its time to get innovative about funding innovation

In the course of my duties at Yukon College over the past month, I have been doing some research into the state of research and development funding and outcomes in Canada.

In the course of my duties at Yukon College over the past month, I have been doing some research into the state of research and development funding and outcomes in Canada.

I earn my daily bread working at the nickel-and-dime level of technology innovation, helping out local innovators and inventors on small projects, so it is salutary for me, every once and a while, to stick my head up and take a look at the larger shape of things.

Two documents I stumbled upon in the course of my research have been very helpful in allowing me to do just that, and they form the basis of what I will have to say in this column.

The first is State of the Nation 2008: Canada’s Science, Technology and Innovation System, published by the federal government’s Science, Technology and Innovation Council. You can download a pdf version of the report at www.stic-csti.ca,

The second is Tax Measures to Mobilize Science and Technology to Canada’s Advantage, put out by the Information Technology Association of Canada, in August of 2007 as a submission to the federal government. You can download a pdf of it at www.itac.ca.

The State of the Nation document reports that, in 2006 (the last year for which we have numbers, apparently), some 34 per cent of Canada’s research and development spending was invested in the higher education sector – colleges and, more often, universities – mostly on “pure research.”

This means Canada invested just under $30 billion in R&D that year.

The report further states that 55 per cent of R&D spending – so about $16.5 billion – was carried out by Canada’s business sector, mostly on “applied research”- research specifically targeted to producing marketable products.

The remaining 11 per cent – about $3.3 billion – was expensed by the federal and provincial governments on in-house-funded research and development.

These numbers raise some interesting questions.

First, the fact more than one-third of our national research and development expenditures are going to fund academic research looks disconcertingly out of scale.

There are three possible reasons for this disparity: a) We are investing too heavily in “lab coat” science; b) the percentage is inflated because the business sector’s investment in R&D is too low; and c) both a and b are true.

I am probably with the majority opinion when I settle on option C.

Though our investment in academic research may be a little bloated at present, it would be a mistake to try to downsize it too seriously.

Academic research may not be a hot financial investment, but there reasons all self-respecting countries do it.

First, there is just the moral obligation to do your bit in advancing science and human knowledge.

Second, there is a political pay-back to being seen as a technologically and scientifically advanced nation: You encourage your own youth to take up interest in these things, and you become an attractive nation to high-quality minds from other countries.

Third, though the time horizons are long, the costs high, and the number of instances are few, new technologies do indeed come into being as spinoffs of pure research, and many of these are of extreme importance to increasing the quality of human life.

If Canada’s pure research slice of the research and development pie looks disproportional, the answer is not to decrease the size of the slice, but to increase the size of the pie.

To do that, we need to increase the business world’s amount of financial investment in research and development.

And to do that, we need a better tool than the government’s current Scientific Research and Experimental Development tax credit.

Though the SR&ED; (popularly called “shred”) tax credit serves some valuable purposes, it also has several inherent problems; and, furthermore, it represents a far too passive approach to encouraging research and development in Canada.

I do not have time or space, here, to give you a full description of what Scientific Research and Experimental Development is and does.

Revenue Canada’s webpage at http://www.cra-arc.gc.ca/txcrdt/sred-rsde/menu-eng.html provides very well formulated information about this tax program – a program too little know and too little accessed by Yukoners, by the way.

Basically, the Scientific Research and Experimental Development tax credit allows small to middle-sized businesses to get a direct cash rebate for expenses they incur on scientific or experimental innovations they undertake.

Larger companies doing scientific and experimental innovations get tax credits they can apply against their corporate profits; and those credits can be drawn down over a number of years.

Though a good idea in itself, the credit has some major malfunctions.

It is a very valuable resource for early-stage start-up companies, who can certainly use that cash rebate to get their businesses up and running.

Problem is, very few small companies in Canada actually do much by the way of R&D.

Most private sector research and development in Canada is undertaken by a small number of large firms.

Companies with revenues of $400 million or more accounted for more than 42 per cent of all the private-sector research and development performed in 2006, though they comprised only one per cent of all the companies claiming Scientific Research and Experimental Development benefits.

Smaller companies comprised 88 per cent of the Scientific Research and Experimental Development claimants, but accounted for only 22 per cent of all the research and development performed.

Clearly, the tax-credit approach to encouraging businesses to invest in research and development is not working.

It appears to benefit the wealthy few, while leaving a large number of potentially innovative companies out of the picture.

This is disturbing, because commercial research and development tends to be a lot like the clothing industry: It is easily transportable, and it sets up shop in the countries and regions that have the skilled labour they need and the business environment they want.

Given current economic conditions – the world has suffered a financial melt-down since 2006 – we are not in good shape trying to increase the size of the private industry side of the industry research and development pie.

As the authors of the Information Technology Association of Canada brief suggest, more direct cash-back incentives need to be put into place to encourage middle-to-large sized companies to invest in research and development.

Offering relief on taxes on profits is not much of an incentive in a time when profits are pretty much non-existent, anyway.

The Canadian government has to find ways to place more direct funding support into enterprises – perhaps through government-private business joint ventures – that will keep the country’s technology sector sustainable through the current hard times, and competitive when things finally turn around.

In other words, it is time the government stopped j ust giving tax breaks and started making some real, targeted investments in Canadian research and development.

Rick Steele is a technology junkie

who lives in Whitehorse.

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