If governments want to spur innovation, they need to rethink policy

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Another government, another promise to spur innovation. Innovation Minister Navdeep Bains has innovated (irony alert!) in setting afoot a long period of consultation and hiring a tech executive to advise him. We are told to expect a new innovation policy in mid-2017.

Here is my contribution to the Minister's listening exercise. Let's start with a definition: innovation is human ingenuity successfully applied to solving concrete problems.

If that definition is right, what follows? First, the two key elements are 1) new ideas and 2) correct identification of problems to be solved. It would be nonsensical for government to have a policy that says, "There shall be new ideas"; you cannot create new ideas by fiat. They are the product of well-supported fertile minds grappling with real problems helped along by luck and serendipity.

The list is amazingly long of world-transforming innovations that were, quite simply, accidents, starting with penicillin, the telescope, aniline dyes and glass.

So government can not order that innovation occur, nor can they know who is most likely to have good ideas.

Nor, generally speaking, can government know enough about the concrete problems facing companies and individuals in the marketplace to be able to decide which ones are most important or soluble or how to attack them in the way most likely to help.

Governments are thus poorly positioned to pick innovation winners. So government policy shouldn't attempt to pick winners directly. What's left? Two chief things: supporting institutions where innovation may occur or rewarding innovation when it does occur – a policy of incentives. Which is best?

Every university or research institute president will tell you that his or her institution is an innovation machine. Ergo, more money for these institutions will produce more innovation.

Of course when governments start handing out money to institutions, the pressure on politicians to distribute it for political reasons becomes intense.

Attend any public meeting on innovation (and I've been to many) and much will be made of the need for innovation policy to be "regionally sensitive," not to favour large institutions at the expense of small ones, to support all or most of the disciplines, etc. And if an institution in one community gets a big R&D grant, the reaction from other communities is to begin a furious lobbying campaign to get their "fair share."

And of course such rent-seeking behaviour will work tirelessly to eliminate or water down any measures of actual success in producing innovation. Evidence of innovation-related activity will abound, but not evidence that innovation has actually been furthered. Of course there may be lots of evidence of political benefit, and that may be what really matters. Let's just recognize it's costly and inefficient.

So how about a policy where innovation, where it does occur, is suitably rewarded? After all, while governments cannot decree that "There shall be innovation," they can decree that if you have a good idea that is successful and you make money at it, you'll get to keep a good part of it.

That means that governments could and should focus their efforts in areas like: tax policy (if you innovate and make money, the government won't tax most of it away); strong intellectual property protection (so that you can protect your idea from imitators long enough to recoup your investment and make a profit); competition policy and free trade (because competitive pressure on companies is the single biggest force driving and rewarding innovation); and finally regulatory policy that doesn't just encourage competition, but allows ease of investment and changes of ownership (because new investors and owners will often bring with them innovative ideas). We do most of these things poorly compared to more innovative economies.

If you let people with ideas make money and reinvest it freely, that is the best innovation policy because it gives the biggest incentives to entrepreneurs to match new ideas with those who need them and those who have the capital to finance them. And unlike most government innovation policy, it isn't limited to fashionable sectors like high tech, but is neutral across all industries. Innovations like fracking, just-in-time inventory control and low-cost air carriers are every bit as important as IT and electronic gadgets.

Such a policy recognizes there are complex layers of players in a highly innovative economy, and the roles played by entrepreneurs and investors matter at least as much as those of researchers and institutional administrators.

Finally, such an approach will direct research effort to the search for real solutions to genuine problems faced by companies, rather than to areas that you can convince bureaucrats to fund. Bureaucrats spend other people's money. Entrepreneurs and companies risk their own money and reputations and have higher degrees of accountability for results.

Minister Bains would be well advised to remember: innovation in policy matters, too.

Brian Lee Crowley (@brianleecrowley) is the managing director of the Macdonald-Laurier Institute, an independent non-partisan public policy think tank in Ottawa: www.macdonaldlaurier.ca