Archive for the ‘SR&ED News’ Category

Canadian Prime Minister Harper reiterated possible amendments to the Canadian SR&ED program at the World Economic Forum at Davos, Switzerland on Thursday.   “We believe that Canada’s less than optimal results for those investments is a significant problem for our country,” Mr. Harper stated.

Suggested changes, as previously mentioned by the Globe and Mail, follow from the much-discussed Jenkins Report, such as potentially limiting refunds to labour-based expenditures. However, the goal of the SR&ED will remain to support innovation in Canada.

Prime Minister Stephen Harper is hinting that Ottawa will overhaul a $3.5-billion SR&ED program.  The recent Jenkins Report recommended that the SR&ED tax credit be made simpler and smaller.  Among suggested changes to the SR&ED program, the report suggests that the credit should be limited to labour costs, and that the generous refundable portion of the credit for smaller Canadian-owned companies should be reduced.

The Jenkins report also recommends redirecting the savings to more direct funding of business research.  The current program provides a level playing field for both SMEs and larger corporations, reimbursing companies equally for monies that have been spent on research and development.  Should we allow bureaucrats to “pick winners” and make decisions about which companies the funding should go towards?

Quoting a recent publication from the Mowat Centre, ”picking winners” was a term originally used in a paper by Nelson and Langlois (1983) in reference to the practice of government officials picking specific technologies to commercialize, a practice that was found to be the least successful form of government support identified in their research.  This more direct manner of investment is often disparaged as either “corporate welfare” (Taylor, 2008) or as a distortion of markets. However, such investments were pivotal in building capabilities in what became leading sectors in Ontario. While in essence it requires ‘picking winners’, it is about picking sectors and not technologies.   This is an important distinction and one that is often lost amidst the confusion surrounding the term’s use in ideological debates over industrial policy.

On October 17, 2011, the federally appointed panel, chaired by Open Text chief strategy officer Tom Jenkins, released an assessment of the government’s $7-billion in annual investment in “business R&D”. The report recommended significant changes to the incentive programs and singled out the Scientific Research & Experimental Development (SR&ED) tax credit, the largest program, which accounts for nearly half of the government’s $7-billion in annual R&D investment.

The Jenkins report focused solely on small and medium enterprises (SMEs) and considering the vital role the SMEs play in the Canadian economy, I sincerely hope that the conservative government does its homework before deciding what changes to make (and when) to the SR&ED program. The SME market (businesses with less than 500 employees) represents the vast majority of firms in Canada, collectively employing almost 50% of the workers in the private sector (or 40% if the public sector is included) and contributes significantly to GDP growth and job creation. Aside from the benefits of productivity, it is growth that has more significant effects on the economy. Studies have shown that a large portion of job creation comes from a small subset of businesses, which experience a long period of sustained exponential growth. The irony is that the vast majority of these firms have started out as SMEs.

The word, “innovation” shows up in almost every page of the Jenkins report. When you look up the definition of “innovation” it refers to the “creation of better or more effective products, processes, technologies, or ideas”. The unfortunate reality is that the government and CRA seem to be focusing on “invention” rather than “innovation” – they’re not the same. Invention is the creation or discovery of something new to the world, whereas Innovation is about creating value through enhanced products, new processes or reducing costs of existing products or services.

In my opinion, the SR&ED program should mainly be about growth (productivity and innovation) – not the number of patents or scientists in a lab (i.e., inventions). That being said, I don’t want to discount the importance of science and research to our economic success but how many top companies rely solely on inventions to achieve global leadership? Canadian firms have achieved success through innovation, not invention.

It is interesting to note that Canada has had one of the most stable economies since the global recession, yet it continues to fall behind other countries when it comes to innovation. It is somewhat puzzling as to why Canada has slipped out of the World Economic Forum’s ranking of the 10 most competitive national economies. It is easy to blame the inefficiencies of the SR&ED program (I think there are many), however, I can think of at least one game changer (in addition to the China factor) that probably played a bigger role in Canada’s declining global competitiveness – the rise of the Canadian dollar. Ten years ago, Canada’s dollar hovered in the 60-cent range that provided a cost advantage (or incentive) to invest in Canada and trigger further productivity. With the Canadian dollar trading around par to the US dollar, that advantage is far less prevalent today. As such, Canadian businesses must continually innovate and increase their productivity to remain globally competitive. If every business in Canada did something incrementally better than they did before, whether it was expanding into a new market or changing a process, it would be those types of innovations that would increase the standard of living and reinforce growth in the Canadian economy.

There was a recent Angus Reid Public Opinion survey released by Intuit Inc. that stated, 97% of Canadian small business owners said innovation was less about disrupting the status quo and more about making changes to existing products and services, upgrading technology, or improving customer relations and internal processes. The SR&ED program is a means to incentivize companies (large and small) to take risks so any cuts to the program or obstacles to receive funds will be a sure way for Canadian entrepreneurs to avoid such experimentation.

- James Ro, Vice President of Northbridge Consulting Services