The Organisation for Economic Co-operation and Development (OECD) released the June 2012 results of the OECD Economic Surveys for Canada’s macro-economic state of affairs. The report indicates that the economy is picking up, with a positive outlook for continued moderate output growth and inflation. The OECD also cites innovation as a priority on the government’s agenda.
“Boosting innovation can raise historically weak productivity growth to sustain living standards… Competitive pressures, which spur innovation, have recently intensified because of the high exchange rate, but further market opening in sheltered sectors like network industries and professional services would be beneficial.”
Currently, innovation is lagging in Canada, with limited business R&D productivity and a low patenting quota. Fostering innovation can contribute to healthy multi-factor productivity (MFP) growth; innovation thus emerged as the overarching theme of the survey, with recommendations to improving the current policy framework. The OECD calls for support focused more on “sharpening incentives and raising performance,” through SR&ED strategies like unifying the higher enhanced ITC rate with the lower general ITC rate to encourage companies to grow. The OECD further recommended reinstating capital costs in the eligible expenditure base for SR&ED.
Aside from SR&ED, the OECD recommended subjecting the Industrial Research Assistance Program (IRAP) and other R&D programs to in-depth cost-benefit analysis. One suggestion was to implement user fees as a recovery method for the high costs of expert advice, especially for companies with products on the path to commercialization.
The Globe and Mail recently addressed the fact that in recent years, the relative impact of self-employment across Canada has been waning. Self-employment has always been an important feature of the Canadian economy; the OECD lists Canada as one of the highest concentrations of entrepreneurs within a working population. However in recent years, the ratio of self-employed persons to those working for someone else has dropped back.
Statistics Canada’s Labour Force Survey (ratio of self-employment to those employed by someone else):
- 13.8 per 100 in 1976
- 21.0 per 100 in 1998
- 18.2 per 100 in 2011
What might be some of the causes for this recent decrease?
Some obvious contributors may be the decline of self-employment due to (1) the retirement of baby boomers, and (2) business failures caused by the last recession. If this is the case, then it is even more paramount for the Canadian government to support new business startups. How can we effectively create new startups to displace the ones that have disappeared?
One of the issues that deters entrepreneurship is the current gap that exists between innovation and commercialization. Our best ideas are often acquired by US-backed firms because we may not be effectively funding business commercialization. Private venture capital is lacking in Canada, so without a doubt, the largest contributor to startup commercialization in Canada is the Scientific Research and Experimental Development (SR&ED) program. The SR&ED program provides refundable tax credits to start-up companies, for expenses that have already been incurred. However, it often takes 1-2 years for companies to see these refunds! This is definitely an area that requires improvement if we to remove the commercialization gap. It should be noted that innovative companies such as the North Innovation Fund have recently begun to offer SR&ED financing on unfiled SR&ED claims.
Changes to the SR&ED program are rumoured in the next federal budget. It goes without saying that the SR&ED program is critical to the survival of many small starts-up. Reducing or removing SR&ED will further decrease the likelihood that these startups will be able to commercialize their innovations, and create new jobs. Instead of cutting back funding to startups, we need to invest in startups, and encourage entrepreneurship in Canada in order to create future employment.