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Making Canada shine: R&D or making things real?

By Anca Gurzu      

As Canada slowly emerges from the global recession, experts agree the key to long-term prosperity is a committed investment in science and technology.

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As Canada slowly emerges from the global recession, experts agree the key to long-term prosperity is a committed investment in science and technology.

As a result, many lobby groups predicted innovation to be a significant topic in last week’s budget. But now opinions are split on whether the newly revealed measures will allow Canada to become more globally competitive.

While some point to lower corporate rates and changes in the income tax as a good opportunity to attract more high-tech companies to Canada, others say the government continues to focus too much on research spending and not enough on development.

One measure highly welcomed by businesses was a proposed change in the Income Tax Act, which narrows the definition of a “taxable Canadian property,” eliminating the need for tax filling for many foreign investments.

“This was the most positive change for us,” said Mike Darch, executive director of global marketing at the Ottawa Centre for Research and Innovation, a non-profit organization that advances economic development in the Ottawa region.

The old rules used to be a major detriment for attracting venture capital to Canada, Mr. Darch explained. The change will make foreign investment in Canadian-based innovation and technology firms more attractive.

So will the lower corporate rates promised by the government, according to Jayson Myers, president and CEO of the Canadian Manufacturers and Exporters.

The government reduced the corporate income tax to 18 per cent on Jan. 1, 2010, and it will continue to drop to 16.5 per cent at the beginning of 2011 and 15 per cent the following year. This means Canada will have the lowest corporate rate among the G7 countries, below the 20.7 per cent average of the Organization for Economic Co-operation and Development countries.

“If companies invest in Canada, then they will create more jobs and bring in new technology,” Mr. Myers said. “But we can’t improve productivity until we take new products to market.”

Mr. Myers said this budget is also showing “the government has the innovation equation half right.” Although money is flowing towards different research centres, the government is still investing in what he calls “the raw materials of the 21st century.”

Among other things, the 2010 budget has pledged:

n $45 million over five years to establish a post-doctoral fellowship program;

n $222 million over five years to TRIUMF, a national laboratory for nuclear and particle physics research;

n a total $32-million budget increase per year for the research granting councils;

n $75 million for Genome Canada;

n an additional $15 million per year for the College and Community Innovation Program (doubling of its budget); and

n $497 million over five years to develop the RADARSAT Constellation Mission, a multiple-satellite surveillance system.

“I think it’s significant for the research centres to be getting this money,” said Mr. Myers, “but at the end of the day we are still investing in research, and what we are lacking is a strategy of how to pull that research into innovation—and I still don’t see that.”

But Tom Brzustowski, RBC Financial Group professor in the commercialization of innovation at the University of Ottawa, disagrees.

“This budget is sprinkled with some seeds of important change,” he said. “Small amounts, but in important directions.”

The need for a greater focus on commercialization has been secretly acknowledged by the Canadian government in the past, according to briefing notes given to Foreign Affairs Minister Lawrence Cannon after taking office in 2008. Under a heading called “World-class excellence in innovation is essential,” the documents state that “Canada has a strong track record of domestic investments in R&D, but successful commercialization of Canadian innovations has not kept pace.”

In a speech to the Canadian Association for Business Economics last August, the Bank of Canada’s deputy governor, Timothy Lane said, Canada has a poor record on innovation. Canada’s average labour productivity growth from 2000 to 2008 stood at about one per cent, well below the 2.6 per cent level achieved in the United States over the same period, he said.

Moreover, Canada’s productivity ranking fell from third out of 20 countries in the OECD in 1960 to 17 out of the current 30 members.

A report released in April 2009 by the Council of Canadian Academies showed that, expressed as a percentage of the GDP, business investment in research and development declined by 20 per cent between 2001 and 2007. The report also found that few Canadian companies adopt innovation-based business strategies and tend to follow the lead of other countries.

While the report praised the government’s investment in university research, it also stated that “Canada is having difficulty keeping pace with the best innovators.” It listed Canada as ranking 15 out of 30 countries in the OECD and sixth among the G7 in terms of GDP spending on research and development.

“The government has been relatively slow in taking up Canadian innovation and Canadian products,” but the proposed Small and Medium-sized Enterprise Innovation and Commercialization program is a sign the government is moving to solve that, Mr. Darch said.

This is a pilot initiative offering businesses $40 million over two years to support up to 20 demonstration projects. Federal departments and agencies will organize trade shows and display the new products, but the exact details still remain unknown.

“In the overall scheme of things it’s not a lot, but it’s a start,” Mr. Darch said.

Ron Freedman, CEO of Research Infosource, a provider of research intelligence for Canadian businesses and universities, said this program is “potentially very important.”

“It gives validation to new products and services that Canadian companies come up with,” he said. “This is very important for the credibility of the products.”

Mr. Brzustowski at the University of Ottawa echoed his thoughts, adding the credibility card is very important in foreign markets. “If they go to sell to customers abroad and they are asked if their government is using this, they can answer yes and that’s a big boost.”

Mr. Myers, however, said the 20 product demonstrations are “just a drop in the bucket” because there are many small businesses with great products.

The government also promised to gradually remove in the next few years all tariffs on machinery, equipment and goods imported for further manufacturing. According to the budget plan, this will create $300 million in savings “for Canadian business to support investment and growth and create jobs.

“A lot of experts believe that the productivity problem is due to under-investment in capital equipments, such as new machinery, new technology or high-end computers,” said Ian Lee, MBA director at Carleton University’s Sprott School of Business. “Reducing the excise tax is very useful.”

There seems to be a consensus among experts that—due to the current financial situation—the government did not have a lot of money to spend overall.

“We didn’t expect massive amounts of funding [for innovation], and given the constraints at this time, I think [the government] took a down the middle path,” Mr. Darch said.

agurzu@embassymag.ca

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