Innovation Canada: A Call to Action

Innovation Canada: A Call to Actionon Commercialization (2006a; see also Annex B)made several recommendations to expandfederal programs that support start-up firms inproving their business ideas and generally toincrease the commercialization involvement ofsmall and medium-sized enterprises (SMEs).That panel also recommended improved accessto early-stage angel financing and expertise, aswell as improvements in Canada’s expansionstageventure capital market.The fact that the same shortcomings in respectof procurement, large-scale researchcollaboration and risk financing were identifiedin the Panel’s consultations and throughinternational comparative investigations as wellas in prior studies of innovation in Canada isconvincing evidence that these are the programgaps — and therefore the opportunities — mostin need of focussed attention.The Procurement GapThe underlying premise of the procurementprovisions of international and domestic tradeagreements is that unrestricted competitionfor government purchases spurs businessproductivity and provides the best value forthe taxpayer’s dollar. Why, then, wouldgovernments want to adopt policies that favourcertain types of suppliers for their purchases ofgoods and services? The general answer is thatgovernments have a huge, ongoing need for anarray of goods and services across a broad rangeof activities — for example, defence, health,and information and communicationtechnologies. SMEs that supply sophisticatednew products and services can potentially meetthese requirements but may need to benurtured by governments until they reach apoint where they can compete withoutassistance. Also, procurement programs moregeared to acquiring innovative products promiseto boost public sector productivity and therebylower the cost of providing public sectorservices.The strategic use of public sector procurementcan contribute to the viability and growth offirms, particularly of innovative SMEs, in anumber of ways. For instance, whengovernments are demanding and sophisticatedcustomers for innovative solutions to theirneeds, their purchases — and the prospects forfollow-on sales — facilitate equity and debtfinancing for firms. Moreover, firms supplyinggovernments as lead users can then showcasetheir products and thus market them moresuccessfully to customers in Canada andabroad. For these reasons, successful initialpurchases are key to ongoing procurement andthe building of critical mass for economies ofscale and future growth. In the case of defenceand security-related procurement specifically,governments may favour domestic suppliers inorder to maintain capability for at least someself-supply of these sensitive assets.While there are good policy reasons to usepublic sector procurement to help builddomestic economic muscle, these will alwayshave to be balanced in the context of value-formoney,trade obligations, and the risk offostering supplier dependency and possiblydisadvantaging other domestic competitors.Assessment of the balance of benefits and costsof using procurement to develop the innovationcapabilities of SMEs will depend on the specificcircumstances. Good judgment will always berequired, since definitive data on the full extentof benefits and costs are rarely available.Notwithstanding this caveat, Canada’s use ofprocurement to enhance industrial innovationhas been very modest by internationalstandards, although recent federal initiatives likethe Canadian Innovation CommercializationProgram (CICP — see Box 7.2) 1 and a revised1 More information on the CICP is available from Public Works and Government Services Canada at:http://buyandsell.gc.ca/initiatives-and-programs/canadian-innovation-commercialization-program.7-2