,should address the full range of businessinnovation activities, including research,development, commercialization andcollaboration with other key actors in theinnovation ecosystem — provinces, postsecondaryeducation institutions, civil societyorganizations and the relevant investorcommunities. The design and delivery offederal business innovation programs mustalways strive to result in research activity andcommercialization outcomes that meet thehighest global standards.4-1

Innovation Canada: A Call to ActionRequire Positive Net BenefitThe primary purpose of government programsin support of business innovation is to improvemarket outcomes to better Canada’s economicperformance. The total benefit of any givenprogram should be greater than the cost offunding, administering and complying with theprogram. Support programs should reduce thesubsidy amount provided — or move to arepayable basis — the closer the activity beingsupported is to market, and therefore the morelikely it is that the recipient firm will capturemost of the benefit for itself. There is also aneed for coordination across the full suite offederal innovation programs — and ideally alsobetween programs of the federal and provincialgovernments — to avoid excessive “stacking”of incentives that may result in subsidies that arehigher than needed to achieve policy objectives.Excessive subsidization not only wastes financialresources, but also risks encouraging orsustaining activities that deliver little societalbenefit. As set out in Chapter 6, all of theseconsiderations are reflected in the adviceregarding improvement of the ScientificResearch and Experimental Development(SR&ED) tax credit. The Panel has concludedthat the program should be simplified to reducecompliance and administration costs. Moreover,the benefit should be restructured to generatesavings for reallocation to other initiativesbenefiting small and medium-sized firms.Favour National Scope and BroadApplicationThe Panel believes that the foundational coreof the federal suite of business innovationprograms should be large national programs ofbroad application — for example, the SR&EDprogram and Industrial Research AssistanceProgram (IRAP) — that support businessinnovation activity generally, empoweringfirms and entrepreneurs to make market-driveninvestment decisions according to their owntimelines and regardless of sector, technologyor region. As set out in Chapter 5, this isamong the reasons the Panel believes thatfunding for IRAP should be increased and thata commercialization vouchers pilot programshould be delivered within the suite of existingsupport mechanisms offered through IRAP.Build Sector Strategies CollaborativelyBeyond programs of broad application, thereis a complementary role for programs tailoredto the needs of specific sectors that thegovernment identifies as being of strategicimportance. For industry sectors that areconcentrated in particular regions, initiativesshould be designed and delivered to workcollaboratively with the relevant provinces andother local interests. These considerationsinform the Panel’s recommendation inChapter 7 to evolve the National ResearchCouncil’s business-oriented institutes intoindependent collaborative researchorganizations, intended to be even moreresponsive to the needs of sectoral researchand innovation strategies. It is also expectedthat the Panel’s recommendation in Chapter 7to use public procurement to promotedevelopment of innovative Canadian supplierswill contribute significantly to enhancedcapabilities in several sectors.Require Commercial Success in RegionalInnovationThe Panel is strongly of the view that regionallyoriented programs to support businessinnovation should focus on creating the capacityof firms in the target region to succeed in thearena of global competition. That is why it isessential for regional innovation programs toapply the same high standards of commercialpotential as are required by programs ofnationwide application. For this reason, thePanel is recommending that the proposedIndustrial Research and Innovation Council set4-2

Vision and Principlesout in Chapter 5 — which would be a nationaldelivery agency for federal business innovationprogramming — should provide the technicalassessment of proposals for commercializationand R&D projects submitted to the regionaldevelopment agencies (RDAs), while servingas a platform for RDAs to share best practices.This would allow for increased cross-countrycollaboration and for the development ofcommon national standards of success inregional innovation.Establish Clear Outcome Objectives,Appropriate Scale and a User-OrientedApproachA program to foster business innovation shouldbe designed to address a specific problem forwhich a government initiative is needed as partof the solution. The program should havewell-defined outcome objectives, be of a scaleappropriate for the problem at hand, be wellknown to its target clientele, and be easy andtimely to access and use. These fundamentaldesign principles, which should apply to allprograms, have led the Panel to recommend inChapter 5, for example, consolidation of groupsof subscale programs that have commonoutcome objectives.Design for FlexibilityFederal innovation programs should themselvesbe innovative and flexible in their design, settingclear objectives and measurable outcomes, andthen allowing program users to propose novelways of meeting the objectives. For example,where appropriate, programs should invite civilsociety to make proposals to develop newapproaches and to actually deliver programs,rather than relying exclusively on establishedgovernment delivery mechanisms. This designprinciple is in evidence in the Panel’srecommendations on programs in Chapter 5and on procurement in Chapter 7, where it isproposed that requests for proposals be based,wherever feasible, on a description of the needsto be met rather than on detailed technicalspecifications that leave too little opportunityfor truly innovative solutions.Assess EffectivenessFinally, the Panel is convinced that moreextensive performance managementinformation is required to ensure an outcomedrivenand user-oriented approach to federalsupport for business innovation. This entailsregular public reporting on the outcomes bothof individual programs and of the full suite offederal innovation support. The performanceinformation would inform periodic evaluations,not only against the objectives of individualprograms, but also of the programs’ relativeeffectiveness within the overall portfolio.Comparative evaluation of this kind is anextremely challenging task, but it is key to anevidence-based reallocation of resources awayfrom underperforming programs and towardnew or redesigned programs that can betterserve changing priorities and evolving businessneeds. To assist the government in this vitallyimportant regard, the Panel proposes improvedprogram evaluation approaches in Chapter 5and creation of an external Innovation AdvisoryCommittee in Chapter 8, which would inaddition provide whole-of-government adviceon the goals of innovation policy, onopportunities for new initiatives, and on anyother matters arising from the government’sinnovation agenda.4-3

Innovation Canada: A Call to ActionApproach to theRecommendationsOverall, the advice presented in the next threechapters is organized in response to the Panel’sthree mandate questions:Chapter 5: Program Effectiveness.What federal initiatives are most effective inincreasing business R&D and facilitatingcommercially relevant R&D partnerships?Chapter 6: Program Mix and Design.Is the current mix and design of tax incentivesand direct support for business R&D andbusiness-focussed R&D appropriate?Chapter 7: Filling the Gaps.What, if any, gaps are evident in the currentsuite of programming, and what might bedone to fill these gaps?4-4

Program EffectivenessChapterProgram Effectiveness5This chapter addresses the first question inthe government’s charge to the Panel:“What federal initiatives are most effective inincreasing business research and development(R&D) and facilitating commercially relevantR&D partnerships?”While the Panel determined that Canada isconsidered to be among the leaders in programassessment, 1 it was concerned to learn, in thecourse of briefings with federal officials, thatthe tools are not in place to undertakecomparative assessments as contemplated inthis question. In the federal framework forprogram evaluation, “effectiveness” is definedby the Treasury Board of Canada Secretariat(2009) as “the extent to which a program isachieving expected outcomes.” There is nocommon evaluation framework in place todetermine relative program effectiveness acrossdepartmental lines. As a result, standardizedperformance and outcome indicators do notexist for the roughly $5 billion of businessinnovation programs in the review, and thesupporting information is not retained in acommon form or database.This changes the nature of the advice that thePanel is able to offer. Instead of assessing therelative effectiveness of the 60 programsdescribed in Chapter 3, the Panel is makingrecommendations that respond to stakeholderissues and concerns and that, if implemented,will establish the missing framework needed toshape a comprehensive and consistentevaluation of R&D program effectivenessgoing forward.To establish a context for the Panel’srecommendations, the following sectionssummarize (i) the relevant evaluation machineryalready in place in the federal government,(ii) some international experience in respect ofthe evaluation and comparative assessmentof programs that support business innovationand (iii) what the Panel heard from stakeholdersregarding the effectiveness (and shortcomings)of innovation support programs in Canada.Existing AssessmentProcedures forFederal ProgramsThere are several mechanisms in place forassessing federal program expenditures,including audits by the Auditor General,strategic reviews and ongoing programevaluations. Performance assessment has awell-defined role within the government’sexpenditure management system (EMS) —the overall framework for decision making onspending. In recent years, the EMS has evolvedto put greater focus on results. The 2006Federal Accountability Act requires departmentsand agencies to review the relevance andeffectiveness of their grants and contributions1 More specifically, the net public benefit evaluation of the SR&ED tax credit by the Department of Finance in 2007 (Parsonsand Phillips 2007) is considered to be state-of-the-art for program assessments of its type.5-1

Innovation Canada: A Call to Actionevery five years. Budget 2007 announced a newEMS that includes a requirement for spendingproposals to clearly define expected results, andfor departments to manage against these resultsand formally evaluate program performance(Department of Finance 2007). Budget 2007also introduced strategic reviews ofdepartmental expenditures on a four-year cycleto determine whether they are achieving theirintended results and are aligned with thegovernment’s priorities. Because these strategicreviews are Cabinet documents, their resultswere not available to the Panel. In Budget 2011,the government announced a strategic andoperating review that will assess $80 billion indirect program spending across the federalgovernment in order to achieve at least$4 billion in ongoing annual savings by2014–15 (Department of Finance 2011).Although this program evaluation machinery isuseful for management purposes, it does not,for reasons discussed below, enable assessmentof which of the programs reviewed by the Panelare relatively more or less effective.Assessment of Program“Effectiveness”Effectiveness, as noted earlier, is defined by theTreasury Board Secretariat as simply “the extentto which a program is achieving expectedoutcomes.” Based on the Panel’s assessment ofprograms, it is clear that individual programs’“expected outcomes” are as varied as theprograms themselves, and to a large extent areincommensurable. For example, the ScientificResearch and Experimental Development(SR&ED) program, because it is deliveredthrough the tax system, does not have a resultsbasedaccountability framework and itsperformance is not evaluated on a regular basis.However, the Department of Finance hasoccasionally undertaken economic assessmentsof the program from a net benefit perspective— that is, estimating the economy-widebenefits and netting out the estimated costs ofadministration, compliance and the impositionof taxes (for the most recent assessment, seeParsons and Phillips 2007). Work undertaken forthis review applied the net public benefitmethodology to a sample of other programsbut, for reasons outlined in Chapter 6, the Panelhas concluded that the method is notsufficiently precise and well developed at thisstage for general use to assess the comparativeeffectiveness of programs.The more sector-focussed programs, such as theSD Tech Fund and FPInnovations, have intendedfinal outcomes that are relatively narrow in scope— for example, increased market growth, sectorcompetitiveness and specific environmentalbenefits. On the other hand, many programsinclude outcome objectives at the scale of theentire economy — for example, productivitygrowth or the overall prosperity of Canadians.Such ultimate impacts of individual programs areeffectively impossible to measure, since thespecific contribution of the program in questioncan rarely be isolated from the myriad factorsthat affect all macroeconomic outcomes.Intermediate outcomes, which occur closer to aprogram’s point of influence, are obviously easierto measure and attribution is stronger, althoughalmost never definitive. The Panel has observedthat intermediate outcomes are typicallyidentified according to each program’s specificobjectives. Internship programs, for example,have as desired outcomes increased jobopportunities in the business sector forgraduates. Other programs seek to increasepartnerships and collaboration, establishnetworks, foster an entrepreneurial culture,develop and retain researchers in Canada, oradvance the commercialization of new products5-2

Program Effectivenessand processes. All of these contribute in varyingdegrees to business innovation, and thus tobusiness competitiveness and prosperity forCanadians, but the linkage to such ultimatelydesired outcomes is usually indirect and longterm. In the end, the linkage must be assessedbased on a combination of econometric analysis,anecdote, accumulated experience and intuitiveplausibility.The diversity of outcomes in the portfolio ofR&D programs in this review further complicatescomparison of their relative impact on businessinnovation and commercially relevant R&Dpartnerships. It is nevertheless possible toconceive of common intermediate outcomesfor similar program types, and potentially toevaluate the comparative effectiveness of thoseprograms in achieving the common outcomes.This is explained later in this chapter inRecommendation 1.6.International Practices inComparative ProgramAssessmentThe Panel met with government representativesfrom the United Kingdom (UK), Germany, theUnited States, Australia, Singapore, Finland andthe Organisation for Economic Co-operationand Development (OECD) to discuss approachesto performance measurement and thecomparative review of programs. It concludedthat all jurisdictions recognize the importance ofperformance measurement and regularlyevaluate individual programs within specificministerial accountabilities. However, whole-ofgovernmentassessments of innovationprograms for comparative effectiveness areeither still in development or not contemplatedat all. To the extent that comparativeassessments are undertaken, they look at thebroad performance of innovation systems andpolicy — for example, the recent study of theFinnish innovation system (Finland 2009) — andnot at the relative effectiveness of individualprograms.Other jurisdictions are thus confronted with thesame issues as Canada in assessing the value oftheir innovation support measures. In aforthcoming publication on business innovationpolicies, the OECD notes that, while growingattention is being paid to evaluationinternationally, the overall evaluation recordremains “patchy” (OECD forthcoming). ThePanel believes that Canada should encourage,through the OECD, focussed collaborationregarding analysis and best practices in theevaluation of innovation policy and associatedsuites of programs.Consultations withStakeholdersIn the absence of the data and methodologiesneeded for objective and consistent assessmentof relative program effectiveness, the opinions ofstakeholders provide some basis for judgment oncomparative effectiveness. For example,programs that have little uptake or awareness bytarget clients — even though they may be welldesigned — are not able to have a significantimpact on business innovation nationally.The Panel heard the opinions of domesticstakeholders through (i) consultations in theform of in-person group sessions, held in ninecities across Canada, and a call for writtensubmissions, which elicited 228 responses and(ii) a survey of firms conducted by EKOS ResearchAssociates Inc., which generated responses frommore than one thousand R&D-performingbusinesses of varying sizes, sectors and provinces.The full results of this survey will be madeavailable through the Panel’s website atwww.rd-review.ca.These activities shed valuable light on aspects ofthe comparative effectiveness of the programsunder review. It must of course be borne in5-3

Innovation Canada: A Call to Actionmind that stakeholders, by definition, havevested interests. They are beneficiaries of theprograms being discussed. Inevitably, somemay be excessively complimentary or critical,depending on individual objectives andexperience. Nevertheless, because the Panel’sconsultations — both in person and via writtensubmissions — were extensive and reasonablyrepresentative of the span of interests, it is likelythat the most oft-repeated views have goodgrounding in reality.ConsultationsThree federal programs that support R&Dwere most often mentioned in the Panel’sconsultations and survey: SR&ED tax credits, theIndustrial Research Assistance Program (IRAP)and, to a lesser extent, the Natural Sciencesand Engineering Research Council’s (NSERC)suite of business-facing programs in support ofinternships, networking and collaboration.Some corporate stakeholders called the SR&EDprogram and IRAP the lifelines that saved theirbusinesses; without them, their companieswould have foundered.The SR&ED program, in view of its scale andscope, drew considerable commentary. Muchwas positive: the program is seen to encouragenew investment in R&D, offset the high cost ofexploratory work, directly support operations,generate cash flow, and facilitate access tocredit, while leaving the specific choice of R&Dactivity up to the individual business. At thesame time, reflecting the fact that it is the bestknown of the programs being reviewed, theSR&ED program also drew more criticalcommentary than any other R&D program.Many stakeholders called the claims processcumbersome, complex and time-consuming.Uncertainties associated with qualification andtiming are sometimes so great that the SR&EDprogram is excluded from R&D investmentdecisions. Many smaller businesses find theclaims process so unwieldy that they are forcedto engage SR&ED “consultants,” sometimessurrendering significant percentages of theirrefunds as contingency fees. (These issues, aswell as the striking preponderance of SR&ED taxcredits in the total mix of business R&D support,are addressed in detail in Chapter 6.)IRAP was widely praised as an effective, well-runprogram that provides industry with nonrepayablecontributions, mentorship andtechnical business advice. The main criticism isthe exhaustion of funds very early in the fiscalyear, but this is also one indication of the highlevel of demand for the program. Some believethat the amounts of IRAP funding awardsare too small to be effective and that theapplication process is excessively difficult forfirst-time applicants.A frequently raised issue was the need for moreefficient and targeted collaboration betweenpost-secondary institutions and businesses,particularly as it relates to mobilizing academiccontributions for commercialization. NSERC’scurrent suite of industry-facing programs isextensive, but is not well known by thepopulation of firms it is meant to support.Those stakeholders who were aware of NSERCprograms were generally pleased with them.Others, however, urged that the programs bemarketed more widely, because businessesoften do not know that they can access R&Dthrough post-secondary institutions. Thisproblem is clearly related to the small scale ofmost of NSERC’s business-facing programsand reduces their overall impact. The Panelemphasizes that, although program budgetsmay be fully subscribed, it is still important forthe programs to be widely known in order toattract more applicants. The selection processwould then be more competitive, leading tobetter overall outcomes for any given programbudget.Regarding the supply of graduates and theirskills, the Panel heard that businesses require a5-4

Program Effectivenessfull spectrum of skills, at all levels, to supporttheir R&D and innovation activities. This isconsistent with a recent OECD report onworkforce skills and innovation:As with the broader concept of innovation,there is great diversity in the range ofactivities undertaken within R&D and,consequently, considerable diversity in theoccupational structure of the R&Dworkforce. . . . The great bulk of businessR&D expenditure is devoted to Development,not Research; that is to say, it is directed notat fundamental or basic research, but toimprove existing products, services andproduction methods. . . . Such activities area key function of trade and technicianoccupations. (Toner 2011, pp. 24–25)Participants in consultations suggested thatgreater use of co-ops and internships wouldimprove the market readiness of highereducation graduates. To this end, theysuggested more support for such programsand broad eligibility to include students atcolleges and polytechnics. They also endorsedwider participation in programs that blendedscience and/or technology skills withmanagement training.Many provincial collaboration programs wereendorsed in the consultations, including theOntario Network of Excellence, the CollegesOntario Network for Industry Innovation(CONII), MaRS Innovation centres, the CollegeCentres for the Transfer of Technologies of theQuebec-based Cégeps, BCIC New Ventures, andAlberta Innovates. While stakeholders urged thefederal government to include elements ofthese programs in its own R&D supports, theycautioned against duplication of existingprovincial initiatives. Instead, they said, thefederal government should consider whether itsprograms could become accessible to morefirms if they were delivered through existingprovincial and local organizationsand, to this end, they encouraged greatercollaboration between the two orders ofgovernment.In addition to feedback on specific programs,stakeholders also commented on the programlandscape as a whole. Some frequent themesin this regard were that (i) many programs arenot known to as many businesses as theyshould be and (ii) businesses that learn of theexistence of programs are often bewildered bythe array of choices across many departmentsand agencies. Stakeholders called for programsto be consolidated and delivered by fewerorganizations. Another oft-raised commentwas that the government’s business innovationsupport is heavily oriented toward R&D andis in fact dominated by the SR&ED tax credit.Consequently, there is a need to providecomplementary support for other kinds ofactivities along the continuum from idea tocommercial success.Survey of R&D-Performing FirmsThe survey questionnaire enabled the Panel toobtain more comprehensive feedback fromR&D-performing firms (see also Box 2.4 inChapter 2). The findings emerging from thiswork provide an additional layer of insight.Surveyed firms that performed in-house R&Dwere most likely to have R&D employees whoheld undergraduate degrees (62 percent of firmsin the sample) or graduate degrees (59 percent)or who were technicians or technologists(52 percent). By comparison, only 18 percent ofresponding firms had PhD holders working asR&D employees (Figure 5.1).Of the 1009 R&D-performing firms surveyed,about one-third (331 respondents) reportednever having attempted to access a federalprogram, including tax credits, that supportsbusiness or commercially oriented R&D. Whenasked, from a prompted list, why they had neverparticipated, more than half said they were notaware of any available programs. Slightly more5-5

Innovation Canada: A Call to ActionFigure 5.1 Types of R&D Performers Employed by Firm“Approximately what percentage of your R&D performers....?”[Addressed to firms reporting that they perform in-house R&D]Hold doctorates/PhDs8015 3 2Hold graduate degreesAre undergraduates(colleges and universities)Are technicians/technologists38 30 29 335 24 38 344 28 24 40 20 40 60 80 100Percent01–50 51+ Did not know/no responsen = 956Source: Results from a survey of firms conducted for the Panel by EKOS Research Associates Inc., 2011.than a third claimed the application process wastoo burdensome. All other responses werementioned much less frequently (Figure 5.2).Two-thirds of the 1009 firms surveyed reportedhaving used a federal R&D program sometimein the past and 72 percent of those (488 firms)had accessed such a program in the past threeyears. Of the 678 firms that were past orpresent program users, 58 percent stated thattheir firms expended more on R&D as a resultof receiving federal support. This included79 percent of IRAP users and 71 percent ofSR&ED program users — further evidence of theimpact of these two large-scale programs onthe propensity of companies to undertake R&D.(This of course still does not permit conclusionsabout the comparative effectiveness of theSR&ED program and IRAP, nor objectivequantification of their net public benefit.)Among the 488 survey respondents that hadaccessed a federal R&D program in the pastthree years, 73 percent reported using theSR&ED program and 17 percent IRAP. No otherprogram was identified (unprompted) by morethan 1 percent of the companies (Figure 5.3).This strongly suggests that other federalprograms are not well known to firms.Moreover, it implies that the survey responsesto questions about firms’ experiences in usingfederal R&D programs for the most part concernthe SR&ED program and/or IRAP, with theSR&ED program the more prevalent by a ratioof more than four to one.Bearing this significant qualification in mind,recent program users were also asked to ratetheir satisfaction in relation to ten aspects of theprograms they had used (Figure 5.4). Generallyspeaking, the surveyed firms expressed highlevels of satisfaction with federal R&D supportprograms — in effect, the SR&ED program and5-6

Program EffectivenessFigure 5.2 Reasons for Not Participating in R&D Programs“Are any of the reasons listed below among the reasons your firmhas never used or participated in federal programs that support businessor commercially oriented R&D?” [Addressed to R&D-performing firmsreporting that they never accessed a federal progam]Firm is not aware of federal R&D support programs52%Application process too burdensomeFirm is not eligible under federal programsEligible costs under programs not aligned with firm’s needs12%19%35%Have not looked into it yetDo not wish for government interferenceFirm’s application for funding was not successfulSuperior provincial programIs not worth them looking into itLack of information/clarificationIssues with start-up costsNo need, no reason for itTaken care of through contract/clientLack of government support/expertiseDid not know/no response4%4%3%3%3%3%3%2%2%1%3%0 20 40 60n = 331PercentSource: Results from a survey of firms conducted for the Panel by EKOS Research Associates Inc., 2011.IRAP. More than seven in ten were satisfied withthe overall quality of program delivery and theform of support. Roughly two-thirds were alsosatisfied with the conditions on eligibility,eligible expenses and length of time betweendecision and receipt of funds. At the bottomof the list, although still garnering majoritysatisfaction ratings, were the reportingrequirements, the length of time betweenapplication and decision, and theappropriateness of the selection process.Following from the overview of the 60 programsin Chapter 3, the discussion of existing programeffectiveness evaluation “infrastructure” andthe survey of stakeholder views regarding theeffectiveness of programs, the Panel believesthat change is required to improve theeffectiveness and impact of federal programs insupport of business innovation in Canada.Specifically, the rest of this chapter sets out acomprehensive and transformative agenda ofrecommendations that will, over time, greatly5-7

Innovation Canada: A Call to ActionFigure 5.3 Program from Which Funding Received“In the last three fiscal years, from which program did your firm receive fundingor support from the federal government in relation to business R&D?”[Open ended - multiple responses accepted]Scientific Research and ExperimentalDevelopment Program73%Industrial Research Assistance Program17%Western Diversification Programdelivered by Western Economic Diversification CanadaNSERC university–business partnership programSustainable Development Technology Canada’sSD Tech FundAtlantic Innovation Fund delivered bythe Atlantic Canada Opportunities AgencyMITACSNational Research Council program1%1%1%1%1%1%Other5%Did not know/no response14%0 20 40 60 80 100Percentn = 488Source: Results from a survey of firms conducted for the Panel by EKOS Research Associates Inc., 2011.improve the impact of federal direct supportprograms for business innovation. Of foremostimportance, the Government of Canada mustbuild a focal point for direct supportprogramming — a new funding and deliveryagency for business innovation support.5-8

Program EffectivenessFigure 5.4 Satisfaction with Various Aspects of the Program“For this same program, please rate your firm’s satisfaction withdifferent aspects of the program.”Overall quality of program deliveryForm of supportConditions on eligibility to receive supportEligible expensesLength of time between decisionand receipt of fundsSkills and expertise for the assessment of projectAmount of supportReporting requirements for firmLength of time between application and decisionSelection process3 6 176 7 163 11 182 13 192 13 228 8 234 13 222 12 273 16 2316 5 22747168666361615958560 20 40 60 80 100PercentDid not know/no response Not satisfied (1–2) Neither (3) Satisfied (4–5)n = 488Source: Results from a survey of firms conducted for the Panel by EKOS Research Associates Inc., 2011.Recommendation 1Create an Industrial Research andInnovation Council (IRIC), with aclear business innovation mandate(including delivery of business-facinginnovation programs, developmentof a business innovation talentstrategy, and other duties overtime), and enhance the impact ofprograms through consolidationand improved whole-of-governmentevaluation.The Vision of the PanelFederal programs to foster business innovationmust play the central role in the government’sstrategy to boost Canada’s lagging productivitygrowth so as to ensure ongoing prosperity forCanadians. Programs to promote businessinnovation should be designed to address aspecific problem for which a governmentinitiative is needed as part of the solution.They should have a scale appropriate for theproblem at hand, be well known to business, beeasy and timely to access and use, be deliveredin coordination with other federal and provincialinitiatives, and have clear performance measuresto track progress and success.5-9

Innovation Canada: A Call to ActionGetting ThereTo realize this vision, the Panel recommendsthe following.1.1 Industrial Research and InnovationCouncil (IRIC) — Create an arm’s-lengthfunding and delivery agency — IRIC —with a clear and sharply focussed mission tosupport business innovation. IRIC shouldbecome the common service platform forall appropriate federal business innovationsupport programs. Over time, it should takeon at least the following industry-facingactivities, as further elaborated inRecommendations 1.2 through 1.4:delivery of the Industrial ResearchAssistance Program (IRAP) and acommercialization vouchers pilotprogram (1.2)delivery of a national concierge serviceand related web portal (1.3)development of a federal businessinnovation talent strategy (1.4).In addition, the IRIC could take on the followingactivities: (i) in partnership with the federalgranting agencies, joint oversight of appropriatebusiness-facing programs administered bythose agencies, (ii) technical assessment of theinnovation element of project proposalssubmitted to the regional developmentagencies and (iii) oversight of federal supportfor business-oriented collaborative researchinstitutes (see Recommendation 4, Chapter 7).Industrial Research and Innovation CouncilStakeholders consulted by the Panel complainedabout the fragmentation of the system offederal innovation programming and suggesteda streamlined approach whereby programs areoverseen and/or delivered by a single entity.Other jurisdictions, including the UK, Australiaand New Zealand, have benefited from usingcommon delivery agents for suites of businessfacingprograms. For example, the UK deliversits innovation programming through a centralpoint — the Technology Strategy Board (TSB) —which reports to the Department for Business,Innovation and Skills. The TSB operates at arm’slength from government, sets national priorities,and invests in programs and projects. TheConfederation of British Industry told the Panelthat British businesses are pleased with the onestop-shopapproach. It is also notable thatprevious expert panels in Canada — specifically,the Expert Panel on Commercialization and theCompetition Policy Review Panel — haverecommended increased coordination at thefederal level, suggesting it could be broughtabout through creation of a body mandated tooversee and provide advice from a whole-ofgovernmentperspective (see Annex B).In view of the foregoing, the Panel recommendsthe creation of the IRIC, an arm’s-length fundingand delivery agency reporting to Parliamentthrough the minister responsible for innovation(see Chapter 8). The IRIC would drive a changein the governance of industry-facing programs,providing an integrated and responsive entity tofoster business innovation and competitiveness.The Panel envisages IRIC as a national deliveryagency for federal business innovationprogramming. It would be demand driven,with clear performance metrics, a whole-ofgovernmentorientation and a strong ethos ofpartnership with the provinces and territories aswell as with the existing federal grantingagencies — namely, the Natural Sciences andEngineering Research Council (NSERC), theCanadian Institutes of Health Research (CIHR)and the Social Sciences and HumanitiesResearch Council (SSHRC). The IRIC, subjectto a performance review every five years,should also be expected to operate accordingto a number of fundamental principles ensuringa commitment to quality, cooperation andtransparency in program design and delivery(Box 5.1).5-10

Program EffectivenessBox 5.1 Operating Principles of the Proposed IndustrialResearch and Innovation Council1. Be mandated to stimulate Canadian economic growth and to foster a culture ofinnovation by encouraging and supporting business innovation in Canada through anoptimal mix of programs.2. Provide a single point of contact for Canadian businesses seeking to undertakeR&D/innovation activities, and guide business “clients” to the program and serviceproviders that best meet the timelines and supports that the industry client needs. Thiswill reduce the confusion of multiple points of entry.3. Be industry sector agnostic and emphasize that innovation occurs in all sectors of theeconomy, in urban and rural areas, and within micro, small, medium and largeCanadian companies, and that innovation can be enabled by talent from a range ofservice providers.4. Work collaboratively with businesses, the federal and provincial governments as wellas the Canadian research community to design new programs and remove existingbarriers and impediments in order to improve Canada’s commercialization outputs,competitiveness and productivity. Encourage, as appropriate, cross-sector,cross-platform, cross-disciplinary collaboration.5. Use common definitions, a common program/project application form, and offer clearand consistent advice to Canadian business from coast to coast.6. Enable and encourage novel program design and delivery. Where appropriate, solicitoutside program delivery agents through a competitive process designed to maximizeprogram outcomes. In such cases, IRIC must ensure clear lines of accountability withthese delivery agents, allowing them to compete and avoiding any conflict of interestin which IRIC competes with delivery agents for program funding.7. Require that businesses put “skin in the game” for programs/projects commensuratewith the level of return to the partner. Generally, as projects are further downstreamtoward the market in the innovation chain, businesses must be required to increase theproportion of their own investment.8. Maintain an uncompromising focus on quality. Where appropriate, peer review shouldbe used to determine research funding to ensure that the right problem and audienceare being targeted with the right methodology.9. Respect stakeholder timelines and commitments. For example, peer review processesmust be designed to ensure against protracted delays in either starting projects orreleasing business contributions.10. Track, measure and report to the proposed Innovation Advisory Committee (IAC,described in Chapter 8) and the public on outcomes and indicators for all businessfacingR&D programs offered by the Government of Canada. Where needed, developnew metrics, approved by the IAC, and keep a scorecard of performance. Create linesof accountability to the IAC for program outcomes and delivery.5-11

Innovation Canada: A Call to ActionOver time, IRIC would become the commonservice platform for all appropriate businessinnovation support programs of the federalgovernment. Eventually, and with increasedindustry participation and contribution tothese programs, IRIC would play a lead role indeveloping new initiatives that directly assistfirms with their business innovation needs,including joint initiatives with the provinces andterritories, where warranted. The key distinctionbetween programs administered by IRIC andthose administered by NSERC and other existinggranting councils is that the former wouldfocus on demand-driven support — typically inresponse to initiatives from, or directly relatedto, businesses — while the latter wouldcontinue to focus on supply-push support —for example, funding for commercially orientedprojects initiated within academic institutions.In this regard, there is also a need to distinguishbetween (i) the support by NSERC and CIHR ofsolution-driven research and (ii) their support ofbasic discovery research, ensuring that bothreceive adequate funding and are evaluatedusing appropriate and relevant metrics. 2Given IRIC’s central role for federal initiativessupporting business innovation, it should beinvolved in a substantive and strategic way withthe risk capital and procurement programmingset out in Chapter 7. That said, the legal andfinancial responsibility for delivery and financialmanagement should remain with the BusinessDevelopment Bank of Canada and Public Worksand Government Services Canada, respectively.The IRIC should also assume responsibility forthe technical assessment of all proposalssubmitted to regional development agency(RDA) programs that support businessinnovation. 3In fulfilling its role, the IRIC would need toadopt an overall portfolio view of its suite ofprograms, consolidate similar programs, identifygaps, set clear outcomes for each program andmonitor programs to ensure they are meetingobjectives. The IRIC would ensure that intendedprogram outcomes are relevant and responsiveto program users. Moreover, a commitment tofederal–provincial collaboration would be aconstant feature of all of the IRIC’s operations.While ongoing costs for the IRIC would be partlyoffset through the transfer of existing employeesfrom other organizations, its creation would taketime and entail up-front incremental cost, arisingfrom both the transfer of the range of programsand the set-up of the new organization itself.Creation of this new organization and thetransfer of existing programs to the IRICframework should be staged to minimizestakeholder and program disruption.Industrial Research Assistance Program andCommercialization VouchersAs noted, the Panel’s consultations revealedthat IRAP is widely regarded as an effective,well-run initiative that facilitates R&D andcommercialization activity by small andmedium-sized enterprises (SMEs). This findingis corroborated by evidence collected throughthe Council of Canadian Academies’ 20062 In an opinion piece published in Nature, Dr. Indira Samarasekera, President of the University of Alberta, argues the need fora new social contract that “would involve establishing a review, approval and funding process for solution-driven researchthat sits parallel to processes for basic research, and has the nimbleness and urgency desired in the outcomes, withoutcompromising the cautions that validate and protect the quality of the work” (Samarasekera 2009, p. 161).3 The assessment of proposals to support innovation should be based on broad criteria of commercial success, taking intoaccount the overall competitive landscape both nationally and globally. This requires expertise and specific skills that aredifficult to maintain across a variety of small programs and delivery organizations. Consolidating assessment of theinnovativeness and commercial potential of business innovation projects in the IRIC, as a “back office” function providedfor the RDAs, would allow IRIC to develop common definitions, standards and assessment processes across Canada toensure consistently high standards. The IRIC should also facilitate the sharing of best practices among RDAs and work withthem on partnering more effectively with provincial governments.5-12

Program Effectivenessassessment of Canada’s strengths andweaknesses in science and technology. A surveyconducted as part of that assessment foundthat IRAP was considered to be the federalgovernment’s strongest program of directsupport for the commercialization or translationof research into applications that benefit theeconomy or society (CCA 2006).The Panel’s consultations further revealed thatmany stakeholders believe the federal portfolioof business innovation support places anemphasis on R&D and that there is an ensuingneed to provide complementary assistance fornon-R&D activities along the path from idea tomarket success, particularly those related tocommercialization. The Panel was alsofrequently told that many companies, especiallySMEs, lack awareness of the range of postsecondaryeducation, government, non-profitand other commercialization facilities, assetsand skilled personnel available across thecountry. It was suggested that such issues couldbe addressed through the introduction of a“vouchers” program — that is, governmentfunding support would be delivered viavouchers provided to qualifying businesses andused to defray part of the cost of acquiringapproved commercialization services fromapproved providers. A vouchers approach hasalready been adopted by other jurisdictions(e.g., the Netherlands, Hungary, the UK andIreland) as well as by provincial governments,including Alberta, Newfoundland and Labrador,and Nova Scotia. Vouchers are a relatively newform of delivering direct assistance to firms.Their underlying objective is to help buildrelationships between SMEs and innovationpartners by eliminating obstacles that havetraditionally been barriers to such relationships— for example, the relatively high fixed costsrequired for SMEs to identify a suitable partner.Recognizing that IRAP plays a central role inenabling SMEs to conduct R&D and to innovate,and that vouchers would help SMEs betterconnect to commercialization partners, thePanel recommends the following.1.2 Resources for IRAP andcommercialization vouchers —Increase IRAP’s budget to enable it to buildon its proven track record of facilitatinginnovation by SMEs throughout Canada,and create a national commercializationvouchers pilot program, delivered withinthe suite of existing support mechanismsoffered through IRAP, to help SMEsconnect with approved providers ofcommercialization services in postsecondary,government, non-profit andprivate organizations.Funded IRAP projects must have strongcommercialization potential and representsignificant contributions to the developmentand use of leading-edge technologies. In viewof IRAP’s well-known and respected “brand,” itis also important for the program to retain itsidentity under the IRIC umbrella.The national commercialization vouchersprogram should be established as a five-yearpilot initiative and delivered collaboratively withprovinces in cases where there is provincialinterest. Clear principles, common definitionsand consistent outcome indicators should beput in place for this pilot program. The businessbeneficiary of a voucher-related project shouldbe required to contribute as well in order todemonstrate commitment to the project.Concierge ServiceCanada’s landscape of programs that supportbusiness innovation is densely populated byinitiatives spanning many departments andagencies at both the federal and provinciallevels. This leaves many businesses bewilderedby the array of choices. A corollary is that manyprograms are not as well known to businessesas they should be. The Panel thereforerecommends the following.5-13

Innovation Canada: A Call to Action1.3 Innovation concierge service —Establish a national “concierge” service andassociated comprehensive web portal toprovide companies with high-quality, timelyadvice to help identify and access the mostappropriate business innovation assistanceand programs for the individual firm.The concierge service would serve the dualpurpose of (i) providing a single access point forbusinesses to obtain individualized assistance innavigating the complex program landscapethrough well-informed guidance on the mostappropriate programs and (ii) generatingawareness of programs by directing clients toinitiatives they might not have otherwiseidentified.In order to ensure that businesses benefit fromhigh-quality, personalized assistance on acase-by-case basis, client service personnel inthe concierge offices should be appropriatelytrained to provide services ranging from initialclient referrals to specialized sectoral advice,drawing on all Government of Canadaresources as well as relevant provincialprograms. The associated web portal shouldbe developed in collaboration with theprovinces to constitute a “one-stop” onlineorientation to the full range of governmentprograms in support of business innovation.The new concierge service should build on theexisting capacity of Canada Business, whichprovides access to information and tools forCanadian businesses and entrepreneurs throughservice centres and an online delivery channel.TalentA talented and adaptable workforce is at theheart of innovative economies. Every part of theeconomy therefore has a stake in educating,training and effectively integrating highlyqualified and skilled Canadians into theworkforce, and in attracting and retainingtalented individuals to Canada. While thedevelopment of talent is the responsibility of theprovinces, the Government of Canada plays animportant role through the granting councilsand can have a particular focus on thedeployment of talent in support of businessinnovation. Unfortunately, federal efforts areunorganized, and federal programs are subscaleand uncoordinated. The Panel thereforerecommends the following.1.4 Talent — IRIC should lead the developmentof a federal business innovation talentstrategy, working closely with the provincesand relevant federal departmentsand agencies, focussed on increasingbusiness access to, and use of, highlyqualified and skilled personnel.Guided by this strategy, IRIC should work withfederal partners to consolidate federal industrialinternship and youth employment programs,creating a larger, more flexible program open toall senior undergraduate and graduate studentsand post-doctoral fellows from across ourpost-secondary educational institutions.The strategy should address gaps in the currentsuite of business-oriented talent programs,such as creating opportunities forentrepreneurship mentoring, addressingCanada’s underperformance in deploying ourmost highly skilled and highly trained PhDgraduates, and developing the full range ofindustrially relevant research, development andcommercialization skills for trainees, includingboth technical and professional “soft” skills.The strategy should be designed to meet clearlydefined objectives, over time, centring on theincreased use by business of highly qualified andskilled personnel. The Panel also recommendsthat the strategy make use of proactive andflexible delivery mechanisms by engagingstakeholders and civil society in the design anddelivery of its talent initiatives, whereappropriate.5-14

Program EffectivenessFigure 5.5 Direct Spending Portion of the Envelope, by Activity Supported, 2010–11 a100%80%60%40%20%BasicResearch($195 million)Other(17 programs)ABIPNRC-SIMSNRC-PBICHRPIRCStrategicNetwork Grants(SNG)Networks ofCentres ofExcellence(NCE)IndustrialResearchAssistanceProgram (IRAP)CollaborativeResearch andDevelopmentGrants (CRD)AppliedResearch($516 million)Atlantic Innovation Fund (AIF)FPInnovationsExperimentalDevelopment($573 million)Other(24 programs) Other(33 programs)WDPNRC-IRCNRC-IMBNRC-IARNRC-ICPETDeveloping Innovative Agri-ProductsIRCSNGBusiness and Regional Growth ProgramNRC-IITNRC-IMICanadian Agri-Science ClustersSPGABIPNRC-BRICRDNCENRC-IMINCECCIPTDPCECRAtlantic Innovation Fund (AIF)FPInnovationsSDTech FundIndustrialResearchAssistanceProgram (IRAP)Commercialization($162 million)Other(21 programs)NRC-IOTCCIPNRC-IRCNRC-IMSNRC-IARBDPInnovationElementNCEBusinessand RegionalGrowthProgramCECRStrategicProject Grants(SPG)IndustrialResearchAssistanceProgram (IRAP)StrategicAerospace andDefence Initiative(SADI)WDP0%aWithin each activity supported, programs are ordered according to the size of their expenditures, starting from the largestat the bottom and progressing through to the smallest at the top. Expenditures for each program are roughly proportionalto the area of the rectangles representing the program. Some programs (for example, IRAP) are present in more than oneactivity. Three percent of direct expenditures within the review envelope are unclassified and are not represented in thisfigure. See Annex A for the full name of programs represented by acronyms.Source: Based on figures collected from federal departments and agencies.Program ConsolidationAs documented in Chapter 3, there are manysmall-scale business R&D and commerciallyoriented R&D programs in the federal suite.(Figure 5.5 portrays the portfolio of directexpenditure programs by activity supported.)Recent work by the OECD suggests that“. . . the policy mix needs to avoid inefficienciesarising from operating too many schemes attoo small a scale. This is a real concern, since5-15

Innovation Canada: A Call to Actioninstruments can develop constituencies ofsupport and a degree of autonomy, makingthem less amenable to change or cancellation,even where this would be sensible. In somecases, there may be ways to streamline therange of instruments and programmes, reducecomplexity, enhance transparency and loweradministration costs” (OECD forthcoming, p. 9).Internationally, jurisdictions such as Finland andthe UK, and domestically both Alberta andOntario, have reduced the number of businessinnovation programs offered and haverationalized their program suites into a set ofmutually exclusive programs, thus providingcoverage for areas of government interventionin the innovation system. The UK governmenthas consolidated its business support programs,reducing their number very substantially in thenew Solutions for Business program launched inApril 2011. The Panel believes that thegovernment must seize opportunities forprogram consolidation, and thereforerecommends the following.1.5 Program consolidation — Over time,consolidate business innovation programsfocussed on similar outcome areas into asmaller number of larger, more flexibleprograms open to a broader range ofapplicants and approaches.Through a more streamlined suite of programs,the government could reduce overhead costs,increase impact, enhance client awareness andimprove the usability of business innovationprograms.Comparative Program EvaluationThe Panel was asked to provide advice onwhich federal programs in support of businessinnovation are most effective. However, asnoted earlier, the tools needed to assesscomparative effectiveness have not yet beendeveloped — there is no agreed-upondefinition, framework or methodology forcomparative evaluation, no commonperformance indicators and no commondatabase of the programs. Management of$1.5 billion in direct program spending requiresbetter management tools to be put in place,together with a process to apply these tools ina comprehensive, consistent and ongoing way.A common, outcomes-focussed framework forperformance management and publicevaluation of business and commerciallyrelevant R&D programs would improvecomparability among programs and informdecisions to reallocate funding strategicallywithin the overall portfolio. It would makeCanada a leader in managing for results.Accordingly, the Panel recommends thefollowing.1.6 Program evaluation — Build a federalcapacity to assess the effectiveness of newand existing business innovation programsto enable comparative performanceevaluation and to guide resource allocationgoing forward.To this end, it is possible to conceive of a wholeof-governmentevaluation approach wherebysets of “intermediate outcomes” are applied asperformance measures to categories of likeforms of support, regardless of the departmentor agency providing that support. A schematicexample of this approach is illustrated inFigure 5.6, which could potentially serve as abasis for discussion between the IRIC and thefederal evaluation community, working withthe Treasury Board Secretariat.5-16

Program EffectivenessFigure 5.6 Performance Indicators for Comparison of Categoriesof Like Forms of R&D SupportCategory of Support Program Outcomes Possible Indicator(s)A Firm R&D andcommercializationB R&D partnershipsIncreased businessinvestment in innovation,including R&DIncreased ability to performand manage R&DImproved firm performanceIncreased adoption ofknowledge and technologyby firmsStrengthened networks andlinkages• Increased firmexpenditures on R&D• Increased firmexpenditures onintangibles (e.g.,intellectual property)• Increased number of R&Dmanagers• Increased profits from costsavings resulting fromproductivity improvements• Increased profits fromsales/revenues of newproducts and services• Percentage of projectsresulting in technologytransfer• Number of new firmsentering R&Dactivity/number of repeatfirms• Increase in SME clientsserved by post-secondaryeducation service providers• Increase in co-publications• Increase in the intensity ofcollaboration (value ofprivate sector R&Dexpenditures on contractswith the public sector)5-17

Innovation Canada: A Call to ActionFigure 5.6 Performance Indicators for Comparison of Categoriesof Like Forms of R&D Support (cont.)Category of Support Program Outcomes Possible Indicator(s)C Commercially orientedR&DD Training in industryAdvancement oftechnology/knowledgeIncreased commercializationof public researchIncreased supply of talentedpeople• Increased number ofprototypes• Increased number ofpatents, licences anddisclosures• Increased number ofpublications• Number of spin-offcompanies• Spin-off company revenuesand R&D expenditures• Increase in number ofstudents/researchers withindustry experience priorto graduation• Increased retention ratesof highly qualified andskilled personnel inCanadian enterprises5-18

Program Mix and DesignChapterProgram Mixand Design6This chapter addresses the second question inthe government’s charge to the Panel: “Is thecurrent mix and design of tax incentives anddirect support for business research anddevelopment (R&D) and business-focussedR&D appropriate?”In its forthcoming report on business innovationpolicies, the Organisation for EconomicCo-operation and Development (OECD)emphasizes the importance of striking the rightbalance in the mix of programs to supportbusiness innovation. It notes, for example, therequirement to have a set of instruments that issufficiently differentiated to meet the needs ofcomplex innovations systems while at the sametime avoiding the inefficiencies of operating toomany schemes at too small a scale — an issuethat was addressed in the previous chapter.The mix between direct and indirect measuresis another important consideration, notablybecause each form of support offers certainadvantages and disadvantages (Box 6.1).In its State of the Nation reports, the ScienceTechnology and Innovation Council (STIC 2009,2010) notes that, as a percentage of grossdomestic product (GDP), government supportfor business R&D in Canada is among the mostgenerous in the world, but underscores that,relative to comparator countries, Canada’ssupport is heavily weighted toward taxincentives as opposed to direct supportmeasures. Of particular note, as seen inFigure 6.1, the United States (US) spendssignificantly more on direct support measuresrelative to support through tax incentives.However, there is a trend among OECDcountries to make greater use of R&D taxincentives (OECD forthcoming).The Panel has concluded that the OECD data inFigure 6.1 to some extent overstate federalreliance on indirect support because (i) thesedata do not capture the full range of directprograms in Canada and (ii) the measurementof direct support varies across countries, makinginternational comparisons problematic.Specifically, the Panel’s mandate includessupport not only for “direct governmentfunding of business expenditure on researchand development (BERD),” as depicted inFigure 6.1, but also for commercially relevantR&D performed by public and non-profitinstitutions — for example, support throughprograms that seek to help build links betweenacademia and industry. The addition of theseexpenditures to the “direct” support mix wouldslightly increase Canada’s ratio of direct toindirect support relative to the picture inFigure 6.1. There are also differences amongcountries in the calculation of certain items ofdirect government support that have the effectof increasing the reported direct expendituresof some countries relative to Canada — forexample, their inclusion of loans to business andgovernment procurement of R&D services asdirect support measures. It should also be notedthat the refundable Scientific Research andExperimental Development (SR&ED) tax credit is6-1

Innovation Canada: A Call to ActionFigure 6.1 Direct and Indirect Government Support of Business R&D, 2008 (except as noted)(percentage of GDP) a0.40% of GDP0.350.300.25Direct government fundingof BERDIndirect government supportthrough R&D tax incentives0.200.150.100.050.00CanadaKoreaBelgiumJapan (2007)HungaryAustria (2007)Ireland (2007)FranceNetherlands (2007)PortugalDenmarkTurkeyUnited KingdomAustralia (2007)United StatesNorwaySpain (2007)Czech RepublicSweden (2007)GermanyIcelandFinlandLuxembourg (2007)New Zealand (2007)ItalySwitzerlandSlovak RepublicPoland (2007)Mexico (2007)Greece (2005)aThe data illustrated in this figure do not include R&D tax incentives provided by sub-national governments — an importantconsideration, as in Canada provinces also provide tax support.Source: OECD (2010b).in effect a cash transfer to qualifying smallercompanies to help fund their R&D activity, andthus has something in common with a “directexpenditure” program. On the other hand, theSR&ED credit, whether refundable or not, isquite unlike the direct spending programsreviewed by the Panel, since the latter havetargeted criteria and are subject to assessmentof the merit of the proposed businessinnovation project, while the SR&ED programhas neither constraint.Although one might debate the fine points of“direct versus indirect” spending ratios, it isabundantly clear from the program datapresented in Chapter 3 that the federalgovernment’s mix of R&D support is very heavilyweighted to tax incentives — the SR&EDprogram accounts for about 70 percent ofthe value of the support provided by the60 programs reviewed by the Panel.International comparisons of tax incentiveprograms for R&D also demonstrate that theCanadian system is among the most generousin the world, particularly for small businesses(Figure 6.2). Comparisons including the subnationallevel indicate, moreover, that the6-2

Program Mix and DesignBox 6.1 Direct Support Versus Indirect SupportThe OECD (2010a, p. 76) defines direct and indirect funding as follows: “Government directR&D funding includes grants, loans and procurement. Government indirect R&D fundingincludes tax incentives such as R&D tax credits.” In practical terms, the main distinctionbetween direct and indirect support is that the latter is open ended and is available to allfirms, whereas the former is limited in overall funding and is allocated by programadministrators to specific projects, industries or regions. Direct support can therefore betargeted to specific areas, contrary to more neutral indirect measures.It follows that the principal advantage of direct instruments lies in the ability to focussupport on actors or activities considered more likely to achieve high social returns or toadvance specific policy goals. Notwithstanding the benefits associated with this ability tostrategically target resources, there are also some drawbacks to direct support measures. Inparticular, they generally involve more rigorous selection and evaluation processes, whichcan translate into higher administration costs for government and compliance costs forbeneficiaries. Moreover, they can raise some concerns around the desirability of governments“picking winners” in the marketplace.Conversely, indirect measures are advantageous for the opposite reason. Since they arenon-discriminatory and widely available across firms, sectors, fields and activities, theymore closely conform to market rationality. Indirect measures are also generally easier andcheaper to implement. The flip side, however, is that they are less amenable to being steeredtoward specific policy objectives.combination of federal and provincial tax creditsin Canada provides much higher subsidy ratesfor R&D than are available, for example, in USstates.The question therefore is whether Canada isrelying too heavily on “indirect” tax expenditurein its overall mix of business innovation/R&Dsupport. The great advantage of a tax-basedapproach is that, once basic eligibility criteria aremet, it does not discriminate on the basis ofsector, region or specific opportunity. Since theSR&ED program is based on the tax system, itoperates “automatically.” The tax incentivestimulates R&D generally, but leaves projectselection decisions to individual firms. Thegovernment does not try to pick the winners —the companies do. The strength of the programis also potentially its weakness. The tax credit isa blunt instrument. Not every R&D project willgenerate the same rate of social return; notevery R&D performer is equally in need ofstimulus or equally likely to be successful; andgovernments will often be well justified inseeking to promote, through targeted support,certain domains of innovation and R&D forstrategic purposes.Changing the Mix:More Direct SupportThe SR&ED program plays a fundamental role inlowering the costs of industrial R&D for firms,enhancing investment in R&D, and makingCanada a more attractive place to locate R&Dactivity. However, a key implication of this heavyreliance on the program is that federal supportfor innovation may be overweighted towardsubsidizing the cost of business R&D rather thanother important aspects of innovation. Inparticular, the Panel believes the federal6-3

Innovation Canada: A Call to ActionFigure 6.2 Tax Subsidy Rates on Investment in R&D for Selected Countries, 2009 aLarge Small Combined BERD IntensityFirms Firms Large/Small Combined Ranking inCountry (%) (%) (%) Ranking the OECD (2008)France 38.6 47.6 40.2 1 14Spain 34.1 36.9 34.5 2 24Canada 26.9 46.0 30.2 3 18India 29.3 31.7 29.7 4 — bBrazil 28.9 33.0 29.6 5 — bIreland 26.2 26.1 26.2 6 19UnitedKingdom 21.1 22.8 21.4 7 16Japan 18.0 23.2 18.9 8 4China 17.4 18.8 17.7 9 — bNorway 15.9 24.6 17.4 10 22Australia 14.2 15.5 14.4 11 12Korea 12.1 14.2 12.4 12 5Netherlands 10.0 12.2 10.3 13 21UnitedStates 9.1 10.0 9.2 14 7Italy 4.9 17.5 7.0 15 25Finland 3.1 3.4 3.1 16 2Sweden 2.1 3.2 2.3 17 3Germany 1.6 3.3 1.9 18 10Switzerland 0.4 2.6 0.8 19 6RussianFederation 0.2 0.6 0.3 20 — bUnweightedaverage 15.7 19.7 16.4Median 15.1 18.2 15.9abThe data in this table include income tax deductions. They also include R&D tax incentives provided by sub-nationalgovernments.Not a member country of the OECD.Source: Department of Finance (2009); and OECD (2011) for the rankings for BERD intensity (BERD as a percentage ofGDP) in 2008.government needs to focus its innovationsupport more sharply on the strategic objectiveof growing innovative firms into largerenterprises — a key means of achieving thescale required to realize the Panel’s vision of aCanadian business sector that stands shoulderto-shoulderwith the world’s innovation leaders.For this reason, coupled with stakeholder callsfor increased direct support, the Panel believesthe government should rebalance the mix ofdirect and indirect funding by decreasingspending through the SR&ED program anddirecting the savings to complementaryinitiatives strategically focussed on serving6-4

Program Mix and Designthe needs of innovative Canadian firms,especially small and medium-sized enterprises(SMEs), to help them grow and prosper.These complementary initiatives include thoserecommended in Chapter 5: (i) shored-upsupport for the Industrial Research AssistanceProgram (IRAP) to provide advice, mentoringand funding in support of R&D andcommercialization projects by SMEs; (ii) a newcommercialization vouchers pilot program tohelp SMEs connect with innovation partners;(iii) a new concierge system to improve clientservice; and (iv) increased access to a highlyskilled and entrepreneurial workforce. They alsoinclude other measures discussed in the nextchapter: (i) using procurement and relatedprogramming to foster demand for businessinnovation, particularly by SMEs; and(ii) improving federal support for risk capital atthe start-up and later stages of growth to helpsmall firms become larger ones, while retaininga significant presence in Canada as they grow.The end result of this rebalanced program mixwould be a substantial increase in the range andsophistication of federal support for SMEs.Overview of the SR&EDProgramThe SR&ED tax incentive program is designed toencourage Canadian businesses of all sizes andin all sectors to conduct R&D in Canada that willlead to new, improved or technologicallyadvanced products or processes (Box 6.2).The SR&ED program generally provides a20-percent tax credit to Canadian businesses,with an enhanced 35-percent federal tax creditavailable to qualified small businesses that areCanadian-controlled private corporations(CCPCs). 1 The enhanced credit is fullyrefundable up to an expenditure limit, which isto say that the enhanced credit is payableregardless of the tax position of the company.The refundability feature for small companiesmeans, for example, that many youngcompanies that have little or no taxable incomereceive cash to help finance their R&D andpotential growth.The current expenditure limit to access the35-percent credit with full refundability is$3 million, which at this limit can generate anannual tax credit of just over $1 million. 2 The$3-million expenditure limit is gradually reducedto zero as prior-year taxable income rises from$500 000 to $800 000 or as prior-year capitalassets rise from $10 million to $50 million.Spending above the expenditure limit qualifiesfor a 20-percent credit that is 40-percentrefundable but, once taxable income exceeds$800 000 or capital assets exceed $50 million,CCPCs receive the standard non-refundable20-percent SR&ED tax credit.In 2007 — the most recent year for which suchdata are available — some 20 000 smallbusinesses that were CCPCs received about$1.3 billion in SR&ED tax credits (Figure 6.3).(By way of contrast, 1082 SMEs received a totalof $69.1 million in funding from IRAP in 2007.)About 3900 other firms earned roughly$2.0 billion in SR&ED tax credits in 2007. Theaverage credit value for small businesses wasabout $65 000, compared with an averageclaim of approximately $700 000 for largercorporations. The number of qualified smallbusinesses increased by more than 25 percentbetween 2004 and 2007, compared with a verymodest growth for large businesses. Part of the1 To have access to the 35-percent credit, the claimant needs to be incorporated as well.2 Only current expenditures are eligible for full refundability; capital expenditures, which account for about 4 percent oftotal costs, are eligible for a 40-percent refund. Access to full refundability is restricted to CCPCs with prior-year taxableincome up to a maximum of $500 000, which is gradually reduced to zero as capital assets increase from $10 million to$50 million.6-5

Innovation Canada: A Call to ActionBox 6.2 Key Parameters of the SR&ED Tax Incentive ProgramNature and PurposeThe SR&ED program seeks to encourage Canadian businesses of all sizes and in all sectors toconduct R&D in Canada that will lead to new, improved or technologically advancedproducts or processes. The program offers two types of incentives:Income tax deductions — All allowable SR&ED expenditures, including capital, may bededucted from taxable income in the year incurred at the taxpayer’s discretion; unuseddeductions may be carried forward indefinitely. R&D spending is generally considered tobe an investment — that is, the spending is undertaken in one period with theexpectation of generating revenues in future periods — so allowing immediatedeductibility of capital and current expenditures provides a significant benefit to firms.Investment tax credits — Earned as a percentage of qualified SR&ED expenditures,investment tax credits can be used to reduce the amount of income taxes otherwisepayable. They can be carried back up to three years and forward up to 20 years to reduceincome taxes otherwise payable in those years. Credits earned in a year but not used arepartially or fully refundable (that is, redeemed for cash) for smaller businesses.EligibilityParticipants: corporations, proprietorships (individuals), partnerships and trustsCosts: Salaries and wages, overhead expenses, materials, capital equipment expenses,contracts and payments to third parties such as post-secondary institutionsProjects: experimental development, basic and applied research, and support work (suchas engineering design and operations research) carried out for the purpose of achievingtechnological advancement or advancing scientific knowledge.AdministrationAdministration is the responsibility of the Canada Revenue Agency (CRA), while governinglegislation (Income Tax Act) is the responsibility of the Department of Finance. Firms file aSR&ED claim for their eligible expenditures incurred. The CRA reviews the claim, and aims toprocess 90 percent of refundable claims within 120 days of receipt and 90 percent of nonrefundableclaims within 365 days of receipt. The CRA offers a preclaim advisory service tohelp businesses identify the eligibility of projects. It is available at no cost before claims arefiled. As noted on the CRA website, the preclaim service is “neither an advanced income taxruling nor a pre-approval of a SR&ED claim. A final determination on any SR&ED claim mustbe based on the actual work done and can only be made after the claim is filed.”growth in the number of small CCPCs in 2007may have been due to an increase of thetaxable income threshold that allows a companyto qualify for the enhanced credit. Due to theirhigher credit rate and refundability, small CCPCsclaimed about 40 percent of total credits whileperforming about 30 percent of qualifyingR&D in 2007.The SR&ED program, unlike grant programs, isnot subject to assessment of the quality of anyparticular business project. Businesses that donot qualify for a refundable credit nevertheless6-6

Program Mix and DesignFigure 6.3 Tax Expenditures, by Type of CorporationValue of Credit ($ million)Number of Corporations (units)2004 2005 2006 2007 2004 2005 2006 2007SmallCCPCs 1 043 1 119 1 128 1 298 15 482 16 917 17 712 19 806Largefirms 1 944 1 448 1 471 1 822 2 452 2 448 2 728 2 599Others a 137 170 208 136 1 259 1 510 1 920 1 310Total 3 123 2 737 2 807 3 256 19 193 20 875 22 360 23 724aIncludes CCPCs in expenditure limit phase-out range and small non-CCPCs.Source: Department of Finance.face “tax risk” in that they must have sufficienttax payable in order to fully benefit from thecredit. This has the significant advantage of“targeting success” — that is, the (nonrefundable)benefit is available only tocompanies that are sufficiently profitable —while making the credit less open ended than itinitially appears. Although businesses can carryunused credits to future years, delayed usereduces the value of the benefit. With thealmost 50-percent reduction in the federalstatutory corporate tax rate since 2000,businesses now find it more difficult to fullyutilize the SR&ED tax credit generated in acurrent year against federal tax otherwisepayable, putting further downward pressure onthe average expected effective tax credit rate. Incontrast, the criterion for “targeting success”does not apply to the small CCPCs that receivea fully refundable tax credit.Net Public BenefitIn 2007, the Department of Finance conducteda thorough benefit–cost analysis of the SR&EDprogram (Parsons and Phillips 2007). Itconcluded that the public benefit of theprogram — the part due to the incrementalR&D investment stimulated by the SR&EDsubsidy and the estimated social return on thatincremental investment (i.e., extra outputgenerated in the economy as a whole) —exceeded its full costs. These costs include notonly administrative and compliance costs, butalso the cost to the economy of having to raiseadditional tax revenues to finance the credit.This type of benefit–cost analysis relies on keyparameter estimates — particularly of theextra R&D performed per dollar of tax creditprovided and of the social rate of return onbusiness R&D expenditure — which are subjectto considerable estimation error. Thesemeasurement problems, together with thedifficulty of applying the methodology to otherinnovation support programs — for example, tobusiness network and internship programs —have led the Panel to conclude that thecalculation of net public benefit is notsufficiently precise at this time to permit abenefit–cost ranking of the government’sbusiness R&D support programs, nor to finetunethe mix between SR&ED and the portfolioof direct expenditures.The estimation of net public benefit ofinnovation programs is nevertheless an excellentgoal and should be included, as it is developedand refined, within the suite of programevaluation tools, as referred to in Chapter 5 onprogram effectiveness. What can be said, in anyevent, is that the net public benefit of a supportprogram declines as administration andcompliance costs increase, and as the subsidy6-7

Innovation Canada: A Call to Actionrate for the program increases beyond a certainthreshold. Some level of subsidy is of courseneeded to stimulate the behaviour that aprogram is trying to encourage. But anincreasing subsidy obviously raises the “cost”side of the equation directly and also steadilyincreases the likelihood that projects withpoorer expected returns will be undertaken, orthat businesses with poor prospects will besustained longer than they otherwise would be.Either of these outcomes reduces the addedbenefit contribution of the program. At somepoint, the additional cost of a higher subsidywill exceed the additional social benefit thatmore generously subsidized projects induce.Were this to occur, the subsidy rate should bereduced. When subsidies associated with severaldifferent programs are combined to support agiven project, the risk of excessive subsidizationobviously increases. This is why it is important totake an overall portfolio approach to a suite ofR&D programs and to establish closecooperation between federal and provincialgovernments in this regard.As noted in Chapter 5, the SR&ED program isboth lauded and criticized. In the latter regard,its complexity results in excessive compliancecosts, unpredictability about qualification andfirms having to resort to retaining consultants,the cost of which diminishes the benefit.Compliance costs are currently estimated to beapproximately 14 percent of the value of creditsearned by small firms and 5 percent for largefirms. 3 At the same time, the program’senhanced benefit for small firms may be richerthan necessary, particularly given thecompounded effect of provincial credits andother government support programs. Figure 6.4shows the impact of combining the R&D taxcredits provided by individual provinces withfederal SR&ED credits. Box 6.3 providesaFigure 6.4 Federal and Provincial Tax Credit Rates (%)Provinces Provincial Tax Credit Federal Plus Provincial aCCPCsOther FirmsAlberta andBritish Columbia 10 42 28Manitoba 20 48 36New Brunswick,Newfoundland andLabrador, Nova Scotia,Saskatchewan andYukon 15 45 32Northwest Territoriesand Prince Edward Island 0 35 20Ontario (small/large firms) 10/4.5 42 24Quebec (small/large firms) b 37.5/17.5 48 27The federal credit is 35 percent for small CCPCs and 20 percent for other firms. The base for the federal credit is reducedby the amount of provincial credits.b The Quebec credit is paid on wages and salaries plus 50 percent of contracts. The federal–provincial rate is expressed as apercentage of R&D costs eligible for the SR&ED credit.Source: PricewaterhouseCoopers (2011) and calculations undertaken for this review.3 These estimates are based on a web-based survey undertaken in May and June 2011 on behalf of the Panel.6-8

Program Mix and DesignBox 6.3 Stacking of R&D SupportFirms undertaking R&D in Canada have access to a wide range of federal and provincialsupport programs, and can frequently obtain financial support for the same project frommore than one program. For example, in 2007, some 86 percent of small firms claiming theSR&ED credit made use of at least one other (federal and/or provincial) R&D supportprogram. In that year, approximately 70 percent of all small firms received financialassistance amounting to 40–50 percent of their spending on R&D and almost 10 percent ofsmall firms (about 1600) received assistance amounting to more than 50 percent of their R&Dspending.Within the federal government, the key constraint on “stacking” — that is, the use of two ormore programs to support a given initiative — is a Treasury Board requirement that fundingfrom all government sources (federal, provincial and municipal), including tax credits, cannotexceed 100 percent of the eligible costs of a project. However, lower limits are typicallyestablished for individual programs. For example, the stacking limit for IRAP projects is75 percent of eligible costs, which consist of wages, contract expenses and overhead.Programs also limit the proportional amount of funding that can be provided by theprogram itself to support any one project. In the case of IRAP, this “stand-alone” limit is also75 percent, but the base is smaller because of the exclusion of overhead expenses.It is important to bear in mind that IRAP does not automatically provide the maximumsubsidy to firms — some firms may receive the maximum, but this would be the exception,given that the average subsidy rate is actually closer to 20 percent. a But as stated above, asubstantial number of firms are able to obtain government assistance that exceeds half oftheir spending on R&D.The Panel believes that the government should undertake a comprehensive study of theappropriate level of public support for a project, including the maximum allowable stackingrate. Over-subsidization is a potential concern because, beyond a certain point, subsidizationno longer generates a net benefit for the economy as a whole.aThis number is based on a web-based survey undertaken in May and June 2011 on behalf of the Panel.information on how firms are able to “stack”benefits from tax credits and direct assistance.It also illustrates the present limits on stacking.The research and consultation undertaken bythe Panel point to both the need andopportunity to improve several aspects of theSR&ED program in ways that would increase thenet public benefit of the program. It is likely thatfiscal savings could thus be obtained whileincreasing the net benefit that is currently beingdelivered by the program. The savings would beavailable to finance the incremental costs ofimplementing the Panel’s recommendations,which are directed primarily toward SMEs, asoutlined in other chapters. The followingrecommendation in respect of the SR&EDprogram constitutes the Panel’s advice withregard to a more appropriate mix and design oftax incentives and direct support.6-9

Innovation Canada: A Call to ActionRecommendation 2Simplify the SR&ED program bybasing the tax credit for SMEs onlabour-related costs. Redeploy fundsfrom the tax credit to a morecomplete set of direct supportinitiatives to help SMEs grow intolarger, competitive firms.The Vision of the PanelThe SR&ED tax credit is the flagship of federalsupport for innovation, allowing almost 24 000firms across all economic sectors and regions ofthe country to make individual, market-drivendecisions about the industrial R&D they need inorder to compete and succeed. It is essential forthis highly valued program to be made simpler,more predictable and more cost effective inpromoting innovation through business R&Dspending. Much more information on the costsand benefits of the SR&ED program needs to beprovided on a regular basis to enable futureprogram adjustments and to ensure that theprogram continues to contribute cost effectivelyto business innovation in Canada.Getting ThereTo realize this vision, the Panel makes thefollowing recommendations.2.1 Simpler compliance and administration —The tax credit benefiting small and mediumsizedCanadian-controlled privatecorporations (CCPCs) should be based onlabour-related costs in order to reducecompliance and administration costs.Because the credit would be calculated on asmaller cost base than at present, its ratewould be increased. Over time, thegovernment should also consider extendingthis new labour-based approach to all firms,provided it is able to concurrently providecompensatory assistance to offset thenegative impacts of this approach on largefirms with high non-labour R&D costs.2.2 More predictable qualification —Improve the Canada Revenue Agency’spreclaim project review service to providefirms with pre-approval of their eligibilityfor the credit.2.3 More cost effective — Reduce theamount of SR&ED tax credit assistance byintroducing incentives that encourage thegrowth and profitability of small andmedium-sized enterprises (SMEs) whiledecreasing the refundable portion of thecredit over time. Redeploy the savings tofund new and/or enhanced support forinnovation by SMEs, as proposed in thePanel’s other recommendations.2.4 More accountable — Provide data on theperformance of the SR&ED tax credit on aregular basis to permit evaluation of itscost-effectiveness in stimulating R&D,innovation and productivity growth.2.5 Phased implementation andconsultation — Adopt the proposedchanges through a phased-in approach togive the business sector time to plan andadjust smoothly. There should be earlyconsultations with the provinces on theproposed changes, given that they maywant to consider adopting the same baseas the federal government.Simpler Compliance and AdministrationThe base for the SR&ED tax credit currentlycomprises — in addition to the direct labourcost of researchers — overhead expenses,materials, capital equipment expenses, contractsand payments to third parties such as postsecondaryinstitutions. This Canadian definitionof the tax credit base is broader than that inmost other countries. Four developed countries(the US, Japan, Australia and Singapore) exclude6-10

Program Mix and Designcapital costs from the base. The US alsoexcludes overhead expenses, while the credit inthe Netherlands is based on wage costs only.The calculation of non-labour costs can becomplex, particularly for expenditures on capitaland materials. This complexity imposes costs onR&D performers by increasing their complianceeffort and, particularly for SMEs, leads toincreased reliance on third-party consultants toprepare R&D claims. Recall that compliancecosts for the SR&ED program are currentlyestimated to average approximately 14 percentof the value of credits earned by small firms and5 percent for large firms.The program could be greatly simplified bymoving to a program cost base comprised of(i) direct labour costs, (ii) the labour componentof contracts (assumed to be 50 percent, the sameas for in-house R&D) and (iii) payments to thirdparties (such as post-secondary institutions),much of which are labour based. Moving to alabour cost base will reduce compliance costs byeliminating all of the calculations related tocapital, materials and overheads.Since high compliance costs mainly affect SMEsand since switching to a labour cost base wouldadversely affect large firms in industries wherematerial inputs and equipment are a largefraction of the cost of doing research, it isrecommended that this new labour-basedapproach immediately apply only to the taxcredits for the CCPCs. Thereafter, thegovernment should consult with the businesscommunity and the provinces on the possibilityof applying the approach to all firms. Suchuniversal application should be pursued on thecondition that initiatives are developed toaddress the potentially negative impacts of alabour-based approach on large firms withcapital-intensive R&D activity.More Predictable QualificationThe CRA does not review all filed claims, butinstead uses a risk management approach,reviewing some claims for both their financialcontent and scientific aspects (that is, whetherthe R&D expenditures are eligible for the taxcredit). Businesses must be able to demonstratethat their projects meet the SR&ED eligibilitycriteria, and must identify the particular costsassociated with the eligible project. Businessestherefore face “eligibility risk” should theproject not qualify as SR&ED in the view of CRA,or should the costs allocated to the eligibleSR&ED project be determined by CRA to be lessthan originally expected.Box 6.4 Claiming Overhead Expenses through theSR&ED ProgramFirms claiming the SR&ED tax credit currently have the option of claiming overhead expenses(administrative and financial support, utilities, etc.) either directly or through the proxymethod. Under the proxy method, firms forgo claiming their actual overhead costs, butinstead gross up their wage costs by 65 percent. Almost all firms choose the proxy method,but the reasons for this are unclear to the Panel. For example, for some firms, the reducedcompliance costs in using the proxy method may justify its use, even when the actualoverhead is greater than 65 percent of wage costs. In other cases, firms may find theiroverhead costs are less than 65 percent and so the proxy method provides a net benefit.The Panel believes that the proxy method is justified, but it is unclear what the appropriaterate should be. Therefore, the Panel advises the government to undertake a study of thetrue overhead costs borne by firms for their eligible R&D activities and to establish the proxyrate that best reflects these costs.6-11

Innovation Canada: A Call to ActionBudget 2008 announced $10 million in annualfunding to enable the CRA to implement anaction plan to improve the administration of theSR&ED program by increasing the agency’sscientific capacity and by improving its servicesto claimants (Department of Finance 2008,p. 87). Since then, CRA has undertaken severalinitiatives, some of which are still under way.For example, it has increased the number oftechnical reviewers who determine programeligibility and provide claimant services. TheCRA also provides First-Time Claimant, PreclaimProject Review and Account Executive services.These free services are demand-driven and areintended to improve claimants’ access to theprogram. 4 The Panel heard evidence fromstakeholders that CRA’s existing “pre-approval”service is not achieving its objective ofimproving the speed and predictability of theclaims process. One factor contributing to thisoutcome is that third-party preparers — whoare involved in more than half of all claims —may be reluctant to communicate to theirclients the availability of CRA’s free services.With its existing services, clients can obtain aninformal ruling on eligibility from CRA, whichcan be useful to firms seeking loans and usingtax credits as security. A formal ruling,particularly one that is available at any stage ofthe R&D process, would evidently be morevaluable to R&D performers and would reducethe incentive to make use of contingency feearrangements with third parties. A morepredictable eligibility determination processwould also reduce the current tension betweenCRA and taxpayers when projects aredetermined not to qualify ex post, whichsometimes imposes substantial costs on thecompany performing the R&D. In addition, theproposed labour base for the credit wouldremove a great deal of uncertainty for theCCPCs regarding qualifying expenditures.More Cost EffectiveAnalysis by the Department of Finance ofstart-ups created over the 2000–2004 periodindicates that, within five years followingincorporation, approximately 2 percent ofinnovative start-ups grow into large firms thatcontinue to undertake R&D. This outcomesuggests that the enhanced SR&ED tax credit isa blunt instrument for supporting the “gazelles”among the many start-ups that are eligible forthe enhanced SR&ED credit and that a shift inassistance for SMEs to other more targetedprograms could be more supportive and costeffective. Furthermore, calculation of the netpublic benefit undertaken for this reviewindicates that the SR&ED credit for smallcompanies likely does not generate a positivenet benefit because of the high subsidy rate andcompliance costs relative to the estimatedspillover benefit.The effectiveness of the SR&ED program wouldbe improved if its parameters could be adjustedto target more of the benefit toward those firmsthat have a greater probability of achieving highR&D-based growth and profitability. If theprogram were to adopt the proposed labourcost base set out in Recommendation 2.1, theprevailing 35-percent rate for small companieswould have to be increased to compensate forthe new narrower cost base of the tax credit.The Panel is not in a position to recommendnew rate parameters to be applied to the labourcost base. That will require considerabletechnical analysis, which is the purview of theDepartment of Finance. But it is evident that, inreadjusting the parameters, there is anopportunity to retarget the benefit. Specifically,the refundable portion of the credit for CCPCsshould be reduced over time so that a portionof the benefit would be claimed only if thecompany is profitable and therefore has taxowing against which the non-refundable4 More information on the services the CRA provides to SR&ED claimants is available from the CRA website at:http://www.cra-arc.gc.ca/txcrdt/sred-rsde/srvcs-eng.html.6-12

Program Mix and Designportion of the credit could be applied. In otherwords, all relevant parameters of the SR&EDtax credit regime applied to CCPCs should bechanged to enable implementation of thePanel’s vision of a new approach to CCPCrefundability that better “targets success” andthus contributes to the objective of increasingthe number of small, innovative Canadianbusinesses that become larger, globallycompetitive enterprises.The resulting savings will depend on the extentof the shift to only partial refundability for smallbusinesses. As discussed above, the Panel isrecommending that these savings be used tofinance increases in direct programs that willdeliver more “bang for the buck” and serveother needs of SMEs, including providingsupport in certain areas that are not currentlycovered under the SR&ED program. Theenhanced direct spending programs beingrecommended are discussed in more detail inChapters 5 and 7.The Panel wishes to emphasize that theserecommendations — savings from the SR&EDtax credit regime, on the one hand, andincreases in direct program spending to benefitSMEs, on the other — are intended to bedirectly linked. That is, any savings through theSR&ED program for CCPCs must necessarily becontingent upon a commensurate increase indirect program spending benefiting SMEs,particularly to increase the likelihood that asmall innovative company will succeed in thetransition to becoming a large Canadianenterprise.More AccountableTo facilitate broader assessments of the SR&EDprogram, the government should publish dataon use of the tax credit, subject to respectingtaxpayer confidentiality. More detailedinformation could also be submitted bytaxpayers on their costs of compliance,including in particular the use of contingencyfee arrangements and consulting costs in orderto assess the effectiveness of Panelrecommendations related to reducingcomplexity and improving effectiveness.A main stumbling block to date has been thelack of data from taxpayers and the reluctanceof CRA to insist that taxpayers provide qualitydata on the program apart from what is directlyrelevant to the audit function. Taxpayers wouldunderstandably be reticent to provide moredetailed information on their projects if therewere any concerns about confidentiality andresponse burden. Confidentiality must beassured, and firms must understand that theadditional efforts requested are in their interest.To this end, a dialogue should be undertakenwith major industry associations on the rationalefor the information collected, including a clearindication of how it would be used andprotected.Phased Implementation and ConsultationThe Panel is aware that changing the base forthe federal credit has implications for provincialgovernments with tax credits that (except forQuebec) use the federal base with only minormodifications. Consultation will be requiredwith these provinces before changing thefederal base pursuant to Recommendation 2.During its consultations, many stakeholders alsoadvised the Panel that it should take account ofthe potentially disruptive effect of makingchanges to programs, especially the larger ones.The government should therefore adopt aphased approach to the implementation of theproposed changes, so businesses will haveample time for transition planning andadjustment. In particular, given that the move toa more performance-based approach for CCPCswould represent a major change in philosophyfor the SR&ED regime, the reduction ofrefundability for existing small businesses shouldbe phased in gradually, in tandem with thegradual redeployment of funds for enhanced6-13

Innovation Canada: A Call to Actiondirect support measures benefiting SMEs, asrecommended in other chapters of this report.It is also important to note that about 650newly-created start-ups apply for SR&ED creditsfor the first time each year. Lack of adequatefinancing is a constraint on the growth of moststart-ups, and the current SR&ED tax credithelps to address this problem through the35-percent refundable tax credit. Ourrecommendations will provide start-ups, as wellas established SMEs, with a wider range ofsupport to help them bring their innovations tomarket through an expanded IRAP program, anew commercialization vouchers pilot program,a new concierge service, greater access to ahighly skilled and entrepreneurial workforce,enhanced procurement programming, andimproved access to risk capital at the start-upand later stages of growth. While the enhanceddirect support measures that we arerecommending would provide alternativesources of finance for start-ups and a portionof the SR&ED credit would still be refundable,some start-ups might receive a lower level ofsupport through these measures. In view of this,the government may wish to investigate theadministrative feasibility and budgetaryconsequences of providing a fully refundablelabour-based tax credit for a fixed number ofyears for start-ups to ensure continued supportfor Canadian entrepreneurs who take on therisks of establishing new firms.6-14

Filling the GapsChapterFilling the Gaps7This chapter addresses the third and finalquestion in the charge to the Panel: “What, ifany, gaps are evident in the current suite ofprogramming, and what might be done to fillthese gaps?”The Panel is firm in its belief that the key toaddressing Canada’s well-documented businessinnovation challenges — including thesignificant commercialization gap — is tostrategically target efforts to support the growthof innovative firms into larger enterprises. It isonly by growing Canada’s innovative firms thatthe country’s business sector will achieve thescale required to become an innovation leaderon the world stage.Although many gaps can be identified in apolicy area as broad as the support of businessinnovation, an overriding consideration of thePanel is to ensure that programs respond toindustry’s “demand-pull” as a primary means ofhelping innovative firms grow and prosper — achallenge that was raised repeatedly in thePanel’s consultations. Three issues in particularstood out. How can the federal government’sown procurement needs be used to fosterinnovation? How can business imperatives beaddressed through large-scale, business–academic–government research collaborations?And how can risk capital be structured torespond to the needs of innovative firms at allstages of their development? Stakeholders toldthe Panel that addressing these issues wouldhelp meet the needs of firms seeking toinnovate and create value.Consistent with these views, an analysis by theOrganisation for Economic Co-operation andDevelopment (OECD forthcoming) of theinnovation systems of several countries identifiesweaknesses in Canada related to limited public–private research collaboration, difficulty intransforming knowledge into commercialapplications, and a low volume of venturecapital activity. Threats identified include adeclining trend in the funding of entrepreneurialventures. The same study also notes the dearthof “demand-side” measures — such as thosethat aim to strengthen the private sector’sutilization of innovation inputs — in Canada’smix of innovation instruments. Procurement isthe major demand-pull stimulus available togovernments to complement the large existingarray of supply-side programs.Broadly similar findings have been reported byother panels that have examined the innovationproblematique in Canada. The Council ofCanadian Academies highlighted the need to“improve the climate for new ventures so as tobetter translate opportunities arising fromCanada’s university research excellence intoviable Canadian-based growth businesses”(CCA 2009, p. 12). It also noted that Canadaranks low internationally for “governmentprocurement of advanced technologicalproducts” (CCA 2009, p. 78). The Expert Panel7-1

Innovation Canada: A Call to Actionon Commercialization (2006a; see also Annex B)made several recommendations to expandfederal programs that support start-up firms inproving their business ideas and generally toincrease the commercialization involvement ofsmall and medium-sized enterprises (SMEs).That panel also recommended improved accessto early-stage angel financing and expertise, aswell as improvements in Canada’s expansionstageventure capital market.The fact that the same shortcomings in respectof procurement, large-scale researchcollaboration and risk financing were identifiedin the Panel’s consultations and throughinternational comparative investigations as wellas in prior studies of innovation in Canada isconvincing evidence that these are the programgaps — and therefore the opportunities — mostin need of focussed attention.The Procurement GapThe underlying premise of the procurementprovisions of international and domestic tradeagreements is that unrestricted competitionfor government purchases spurs businessproductivity and provides the best value forthe taxpayer’s dollar. Why, then, wouldgovernments want to adopt policies that favourcertain types of suppliers for their purchases ofgoods and services? The general answer is thatgovernments have a huge, ongoing need for anarray of goods and services across a broad rangeof activities — for example, defence, health,and information and communicationtechnologies. SMEs that supply sophisticatednew products and services can potentially meetthese requirements but may need to benurtured by governments until they reach apoint where they can compete withoutassistance. Also, procurement programs moregeared to acquiring innovative products promiseto boost public sector productivity and therebylower the cost of providing public sectorservices.The strategic use of public sector procurementcan contribute to the viability and growth offirms, particularly of innovative SMEs, in anumber of ways. For instance, whengovernments are demanding and sophisticatedcustomers for innovative solutions to theirneeds, their purchases — and the prospects forfollow-on sales — facilitate equity and debtfinancing for firms. Moreover, firms supplyinggovernments as lead users can then showcasetheir products and thus market them moresuccessfully to customers in Canada andabroad. For these reasons, successful initialpurchases are key to ongoing procurement andthe building of critical mass for economies ofscale and future growth. In the case of defenceand security-related procurement specifically,governments may favour domestic suppliers inorder to maintain capability for at least someself-supply of these sensitive assets.While there are good policy reasons to usepublic sector procurement to help builddomestic economic muscle, these will alwayshave to be balanced in the context of value-formoney,trade obligations, and the risk offostering supplier dependency and possiblydisadvantaging other domestic competitors.Assessment of the balance of benefits and costsof using procurement to develop the innovationcapabilities of SMEs will depend on the specificcircumstances. Good judgment will always berequired, since definitive data on the full extentof benefits and costs are rarely available.Notwithstanding this caveat, Canada’s use ofprocurement to enhance industrial innovationhas been very modest by internationalstandards, although recent federal initiatives likethe Canadian Innovation CommercializationProgram (CICP — see Box 7.2) 1 and a revised1 More information on the CICP is available from Public Works and Government Services Canada at:http://buyandsell.gc.ca/initiatives-and-programs/canadian-innovation-commercialization-program.7-2

Filling the GapsBox 7.1 Use of Procurement to Support SME InnovationThe US Small Business Innovation Research (SBIR) program mandates, by legislation, thatfederal agencies with more than $100 million annually in external R&D contracts set aside2.5 percent for small businesses. This translates into annual expenditures of $2–3 billion,with the Department of Defense and National Institutes of Health (NIH) as the largest users.The program provides fully funded contracts for phase I proof of principle studies ($150 000over six months) and for phase II R&D ($1 million over two years). Phase III is fundedthrough conventional services, with just under half of projects reaching the marketplacefor either government or business uses.The implementation of SBIR varies widely in practice among US federal agencies, dependingon their individual motivation for conducting intramural R&D. For some like the NIH, theSBIR set-aside is mainly a source of R&D funding. For others, like Defense and Energy, theset-asides are used for the actual first-user procurement of products developed with SBIRfunding assistance.The success of SBIR has inspired similar programs in countries such as Japan, Australia, theUK, Sweden, Finland, South Korea and the Netherlands. In the UK, the Small BusinessResearch Initiative (SBRI) was launched in 2001 and is today administered by the TechnologyStrategy Board — the UK equivalent of the Industrial Research and Innovation Council (IRIC)proposed by the Panel in Chapter 5 (Recommendation 1.1). Like SBIR in the US, theprogram provides fully funded development contracts between SMEs and governmentdepartments, but on a voluntary basis, not mandatory as in the US.Industrial and Regional Benefits (IRB) policysuggest a new recognition of opportunities.The use of procurement to stimulate innovationhas been a long-standing practice in othercountries, particularly the US, with its enormousdefence expenditures. The US has also led theway internationally with respect to promotingsmall businesses with vigorous programs,including procurement set-asides. Thequintessential initiative in this regard is theUS Small Business Innovation and Researchprogram (SBIR — see Box 7.1), 2 now almost30 years old. Recognizing that Canada can learnfrom the use by other governments ofprocurement to support innovation by SMEs,the Panel believes there is an opportunity forgreater application of this kind of policy tool topromote innovation by Canadian business.Recommendation 3Make business innovation one of thecore objectives of procurement, withthe supporting initiatives to achievethis objective.The Vision of the PanelThe government’s procurement and relatedprogramming must be used to createopportunity and demand for leading-edgegoods, services and technologies from Canadiansuppliers, thereby fostering the development ofinnovative and globally competitive Canadiancompanies while also stimulating innovationand greater productivity in the delivery of publicsector goods and services.2 More information on the SBIR program is available at: http://www.sbir.gov.7-3

Innovation Canada: A Call to ActionGetting ThereTo realize this vision, the government shouldincorporate the following practices in itsprocurement initiatives.3.1 Innovation as an objective — Make theencouragement of innovation in theCanadian economy a stated objective ofprocurement policies and programs.In practice, this broad recommendation requiresthe government to regard any significantacquisitions of goods and services asopportunities to build SME innovativecapabilities and thus to strengthen both thebase of suppliers for future procurement and,more generally, the innovation capacity of theCanadian economy. This will require thegovernment over time to undertake acomprehensive review of procurement policiesand activities to ensure that they are supportinginnovation and that departments have theflexibility to work with private sector solutionproviders and then acquire and deploy theresulting solutions. As first steps for action, thePanel further makes the followingrecommendations.3.2 Scope for innovative proposals —Wherever feasible and appropriate, baseprocurement requests for proposals on adescription of the needs to be met orproblems to be solved, rather than ondetailed technical specifications that leavetoo little opportunity for innovativeproposals.The use of procurement to foster the innovationcapacity of Canadian companies requires arevised approach to value-for-money based onoutcomes-oriented specifications. Procurementon the basis of the outcomes desired sets achallenge for industry and thus motivatesinnovative solutions from potential suppliers.This has the dual benefit of bringing forwardbetter products for the buyer and developing aninnovation-focussed mindset in the suppliercommunities. The use of an outcome-orientedprocurement specification does not need to bean invariable rule, since there will be caseswhere more detailed technical specifications fora particular procurement would be clearlyappropriate and would not be inconsistent withthe intent of this recommendation.3.3 Demand-pull — Establish targets fordepartments and agencies for contractingout R&D expenditures, including asubtarget for SMEs, and evolve the currentpilot phase of the Canadian InnovationCommercialization Program (CICP) into apermanent, larger program that solicitsand funds the development of solutionsto specific departmental needs so that thegovernment stimulates demand for, andbecomes a first-time user of, innovativeproducts and technologies.Federal departments and agencies, includingthose of major industry relevance, such as theDepartment of National Defence, undertakemost non-regulatory R&D internally. According toStatistics Canada (2010a), federal in-house R&Dis projected at $1.9 billion in 2010–11, whileR&D contracted to businesses is projected toamount to $272 million or only about15 percent of the in-house R&D total. More than80 percent of the amount of R&D contracted tobusinesses is accounted for by two agencies —the Canadian Space Agency at $167 millionand the Department of National Defence at$59 million. Setting specific department-bydepartmenttargets for external R&D contractswould promote business innovation whilepotentially improving outcomes for contractingdepartments and strengthening their ability todeliver on their mandates.The current CICP pilot is “supply-push” in thesense that the applicants submit proposals toprovide innovative solutions for trial and testing,though not as responses to explicitly identifiedneeds of a particular department or agency(Box 7.2). A new pilot element is needed that7-4

Filling the GapsBox 7.2 Canadian Innovation CommercializationProgram (CICP)The CICP is a $40-million, two-year pilot program announced by the federal government in2010 and administered by Public Works and Government Services Canada. The program wascreated to help Canadian businesses bridge the pre-commercialization gap by procuring andtesting innovations. The current calls for proposals require innovations to be valued at$500 000 or less, to have yet to be sold commercially, to be provided by Canadian bidders,and to include at least 80 percent Canadian content. The products must fit into one of thefollowing categories: environment, safety and security, health and enabling technologies.Innovations are pre-selected based on their degree of innovation, the testing plan and thecommercialization strategy. They are matched to federal departments that then test themand provide feedback on their operation. The program covers the costs of the innovation,delivery, installation and maintenance services, as well as any other direct costs required totest the innovative product. The program’s process is fully competitive and consistent withtrade agreements.would provide incentives for solving operationalproblems identified by departments. Making therevised CICP a permanent program, onceperformance of a revised pilot can be evaluated,would help change the procurement culture.3.4 Globally competitive capabilities —Plan and design major Crown procurementsto provide opportunities for Canadiancompanies to become globally competitivesubcontractors.The currently planned procurement of defenceand security-related equipment and servicespresents a significant opportunity to greatlyincrease the technological readiness ofCanadian industry. 3 There is a need for theDepartment of National Defence to be moreproactive in promoting a defence industrialcapability domestically. The key is to implementa long-term technology capability plan for eachmajor procurement, jointly developed bygovernment and industry and supported bytailored programs. For the Department ofNational Defence, this would mean acceleratingits Project ACCORD with industry as well asDefence Research and Development Canada’sTechnology Demonstration Program. 4 As theexperience of other countries has shown, evenconcerted efforts to promote global supplychain participation takes many years to produceresults. Canada therefore needs to startimmediately. It is emphasized that incrementalinvestment for such improved long-termcapability is scalable. Decisions on amountsshould be relative to opportunities.While the recent Industrial Research Benefits(IRB) policy enhancements — with multipliersfor investments in innovation — are largelyuntested, an additional incentive to invest intechnology commercialization would helpincrease global value chain participation for3 The Canada First Defence Strategy sets out a new long-term funding framework for the Canadian Forces, with projectedpurchases of $240 billion of equipment, infrastructure, and operations and maintenance services between 2008–09 and2027–28.4 Project ACCORD is a Department of National Defence mechanism to bring together industry, academia and government inidentifying Canadian Forces deficiencies and proposed approaches to solutions. Defence Research and DevelopmentCanada’s Technology Demonstration Project funds contracted out R&D in collaboration with private sector partners, valuedat $25.5 million in 2010–11.7-5

Innovation Canada: A Call to Actionforthcoming defence purchases, especially bySMEs. (The commercialization model developedby Sustainable Technology Development Canadamight be emulated.) There is urgency in thissince, if Canadian capabilities were to remainunderdeveloped at the time of contracting, IRBoffsets would be directed more towardtraditional “build to print” work, rather thanleading-edge technology development andcommercialization. In order to achieve criticalmass quickly, the government could considersome form of matching formula with the primecontractors. It is emphasized that taking fulladvantage of Crown procurements depends ongovernment and business investments early on,in order to get the desired innovation capacitybuildingleverage from an IRB, whose costs areborne by prime contractors. This might involvesharper focus of existing programs, rather thanadditional resources.3.5 Working collaboratively — Exploreavenues of collaboration with provincialand municipal governments regarding theuse of procurement to support innovationby Canadian suppliers and to fostergovernments’ adoption of innovativeproducts that will help reduce the cost andimprove the quality of public services.Annual procurement by provinces andmunicipalities across Canada substantiallyexceeds federal procurement because of theirresponsibilities for health care, education andtransportation infrastructure, among otherpublic services. All orders of government shouldcollaborate to develop and share best practicesin the use of procurement to foster innovativeCanadian companies and, where feasible, todevelop joint strategies to enhance the leverageof public procurement in certain sectors.The Large-Scale ResearchCollaboration GapThe basic research performed by universities andother laboratories generates disruptivetechnologies that open up whole newindustries. At colleges, polytechnics anduniversities, there is also a broad range ofapplied research relevant to both the businessand non-profit sectors. This applied research caninclude business-oriented areas such as finance,regulation/legislation and organizationalbehaviour, and also covers the domains ofapplied science and technology — for example,forestry and geosciences, engineering,computer science and information systems,nanotechnology, chemistry, life sciences, andhealth research. Much of this research, evenwhen investigator initiated and funded bygovernment or non-profit agencies, is relevantto industry and is taken up in various ways.Reflecting the benefit of this system to industry,business-sponsored research in Canada’suniversities currently totals more than$785 million a year (Canadian Association ofUniversity Business Officers 2010). Across thecountry, there is an array of ad hoc small-scale,needs-based collaborations under way betweenthe business and post-secondary sectors,assisted by the network and collaborationprograms discussed in Chapter 5.In recognition of the vital role that postsecondaryeducation institutions play in oursystem of innovation — foremost, as theprimary source of highly qualified and skilledpersonnel and, secondly, as a source of leadingedgeideas and knowledge — the Governmentof Canada has substantially increased itssupport for higher education R&D over the past15 years. Given the foundational role that astrong post-secondary education sector plays inthe Canadian system of innovation, this Panel(like the Expert Panel on Commercializationbefore it) urges the government to commit toinvesting in basic research at internationally7-6

Filling the Gapscompetitive levels, and also to review andmodernize the support for the total institutionalcosts of research. 5Currently, federal support for industry–academicresearch collaboration is delivered throughprograms that fund projects with universities,colleges and polytechnics. The current suite ofprograms is mainly (but not exclusively) focussedon investigator-led “idea-push” projects, andthe Panel’s recommendations in Chapter 5 areoriented toward addressing this issue. However,there remains a gap with respect tocollaborative R&D and innovation projects thatare large scale, industry facing, demand drivenand outcome oriented. Such projects can resultin breakthroughs and can build capacity inexisting and emerging industry sectors. Somemay require longer time spans, others mayrequire specialized equipment or personnel,and still others may require an extensive,ongoing collaboration between business,academia and government.Reflecting this, other structures have emergedto partly fill this gap in the innovation system.For instance, FPInnovations for the forestindustry, the National Optics Institute (INO) orthe Consortium for Research and Innovation inAerospace in Québec (CRIAQ) providesignificant non-profit sector examples. Othercountries have also established wider and moredeveloped examples, including most famouslythe Fraunhofer system of institutes in Germany(Box 7.3).The National Research Council (NRC) has thepotential to play a similar role for Canada(Box 7.4). That said, in its present form theNRC has an overly broad — and thereforeunfocussed and fragmented — mandate.Started in 1916 as a basic science entity, theNRC was a source of great pride at a time whenCanadian universities were performing relativelylittle fundamental science. The NRC created,and then spun out, institutions as varied andimportant to Canadian innovation as theNatural Sciences and Engineering ResearchCouncil (NSERC) and the Canadian SpaceAgency. The research mandate of the NRC hasbeen reshaped by the emergence of the federalgranting councils and the growth of Canadianuniversities as the principal locus of basicresearch. Today, the NRC still performs basicresearch, runs the Canada Institute for Scientificand Technical Information, performs publicpolicy services such as metrology, has “cluster”initiatives to spur regional economicdevelopment through innovation, engages insubstantial industry research collaborations,manages Canada’s investment in major scienceinfrastructure, and has a national network ofindustrial technology advisers that deliver theIndustrial Research Assistance Program (IRAP) tosupport SMEs with their business R&D projects.The sheer diversity of these activities raises thequestion of what is the most appropriatemission of the NRC. It is also unclear what theprimary performance metrics of NRC institutesare. Should performance be measured in termsof the number of peer-reviewed publications intop journals, the number of patents andcopyrights issued, licensing revenues frompatents and copyrights or private researchcontracts, SME client satisfaction or the numberof regional jobs created? Furthermore, otherorganizations now also provide basic research,regional economic development, supportfederal science policy mandates, and deliverbusiness innovation assistance.As part of clarifying NRC’s mandate andpromoting its evolution, the Panel has alreadyrecommended that IRAP should be placed underthe aegis of the proposed Industrial Researchand Innovation Council (IRIC). There is now alsothe clear opportunity for the NRC to address5 The Expert Panel on Commercialization noted that “publicly funded research across all disciplines is essential and must befunded at internationally competitive levels, along with the institutions and infrastructure that provide the capacity toconduct this research” (2006b, p. 16).7-7

Innovation Canada: A Call to ActionBox 7.3 Germany’s Fraunhofer-Gesellschaft aThe Fraunhofer-Gesellschaft (F-G) organization operates 60 Fraunhofer institutes inGermany. These customer-oriented, applied research institutes strive to transform scientificfindings into useful innovations. The institutes’ focus on application-oriented research issituated within the broader spectrum of the German research system — a spectrum thatincludes, at one end, the publicly funded, basic research-oriented Max Planck Society and, atthe other end, privately funded industrial research.The F-G’s threefold mission is (i) to promote and undertake research in an internationalcontext of direct utility to private and public enterprise and of wide benefit to society as awhole, (ii) to reinforce the competitive strength of the economy by developingtechnological innovations and novel systems solutions for their customers and (iii) toprovide a platform that enables staff to develop the necessary professional and personalskills to assume positions of responsibility within their institute, in industry and in otherscientific domains. As institutes are encouraged to work with industry, only about a third ofbase funding comes from government. Institutes must secure the remaining revenue fromother sources, which typically comes in roughly equal proportions from industry and publiccontracts and project funding.The Fraunhofer institutes provide highly specialized expertise that may be too expensive forany mid-sized company to build up and may also be beyond the scope of consultingcompanies. By connecting with universities and technical institutes/universities of appliedscience, and by applying for competitive research grants, the F-G institutes retain an edge inscience and technology. Indeed, the grants are used for advanced work that is well ahead ofthe marketplace but has been identified as potentially important to client companies in theyears to come.In summary, the Fraunhofer institutes are characterized by (i) professional R&D services toindustry, (ii) demand-driven research combined with scientific excellence, (iii) strongintegration with academia and (iv) autonomy combined with simple corporate rules and astrong brand.a Information drawn from the Fraunhofer website at: www.fraunhofer.de; and Panel consultations.Canada’s large-scale research collaboration gapby evolving the majority of its current institutesinto a national network of institutes focussed onlarge-scale collaborative research motivated byindustrial needs. To achieve this vision, greatcare will be needed to establish a process that,over time and in dialogue with partners, enablesthe NRC to focus on this opportunity withoutlosing the value for Canada from its otheractivities.The Panel’s consultations elicited statements ofstrong support for IRAP’s role in supporting R&Dand innovation by SMEs but, notably, there wasnot comparable testimony regarding therelevance and role of the NRC’s institutes. This,together with the other considerations outlinedabove, suggests that there is both the need andopportunity to focus and reorganize the NRC’snational assets to more effectively andstrategically support innovation in Canada. ThePanel endorses the plans currently under way toreorient certain NRC institutes to place greater7-8

Filling the GapsBox 7.4 Institutes of the National Research Council withinthe ReviewTotal appropriations for the 17 NRC institutes within this review averaged almost$290 million annually over the four fiscal years, 2007–08 through 2010–11. The institutesreferred to the Panel are:Biotechnology Research InstituteCanadian Hydraulics CentreCentre for Surface TransportationTechnologyIndustrial Materials InstituteInstitute for Aerospace ResearchInstitute for BiodiagnosticsInstitute for Biological SciencesInstitute for Chemical Process andEnvironmental TechnologyInstitute for Fuel Cell InnovationInstitute for Information TechnologyInstitute for Marine BiosciencesInstitute for Microstructural SciencesInstitute for Ocean TechnologyInstitute for Research in ConstructionNational Institute for NanotechnologyPlant Biotechnology InstituteSteacie Institute for Molecular Sciencesemphasis on industry priorities andcollaboration, but believes that an evenmore comprehensive reform is needed.Recommendation 4Transform the institutes of theNational Research Council (NRC)into a constellation of large-scale,sectoral collaborative R&D centresinvolving business, the universitysector and the provinces, whiletransferring NRC public policyrelatedresearch activity to theappropriate federal agencies.The Vision of the PanelCanada needs a fundamentally new approachto building public–private researchcollaborations in areas of strategic importanceand opportunity for the economy. Over the nextfive years, several of the NRC institutes mustevolve to become a core constellation ofresearch and technology centres, mandated tocollaborate closely with business in key sectorsand focussed on achieving measurable progressin this mission. Individual institutes shouldbecome focal points for the development ofR&D and innovation strategies for key sectors,for major enabling technologies and for regionalclusters.Getting ThereTo realize this vision, the Panel recommends thefollowing.4.1 Evolution of the NRC — Charge the NRCto develop a plan for each of its existinginstitutes and major business units thatwould require their evolution over the nextfive years into one of the following:(a) an industry-oriented non-profit researchorganization mandated to undertakecollaborative R&D and commercialization7-9

Innovation Canada: A Call to Actionprojects and services, funded byamounts drawn against existing NRCappropriations together with revenueearned from collaborative activities(b) an institute engaged in basic researchto be affiliated with one or moreuniversities and funded by an amountdrawn against existing NRCappropriations together withcontributions from university and/orprovincial partners(c) a part of a non-profit organizationmandated to manage what arecurrently NRC major science initiativesand potentially other such researchinfrastructure in Canada(d) an institute or unit providing services insupport of a public policy mandate andto be incorporated within the relevantfederal department or agency.4.2 IRAP — Transfer the Industrial ResearchAssistance Program to the proposedIndustrial Research and InnovationCouncil (IRIC).4.3 Structure and oversight — Institutescould be established as independent nonprofitcorporations, with the federalgovernment’s share of funding managedand overseen by the proposed IRIC forindustry-oriented institutes in category (a)above, and by the Natural Sciences andEngineering Research Council (NSERC) orCanadian Institutes of Health Research(CIHR) for categories (b) and (c) above.(Apart from functions in category (d), anyresidual activities of NRC, or institutes thatare unable to secure adequate funding,would be wound down according to anappropriate transition plan.)The model of arm’s-length, non-profit researchinstitutes is key to putting in place appropriateincentives to develop high-quality R&Dprograms that would compete for requiredfunding (beyond federal core funding) fromindustry and from government programs. ThePanel envisions institutes of sufficient scale tohave significant long-term impact on businessinnovation capacity. Some of these institutes —by virtue of their expertise in specific sectors andintegration with related local partners — couldplay an important role as focal points for thedevelopment and implementation of sectoralresearch and innovation strategies. Suchstrategies are paramount to addressingCanada’s innovation deficit, since differentsectors face different challenges across an arrayof issues such as access to financing, regulatoryrestrictions and intellectual property rules,among others (Box 7.5).The Panel’s proposal would allow for theredeployment of institutes that are not activelyengaged in business-related research touniversities whose research capacity has vastlyimproved in recent years. It is not proposed thatthe separate industry-facing institutes should begrouped organizationally under the proposedIRIC, but it would be logical and appropriate forIRIC to have financial authority over the federalcontributions to the institutes by managing thefunding agreements between the institutes andthe Government of Canada. Moreover, it wouldalso be appropriate for NSERC or CIHR tomanage any needed funding agreements withinstitutes fitting in categories (b) and (c) inRecommendation 4.1. 6 Those institutes thatprovide services in support of a public policymandate — for example, activities such as thoseconcerned with public health and safety —should be transferred to appropriate federaldepartments and agencies, with no reduction incurrent resources.6 Scientists in the academic-facing institutes would be able to apply for granting agency funding in line with others at theuniversities.7-10

Filling the GapsThe budgetary implications of the proposedmodel permit considerable flexibility regardingcost sharing between the federal governmentand the external partners. That said, theinstitutes proposed here would have to developrobust transition plans to ensure initially thateach individual institute is achieving fiscalbalance. These plans would also outlineappropriate metrics of success, the ongoingrealization of which would be a necessarycondition for continued federal contributions totheir operation. The key to success would berequirements that (i) the governance of thebusiness-facing institutes be dominated by theindustry they are intended to serve, (ii) the corefederal support be long term and sufficient toensure dependability and quality and (iii) thefunding contributed by business be a sufficientlylarge proportion of the total budget of eachinstitute to ensure business buy-in andcommitment.The devolution of certain of the NRC’s basicresearch activities to the university sector wouldneed to be accompanied by ongoing federalsupport, but presumably not significantlydifferent from the current and anticipatedamounts. There would also be significant onetimecosts associated with the transition to thenew structure. But these costs should be viewedas a necessary long-term investment in muchimprovedoutcomes for business innovation,driven by more leveraged financing ofcommercially relevant R&D.The Risk Capital GapThe term “risk capital” as used in this reviewrefers to funding of innovation-focussedbusinesses from start-up through to maturity,when the company is ready to access publicfinancial markets or is acquired by another firm(Figure 7.1).Box 7.5 Sectoral Research and Innovation StrategiesThe collaborative R&D institutes proposed in Recommendation 4 would have the potential toplay important roles for tailored, industry-led sector strategies. The CCA’s report oninnovation and business strategy (CCA 2009) underscores that no Canadian sector in Canadais “average.” Each sector is characterized by a wide array of features stemming from amultiplicity of social, economic, cultural, historical and other factors. To illustrate, the reportincludes case studies of four sectors that highlight the great diversity of circumstances. Eachof the case studies can be summarized in a phrase as follows.Auto sector — “weak R&D, but strong productivity”Life sciences — “great promise, but mixed results”Banking — “balancing stability versus radical innovation”Information and communication technologies — “a catalytic role for government.”Just as there is no average sector in Canada, there is no “one size fits all” remedy toCanada’s innovation challenges. Sector-specific expertise and initiatives are paramount, andthe Panel’s proposed large-scale, industry-directed and co-funded institutes could potentiallyserve as a catalyst in that respect.7-11

Innovation Canada: A Call to ActionFigure 7.1 Funding Chain by Stage of Development and Size of InvestmentPublic MarketsMergers & Acquisitions$10M +Later StageVenture Capital$1M to$10MEarly StageVenture Capital$100Kto $1MBusiness AngelsAngel GroupsUp to$200KSource: The Panel.“Friends & Family”Government / universitiesSeed Prototypes Start-up Other EarlyStageLater stage/ExpansionMatureThe nature, the causes and even the existenceof a risk capital gap in Canada are the subjectof considerable debate. The Panel’sconsultations nevertheless revealed a strongconsensus within the community of venturecapitalists and entrepreneurs in R&D-based andtechnologically advanced sectors that gaps existalong the funding chain. Some recurring themesfrom the consultations included the following:there is a need to improve access to seedcapitalangel networks in Canada are not as welldeveloped as in the USCanadian companies are not as well financedas their US counterpartsforeign funds are present in adisproportionate share of Canadian exitsCanadian firms are often forced to, or chooseto, go public too early.Interviews with managers of venture capitalfunds and entrepreneurs, conducted on behalfof the Panel, highlighted the problems causedby the relatively small size of Canadian venturecapital investment funds. Subscale size limits theability of Canadian fund managers to followfirms through to maturity as the size ofsuccessive financing rounds increases. Thisadversely affects financing opportunities forinnovative firms in Canada and hurts theperformance of Canadian venture capital funds.Moreover, in the EKOS survey conducted for thePanel (see Chapter 5), lack of access to sourcesof finance was most frequently identified as themain obstacle to firms’ R&D activities.7-12

Filling the GapsSuch concerns are identified in the BusinessDevelopment Bank of Canada’s (BDC) VentureCapital Industry Review, released in February2011. 7 That review concluded that theCanadian venture capital industry was“broken.” Low returns have caused privateinvestors to leave the venture capital marketand, according to the BDC, it will takesubstantial changes to encourage re-entry. Asshown in Figure 7.2, the report identified a“vicious” cycle in the Canadian venture capitalindustry that contributes to its poorperformance, including:a shortage of serial entrepreneurs whobecome angel investorssubscale venture capital fundslimited pool of experienced, high-qualityventure capital fund managersover-investment in early-stage andinadequate follow-on investmentweak linkages to global experts, markets andbusinesses.Others consulted by the Panel argue that theindustry is in a cyclical downturn and investorsare avoiding early-stage technology companiesbecause the risk-adjusted returns are betterelsewhere. The BDC has concluded that simplyinjecting additional capital would not improvethe industry’s performance and that the key torestoring faith in venture capital as an asset classis to bring the industry to a state of profitability.Some economists have attributed the poorperformance of the private venture capitalmarket to “crowding out” by the laboursponsoredventure capital funds (LSVCFs) (see,for example, Cumming and MacIntosh 2006; andBrander, Egan and Hellmann 2008). LSVCFs,which accounted for about 20 percent of venturecapital investments in 2010 (CVCA 2010), arefunded by small “retail” investors who receive taxincentives from the federal and some provincialgovernments. Recognizing that they vary inperformance, some LSVCFs have poormanagement incentive structures and haveexhibited poor performance, 8 perhaps due inpart to overly broad mandates encompassingmultiple objectives such as regional development.Investment activity by retail funds has beenscaled back in many provinces and restructured inothers in order to promote better outcomes.High-growth firms can also obtain fundingthrough the TSX Venture market, and this mayreduce the number of high-quality investmentsthat seek venture capital funding in Canada,contributing also to the low rate of return in theventure capital industry (Carpentier, Cummingand Suret 2010).The issues affecting the performance of the riskcapital markets in Canada are complex, and itwill take time to resolve them. Governmentintervention should be undertaken in a cautiousand carefully structured manner to yield positiveoutcomes for the industry and avoid unintendedharm — an issue that is taken up below. Thenext section reviews in more detail the issuesfacing the angel investment and later-stageventure capital segments of the risk capitalmarket.7 The BDC is a financial institution owned by the Government of Canada. Its mission is to “help create and developCanadian businesses through financing, venture capital and consulting services, with a focus on small and medium-sizedenterprises” (http://www.bdc.ca). Note that the BDC is not the federal government’s sole mechanism to supplementventure capital markets. The Export Development Corporation (EDC), in fulfilling its mandate to help Canadian exportersand investors expand their international business, manages a portfolio of equity investments focussed on next-generationexporters, with a total investment value of $298 million. Farm Credit Canada, a Crown corporation, established FCCVentures in 2002 and since then has provided over $70 million in venture capital financing to small and medium-sizedbusinesses in areas such as agricultural biotech.8 For the latest performance data for captive/evergreen funds, which consist primarily of LSVCFs, see the press release ofCanada’s Venture Capital & Private Equity Association dated May 24, 2011 (available at: http://www.cvca.ca/news/).7-13

Innovation Canada: A Call to ActionFigure 7.2 Many Gaps Have Resulted in a “Vicious” Cyclein the Canadian Venture Capital Industry12345Shortage of of serial serial entrepreneurs and skilled and skilledmanagement with with global global networks networksGeneral GPs arepartners subscaleare and subscale lack strong and lack capabilities strong andcapabilities experienceand compared experience to compared U.S. GPs with USgeneral partnersSignificant investments made by government andSignificantretail funds,investmentswith objectivesmade byandgovernmentconstraintsand retailfunds with objectives and constraints (e.g., region(e.g., region focus, pacing requirements) mayfocus, pacing requirements) may hurt returnshurt returnsAngel network not well developedAngel network not well developedOver-investment in in early early stage stage without without adequate adequatefollow-on capital, leading to dilution to dillutionUndercapitalized and and sometimes sometimes dysfunctional dysfunctionalsyndicatessyndicatesmakemakefollow-onfollow-oninvestmentinvestmentsdifficultdifficultGeneral partners lack experience and networks todevelop GPs lackcompanies experience to and potential networks to developcompanies to potentialForeign general partners capture a disproportionateshare Foreign of exit GPsvaluecapture a disproportionate share ofexit value6Exits have been mediocre, as as public public markets markets place placeadiscount a on on Canadian Canadian venture VC-backed capital-backed companies companiesRelativelyRelativelylowlowlistinglistingrequirementsrequirementson theonTSXtheVentureTSXExchange can be counterproductiveVenture Exchange can be counterproductiveTotal funding to to venture VC capital-eligible companies companies was wasproportionately higher in Canada in Canada than than in the the USU.S.at theturn at the of turn the decade of thebut decade has significantly but has significantly decreased inrecent decreased yearsin recent yearsCurrent capital supply crunch, as institutional limitedCurrent capital supply crunch as institutionalpartners and retail funds have significantly reducedLPs and retail funs have significantly reducedinvestmentsinvestmentsGovernment-sponsored funds made up half of allavailable Government-sponsored limited partner capital, fundswith made allocation up half ofsometimes all available driven LP capital, by public with policy allocation and misaligned sometimesincentives driven byh public policy and misalignedBottom-quartile incentives funds receive largest share of capital;the Bottom-quartile fund natural selection funds receive processlargest is broken share ofcapital; the fund natural selection process isbrokenSophisticated LPsallocate appropriatecapital to the VCindustryVIBRANT VC4Attractiveexit optionsbring strongreturns5INFRASTRUCTUREVCECOSYSTEM1Talentedentrepreneursand managementstart high-potentialcompanies2Skilled VCs/angels directfunds to best3companiesBest companiesgrow throughadditional financingand VC support6Lower level of of non-dilutive capital capital from from government andother government sources prior and other to firstsources venture prior capital toinvestmentfirstLack VC investment of commercialization focus in R&D investmentRelatively Lack of commercialization low effectiveness offocus Technology in R&DTransferOffices investmentcommercializing technologyLack of connectivity to global markets, reducingRelatively low effectiveness of Technologyopportunities for syndication, business developmentTransfer Offices in commercializing technologyand exitsLack of connectivety to global markets, reducingopportunities for syndication, businessdevelopment and exitsSource: Adapted from BDC (2011).7-14

Filling the GapsAngel InvestmentAt the earliest stage — perhaps even before acompany is formed — an entrepreneur typicallyrelies on informal sources of capital from“friends and family” and later from angelinvestors. There are two structural obstacles thatlimit the supply of angel financing: (i) the veryhigh cost of evaluating and then monitoring aprospect, relative to the size of the embryonicbusiness and (ii) the novelty and technologicalcomplexity of the new business idea, whichmakes it difficult for an outside investor toaccurately determine the potential for success.As a result, angel investors target a high rate ofreturn to compensate for the risk they face andoften require entrepreneurs to invest asubstantial fraction of their own wealth in theproject, both of which may prevent viableprojects from going forward. Knowledgeable andexperienced investors are needed for capitalmarkets to function well, but there is also a rolefor government in promoting an efficient angelinvestment market segment.There are few reliable data on the supply–demand conditions in this informal market inCanada. In the US, where the market is welldeveloped, rates of return to angel investorgroups are high. A 2007 survey by the AngelCapital Education Foundation (now called theAngel Resource Institute) found that returns toangel investors in groups averaged 27 percent(Wiltbank and Boeker 2007), which was wellabove the average 10-year return of 18.3 percenton overall venture capital investments in 2007(National Venture Capital Association 2008).Industry participants describe the angelinvestment segment as underdeveloped inCanada, reflecting in part a relatively young riskcapital industry. As a result of this shortage ofsupply of financing relative to demand, it wouldbe expected that similar rates of return to thosein the US should be available to angel investorsin Canada.Venture Capital FinancingThose high-growth businesses that survive theseed and angel-financed stage of developmentusually then turn to the venture capital market,which is an important form of financing until thebusiness goes public, is bought out or is able toaccess conventional financing.The “modern” venture capital industry cameinto being in the US in the late 1970s (Lerner2009). The Canadian venture capital industry, bycontrast, is relatively young and small, havinggotten a second start in the 1990s, just beforethe technology bubble burst. Venture capitalinvestment in Canada experienced a postbubblepeak of $2 billion in 2007; since then ithas averaged $1.2 billion a year (BDC 2011). In2010, about 350 companies in Canada receivedventure capital funding, with an averageinvestment of $3.2 million and a totalinvestment of $1.1 billion (CVCA 2011).Meanwhile, venture capital investment in the USin 2010, at $21.8 billion, was about 20 timesthe Canadian total, and the average deal sizewas about twice as large (SSTI 2011).The smaller relative scale of Canadian venturecapital funds has two main consequences. First,in order to create enough diversity in theirportfolios, fund managers must keep investmentper project relatively low. The small deal sizespreads fixed costs — for example, evaluationand monitoring of investments — over a smallerinvestment base, which hurts returns. Second,smaller-scale Canadian funds are less able toparticipate in later-stage financing, since theseinvolve a larger average deal size. Canadianfunds therefore find it difficult to adopt thetypical US strategy of financing firms from early7-15

Innovation Canada: A Call to Actionstage to exit. As a result, foreign funds,particularly from the US, are often dominant inlater-stage financing in Canada — for example,over the 2004–09 period the average venturecapital investment by foreigners in Canadianfirms was $3.8 million, compared with$1.0 million on average by Canadian investors. 9Although foreign partners invest in only about10 percent of Canadian venture capital deals,they account for about 30 percent of exits andalmost 45 percent of exit proceeds (BDC 2011).This situation appears to be hurting returns ofCanadian funds and is contributing to afinancing gap in later-stage investments.Interviews with managers of venture capital andgrowth equity funds indicate that access tofinancing for firms that have revenues but arenot yet profitable is particularly difficult. Thetypical deal size here is $10–20 million, withfewer than 10 percent of deals greater than$40 million. Canadian participation in thissegment is limited. From 2003 to 2011, privateventure capital funds disclosed 255 technologyrelateddeals over $10 million. 10 About a quarterof these deals were undertaken by purelyCanadian funds, and foreign participantsdominated all of the funding syndicates.Canadian-only funds accounted for about a thirdof the deals in the $10–20 million range andnone of the deals above $40 million. Fundmanagers indicated that, since there are very fewCanadian funds actively investing, there are manyexamples of good Canadian companiesstruggling to obtain financing.The relative lack of participation from Canadianfunds at the critical late stage of development ofa business can have a number of adverse effects.First, either too many worthy firms are notgetting financing, or they are being financed byUS funds, which can affect where the intellectualproperty developed by the firm is ultimatelyexploited. While financing by US funds ispreferable to no financing, overcoming barriersto full participation by Canadian private equityfunds would result in greater benefits forCanada.Second, in downturns, US funds will tend toinvest closer to home, which amplifies the declinein “peripheral” markets like Canada. Third, therequired return on a foreign investment may behigher than that on domestic investments,especially if the investment is not in a current“hot spot” and the company is further awayfrom breakeven. This increases the probabilitythat a good Canadian company will not beproperly financed.On the other hand, US funds bring not onlycapital but also expertise and networks, whichresult in higher exit values. Technologycompanies that obtain quick access to globalmarkets and meet international standards attractthe attention of global acquirers or are able tomake an initial public offering on foreign stockexchanges. Foreign funds appear to prefer to coinvestwith a local investor but, given the smallsize of Canadian funds, this is not alwayspossible. This observation reinforces the pointmade earlier that small fund sizes are hurtingreturns in Canada.Such considerations were the motivation forfunding — with the support of BDC, TeralysCapital and others — the Tandem ExpansionFund, a $300-million private equity fundspecializing in late-stage investments over$10 million. This fund was established inrecognition of the fact that “many Canadianventure-backed companies are unable to accesslater-stage funding from any private source,which causes them to seek out foreign funds,strategic buyers or public market alternativesearlier than they should” (BDC 2009).9 The data in this paragraph and the following paragraph were compiled using the Thomson Reuters venture capital database(except as noted).10 There is no requirement to disclose deals.7-16

Filling the GapsWith the foregoing in mind, the Panel isrecommending programs to facilitate investmentin the two parts of the risk capital market wherethe most crucial gaps exist: angel investment andlate-stage venture capital and growth equity.Recommendation 5Help high-growth innovative firmsaccess the risk capital they needthrough the establishment of newfunds where gaps exist.The Vision of the PanelInnovative, growing firms require risk capital, yettoo many innovative Canadian firms that havethe potential for high growth are unable toaccess the funding needed to realize theirpotential. The Government of Canada can playan important role by facilitating access by suchfirms to an increased supply of risk capital.Getting ThereTo realize this vision, the Panel recommends thefollowing.5.1 Start-up stage — Direct the BusinessDevelopment Bank of Canada (BDC) toallocate a larger proportion of its portfolioto start-up stage financing, preferably inthe form of a “sidecar” fund with angelinvestor groups.5.2 Late stage — Provide the BDC with newcapital to support the development oflarger-scale, later-stage venture capitalfunds and growth equity funds in supportof the private venture capital and equityindustry. These funds would specialize indeal sizes of $10 million and above that aremanaged by the private sector and subjectto appropriate governance practices.The foregoing recommendations, depicted inFigure 7.3, reflect the Panel’s views on wherethe weaknesses in the financing chain arefound. However, as pointed out by Josh Lerner,a respected US analyst of the venture capitalmarket, government intervention has to becarefully structured in order to be effective(Lerner 2009). 11 The recommendations aretherefore developed with the followingconsiderations in mind.Government intervention should bestructured to address market failures andto create a net benefit for society. Thepurpose of intervening in the venture capitalmarket is to improve rates of return onfinancial capital through a reallocation amongsectors. The purpose is not to subsidize theproduction of R&D — that is the role of R&Dsupport programs. As a result, if marketforces are appropriately harnessed to allocatefunding, successful intervention will notrequire a large subsidy. In mostcircumstances, the government will be able tomake a positive return on its investment.Setting up appropriate governance structuresfor the funds is an important determinant oftheir effectiveness and will help ensure thatthe intervention generates a net economicbenefit. Governance structures have to becarefully developed to ensure that privateincentives are appropriately aligned with thepublic interest and that the scope for selfservingbehaviour is constrained.11 The title of Lerner’s recent book on venture capital is highly revealing — Boulevard of Broken Dreams — and the subtitleeven more so — Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed and What to Do about It.7-17

Innovation Canada: A Call to ActionFigure 7.3 Proposal to Support High-Growth Firms$10M +Later StageVenture CapitalPublic MarketsMergers & Acquisitions$1M to$10MEarly StageVenture Capital$100Kto $1MBusiness AngelsAngel GroupsUp to$200K“Friends & Family”Government / universitiesSeed Prototypes Start-up Other EarlyStageLater stage/ExpansionMatureSidecar fundwith angelinvestorsthroughBDCNew capital for BDC tohelp develop late stageand growth equity fundsin support ofprivate industrySource: The Panel.The market should determine theallocation of financing. Governmentsshould co-invest with private venturecapitalists and allow the private investors todetermine the investment strategy. For this towork, a substantial amount of funds shouldcome from non-public sources, and thegovernment cannot micromanage the fundsin terms of investment location and types ofinvestment. It is important to allow fundmanagers to develop strong linkages toglobal experts, markets and businesses.Additional support for the industry hasto be paced in recognition of limits onthe supply of talented and experiencedmanagers as well as on the supply ofhigh-quality firms needing financing.While there is a minimum scale ofintervention required for effectiveness, careshould be exercised not to exceed thecapacity of the industry to successfullymanage the additional funds. As for otherprograms, the capacity to evaluate outcomesshould be built in and the government shouldbe prepared to make adjustments to improveperformance, while at the same time avoidingrules that cause fund managers to focusexcessively on short-term results.7-18

Filling the GapsBearing this in mind, the Panel recommendsthat the BDC set up a national angel investment“sidecar” fund — that is, a pool of committedcapital that “rides along with” or investsfollowing the lead of an investment group.Working with groups (instead of individuals)results in economies of scale and promoteshigher-quality investments through access to abroader range of expertise. BDC’s contributionto the fund would come from its existingresources, with each dollar of BDC fundingmatched by at least 50 cents in funding fromangel groups, although the appropriate fundingratio is likely to vary by sector. In order toencourage adequate participation, it may benecessary to provide an attractive financialstructure to secure private/institutional partnersand to induce private sector fund managers toinvest in high-growth, innovative Canadianfirms. One option is for the government to offerits partners a leveraged return in exchange fortaking on more risk. This approach has beenadopted by a number of countries.The New Zealand Venture InvestmentFund, the Russian Venture Company andthe new Israeli Heznek Fund (all of whichwere inspired by Israel’s The Yozma Groupfund) give private sector partners an option(but not the requirement) to purchase thegovernment’s position after a certain lengthof time at a price that would generate apredetermined rate of return to thegovernment. With this structure, thegovernment is exposed to the same downsiderisk as in a standard co-investment model,but has less upside potential, which reducesthe expected return on its investment.Nevertheless, if market forces areappropriately harnessed to allocate funding,the government should be able to obtain apositive return on its investment. Thisapproach raises the expected return to privateinvestors without affecting the risk of loss. Ittherefore helps align private incentives withthe public interest by giving the fundmanagers an incentive to invest in firms thathave substantial upside potential rather thanusing government funds to offset losses onpoor investments. Fund managers also havean incentive to work closely with fundedcompanies because, once the minimumreturn has been achieved, fund managers areable to keep all of the additional return fromtheir extra effort.In the US, the Small Business InvestmentCompany (SBIC) program lends money toventure capitalists. The interest on thegovernment loan is paid semi-annually andthe principal must be repaid before capital isreturned to private investors. Thesearrangements increase both the expectedreturn and the risk for private investors. Thegovernment faces some risk: if the fundperforms poorly enough, the loan principalwill not be repaid.Enterprise Capital Funds in the UK haveadopted a variant on the SBIC approach, withthe government absorbing more of the risk ofloss and gain by accepting repayment ofcapital on an equal footing with its partnersand negotiating a share of the profits.To improve access to later-stage venture capital,the Panel recommends having the governmentinvest in private sector funds on terms thatencourage larger fund sizes. The current state ofthe risk capital market suggests that thegovernment may have to adopt a financialstructure that encourages private/institutionalco-investment by improving the risk–rewardtrade-off these investors face, as discussedabove. The government should establish fundswith the intention of leveraging private fundson at least a dollar-for-dollar basis.The intention is not to create one large fund;rather, it is to encourage more and larger privatefunds supporting late-stage venture capital.Interviews with fund managers indicate that,while the optimal fund size varies by sector,larger fund sizes are more efficient because7-19

Innovation Canada: A Call to Actionfirms can be financed through early and latestages while a diversified portfolio is still beingbuilt. But these economies of scale and scopeappear to be exhausted relatively quickly: thebest returns in the US are obtained on funds inthe $200–300 million range (BDC 2011, p.13).The Panel’s interviews with pension fundmanagers further indicated that it is moreefficient to focus funds on particular sectors.The government should deploy the additionalfunding in stages in order to assess periodicallythe effectiveness of support.7-20

Leadership for InnovationChapterLeadership forInnovation8Countries around the world are sustaining andeven accelerating their investments in businessR&D and innovation, and are continuouslyimproving the programs through which theyprovide this support in order to achieve moreinnovative, productive and competitiveeconomies. In a study of innovation policies, theOrganisation for Economic Co-operation andDevelopment (OECD forthcoming) identifies anumber of international trends regarding themix of policy instruments being employed tosupport business innovation.A growing attention to demand-sidepolicies. The increasing focus on demandsidepolicies (such as innovation-orientedpublic procurement) reflects a recognition inmany OECD countries that their primaryinnovation challenges lie not in thegeneration of knowledge and ideas but intheir commercial penetration.A growing use of indirect support forinnovation, notably R&D tax incentives.Twenty-two OECD member countries nowprovide some form of R&D tax incentive, upfrom 12 in 1992 and 18 in 2004.Shifting emphasis in direct support forinnovation. Direct support measures areincreasingly emphasizing partnerships andcollaboration, venture capital and start-upfirms.A growing attention to policy evaluation.The need to assess the efficiency and impactof public policies in support of businessinnovation has become a particularlyimportant focus in the wake of the economicdownturn and resulting pressures on publicspending.The Panel believes that it is essential for Canadatoo to continuously improve how governmentsupports business innovation in order toencourage a more productive and competitiveprivate sector. The recommendations of thisreview will deliver on this belief and are entirelyconsistent with the above-noted areas ofcontemporary emphasis in business innovationpolicy. In the foregoing chapters, the Panel hasmade recommendations that address the issueshighlighted by the OECD.Create an Industrial Research and InnovationCouncil (IRIC), with a clear business innovationmandate (including delivery of business-facinginnovation programs, development of abusiness innovation talent strategy, and otherduties over time), and enhance the impactof programs through consolidation andimproved whole-of-government evaluation.Simplify the Scientific Research andExperimental Development (SR&ED) programby basing the tax credit for small andmedium-sized enterprises (SMEs) on labourrelatedcosts. Redeploy funds from the taxcredit to a more complete set of directsupport initiatives to help SMEs grow intolarger competitive firms.8-1

Innovation Canada: A Call to ActionMake business innovation one of the coreobjectives of procurement, with thesupporting initiatives to achieve this objective.Transform the institutes of the NationalResearch Council (NRC) into a constellation oflarge-scale, sectoral collaborative R&D centresinvolving business, the university sector andthe provinces, while transferring NRC publicpolicy-related research activity to theappropriate federal agencies.Help high-growth innovative firms access therisk capital they need through theestablishment of new funds where gaps exist.What a federal government business innovationstrategy now needs is the leadership to be thefocal point of Canada’s innovation system. Todate, innovation has been regarded within thefederal government primarily as one more“silo,” which has in turn been fragmentedwithin many sub-silos in various departmentsand agencies. While the Minister of Industry andthe Minister of State for Science and Technologyare regarded as having the lead responsibility forinnovation, many others in government alsohave roles to play (Figure 8.1).Figure 8.1 The Government of Canada’s Innovation MachineryOther Ministries with responsibilitiesParliamentAgriculture and Agri-Food Portfolio• Agriculture and Agri-food Canada• Canadian Food Inspection AgencyUnder the Department of Industry Act,Parliament vests powers with theMinister of Industry over the followingareas: technology, science, competition,corporations and investmentMinister of Industry$Canadian Heritage Portfolio• Canadian S&T Museum Corporation• Library and Archives Canada• Canadian Museum of Nature• Canadian Museum of CivilizationMinister of State for S&TMinister of State forSmall BusinessEnvironment Portfolio• Environment Canada• Parks CanadaDepartment,Statutoryand OtherAgenciesIndustry Canada (IC)Communications ResearchCentre (CRC)FedDev ONFedNorCanadian SpaceAgency (CSA)Statistics Canada(StatCan)DepartmentalCorporationsNational ResearchCouncil (NRC)Natural Sciencesand EngineeringResearch Council(NSERC)Social Sciences andHumanities ResearchCouncil (SSHRC)Advisory Bodiesto the Ministerof IndustryScience, Technologyand InnovationCouncil (STIC)Crown Corporationswithin IC portfolioBusinessDevelopmentBank of Canada(BDC)Canada Foundationfor Innovation (CFI)Genome Canada(Genome)Council of CanadianAcademies (CCA)Pierre Elliott TrudeauFoundationIC Manages FundingAgreementsPerimeter Institutefor Theoretical PhysicsInstitute forQuantum ComputingIvey Centre forHealth Innovationand LeadershipSeven centres ofexcellence announcedin Budget 2007Fisheries and Oceans Canada• Canadian Coast GuardHealth Portfolio• Health Canada• Public Health Agency of Canada• Canadian Institutes of Health ResearchNational Defence Portfolio• Department of National Defence• Defence R&D CanadaNatural Resources Portfolio• Natural Resources Canada• Atomic Energy of Canada LimitedPublic Safety Portfolio• Royal Canadian Mounted Police• Canadian Border Services AgencyDepartment of Finance CanadaForeign Affairs and International Trade CanadaCanadian Institutefor AdvancedResearch (CIFAR)Etc.Human Resources and SkillsDevelopment CanadaPublic Works and GovernmentServices CanadaRegional Development AgenciesTransport, Infrastructure andCommunities PortfolioSource: Based on information provided by Industry Canada.8-2

Leadership for InnovationThe appropriate concept of innovation, as thePanel has emphasized in Chapter 2, fartranscends science and technology and R&D.Business innovation is the principal source ofproductivity growth in the long run and thus liesat the heart of Canada’s economic prosperity.The responsibility to foster innovation cutsacross many functions of government andrequires a system-wide perspective. In fact, theplethora of government programs to promoteinnovation, many of which are subscale andpartly overlapping, is in large part due to agrowing awareness of the importance ofbusiness innovation, but without adequatelymandated leadership to develop and oversee abroad strategy. This contrasts with the directionbeing taken by a number of other jurisdictions,including other federal countries like Australiaand some provinces (Box 8.1).International PerspectivesBox 8.1 Innovation Policy Advisory BodiesIn 2007, Australia established Innovation Australia, an independent statutory body thattook over the administration of business innovation and venture capital programs. Theorganization’s board is drawn from business and academic communities and is accountableto the Minister of Innovation, Industry, Science and Research for the programs and theirfunding. In addition to its role in program delivery, Innovation Australia reviews andprovides advice on innovation programs and proposals being developed in thegovernment — for example, on commercialization and tax credits. It also performs acoordinating role among players in the Australian innovation system.The United Kingdom also in 2007 established the Technology Strategy Board as an executivenon-departmental body sponsored by the Department for Business, Innovation and Skillsand funded by various departments and agencies. As in Australia, the board’s seniormanagement is drawn from business and academia, and it delivers a range of innovationprograms.Views from CanadaAt the provincial level in Canada, there are several instances where innovation strategiesare being delivered by semi-autonomous, business-led entities. Although governmentsprovide funding and policy direction and oversight, they are not directly involved incase-by-case decision making.Previous expert panels in Canada have made recommendations concerning the need forincreased system coordination at the federal level, suggesting it can be done through thecreation of a body mandated to oversee and provide advice from a whole-of-governmentperspective. For example, the Expert Panel on Commercialization (2006a) recommendedthe creation of a Commercialization Partnerships Board reporting to the Minister ofIndustry to make recommendations and serve an oversight role for federalcommercialization initiatives. A few years later, the Competition Policy Review Panel (2008)recommended that the federal government establish an independent CanadianCompetitiveness Council under the Minister of Industry. Mandated to examine, report onand advocate for measures to improve Canadian competitiveness, the council’s board ofdirectors would include a majority of non-governmental members. To date, theserecommendations have not been acted upon.8-3

Innovation Canada: A Call to ActionRecommendation 6Establish a clear federal voice forinnovation, and engage in adialogue with the provinces toimprove coordination and impact.The Vision of the PanelThe Government of Canada must assume aleadership role by establishing businessinnovation as a whole-of-government priorityand consequently restructuring the governanceof its business innovation agenda, whiledeveloping a shared and cooperative approachwith provincial and business leaders.Getting ThereTo realize this vision, the Panel recommendsthe following.National LeadershipA comprehensive innovation policy mustencompass a suite of policies that addressresearch and invention, technology, servicesector strategy, financial capital and talent,among other domains. A narrow science andtechnology policy will not adequately promoteinnovation by Canadian businesses. Canadaneeds a whole-of-government innovation policythat encompasses research, development,commercialization and business supportstrategies. This principle implies thefollowing need.6.1 Assign responsibility — Identify a leadminister responsible for innovation in theGovernment of Canada together with astated mandate to put business innovationat the centre of the government’s strategyfor improving Canada’s economicperformance.The Prime Minister might assign responsibilityand accountability to a single minister to leadthe challenge function in government forbusiness innovation and to work with provincialand territorial governments to undertake anational innovation dialogue focussed onobjectives and guiding principles. The same leadminister should be charged with developingoutcome-oriented performance objectives toenable comparisons of program effectivenessacross all federal departments. This might befacilitated via a Cabinet committee oninnovation, chaired by the lead minister.In addition, the designated minister couldprovide leadership in helping clarify mandatesfor existing and new entities, including the threegranting councils — Natural Sciences andEngineering Research Council (NSERC), SocialSciences and Humanities Research Council(SSHRC) and Canadian Institutes of HealthResearch (CIHR) — and the many related thirdpartyorganizations currently being funded bythe government to support business innovation.The granting councils have played a pivotal rolein developing both talent and ideas for Canada’sinnovation agenda. Their core raison d’être hasbeen and remains investigator-initiated researchof both a basic and applied nature, and eachneeds to continue to be generously supported.However, there has been mission drift for thegranting councils, as they have responded topressure from government to be more businessfacing. While some business-facing programsmight appropriately be under the aegis of thegranting councils going forward, there is a needto clarify their mandates, taking into accountthe other changes being recommended by thePanel, such as the creation of the IRIC and theevolution of the NRC. In this regard, thedesignated minister will need to play aleadership role in establishing the IRIC andseeing the NRC through to its recommendedend state. Recall that the IRIC, under thepurview of the minister responsible for8-4

Leadership for Innovationinnovation, would have financial authority overthe federal contributions to the evolved NRCinstitutes through management of relatedfunding agreements (Recommendation 4.3 inChapter 7).OversightThe innovation support system implemented bythe Government of Canada should have clearobjectives, with measurable outcomes andresults. Regular whole-of-governmentevaluation is needed to ensure an outcomedrivenapproach. This evaluation should ensurethat the federal program funding is always ableto shift resources from programs that are nolonger effective to those that serve newpriorities and needs in the innovation system.There should be regular public reports on theoutcomes of individual programs and on thesystem-wide performance of the innovationpolicies.To give effect to these principles, the Panelrecommends the following.6.2 Whole-of-government advice —Transform the Science, Technology andInnovation Council (STIC) to become thegovernment’s external Innovation AdvisoryCommittee (IAC), with a mandate toprovide whole-of-government advice onkey goals, measurement and evaluation ofpolicy and program effectiveness, therequirement for new initiatives respondingto evolving needs and priorities goingforward, and all other matters requiring afocussed external perspective on thegovernment’s innovation agenda. The IACshould act though through two standingsubcommittees: a Business InnovationCommittee (BIC) and a Science andResearch Committee (SRC).At present, the STIC, reporting to the Ministerof Industry, provides policy advice to thegovernment on issues related to science,technology and innovation. The Panel proposesto transform and broaden that mandate toencompass whole-of-government advice oninnovation goals related to business, scienceand social innovation, as well as all aspects ofbusiness innovation policy and programming —for example, benchmarking, measurement andcomparative evaluation of existing policies andprograms across federal departments, as well asadvice on the need for new programs and newareas of focus for Canadian innovation. Unlikethe STIC, whose policy advice is confidential, thenew IAC’s advice should be made public.In taking on this broadened mandate, the IACwould be assisted by two standingsubcommittees — the SRC, focussed on“supply-push,” and the BIC, focussed on“demand-pull.” The BIC membership wouldinclude a cross-section of business leaders, thegranting councils and representatives of theinstitutes formerly of the NRC, and would drawon the advice of Canadian and internationalexperts on innovation policies. The BIC couldplay an important role in advising the proposedIRIC on appropriate metrics, indicators andmethodologies to guide the IRIC’s role as abusiness-facing, demand-driven nationalprogram delivery agency (recallRecommendation 1.1 in Chapter 5). To ensureefficient use of resources, the IAC’ssubcommittees could co-include existingmembers of the governing councils of SSHRC,NSERC and CIHR, as well as IRIC, once it isestablished. Over time, all relevant advisoryfunctions across the government should also beconsolidated into the IAC and its twosubcommittees to the greatest extent possible.8-5

Innovation Canada: A Call to ActionFederal–Provincial DialogueCanada is a federation with two jurisdictions ofpolitical and legislative authority. The division ofpowers between each order of governmentassigns certain domains exclusively to one orderof government, while other domains are sharedjurisdictions. In the domain of R&D andinnovation, both federal and provincialgovernments are important players. Theexistence of two orders of governmentproviding active programming in the samedomain creates opportunities for coordinationand collaboration. Conversely, it can also createthe possibility of overlap and duplication ofeffort. That is why there is a need for anongoing national dialogue on innovation. ThePanel therefore recommends the following.6.3 National dialogue on innovation —Through the minister responsible forinnovation, engage provincial and businessleaders in an ongoing national dialogue topromote better business innovationoutcomes through more effectivecollaboration and coordination in respect ofprogram delivery, talent deployment,sectoral initiatives, public sectorprocurement, appropriate tax credit levelsand the availability of risk capital.The need for a dialogue of this sort is amplifiedby the fact that Canada has a small populationspread over a large and geographically diverseland mass. It is therefore particularly importantto work toward better integration, coordinationand unity of effort, while respecting federal andprovincial jurisdictions.In addition to addressing the federal–provincialdimensions of the advice put forward in thisreport, important objectives of the nationaldialogue would also include setting new goalsand standards, monitoring internationalbenchmarks and best practices, and reducingoverlap and duplication in these fiscallyconstrained times.8-6

ConclusionChapterConclusion9We are honoured to have been given theopportunity to undertake the Review of FederalSupport to Research and Development — aninitiative launched at a critical time that is anexus of global economic instability and rapidemergence of new powers. In this context ofopportunity and challenge, the countries mostlikely to succeed are those that understand thatbusiness innovation holds the key to rising livingstandards and to a more creative economy andsociety. In this regard, we are optimistic that ourrecommendations — implemented in tandemwith equally important enhancements tomarketplace frameworks — can play a centralrole in helping Canada to become one of theworld’s innovation leaders. We have no doubtthat this goal is attainable.That said, addressing a decades-long trend ofpoor innovation performance will not be easy.Concerted action will be needed in multiplearenas. Our recommendations — which affectonly a limited part of the wider innovationpicture — will also present challenges. Theirimplementation will require collaboration,cooperation and dialogue across several federaldepartments and agencies, as well as with theprovinces, the business sector and postsecondaryinstitutions. This process cannotsucceed without renewed focus and leadershipin government. That is why we haverecommended governance changes aimedat establishing business innovation as awhole-of-government priority.Below is an overview of what we see as the“end game” of our advice — a brief snapshotof our recommendations boiled down totheir essence.The End GameGuided by strong leadership and soundprinciples, and through concerted action, theend result of our recommendations will be:A rebalanced, more effective system offederal assistance for business innovation thathelps innovative firms grow and prosper withready access to:R&D and commercialization fundinghighly qualified and skilled personnelideas, knowledge and research capacitythrough collaboration with innovationpartnerscapital to grow from start-ups to worldcompetitive,large firmsprocurement opportunities that stimulatedemand for innovative goods, services andtechnologiesan improved Scientific Research andExperimental Development program that issimpler, more effective, more predictableand more accountable.9-1

Innovation Canada: A Call to ActionA commitment to measurable outcomes,increased effectiveness, heightened efficiencyand enhanced collaboration put into effectthrough a whole-of-government approach togovernance that includes:an improved performance managementsystem for federal business innovationprogramsan external Innovation AdvisoryCommittee that advises on key goals, onthe measurement and evaluation of policyand program effectiveness, and on newopportunities and approachesa common delivery platform for businessinnovation programs — the IndustrialResearch and Innovation Council — thatdelivers the Industrial Research AssistanceProgram and a new commercializationvouchers pilot program, provides a singlewindow“concierge” and web portal forbusiness innovation programs, develops afederal business innovation talent strategy,partners with the federal granting agencieson joint oversight of appropriate businessfacingprograms administered by thoseagencies, performs the technicalassessment of regional developmentagency innovation proposals, and overseesthe federal funding of large-scale sectoralcollaborative research institutes.A national constellation of world-classresearch institutes that are formed bystreamlining the institutes of the NationalResearch Council (NRC), through a five-yearplan, into one of four types of organization:industry-oriented, non-profit researchorganizations mandated to undertakecollaborative R&D and commercializationprojects and services, funded by amountsdrawn against existing NRC appropriationstogether with revenue earned fromcollaborative activitiesinstitutes engaged in basic research to beaffiliated with one or more universities andfunded by an amount drawn againstexisting NRC appropriations together withcontributions from university and/orprovincial partnersparts of non-profit organizationsmandated to manage what are currentlyNRC major science initiatives andpotentially other such researchinfrastructure in Canadainstitutes or units providing services insupport of a public policy mandate and tobe incorporated within the relevant federaldepartment or agency.The Way ForwardGoing forward, the Panel welcomes theopportunity to meet with government officials,business leaders and post-secondary institutionsto discuss our recommendations. Our end gameis ambitious, but so too is our vision — aCanadian business sector that stands shoulderto-shoulderwith the world’s innovation leaders.While this is a long-term goal, governmentaction must be swift and decisive, because theimpact of the initiatives begun today may takeyears, even decades, to be fully realized.The longest journey begins with the first step,so the time to act is now.9-2

Programs in the ReviewAnnexPrograms in theReviewADepartment or AgencyAgriculture and Agri-Food Canada (AAFC)Atlantic Canada Opportunities Agency (ACOA)Business Development Bank of Canada (BDC)Canada Economic Development for QuebecRegions (CED-Q)Canadian Institutes of Health Research (CIHR)Canadian Space Agency (CSA)Defence Research and Development Canada (DRDC)Department of Finance Canada (FIN) andCanada Revenue Agency (CRA)Federal Economic Development Agency forSouthern Ontario (FedDev ON)Industry Canada (IC)Initiative/InstituteAgricultural Bioproducts Innovation Program(ABIP)Growing Forward – Canadian Agri-ScienceClustersGrowing Forward – Developing InnovativeAgri-ProductsGrowing Forward – Supporting the InnovativeCapacity of FarmersAtlantic Innovation Fund (AIF)Business Development Program (BDP)BDC Venture CapitalBusiness and Regional Growth ProgramIndustry-Partnered Collaborative ResearchProgramProof of Principle Program (POP)Space Technologies Development Program (STDP)Technology Demonstration Program (TDP)Scientific Research and ExperimentalDevelopment (SR&ED) Tax Incentive ProgramApplied Research and CommercializationProgramInvesting in Business InnovationTechnology Development ProgramAutomotive Innovation FundStrategic Aerospace and Defence Initiative (SADI)A-1

Innovation Canada: A Call to ActionDepartment or AgencyIndustry Canada portfolioIndustry Canada/Federal Economic DevelopmentAgency for Northern Ontario (FedNor)National Research Council Canada (NRC)Natural Resources Canada (NRCan)Natural Sciences and Engineering ResearchCouncil of Canada (NSERC)Initiative/InstituteAutomotive Partnerships Canada (APC)Northern Ontario Development ProgramBiotechnology Research Institute (NRC-BRI)Canadian Hydraulics Centre (NRC-CHC)Centre for Surface Transportation Technology(NRC-CSTT)Industrial Materials Institute (NRC-IMI)Industrial Research Assistance Program (IRAP)Institute for Aerospace Research (NRC-IAR)Institute for Biodiagnostics (NRC-IBD)Institute for Biological Sciences (NRC-IBS)Institute for Chemical Process andEnvironmental Technology (NRC-ICPET)Institute for Fuel Cell Innovation (NRC-IFCI)Institute for Information Technology (NRC-IIT)Institute for Marine Biosciences (NRC-IMB)Institute for Microstructural Sciences (NRC-IMS)Institute for Ocean Technology (NRC-IOT)Institute for Research in Construction (NRC-IRC)National Institute for Nanotechnology (NINT)Plant Biotechnology Institute (NRC-PBI)Steacie Institute for Molecular Sciences (NRC-SIMS)Technology Clusters ProgramContributions to FPInnovationsCollaborative Health Research Projects (CHRP)Collaborative Research and Development GrantsProgram (CRD)College and Community Innovation Program (CCIP)Engage Grants (EG)Idea to Innovation Program (I2I)Industrial Postgraduate Scholarships (IPS)Industrial R&D Fellowships (IRDF)Industrial Research Chairs (IRC)Industrial Undergraduate Student ResearchAwards (I-USRA)Interaction Grants (IG)Partnership Workshops Program (PWP)Strategic Network Grants (SNG)Strategic Project Grants (SPG)A-2

Programs in the ReviewDepartment or AgencySustainable Development Technology Canada(SDTC)Tri-Council (the three granting councils: NSERC,SSHRC and CIHR)Western Economic Diversification Canada (WD)Initiative/InstituteNextGen Biofuels FundSD Tech FundBusiness-Led Networks of Centres of Excellence(BL-NCE)Centres of Excellence for Commercializationand Research (CECR)Industrial R&D Internship Program (IRDI)Networks of Centres of Excellence (NCE)Western Diversification Program (WDP)A-3

The Advice of Other PanelsAnnexThe Advice of OtherPanelsBIn recent years, the federal government hasstruck panels that have touched upon issues ofrelevance to the Review of Federal Support toResearch and Development. In particular, theCompetition Policy Review Panel and the ExpertPanel on Commercialization both exploredtopics that warrant attention in the context ofthis review.Competition Policy ReviewPanel (2008)The formation of the Competition Policy ReviewPanel was announced jointly by the ministers ofIndustry and Finance in July 2007. The panelwas mandated to review Canada’s competitionand foreign investment policies, and to providerelated recommendations on how to improveCanada’s productivity and competitiveness.In its final report, Compete to Win, releasedin June 2008, the panel recommended theestablishment of an independent CanadianCompetitiveness Council under the Minister ofIndustry. Staffed by a chief executive officer anda small core staff overseen by a board ofdirectors, the proposed council’s mandate wouldbe “to examine and report on, advocate formeasures to improve, and to ensure sustainedprogress on, Canadian competitiveness”(p. 133). It would not enforce laws andregulations but would have a public voice,including the power to publish and advocate forits findings. The Competition Policy ReviewPanel also put forward a range of otherrecommendations grouped under variousrubrics, two of which stand out as particularlypertinent to this review.Innovation and Intellectual PropertyThe report made the followingrecommendations (2008, p. 133).“The federal government should monitor thescientific research and experimentaldevelopment tax credit program annually inorder to ensure that business investment inresearch and development and innovation inCanada is effectively encouraged.As a matter of priority, the federalgovernment should ensure that newcopyright legislation will both sufficientlyreward creators while stimulating competitionand innovation in the Internet age. Anyprospective changes to Canada’s patent lawregime should also reflect this balance. Thefederal government should assess andmodernize the Canadian patent andcopyright system to support the internationalefforts of Canadian participants in the globaleconomy in a timely and effective manner.Before December 2009, the federalgovernment should strengthen counterfeitand piracy laws to ensure that intellectualproperty rights are effectively protected.A-5

Innovation Canada: A Call to ActionCanada’s post-secondary educationinstitutions should expedite the transferof intellectual property rights and thecommercialization of university generatedintellectual property. One possible methodto achieve this would be to move to an‘innovator ownership’ model to speedcommercialization.”Attracting and Developing TalentThe report made the followingrecommendations (2008, pp. 128–129).“Governments should continue to invest ineducation in order to enhance quality andimprove educational outcomes whilegradually liberalizing provincial tuition policiesoffset by more student assistance based onincome and merit.Post-secondary education institutions shouldpursue global excellence through greaterspecialization, focusing on strategies tocultivate and attract top international talent,especially in the fields of math, science andbusiness.Governments should use all the mechanismsat their disposal to encourage post-secondaryeducation institutions to collaborate moreclosely with the business community,cultivating partnerships and exchanges inorder to enhance institutional governance,curriculum development and communityengagement.Federal and provincial governments shouldencourage the creation of additional postsecondaryeducation co-op programs andinternship opportunities in appropriate fields,to ensure that more Canadians are equippedto meet future labour market needs and thatstudents gain experiences that help themmake the transition into the workforce.Governments should provide incentives andundertake measures to both attract moreinternational students to Canada’s postsecondaryinstitutions and send moreCanadian students on international studyexchanges.Governments should strive to increaseCanada’s global share of foreign students,and set a goal of doubling Canada’s numberof international students within a decade.Governments, post-secondary educationinstitutions and national post-secondaryeducation associations should undertakeregular evaluations, measure progress andreport publicly on improvements in business–academic collaboration, participation in co-opprograms, and the attraction and retention ofinternational talent.Reforms to Canada’s immigration systemshould place emphasis on immigration as aneconomic tool to meet our labour marketneeds, becoming more selective andresponsive in addressing labour shortagesacross the skills spectrum.Canada’s immigration system should developservice standards related to applications forstudent visas and temporary foreign workers,and should be more responsive to privateemployers and student needs by fast-trackingprocessing and providing greater certaintyregarding the length of time required toprocess applications.In order to ensure that Canada is able toattract and retain top international talent,and respond more effectively to privateemployers, Canada’s immigration systemshould fast-track processing of applicationsfor permanent residency under the newCanadian Experience Class for skilledtemporary foreign workers and foreignstudents with Canadian credentials andwork experience.”A-6

The Advice of Other PanelsExpert Panel onCommercialization (2006)The Minister of Industry struck the Expert Panelon Commercialization in May 2005, asking it toidentify how the federal government could helpensure continuous improvements to Canada’scommercialization performance. The panel’sfinal report, People and Excellence: The Heart ofSuccessful Commercialization, was released inApril 2006.The report called for the creation of aCommercialization Partnership Board reportingto the Minister of Industry as his or her leadadvisory body on commercialization. Amongother activities, it was suggested that the boardcould: serve in an oversight role for federalcommercialization policies, initiatives andinvestments; provide an annual public reportevaluating their effectiveness, integration andimpacts; and call on the Minister of Industry torespond publicly to the report. In addition, thereport made a series of recommendationsorganized in relation to three “themes foraction.”TalentIncrease business demand for talentthrough the development of anew Canada CommercializationFellowships Program. The program would“support businesses in all sectors that arebuilding or renewing a commitment tocommercialization by supporting exchangeswith post-secondary institutions” (2006a,p. 12). These fellowships would (i) encompassthe broad range of disciplines that supportcommercialization and (ii) occur at all stagesof a research career — that is, fromundergraduate studies through to theworkforce.Spur employer hiring of highly qualifiedpersonnel with commercializationtalents. This would be achieved by:“expanding the existing Canadian Institutesof Health Research (CIHR) programs thatfocus on industry–university partnerships;expanding the existing Natural Sciences andEngineering Research Council of Canada(NSERC) programs that provide researchexperience in industrial settings; creating anew Social Sciences and HumanitiesResearch Council of Canada (SSHRC)commercialization and innovation fellowshipprogram emphasizing disciplines such asbusiness, design and human behaviour; andproviding funds to these organizations basedon a competition overseen by the newCommercialization Partnership Board”(2006a, p. 13).Encourage and celebrate young Canadianswho aim for success in business, scienceand technology. This would be achieved byproviding “substantial, guaranteed and longtermsupport for initiatives that promote andcelebrate excellence in science, technology andbusiness by young people” (2006a, p. 14).Develop and retain talent for success inthe global marketplace. This would beachieved by: creating prestigious scholarshipson par with the Rhodes and Fulbrights;enabling foreign research and teachingcollaborators to serve as distinguished visitingchairs; providing matching grants forcollaborative research projects withresearchers in centres of excellence in othercountries; supporting short-term exchangesof researchers between Canadian and foreignuniversities; and significantly increasing thenumber of Canadian students conductingstudies and research at foreign universities(2006a, p. 15).A-7

Innovation Canada: A Call to ActionResearchCreate a Commercialization Superfundto address key commercializationchallenges. This fund would support largescale,private–public sector research andtraining partnerships in targeted sectors,while expanding existing programs andinitiating new ones to train highly qualifiedpersonnel (2006a, p. 18).Expand federal programs that supportseed and start-up firms in proving theirbusiness ideas. This would be achieved as afirst step by (i) increasing funding toprograms such as NSERC’s Idea to Innovationprogram, CIHR’s Proof of Principle programand the Industrial Research AssistanceProgram and (ii) providing funds for SSHRC toestablish a program similar to these three inorder to encourage, where applicable, thecommercialization of the research it funds.As a second step, funding would grow,based on evidence of success (2006a, p. 19).Increase the commercializationinvolvement of small and medium-sizedenterprises (SMEs), through a CanadianSME Partnerships Initiative. The objectiveof this initiative would be to make SMEs moreglobally competitive through two channels:(i) Partnerships Initiative — Research Funding,through which federal science-baseddepartments and agencies would competefor five-year funding for research aboveand beyond their existing budgets and(ii) Canadian SME Partnerships Initiative —Program Support, which would includeefforts such as support for technologyacquisition and R&D partnerships with firmsand research bodies in other countries(2006a, p. 21).CapitalImprove access to early-stage angelfinancing and expertise. This would beachieved through two initiatives: (i) FundingExcellence in Building Angel InvestorNetworks, which would develop angelinvestor networks and enhance thesupport they provide to early-stage firmsthrough a competitive process to fundnon-governmental organizations thatmobilize the resources within communitiesand (ii) a New Angel Investor Co-InvestmentFund Program that would establishcommunity based funds, capitalized by thefederal government, which would investalongside angel investors in seed and start-upcompanies (2006a, p. 24).Review the expansion-stage venturecapital market in Canada. This would beaccomplished by launching a comprehensivereview, potentially with the involvement ofthe provinces and territories, “of policies,programs and other factors influencing therole of the venture capital markets oncompanies during their expansion stage. Thisreview would involve the venture capitalcommunity and include assessing currentinitiatives and capital supply and demandconsiderations, including factors for firmsseeking financing” (2006a, p. 26).Remove barriers to foreign venturecapital investment. This would be achievedthrough the following measures: “eliminatethe withholding tax on capital gains made byforeign investors in the equity of privateCanadian companies; cover limited liabilitycorporations that are venture capital funds orprivate investment funds under Canada’sincome tax treaties and exclude them fromwithholding tax; extend rollover provisions tocross-border mergers, allowing companies toget access to strategic partnerships withforeign companies without triggeringtaxation; and eliminate the requirement fornon-Canadian investors to file a Canadianincome tax return” (2006a, p. 27).A-8

Biographies of Panel MembersAnnexBiographies ofPanel MembersCThomas JenkinsP. Thomas Jenkins is executive chairman andchief strategy officer of Open Text Corporationof Waterloo, Ontario, the largest independentsoftware company in Canada. He has served asa director of Open Text since 1994 and as itschairman since 1998. From 1994 to present,Mr. Jenkins was president and then chiefexecutive officer and then chief strategy officerof Open Text. Mr. Jenkins has also held severalexecutive positions with DALSA Inc., anelectronic imaging manufacturer based inWaterloo, Ontario. Prior to these positions,Mr. Jenkins was employed in technical andmanagerial capacities at a variety of informationtechnology-based companies in Canada.In addition to his Open Text responsibilities,Mr. Jenkins is the chair of the federal centre ofexcellence Canadian Digital Media Network(CDMN). He is also an appointed member ofthe Social Sciences and Humanities ResearchCouncil of Canada (SSHRC), past appointedmember of the Government of Canada’sCompetition Policy Review Panel, whichreported in June 2008, and past appointedmember of the Ontario CommercializationNetwork Review Committee (OCN), whichreported in February 2009. Mr. Jenkins is alsoa member of the board of BMC Software, Inc.,a software corporation based in Houston, Texas.He is also a member of the University ofWaterloo Engineering Dean’s Advisory Council,a director of the C. D. Howe Institute, a directorof the Canadian International Council (CIC) anda director of the Canadian Council of ChiefExecutives (CCCE).Mr. Jenkins received an MBA inentrepreneurship and technology managementfrom Schulich School of Business at YorkUniversity, an M.A.Sc. in electrical engineeringfrom the University of Toronto and a B.Eng.& Mgt. in engineering physics and commercefrom McMaster University.Bev DahlbyDr. Bev Dahlby is a professor and fellow at theInstitute for Public Economics at the Universityof Alberta.Dr. Dahlby has published extensively on taxpolicy and fiscal federalism. Dr. Dahlby’s book,The Marginal Cost of Public Funds: Theory andApplications, was published by MIT Press in2008. In 1998–1999, he held a McCallaResearch Professorship at the University ofAlberta. He has been a visiting scholar at theEconomic Policy Research Unit at the Universityof Copenhagen, the Australian Taxation StudiesProgram at the University of New South Wales,the Graduate School of Economics at GetulioVargas Foundation in Rio de Janeiro, theDepartment of Public Economics at theUniversity of Innsbruck, and the Department ofEconomics at Marburg University. He has servedas a policy adviser to the federal and provincialgovernments in Canada on the reform ofbusiness taxation, the fiscal equalizationA-9

Innovation Canada: A Call to Actionprogram, tax credits for television and filmindustry, taxation of inbound foreign directinvestment, and saving non-renewable resourcerevenues in Alberta. His international experienceincludes advisory work on tax reform in Malawifor the International Monetary Fund, in Thailandfor the Thailand Development Research Institutein Bangkok, and in Brazil for the World Bank. InMay 2010, Dr. Dahlby was awarded the DougPurvis Memorial Prize by the CanadianEconomics Association for a work of excellencerelating to Canadian economic policy.Dr. Dahlby has a B.A. from the University ofSaskatchewan, an M.A. from Queen’s Universityand a Ph.D. from the London School ofEconomics. He joined the Department ofEconomics at the University of Alberta in 1978after completing his Ph.D.Arvind GuptaDr. Arvind Gupta is a professor of computingscience at the University of British Columbia,and is chief executive officer and scientificdirector of the Mathematics of InformationTechnology & Complex Systems group(MITACS), a national research network thatconnects academia, industry and the publicsector to develop tools for Canada’s knowledgebasedeconomy. He also chairs the MITACSResearch Management Committee and is amember of the MITACS Board of Directors andExecutive Committee.Prior to joining MITACS, Dr. Gupta helped foundthe Pacific Institute for the MathematicalSciences and the Banff International ResearchStation for Mathematical Innovation andDiscovery.Dr. Gupta is a member of a number of researchorganizations, including the Association ofComputing Machinery, the EuropeanAssociation of Theoretical Computer Science,the Institute of Electrical and ElectronicsEngineers, and a fellow of the AdvancedSystems Institute. He is also a member of theNatural Sciences and Engineering ResearchCouncil of Canada’s International StrategyAdvisory Committee, the British ColumbiaNatural Resource and Applied ScienceEndowment Fund Advisory Committee, and theBanff International Research Station.Dr. Gupta is the editor of two book series onindustrial mathematics and is currently thePresident of the 2011 International Congress onIndustrial and Applied Mathematics. Dr. Guptahas a B.Sc. from McMaster University, an M.Sc.from the University of Toronto and a Ph.D. fromthe University of Toronto.Monique F. LerouxSince 2008, Monique F. Leroux, FCA, FCMA, hasbeen chair of the board, president and chiefexecutive officer of Desjardins Group. As electedpresident, she represents all Desjardins caissesand leads the largest cooperative financialgroup in Canada and the sixth largest in theworld, with assets of more than $175 billion.From 2001 to 2008, Ms. Leroux held variouspositions within Desjardins Group, includingchief financial officer of Desjardins Group, andpresident of Desjardins Financial Corporationand chief executive officer of its subsidiaries.Prior to joining Desjardins Group, Ms. Lerouxwas senior executive vice president and chiefoperating officer at Quebecor Inc., senior vicepresident, Quebec Division, at RBC Royal Bank,and senior vice president, finance, at the headoffice of the Royal Bank Financial Group. Ms.Leroux began her career at Ernst & Young,ultimately becoming managing partner ofservices to the Quebec financial industry, andmanaging partner in charge of auditing andconsulting for national and internationalcompanies.Ms. Leroux has been active on a number ofcorporate boards as well as a member of severalnational and international organizations andA-10

Biographies of Panel Memberscommittees. She is currently a vice president anda member of the board of directors of theInternational Confederation of Popular Banks, amember of the board of directors of theConference Board of Canada and of theEuropean Association of Co-operative Banks,while also sitting on the executive committee ofthis last organization. In addition, she is amember of the Global Agenda Council of theWorld Economic Forum, the HEC Montréalcouncil of governors, and the governing boardof Montréal International. Ms. Leroux has beenpresident of the Ordre des comptables agréésdu Québec and governor of the CanadianInstitute of Chartered Accountants.Her expertise and accomplishments in the areasof management, finance, accounting andgovernance have been widely acknowledged,including honorary doctorates from Universitédu Québec à Chicoutimi, Concordia Universityand Bishop’s University. Ms. Leroux has alsoreceived numerous leadership awards, such asher recent selection as one of 25transformational Canadians by the Globe andMail and as one of the 2011 honourees of thePublic Policy Forum. In addition, she generouslylends her time as a host of charitableorganizations. She is, for example, acting aspresident of the Canada Summer Games to beheld in Sherbrooke in 2013.David NaylorDr. David Naylor was appointed the 15thpresident of the University of Toronto in 2005.He holds an MD from the University of Torontoand earned his D.Phil. in the Faculty of Socialand Administrative Studies at Oxford Universityin 1983, where he studied as a Rhodes scholar.A fellow of the Royal College of Physicians andSurgeons (Internal Medicine), Dr. Naylor joinedthe Department of Medicine of the University ofToronto in 1988, where he was promoted to fullprofessor by 1996. He was founding chiefexecutive officer of the Institute for ClinicalEvaluative Sciences (1991–1998), beforebecoming dean of medicine and vice provostfor relations with health care institutions of theUniversity of Toronto (1999–2005).Dr. Naylor is the co-author of approximately 300scholarly publications, spanning social history,public policy, epidemiology and biostatistics, andhealth economics, as well as clinical and healthservices research in most fields of medicine. Hehas advised governments in Canada and abroadon policy issues over the course of more than20 years, and was chair of the National AdvisoryCommittee on SARS and Public Health in 2003.David Naylor is a fellow of the Royal Society ofCanada and the Canadian Academy of HealthSciences, a foreign associate fellow of the USInstitute of Medicine, and an Officer of theOrder of Canada. He is also the recipient ofvarious national and international awards forresearch and leadership in medicine, health careand education.Nobina RobinsonSince May 2009, Mrs. Nobina Robinson has heldthe position of chief executive officer ofPolytechnics Canada, a national alliance of theleading research-intensive, publicly fundedcolleges and institutes of technology. She hasheld progressive appointments in the federalgovernment and non-profit sectors since 1990.Mrs. Robinson began her public service career in1990, when she joined the Treasury BoardSecretariat as a management trainee. Two yearslater, she became a foreign service officer andwas posted as a political officer to the CanadianEmbassy in Havana from 1994 to 1997.In 1998, Mrs. Robinson joined the CanadianFoundation for the Americas (FOCAL), anindependent, non-partisan think tank dedicatedto strengthening Canadian relations with LatinAmerica and the Caribbean. She served as thefoundation’s executive director between 1999and 2002. Mrs. Robinson promoted civil societyA-11

Innovation Canada: A Call to Actionengagement with the governments of theAmericas at all major hemispheric events, andco-led the summit of non-governmentalorganizations at the 2001 Québec City Summitof the Americas.Before joining Polytechnics Canada, Mrs.Nobina Robinson was the Ottawa-based seniorgovernment relations adviser for SenecaCollege, with a principal responsibility forfederal advocacy for one of Canada’s largestcolleges.Mrs. Nobina Robinson has a B.A. from AmherstCollege, Massachusetts, an M.A. from OxfordUniversity (Commonwealth Scholar 1985–1988), and has pursued post-graduate study atYale University.A-12

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