Addressing Québec's R&D Problem With More Innovative Policy

Here’s a worrying economic indicator: Despite significant government subsidies, business sector research and development investment in Québec was just 1.3 per cent of GDP, which is far below the average spending of OECD countries, G7 countries, European Union countries, or any other reasonable set of peer nations.

In fact, the rate of R&D spending relative to GDP has substantially declined in Québec over the past 20 years. Québec firms would need to spend an extra $2billion annually just to get back to the rate of R&D spending that we saw 20 years ago. If they wanted to be comparable to a country like Sweden, Québec businesses would need to spend an extra $4.5 billion on R&D!

Québec’s productivity problems are not new, but the report “Towards an innovative Québec” from the Québec Innovation Council (CIQ) is a valuable look at the state of play in 2024.

We can certainly question the effectiveness of government financial incentives for R&D, but also the regulatory and fiscal environment and Québec's ability to attract investment. We can also question why a province with excellent universities and highly educated workers is failing to produce more innovative firms. One thing is certain, Québec has all the tools to be a world leader in innovation.

Small and medium-sized companies that invest in innovation improve their long-term performance, both in terms of revenue growth and profitability. We know this. And we have government studies to prove it. So, what do we need to do to move the needle?

A vision for a more ambitious Québec

The CIQ report really represents an excellent study, and as far as we’re concerned at CCI, if the government takes up this report and gets buy-in from the private sector, the vision of the report really could lead to an energized and innovative technology sector in Québec.

If it were up to us, the vast majority of the contents of this report would be implemented. The measures proposed to encourage companies to invest more in R&D, to accelerate the marketing of innovations, improve transparency & accountability as well as to simplify administrative processes are all excellent ideas likely to boost the innovation ecosystem in Québec.

However, the most interesting recommendation showed up under a section of the report titled: “Protecting Investments Made by the State and Business”. With Recommendation 9, the CIQ report calls for a suite of new financial tools to support investment — royalty subsidies, loans with favorable conditions, and forgivable loans, for example.

These measures actually bear a close resemblance with innovation models in two other jurisdictions — Israel and Finland. These are countries with populations of less than 10 million, each with a strong common language and culture. Does this ring a bell?

What makes the Israeli and Finnish models successful?

Israel’s innovation model favors a “bottom-up” approach, which does not prioritize a particular sector. Rather than focusing on specific problems and trying to innovate around them, Israel openly encourages innovation everywhere. By creating infrastructure and providing rigorous supervision to innovators, the country minimizes risk-taking and allows innovators to focus on what they do best: innovate.

This model is unique and above all a resounding success. Israel is ahead of all OECD countries, with investments in R&D which represented 5.1% of GDP (this ratio was 3.9% in 2000). Israel's Innovation Authority has existed in one form or another for around 60 years and has constantly been adjusted to maximize investment in the private sector. Companies that invest in start-ups in the new technology sector can be reimbursed up to 40% of their losses via certain programs. When we talk about encouraging risk-taking and supporting those who go down this path, this is an excellent example.

The Finnish model is somewhat different, in that it is concentrated around important technological flagships like Nokia. These companies play a catalytic role in the country's innovation ecosystem and, in partnership with the Finnish government, support and finance R&D in various sectors. This model is reminiscent of the importance of supporting our flagships and keeping the head offices here – the benefits for the economy are undeniable and above all not replicable in any other form.

These examples show that it is not necessary to imitate what is done in the United States to innovate. You can be a small country and be a world leader in innovation. Québec is a unique case in North America. The question of language is an important vector of differentiation, alongside its generous welfare state and social fabric. And this uniqueness means that Québec is probably the North American state most likely to successfully implement a model similar to those of Israel and Finland.

Conclusion

It is unfortunate that even before the report was released, the government demanded that “any recommended review of R&D incentives for businesses must be done at zero cost.”

Although we understand the current economic context and the need to maximize efficiency in the management of public funds, the fact remains that this prerequisite is likely to limit potential solutions and our ability to consider new ways of doing things.

What if we made innovation a social project in Québec? All the ingredients are there. Now you just need to put the right mechanisms in place and above all, be patient. Texas pit masters know that to achieve the best brisket possible, you have to wait a very long time... but that wait is well worth it!

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