Unleashing Business Innovation in Canada

This paper discusses how to improve Canada’s business innovation in order to boost labour productivity and outputgrowth. Many general framework conditions are highly favourable to business risk-taking and innovation, includingmacro stability, openness, strong human capital, low corporate tax rates, low barriers to firm entry and flexible labourmarkets. However, they can be improved further by reduced external and interprovincial barriers in network andprofessional service sectors, more efficient capital markets, fewer capital tax distortions and improved patentprotection. A second focus should be on ensuring that incentives arising from government subsidies are targeted onactual market failures. The very high level of support to business R&ampD via the federal Scientific Research andExperimental Development (SR&ampED) tax credit and provincial top-ups may affect the incentives of small firms togrow and should be redesigned. A plethora of small, fragmented granting programmes, mainly geared to SMEs,should be streamlined for better government-business collaboration. The large public share in venture capital shouldbe wound down, as it may crowd out more productive private finance. A final focus should be on boosting managerand worker skills that are intrinsic to all forms of innovation, by filling gaps in training, mentoring and education.This Working Paper relates to the 2012 OECD Economic Review of Canada (www.oecd.org/eco/surveys/Canada).