Manufacturing articles
Building Competitive Advantage Through Innovation
Author: Paul Boucher
Date: May 2011
Publication: Canadian PLANT
Recuperating from the economic downturn, we’re reminded that innovation is critical for economic survival and business growth. Many manufacturers that focused on efficiency, productivity and innovation successfully navigated the turbulence – and are stronger today because of these efforts.
The federal government also recognizes that innovation fuels economic growth and has lately been reinforcing support for this competitive advantage. The Scientific Research and Experimental Development (SR&ED) tax incentive program is a key focus of the government’s efforts to accelerate private sector investment, enhance the ability of Canadian firms to participate in global markets, and create a more competitive business environment. This program is the single largest source of government financial support for industrial research and development. Canada has one of the most generous programs in the world, providing businesses with about $4 billion in tax credits annually to support research and development. However, this country only ranks 14th in innovation among the 17 countries in the Organisation for Economic Co-operation and Development.1
As the marketplace grows increasingly global and competitive, governments in countries around the world are aggressively encouraging local companies to become more productive and competitive. Innovation is the leverage many are using to drive productivity. Thus the Canadian government is reviewing why businesses here are lagging other countries in business R&D spending, rates of commercialization of new products and services, and productivity growth.2 An expert panel was appointed last fall to conduct a comprehensive review of federal programs that support innovation in the private sector. Among those included in this review is the SR&ED program. While we won’t know the panel’s recommendations until sometime this fall, a number of enhancements are already underway to provide more certainty regarding the approval of claims and to speed delivery of tax credits.
Many businesses have leveraged the SR&ED program as a valuable competitive advantage. One family-owned manufacturing company survived the economic downturn and created new market opportunities that will soon double its business. This mid-size manufacturer had been operating in the fabricated metal sector for more than a decade – until the company’s largest customer unexpectedly declared bankruptcy during the recession. Faced with idle machining and assembly and the loss of irreplaceable sales, the management team immediately began investigating opportunities to utilize the operation’s capabilities elsewhere.
Unfortunately, they could find no significant potential within the company’s own or related sectors. Looking farther afield, management eventually identified possible opportunities within the energy sector. Since this industry sector is significantly more regulated than their own, they had to develop prototypes for a rigorous approval process. Knowing this would require an extensive investment in research and development, the management team worked with a specialist to evaluate SR&ED opportunities and develop a process that would meet program requirements. This was crucial because many alternative lenders had vanished during the downturn and management had few funding options.
The company submitted a successful claim to the S&ED program and, with the assistance of $200,000 in tax credits, accelerated cash flow and working capital. Within two years management had developed the necessary prototypes, successfully secured several contracts and reconfigured operations. The company is now on track to double sales.
This enterprise is one of about 18,000 businesses that use the SR&ED program each year. Since there are more than 84,000 manufacturers3 in Canada, many more could likely benefit from the program’s investment tax credits of up to 35% for eligible current and capital expenses – along with additional deductions and credits offered by most provinces.
There are a couple of steps manufacturers can take to identify appropriate research and development opportunities and submit successful SR&ED claims. For example, when planning significant expenditures the management team should discuss these investments in the context of their potential contribution to research and development activities. If an investment might contribute to producing new products or processes or to improving existing ones, a company may be able to structure these investments to claim tax credits.
In order to identify and monitor research and development activities a company must be able to track these activities on a current and ongoing basis. This requires integrating R&D practices into the regular business routine, such as adding an agenda item to monthly operations review meetings. Discussing recent activities related to research and development at these meetings makes it easier to document activities – and to meet the documentation requirements of the SR&ED program.
Canadian companies facing the loss of sales volume and even entire markets have been able to invest in new products and manufacturing processes with the assistance of this program, thereby supplementing and sometimes completely replacing a core business. Small to medium-size businesses comprise about 75% of SR&ED participants. Thus the door is open for manufacturers of virtually any size that wish to position themselves for the future by enhancing innovation and productivity.
Over to you, Canadian manufacturers – there’s never been a better time to assess opportunities for using the SR&ED program to gain a competitive advantage.
Paul Boucher, PEng (905-272-7831/ pboucher@bdo.ca), is National Advisory Leader of BDO’s manufacturing industry practice. He works with companies to drive revenues and profitable growth through innovation.
