Innovation Canada: A Call to Action

Program Mix and DesignChapterProgram Mixand Design6This chapter addresses the second question inthe government’s charge to the Panel: “Is thecurrent mix and design of tax incentives anddirect support for business research anddevelopment (R&D) and business-focussedR&D appropriate?”In its forthcoming report on business innovationpolicies, the Organisation for EconomicCo-operation and Development (OECD)emphasizes the importance of striking the rightbalance in the mix of programs to supportbusiness innovation. It notes, for example, therequirement to have a set of instruments that issufficiently differentiated to meet the needs ofcomplex innovations systems while at the sametime avoiding the inefficiencies of operating toomany schemes at too small a scale — an issuethat was addressed in the previous chapter.The mix between direct and indirect measuresis another important consideration, notablybecause each form of support offers certainadvantages and disadvantages (Box 6.1).In its State of the Nation reports, the ScienceTechnology and Innovation Council (STIC 2009,2010) notes that, as a percentage of grossdomestic product (GDP), government supportfor business R&D in Canada is among the mostgenerous in the world, but underscores that,relative to comparator countries, Canada’ssupport is heavily weighted toward taxincentives as opposed to direct supportmeasures. Of particular note, as seen inFigure 6.1, the United States (US) spendssignificantly more on direct support measuresrelative to support through tax incentives.However, there is a trend among OECDcountries to make greater use of R&D taxincentives (OECD forthcoming).The Panel has concluded that the OECD data inFigure 6.1 to some extent overstate federalreliance on indirect support because (i) thesedata do not capture the full range of directprograms in Canada and (ii) the measurementof direct support varies across countries, makinginternational comparisons problematic.Specifically, the Panel’s mandate includessupport not only for “direct governmentfunding of business expenditure on researchand development (BERD),” as depicted inFigure 6.1, but also for commercially relevantR&D performed by public and non-profitinstitutions — for example, support throughprograms that seek to help build links betweenacademia and industry. The addition of theseexpenditures to the “direct” support mix wouldslightly increase Canada’s ratio of direct toindirect support relative to the picture inFigure 6.1. There are also differences amongcountries in the calculation of certain items ofdirect government support that have the effectof increasing the reported direct expendituresof some countries relative to Canada — forexample, their inclusion of loans to business andgovernment procurement of R&D services asdirect support measures. It should also be notedthat the refundable Scientific Research andExperimental Development (SR&ED) tax credit is6-1