investment and innovation - canda

8/8/2019 Investment and Innovation - Canda

1/46

Invest to Grow:

Technology, Innovation andCanadas Productivity Challenge

October 2010

Leadership makes the difference

Roadmap to Recovery


2/46

InvesttoGrow:Technology,Innovation,andCanadasProductivityChallenge

October2010CanadianManufacturers&Exporters

ReportAuthor:JaysonMyers,President&CEO

[email protected]

CanadianManufacturers&Exporters(CME)isCanadasleadingtradeandindustry

associationandthevoiceofmanufacturingandglobalbusinessinCanada.

Wefocusontheissuesthataremostcriticaltoourmembers-manufacturing

competitiveness,USbusinessopportunities,internationalmarkets,peopleandskills,energy

andtheenvironment.Theirchallengesareourpriorities.Weoffersolutionsforourmembers

throughourleadershipin:

CMEAdvocacy

CMEIntelligence

CMEBusinessOpportunities

CMEBestPractices

CMENetworking

Since1871,wehavemadeadifferenceforCanadasmanufacturingandexporting

communities.Fightingfortheirfuture.Savingthemmoney.Helpingthemgrow.

Theassociationrepresentsmorethan10,000leadingcompaniesnationwide.Morethan85%

ofCMEsmembersaresmallandmedium-sizedenterprises.AsCanadasleadingbusiness

network,CME,throughvariousinitiativesincludingtheestablishmentoftheCanadian

ManufacturingCoalition,touchesmorethan100,000companiesfromcoasttocoast,engaged

inmanufacturing,globalbusinessandservice-relatedindustries.

CMEsmembershipnetworkaccountsforanestimated82%oftotalmanufacturing

productionand90%ofCanadasexports.


3/46

1

Contents

ExecutiveSummary ......................................................................................................................................2

KeyObservations..........................................................................................................................................4

Innovation,Productivity,&Prosperity .........................................................................................................5

InvestinginProductiveAssets......................................................................................................................7

i.InvestinginKnowledge..........................................................................................................................7

ii.InvestinginTechnology ........................................................................................................................9

iii.InvestinginPeople.............................................................................................................................11

CanadaLagsBehindinProductivity,Innovation,andInvestment .............................................................12

WhatHoldsCanadaBack?..........................................................................................................................19

TheInnovationImperative .........................................................................................................................24

CanadasInvestmentChallenge .................................................................................................................26

ImplicationsforFiscalPolicy.......................................................................................................................33

TaxPolicyRecommendations.....................................................................................................................36

OtherPolicyRecommendations .................................................................................................................39


4/46

2

InvesttoGrow:Technology,Innovation,andCanadasProductivity

Challenge

ExecutiveSummary

Innovationisthemostimportantdeterminantofbusinesscompetitiveness,productivitygrowth,andeconomicprosperityinaworldofglobalmarketsandrapidtechnological

change.Byprovidingnewandimprovedsolutionsinhealthcare,personalsecurity,andthe

qualityofourenvironment,innovationalsoimprovesthequalityoflifeofeveryCanadian.

TheproblemisthatCanadalagsbehindtheUnitedStatesandothercountrieswithrespecttobothinnovationandproductivitygrowth.

Innovationisultimatelyabusinessinvestmentdecision.

Innovationisdrivenbyinvestmentsinproductiveassetsinknowledge(R&D),technology(newmachineryandequipment),andworkforceskills(workplacetraining).

Forbusinesses,theseinvestmentsareinturndrivenbyafter-taxcashflowperformance.

(After-taxcashflowistheamountofmoneycompanieshaveavailabletoinvestafter

businesscostsandtaxesarepaid.Itiscalculatedasthesumofafter-taxprofitspluscapital

consumptionallowances.)InmanufacturingandothersectorsofCanadianbusiness,there

isacloserelationshipbetweenafter-taxcashflowononehandandresearchand

developmentspendingandinvestmentsinnewmachineryandequipmentontheother.

Governmentpoliciesaimingtoencouragebusinessinvestmentininnovationshould:

1. EncourageinvestmentinproductiveassetsinR&D,machineryandequipmentusedinproducinggoodsandservicesofgreatervalue,andworkplacetraining;

2. Increasethecashthatbusinesseshaveavailabletoinvestbyleavingmoremoneyinthehandsofthosecompaniesmakingtheinvestments;

3. Raisetherateofreturnonproductiveassets,therebymakinginvestmentsinR&D,technology,andworkforceskillsmoreattractiveforbusinessesthanotherwaysof


5/46

3

allocatingcash(suchasinvestingoutsideCanada,acquiringexistingassets,paying

dividends,orincreasingsavings);and,

4. Assurebusinessesthatpolicymeasureswillremaininplaceduringthecourseoftheirinvestmentcycleandprovidegreatercertaintyandconsistencywithrespecttothe

applicationofrulesandeligibilityrequirements.

Refundabletaxcreditsincreasecashflowaswellasratesofreturnoninvestmentandarelikelytohavethegreatestpositiveimpactonbusinessinvestmentdecisions.Accelerated

capitalcostallowanceshavethesecondlargestimpactoninvestmentdecisions.Reductions

indirecttaxrates,aswellasinindirecttaxespaidbybusiness,alsohavepositivebutmore

mutedimpactsoninvestment.

TaxreformsundertakeninCanadabetween2006and2009,areestimatedtohaveledtoa14%increaseinmanufacturinginvestmentinnewmachineryandequipmentoverlevelsof

investmentthatmighthavebeenexpectedifthetaxchangeshadnotbeenmade.

CanadianManufacturers&Exportersmakesthefollowingtaxpolicyrecommendationstoencouragemorebusinessinvestmentinthoseproductiveassetsnecessarytoimprove

Canadasinnovationandproductivityperformance:

1. Extendthetwo-yearwriteoffforinvestmentsinmanufacturingandprocessingtechnologiestoatleasttheendof2016,andconsidermakingthisacceleratedcapital

costallowancepermanent;

2. MakeCanadasScientificResearchandExperimentalDevelopment(SR&ED)taxcreditrefundableandimprovetheadministrationofthetaxcredit;

3. IntroducearefundabletaxcreditforworkplacetraininginordertooffsettheimpactofrisingEmploymentInsurancepremiums;

4. Introducearefundabletaxcreditforinvestmentsrequiredforregulatorycompliancepurposes;

5. Followthroughoncommitmentstoreducethefederalcorporateincometaxrateto15%andaveragecombinedfederalandprovincialtaxratesto25%by2012;and,

6. FollowthroughoncommitmentstoharmonizeprovincialsalestaxeswiththeGST.

Taxmeasurestoencouragebusinessinvestmentandinnovationneedtobesupportedbyotherpolicyinitiativesaswell,inorderto:

HelpCanadianbusinessesfindnewcustomersandidentifynewopportunitiestoparticipateintechnologydevelopmentinitiativesinCanadaandaroundtheworld;


6/46

4

Supportthedevelopment,commercialization,andadoptionofnewandimprovedproductsandprocessesbyCanadianindustry;

StrengthentechnologytransfertoCanadianbusiness; Maintainaninnovativeworkforce;

Improvetheavailabilityoffinancingforinnovationandbusinessgrowth;and, Ensureabusinessenvironmentthatpromotesinnovation.

Aboveall,Canadarequiresanationallycoordinatedinnovationstrategythatmoreeffectivelyalignspublicpoliciesandprogramstowhatbusinessesneedtocompeteandwin

intheglobaleconomyofthe21st

century.

KeyObservations

Manufacturersaccountfor56%ofallR&DinvestmentsbyCanadianbusiness.

ForeverydollarCanadianmanufacturersspendonresearchanddevelopment,theyinvest

$32indesign,engineering,scale-up,production,andmarketingofthenewandimproved

goodsandservicestheybringtomarket.

CapitalturnoverandinvestmentsinnewmachineryandequipmentenabledCanadian

manufacturerstocuttheirgreenhousegasemissionsbymorethan6%since1990.

TechnologyinvestmentsbyCanadianmanufacturershavefallen37%overthepastten

years.

BusinessesbaseR&Dspendingdecisionsontheirpreviousyearscashflowperformance.

After-taxcashflowdrivesbusinessinvestmentactivity.Investmentsinnewmachineryand

equipmentfollowcloselybehindchangesinafter-taxcashflowperformance.

Canadianbusinessesinvestroughlythesameproportionofafter-taxcashflowin

machineryandequipmentovertime.

Contrarytoconventionalwisdom,Canadiancompaniesinvestedproportionatelymoreof

theiravailablecashinnewmachineryandequipmentwhentheCanadiandollarwas

depreciatinginvalueagainstitsU.S.counterpartduringthelatterhalfofthe1990s.

Taxmeasuresadoptedbyfederalandprovincialgovernmentssince2006haveencouraged

Canadianmanufacturerstoallocatemorecashtotechnologyinvestments.


7/46


8/46

6

Corporateconsolidationandtherestructuringofsupplychainsinresponsetoshiftingpatternsofindustrialproductionandtradearoundtheworld.

Rapidtechnologicaladvanceandtheemergenceofnewtransformativetechnologies,particularlyinthefieldsofinformationandcommunications,lifesciences,andadvancedmaterials.

Elevatedlevelsofgovernmentdebtasaresultofstimulusspendingtooffsettheimpactsoffinancialdeflationandrecession.

Anagingpopulation.By2012moreCanadianswillbeleavingemploymentthanenteringtheworkforce.Anolderpopulationwillincreasedemandforhealthcareandsocialservices

andplacefurtherstrainsongovernmentfinances.Moreseniorswilldependonpersonal

savings,pensions,orpublicincomesupportprogramsatatimewhenfewerpeoplewillbe

employedandinvestingineitherpropertyorfinancialassets.Anagingpopulation

threatenstobringwithitshortagesofcapitalandskilledlabour.Itwillshifttheonustothe

fewerpeopleintheworkforcetoboostproductivityandcreatetheincomerequiredto

sustaintheneedsofanoldergeneration.

Energyconstraintsandenvironmentalpriorities.HowwerespondtoclimatechangeandotherenvironmentalchallengeswillfundamentallyreshapeeconomicactivityinCanada

andaroundtheworld.Energyandresourcesareconsumed,andwasteisgenerated,in

everythingthathumansdo.Ifwearetomaintaineconomicgrowthandimproveliving

standardsindevelopedanddevelopingcountriesalike,thentheonlywaytoreduceour

environmentalfootprintistoacceleratetechnologicalprogress.Innovationwillbecrucialin

developingandadoptingthetechnologicalsolutionsweneedtoincreaseenergyefficiency,

replaceindustrialprocesses,reduceharmfulenvironmentalimpacts,andtransitionto

alternativeenergyorlesscarbonintensiveproductsandfuels.

Manufacturingwillplayacriticalroleinimprovingproductivityandbringingtomarketthe

technologicalsolutionsrequiredtorespondtostructuralchange,sustaineconomicgrowth,and

createhighqualityjobs.ManufacturingisCanadaslargestsinglebusinesssector,directly

employing1.8millionCanadians.Overthepastdecade,manufacturershaveaccountedfor

two-thirdsofCanadasgoodsandservicesexports,56%ofbusinesssectorresearchand

development,and80percentofallnewpatentscommercializedinCanada.Inaddition,every

dollarofmanufacturingoutputcreatesmorethanthreedollarsintotaleconomicactivity,

leveragingsales,innovation,andinvestmentsinprimaryindustries,utilities,construction,and

businessservicesincludingresearch,design,engineering,softwareandtechnicalservices,


9/46

7

transportation,warehousing,distribution,informationandcommunicationservices,aswellas

administrative,businessmanagement,andfinancialservices.

Morethaneverbefore,businessinnovationisastrategicimperative.Tostayinthegame,

companiesinmanufacturingaswellasinotherbusinesssectorsmustdifferentiatethemselvesthroughinnovationnewproductsandservices,newwaysofworking,newwaysofgoingto

marketinordertocompeteandwinintheglobaleconomy.

InvestinginProductiveAssets

Canadasplaceinacompetitiveworldourabilitytosustainandincreasetheeconomic

prosperityandthestandardoflivingofallCanadiansdependsonourabilitytoaddvaluein

theeconomicactivities,thebusinesses,thejobs,inwhichweareengaged.Today,our

customersandourcompetitorsarelocatedaroundtheworld.Thecompetitionforinvestment,marketshare,knowledge,technology,andskilledworkersisintense.But,Canadianshave

remarkableassetsworkinginourfavourtherichnessofournaturalresources,ahighly

educatedandhighlyskilledworkforce,ourknowledgebase,aflexibleandhighlyresponsive

industrialsector,aswellasourwelldevelopedlogistics,energy,services,andknowledge

infrastructure.Ourfutureeconomicprosperityrestsonourabilitytogrowthoseassetsandto

creategreatervaluefromthem.Thatdepends,inturn,onaninvestmentstrategyfocusedon

productiveassets:

1. Investinginknowledgeintheresearch,development,application,andcommercializationofnewproductsandprocesses;

2. Investinginproductivetechnologiestechnologiesthatproducethingsofgreatervalue;and,

3. Investinginpeoplespecificallyintheskillsandcapabilitiesofaproductiveworkforce.

i.InvestinginKnowledge

Animportantindicatorofacountrysinnovationperformanceisthetotalamountofmoney

spentonresearchanddevelopmentrelativetothesizeofitseconomy(GDP).Thisisameasure

oftheintensityofR&Dactivity.In2009,R&DexpendituresinCanadaareestimatedtohave

beenjustover$29.8billionor1.95%ofGDP.4R&Dspendingaccountedforthesameshareof

CanadasGDPin2006.And,thatis18%higherthanR&Dintensityin1996.

4StatisticsCanada,GrossDomesticExpendituresonResearchandDevelopmentinCanada(GERD),andthe

Provinces,2009.


10/46

8

Businessesaccountedfor54%ofCanadastotalspendinginresearchanddevelopmentin2009.

Companiesinvestedanestimated$16.1billion(or1.1%ofCanadasGDP)oninternalresearch

anddevelopmentactivities,andmanufacturersinvested$8.4billion,about52%oftotal

businessinvestmentinR&D.In2009,Canadianfirmsspent$1.3billiononR&Drelated

equipmentand$14.9billionincurrentR&Dexpensessuchassalaries,materials,andservices.5

5Ibid.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1994 1995 1996 1997 1998 1999 2000 2001 2002 20032004 2005 2006 2007 2008 2009

PercentofGDP

BusinessExpendituresonResearchandDevelopmentinCanada

Manufacturing OtherBusinessSectors

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

PercentofGDP

BusinessExpendituresonResearchandDevelopmentinCanada

ExpendituresonMachineryandEquipment CurrentSpendingonPersonnel,Goods&Services


11/46

9

Over6%ofallR&DfinancedbyCanadianbusinessisperformedbytheacademicsector.

Canadiancompaniesinvestabout0.07%ofGDPannuallyinuniversityresearch,oneofthe

highestlevelsofbusinessfinancingforacademicresearchintheworld.6

ii.InvestinginTechnology

Technologyinvestmentisanotherimportantdriverofproductivitygrowthandinnovation

performanceinprivateandpublicsectorsalike.Forbusinesses,investmentinnewmachinery

andequipmentprovidesthetoolsthatenhancethecapacityandcapabilitiesoftheirworkforce

andimprovetheirhealth,safety,andenvironmentalperformance.

Newtechnologiesareemployeddirectlyinresearchanddevelopmentactivitiesaswell.

Investmentinnewmachineryandequipmentaccountedfor7.5%oftotalR&Dspendingby

Canadianbusinessbetween2000and2009.

Technologyinvestmentshelptospurinnovationbecause,astheCouncilofCanadianAcademies

notes,innovationencompassesnotonlythedirectinnovativeactivitiesinitiatedwithina

businessbutalsothecapitalinvestmentandknowledgeacquisitionbywhichthebusiness

capturesandemploysinnovationthatisgeneratedelsewhere...Machineryandequipmentis

theembodimentofR&D,andisacriticallinkinthechainofeconomicvaluecreation,whether

itisperformeddirectlybyabusinessfirmoracquiredindirectly.7

Investmentsinnewmachineryandequipmentofferopportunitiesforbusinessestodevelop

newandimprovedproductsandservices.Theydemandnewskillsandknowledgeonthepart

oftheworkforceinordertooperatethemeffectively.And,theyoftenrequirenewoperating

procedures,businessprocesses,andnewmethodsofbusinessorganizationtooptimizetheir

use.

Informationandcommunicationtechnologies(ICT)accountforapproximatelyone-thirdoftotal

investmentsinmachineryandequipmentmadebyCanadianbusiness.But,ICTisalso

embodiedinotherproductandprocesstechnologiesdeployedacrossallsectorsofindustry.

Studieshaveshowntheimportantcontributionthatinvestmentsininformationand

communicationtechnologieshavemadetoboostingproductivityandinnovationperformance,

particularlyinmorelabour-intensiveservicessectors.8

6OECD,GrossDomesticExpenditureonR&DbySectorofPerformanceandSourceofFunds,2008/10.

7CCA,InnovationandBusinessStrategy,pp.5,7.

8SeeinparticularA.Sharpe,WhatExplainstheCanada-U.S.ICTInvestmentIntensityGap?,CentrefortheStudyof

LivingStandards,2005.


12/46

10

Investmentinnewtechnologiesisanespeciallyimportantsourceofinnovationactivityfor

Canadasmanufacturingsector.Over55%ofCanadianmanufacturersintroducingadvanced

technologiestothemarketaretechnologypurchasers,while42%ofmanufacturingfirms

modifythetechnologytheypurchaseordevelopitfurtherthemselves.AsCanadasScience,TechnologyandInnovationCouncilpointsout,thereisaconsiderableamountofuser-driven

innovationthattakesplaceinCanadianindustry.9

Technologyinvestmentsarealsoneededtocommercializenewproducts.Foreverydollar

Canadianmanufacturersspentonresearchanddevelopmentbetween2000and2009,they

invested$32incommercializationactivitiesincludingthedesign,engineering,scale-up,

production,andmarketingofthenewandimprovedgoodsandservicestheybroughtto

market.10

Thereareotherbenefitstobederivedfrombusinessinvestmentinnewmachineryand

equipment,andinnewfacilitiestoo.AnimportantexampleistheprogressmadebyCanadian

9StatisticsCanada,Follow-uptotheSurveyofAdvancedTechnology,2007;STIC,StateoftheNation2008,p.22.

10CanadianManufacturers&Exporters,ManagementIssuesSurvey2008-2009;StatisticsCanada,GrossDomestic

ExpendituresonResearchandDevelopmentinCanada(GERD),andtheProvinces,2009.

9%

21%

26%

16%

13%

8%

5%

2%

15%

18%20%

21%

12%

7%

4% 4%

21%22%

17%18%

10%

6%

3% 3%

31%

25%

19%

10%

8%

3% 2% 2%

0%

5%

10%

15%

20%

25%

30%

35%

NONE UPTO1% 1%TO3% 3%TO5% 5%TO10% 10%TO15% 15%TO20% OVER20%

PercentofCo

mpanies

PercentofSalesSpentbyManufacturersonInnovaon

RESEARCH&EXPERIMENTALDEVELOPMENT

PRODUCT&PROCESSDESIGN

ENGINEERING,PROTOTYPING,TESTING

PROCESSRE-ENGINEERING&SCALE-UP


13/46

11

manufacturersinreducinggreenhousegas(GHG)emissionsbetween1990and2007.Overthat

periodoftime,manufacturerscuttheirGHGemissionsby6.5%(exceedingCanadas6%Kyoto

Protocoltarget),evenaslevelsofoutputexpandedbycloseto50%.Halfofthereductionin

emissionsintensity(emissionsperunitofoutput)thatwasrequiredtoreduceemissionslevels

camefromimprovementsinenergyefficiency,another30%fromthereplacementofindustrialprocesses,and20%fromswitchingtolesscarbon-intensivefuels.Alloftheseprocess

improvementsrequiredcapitalturnoverandinvestmentsinnewmachineryandequipment.

Thereisastronganddemonstrablerelationshipbetweenmanufacturersinvestmentsinnew

machineryandequipmentandprogressinreducingcarbonintensityandultimatelylowering

GHGemissions.Onaverage,everybilliondollarsthatCanadianmanufacturersinvestedinnew

technologyandstructuresbetween1990and2007resultedina0.2%annualreductioninGHG

emissionintensity.11

iii.InvestinginPeople

Whileinvestmentsinresearchanddevelopmentandnewmachineryandequipmentare

essentialforstrengtheningproductivity,innovation,andenvironmentalperformance,theyare

notsufficientinthemselvestoguaranteesuccess.Theymustalsobeaccompaniedbystrategic

11

EnvironmentCanada,CanadasGreenhouseGasInventory,2010;StatisticsCanada,NationalIncomeand

ExpenditureAccounts,2010.

-25

-20

-15

-10

-5

0

5

10

15

20

25

AnnualPercentChange

CapitalInvestment&GHGEmissionIntensityinCanadianManufacturing

EmissionIntensity CapitalInvestment


14/46

12

leadership,workforcetrainingandsignificantchangesinbusinessorganization,market

development,andworkpractices.12

Therearethreeinter-relatedissuesthathelpdeterminetheinnovativecapacityofacountrys

workforce.First,whatarethecompetenciesofthelabourforce?Second,dobusinessesandotherorganizationshaveaccesstopersonnelwiththeskills,expertise,andexperiencethey

requirenowandinthefuture?Andthird,dobusinessesandotherorganizationshavethe

leadership,managerialexpertise,andworkforcecapabilitiestheyneedtoachievenewand

changingoperationalobjectives?Allthreeissuesunderlinetheimportanceofinvestmentsin

education,skillstraining,improvedworkpractices,andworkforcedevelopment.Unfortunately,

therearenostatisticsinCanadathattrackthisimportantareaofinvestmentactivityona

regularbasis.

CanadaLagsBehindinProductivity,Innovation,andInvestment

TheproblemisthatCanadalagssignificantlybehindmanyothercountriesincludingour

largesttradingpartner,theUnitedStateswhenitcomestoproductivitygrowth,innovation

performance,andinvestment.Ourrecordinthisregardiswelldocumentedinrecent

analyses.13

LabourproductivityinCanadasbusinesssectorfellfrom93%oftheU.S.levelin1984to76%in

2007,justpriortotherecession.Between1985and2006,Canadaranked15thoutof18OECD

countriesintermsoflabourproductivitygrowth.Astheexpertstudiespointout,Canadaslaggingproductivityrecordisduelargelytoweakinnovationperformance,particularlyonthe

partofbusiness.

Canadalagsbehindmanyothercountrieswhenitcomestoinvestmentsinresearchand

development.WithtotalR&Dexpendituresat1.95%ofGDP,Canadaperformsjustslightly

betterthantheOECDaverage,butwestillrank12th

outof29economiesintheOECDdatabase

onthismeasureofR&Dintensity.WetrailbehindtheG7averageof2.2%andwefallwellshort

ofthe2.6%shareofGDPrecordedbytheUnitedStates.WelagevenfurtherbehindSweden,

12

CCA,InnovationandBusinessStrategy,p.9.13

SeeSTIC,StateoftheNation2008;CCA,InnovationandBusinessStrategy;CanadianManufacturers&Exporters,

Manufacturing20/20,CME,2005;J.Baldwin&W.Gu,Long-TermProductivityGrowthinCanadaandtheUnited

States,StatisticsCanada,2007;J.Baldwin,AFisher,W.Gu,&B.Robidoux,CapitalIntensityinCanadaandthe

UnitedStates,1987to2003,TheCanadianProductivityReview,StatisticsCanada,2008;WorldEconomicForum,

TheGlobalCompetitivenessReport2008-2009,WEF,2009;OECD,MainScienceandTechnologyIndicators,2009;

OECD,Science,TechnologyandIndustryScoreboard,2007.


15/46

13

Finland,Japan,andKoreawheretotalR&Dspendingaccountsformorethan3%ofGDPand

intensitylevelshavegrownmorerapidlythaninCanadasincethemid-1990s.14

CanadasR&DperformanceshouldalsobecomparedwiththatofChinaandIndia.Bothof

thesecountrieshaveemergedoverthepastdecadeasworldleadersininnovation.AccordingtotheOECD,Chinanowranksasthethirdlargestinvestorinresearchanddevelopment

globally.15

TheEconomistIntelligenceUnitnowranksIndiaasthebestoveralllocationfor

researchanddevelopment.TheU.S.andChinawererespectivelysecondandthird.16

WhilemanyCanadianbusinessesdrawfromresearchanddevelopmentperformedbyCanadas

academicandpublicsectors,aswellasfromR&Dactivitiesundertakeninothercountries,their

ownrateofR&Dspendingiscauseforsignificantconcern.

Overthepastdecade,wehavewitnessedtheincreasingglobalizationofmarkets,supplychains,

andbusinessactivity,theriseofChina,India,andBrazilasmajormarketsandleadingcentresof

innovationandindustrialproduction,intensifiedcompetition,rapidtechnologicaldevelopment,

thewidespreaduseoftransformativecommunicationtechnologies,andtheaccelerated

commoditizationofgoodsandservicesaroundtheworld.Evenso,inCanada,business

spendingonresearchanddevelopmenthasfailedtokeeppacewitheconomicgrowth.

Canadianbusinessesspent1.06%ofGDPonR&Din2006slightlyhigherthanin1996,but20%

downfromthepeakof1.29%ofGDPrecordedin2001.Manufacturingaccountedfor68%of

R&DspendingbyCanadianbusinessin1999,butforonly52%in2009.AsashareoftotalGDP,

R&DspendingbyCanadianmanufacturershasfallenby33%overthepasttenyears.17

TheR&DperformanceofCanadianbusinesscontrastssharplywithR&Dintensitiesrecordedin

manyothercountries.BusinessesspendingonR&Daveraged1.57%ofGDPacrosstheOECDin

2001and1.56%in2006.Infact,Canadaranked16th

outof30OECDcountriesintermsofR&D

spendingbybusinessesin2006.FirmsintheUnitedStates,Switzerland,Finland,Korea,Japan,

Sweden,andIsraelallspent2Xto3.5XmoreonR&Dinrelationtothesizeoftheirrespective

economiesthantheirCanadiancounterparts.18

14

OECD,MainScienceandTechnologyIndicators,2008.15

OECD,MainScienceandTechnologyIndicators,2008.16

EconomistIntelligenceUnit,ScatteringtheSeedsofInvention:TheGlobalisationofResearchandDevelopment,

2004,p.9.17

StatisticsCanada,GrossDomesticExpendituresonResearchandDevelopmentinCanada(GERD),andthe

Provinces,2009.18

OECD,MainScienceandTechnologyIndicators,2008.


16/46


17/46

15

Comparedtoothercountries,Canadaisfallingbehind.In2004,thelastyearforwhichstatistics

areavailable,Canadaranked13thamongallOECDcountriesintermsofbusinessinvestmentin

machineryandequipmentasashareofGDP.Wefell5%shortoftheOECDaverage.20

20

OECD,Science,TechnologyandIndustryScoreboard,2007.

0

1

2

3

4

5

6

7

8

9

10

1991199219931994199519961997199819992000200120022003200420052006200720082009

PercentofGDP

CanadianBusinessInvestmentinMachineryandEquipment

Manufacturing OtherBusinessSectors

5

6

7

8

9

10

1991199219931994199519961997199819992000200120022003200420052006200720082009

PercentofGDP

BusinessInvestmentinMachineryandEquipment

Canada UnitedStates


18/46

16

CanadiancompanieshavelaggedbehindUSbusinessesininvestinginmachineryand

equipmentsince1992.21

InlargepartthegapreflectsCanadasweakerinvestmentin

informationandcommunicationtechnologies.Studiesshowthatabout20%oftheCanada-U.S.

ICTinvestmentgapisduetodifferencesinindustrialstructurebetweenthetwocountriesa

highershareofoutputinICT-intensiveindustriesintheUnitedStatesandahigherproportionofsmallfirmsinCanada,whichtendtoinvestlessinITC.But,researchalsoindicatesthatafter

industrystructureistakenintoaccountfortheM&E[machineryandequipment]assetclass,

mostindustriesofCanadasbusinesssectorarelesscapitalintensivethanthatoftheU.S.In

thecaseofnon-ICTM&E,thereissmalldeficitofabout12percent.Thedeficitismore

pronouncedforICTinvestmentssome33percent.22

Theweakertechnologyinvestment

performanceofCanadianbusinessesvis--vistheirAmericancustomersandcompetitorsisan

importantfactorinexplainingwhyCanadalagsbehindinproductivitygrowthaswell.

Asforworkforcequalifications,Canadaranksfavourablyininternationaltableswhenitcomes

tosomecomparisons.Forinstance,theProgrammeforInternationalStudentAssessment

(PISA)isacollaborativeinitiativeinvolving57countriesthatassessestheabilityof15-year-old

studentstoapplyknowledgeandskillsinkeysubjectareasincludingreading,mathematics,and

science.AccordingtoPISA,Canadianstudentsrankthirdoverall(behindFinlandandHong

Kong)inscience,fourth(behindFinland,HongKong,andKorea)inreadingskills,andseventh

(behindTaipei,Finland,HongKong,Korea,theNetherlands,andSwitzerland)inmathematics.23

CanadaranksinfirstplaceamongallOECDcountrieswithrespecttotheeducational

attainmentofitsworkforce.Over47%ofCanadianshaveatertiaryeducation,andoverthe

pastdecadeCanadahasexperiencedthesecondlargestincreaseintertiaryattainment(Korea

hadthelargestincrease)intheOECD.24

However,otherindicatorsofworkforcedevelopmentarenotaspositive.Twenty-fourpercent

ofCanadianshaveattainedauniversityeducation,whichplacesCanadasixthamongOECD

countries,behindtheUnitedStates,Norway,theNetherlands,Denmark,andIceland.25

In

Canada,about20%ofallnewdegreesareinscienceandengineering,whichplacesus21st

amongOECDcountries,andwellbehindKorea,Germany,andFinlandwherescienceand

engineeringgraduatesaccountfor30%ormoreofallnewdegreesgrantedbypost-secondary

21

StatisticsCanada,NationalIncomeandExpenditureAccounts;U.S.DepartmentofCommerce,Bureauof

EconomicAnalysis,NationalIncomeandProductAccounts.22

Baldwin,Fisher,etal.,CapitalIntensityinCanadaandtheUnitedStates,TheCanadianProductivityReview,

2008,p.41.23

StatisticsCanada,MeasuringUp:CanadianresultsoftheOECDPISAStudy,ThePerformanceofCanadasYouthin

Science,ReadingandMathematics,2006.24

OECD,EducationataGlance,2008.25

Ibid.


19/46

17

institutions.26Onapercapitabasis,therearefewerPhDgraduatesinscience,engineering,as

wellasothersubjectsinCanadathaninmanyothercountries(Canadaranks20th

amongOECD

countries).27

ManagersandseniorexecutivesinCanadianbusinessesalsohavelowerlevelsof

educationalqualificationsandinternationalworkexperiencethantheircounterpartsinthe

UnitedStates,Europe,andJapan.

28

Canadiancompanieslagbehindaswellwhenitcomestotheinvestmentstheymakeinformal

workplacetraining.AccordingtotheConferenceBoardofCanada,Canadianbusinessesinvest

relativelylessinworkplacetrainingthantheirAmericanandEuropeancounterparts.Realper

capitainvestmentintraininginCanadaisactuallyfallingfrom$842peremployeein1996to

$699peremployeein2006.29

Between2000and2008,Canadianmanufacturersinvestedapproximately3%ofpayrollin

workforcetraining.Nevertheless,manufacturersstillreporteddifficultiesinretainingand

acquiringemployeeswiththeessentialandtechnicalskillstheyrequired.30

Thedevelopmentandavailabilityofaskilledandcompetentworkforcearestrategicpriorities

formanufacturersinCanadaandthroughouttheworld.

26

OECD,GraduatesbyFieldofStudy,2005.27

OECD,Science,TechnologyandIndustryOutlook,2006.28

R.Martin&J.Milway,StrengtheningManagementforProsperity,2007.29

TheConferenceBoardofCanada,HowCanadaPerforms:AReportCardonCanada,2007.30

CME,ManagementIssuesSurvey,2008-2009.

7%

26%

34%

18%

9%

4% 2%0%

0%

5%

10%

15%

20%

25%

30%

35%

40%

NONE UPTO1% 1%TO3% 3%TO5% 5%TO10% 10%TO15% 15%TO20% OVER20%

PERCENTAGEOFCOMPANIES

PercentofPayrollInvestedinWorkforceTraining


20/46

18

38%

35%

27%

26%

24%

20%

19%

17%

17%

16%

16%

15%

13%

13%

10%

10%

0% 5% 10% 15% 20% 25% 30% 35% 40%

PROBLEM-SOLVING

TECHNICALSKILLS

VERBALCOMMUNICATION

BASICEMPLOYABILITYSKILLS

TEAMWORK

INNOVATION/CREATIVITY

LEARNING/FLEXIBILITY

SUPERVISORY/MANAGEMENT

INTERPERSONAL

PROJECTMANAGEMENT

READING/WRITING

READ/TRANSLATETECHNICALDRAWINGS

ENTREPRENEURSHIP

COMPUTER

MATH

LACKOFCREDENTIALS/ADEQUATECERTIFICATION


WorkforceSkillsinNeedofImprovement

66%

49%

45%

38%

32%28%

26%

23%

23%

23%

23%

22%

21%

20%

20%

19%

19%

18%

18%17%

17%

16%

16%

11%

5%

0% 10% 20% 30% 40% 50% 60% 70%

ENTRYLEVELEMPLOYEES

EQUIPMENTOPERATORS

SALES&MARKETING

ENGINEERS

PLANTMANAGERSDESIGNERS

CUSTOMERSERVICEPERSONNEL

MAINTENANCE

ITPROFESSIONALS

SCIENTISTS/R&DTECHNICIANS

MACHINISTS

GENERALMANAGERS

WELDERS

ITTECHNICIANS

ACOUNTANTS/FINANCIALMANAGERS

INTERNATIONALBUSINESS

MATERIALSMANAGERS

TECHNICIANS/ELECTRICIANS

LOGISTICS/SUPPLYCHAINMANAGERSHUMANRESOURCEMANAGERS

COMPUTERPROGRAMMERS

TOOL&DIEMAKERS

CRAFTWORKERS

PIPEFITTERS

OTHER


DifficulesFindingandKeepingSkilledWorkers


21/46

19

AnalysesbybothStatisticsCanadaandtheOECDindicatethatCanadasrelativelypoor

productivityperformanceisduemainlytoweakgrowthinmulti-factorproductivity,ameasure

thatreflectsthecontributionstoproductivityandinnovationderivedfrombusinessleadership,

workforcecapabilities,entrepreneurship,theadoptionofnewbusinessmodels,improvements

intheorganizationofwork,betterworkpractices,theefficientandeffectiveincorporationofnewtechnologies,andthecommercializationofnewproductsandservicesresultingfrom

R&D.31

TheyshowthatCanadiancompanieshavefailedtokeepupwiththeircustomers,

competitors,andbusinesspartnerswhenitcomesfirstofalltoinvestinginproductiveassets

andsecondtoleveragingthoseinvestmentstogenerategreatervalueandlowerunit

productioncosts.

WhatHoldsCanadaBack?

WhatexplainsCanadasrelativelyweakrecordonproductivity,innovation,andinvestment?TheissuehasbeenexaminedindetailbytheCouncilofCanadianAcademies.TheCouncils

reportprovidesausefulsummaryofmanyofthefactorsthatcouldpotentiallyinfluencethe

choiceofinnovationasabusinessstrategy.32

AstheCouncilpointsout,somestructuralcharacteristicsoftheCanadianeconomyprovidea

betterexplanationofCanadaslagginginnovationperformancevis--vistheUnitedStatesthan

others.Forinstance,itfindsthatdifferinglevelsofR&Dintensityaremoreimportantthan

differencesinsectormixbetweenthetwocountries.33Moreover,whilesomeindustrysectors

aremoreR&Dintensive,othersrelyinsteadontechnologyembodiedincapitalequipment.

ForeigncontrolofR&Dexpenditureisnotanadequateexplanationeither.Canadian-owned

multinationalsaremostlikelytoengageinproductinnovationandR&Dspending.Infact,the

CouncilconcludesthatCanadasfailuretodevelopagreaternumberofCanadian-based

multinationalenterpriseshasbeenakeycontributortothecountrysoverallweakness.But,

CanadiansubsidiariesofforeignmultinationalsarealsoamongthecountrystopR&D

performers,andgenerallyhavehigherlevelsofR&Dintensityandbetteraccesstocapital,as

wellastoinnovativetechnologiesandworkpractices,thanCanadianfirmswithonlydomestic

operations.34

31


Ibid.,pp.10-21.33

Ibid.,p.12.34

Ibid.,p.12.


22/46

20

Doessizemakeadifference?Smallerbusinessesspendrelativelylessonresearchand

developmentthanlargerfirms,andCanadahasahigherproportionofsmallandmid-sized

companiesthantheUnitedStates.But,thereislittledifferenceintheinnovationperformance

ofsmallerfirmsinCanadaandtheUnitedStates.Moreover,astheCouncilpointsout,small

firmsaccountforaminorshareoftheR&Dspendinggapbybusiness.Again,itisthefailuretogrowlargerandmoreR&D-intensiveCanadian-basedmultinationalsthatprovidesamore

tellingexplanationofCanadasrelativelyweakperformance.35

WhereCanadiancompaniesoperatewithinvaluechainsalsomakesadifferenceinexplaining

Canadasweakrecord.TheCouncilnotesthatCanadianmanufacturers(withsomesignificant

exceptions)tendtooccupyanupstreampositioninNorthAmericanvaluechains.Theyare

moreoftenfoundassuppliersofcommoditiesorintermediategoodstootherbusinessesthat

areclosertotheirultimatecustomers.AccordingtotheCouncil,successfulinnovation,

especiallyinrespectofgoodsandservices,ismostlikelytocomefrombusinessesthathave

directcontactwithend-usersandtherebydevelopunderstandingofwhatthoseultimate

customersneedorwant.Itisalsothecasethatfirmsattheupstreamendofthevaluechain

areremovedfromtheleadingedgeofbusinessdecisionmakingregardinginnovation,

especiallyinrespectofproductdevelopment,marketing,andnewbusinessmodels.36And,

todaythemoredemandingcustomerswholeadintheadoptionofnewtechnologiesaretobe

foundincreasinglyoutsideNorthAmerica.

ThestructuralchallengeforCanada,then,istodevelopmoremultinationalleadersin

innovationandtechnologydevelopmentandmoreinnovativesuppliersinvaluechainswithin

closerproximitytofinalcustomersaroundtheworld.

AsecondfactoridentifiedbytheCouncilistherolethatcompetitionplaysininfluencing

innovationperformance.Canadasrelativelysmall,fragmentedmarketsrequirecompaniesto

exportinordertofindthecustomersandthereturnsoninvestmentthatarerequiredfornew

productinnovation.Asaresult,export-orientedbusinessestendtobebothmoreinnovative

andmoreproductive.37Ontheotherhand,boththeCouncilandCanadasCompetitionPolicy

ReviewPanelpointtoregulationsthatrestrictforeigninvestmentandgovernment

procurement,internalbarriersthatinhibittheinter-provincialflowofgoodsandservices,

capital,andlabour,aswellasregulatorydifferencesthatincreasethecomplexityandcostof

35

Ibid.,p.13.36

Ibid.,p.13.37

Ibid.,p.13.


23/46

21

regulatorycompliance,assignificantconstraintsoncompetitionand,therefore,oninvestment,

innovation,andproductivitygrowthwithinCanadasdomesticmarket.38

Theclimatefornewventuresincludingtheavailabilityoffinancing,theeffectivenessof

technologytransfer,andtheprevalenceofbusinessclustersisathirdsetofthatinfluencesthechoiceofinnovationasabusinessstrategy.

Apersistentshortageofriskcapitalthroughthefundingcycle,fromseedcapitalthroughthe

venturestagetomaturegrowthiswidelyidentifiedasanimpedimenttoinnovationinCanada,

andtothegrowthofsmallandmid-sizedR&Dintensivecompaniesheadquarteredinthe

country.39

TheCouncilofCanadianAcademiesfindsthatCanadasventurecapital(VC)industryfallswell

behindVCfirmsintheUnitedStatesandmanyothercountriesinfinancinginnovative

businesses.In2007,justpriortotherecession,CanadasVCfirmsraisedonly$1.2billion,or3%

ofthe$37billiontheircounterpartsraisedintheUnitedStates.40FundraisingbyVCfirmsin

Canadaactuallyfellby40%between2003and2007.Bycontrast,intheUnitedStates,the

amountoffundsraisedbyVCfirmsgrewby167%overthatsameperiodoftime.41

ThereisproportionatelylessventurecapitalraisedinCanadathaninothercountries.Lessthan

2%oftotalsmallandmedium-sizedbusinessfinancinginCanadacomesfromventurecapital

(53%comesfromdomesticbanks,16%fromotherbanks,10%fromcreditunionsandcaisses

populaires,11%fromfinancecompanies,and8%frominsurancecompanies).42

In2007,

venturecapitalamountedto0.12%ofGDPinCanada.Thatwaslessthanhalfthe

proportionateamountraisedintheUnitedKingdom,Sweden,andFinland.Itwasalsolower

thantheUnitedStates,Norway,andBelgium.43Moreover,in2007,Canadaranked10thamong

OECDcountriesintermsoftheaveragesizeofVCdeals.Infact,theaveragesizeofVCdealsin

Canadawasonlyone-thirdofthatintheUnitedStates.44

StudiesindicatethattherelativelylowlevelofinstitutionalVCinvestmentinCanadaactsasa

constraintonthesupplyofVCfunds.(In2006,theCanadianVCindustryraised10%ofits

capitalfrompensionandotherinvestmentfundsand58%fromindividuals.Incontrast,theVC38

Ibid.,pp.13-14;CompetitionPolicyReviewPanel,CompetetoWinFinalReport,Ottawa,IndustryCanada,

2008.39

CoalitionforActiononInnovationinCanada,AnActionPlanforProsperity,p.3.40


Ibid.,p.15.42

StatisticsCanada,SurveyofSuppliersofBusinessFinancing,TheDaily,December5,2008.43

STIC,StateoftheNation2008,p.23.44

Ibid.,p.24.


24/46

22

industryintheUnitedStatesraised42%ofitscapitalfrompensionfundsandanother25%from

banksandinsurancecompanies.)45

Relativelylowreturnsexpectedonstart-upinvestments

mayalsobeaconstraint,butastheCouncilofCanadianAcademiesnotes,Canadianbuy-out

fundstargetingmorematurebusinesseshaveperformedrelativelywellinCanadaandhavenot

experiencedthesamefundraisingissuesastheirVCcounterparts.

46

Theavailabilityoffinancingfornewventures,aswellasforinvestmentsininnovationand

technology,hasbecomemuchmorelimitedinCanadaasaresultofrecession.Canadian

Manufacturers&Exporters(CME)hassurveyedbusinessconditionsfacingitsmemberssince

thebeginningofthemarketdownturn.Asthefollowingtableindicates,inJune2010,afull

yearafterhittingthebottomoftherecession,asignificantnumberofmanufacturersand

exporterswerestillreportingdifficultiesinobtainingfinancingforthedevelopmentofnew

products,newtechnologies,andnewmarkets,aswellasforbusinessimprovementand

expansionpurposes.47

CMEBusinessConditionsSurvey,June2010

PercentageofRespondingCompanies(n=954)

Companiesexperiencing

difficultiesinaccessing:

Unableto

Obtain

Financing

Experiencing

Significant

Difficulties

Experiencing

Difficulties

IncludingHigher

Costs

No

Difficulties

Not

Applicable

Financingforworkingcapital

purposes5% 8% 14% 51% 22%

Operatinglineofcredit 5% 8% 14% 58% 15%

Equityfinancing 2% 6% 6% 32% 54%

Financingforcapital

investment5% 8% 12% 39% 36%

Financingforinvestmentsin

newtechnologies4% 7% 9% 29% 51%

Equipmentleasing 2% 5% 7% 34% 52%

Financingthroughbondsor

commercialpaper1% 2% 2% 11% 84%

45

STIC,StateoftheNation2008,p.25.46


CanadianManufacturers&Exporters,BusinessConditionsSurvey,June2010.


25/46

23

Venturecapital 2% 5% 2% 2% 89%

Financingfornewproduct

development2% 5% 6% 30% 57%

Exportfinancing 2% 5% 7% 22% 64%

Exportcreditinsurance 2% 4% 6% 25% 63%

Financingforbusiness

acquisitions4% 4% 6% 18% 68%

Othertypesofbusiness

financing2% 3% 3% 20% 72%

Theeffectivenessoftechnologytransfermechanismsisanotheraspectoftheclimatefornew

venturesexaminedbytheCouncilofCanadianAcademiesandbyCanadasScience,Technology,andInnovationCouncil.HowwelltechnologytransferworksinCanadais

particularlyimportantgiventherelativelylargeinvestmentsmadeinacademicandgovernment

researchorganizationswhichaccountinturnforalmosthalfoftheR&Dperformedinthe

country.Yet,Canadafairsrelativelypoorlywhenitcomestoapplyingthisresearchtonew

productsandprocessesthatarethencommercializedbybusiness.

Canadaranks24th

amongOECDcountriesintermsofthepercentageofbusinessesthat

undertakecollaborativeinnovationworkwithotherfirmsorresearchorganizations.48

Tosome

extent,thisisduetoalackofinterestorlackofawarenessonthepartofcompaniesabouttheresearchcapabilitiesofcolleges,universities,andgovernmentresearchorganizations.Itisin

partareflectionoftherelativelylowlevelofR&Dintensitybybusinessesthemselves.But,

technologytransferfromuniversitiesandgovernmentresearchcentreshasalsobeenweak.

Muchoftheresearchcurrentlyperformedinuniversityorgovernmentresearchcentresis

simplynotusefulforcompanieslookingtoapplyinnovativesolutionsintheirbusiness.

MostresearchfundingandthereforemostresearchactivitiesinCanadianuniversitieshas

beendirectedtobasicresearch.Whenapplicationsdoresult,therearefurtherproblemsintransferringtechnologytotheprivatesector.Infact,theCouncilofCanadianAcademiesnotes

thatlicensingrevenuesareinsufficienttocoverofficecostsformostuniversitytechnology

transferofficesinCanada.49

And,collaborativeventuresamongresearchers,entrepreneurs,

andotherbusinessesarefurtherconstrainedwhenintellectualpropertyrightsareretainedby

48

OECD,STIScoreboard,2007.49

CCA,InnovationandBusinessStrategy,p.16.


26/46

24

universityorgovernmentinstitutions.50Canadasuniversitiesandcollegesdoabetterjob

educatingandgraduatingpersonnelwithstrongresearchandtechnicalskillsthantransferring

technologyandappliedresearchresultstoCanadianbusiness.Itistheconcentrationofhighly

qualifiedpersonnelthatformsthebasisfortheinnovationandtechnologyclustersthatexist

acrossthecountry.

Ultimately,thereisafourthsetoffactorsthattheCouncilofCanadianAcademiesandCanadas

Science,TechnologyandInnovationCouncilbothemphasizeinexplainingCanadasweak

innovationperformancealackofbusinessambition.Initsreport,theCouncilofCanadian

AcademiesconcludesthattherearesimplynotenoughCanadianbusinessesgoodenoughto

competeinglobalmarkets,aggressiveenough,willingtotakerisks,andsufficientlyoutward-

lookingbeyondthehugeandaccessibleU.S.market.51

TheimplicationisthatbusinesshassimplybeentooeasyformostCanadiancompaniesthat

havebeenabletorelyoneitheraprotecteddomesticmarketoreasyaccesstotheU.S.market,

alowCanadiandollarexchangerate,highcommodityprices,andacomfortablepositionas

upstreamsuppliersintostableNorthAmericansupplychainsforprofitablereturns.Infact,

thosefirmsthathaveinvestedinnewproductsandservices,newtechnologies,andnew

marketsoutsideCanadaandtheUnitedStatesstandoutaswidelyacknowledgedandnotable

exceptions.TheyarethecompaniesthathavegrownintoCanadassuccessfulmultinational

enterprises.

But,businessconditionsarechanging.Businessstrategiesalsoneedtochangeandalongwith

them,thestrategicimportancethatCanadiancompaniesascribetoinnovation.

TheInnovationImperative

ForCanadasmanufacturersandexporters,businessconditionshavechangeddramaticallyover

thepastfiveyears,bothaggravatedandacceleratedbyrecession.Customerdemandhasfallen

precipitouslyintheUnitedStateswhilemarketpowerhasshiftedtothenewlyindustrialized

economiesofAsiaandLatinAmerica.TheCanadiandollarhasrisentonearparitywithitsUS

counterpart.Newsecurity,customs,andproductsafetyregulationsareincreasingthecostand

complexityofcommercialtransactionsacrosstheCanada-U.S.borderandaroundtheworld.

Health,safety,andenvironmentalregulationsarerequiringimprovementstobemadein

productsandproductionprocesses.Meanwhile,multinationalenterpriseshaveconsolidated

theiroperations,increasedinvestmentsingrowthmarketsandshutdownoperationsand

50

Ibid.,p.17.51

Ibid.,p.21.


27/46

25

productmandatesinCanada,requiringCanadiansupplierseithertomovewiththemorbuild

newmultinationalsupplychainrelationships.Atthesametime,businesscompetitionhas

becomemoreintensewithconditionsofovercapacityprevailinginmanyindustrialmarkets,

newmultinationalenterprisesemerginginAsiaandLatinAmerica,andnewtechnologiesthat

arebeingcommercializedatarapidpace.

TherecessionhastaughtCanadiancompaniesthatbusinessasusualcannotbeanoptionfor

businessesthatareaimingtocompeteandgrowindomesticorglobalmarkets.Ifcompanies

aredoingbusinesstodaythesamewaytheywerefiveyearsago,theyareverylikelyfacing

severefinancialdifficulties.Atthesametime,nobusinessislikelytoprosperifitdoesnottake

thenewchallengesandopportunitiesthatrecoverywillbringoverthenextfiveyearsinto

account,andadjustitscompetitivestrategyaccordingly.

Today,innovationisanimperativeforbusinesssurvival,andforgrowth.Inordertosucceed,

Canadasbusinessleaderscannotthinkofwhattheircompaniesdoassimplygettingproduct

outthedoor.Instead,theyhavetoseethattheyareinthebusinessofprovidingsolutionsfor

customersthroughthecapabilitiesthattheirorganizationshavetooffer.Inordertocompete

andgrow,theirbusinessesneedtodifferentiatethemselvesfromthecompetition.Inorderto

dothat,theyneedto:

1. Findnewcustomers,businesspartners,anddistributionchannelsinmarketsaroundtheworld;

2. Improveexistingproductsthroughmorecustomizeddesignandservices;3. Developandbringtomarketnewandmorespecializedproductsandtechnologies;4. Improveoperatingefficienciesandlowercostsbyfocusingonthevaluethatcustomers

willpayforandeliminatingwastefulnonvalue-addingactivitiesthroughouttheir

enterprise;

5. Adoptnew,moreproductive,safer,andmoreenvironmentallyfriendlyproduction,information,andcommunicationtechnologies;

6. Workwithsupplierstolowercosts,developnewmaterials,components,andservices,andspeedupandimprovethereliabilityofsupply;

7. Managelogisticssystemstoensurerapidandreliabledeliveryofproductsandservicestocustomers;and,

8. Ensurethattheiremployeeshavetheskillsetsandcompetenciesrequiredforbusinesssuccess.

RapidlychangingbusinessconditionshaveelevatedtheimportanceforCanadiancompaniesof

findingnewcustomersanddevelopingnewandimprovedproductsandprocesses.Thisis


28/46


29/46

27

Inthefirstplace,after-taxcashflowdrivesbusinessspendingonresearchanddevelopment

activityinCanada.53

ChangesincashflowtendtoprecedechangesinR&Dspendingbyabouta

year.ThisindicatesthatcompaniestendtobasetheleveloftheirR&Dexpendituresinany

yearonthebasisofthepreviousyearscashflowperformance.Theevidencealsoindicates

thatbecauseofthetimelaginvolved,R&Dspendingtendstobeontheincreasejustattimeswhenprofitmarginsandcashflowbegintodecline.

Anevenmoreevidentrelationshipexistsbetweenafter-taxcashflowandcapitalinvestmenton

thepartofCanadianbusinesses.Again,cashflowperformanceleadsinvestmentactivity.

Investmentsinnewmachineryandequipmenttendtofollowcloselybehindchangesinafter-

taxcashflowperformance,whilebusinessinvestmentsinnon-residentialconstructionrequire

asomewhatlongerleadtime.54

53

StatisticsCanada,NationalIncomeandExpenditureAccounts;GrossDomesticExpendituresofResearchand

Development.54

StatisticsCanada,NationalIncomeandExpenditureAccounts.

-10

-5

0

5

10

15

20

25

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Year-over-YearPercentChange

Aer-TaxCashFlowDrivesBusinessSpending

onResearch&Development

BusinessSpendingonR&D Aer-TaxCashFlow


30/46

28

-30

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

35

40

1980

1995

2010

Year-over-YearPercentChange

Aer-TaxCashFlowDrivesCapitalInvestmentbyBusiness

CorporateAer-TaxCashFlow BusinessInvestmentinMachinery&Equipment

BusinessInvestmentinNon-ResidenalConstrucon

-30

-25

-20-15

-10

-5

0

5

10

15

20

25

30

35

40

1980

1985

1990

1995

2000

2005

2010

Y

ear-over-YearPercentChange

Aer-TaxCashFlowDrivesBusinessInvestment

inMachinery&Equipment

CorporateAer-TaxCashFlow BusinessInvestmentinMachinery&Equipment


31/46

29

Thereisanotherimportantfeatureofbusinessinvestmentintechnologyasitrelatesto

corporatecashflowperformance.Canadianbusinessestendtoinvestthesameproportionof

after-taxcashflowinmachineryandequipmentovertime.Between1979and2002,their

technologyinvestmentsaccountedforbetween33%and40%ofafter-taxcashflow.That

proportionfelltoaround25%in2009.However,thepriceofmachineryandequipmentshouldalsobetakenintoaccount,includingtheimpactoftheCanadiandollarexchangeratewhich

affectsthepurchasepriceoftechnologyimports.Afterdiscountingforpricevariations,the

constantdollarvalueofbusinessinvestmentinmachineryandequipmenthasusuallyvaried

between25%and35%ofafter-taxcashflow.

Thevariationintheshareofafter-taxcashflowallocatedforthepurposeofinvestinginnew

machineryandequipmentcan,inturn,beinterpretedasareflectionoftherelativereturnsthat

businessesexpecttogeneratefromtheirinvestments.Neartheupperendoftherange,

companiesexpecttoreceiveahigherpaybackbyinvestingintechnologythanotherwaysof

usingtheircash.Whennearthelowerendoftherange,businessesareexpectingtogenerate

higherreturnsbyusingtheircashforpurposesotherthanmakingtechnologyinvestments.

Oneimportantobservationtonoteisthat,contrarytoconventionalwisdom,Canadian

companiesinvestedproportionatelymoreoftheiravailablecashinnewmachineryand

equipment(inbothcurrentandconstantdollarterms)astheCanadiandollarwasdepreciating

invalueagainstitsU.S.counterpartduringthelatterhalfofthe1990s.Whiletechnology

investmentshavedeclinedasashareofcashflowincurrentdollartermssince2002,

0

5

10

15

20

25

30

35

40

45

PercentofAqer-TaxCashFlow

BusinessInvestmentinMachinery&Equipment

Machinery&EquipmentInvestmentinCurrentDollars

Machinery&EquipmentInvestmentAdjustedforPriceChanges


32/46

30

purchasingpowerhasincreasedastheCanadiandollarhasriseninvalueagainstitsAmerican

counterpartandothermajorcurrencies.Whenviewedinconstantdollartermsafteradjusting

forpricechanges,theshareofavailablecashthatCanadianbusinessesputtowards

investmentsinnewmachineryandequipmentincreasedbetween2002and2006,beforefalling

backtoaround27%ofafter-taxcashflowin2008astherecessiongotunderway.

55

Theconsistencythatisapparentintherelationshipbetweenafter-taxcashflowandinvestment

inmachineryandequipmentissignificantbecauseitprovidesadegreeofpredictabilityin

estimatingtheimpactofchangesincashflowperformanceontechnologyinvestmentdecisions

byCanadianbusiness.Itindicatesthatapercentagechangeinafter-taxcashflowshouldbe

expectedtoleadtoachangeinreal(constantdollar)technologyinvestmentofasimilar

magnitude,witharangeofvariabilityofabout17%.Aonepercentchangeincashflowshould,

forexample,resultina0.83%to1.17%increaseininvestment.Theimpactofcashflow

performanceontechnologyinvestmentisstrongeratupperlevelsoftherangeofvariability,

wherebusinessesfinditrelativelymoreattractivetoinvestinmachineryandequipment,than

atlowerlevels.

After-taxcashflowiscalculatedasthesumofbefore-taxbusinessprofitspluscapital

consumptionallowancesminusdirecttaxespaidonprofits.Basedonthisequationandthe

consistentrelationshipthatexistsbetweencashflowandcapitalinvestment,itispossibleto

estimatetheimpactatanyoneperiodoftimeofchangesinprofitmarginsandcapital

consumptionallowancesonbusinessinvestmentdecisions.For2010,theimpactsofaone

percentchangeinthecomponentsofafter-taxcashflowaresummarizedinthefollowingtable.

ImpactsonBusinessInvestmentinMachinery&Equipment:2010

Rateof

Change

LowerRange:

InvestmentChanges

by83%ofChangein

CashFlow

DirectImpact:

InvestmentChanges

by100%Changein

CashFlow

HigherLimit:

InvestmentChanges

by117%Changein

CashFlow

Before-TaxProfits +1% +0.30% +0.36% +0.42%

EffectiveDirectTaxRate

onProfits-1% +0.09% +0.11% +0.13%

CapitalConsumption

Allowance+1% +0.53% +0.64% +0.75%

TotalAfter-TaxCashFlow +1% +0.83% +1.00% +1.17%

55

Ibid.


33/46

31

Asimilartypeofrelationshipexistsbetweencashflowperformanceandmachineryand

equipmentinvestmentinCanadasmanufacturingsector.However,inmanufacturingthereisa

longerleadtimebetweenchangesincashflowandinvestmentperformance.56

Manufacturersalsotendtoinvestaconsistentshareoftheiravailablecashinmachineryandequipmentwhenadjustedforaone-yeartimelag.Overthepastdecadetheratiohasaveraged

around42%ofannualcashflow,butithasvariedfromalowof36%toahighof53%.This

trendreflectsthemorecapital-intensivenatureofmanufacturing.Italsoindicatesthata

percentagechangeincashflowshouldbeexpectedtoleadtoasimilarchangeintechnology

investmentinCanadasmanufacturingsector,whenmeasuredincurrentdollartermsandwith

aslightlyhigherrangeofvariabilityofabout19%.57

56

StatisticsCanada,InvestmentIntentions;QuarterlyFinancialStatisticsforEnterprises.57

Ibid.

-40

-30

-20

-10

0

10

20

30

40

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Year-ove

r-YearPercentChange

CashFlow&InvestmentinMachinery&EquipmentbyCanadian

Manufacturers

InvestmentinMachinery&Equipment CashFlow


34/46

32

For2010,theimpactsonmanufacturingofaonepercentchangeinthecomponentsofafter-

taxcashflowaresummarizedinthefollowingtable.

ImpactsonManufacturingInvestmentinMachinery&Equipment:2010

Rateof

Change

LowerRange:

InvestmentChanges

by81%ofChangeinCashFlow

DirectImpact:

InvestmentChanges

by100%ChangeinCashFlow

HigherLimit:

InvestmentChanges

by119%ChangeinCashFlow

Before-TaxProfits +1% +0.29% +0.36% +0.43%

EffectiveDirectTaxRate

onProfits-1% +0.09% +0.11% +0.13%

CapitalConsumption

Allowance+1% +0.52% +0.64% +0.76%

TotalAfter-TaxCashFlow +1% +0.81% +1.00% +1.19%

Theimplicationisthattheoutlookformanufacturinginvestmentremainsveryweakfor2010.

Cashflowinmanufacturingfellby28%in2009.Assumingthatmanufacturerscontinueto

investaconsistentproportionofthepreviousyearscashin2010asin2009,theirinvestments

innewmachineryandequipmentcanbealsobeexpectedtofallin2010,bysomewhere

between23%to33%.

0

10

20

30

40

50

60

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

InvestmentasaPercentofPreviousYear'sAqer-T

axCashFlow

ManufacturingInvestmentinMachinery&Equipment


35/46

33

ImplicationsforFiscalPolicy

Thecloserelationshipsthatexistbetweenafter-taxcashflowperformanceononehandand

businessspendingonresearchanddevelopmentandonnewmachineryandequipmentontheotherindicatethatinnovationshouldbeviewedultimatelyasaninvestmentdecision.

Governmentfiscalpoliciesthataimtoencouragebusinessinvestmentininnovationshould

thereforehavefourstrategicobjectives:

1. EncourageinvestmentinproductiveassetsinR&D,machineryandequipmentusedinproducinggoodsandservicesofgreatervalue,andworkplacetraining;

2.

Increasethecashthatbusinesseshaveavailabletoinvestbyleavingmoremoneyinthehandsofthosecompaniesmakingtheinvestments;

3. Raisetherateofreturnonproductiveassets,therebymakinginvestmentsinR&D,technology,andworkforceskillsmoreattractiveforbusinessesthanotherwaysof

allocatingcash(suchasinvestingoutsideCanada,acquiringexistingassets,paying

dividends,orincreasingsavings);and,

4. Assurebusinessesthatpolicymeasureswillremaininplaceduringthecourseoftheirinvestmentcycleandprovidegreatercertaintyandconsistencywithrespecttotheapplicationofrulesandeligibilityrequirements.

GovernmentsinCanadauseprocurement,directsubsidiesandloans,aswellastaxmeasuresto

encourageinvestmentsininnovation.Governmentprocurementcreatesalargerscale

domesticmarketorleveragesglobalopportunitiesforthecommercializationofnewproducts

andservices.Directgrantsorloanstobusinesshelpsubsidizeorfinanceinnovationinitiatives

onceinvestmentdecisionsaremade.Theyalsomakemorecashavailableforspecific

investmentpurposes.Governmentscanalsoacceleratebusinessspendingoninnovationby

leavingmoremoneyinthehandsofthosecompaniesthataremakinginvestmentsin

productiveassets.

Basedontheempiricalrelationshipthatexistsbetweencashflowandinvestmentactivity,and

assumingthatcompaniesinvestthesameshareofcashflowinR&Dandnewmachineryand

equipmentfromoneyeartothenext,thefollowingtablesummarizestheimpactthatchanges


36/46

34

infiscalpolicycouldbeexpectedtohaveoninvestmentdecisionsbyCanadianbusinessin

2010.

FiscalPolicyImpactsonInnovation,2010

ImpactofPolicyMeasure

onCashFlowExamplesofPolicyMeasures

Impactsof1%ChangeinCash

FlowonInnovation

Investmentsresultingfrom

PolicyMeasures

IncreaseinBefore-Tax

Profits

-Harmonizationofprovincialsalestaxeswiththe

GST

-Eliminationofdutiesonimportedtechnologies,

goods,andservices

-Reductioninregulatorycompliancecosts

-Subsidiestiedtobusinessinvestment

+0.36%

ReductionofEffectiveTax

RateonProfits

-Reductionincorporateincometaxrate

-Eliminationofcapitaltaxes+0.11%

IncreaseinCapitalCost

Allowance-Accelerateddepreciationrates +0.64%

Refundableinvestment

TaxCredit

-ScientificResearch&DevelopmentTaxCredit

-RefundableInvestmentTaxCredit+3.20%

Refundabletaxcreditsincreasecashflowaswellasratesofreturnoninvestmentandarelikely

tohavethegreatestpositiveimpactonbusinessinvestmentdecisions.Acceleratedcapitalcost

allowanceshavethesecondlargestimpactoninvestmentdecisions.Reductionsindirecttax

rates,aswellasinindirecttaxespaidbybusiness,alsohavepositiveifmoremutedimpactson

investment.

Impactswouldbelargerifpolicymeasuresweretomakeexpectedreturnsoninnovation

investmentsmoreattractivethanotherusesofcashflow.Certaintythatfiscalmeasureswillbe

inplaceoverthedurationoftheinvestmentplanningcycle,andconsistencyofrulesand

eligibilityrequirements,arealsoessentialinestablishingandconfirmingbusinessexpectations,

andarethereforecriticaltotheeffectivenessofanyinvestmentincentiveregime.

Thisanalysisindicatesthattherearemoreeffectivetaxincentivesthatgovernmentscanuseto

encourageinvestmentsininnovationandproductiveassetsthanreductionsincorporate

incometaxrates.Thisdoesnotmean,however,thatdirecttaxratereductionsare

unimportantinattractingandretainingbusinessinvestmentsandproductmandatesinCanada.

Corporateincomeandcapitaltaxratesdeterminehowmuchprofitcanbekeptbybusinesses

andre-investedaspartoftheircashflowinnewstructuresandequipmentorinexistingassets,

ordistributedintheformofdividendstoexistinginvestors.Companieswillprefertolocatein

thosejurisdictionswhereprofitscanbemaximized.Competitivecorporatetaxratesare,

therefore,essentialtoanchoringbusinessinvestmentinthefirstplace.


37/46

35

Itispossibletoapplythisanalyticalapproachtoestimatetheimpactthattaxchangeshavehad

upontechnologyinvestmentinCanadasmanufacturingsectorbetween2006and2009.Inits

2006/07budget,thefederalgovernmentcommittedtoloweringthefederalcorporateincome

taxrateto15%by2012.Italsointroducedatwo-yearstraightlinedepreciationrateforinvestmentsinmanufacturingandprocessingmachineryandequipment.Provincial

governmentsfollowedsuitincommittingtocorporatetaxratereductions,acceleratedcapital

costallowances,andtheeliminationofcapitaltaxes.Insubsequentbudgets,thefederal

governmenthasextendedthetwo-yeardepreciationrateformanufacturersuntiltheendof

2011andeliminateddutiesonimportedmaterialsandequipmentusedinmanufacturing,

beginningin2009.Thefollowingtableestimatestheimpactthatthesespecifictaxchanges

havehadonmanufacturinginvestmentbetween2006and2009.

ImpactofRecentTaxChangesonManufacturingInvestmentinMachinery&Equipment

TaxMeasure EstimatedImpactonCashFlowEstimatedImpacton

Investment

EliminationofCapital

TaxandReductionin

CorporateIncomeTax

RatebytheFederal

Government

17%reductionineffectivetaxrateon

profits+1.87%

Two-Year

Depreciation

18.4%increaseincapitalconsumption

allowance+11.78%

EliminationofImport

Duties 0.37%increaseinbefore-taxprofits +0.13%

EliminationofCapital

Taxes&Reductionof

CorporateIncomeTax

Ratesbythe

Provinces

15%reductionineffectivetaxrateon

profits+1.65%

Between2006and2009,thesetaxmeasuresareestimatedtohaveledtoa14%increasein

manufacturinginvestmentinnewmachineryandequipmentoverlevelsofinvestmentthat

wouldotherwisehavebeenexpectedifthetaxchangeshadnotbeenmade.Manufacturing

investmentinmachineryandequipmentactuallyfellbyabout30%between2006and2009.

Ouranalysissuggeststhatinvestmentwouldhavefallenevenfurtherhadthesetaxchangesnot

beenimplemented.Theconsistentratioofinvestmenttoafter-taxcashflowindicatesthatthis

wouldindeedhavebeenthecase.


38/46


39/46

37

requiretoplanandputinplacelargerscaletechnologyinvestmentsandtherefore

improvetheeffectivenessofthistaxmeasure.

Becauseoftheimportanceoftheacceleratedcapitalcostallowance,CMErecommends

thattheGovernmentconsidermakingthetwo-yeardepreciationformanufacturingand

processingmachineryandequipmentpermanent.Apermanenttwo-yearwrite-off

wouldmakethismeasureanimportanttoolforgovernmenttoimprovethe

competitivenessoftheCanadiantaxsystemformanufacturinginvestment,encourage

innovation,andproductivitygrowth,andimprovesafetyandenvironmental

performanceonthepartofCanadaslargestbusinesssector.

2. MakeCanadasScientificResearchandExperimentalDevelopment(SR&ED)taxcreditrefundableandimprovetheadministrationofthetaxcreditsystem.

TheSR&EDtaxcreditisthemostimportantgovernmentincentiveforbusinessR&DinvestmentinCanada.AccordingtoFinanceCanada,theSR&EDcreditprovidesanet

economicbenefittoCanadaof11centsperdollaroftaxexpenditure,orroughly$400

millionannuallyfortheCanadianeconomy.58

ThiscreditprovidesCanadianbusinessescriticalsupportforin-houseinnovationand

commercialization.However,duringdifficulteconomictimes,whencompaniesare

investingmorethantheyaremakinginprofits,theycannottakeadvantageofthe

credit.Itsrealvaluedeclinesovertime,reducingtheeffectivereturnsfrominvestments

inSR&EDprojects.MakingtheSR&EDcreditrefundablewouldprovideacash-flowinfusiontheyearthatR&Dinvestmentsaremade,andwouldthereforebemore

effectiveincentiveforcompaniestosustaintheirinvestmentsininnovationduring

periodsofeconomicdownturnwheninnovationisneededthemost.

Makingthetaxcreditrefundablewouldalsoextendthebenefitsofthisincentiveto

companiesoperatinginCanadawhich,becausetheyareeithercurrentlyfacinga

downturninprofits,investinginR&Daheadoftheirearningsperformance,orhavingto

consolidatecorporateearningsforforeigntaxreportingpurposes,arenotcurrentlyable

totakeadvantageofthisimportanttaxmeasure.Itwouldhelpliquefyassetsof

companiesthatarecontinuingtoinvestininnovation,thusimprovingtheircash

positionforfurthergrowth.CMEfurtherrecommendsthatfullrefundabilitybe

providedfromJanuary1st,2008.Businessesshouldstillbeallowedtoapplytaxcredits

accumulatedbeforethatdateagainstfuturetaxespayable.

58

Parsons,M&Phillips,N.,AnEvaluationoftheFederalTaxCreditforScientificResearchandExperimental

Development,Ottawa,FinanceCanada,2007.


40/46

38

InspiteofcommitmentsmadebytheCanadaRevenueAgency(CRA)toimprovethe

administrationoftheSR&EDtaxcreditsystem,thelackofconsistentandscientifically

qualifiedtechnicalinterpretations,moreandmorecomplexcompliancerequirements,

andlengthydelaysinprocessingandadjudicatingclaimscontinuetoerodetheeffectivenessanduseofthetaxcredit.Businessesneedtobeabletopredictwitha

greaterdegreeofconfidencethannowexistswhattypesofR&Dspendingareeligible

undertheprogram.Thetaxcreditshouldalsofocusmoreontheexperimental

developmentandtechnologicallybasedinnovationthatbusinessesrequire,andlesson

thelaboratory-basedscientificresearchthatseemstobethefocusofrecent

interpretationsbytheCRA.Extensiveimprovementsareneededinthetransparency,

efficiency,predictability,andefficacyofthesystem.59

3. IntroducearefundabletaxcreditforworkplacetraininginordertooffsettheimpactofrisingEmploymentInsurancepremiums.

IncreasesinEmploymentInsurancepremiumswilldiscouragebothworkforcetraining

andjobgrowthbyincreasingthecostofemployment.Companiesthatareinvestingin

workplacetrainingarealreadymakinganinvestmentinthefutureoftheiremployeesas

wellasininnovation.Businessesthataremakingtheseinvestmentsshouldreceivea

credittooffsetrisingpayrolltaxes.Thistaxmeasurewouldaimtoimproveskillsand

competenciesattheworkplace,andthereforetargetthewidelyrecognizedchallengeof

boostingCanadastotalfactorproductivity.60

4. Introducearefundabletaxcreditforinvestmentsrequiredforregulatorycompliancepurposes.

Governmentregulationsredefinethemarketandoperatingrulesforbusiness.Inorder

tocomplyandmeettheirlegalobligations,companiesusuallyneedtoinvestinnew

technologies,informationsystems,andworkpractices.Frequently,however,thereis

nodirectvalue-added,innovationorproductivitygain,realizedbybusinessesasaresult

ofthoseinvestments.Inthesecases,aninvestmenttaxcreditshouldbeofferedto

enhancecashflowandthereturnsthatfirmscanexpectfromsuchinvestments.By

determiningtimelimitsforeligibility,suchataxcreditwouldalsobeanincentivefor

speedierandverifiablecomplianceonthepartofbusinesses.

59

CMEsupportsthefindingsandrecommendationsoutlinedintheCATAAlliance,KeyElementsfortheSuccessof

theScientificResearchandExperimentalDevelopment(SR&ED)ProgramasanIncentive,201060

Seepages12and19above.


41/46

39

5. Followthroughoncommitmentstoreducethefederalcorporateincometaxrateto15%andaveragecombinedfederalandprovincialtaxratesto25%by2012.

FollowingthroughonthesecommitmentsiscriticaltoprovidingCanadawithagloballycompetitivetaxrateoncorporateincomethatwillattractandretainbusiness

investmentandproductmandates,andatthesametimemaintainbusinessconfidence

thatreturnsoninvestmentplannedasaresultofinvestmentsinCanadawillbe

forthcoming.

6. FollowthroughoncommitmentstoharmonizeprovincialsalestaxeswiththeGST.

TheHarmonizedSalesTax(HST)eliminatesprovincialsalestaxesonbusinessinputs,

therebyloweringthecostofinnovationandincreasingreturnsoninvestment.

ProvincesthathaverecentlyadoptedtheHSTshouldapplyInputTaxCreditstoall

businessinputsandmakethemavailableforallcompaniesadministeringtheHST.

Thesetaxmeasureswillencourageinvestment,innovation,andproductivityimprovementby

increasingcashflowandprovidingbusinessesgreatercertaintythattheywillindeedbeableto

realizeexpectedreturnsontheirinvestments.

OtherPolicyRecommendations

Taxmeasurestoencouragebusinessinvestmentandinnovationneedtobesupportedbyother

policyinitiativesaswell.

A) TohelpCanadianbusinessesfindnewcustomersandidentifynewopportunitiestoparticipateintechnologydevelopmentprojectsinCanadaandaroundtheworld:

DevelopaCanadiantechnologyforesightinitiativeinvolvingtechnologyexpertsaswellasbusiness,government,academic,andotherpolicyleadersfromacrossCanada,aimed

atidentifyingroadmapsforcriticaltechnologies,informingpublicpolicies,andguiding

publicandprivateR&Dpriorities.

UsepublicprocurementpoliciestostrengthendemandforinnovativetechnologieswithinCanadaandleverageopportunitiesfortheparticipationofCanadianbusinesses

ininternationaltechnologydevelopmentandprocurementprojects.


42/46

40

HarmonizeregulationsandstandardsasmuchaspossibleacrossCanadaandinternationally.

Concludeeconomicagreementsthateliminateprotectivebarrierstotrade,investment,R&Dpartnerships,technologytransfer,andlabourmobilitywithinCanadaaswellas

withkeyinternationalmarketsincludingtheUnitedStates,EuropeanUnion,China,

India,Brazil,Russia,andotherindustrializingnations.

ConcludeagreementswiththeUnitedStatestoopenstateandlocalprocurementmarketsandremoverestrictionsonemployingthird-countrynationalsinthe

developmentandmanufactureofdefence-relatedtechnologies.

EncourageconnectionsbetweenCanadianbusinessesandmultinationalsupplychainsandtechnologydevelopmentprojects.

StrengthentheroleofCanadastradecommissionersinidentifyingopportunitiesforCanadiancompaniestoparticipateininternationalprocurementandtechnology

developmentprojects,andimprovethewaythoseopportunitiesarecommunicatedto

business.

EstablishaCanadianInnovationandDevelopmentFundtotakelong-termequitypositionsininternationalinfrastructureandtechnologyprojects.

ImprovetheavailabilityofmarketandbusinessintelligenceprovidedbyorganizationsliketheDepartmentofForeignAffairsandInternationalTrade,theCanadian

InternationalDevelopmentAgency,CanadianCommercialCorporation,Export

DevelopmentCanada,otherdepartmentswithinfederalandprovincialgovernments,

theForumforInternationalTradeTraining,tradeassociations,andothertrade

promotionagencies.

B) Tosupportthedevelopment,commercialization,andadoptionofnewandimprovedproductsandprocessesbyCanadianbusiness:

Continuetoprovidedirectfinancialsupportforcompaniesinvestinginnewproducts,processes,andtechnologies.

Strengthenprivateandpublicsectorinvestmentsinbroadbandandwirelessinfrastructure.


43/46

41

IncreasefinancialsupportfortheNationalResearchCouncilsIndustrialResearchAssistanceProgram(IRAP).

Improvecoordinationandawarenessaboutinnovationinfrastructureandbusinessdevelopmentservicesatthecommunitylevel.

C) TostrengthentechnologytransfertoCanadianbusiness:

Directmorefundingforpost-secondaryandgovernmentresearchtoappliedandcollaborativeR&Dinitiativeswithbusiness.

FundmoreR&Dprojectsatpost-secondaryinstitutionsandgovernmentresearchorganizationsindirectlythroughbusinesses,withtheobjectiveofincreasing

collaborativeresearchactivitiesandimprovingtheresponsivenessofresearchersto

businessneeds.

Adoptuniformcriteriaacrossgrantingorganizationsforassessinggovernment-fundedresearchprojectsandpotentialbenefitstoCanadianbusiness.

Expandthenetworkofindustrialtechnologyadvisorsworkingtoidentifyopportunitiesforcollaborativeresearchanddevelopmentbetweenbusinessandpost-secondaryand

governmentresearchorganizations.

ImprovecoordinationandcustomerserviceacrossCanadasnetworkofacademicandgovernmentresearchorganizations.

RaisebusinessawarenessabouttheinnovationservicesthatareavailablefromCanadasuniversities,colleges,andgovernmentresearchcentres.

D) Tomaintainaninnovativeworkforce:

EnsurethatCanadasyoungpeopleandadultworkforcehavethebasicliteracyandnumeracyskillstheyrequiretofunctionintheworkplace.

Increaseenrolmentinmathematics,science,engineeringandothertechnology-relatedfieldsofeducation.


44/46

42

ImproveCanadasapprenticeshipsystemandincreasesupportforappliedskills,trades,andtechnologyprogramsinCanadasschoolandcollegesystems.

Makeiteasierforbusinessvisitorsandskilledimmigrantstoenter,work,andstayinCanada.

EncourageandimprovesupportforCanadianstudentsstudyingabroadaswellasforforeignstudentsstudyinginCanada.

Encouragethedevelopmentofnationallyandinternationallyrecognizedskillsaccreditationacrossindustry.

Helpidentifyandcommunicatebestpracticesininnovationmanagementandworkplaceskillsdevelopment.

E) Toimprovetheavailabilityofinnovationfinancing:

IncreasethelevelofinvestmentbytheBusinessDevelopmentBankofCanadaandExportDevelopmentCanadaindirectequityandinventurecapitalfunds,thereby

expandingthepoolofriskcapitalavailabletosupportbusinessstart-ups,newproduct

commercialization,andparticipationbyCanadiancompaniesinconsortiatodevelop,

integrate,andcommercializenewtechnologies.

AllowfinancialinstitutionstolendagainstaccumulatedSR&EDtaxcredits.

Simplifyandexpeditefundingapprovalsforgovernmentprogramsinsupportofbusinessinnovation.

LaunchanationalexpertreviewofCanadasinnovationfinancingsystemandadoptrecommendationsforimprovement.

F) Toensureabusinessenvironmentthatpromotesinnovation:

Improvetheprotectionofintellectualpropertyandstrengthenanti-counterfeitenforcementinCanada.


45/46

43

ImprovethepatentingprocessinCanadabystrengtheningprotectionofintellectualpropertyrightsatthetimeoffilingandstreamliningpatentapplicationanddispute

settlementprocedures.

Encouragethedevelopmentofaclearandconsistentframeworkforconfidentialityandintellectualpropertyagreementsbetweenbusinessesononehandandpost-secondary

institutions,governmentresearchorganizations,andgrantingcouncilsontheother,

withtheaimoffacilitatingcollaborativeresearch,development,andtechnology

commercialization.

Ensurecost-competitiveaccesstohigh-gradetransportation,communication,andenergyinfrastructure.

Streamlineregulatoryapprovalprocesses,simplifyregulatorycompliancecosts,andeliminateunnecessaryregulatorybarrierstoproductandprocessinnovationand

commercializationacrossCanada.

Aboveall,Canadarequiresanewnationallycoordinatedinnovationstrategythatmore

effectivelyalignspublicpoliciesandprogramstowhatbusinessesneedtocompeteandwin

intheglobaleconomyofthe21stcentury.


46/46

For more information:

www.cme-mec.ca

Roadmap to Recovery

investment and innovation - canda

Documents