Where SR&ED answers questions about the underlying principles of science and applied technology, innovation answers a broader set of questions about the interplay of technology and business.
The Innovation and Skills Plan
As most of us in the Canadian business community are aware, the 2017 Federal budget introduced Canada’s Innovation and Skills Plan, with the goal of “making Canada a world leader for innovation to create more good, well-paying jobs, and help strengthen and grow the middle class”. The plan aimed to achieve two key goals: make Canada home to the most skilled workforce in the world and ensure the country is competitive in the global innovation economy.
To support the above objectives, the budget outlined a number of key funding initiatives geared toward R&D and business innovation, most notably the $1.26 billion “Strategic Innovation Fund (SIF)” and the $950 million “Innovation Superclusters Initiative (ISI)”. Because of the sheer size of funding committed to these programs, a lot of businesses are very interested in applying for and accessing the funds, particularly the SIF.
However, as we noted in one of our posts on SIF, after initially announcing that it would only cover priority sectors, the SIF is actually open to any industry and to all business sectors of the Canadian economy (start-up, SMEs and large enterprises). Furthermore, the program has four incredibly broad streams with the key defining feature for eligibility being a project’s innovation benefits to Canada. Which brings us to the following key question:
What Does “Innovation” Mean?
By some accounts, the word “innovation” reached meaningless buzzword status as early as 2013. For the purposes of this article, we’re going to operate under the assumption that the Canadian government does know the true meaning of innovation, although I suppose there is no guarantee since no official definition for the term has been provided. Fortunately, the policy makers at the Organisation for Economic Co-operation and Development (OECD) have taken the time to comb through all of the eminent research that defines innovation from an economic standpoint. OECD put together Guidelines for Collecting and Interpreting Innovation Data (aka the Oslo Manual). The document contains a rich body of literature that offer insight on how innovation activities contribute to the economic goals set out in government plans.
This manual defines three types of innovation and makes it clear that its definitions only relate to significant changes made by a firm, whereby a substantial degree of novelty is introduced to the market. The three types are as follows:
- Technological product and process (TPP) innovation: involving appreciable improvements in capabilities of goods or services (for products) and production and delivery methods (for processes);
- Organizational innovation: involving significant changes to a firm’s organizational methods, which may happen either as a result of technological changes, or responses to those changes;
- Marketing innovation: involving significant changes to marketing practices, such as targeting new markets, repackaging products and non-technological changes to product design
The eligibility guidelines for the Strategic Innovation Fund indicate that they are interested in the innovation benefits as they pertain to a project’s “technological advancements”.
The Fund claims to offer funding toward projects with Technology Readiness Levels as high as 9, where the actual product or process has been proven successful and no further TPP innovation is likely. Here, one can assume that they must also be willing to consider the merits of organizational and marketing innovations, especially if they can be framed as enabling the commercialization of a TPP innovation that was previously achieved by the firm, but has not yet reached its full commercial potential.
This brings us to another interesting innovation concept: diffusion, or the spread of innovations. To have an economic impact, innovations must be taken from their first implementation anywhere in the world to other regions and countries. This process also involves more than just adopting the most leading-edge technologies; the firms that adopt them very often are also learning (essentially providing work-integrated learning opportunities for their team) and building on the knowledge of the original inventor.
In such cases, we can see again an innovation benefit to Canada to be gained through the adoption of the TPP innovations of others, by making a strong case for increasing the skillset of a firm’s workforce, or the competitiveness of its products and services on the global scale. Being an early adopter, or even the first firm in Canada to employ such an innovation would likely present a compelling case for eligibility.
What can we learn from the Innovation Superclusters Initiative?
The 9 shortlisted candidates for the Superclusters Initiative announced in October may offer some insight into where the Ministry of Innovation, Science and Economic Development Canada is leaning in its consideration of innovative projects and what sectors it prioritizing for funding. The group of shortlisted consortia, which included contributions from over 670 innovation partners, exhibit some commonalities:
- 7 include digital technology as a key driver of innovation through the development of data-driven solutions for increasing intelligence in particular industry verticals to which the cluster relates;
- 4 aim to offer solutions that will increase Canada’s global competitiveness in advanced manufacturing;
- 3 emphasize that their projects will contribute to increasing the proliferation of clean technology solutions and meeting Canada’s sustainability goals;
- 2 are entirely specialized in agri-food.
In essence, most of the priority sectors announced in the budget, for which the SIF was originally intended (advanced manufacturing, agri-food, clean technology/resources, digital industries) are well-represented here with the exception of health and medical. Although a vaguely defined Digital Technology led by Telus has been shortlisted, the remaining involve application of digital technologies to sector-specific problems in the identified priority sectors. This suggests that while policy makers won’t close the door on other ideas, ICT-centric innovation projects that provide clear benefits stand a better chance for funding approval.
Where Does SR&ED Fit in All This?
Amidst all the excitement about the new funds, it is easy to forget that annual budget for the Scientific Research & Experimental Development (SR&ED) tax credit program (projected at $2.9 billion for 2018) dwarfs in size the annual commitments for SIF and ISI combined. So, how does SR&ED play out in the government’s so-called “innovation agenda”?
SR&ED eligibility criteria are focused on technological product and process innovations only, while organizational and marketing innovations remain explicitly excluded. Some SR&ED-eligible activities can be considered innovative and some not (and vice versa), since SR&ED is only meant to result in the advancement of knowledge rather than an invention that can be commercialized. Where SR&ED answers questions about the underlying principles of science and applied technology, innovation answers a broader set of questions about the interplay of technology and business.
Nonetheless, many in industry believe that the CRA’s focus on the “scientific method” (as was defined in the landmark Northwest Hydraulics tax court ruling) and its narrow view of how a claim can be documented has greatly limited the scope of the program. This is particularly clear in supporting TPP innovation activities across the entire spectrum of industrial R&D.
It is well-established that innovation and R&D activity do not take the same form across all sectors. For example, in the service industry, which is process-oriented, R&D can take a more informal, incremental and commercially-integrated approach compared to similar R&D carried out for purveyors of goods.
Moreover, innovation in low- and medium-technology industries will have a significant impact on economic growth given their relative size in the economy. But they are highly incremental and focused on production efficiency and differentiation. No single systematic methodology can be prescribed to fit all innovation scenarios. As a result, there are concerns that SR&ED, in its current form, is not as effective as it could be when it comes to stimulating the kind of innovation Canada needs for its economy. The program is currently under review for efficacy and efficiency. One can hope for a better alignment of SR&ED’s intended impact with Canadian objectives in nurturing an innovative economy.
To SIF, or not to SIF?
If you are seriously considering to apply for the Strategic Innovation Fund, it would serve you well to think carefully about some of these definitions and principles. Give ample thought to how your project can be best positioned to demonstrate its ability for new innovations that offer significant improvements to your firm’s product/process capabilities. Also, demonstrate how your project contributes to greater adoption of the innovations of others throughout Canada, and how it can positively impact the skillset of our workforce and our global competitiveness.
Given the level of interest in this program and the fact that it is open to large multinational corporations with substantial budgets, the feds are likely to fund projects with greatest innovation potential. Further, well-established, high-growth businesses (growing at 20%-40 % yoy) with demonstrable, untapped market potential are prime candidates, which can be narrowed further based on prioritized sectors. However, there is a glimmer of hope for smaller businesses since the SIF eligibility guidelines refer to “potential market disruption”, whereby a smaller company overtakes incumbent enterprises in their industry by uniquely targeting and serving a neglected market segment. However, meeting the test for disruptive innovation may not be that easy.
If your firm and project don’t exhibit one or more of the above qualities, then it is probably worth hedging your bets on alternative funding, including accessing the SR&ED program. For example, the NRC’s Industrial Research Assistance Program (IRAP) is currently meeting with businesses about projects that start in 2018, focusing on funding technology innovation projects in the SME sector.
Andrea McPhail is Vice President of Operations at RDP Associates.