After billions in funding, Strategic Innovation Fund failed to improve Canada’s innovation performance, experts say

NOTE: See accompanying story, “Strategic Innovation Fund producing ‘significant benefits’ for Canadians, ISED says,” for a response from Innovation, Science and Economic Development Canada to criticisms raised in this story.

Nearly $3.4 billion in federal spending through the Strategic Innovation Fund (SIF) during the last three years has failed to improve Canada’s innovation performance and productivity, say some innovation and policy experts.

The SIF is a “corporate welfare program” that serves no strategic or innovative purpose and it should be scrapped altogether, says Richard Owens, a Senior Munk Fellow with the Macdonald-Laurier Institute and an adjunct law professor at the University of Toronto.

“It’s merely a political slush fund and it is the most undisciplined use of public funding on The Hill (Parliament),” he told Research Money. “It’s enormously wasteful.”

Despite the criticism, the 2021 federal budget's single largest investment is in the SIF, which will receive $7.2 billion over seven years starting this fiscal year. Key technology-based sectors, including life sciences, automotive, aerospace and agriculture will be receiving $2.2 billion over seven years and $511.4 million a year on an ongoing basis.

Owens argues that there is no government accountability for SIF spending. As an example of waste, he pointed to SIF providing $49 million last year to U.S.-based multinational Mastercard Inc., to establish a global Intelligence and Cyber Centre in Vancouver. Work will include creating cybersecurity-related software tools.

Mastercard is a “highly profitable global behemoth” with $12 billion in annual revenue, so it doesn’t need Canadian taxpayer money to develop new software, Owens said.

The SIF “has got nothing to do with innovation,” said political economist Richard Hawkins, professor in the Science, Technology and Society Program at the University of Calgary. The program is actually financing individual companies’ R&D, not producing productivity gains, he said.

SIF isn’t linked to any overarching innovation or industrial strategy, Hawkins said. “It’s a dog’s breakfast of stuff. And some of it is just political. It’s just preserving jobs in traditional sectors.”

For example, in 2019, SIF provided nearly $50 million to Stelco to upgrade its steel-production facilities in Hamilton and Lake Erie. The same year, Algoma Steel received $30 million in SIF funding for new technologies at its plant in Sault Ste. Marie.

“If companies are being funded to do something that they would have done anyway, that’s not a particularly good expenditure of [public] money,” Hawkins noted.

Another problem, he added, is that SIF is entirely focused on inputs, such as R&D expenditures and expected job creation, rather than on innovation outputs such sector productivity, number of patents filed and IP retained in Canada.

“The problem in Canada is that we’ve got everything ass-backwards, and we’ve had it ass-backwards since the 1970s,” Hawkins said.

Canada’s innovation performance is “a disaster”

Despite SIF and other federal innovation programs, Canada remains last or next-to-last among G7 countries when it comes to R&D spending, productivity and patent filings, said Joël Blit, senior fellow at the Centre for International Governance Innovation and an assistant professor of economics at the University of Waterloo.

“We have gone from second-best to second-last in productivity in the span of 50 years,” he said in an interview. “It’s a disaster regardless of how you look at it.”

Studies show that during times of crisis is when a lot of innovation happens, including rapid automation and other technology adoption, Blit said.

“Instead of supporting and encouraging that, we’re actually stifling it through programs like the wage subsidy that are effectively just trying to maintain the status quo instead of embracing the forces for change,” he said.

The SIF typically provides funding mainly to large, well-established firms for projects worth $10 million or more, yet the vast majority of Canadian companies are small to medium-sized businesses, he said. These SMEs are often the most innovative, he added, but due to the COVID pandemic they don’t have the money to invest in technology adoption and innovation.

The government needs to consider a separate fund to support innovation by SMEs during and after the pandemic, and should do more to bring SMEs together with innovators and technology providers, he said.

Government also needs to help educate Canadian companies on how they can use global IP to protect and export their innovations, Blit said. Weakening patent laws in Canada would actually give companies the freedom to operate locally, without being sued over patents by large multinationals, he said.

In addition to the $3.4 billion already spent through SIF, the bulk of new SIF funding ($5 billion) allocated in the Federal 2021 Budget goes to SIF’s new “Net Zero Accelerator” fund, “to rapidly expedite decarbonization projects with large emitters, scale-up clean technology and accelerate Canada’s industrial transformation across all sectors.”

But Owens said the government should immediately eliminate all of its innovation subsidy programs, including SIF, the Scientific Research and Experimental Development tax credit program, National Research Council business grants and the five superclusters, and instead implement public and corporate tax reductions that “would be far more effective for innovators.”

“If we want to subsidize to create productivity gain, then it should be done on a commercial basis, preferably with private sector co-investors in accordance with direct and continuously updated set of investment criteria, and tracked on a balance sheet so you show returns,” Owens said.

Ontario and Quebec received majority of SIF money

An analysis by Research Money based on SIF data shows that companies and joint ventures in Ontario and Quebec have received two-thirds of SIF funding during the last three years.

Projects in those two provinces together received $2.254 billion, or 66 percent of the total $3.39 billion in SIF funding provided from January 15, 2018 to April 9, 2021.

Hawkins said he’s not surprised that the lion’s share of funding went to those provinces, since that’s where most of Canada’s R&D-intensive, high-tech manufacturing occurs.

Owens, however, said regionalism shouldn’t be used as the criteria for investment. “If you look at the history of government innovation programs in the country, time and again what you see is a pattern of regional subsidization instead of innovation subsidy,” he said.

SIF funding often benefits companies based in foreign countries

About $1.36 billion, or 40 percent, of all SIF funding has gone to companies and joint ventures in Canada whose parent company is based in a foreign country.

For example, in March 2021, SIF announced $415 million — the largest SIF award to date — for Sanofi Pasteur Limited to build an influenza manufacturing facility in Toronto. Sanofi’s parent company is based in France. The company promised to invest at least $79 million a year to fund Canadian R&D.

But Owens said that Sanofi will apply the innovation involved worldwide to the benefit of the parent company, “not to the benefit of a Canadian company and not to the benefit of the Canadian taxpayer that has no ownership interest or even the ability to tax the worldwide profit of Sanofi.”

In 2019, LNG Canada Development received the second-largest SIF award to date — $220 million to buy “highly energy-efficient natural gas turbines” for its $40-billion LNG production facility being built in Kitimat, B.C. LNG Canada is a joint venture among Shell, PETRONAS, PetroChina, Mitsubishi and KOGAS — all companies based in other countries. LNG Canada has since bought commercially available turbines that don’t require innovation.

This SIF investment “is creating a bunch of construction jobs,” Owens said. “Is that creating an innovative economy? Of course not.”

SIF's publicly stated mandate is to support "large-scale, transformative and collaborative projects that help position Canada to prosper in the global knowledge-based economy."

However, Research Money’s analysis shows that funding doesn't always go to knowledge-based industries, such as artificial intelligence, big data analysis, or information and communications. Of the 13 companies or joint ventures that received $50 million or more in SIF funding, four companies or joint ventures were in well-established industrial sectors — oil and gas, automobile manufacturing, and mines and metals.

Out of those 13 companies or joint ventures receiving $50 million or more, eight have parent companies located in foreign countries.

For example, in 2018, the SIF provided $110 million to Toyota Motor Manufacturing Canada, whose parent company is based in Japan, to bring “a new advanced manufacturing platform” to the company’s plants in Ontario.

The same year, Elysis Limited Partnership in Quebec received $60 million in SIF funding for a “revolutionary process to make aluminum.” Elysis is a joint venture by U.S.-based Alcoa Corporation and Rio Tinto Aluminum, a subsidiary of Anglo-Australian multinational Rio Tinto.

Blit said it is necessary for Canada to be able to attract foreign multinationals that bring innovation knowledge and technology which then diffuses to other companies in the local economy.

“But we can’t be a branch plant economy forever,” he added. “There has to come a time when, instead of begging these multinationals to come and set up here, we have to really start developing our own [industry] from the ground up.”

Kyria Sztainbok, an intern with Research Money, contributed research for this story.

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