This paper discusses how to improve Canada’s business innovation in order to boost labour productivity and output
growth. Many general framework conditions are highly favourable to business risk-taking and innovation, including
macro stability, openness, strong human capital, low corporate tax rates, low barriers to firm entry and flexible labour
markets. However, they can be improved further by reduced external and interprovincial barriers in network and
professional service sectors, more efficient capital markets, fewer capital tax distortions and improved patent
protection. A second focus should be on ensuring that incentives arising from government subsidies are targeted on
actual market failures. The very high level of support to business R&D via the federal Scientific Research and
Experimental Development (SR&ED) tax credit and provincial top-ups may affect the incentives of small firms to
grow 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 should
be wound down, as it may crowd out more productive private finance. A final focus should be on boosting manager
and 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).
