Canada is suffering from an innovation deficit, which has been worsening for years. The result has been a dramatic decline in productivity growth and the economic growth potential of the economy. For decades, we have been living off unsustainably high commodity prices, particularly for oil and gas, at the expense of innovation and global competitiveness.

Policy makers, academics, and entrepreneurs have been aware of this worsening innovation deficit for years. But despite substantial financial support from governments for research and technology, innovation has failed to emerge as a critical source of stronger productivity growth.

In his first budget, Finance Minister Morneau began to prepare the way for an innovation agenda that would be critical to his long-term economic growth agenda. The Minister for Innovation, Science and Technology is now busy consulting with everyone and anyone who has some knowledge and experience, small or large, in the process of innovation.

In a recent article (April 23) in the Globe and Mail, Dan Bresnitz, Chair of Innovation Studies at the Munk School of Global Affairs at the University of Toronto, concluded that our innovation failure results from a lack of “ commercialization of ideas across the board in all industries, and in all sizes and ages of companies. Only 2.2 per cent of our firms even engage with innovation, and business R&D spending has been systemically declining for 15 years.”

According to Breznits, a new “innovation policy needs to be based on continuous experimentation, not long-term detailed planning. Policy-makers must rapidly come up with new initiatives, kill the ones that don’t work, scale up those that do, and then, as new industries grow, keep changing the incentives in a co-evolutionary process to keep pace with the industry’s dynamic needs and capabilities.”

But what does this mean in terms of the actual implementation of an innovation policy by the federal government? What it means is that a successful innovation policy would require that both federal Ministers and the federal bureaucracy operate in a way that they never have in the past and most likely never will in the future.  If would require a political and bureaucratic process that encourages risk taking, rewards success, and accepts failure, as a natural part a dynamic innovation process. Such a system exists in Silicon Valley but is not likely to emerge any time soon in Canada.

But there may be a way around this political and bureaucratic rigidity. In planning its Innovation Strategy, the government should consider creating an independent “Canada Innovation Fund” (CIF) modeled on the Canada Foundation for Innovation (CFI), which was created in 1997. Despite its name the CFI was never meant to support innovation. The CFI was misnamed because no one at the time understood what innovation meant.

The CFI was in fact created “to undertake world-class research and technology development to benefit Canadians. Thanks to CFI investment in state-of-the-art facilities and equipment, universities, colleges, research hospitals and non-profit research institutions are attracting and retaining the world’s top talent, training the next generation of researchers, supporting private-sector innovation and creating high-quality jobs that strengthen Canada’s position in today’s knowledge economy”. It was never meant to foster innovation but rather “scientific discovery”. Since 1997 the CFI has funded 9,303 research projects with cumulative funding of $6.6 billion.

The CFI was created as an independent institution governed by a CEO, a chairperson, and 13-person council appointed to three-year terms. The CFI receives its funding from Parliament and is accountable to Parliament.

The CIF would operate as a “hedge fund”, owned by the government, but operated by an independent CEO, Chairman and Board of Directors.  Like the CFI it would be dependent on Parliament for it’s funding and accountable to Parliament for results. Its mandate would be to make investments in businesses (especially new businesses), sectors and industries to support innovation (the commercialization of ideas). Like any hedge fund, it would be in the business of making investments that would yield significant private returns to its owners, the taxpayers of Canada. These would be paid to the government and to Canadian taxpayers in the form of an “innovation dividend”. These investments, by there very nature, would also have significant positive externalities for the rest of the economy.

The CIF would not require new funding from the fiscal framework. Funding could be found through reallocations from the Scientific Research and Economic Development tax Credit (SRED), which spends about $3.5 billion annually, and also from additional savings from the review of the personal and corporate tax systems that the Minister of Finance is already committed to.