Science and Innovation

Yesterday, I wrote about the practical element of encouraging sound science policy – the need to communicate effectively. The Canadian Science Policy Conference had a lot to say about it, and there has been much discussion here and elsewhere about how to balance effective communication and sound science.

But what about content? What should Canadian science policy address? Reports from the Council of Canadian Academies (.pdf) and the Science and Technology Innovation Council both lauded much of Canada’s research landscape – especially on the academic side – but also highlighted a major problem: Canada lags much of the world in R&D performed by business. I’ve written about this problem previously, and addressing this problem and its corollary – the lack of innovation in Canadian industry – was a major focus at the policy conference.

First, why does Canada perform so poorly in innovation? We trail most of the OECD in industry investment in R&D, as measured by BERD (business expenditures on R&D) as a percentage of GDP. As Peter Nicholson, President of the CCA, outlined, this lack of innovation has real consequences for productivity. Examining relative productivity levels in the private sector between US and Canada shows that Canada’s productivity (as measured by GDP/person-hours worked) reached a peak in 1984 of 93% of US productivity and has been declining steadily since (it currently sits somewhere around 75%). So, Canada suffers from both an innovation gap and a related productivity gap. However, analysis also shows that Canadian firms have remained roughly as profitable as US companies over the same period. This suggests that US companies need to innovate and improve productivity to remain profitable, whereas Canadian companies do not. Thus, the profit motive and competitive landscape are neither one strong enough to motivate investment in innovation.

So what has Canada been doing to use policy to encourage business to innovate? By and large, the Canadian government has relied heavily on tax incentives to encourage innovation. Programs like SR&ED and other R&D tax credits encourage companies to invest in increasing productivity through R&D. In fact, the STIC and CCA reports both found that Canada’s tax landscape is the most favourable to business R&D in the world. So why isn’t it working?

It seems there are two related problems, both based on the fact that tax incentives are back-ended. Companies need to invest the money to receive financial support. For small companies, SR&ED credits are refundable – meaning that the government will issue a cheque to cover a portion of R&D activities. The small company still needs to finance the initial investment, however – raising capital is a significant challenge for startups, and SR&ED money doesn’t assist this process. For larger companies, SR&ED credits are non-refundable, meaning that the credits can be used to decrease past or future tax liabilities. This is often not a motivating factor for companies that have already reduced their tax exposure. There was widespread feeling at the policy conference that encouraging innovation with tax incentives isn’t working.

A second way the government has used policy to encourage business R&D is through the direct funding of industry-academia partnerships. There are two problems with this – first, tying more academic research funding to industry partnerships is like looking for lost keys under the lamppost because the light is better there. Just because tinkering with funding agency policies is more straightforward than designing policies to influence the private sector doesn’t make it a good idea. Second, academic research is a major strength that can feed into the innovation system, and we shouldn’t screw it up while trying to fix the rest of the system. Finally, Peter Frise gave a somewhat chilling description of the challenges facing industry-academic partnerships. Frise is the Scientific Director and CEO of Auto21, a Network of Centres of Excellence for the auto industry. Frise’s description of the requirements industry has for partnering – obvious return on investment, major privacy and IP concerns, narrowly focused and targeted research, short and absolute deadlines, and more – outlines why industry traditionally performs its own R&D. Certainly, the cultures of industrial R&D and academic R&D couldn’t have been made more obviously distinct. These sorts of partnerships seem destined to turn academic researchers into “branch plant” technicians.

So what’s to be done about it? Well, everyone agrees something has to be done. Minister of Science, etc. Gary Goodyear told delegates that he’s seen the numbers, knows this has been a problem for a long time, and that’s why he is absolutely going to do something about it! He didn’t provide any details, which is maybe why he suggested his door is open for suggestions. Other speakers – Heather Munro-Blum, Suzanne Fortier, Peter Hackett – reiterated the need to do something. Unfortunately, ideas seem somewhat lacking. Hackett wants to get government out of the picture altogether (government subsidies didn’t build the skateboarding industry). Suzanne Fortier wants NSERC to take innovation to the next level. Several people suggested that direct subsidies to emerging companies is a better policy direction than tax incentives. The fact that this problem has persisted for so long points to the challenge of solving it, but hopefully people are becoming more serious about trying new solutions.

More generally, though, I was a little disappointed that the issue of innovation dominated so much of the conference. While innovation has a scientific component, it became increasingly obvious to me that innovation isn’t really a “science policy” issue so much as it is an economic policy issue. There are a couple of problems. Science policy is really focused on R&D. Innovation is about economics – designing new processes for the shop floor or bringing ideas to market. Scientists, scientific granting councils, etc. aren’t a part of that process. The role for science policy should be to encourage strong R&D, identify strategic areas for science development, and provide a base for business and industry to build on. Furthermore, when it comes to innovation, policy will have a hard time influencing companies to innovate more. We’ve been trying to do it for 25 years. The market trumps policy. Encouraging an innovative work force by encouraging PhDs to move into private sector positions, increasing competitiveness through global trade agreements and a more robust dollar – these are maybe ideas to explore. But asking a bunch of scientists to figure out ways to make industry more innovative seems a bit misplaced to me.