Innovation expenditures dominate federal Budget with observers hoping discovery science will be addressed in future years

The minority Liberal government’s first Budget surprised many in the research and innovation community by announcing billions in new funding amidst a sea of spending in areas considered higher priority. With pressure to boost outlays on defence, housing and daycare - coupled with a nod to constraining deficit spending and a somewhat schizophrenic climate change policy - many gauged the chances of seeing significant new research and innovation expenditures as slim.

But Deputy PM and Finance minister Chrystia Freeland confounded that thinking by committing new expenditures in areas of federal influence aimed at boosting productivity and competitiveness. The new initiatives, according to several observers, indicate an increased focus on innovation, spurred by a belated recognition that the decades-long under-performance of business R&D needs to be actively addressed.

The new spending is highlighted by the creation of two new agencies: the Canada Growth Fund to stimulate sustainable economic growth and the Canadian Innovation and Investment Agency (CIIA), both of which are subject to further consultation before being finalized.

The Canada Growth Fund will be jumpstarted with $15 billion sourced from the existing fiscal framework over five years. It aims to provide a “broad suite of financial instruments including all forms of debt, equity, guarantees, and specialized contracts” with each federal dollar attracting three dollars in private capital. The Budget acknowledges that the CGF is required for Canada to “keep pace” with other countries that have already established similar funds to tap into the trillions of dollars in private capital seeking investment opportunities. The measure is tied to the government’s objective of achieving a net-zero economy by 2050.

In announcing the CIIA with $1 billion over five years starting in FY22-23, the government draws on models developed in Israel and Finland to “proactively work with new and established Canadian industries and businesses to help them make the investments they need to innovate, grow, create jobs, and be competitive in the changing global economy”.

Modest increases projected for business R&D

One day prior to the April 7 Budget, Statistics Canada released business R&D early estimates for 2020 through to 2022 showing “industrial R&D in-house expenditures declined from the revised 2019 estimate of $21.9 billion to $21.3 billion in 2020” with only moderate increases expected for 2021 ($21.9 billion) and 2022 ($2.4 billion) .

The CIIA’s objectives are augmented with investments in intellectual property (IP) protection and exploitation to further advance the government’s Strategic Intellectual Property Program review, announced in the 2021 Budget. This includes $35 million over five years for Global Affairs Canada to “help Canadian businesses secure their intellectual property in foreign markets” and $47.8 million over five years (and $20.1 million ongoing) to Innovation, Science and Economic Development (ISED) to “launch a new national lab-to-market platform to help graduate students and researchers take their work to market”.

The review will also “consider and seek views on the suitability of adopting a patent box regime and other measures to promote the growth of intellectual property and maintain it in Canada” —an initiative recently backed by the C.D. Howe Institute.

“You can see a real shift towards the innovation side of the equation

and that was to be expected given the campaign documents.”

Paul Davidson, President, Universities Canada

“You can see a real shift towards the innovation side of the equation and that was to be expected given the campaign documents,” says Universities Canada president Paul Davidson. “Overall, we’ve been saying for over a decade, how do we get the private sector to invest in more R&D? If these measures will do that then we can help improve global standing. I will say that there’s still an urgent need to invest in discovery research and that’s where the message was missing yesterday.”

Read R$’s coverage of the 2021 federal budget: Science, technology and innovation are big winners in Liberal pre-election budget with investments across multiple sectors

Other initiatives announced to address technology adoption by the business community include:

• $750 million over six years in additional support for the Innovation Superclusters Initiative, re-branded as Canada’s Global Innovation Clusters. Reviews of the program to date have been mixed but the Budget deemed it worthy of continuing with the proviso that the five existing clusters must compete among themselves for the new funding. Priorities for the next phase of the program include expanding their national presence, and collaboration “to deepen their impact, including through joint missions aligned with key government priorities such as fighting climate change and addressing supply chain disruptions”.
• $35 million over four years starting in FY 22-23 for the two-year-old Coordinated Accessible National (CAN) Health Network. The program is pitched as a” Integrated Marketplace” of 27 hospitals, health authorities, and private clinics across Canada and is designed to break down barriers “to entry into the health care sector for Canadian companies” by identifying challenges and matching them with advanced, Canadian-made technology solutions.
• $38.3 million over four years, starting in FY23-24 ($12.7 million ongoing) for the Canada Excellence Research Chairs program—through the granting councils—for 12 to 25 new, internationally recruited experts  in the fields of science, technology, engineering, and mathematics.
• Countering security threats to research and Canadian IP received $159.6 million over five years ($33.4 million ongoing) starting FY22-23 in two areas: $125 million over five years for the Research Support Fund (indirect costs) “to build capacity within post-secondary institutions to identify, assess, and mitigate potential risks to research security” and $34.6 million over five years ($8.4 million ongoing) “to enhance Canada’s ability to protect our research, and to establish a Research Security Centre that will provide advice and guidance directly to research institutions”.

While these initiatives and other innovation-focused investments are welcome, observers have noted that there doesn’t appear to be an explicit plan or strategy informing the Budget’s funding choices. Paul Dufour, veteran S&T policymaker and senior fellow at the University of Ottawa’s Institute for Science, Society and Policy, describes the basket of research and innovation measures as a “dog’s breakfast” that doesn’t include Canada’s formidable research strengths and their role in tackling crises like the COVID-19 pandemic.

“You’d think that would have triggered some more investment (in discovery science) and also the outstanding recommendations from the Naylor report which are still out there,” says Dufour. “You really need to study each piece carefully, what’s been said, read the tea leaves and wait for the implementation. It’s very hard to describe any strategy around this. It’s a series of initiatives that don’t necessarily tie altogether. In my view we need to tie things together on the global front and on the domestic front.”

Dufour is also critical of the time-worn observation that the private sector needs to enhance its R&D efforts to counter Canada’s basement-dwelling status among G7 nations. While acknowledging the oft-cited statement from policy guru Peter Nicholson that Canada is only as innovative as it needs to be due to substantial spillover from U.S.-derived research and innovation, he notes that Nicholson, in his ground-breaking 2009 book, Innovation and Business Strategy: Why Canada Falls Short, argues that a national crisis offers an opportunity to mobilize innovation and its research underpinnings to enhance productivity.

“In Finland’s case, a national crisis was the “necessity” that gave birth to invention and galvanized the nation’s commitment to innovation as an economic strategy. Finland’s experience shows that a concerted strategy to focus resources on innovative activity and investments, and to nurture globally oriented national companies and sectors, can transform a national economy from laggard to leader in a remarkably short period of time.”

Innovation and Business Strategy: Why Canada Falls Short

“I thought we were in a crisis. You don’t get a sense of crisis (in the Budget), you don’t get a sense of urgency,” said Dufour. “Where does this stuff come from and where’s the sense that we are in an urgent world that’s interconnected? On the global front, there’s very little on our international partnerships for science, technology and innovation. We should be thinking about that and in the meantime those countries are investing. There was a big discussion about the two models—Israel and Finland—in the Budget about how they’re doing things. Well, we should be doing that.”

In her Budget speech, Freeland acknowledged Canada’s failing performance on economic productivity – a situation she describes as “insidious” and an obstacle to the government’s growth agenda.

A key element of the Budget’s measures to build a growth agenda is the new CIIA, apparently inspired by the work of Dan Breznitz, Clifford Clark Visiting Economist at the Department of Finance on leave from the University of Toronto’s Munk School of Global Affairs & Public Policy.

The Budget’s name-checking of the Finnish Funding Agency for Technology and Innovation Finland (TEKES) and the Israel Innovation Authority as initiatives to establish a “market-oriented innovation and investment agency” informed the government’s decision to create the CIIA with $1 billion over five years beginning in FY22-23. CIIA will undergo a period of consultation later in 2022 before it begins to “proactively work with new and established Canadian industries and businesses to help them make the investments they need to innovate, grow, create jobs, and be competitive in the changing global economy”.

For Breznitz, the urgent need for such a program is clear.

“For a country that wants to move into the green economy and not become poorer in it—energy and other stuff is our main exports—it's impossible to do as long as your business sector does not engage with it,” he says. “The gap between the capacity of our business sector to actually deal with new technologies and R&D and the quality of our cutting-edge research is so high that that is a serious systemic problem. Into that system—there's no vacuum when you have great ideas in a global economy—comes the multinationals. They grab all of our inventions and make them into innovations.”

The Budget’s announcement of the CIIA coincides with an abandonment of the idea of creating a program modelled on the US Defense Advanced Research Projects Agency (DARPA) which provides funding for the development of emerging technologies for use by the military. Breznitz defends the change in direction, arguing that Canada’s most pressing need isn’t so much cutting-edge research but the use of existing technologies by the business sector.

“(CIIA) it will be an experimental agency to try to find policies that work  … It can work very quickly because it’s independent and can decide to stop things that don’t work, which is important,” he says. “One effect that will definitely happen if this agency works well, is that SIF (Strategic Innovation Fund), Innovation Canada, and (NRC’s) IRAP (Industrial Research Assistance Program) are going to have, in four or five years, a lot more clients, and a lot more new clients.”

NRC and NRCAN share $144.4M for mineral value chains

The National Research Council will share $144.4 million over five years starting in FY22-23 with Natural Resources Canada to support R&D and “the deployment of technologies and materials” to bolster mineral value chains. The Budget also announced that – as part of the forthcoming CIIA – it will explore ways to better integrate the R&D activities of the NRC with business partners and academic partners to “further modernize the NRC to better invent, innovate, and prosper.”

In February, the government announced a $150-million investment to “retool and modernize” the NRC’s Canadian Photonics Fabrication Centre. The Budget augments this investment by providing $45 million over four years to ISED “to engage with stakeholders, conduct market analysis, and support projects that will strengthen Canada’s semiconductor industry”.

The NRC is once again under the leadership of Iain Stewart, following an arduous two-year stint as head of the Public Health Agency of Canada.

Modernizing and simplifying SR&ED

In additional to continuing its review of intellectual property regulations, the Budget announced a review of its bedrock support program for industrial R&D.

The Scientific Research and Experimental Development (SR&ED) tax incentive program will be examined in the coming months with a view to ensure its effectiveness and explore ways to “modernize and simplify it”.  The review will also examine whether SR&ED “can play a role in encouraging the development and retention of intellectual property stemming from R&D conducted in Canada” including “the suitability of adopting a patent box regime in order to meet these objective”.

Federal Budget 2022 – Research and Innovation Initiatives

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