Innovation Canada: A Call to Action

Overview of Programs to Support Business R&DOverview of Programsto Support BusinessR&DChapter3The Panel was asked to review three types offederal programs intended to support researchand development (R&D) that is undertaken bybusiness or that is commercially oriented. Theseinclude (i) the Scientific Research andExperimental Development (SR&ED) tax credit,(ii) programs that support business R&D throughdirect expenditure (which may be of generalapplication or targeted to sectors or regions)and (iii) programs funded through the federalgranting councils, departments and agenciesthat support commercially focussed R&D, oftenperformed by academic institutions. Thepurpose of this descriptive chapter is tointroduce and characterize the suite ofprograms analysed by the Panel. First, it isimportant to recall the reasons whygovernments create programs that providesupport for business innovation and R&D.Rationale for GovernmentSupport of BusinessInnovationThe fundamental motivation for governmentintervention in private sector commercial activityis to improve market outcomes for thebetterment of society at large. There areconditions under which markets do not allocateresources efficiently, and governments interveneto try to correct or at least diminish “marketfailures” — for example, to guard againstmonopoly, to protect property rights, to providepublic goods such as basic research thatgenerate benefits for society at large or toovercome problems of inadequate information.Interventions may also be motivated by aconcern for equity — for example, provision ofa social safety net or, where internationalagreement cannot be reached, to level theplaying field in situations where subsidiesprovided in other countries put domestic firmsat a competitive disadvantage.In the context of this review, the mostfundamental motivation for governmentprograms to foster business R&D is the desireto improve Canada’s productivity growth byencouraging more business innovation.Specifically in the case of R&D, there isabundant empirical evidence that an individualfirm cannot capture all the benefit of itsinvestment in R&D (see, for example, Parsonsand Phillips 2007). Some of the knowledgegenerated is picked up “for free” by other firmsand is eventually used, by some at least, toimprove their productivity. The existence of suchspillovers means that a dollar of R&D investmentby a firm returns greater value to the economyat large, and not just to the investing firm alone.For this reason, governments provide incentivessuch as tax credits, grants and advisory servicesto induce firms to perform more R&D than theyotherwise would.There are other motivations to intervene.A number of programs to encourage greaterbusiness innovation are designed to help3-1