When it comes to innovation, Canada has a problem. Here’s how to fix it
Here’s some advice for Canadian politicians: Please don’t fall into the age-old trap that so many other politicians before you have fallen into. Stop citing Canada’s brilliant historical achievements as proof that we are an innovative country.
In particular, stop talking about insulin and the Canadarm. It’s gotten embarrassing. Any time a politician wants to talk about innovation in Canada, these are the only two examples they can seem to pull out of a hat.
The problem with these cases is that both are decades, if not a century old, and neither has resulted in significant economic growth for Canada.
In reality, the harder-to-swallow truth is that we’re not a productive economy (compared to our peers) and we don’t have a system that disproportionately encourages innovation.
With the end of the Conservative leadership race, the party’s focus will soon shift to election preparation and platform building. According to recent polls, Conservatives may have a healthy advantage over their opponents on economic issues.
They need a bold political platform to steer Canada’s economy into the decades to come.
Over the past year, the party’s platform, led by Erin O’Toole, has rightly emphasized a focus on innovation but has failed to properly articulate how it fits into a broader platform for economic growth and productivity.
I will use some of the key policy ideas proposed in the O’Toole platform to offer some opinions and suggestions on what a renewed Conservative platform should look like in the next election.
O’Toole’s platform had some sensible ideas, most of which didn’t go far enough. And more broadly, it seemed obvious that the platform’s authors were suffering from what other governments and parties have also fallen victim to in the past.
Politicians see innovation as a sector of our economy, or worse, a cute pastime for hoodie-wearing millennials hanging out in government-subsidized startup incubators.
The only way to drive meaningful innovation in Canada is to view economic growth and productivity as the result of effective innovation.
Innovation simply means bringing a new product or service to market for the first time, or improving an existing one under threat of competition. With this definition, all companies should consider innovation critical to their own growth and competitiveness, and the Canadian economy is the ultimate beneficiary.
Here are some of the key takeaways from O’Toole’s plan and my thoughts on how these could be improved and what may be missing overall.
- Reduce the income tax rate by 50 percent on patented technologies developed and commercialized in Canada by Canadian companies.
You won’t see me arguing against a tax break for start-ups, but tying that incentive to patented technology as a condition only shows our politicians’ lack of depth when it comes to modern technology. Patents aren’t what they used to be, especially in the fastest growing segments of our technology industries that develop modern software.
This policy shaping is likely to benefit incumbents at the expense of new entrants, a common theme in most existing government innovation programs.
It also does nothing for Canadian companies with global ambitions, since their earnings will be taxed in the markets where they sell their products and services.
Ultimately, the easiest solution to partially address this is an across-the-board cut in the federal corporate tax rate.
- Introduce flow-through shares as a tax incentive mechanism to encourage investment in innovative companies.
While there may be some merit to this policy, there are many nuances that distinguish tech companies from junior miners (where flow-through stocks were originally introduced).Instead of creating complex new tax deduction rules for investors, why not simply reconsider the capital gains treatment of investments aimed at certain types of early-stage innovative companies?
Investors who provide initial seed capital to a new startup should be completely exempt from long-term capital gains. These investors take incredible risks and breathe life into an idea that has the potential to grow into a business.
- Stop government funding of foreign-owned technologies and companies; namely: Huawei.
Of course, the Canadian federal government should not subsidize Chinese state research and development. I think there is a general consensus on this across the political spectrum. In a broader sense, however, the devil will be in the details of this policy.
Already today, many of our innovation-focused government incentives are tied to CCPC (Canadian Controlled Private Corporations) rules, which sound positive in principle but in practice prevent top Canadian entrepreneurs from raising significant amounts of capital from more established venture capital markets such as the US
“Ownership” is a broad term. Many Canadian companies count “foreigners” among their investors; predominantly American venture capitalists.
You don’t have to look much further than home-grown Shopify. Their success, although a Canadian story, was fueled heavily by US investment dollars. We should celebrate this and not try to discourage it.
We should do away with the CCPC rules and replace them with some simple conditions that require a company’s substance to be conducted in Canada.
- Fix the SR&ED program by simplifying the application process and moving it to another government department.
Any Canadian entrepreneur who has dealt with SR&ED will agree that this program is completely broken. I would argue irreparable.
While I agree that it’s ridiculous that our #1 government incentive program for innovation is managed by our tax collectors (CRA), I don’t think the solution is to hand it off to another equally bureaucratic government department.
SR&ED is a political third rail, but ultimately it must be wound up. The billions of dollars we spend on it each year have had no measurable impact on our economic growth, other than spurring an industry of specialized form-filling consultants.
A conservative government should abolish SR&ED. We should divert those billions of dollars into a new sovereign wealth fund focused on investing in tech companies and kept away from any Ottawa bureaucracy. Singapore has had significant success with this model through Temasek; which has meanwhile developed into a world-renowned tech investor.
- Address the brain drain
Although O’Toole mentioned the fact that many of our STEM grads are moving to the US to pursue opportunities, he didn’t specifically address how we might resolve this.
The policies suggested above would play a role in creating a more attractive market in Canada, but ultimately we could address our problem of brain drain more precisely.
At the University of Waterloo, for example, more than 50 percent of their graduate software engineers move to the US after completing four years of heavily subsidized post-secondary education in Canada.
A brain drain policy would reconsider our education funding for post-secondary students, making any subsidy conditional on them being able to work or start a business in Canada after graduation. Put simply, if a Waterloo engineer wants to move to Silicon Valley, he should reimburse the federal government for the subsidized portion of his previous 4 years of college.
O’Toole’s platform wasn’t a bad start for this topic, and the list of mandated guidelines likely would have yielded positive results. But the goal shouldn’t be to tweak the edges; it should be to fundamentally change the economic course of our country.
Missing from O’Toole’s list above are two incredibly important issues that are directly related to our ability as a country to foster innovation and foster economic prosperity: immigration and housing.
We need a significant increase in immigration of skilled workers and entrepreneurs, and we need policies focused on improving housing affordability in our largest labor markets. Ultimately, innovation occurs when the right people are concentrated in densely populated cities where they can afford to live.
However, both topics would be better explored in follow-up articles, but prioritizing them is critical to a successful innovation agenda.
Ultimately, we must become a country that attracts and retains the world’s best and that encourages the pursuit of new ideas and competition. Anything less will result in us continuing to struggle in our efforts to maintain a meager 2 percent economic growth agenda…when we should be striving to build a country where 5 percent is within reach.
To that end, it is crucial that we approach discussions of ‘innovation’ in the right context. Innovation is not a separate issue from economic growth. Innovation should be our idea of economic policy. Unless we foster more global competitiveness and productivity in our industries, we will continue to fall behind others who do.
The focus should not be on jobs either. Jobs will be the result of intelligent, growth-oriented economic policies.
To get us there, we need leaders who ask the right questions.
“Why are our largest companies (with the exception of Shopify and maybe Lululemon) all well-established companies operating primarily only in Canada? And mostly just from the world of finance, insurance and natural resource development?”
“How are we helping to create a class of new companies that put global ambition and technology at the heart of their business?”
A government that thinks so, and is not afraid to upset some incumbents, will help build a Canada worth getting excited about.
