The Unintended Lessons from the Canada Emergency Wage Subsidy
Although the COVID-19 economic crisis is far from over, many knowledge-based scale-ups—relatively larger, market-tested firms—are already well on their way to bouncing back due in part to the federal government’s suite of supports introduced for these companies. They are also likely the best positioned to lead Canada’s post-pandemic recovery having managed to avoid the full brunt of the economic fallout.
Direct-to-firm government support has proven to be especially vital for businesses without cash reserves or sufficient runways to wait this crisis out. These direct forms of support, especially the Canada Emergency Wage Subsidy (CEWS), have been crucial to innovation-based technology firms including my own.
The federal subsidies are tailored to cover part of employees’ wages and prevent additional layoffs at already established firms, whereas the Innovation Assistance Program managed by IRAP (a similar support) is tailored for startups and pre-revenue firms that are not eligible for CEWS. This is an important distinction, as the concern for firms isn’t to be saved from closing shop. Rather, the focus is on maintaining growth momentum and R&D investments while continuing to expand into global markets. Much media focus has been on closures and accompanying job losses in smaller, service-sector businesses, especially for younger workers, and rightfully so. Well north of three-quarters of all businesses in Canada have 20 employees or less. This crisis is unique in how hard it has hit such businesses, but the concern for larger firms, beyond furloughing or laying-off staff, is the impact it can have on innovation-related activities and other strategic investments. In subsidizing employment, CEWS indirectly supports other parts of our company’s activities that we do not want to come to a halt.
In the months since the pandemic hit and the economy took a tumble, my company hasn’t missed a beat. In 2019 we were seeing triple digit growth. When the coronavirus struck, we, like many others, felt the instability of the economy and a decline in monthly revenues of over 30 percent. Despite this challenge, we have continued investing in R&D and our pre-COVID growth plan of international expansion.
In a hypothetical world where CEWS was not available, we almost certainly would have laid-off (or at least furloughed) staff, cut back significantly on R&D and slashed investment in our international expansion. Instead, CEWS allowed us to maintain our momentum across all fronts. We’re now back to the growth levels we were experiencing pre-COVID. As a Canadian technology company that is in the midst of scaling internationally, maintaining momentum is necessary when we have to compete internationally against better financed global competitors. With the support of CEWS, we not only survived, we also maintained our forward momentum, which is now helping us thrive. In fact, our staff has grown by almost 20 percent during the pandemic.
What can we learn from this? I think something vital and maybe a little obvious. Canada is stuck in what innovation policy scholars call a “low innovation equilibrium”. We have, for so long, relied on costly innovation from abroad (especially the United States) and a foreign direct investment-led growth strategy. Until recently, Canada has opted to import new ideas, processes, and products via foreign subsidiaries and close ties with foreign-based clients and customers. It has made us enormously wealthy but has come with some hidden costs and unintended consequences. The most obvious is a lack of investment in our own innovative activities. As evidenced by cross-national data on funding business R&D, Canada ranks close to the bottom among OECD peers. In 2017, Canada spent .06 percent of its GDP supporting business R&D, lagging drastically when compared to the US (.13 percent) and South Korea (.16 percent). We prefer, instead, to provide indirect support in the form of tax credits. This type of policy instrument—SR&ED chief among them—is valuable as indirect forms of support for R&D, but it is far cry from what other governments provide strategic industries. According to research, my peers are clear that in order to compete in today’s increasing competitive global market, more direct and targeted policy instruments are needed.
CEWS is a temporary emergency measure, not a sustainable and targeted form of support for technology-based scale-ups. That said I would be remiss not to underscore the lessons we can draw from its impact. What if more direct-to-firm supports were provided to market-validated firms that focus on innovation and international market expansion? This type of funding would truly accelerate growth and innovation in non-crisis times, helping companies compete and succeed on a global scale.