In spite of significant tax incentives from many levels of government, Canada continues to lag its Organization for Economic Cooperation and Development (OECD) peer countries in innovation performance. The Conference Board of Canada report concludes the following:
Canadian companies are rarely at the leading edge of new technology and often find themselves behind the productivity growth achieved by global industry leaders. Canada has lost its global technology leader Nortel, and once the global dominant RIM/Blackberry is struggling to survive. Nor does it appear that any other Canadian companies are prepared to step up on the world stage.
According to the Conference Board Report, countries that are more innovative are passing Canada on measures such as income per capita, productivity, and the quality of social programs. Innovation is critical to environmental protection, a high-performing education system, a well-functioning system of health promotion and health care, and an inclusive society. Without innovation, all these systems stagnate and Canada’s performance deteriorates relatively to that of its peers. Innovation is essential to a high-performing economy.
So why are there no conclusive answers to Canada’s poor innovation performance?
Canada has a good technical infrastructure with universities, engineering schools, teaching hospitals, technical institutes, an excellent quality of life and advanced knowledge workers. So why does the country fail to take the steps that other countries take to commercialize its research as a source of competitive advantage?
According to the Conference Board, there are three explanations for the poor innovation performance:
As a result, Canada has largely become an innovation laggard country of comfortable oligopolies and ‘pick and shovel” resource companies.
Canadian Companies Lack Innovation Strategies
Canada must overcome its endemic poor entrepreneurial behavior, and encourage its companies to become global leaders, otherwise public innovation grant and tax policies, and creating sufficient pools of risk capital will continue to remain ineffective to improving the economy.
Few Canadian businesses take a systematic approach to innovation. According to the Boston Consulting Group, the available evidence indicates that the most successful companies approach innovation in a holistic and systematic way. They develop an innovation strategy that fully integrates with their business mission and goals, and aligns with their organizational culture and organizational systems.
Innovation becomes inherent in everyone’s job description. Google, Apple, 3M, Nike, Starbucks, Walmart, Amazon, to name a few are global leaders because they have an innovation strategy.
Innovation is much more than what comes out of the company’s R&D process. Innovation can occur in a company’s business model, in its value proposition, how it sells its products, and to whom it sells its products. Companies like Dell, SW Airlines and Virgin, became market leaders through business strategy innovation. Apple, Amazon, Google and Facebook created new industries by technological and business model innovation.
For any organization, innovation represents not only the opportunity to grow and survive, but also an opportunity to influence the direction of the industry. According to management consultant Peter Drucker, “Innovation is the effort to create purposeful focused change in an enterprise’s economic or social potential.” That statement very accurately positions innovation as the agent for change and a crucial tool for every Canadian CEO. However, many Canadian CEO’s believe their strategic innovation investments are failing, because many companies fail to implement a formal innovation strategy and process.
Innovation, like many business functions, is a management process that requires an innovation strategy with specific tools, rules, and discipline. Execution is simple once it is clear how the pieces fit together. An innovation strategy is an integrated framework, formal processes and tools that all managers can use to create top- and bottom-line growth from innovation. It is simply the use of standard management tools (such as strategy, organizational design and structure, management systems, performance evaluation, people, and rewards) to dramatically increase the payoffs from innovation investments. How a company innovates is what it will ultimately innovate.
Developing a business environment that supports and promotes innovation often requires extensive changes in organizational culture and systems, which can be difficult to achieve, not to mention disruptive, costly, and time-consuming. Though the potential long-term benefits are considerable, many Canadian firms often focus on short-term gains, and cost reductions and are unwilling to invest time and resources into organizational transformation efforts. The high risks of failure associated with major organizational change projects is also a Canadian deterrent.
Overcoming Canadian Corporate Entrepreneurial Resistance by Changing Government Tax Incentives Requirements
Canada’s low levels of innovation call into question the effectiveness of Canada’s generous innovation tax incentives. There are a numerous tax incentive programs in Canada among the various levels of government.
The flagship, federal Scientific Research and Experimental Development (SR&ED) program is the largest and most popular program in the country, and like the other programs, is flawed. The SR&ED program, administered by the Canada Revenue Agency (CRA) encourages businesses of all sizes, to conduct Research and Development (R&D) that will lead to new, improved, or technologically advanced products, processes, devices, and materials. Canada has one of the most generous tax incentive R&D programs among OECD countries. Each year the SR&ED program provides approximately $4 billion in investment tax credits to over 18,000 claimants.
What Determines an Eligible SR&ED Project?
According to CRA qualification criteria, a Canadian-controlled private corporation can earn an Investment Tax Credit (ITC) of 35 percent up to the first $3 million of qualified expenditures for SR&ED carried out in Canada, and 20 percent on any excess amount. Other Canadian corporations, proprietorships, partnerships, and trusts can earn an ITC of 20 percent of qualified expenditures for SR&ED carried out in Canada.
To qualify for the SR&ED program, work must advance the understanding of scientific relations or technologies, address scientific or technological uncertainty, and incorporate a systematic investigation by qualified personnel. The CRA list work that qualifies for SR&ED tax credits as including experimental development, applied research, basic research and support work.
Interestingly, there are no requirements for a company to demonstrate that they have a successful record of accomplishment of innovations, or a formal innovation strategy, linking to the business strategy.
Applying for a SR&ED grant or tax credit requires a complicated amount of paperwork to satisfy the funding conditions and technical requirements. This has spawned a lucrative third party consulting industry where specialized financial technicians adept at filling out the qualification forms, act on behalf of clients to secure the maximum tax grants and credits. KPMG estimates this to be in the order of $137 million or 3.7 per cent of the total 2011 expenditure of $3.6 billion. The same report also suggests that some firms charge clients as much as a 30 per cent contingency fee to complete SR&ED documentation.
The SR&ED and other government tax grant and credit programs are not working for Canada, given our 13th country placing on the OECD list of 16 peer countries. Many ask if this is innovation, or corporate welfare that reduces operating and capital expense costs!
So what can the Canadian Governments do to increase the effectiveness of the many tax grants and credit programs available to Canadian companies?
The CRA and other government agencies add to the existing program requirements to qualify for SR&ED and other government tax incentives, provisions to ensure that qualifying Canadian businesses demonstrate that they have an existing innovation strategy linking to its business strategy. This includes parameters such as organizational design, management systems, performance evaluation metrics, people, human resource policies, and incentives resulting in successful innovations. In addition, qualifying businesses need to demonstrate a record of successful innovations ensuring that these programs reward success. Most international businesses that are successful at innovation have an innovation strategy that fully integrates with their business mission and goals, and aligns their organizational culture and systems.
By Ronald J. Pickett
About the Author
Ronald J. Pickett resides in Newmarket, Ontario. He is President of RDM Management Group, specializing in innovation, business, and technology strategy consulting. Ron has an MBA from the University of Phoenix, a Master’s Degree in Innovation Leadership from the University of Fredericton, and publicly speaks on and teaches innovation leadership strategy to Laurentian University Students at Georgian College.
