Mobilizing Science and Technology to Canada's Advantage—2007

Chapter 3: Entrepreneurial Advantage—Making Canada a World Leader through Science and Technology

The federal government supports productivity growth through S&T by putting in place the conditions that encourage private-sector investment. By encouraging entrepreneurs to innovate and market their products to the world, the government can maximize the benefits from its investment in skills and research.

With this in mind, the Government of Canada will:

Foster a competitive and dynamic business environment.
Pursue public-private research and commercialization partnerships.
Increase the impact of federal business R&D assistance programs.

3.1 Fostering a Competitive and Dynamic Business Environment

Governments establish marketplace framework policies — the basic rules under which businesses, consumers, and others conduct their activities in the marketplace. Marketplace framework policies influence private-sector decisions to invest, trade, and innovate. They play a vital role in encouraging firms to strive to be environmental innovators. Key marketplace framework polices that touch on S&T include competition, trade, investment, intellectual property, taxation, regulation, and capital markets.

Innovation usually takes place when there is vigorous competition among firms. Competition drives firms to become more efficient, invest in new technologies, and introduce new products and services. A highly competitive national economy also helps our companies to be more successful when competing in global markets. In the broadest sense, the challenge is to encourage competition by letting market forces play out, while ensuring that individual firms with market power are deterred from taking action that undermines competition. Canada's federal government will work to ensure that its competition laws are encouraging a more innovative economy.

Openness to international trade and investment brings expertise and innovation to Canada, increases competition to bring out the best in firms, and gives Canadian firms opportunities to reap the rewards from their investments in innovation in world markets. Canadian trade agreements, S&T agreements, and tax treaties have dramatically increased our openness to trade, and the movement of new ideas, products, and technologies benefiting Canadians. However, recent difficulties in concluding the Doha round of multilateral trade negotiations have led many countries to pursue bilateral or regional negotiations to capture the benefits of freer trade. To ensure that Canadian businesses can fully participate in global market opportunities, the government will develop a new approach to international trade policy through a comprehensive Global Commerce Strategy that will enhance linkages with existing and emerging markets through regional and bilateral trade and investment agreements.

Foreign direct investment in Canada provides firms with capital to innovate and brings with it new technologies, new ways of doing business, and healthy competition. When Canadians invest abroad, they integrate into global supply chains, seize opportunities, and improve their competitiveness. Canadians are investing more abroad, but Canada has been attracting a declining share of global direct investment. This is limiting opportunities for Canadians. We need to ensure that our approach to foreign direct investment is modern and in line with best practices around the world.

A modern intellectual property regime is critical for researchers and creators, whose ability to commercialize the fruit of their labour is directly linked to the protection provided by patent and copyright laws. Canada therefore needs to maintain intellectual property protection that is competitive with its trading partners in order to attract both venture capital and intellectual capital.

Canada is committed to maintaining a balanced patent regime that provides appropriate incentives for innovation while respecting Canadians' values and ensuring that they have access to the latest scientific information and technologies. Similarly, Canada is committed to ensuring that its copyright framework provides the legal protection necessary to give copyright-based industries the confidence to invest in and roll out new business models that make full use of leading-edge technologies, while promoting the use of these technologies by researchers to gain access to the knowledge and information needed for innovation and competitiveness.

High business taxes are harmful because they reduce the returns from investment, thereby reducing the amount of business investment that takes place in Canada. With increasingly mobile capital, Canada must build an internationally competitive corporate tax system that will attract and retain business investment. The tax relief measures in Budget 2006 and the Tax Fairness Plan will reduce the general corporate income tax rate from 21 per cent to 18.5 per cent by 2011; eliminate the corporation surtax for all corporations in 2008; and has eliminated the federal capital tax. Budget 2007 will further enhance competitiveness by increasing capital cost allowance rates for manufacturing buildings and other assets to better reflect useful life. As a result of these tax reductions, Canada will have a meaningful marginal effective tax rate advantage over the United States, and will move to the third-lowest tax rate on new business investment in the G-7 by 2011.²¹

In recent years, OECD countries have been reducing their level of direct support for industrial R&D, and using more indirect incentives, such as tax credits. Canada's SR&ED tax incentive program is one of the most advantageous systems in the industrialized world for promoting business investment in R&D, providing over $3 billion in tax assistance to innovative Canadian businesses in 2006. It is the single largest federal program supporting business R&D in Canada, and it will continue to play a leading role in fostering a competitive and dynamic business environment in Canada. The SR&ED tax incentives are supplemented by similar measures in most provinces. The government continually monitors the effectiveness of SR&ED tax incentives.

Regulation and S&T are fundamentally interconnected. Science and technology inform the development and management of federal regulations in areas such as health and safety and environmental protection, ensuring that requirements imposed by government continue to be technically feasible and economically sound. Good regulatory practice means managing risks and opportunities.

The experience in Canada and other OECD countries in recent years confirms that regulation, done right, encourages innovation by setting standards for industry to meet in upgrading products and processes. For instance, when strong, clear environmental laws and regulations work with market forces, governments create incentives and conditions in which businesses and people protect our natural environment and respond to environmental challenges with entrepreneurial innovation. Strong environmental protection laws preserve our natural heritage, attract "new economy" firms and entrepreneurs, and incubate world-leading environmental protection industries.

Canada's new Chemicals Management Plan is part of the government's comprehensive environmental agenda. This $300-million initiative will make Canada a world leader in assessing and regulating chemicals that are used in thousands of industrial and consumer products. It will improve our environment and protect the health and safety of Canadians through scientific risk assessments of legacy chemicals.

At the same time, it is essential to ensure that effective regulatory approaches are in place to tackle the increasingly important intellectual property, information-sharing, and confidentiality issues that are part and parcel of life in the 21^st century. The challenge is to ensure that Canada's regulatory framework supports the delivery of S&T benefits to Canadians.

There are opportunities to increase cooperation and coordination on S&T-related regulatory issues among federal, provincial, and territorial governments, and with our continental neighbours and trade partners. Consequently, we must promote better international regulatory cooperation as it relates to S&T. Through the Security and Prosperity Partnership, for example, the Government of Canada is already working with the United States and Mexico to encourage the compatibility of regulations and reduce redundant testing and certification requirements in the S&T area. We must also continue to improve the cost-effectiveness of regulatory processes affecting S&T, strengthen performance and accountability measures, and develop and implement regulations in a more timely way.

Work is under way by Health Canada to move beyond international standardization in the regulation of health products to include international work sharing in order to take advantage of international expertise, sustain the high standard of safety and efficacy assessments, and continue to improve product review times.

The biotechnology landscape is rapidly becoming more complex and global: science has produced a second wave of biotechnology products with diverse regulatory, social, and ethical implications, and international competition to commercialize these products is much more intense. At the same time, governments worldwide are investing heavily in nanotechnology, the challenges and opportunities of which are yet to be fully realized. Both of these areas of innovation will need to be supported by strong science and effective regulation to protect human health and the environment while supporting Canadian competitiveness.

Canada's financial institutions and capital markets have a role to play in ensuring that innovative businesses have access to appropriate financing to enable them to reach their potential. One avenue for businesses to finance growth is through venture capital. Keeping Canada's financial institutions and markets innovative and competitive, with a flexible regulatory framework founded on sound principles, will ensure that they continue to meet the needs of our growing economy. Regular reviews of financial institution statutes will contribute to encouraging this environment, as will reduced barriers to international capital flows. For example, Budget 2007 announced significant developments that will facilitate access by Canadian entrepreneurs to venture capital from the United States. Most notably, agreement in principle has been reached on changes to the Canada-U.S. tax treaty, including treaty recognition of limited liability companies and the elimination of source-country withholding tax on interest. Another important change is the removal of non-resident tax clearing requirements ("section 116 certificates") for shares that are listed on any stock exchange in any OECD country with which Canada has a tax treaty. These measures address longstanding concerns of the venture capital sector.

Policy Commitments

Canada's federal government will create a business environment that is conducive to greater private-sector innovation by:

Ensuring competition policies provide competitive marketplaces. As announced in Budget 2007, the government will task an expert, independent panel to undertake a comprehensive review of Canada's competition policies.
Encouraging foreign direct investment in Canada.
Establishing the lowest tax rate on new business investment in the G-7. Budget 2007 proposes measures to allow Canada to become one of the most investment-friendly countries in the G-7 by providing assistance to the manufacturing sector to invest in machinery and equipment, aligning capital cost allowances with useful life, and providing a financial incentive to the provinces to facilitate the elimination of provincial capital taxes.
Identifying opportunities to improve the Scientific Research and Experimental Development (SR&ED) program, including its administration, to further encourage R&D within the business sector in Canada.
Putting in place an effective, forward-looking, and responsive regulatory environment that promotes a competitive marketplace and protects the health and safety of Canadians and the environment. As part of this effort, federal regulatory departments and agencies will develop a plan to ensure biotechnology, nanotechnology, and ICT products, services, and technologies are regulated responsibly and in a timely manner, drawing on international best practices and benchmarks. As announced in Budget 2007, the government will invest $9 million over two years to make Canada a best-in-class regulator by ensuring that efficiency and effectiveness are key considerations in the development and implementation of regulations through a new Cabinet directive on streamlining regulation.
Fostering a leading-edge financial system.
Considering new or different approaches to stimulate the supply of venture capital in Canada, including working to attract institutional investments in Canadian funds. Budget 2007 announced agreement in principle on the major elements of an updated Canada-U.S. Tax Treaty, including addressing tax barriers to improve access to U.S. venture capital by Canadian entrepreneurs.

3.2 Pursuing Public-Private Research and Commercialization Partnerships

Partnerships of researchers and entrepreneurs are important because they bring research strengths to bear on market-driven challenges and opportunities. There is a role for public support for such partnerships because the benefits they provide spread across the economy. The federal government already supports research collaborations between researchers in the public and private sectors. For example:

The Networks of Centres of Excellence program brings university and industry researchers together, under the leadership of the university, to advance S&T developments with practical applications. To date, centres have spun off 117 companies and contributed to the development of more than 6,000 highly qualified professionals, including researchers, post-doctoral fellows, graduate students, and technicians.²² There are opportunities to generate even greater commercial outcomes from this program by creating new networks that are proposed and led by the private sector.
The Natural Sciences and Engineering Research Council's College and Community Innovation Pilot Program is enabling community colleges to help Canadian businesses address practical technology-based challenges and opportunities. It is also exposing college students to business work environments. There are opportunities to further enable colleges to support innovation in communities across the country.
Global leadership in research and commercialization requires large-scale facilities operating at world-class levels of excellence. Such facilities produce outstanding research and market innovations, help attract leading researchers to Canada, provide unique training opportunities for young Canadians, and contribute to the growth of innovative industries and firms. They also provide opportunities to lever international resources.
The Perimeter Institute for Theoretical Physics in Waterloo, Ontario, is an example of a world-renowned research institute. Since its creation in 1999, the Perimeter Institute has become a leader for Canadian research in the emerging field of quantum physics and a model for science education and outreach. The Medical and Related Sciences Discovery District (MaRS) in Toronto is a good example of a major commercialization facility. It brings together, in the same building, leading health researchers, investors, businesses, and legal, banking, and other commercialization services in a creative and collaborative environment.

Budget 2007 announced support for Canadian research and commercialization centres capable of global leadership:

Perimeter Institute for Theoretical Physics at the University of Waterloo.

Brain Research Centre at the University of British Columbia.

Canada School of Sustainable Energy at the University of Alberta, the University of Calgary, and the University of Lethbridge.

Li Ka Shing Knowledge Institute at St. Michael's Hospital, affiliated with the University of Toronto.

Heart and Stroke Foundation Centre for Stroke Recovery, affiliated with the University of Toronto and the University of Ottawa.

Montreal Neurological Institute at McGill University.

National Optics Institute in Québec City.

Life Science Research Institute in Halifax, affiliated with Dalhousie University.

The benefits from large world-class facilities are highest when there is close collaboration between research institutes, governments, and the private sector to reflect joint priorities, combine strengths and expertise, and share resources. Canada needs a more effective and efficient way to identify research and commercialization opportunities where we have the potential to be world-class and to bring together the partners and resources required to achieve world-leading excellence.
Efforts to support the transfer of technology from Canadian universities to the private sector are resulting in spin-off companies, technology licensing agreements, and patent filings. More can be done to encourage technology transfer at both ends of that process. A review will be launched to uncover factors that might be inhibiting S&T collaboration between industry and the higher-education sector (universities and colleges). This review will include an assessment of whether a new approach to intellectual property management of university research is warranted. In the meantime, the government will pilot new approaches to university and government laboratory technology transfer; greater involvement by the private sector in the design of these new approaches is needed.

The granting councils support knowledge transfer and the commercialization of university research through a number of initiatives, including CIHR's Proof of Principle Program, NSERC's Idea to Innovation Program, and SSHRC's Knowledge Impact in Society Program.

Policy Commitments

Canada's federal government will strengthen public-private research and commercialization partnerships by:

Introducing new business-led research networks under the Networks of Centres of Excellence (NCE) Program in order to bring together government, private, and academic experts from around the world to support applied research in environment, energy, ICT, and health priorities, through a competitive, national process. As announced in Budget 2007, the government will provide $11 million in 2008-09 to accelerate the creation of new business-led NCE networks.
Establishing a new Centres of Excellence in Commercialization and Research program. In partnership with other levels of government and the private sector, federal support will help Canada to achieve a critical mass of capacity in strategic areas of scientific opportunity and competitive advantage. As announced in Budget 2007, the government will provide $350 million over three years to support eight large-scale centres of research and commercialization in priority areas where Canada has the potential to be a global leader (see text box) and to fund other centres that operate at international standards of excellence, as determined through international peer-reviewed competitions.
Developing new approaches to transfer knowledge and technologies from universities, research hospitals, and government laboratories to the private sector.
Encouraging collaboration between community colleges and local firms to support the development, adaption, and adoption of new technologies. As announced in Budget 2007, the government will provide $48 million over five years to make the College and Community Innovation pilot a permanent program and support more college-industry partnerships.
Creating a new tri-council private-sector advisory board for the granting councils to provide advice on the implementation of business-driven Networks of Centres of Excellence, Centres of Excellence in Commercialization and Research, and the college initiatives.

3.3 Increasing the Impact of Federal Business R&D Assistance Programs

Federal and provincial departments and agencies deliver a range of programs to increase private-sector innovation. These initiatives provide loans, grants, contracts, and repayable contributions to firms using a variety of mechanisms, including government programs, arm's-length foundations, and international organizations.

For instance, the National Research Council of Canada's Industrial Research Assistance Program (IRAP) helps Canadian small and medium-sized businesses access, develop, exploit, and apply technologies to create new products, services, and industrial processes. IRAP's field force of 260 advisors gives firms access to a unique national network of highly specialized technical and business experts in more than 100 communities across Canada. The Business Development Bank of Canada plays an important role in stimulating the supply of venture capital available to emerging technology companies. It provides early-stage venture capital through direct investments in firms and by helping to capitalize funds managed by venture capital partners. Sustainable Development Technologies Canada supports the development of environmental technologies and their introduction into the marketplace.

Greater cooperation and alignment among federal programs, and between federal and provincial programs, could generate efficiencies and increase the effectiveness of these efforts. Alignment is particularly important for emerging technologies, such as biotechnology developments, given their long development times and high development costs.

Early opportunities to improve outcomes from particularly large federal programs with national reach, including the Business Development Bank of Canada, the Natural Sciences and Engineering Research Council and the National Research Council of Canada, warrant priority attention. The Government of Canada will also continue to engage the provinces in discussions designed to align programs and improve outcomes.

In addition to improving alignment and partnerships in business R&D support, the Government of Canada will continuously improve the impact and effectiveness of individual programs. The Strategic Aerospace and Defence Initiative is an example of this, representing a new approach to supporting R&D excellence and partnerships in Canada's aerospace, defence, security, and space industries. It replaces the former Technology Partnerships Canada.

Policy Commitments

Canada's federal government will improve the impact and efficiency of federal R&D business assistance by:

Replacing Technology Partnerships Canada with a new program, the Strategic Aerospace and Defence Initiative. This program will support excellence in aerospace and defence R&D.
Aligning the programs and activities of existing organizations to increase commercialization outcomes. In the first instance, the National Research Council of Canada, the Natural Sciences and Engineering Research Council of Canada, and the Business Development Bank of Canada will implement a plan to work more effectively together to support the commercialization of research in Canada. This exercise could be broadened to include other departments and agencies over time.
Working with the provinces and territories to improve commercialization outcomes.