Reflections on the Jenkins Report (2)

These reflections focus on the Executive Summary section of the report.

One of the phrases we have heard frequently from RTA’s is “root cause”. Some of the RTA’s have even held that SR&ED can’t begin until a root cause has been identified. The Jenkins group was established to provide “advice to the government on how federal programs that support business and commercially oriented R&D can make an even stronger contribution to a more innovative and prosperous Canada.”

Following the approach of a CRA SR&ED RTA one observes that the report fails to analyze why Canadian innovation lags behind that of its main competitors and why the current panoply of direct and indirect innovation support programs has not resulted in a better result. Without identification of the “root causes”, I would respectfully submit that the recommendations of the Jenkins Panel not only constitutes poor science but would also not receive a passing grade if it were a B-school paper.

In section 3, the report suggests the low level of Canadian Business Expenditure on Research and Development (BERD) as one of the main causes of Canada’s low competitive ranking in terms of productivity. So far, so good.

Then we remember that we have heard this story for decades. Our friend the RTA would class this as “existing knowledge”. The “root cause” in this situation is the answer to the question: Why is Canada’s BERD so low? This question was not within the mandate of the Jenkins Panel, and therefore they offered no answers to the question.

Without addressing this key question, I respectfully suggest that nothing positive has been achieved by the Panel and that its recommendations are of little or no use to the solution of the real problem that Canada needs to address.

Specific comments on each recommendation follow:

Recommendation 1: Create an Industrial Research and Innovation Council:
Comment: The last thing we need is another government bureaucracy to help achieve a higher intensity of business investment in R&D. The problem is the low rate of BERD, not the lack of government programs and councils.

Recommendation 2: Simplify the SR&ED Program by basing the tax credit for SME’s. Redeploy funds from the tax credit to a more complete set of direct support initiatives to help SME’s grow into larger, competitive firms.
Comment:The Report fails to provide any support that limiting the allowable expenditures to labour related costs would reduce the compliance and administrative costs. What does this mean for the costs of SR&ED work conducted by contractors and universities and the like?
In addition, the Panel recommends that “Over time, the government should also consider extending this new labour-based approach to approach to all firms”. In one paragraph (2.1) the Panel suggests that limiting the cost basis for SME’s reduces costs of compliance and administration but that still permitting larger firms to use a broader range of costs would not help reduce these costs. Where’s the logic”.
What would really help SME’s would be templates for recording and tracking activities to assist the SME’s in properly documenting their SR&ED activities. This make the job of the RTA’s easier, as the proper use of these templates could be prima-facie evidence that the work was performed and make it easier for the RTA to determine if it meets the SR&ED requirements. Right now each RTA has his own format for obtaining information, which often duplicates the documentation prepared by the Claimant.

Recommendation 3: Make business innovation one of the core objectives of procurement, with the supporting initiatives to achieve this objective.
Comments: By the time the bureaucracy gets through the effort of figuring how to make this work, the cost will likely exceed the monies saved by cutting back SR&ED.

Recommendation 4: Transform the NRC into “a constellation of large-scale collaborative sectoral R&D centres.
Comment: Now how, exactly, will this help to increase business innovation and BERD?

Recommendation 5: Help high-growth innovative firms access the risk capital they need through the establishment of new funds where gaps exist.
Comment: This boils down to providing additional funding for BDC, which is not renowned for its support of innovation and taking risks.

Recommendation 6: Establish a clear voice for innovation and engage in a dialogue with the provinces to improve coordination and impact.
Comment: The constitutional problem with this is that, excepting airlines, telecommunications, banking and railroads the primary jurisdiction for most business activities lies with the provinces. The role of the Federal government in business lies primarily with its taxing power and spending power. As demonstrated by the recent failure of the Government to create a single securities regulator in Canada, something that most financial commentators consider to the development of a more efficient capital market, recommendation 6 is a non-starter from the outset.

 

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