We don’t need another growth fund to address innovation and productivity

As published in the Financial Post

Last week’s federal budget could be seen as a pivotal one, at least directionally for the emphasis it put on economic growth. “Now is the time to focus — with smart investments and a clarity of purpose — on growing the economy,” it boldly pronounced in the foreword. To the surprise of many, the words “productivity” and “innovation” even made their way into the budget plan several times. The first step to solve any problem is acknowledging one exists and, as such, the government deserves ample credit.

Where it disappointed was on the two flagship measures proclaimed as solutions to the problem: a $15-billion growth fund and a yet-to-be defined Innovation and Investment Agency that will provide “advice.” The issue with these instruments and structures is they already exist in various forms — or have been tried before — and for the most part, their track records on boosting innovation and productivity are very questionable.

How will these two flagship initiatives be different from the Strategic Innovation Fund and the Net-Zero Accelerator Fund that were presented in previous budgets as growth funds? And how will they accomplish anything different from the multiple layers of existing programs and funding at the National Research Council, the Canadian Infrastructure Bank, the Business Development Bank of Canada, Export Development Canada, Sustainable Development Technology Canada, the Venture Capital Catalyst Initiative, etc? Crowding out is an outdated — and wrong — way to think about industrial policy.

No matter what financial instrument is deployed, public “investments” won’t produce better outcomes if we don’t change the way we think, incentivize, and produce innovation. Being content with incremental innovation and technological adoption means Canada is leaving a considerable amount of economic wealth on the table to other countries.

Innovation economics is about amassing and leveraging intellectual capital into commercial assets. To only “adopt technology” means we will always be rentiers. This idea that Canada is great at invention but only needs reinforcement at the commercialization phase is false and misguided. Just look at our record on patents creation over the last decade. Take artificial intelligence as an example: how can we be so good at R&D and so ordinary at reaping the commercial benefits at scale at a time when venture capital (VC) investing in Canada has reached historic levels? How will a new growth fund solve this?

Science and technology form the modern frontier of competitiveness and we need a capacity to better compete for new ideas and technologies. But Canada has an organizational structure for science that has not adapted to the 21st century. Our capacity to do industrial research at scale is almost nonexistent and our technology transfer mechanisms have not kept pace with developments in the creation of knowledge. There is still an overreliance on incremental innovation or safe bets. Ask yourself where we would be without mRNA vaccines or how we will reduce emissions to reach our climate targets.

The government must therefore augment its current scientific and technology strategy to build greater capacity to pursue radical innovation or game-changing technologies. A pipeline of such breakthrough ideas and technologies is a crucial ingredient of generating valuable intellectual property within the country.

One of the reasons Americans became dominant in the space and defence sectors was because they organized their science and technology infrastructure to connect and optimize their public R&D with private firms. The success of the Advanced Research Projects Agency (ARPA) model isn’t a function of capital formation, but rather a deliberate and intentional system design and method for a successful and modern application of science and technology through industrial policy. When it comes to innovation in Canada, we can aim to be more than just takers: we can be makers, too.

To improve our business investment performance, scaling Canadian firms will be paramount. This can happen with better demand side levers such as using public procurement to create market demand and grow small and medium businesses. Public-private institutions such as NASA would have been much less successful if the U.S. government had not used procurement to nurture its promising technologies and advanced industries.

By focusing on innovation, intellectual property and R&D, last week’s federal budget marked an important and welcome change on policy focus. There is a lot of work ahead to achieve Canada’s full economic potential. To start, let’s identify where the challenges lie and not do more of the same. If we want to innovate and keep up with our global competitors, we need to get away from safe bets, firms’ subsidies, and more inefficient government structures.