Mary SciannaClick image to enlargeby Mary Scianna

 

By the time you read this, we will have elected a federal government. And the likelihood is that whichever party is in power, R&D subsidies will continue to play a role in supporting business innovation.

Many are familiar with the Scientific Research and Experimental Development (SR&ED) tax incentive program and the Industrial Research Assistance Program (IRAP). Through these programs, manufacturers and other businesses receive support through subsidized research and development initiatives aimed at developing and commercializing innovative technologies.

Companies of all sizes can reap the benefits of the subsidies, but one economist is suggesting that R&D performed by smaller firms should be subsidized less than R&D
by larger firms.

John Lester, a senior research associate at the Centre for the Study of Living Standards and a former federal government economist, makes this suggestion in an August 7, 2019 Globe and Mail article, commenting on the federal government’s innovation policy report.

One of the benefits of government R&D subsidies is the “spillover” effect – “some of the knowledge created while performing R&D inevitably leaks out or spills over to other firms, which allows them to reduce production costs or to improve their products and services.”

Lester goes on to say that the centre’s research finds that small companies generate fewer spillovers than larger firms, but that this is not the only consideration for deciding how much to subsidize R&D performed by small companies. 

“…subsidizing R&D performed by small companies at a high rate is contributing to the problems of commercializing inventions and scaling up companies identified in the innovation report,” says Lester.

He suggests that governments should adopt a common federal-provincial SR&ED subsidy rate to rebalance subsidies for both small and larger firms.

Lester is not the first to suggest rebalancing subsidies to support and generate more innovation, but is it the right approach? Would this approach punish smaller firms developing interesting technologies with less support from government subsidies? And is it a fair assesssment to compare "spillover" effects from larger businesses to smaller ones given that larger business entities, by their size alone, would naturally have a wider sphere of influence in this area?

Innovation is an essential component of a successful knowledge-based economy and governments have an important role to play in helping to create more competitive businesses in Canada. I'm not convinced that Lester's approach is the right one. What do you think? Let us know and we'll publish your comments in the next issue of this magazine. SMT

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