Driving Canadian Innovation

Image of a man speaking with Canadian flags in the background

As notorious Italian Renaissance historian Niccolò Machiavelli famously put it: “There is nothing more difficult to carry out nor more doubtful of success nor more dangerous to handle than to initiate a new order of things. For the reformer has enemies in all those who profit by the old order, and only lukewarm defenders in all those who would profit by the new order, this lukewarmness arising partly from . . . the incredulity of mankind, who do not truly believe in anything new until they have had actual experience of it.”

But while coming up with new and better ways of doing things is challenging, there is no question that taking innovation to market is even more difficult. That’s why Bill Morneau, Canada’s finance minister, should be applauded for his unprecedented focus on innovation, which he outlined in his March 22, 2017 federal budget.

Canada’s economy clearly could use a blast of innovation. After all, between 2005 and 2015, productivity averaged only 1 per cent per year, while economic growth averaged just under 2 per cent. Unfortunately, despite public policy talk of supporting innovation, government does not go far enough to provide incentives for innovation. Indeed, the stimulants currently in place are inadequate to produce the high-performance economy that Canada requires.

Incentives affect behaviour. That three-word idiom is the cornerstone of economic thought. So to help the Canadian economy return to the 3–4 per cent growth rates of our past, policy makers should consider the following three strategies.

IMPROVE RETURN ON INNOVATION: Innovators credit various diverse motivations for their achievements. However, a common desire among the best of them is compensation for the risks, stresses, and long hours that are synonymous with innovation. Keep in mind that intense drive for innovation can be a serious drain on physical, emotional, and financial resources. The prospect of financial failure and complete loss is very real, and a tax rate above 47.7 per cent awaits those few who succeed if they earn more than $204,000 per year (53.3 per cent in Quebec, 53.5 per cent in Ontario, and 54 per cent in Nova Scotia). That just doesn’t cut it as an incentive. Meanwhile, capital gains and options gains stand alone in our system as financial incentives to innovation. Their tax rates are half of ordinary income tax rates, but there is nagging talk of increasing the capital gains inclusion rate and taxing options gains as ordinary income. What is needed is unambiguous confirmation that the current capital gains and options gains tax regimes will stand—even better, that rates may be lowered.

IMPROVE THE REGULATORY ENVIRONMENT: Government regulations affect virtually every aspect of a business:  product design, safety, pricing, labelling, and advertising; labour and staff relations; financial structure, reporting, and control; the environment; governance; licensing, codes, certifications, registrations, and approvals; business start-ups; and competitive practices. The list goes on. As a result, excessive and poorly conceived regulations serve as an innovation killer, especially for small businesses that lack the financial resources to manage an excessive compliance process. Laurence J. Peter noted, “Bureaucracy defends the status quo long past the time when the quo has lost its status.” To give the Canadian economy a boost, our regulators should think about that line and better consider who bears the costs, and who reaps the benefits, of every marketplace regulation—old and new.

INNOVATE GOVERNMENT SERVICES: Innovation isn’t just for the private sector. Government services, which materially affect Canada’s economic performance, also benefit from innovation. But how do you encourage innovation in the bureaucratic public sector, which typically operates without private-sector incentives? One approach is to take the bold step of taking the shackles off government sector incentive systems and specifically rewarding efforts at innovation. Another less controversial approach is a competitive grant program aimed at would-be government sector innovators. Finally, universities and colleges through their teaching and research programs are a hotbed of innovation. Enhanced post-secondary education funding with proper targets and controls could be a real boon to innovation.

Canadian economic growth has been better than most advanced economies in recent years. But we still are not close to meeting the needs of Canadian people and businesses and private sector forecasts through 2020 are far from encouraging.

The road to a stronger Canadian economic growth goes straight through innovation. But getting there will require more than policy talk about innovation. We to improve the incentives to innovate in this country.

About the Author

John S. McCallum is Professor of Finance at the I. H. Asper School of Business, University of Manitoba, and former Chairman of Manitoba Hydro. Contact John.McCallum@umanitoba.ca.