Friday, October 03, 2008

Narrow view of innovation drives proposed Ontario law

The Ontario government introduced its "Ideas For the Future Act" last week—following through on its pledge earlier this year to provide a refund of provincial income tax to university spinoff companies over their first 10 years in business.

The refund would only be available to companies incorporated after March 24, 2008 and only to companies whose sole purpose—in the opinion of the Ministry of Research and Innovation—is selling/licensing:

1) Software created by university employees or students "in the course of" their employment at the university or their academic studies. The software must constitute "a technological advancement" in the opinion of the Ministry of Research and Innovation.

2) Computer/communications/semiconductor/electronics equipment, health technology, or bioeconomy products "an essential element of which" is a patented technology wholly developed by university employees or students "in the course of" their employment at the university or academic studies. The patent doesn't have to have been issued before the company can qualify, but it must be issued within the company's first 10 years.

There's some flexibility given to both the Ministry of Finance and the Ministry of Research and Innovation in deciding exactly what qualifies, but if your company falls into one of those two categories, there's a good chance that it will qualify. If it doesn't, I suspect you'll have a hard time getting approval.

You won't know for sure if you qualify until after the end of each year when you ask the Ministry of Research and Innovation to provide you with a certificate of eligibility. If your company is certified, you can then ask the Ministry of Finance for a refund of your provincial income tax.

The bill is only at first reading stage, so there will be opportunities to make changes before it becomes law—which is good, because there are a lot of ways that the act should be improved.

Unfortunately, the act would do nothing for the majority of our most innovative companies, most of which wouldn't qualify. It certainly won't do anything to encourage startup creation—in the 10 years I've worked with new tech companies, provincial income tax has never been raised as an issue by any entrepreneur. At best, it's like a nice Christmas bonus, which makes its overly-restrictive eligibility rules even more of a disappointment.

If the goal is to cultivate Ontario's economic future, shouldn't we be supporting all of our innovative startups? Why is a tech company started by a 22-year-old student more worthy of support than a startup created by a 26-year-old graduate ... or a 46-year-old who isn't a university employee, or anyone else?

The cardboard version of innovation driving this legislation goes something like this: research occurs at universities and labs and leads to patents which are then pushed out into the business world and commercialized, creating the innovative tech companies that the economic future of the province depends upon.

In the real world, the links between research and economic prosperity—and the two are certainly connected—follow many different routes. Unfortunately, policymakers have obsessed over one patent-centric path at the expense of others that have more impact on our economy. As Mike Lazaridis pointed out years ago, if you want to see the economic impact of research, you need to look more at students and less at patents. Few innovative companies are created to commercialize university-created patents, but almost all of them have university- or college-educated people driving them. RIM itself wasn't created to commercialize a particular university-created innovation. In fact, Lazaridis has said that over RIM's first 20 years in business it licensed just two technologies from universities.

The government should expand the eligibility for the tax refund so it includes all  innovative startups—all of which make use of ideas and knowledge that flowed from research—and not just the small percentage of those companies that were created to commercialize a specific university-based invention.

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