Government incentives: past, present and future

How many programs are there? 

The number of incentive programs available to Canadian companies frequently changes, as some programs sunset after a certain period of time and new ones are announced often based on economic factors across different regions. Even if a program remains active, it may have only a few intake periods each year.

The sheer number and variable life of the programs make keeping on top of what is available and meeting application deadlines a significant challenge for Canadian companies, as it requires considerable time by scarce resources that may be better focused on growing their business.

In the period 2019–21, deals were awarded through a variety of different municipal, provincial and federal programs. Table 4 shows the breakdown between loans/credits awarded vs. grants or subsidies. The “Unspecified” category can be a combination of loans and grants, and/or the details of the deal were not made public. 

Table 5 shows the top 10 programs in terms of total incentives awarded in the period 2019-21. The federal Strategic Innovation Fund, one of the three federal programs in the top 10, tops the list with a total of $3.06 billion in 2019-21, which is 260% more funding in comparison to the previous five-year period. Additionally, the number of deals increased by 176% to 55, compared to 20 in the 2014-18 period. The Québec ESSOR Program comes second at $232.9 million. Canada Regional Economic Growth Through Innovation (REGI) Fund accounts for 3 of the top 10.

How effective is the incentives policy?

Although this report examines discretionary incentives offered to companies to establish new operations or to expand an existing operation, it doesn’t include an indication of incentives purely for R&D purposes, which is a key determinant of long-term growth for the entire economy.

In a period of economic turbulence around the globe — including market recession, rising interest rates and a slowdown in venture capital markets — a broad range of government funding tools and well-defined policies are more vital than ever to support local innovation and entrepreneurship.

Although the Global Innovation Index 2022 indicates the Canadian innovation industry as the highest in the world in terms of venture capital recipients in deals per billion PPP (purchasing power parity) dollars GDP, three-year average, the latest venture capital activity on the local VC market has not been encouraging.[5]

A recent report by the Canadian Venture Capital and Private Equity Association (CVCA) indicates that although 2021 was a historically high year for venture capital and private equity activity in Canada in terms of deals and dollar investments, 2022 saw a 34% decrease in terms of total investment.[6]

In global terms, VC activity experienced a 35% decline from the investment peak reached in 2021.[7] With declining VC activity, government funding becomes even more crucial to the growth of the local innovation industry, especially for early-stage and scale-up companies.

International competition between countries for talent and R&D budgets of multinational companies has led many economies to expand and diversify their support tools to attract foreign investment and encourage innovation and entrepreneurship. While Canada learned how to build support mechanisms decades ago — within the activity of the SR&ED and Industrial Research Assistance Program (IRAP) programs — it currently finds itself with a relatively limited and sparse set of support tools and budgets for R&D projects. For instance, among tens of available funding programs, only a few provide upfront support for R&D activities, whereas most of them target very specific industries and stages of development.

With more than 45,000 technology companies operating in Canada,[8] and hundreds of new ones being established every year, these funds could be insufficient to nurture innovation development.

Despite being one of the top 10 ecosystems for technological companies and startups, Canada ranks 25th globally for the growth of innovative companies (WEF 2019).[9] Furthermore, according to the OECD, gross domestic research and development expenditures in Canada are lower than the average among OECD countries, 1.69% vs. 2.68% (2021), and have been declining since 2001 (2.02%), whereas other countries have increased R&D spending since then, including the US, China, Israel, South Korea, Germany, Belgium, Austria and others.[10]

Moreover, the UN’s World Intellectual Property Organization (WIPO) Global Innovation Index 2022 displays two other related indicators ranked relatively low.[11] Gross expenditure on R&D performed by and financed by businesses as a percentage of GDP rank 28th and 40th, respectively, on the worldwide index.

Additionally, based on the same data source, Canada is in 67th place in terms of foreign direct investment net inflows as a percentage of GDP (WIPO 2022).[12] These indicators may serve as a potential sign for policymakers working on the creation of innovation-driven economic growth in the country.

Data from EY annual Worldwide R&D Incentives Reference Guide indicates that Canada provides a variety of incentives and support to local companies to foster their growth through various tools and mechanisms.[13] Among these are cash grants and loans, accelerated depreciation of R&D assets, lowered tax rates, tax credits and tax holidays. However, no clear methods exist when it comes to evaluating performance and determining if the incentives had the impact for which they were designed.

As stated in 2011, The Innovation Canada: A Call to Action report, also called the Jenkins report, “adequate tools do not exist to comparatively assess relative program effectiveness. Therefore, the evidence base is lacking for a regular and systematic reallocation of resources among programs to achieve the most cost-effective support for business innovation.”

To truly evaluate the effectiveness of incentives and subsequently evaluate the innovation policy in general, a holistic approach to the analysis is imperative and can more readily be achieved if measurable outcomes are identified at the outset and managed throughout the lifecycle of the incentive programs. Such an organized strategy, and the ability to implement key steps based on the outcomes, could better foster innovation-driven growth in the Canadian industry.

Based on our observation and after reviewing the incentive policies of leading countries that have been able to create significant changes and growth over time, it appears that their success was a result of a coordinated effort among the various stakeholders around a built-in policy combined with high-performance capabilities.

In the past, the federal and provincial governments have not implemented a coordinated approach to address the industry’s challenges and ensure the prosperity of the innovation ecosystem. As an example, it’s interesting to review Israel’s innovation policy — the country with the highest gross domestic expenditure on R&D in the OECD — where 5.44% of its GDP is spent on R&D and has been increasing since 2001 (4.18%).

In 2016, to ensure the leadership of the Israeli technological innovation industry on the international markets, the Israel Innovation Authority (IIA), a brand-new statutory entity, was created with the aim of building an authority for innovation, whose activities are faster, more efficient and more effective. 

The IIA’s fundamental principle is the partnership between government and industry. The council reflects not only the government’s view but also that of companies, which are the authority’s target audience, through the industry’s public representatives on the council. This structure ensures an effective and relevant policy outline for the industry’s needs, alongside the promotion of government priorities.

Initiatives like the IIA benefit a number of technology ecosystem development drivers, among them the level of cluster development and the depth of the technology ecosystem. Based on the Global Innovation Index 2022,[14] while the number of joint venture/strategic alliance deals and university–industry R&D collaboration in Canada is high in the worldwide rating — first and ninth, respectively — in terms of cluster development, Canada ranks 19th globally.

International R&D collaboration is a key factor in innovation investment. The Canadian International Innovation Program (CIIP) supports Canadian companies pursuing international R&D collaborations with foreign partners, including Brazil, China, India, Israel and South Korea. However, the budgets are limited, and the calls for proposals are infrequent. Nonetheless, it is necessary to consider expanding the support mechanisms so that they allow the encouragement of innovation and collaboration in the industry and with overseas partners.

Clearly, Canada’s federal and provincial governments can do more to incentivize greater ecosystem development, collaboration and the enhancement of capital markets to support one of the key pillars of economic growth by stimulating innovation and productivity and accelerating these processes. More coordinated government support for the development of these ecosystems may now be beginning to emerge. For instance, a number of global original equipment manufacturers (OEMs) in the automotive sector (e.g., Volkswagen, General Motors, Honda, Ford, Stellantis and LG) have recently received significant support from Ontario through its investment fund and the federal government through the Strategic Innovation Fund to establish or expand their manufacturing facilities and plants in Ontario. This has resulted in a concentrated zone of advanced manufacturing and research and development capabilities in Southern Ontario which, in turn, has created thousands of direct and indirect jobs.

Recent announcements from the federal government are also bringing positive news. Finance Canada first announced a review of the Scientific Research and Experimental Development (SR&ED) Program in Budget 2022. Specifically, Budget 2022 revealed the government’s intention to examine if changes to eligibility criteria are warranted to improve program efficiency. The 2022 budget also stated that the government will consider the creation of a patent box regime to encourage the development and retention of intellectual property in Canada. Budget 2023 indicated that the review of the program is continuing and includes the engagement of stakeholders in the review process.

In addition, Budget 2022 first introduced the government’s plan to establish the Canada Innovation Corporation (CIC). Along with a number of new “green” refundable tax credit incentives, Budget 2023 highlighted the federal government’s plan to introduce legislation to create the entity. Although seemingly slow to get started, this new Crown corporation may be the first step in creating a more coordinated incentives effort in Canada.

With an initial budget of $2.6 million, the CIC has the mandate to increase Canadian business expenditure on R&D across all sectors and regions of Canada and help to generate new and improved products and processes that will support the productivity and growth of Canadian firms.

In addition to developing and delivering funding programs and providing advisory services, the CIC is also expected to integrate some key existing funding programs (e.g., IRAP) and complement other federal programs, including the Strategic Innovation Fund and the Regional Development Agencies.[15] Although there is no mention in its mandate to coordinate with provincial programs, it is definitely a step in the right direction towards both simplifying and strengthening the incentive landscape in Canada.

It is encouraging to see the beginnings of a more coordinated effort to achieve common targets that will further enhance the incentives. It is through this more holistic approach that the chances of addressing current and upcoming challenges, meeting growth targets and advancing competitiveness will be increased.

With a coordinated effort and a body capable of initiating, promoting and coordinating horizontal activities, it may advance the country’s objectives of promoting innovation and productivity in Canada. If the CIC can synchronize federal incentive programs’ budgets and performance indicators to optimize the results of these programs, Canada may be able to maximize the government’s ability to achieve innovation-driven growth.

Summary 

Comprehensive data on discretionary incentive programs are difficult to obtain given the sheer number of programs that are developed and administered by various levels of government in different geographical regions.

The historical lack of a holistic and comprehensive policy where specific economic and/or socio-economic objectives are identified and specific methodologies are employed remains challenging.

However, recent government announcements, most notably the creation of the Canada Innovation Corporation, seem to demonstrate the beginnings of a more coordinated approach. 

These enhanced capabilities should ultimately result in stronger support for the growth and competitiveness of the Canadian economy.