Peering Into the Innovation Policy Toolkit

Across the world, governments are striving to stimulate innovation as a way to accelerate economic growth, increase productivity, create more high-quality jobs, and reduce the environmental impact of industrial and other human activity. Innovation ultimately shows up as higher productivity: more (and better) goods and services are produced, for a given quantum of “inputs” (e.g., labour and capital). In fact, economists believe that innovation is the key to long-run productivity growth in advanced economies like Canada.

What policies are available to governments to nurture innovation? A recent paper by three economists affiliated with the UK-based Centre for Economic Performance provides a valuable summary and synthesis of the existing academic and policy literature.

Policies to Promote Innovation

A diverse mix of policies and policy instruments have been used to encourage innovation. Some are directly targeted at influencing the demand for innovation by companies – such as the provision of tax credits or other incentives for research and development and commercialization. Other approaches aim to boost the supply of innovation, such as attracting skilled immigrants, supporting certain kinds of university research, or increasing the numbers of scientists, engineers and technologists produced by the post-secondary education sector.

The list below includes key examples drawn from the innovation policy tool-kits used by governments in many advanced economies. In practice, countries differ greatly in the particular mix of policies and programs deployed to support innovation, and also in the extent to which the main focus is on increasing the demand for or the supply of innovation.

  • Direct grants to companies that undertake R&D
  • Tax credits to incentivize companies to do R&D
  • Adopting “patent boxes” (lower corporate tax rates on revenues/profits linked to patents)
  • Attracting and employing more skilled immigrants
  • Increasing the number of university and college graduates from STEM[1] programs
  • Reform of intellectual property policy to stimulate/reward innovation
  • Government funding for post-secondary research that is deemed likely to lead to the commercialization of new products and technologies
  • Support for research/commercialization in government-owned labs and enterprises
  • Open trade policies, including through participation in trade agreements that open new markets and heighten domestic market competition
  • Ensuring robust product market competition to drive efficiency and innovation among domestic firms
  • Encouraging the co-location of innovative SMEs (e.g., industrial parks, accelerators, etc.)

To the above list we can add a couple of additional policy approaches that may help to stimulate innovation. One is support for “strategic clusters,” consisting of firms (and sometimes other non-profit entities) within a defined industry sector. The federal government’s recent “supercluster” program is an example. Another type of innovation policy is a set of structural or micro-economic reforms designed to reduce barriers to competition (and entry) in product and service markets.

Canada’s Experience

Canada’s innovation performance is poor. Table 1 shows where Canada ranks in several global surveys and studies of innovation. Overall, we fall well short of being a top-tier performer judged against peer jurisdictions.

Canada’s policy tool-kit has relied heavily on indirect tax support – through R&D tax credits that are particularly generous to very small firms and less so to larger firms– as the primary instrument to spur business innovation. The results can only be described as disappointing – especially given the vast sums allocated for this purpose over the last decade. Governments have also put a high priority on university research as a “supply side” means to create a more innovative and productive business sector, again with very mixed results.

A recent C.D. Howe Institute report takes a critical look at Canada’s innovation record. It calls for a stronger focus on other elements of the innovation policy tool-kit, including:

  • promotion of product market competition;
  • modifying tax support for business R&D to reward growth and commercial success;
  • bringing intellectual property laws and policies into closer alignment with those of advanced economies that outperform Canada on innovation outcomes;
  • modernizing regulatory regimes to encourage innovation and take advantage of emerging technologies;
  • using public sector procurement and service delivery to foster innovation; and,
  • doing more to attract the full spectrum of talent needed to drive innovation – not just STEM workers and researchers, but also people with relevant business and marketing skills.

In the end, there is no magic formula for building a more innovative economy. A degree of policy experimentation is necessary, as the federal government is doing with its new “supercluster” strategy. A fundamental challenge for policy-makers is that the Canadian private sector, taken as a whole, appears to have long ago settled into a comfortable “low-innovation equilibrium,” as described by Peter Nicholson. At a time of technological disruption and ever-increasing competitive pressure, sticking with the “low-innovation equilibrium" is unlikely to be a recipe for future economic or business success.

To help establish positive momentum around innovation, the Business Council of B.C. has partnered with business, community and research leaders from B.C., Oregon and Washington state on the Cascadia Innovation Corridor initiative. The goal is to support and strengthen an innovative ecosystem in the Pacific Northwest to attract capital and talent and position the Cascadia region as a major global innovation hub in life sciences, the digital economy, and sustainable agriculture.

[1] STEM: Science, technology, engineering and mathematics.