Jeffrey Dale is president of Snowy Cloud Inc. and former president of the Ottawa Centre for Research and Innovation.
Not so long ago, Canada was known as an innovation nation. Many of our companies were global leaders. Our governments and businesses have invested billions in research and development to drive more innovation. Why have our leaders such as Nortel, BlackBerry and now Bombardier lost their once-global competitive advantage?
Until 2008, Nortel was the largest corporate investor in R&D in Canada, according to Research Infosource's annual reports. In 2000, Nortel was a global telecommunications leader and spent more than $5-billion on research in that year alone. But the company missed key shifts in the telecom market to optical and wireless products, leaving it playing catch-up despite the fact that it invested more in R&D than its competitors.
BlackBerry was Canada's largest investor in R&D from 2009 to 2011. But its focus on enterprise users caused it to miss the consumerization of the smartphone, on which Apple and then Android focused. BlackBerry's revenue has fallen from $19-billion in 2010 to less than $3-billion in 2015, and it's now struggling to reinvent itself and stay in business.
From 2012 to 2014, Bombardier was the largest R&D investor in Canada. Bombardier invented the regional jet market with the CRJ, an evolution of the Challenger business jet. In 2004, Bombardier's largest competitor, Embraer, revolutionized the regional jet approach when the company designed a new airplane, the E-Jet. Bombardier's CRJ sales plummeted.
It took Bombardier until 2009 to announce the C Series to compete with the E-Jet. The new plane is still not complete and Bombardier is still relying on the old CRJ for sales. The firm had a very poor fiscal 2014 and the president and CEO announced he was stepping down. The company has since unveiled plans to raise $600-million in new equity and $1.5-billion in new debt and asked both the Quebec and federal governments for billions in loans and grants.
Nortel, BlackBerry and Bombardier were once all true global leaders in innovation. However, they failed to recognize changes in the marketplace, and when they did, their level of innovation fell short of what the market expected.
Despite massive investment in research and innovation, why do so many of Canada's leading R&D companies miss major market changes? These companies and others have lost their ability to develop disruptive innovation and have focused too much on incremental improvements.
Research and development investment by governments is focused on peer-reviewed academic research that is not linked to any industrial strategy. More than 60 per cent of government R&D investment goes to health-related projects, while more than 70 per cent of all private-sector R&D budgets go to technology-related projects.
The Canadian situation is a complete mismatch of public- and private-sector research. The result is that Canada has a very low percentage of collaborative research projects.
Canadian businesses rely on internal research teams to drive innovation. The key incentive program for business R&D is research tax credits through the Scientific Research and Experimental Development program, which rewards science-focused research activities. Qualifying for the SR&ED program drives how our corporations invest in R&D.
SR&ED has been a great funding program for startups, and many will tell you they would not have survived without the program. However, in larger companies, SR&ED has mainly driven spending rather than innovation. Canadian companies overinvest in technology research and underinvest in market research: They're known for being great at technology, but terrible at taking the technology to market.
But changing our research-granting system and the SR&ED program is like trying to amend the Constitution. We know changes are needed, but no one wants to open that discussion because there are so many widely varying views and entrenched positions. But it must change if we want to improve our global competitiveness.
Canada needs to align government investments to national and provincial industrial strategies. Business will need to be more involved in these discussions and in setting the direction for government investments. We must continue to rely on our academic institutions to lead focused research initiatives – however, governments need to mandate that academics collaborate with businesses for new research grants.
The SR&ED program, which was implemented in its current form in 1986, has undergone dozens of incremental changes but remains largely the same. It provides very different benefits to companies at each of their stages of growth. For startups, it is a source of funding; for growing companies, it helps offset investment costs; and for mature companies, it influences how expenses are categorized and accounted for.
While the SR&ED program is still very important to Canadian businesses, it is no longer the principal driver for globally competitive research.
The program needs to be broken down into different components to achieve different results: first, a non-refundable grant program for startups to offset a portion of their initial development costs; second, a program offsetting tax and other levies for research initiatives linked to new product or service developments; and third, a generous corporate granting program that supports our industrial strategy and requires an academic and corporate partnership for the development of disruptive innovation.
The success or failure of any changes to our research framework will require a well-managed transition from the current structure to a new structure without a major negative impact to both our academic and corporate sectors.
Our national goal should be to provide Canadian businesses with every advantage possible to make them global innovation leaders. Right now, our R&D programs are failing.