1. JPW Innovation Associates Inc. 1 Searching for a Balanced System of Innovation Incentives A presentation to: The Sixth Annual Research Money Conference "Are Canada's Business R&D Incentives Working?" Ottawa, March 8, 2007 An International Perspective

2. JPW Innovation Associates Inc. 2 Contents Canada and the world Canada and the world Comparisons of fiscal supportComparisons of fiscal support Policy Issues Policy Issues Incentive designIncentive design Policy optionsPolicy options Conclusions Conclusions Future of tax incentivesFuture of tax incentives Whats next for CanadaWhats next for Canada

3. JPW Innovation Associates Inc.; OECD 2006 3 Canada relies heavily on fiscal support of R&D (% of GDP) Canada and the World

4. JPW Innovation Associates Inc. 4 … but it does not translate into high business R&D intensity CountryR&D/GDPBERD/GDPAvailability of R&D Tax Incentives/Trend Per Cent OECD Rank* Per CentOECD Rank* Canada Australia France Japan U.K. USA … Austria … Sweden Finland OECD 1.96 1.64 2.16 3.13 1.88 2.68 … 2.35 … 3.95 3.51 2.26 11 16 10 3 13 6 … 9 … 1 2 1.03 0.86 1.36 2.35 1.16 1.88 … 1.42 … 2.93 2.41 1.53 16 18 13 3 14 6 … 11 … 1 2 Volume tax credit Hybrid tax allowance Hybrid tax credit Volume tax credit Volume tax allowance Incremental tax credit … Hybrid tax allowance or refundable to all tax credit … Not available * Of all 30 member countries, 2005 or most recent available year Source: OECD, Main Science and Technology Indicators, 2006 -1, Paris, Tables 2and 24. Most improved Canada and the World

5. JPW Innovation Associates Inc.; OECD 5 More countries employ tax incentives A strong uptake in R&D tax incentives in recent 7 years - in Europe and Asia. Canada and the World Before-tax price of R&D

6. JPW Innovation Associates Inc., OECD 6 Canadas R&D tax subsidies are internationally generous Canada and the World

7. JPW Innovation Associates Inc. 7 Provinces top up Canadas generosity Canada and the World

8. JPW Innovation Associates Inc. 8 Tax incentives are going beyond R&D Incentives for enterprise formation Incentives for enterprise formation Young innovative companies: FR, BEYoung innovative companies: FR, BE Venture capital incentives: UK, IE, BCVenture capital incentives: UK, IE, BC Technological Development Incentives: ES, PEI Technological Development Incentives: ES, PEI Technology Transfer (Patents): ON Technology Transfer (Patents): ON Training Incentives: JP, KO, AT, FR, QUE, ON Training Incentives: JP, KO, AT, FR, QUE, ON Collaboration incentives: JP,DK, BE, HU, ES, QUE, ON Collaboration incentives: JP,DK, BE, HU, ES, QUE, ON Canada and the World

9. JPW Innovation Associates Inc. 9 Training incentives become significant Training incentives become significant Canada and the World Tax Subsidy

10. JPW Innovation Associates Inc. 10 Collaboration incentives are gaining Collaboration incentives are gaining Tax Subsidy Canada and the World

11. JPW Innovation Associates Inc. 11 Trends in business support Two thirds of OECD countries have R&D tax incentives in placeTwo thirds of OECD countries have R&D tax incentives in place Canada has a prominent place Canada has a prominent place Holistic innovation support emergingHolistic innovation support emerging Canadas place not so prominent Canadas place not so prominent Where federal Canada is missing the boat – provinces are picking the slack, e.g. in incentives for training and collaborationWhere federal Canada is missing the boat – provinces are picking the slack, e.g. in incentives for training and collaboration Canada and the World Where is the direct public support?

12. EU/CREST Working Group Rationale Choice of tools 1st order effects 2nd order effects 3rd order effects High social return... Firms underinvest in R&D Direct measures or fiscal incentives Benefits at macro level: TFP, growth, quality of life Increased R&D at firm level Increased profits at firm level Logic of state intervention Source: EU/CREST Working Group Policy Mix Issues

13. JPW Innovation Associates Inc. 13 Basic forms of support Grants & subsidies Tax incentives More targeted Pre-set budget More neutral More accessible Less costly to administer ? Source: EU/CREST Long term? Short term? More costly to administer ? Policy Mix Issues

14. JPW Innovation Associates Inc.; European Commission, 2007 14 Direct vs. tax support in EU-17 A Significant Shift to Fiscal Incentives Policy Mix Issues Finland, Sweden Germany

15. JPW Innovation Associates Inc. 15 Policy design depends on national goals Goal: Increase risky research/ inventions Narrower R&D definition Narrower R&D definition Narrower expenditure base (less D) Narrower expenditure base (less D) De-linking from current profits (refund, wages) De-linking from current profits (refund, wages) Collaborative R&D Collaborative R&D Policy Tools: Grants and subsidies; incremental tax credits Goal: Increase general uptake of new knowledge and innovation Broader R&D definition (e.g. new to the firm) may include innovation Broader R&D definition (e.g. new to the firm) may include innovation Broader expenditure base Broader expenditure base Policy Tools: Tax credits based on volume of R&D, incentives for innovation, networks, regulations, new facilitating institutions Source: Jan Nill, EU/IPTS Policy Mix Issues

16. JPW Innovation Associates Inc. 16 Policy objective and incentive design Explore novel and generic research directions (limited appropriation of returns) Explore novel and generic research directions (limited appropriation of returns) Grants and subsidies, refundable incremental tax credit, research wages tax creditGrants and subsidies, refundable incremental tax credit, research wages tax credit Promote linkages between elements of the science and innovation system Promote linkages between elements of the science and innovation system Non-incremental tax schemes, collaboration incentives, grants and subsidiesNon-incremental tax schemes, collaboration incentives, grants and subsidies Encourage uptake of new knowledge by business Encourage uptake of new knowledge by business Broadest inclusion of R&D costs, a volume-based R&D tax credit, possibly including some innovation costsBroadest inclusion of R&D costs, a volume-based R&D tax credit, possibly including some innovation costs Source: Jan Nill, EU/IPTS Policy Mix Issues

17. JPW Innovation Associates Inc. 17 What the future holds Pressures to address business innovation will continue to influence policy mix Pressures to address business innovation will continue to influence policy mix Direct support to business innovation … remains important (OECD)Direct support to business innovation … remains important (OECD) Focus on innovation linkages (networks, partnerships)Focus on innovation linkages (networks, partnerships) Tax credits will survive … but may not be as generous as they are now Tax credits will survive … but may not be as generous as they are now Countries streamlining: ES, JP, AUCountries streamlining: ES, JP, AU Countries evaluating: UK, NO, NL, ATCountries evaluating: UK, NO, NL, AT Conclusions

18. JPW Innovation Associates Inc. 18 Do R&D tax incentives work in Canada? Evidence supportive but dated Evidence supportive but dated New evaluation required New evaluation required Include direct support contextInclude direct support context Look at overall business tax regime Look at overall business tax regime How do tax incentives interplay with business taxation?How do tax incentives interplay with business taxation? How generous should R&D tax incentives be?How generous should R&D tax incentives be? Conclusions

19. JPW Innovation Associates Inc. 19 Whats next for Canada? Adapt to current business needs: Adapt to current business needs: Expand SR&ED thresholdsExpand SR&ED thresholds Make SR&ED refundable to non-CCPCs, etcMake SR&ED refundable to non-CCPCs, etc Rethink the balance: fiscal – direct Rethink the balance: fiscal – direct Design new mix of incentivesDesign new mix of incentives Reward merit and competitiveness of projectsReward merit and competitiveness of projects Work with provincesWork with provinces New facilitating institutions required?New facilitating institutions required? Conclusions A better solution? A quick fix solution?

20. JPW Innovation Associates Inc. 20 The art of explaining tax expenditures lies in knowing where to stop. The art of explaining tax expenditures lies in knowing where to stop. Roger Heath Thank you I welcome your questions