Ottawa’s innovation policy muddle just got worse

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Before last week’s federal budget, a political consensus appeared to have emerged about which foreign model Canada needed to embrace to improve the country’s anemic innovation record.

During the 2021 election campaign, the Liberals and Conservatives both promised to create a Canadian version of the U.S. Defense Advanced Research Projects Agency, or DARPA, with a mandate to leverage public-private investments aimed at commercializing new technologies. The Liberals vowed to endow the new agency – dubbed CARPA – with $2-billion in seed capital.

Ottawa unveils $3-billion in new spending on innovation to address Canada’s chronic weaknesses in productivity, R&D, investment

If settling on an innovation model is half the bargain, it seemed as if Ottawa was finally taking this country’s poor innovation performance seriously, rather than simply paying lip service to it.

Alas, it was not to be. Innovation-policy thinking in Ottawa appears to be as muddled as ever.

In last week’s budget, Prime Minister Justin Trudeau’s government scrapped the DARPA model in favour of creating a new Canadian innovation and investment agency fashioned after the Israel Innovation Authority and Finland’s TEKES, which it credits with helping those countries out-innovate their peers. Finance Minister Chrystia Freeland announced $1-billion over five years to create the “operationally independent” agency, with the details to come in a fall economic update.

“A market-oriented innovation and investment agency – one with private-sector leadership and expertise – has helped countries like Finland and Israel transform themselves into global innovation leaders,” the budget said. “The Israel Innovation Authority has spurred the growth of R&D-intensive sectors, like the information and communications technology and autonomous vehicle sectors. The Finnish TEKES helped transform low-technology sectors like forestry and mining into high-technology, prosperous, and globally competitive industries.”

A senior government official who briefed reporters on the budget said that DARPA’s embeddedness in the U.S. Defense Department makes it an unsuitable model for Canada. The official added that DARPA’s focus on moon shot ideas also made it an inappropriate template, saying Canada needs an organization that is much closer to the market. (The Globe and Mail is not naming the official because the government wouldn’t allow the individual to be publicly identified, even though they were made available to media during the budget lock-up.)

Suddenly, what the Liberals had touted as a brilliant idea during the campaign is now discredited by those same Liberals as a misguided approach to solving Canada’s innovation conundrum. What are the chances they have thought through their latest bright idea any more than the last one?

While the Finnish and Israeli models have their strengths, it is not clear either approach is replicable in Canada. Finland and Israel are small countries, of 5.5 million and nine million people, respectively, each with an uncommon emphasis on innovation that informs almost all aspects of government policy. Each has a history of pursuing national strategies with laser-like focus. That does not sound like Canada.

What’s more, the Finnish innovation model experienced serious setbacks after the 2008 global financial crisis and the country has consistently failed to meet its official target of spending 4 per cent of gross domestic product on research and development. The ratio stood at around 2.8 per cent of GDP in 2019, down from 3.2 per cent in 2000.

By comparison, Canada spent only 1.6 per cent of GDP on research in 2019, down from 2 per cent of GDP in 2000, and well below the OECD average of 2.7 per cent.

“Official 4-per-cent targets have proved challenging to meet because of the realities of the political, economic and social operating environments since the early 2010s,” a 2021 Organization for Economic Co-operation and Development working paper on Finland notes. “By the end of the 2000s, the leading Finnish industrial sectors of information and communication technologies (ICT) and forestry started to lose their position in global markets and value chains.”

The stagnating R&D performance led the Finnish government, in 2018, to merge TEKES, which funds academic and business innovation, with the Finnish Foreign Trade Association to create Business Finland. The new agency provides seamless support for businesses through all phases of development, from innovation to internationalization. Based on that detail alone, Ottawa’s reference to TEKES as a stand-alone funding agency is several years out of date.

Israel is a case unto itself. It leads its OECD peers by far, dedicating more than 5.1 per cent of GDP to R&D in 2019, up from 3.9 per cent in 2000. (The ratio rose to 5.4 per cent in 2020, but in part because the economy shrunk during the pandemic while research spending held steady.)

The Israel Innovation Authority has been around in some form for almost six decades and has repeatedly fine-tuned its funding programs to leverage private investments. One such program compensates institutional investors for up to 40 per cent of their losses on investments in high-tech firms after seven years.

On paper at least, the IIA’s incubator program resembles Canada’s superclusters strategy, creating ecosystems that bring together established firms and startups to collaborate on developing new technologies in future-oriented sectors. But the dynamism of Israel’s tech sector also speaks to the country’s culture of innovation.

“We are among the most educated countries in the world. Our scientists win Nobel prizes, and our cities are outshining Silicon Valley in creating high-paying technology jobs,” Ms. Freeland said in her budget speech. “But we are falling behind when it comes to economic productivity. … This is a well-known Canadian problem – and an insidious one. It is time for Canada to tackle it.”

Forgive us for wondering whether Ottawa’s latest idea will allow us to do that.

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