Canadian program similar to SBIR faces big budget cuts

The Innovative Solutions Canada (ISC) program is often compared to the U.S. Small Business Innovative Research (SBIR) program. And, like the SBIR program, ISC has faced criticism from skeptics despite metrics that show the program delivers high returns on investment. When Canada’s Budget 2023 Initiative recommended reallocating 14.1 billion Canadian dollars (CAD) in federal spending, each Ministry was tasked to identify programs that did not address the government’s top priorities. Innovation, Science and Economic Development Canada (ISED) identified ISC as one such program. ISC’s budget of 147.6 million CAD in fiscal year 2023 was trimmed by 28.2 million CAD in 2024-25 and 70 million CAD annually thereafter.

ISED has reallocated some of those dollars to target high priority industries. One other reason for the cut cited by ISED is, somewhat ironically, that many government departments have consistently failed to meet their spending obligations mandated under the ISC program (1% of R&D expenditures), resulting in significant shortfalls in funding for the program. ISC remains active and continues to support Canadian startups though the reduced funding will limit the number of innovations advanced.

Now, supporters of ISC, including the office of Senator Colin Deacon, are fighting to have the cuts rescinded by demonstrating the effectiveness of federal innovation programs in Canada and questioning the criteria used to justify the cuts. According to a report released by Senator Deacon, Federal Programs for Business Innovation, the ISC program was cut despite delivering high returns on investment. ​In fact, the Canadian government reported that every $1.00 invested in the ISC program produced a $3.10 increase in GDP and a $1.40 increase in tax revenue.

To satisfy critics of the program, Deacon proposes targeting ISC to align with business realities. This alignment would entail providing timely and flexible support and use lessons learned from successful international models, such as the U.S. SBIR program and South Korea’s KISED, which emphasize tailored support, private sector collaboration, and simplified application processes to increase program accessibility. Deacon’s report states that because Canada struggles to retain intellectual property (IP) and talent, the program should incentivize commercialization within Canada to maximize economic benefits. This incentive could be achieved partly through greater use of government procurement from ISC-supported companies, providing early revenue and validation. ​

Innovation Solutions Canada (ISC) and the Small Business Innovation Research (SBIR) program in the U.S. share some similarities but also have key differences. ISC and SBIR are both designed to support technology commercialization and small businesses, rely on government funding to provide financial support to businesses, and use a phased approach, with funding provided in stages to de-risk the concept and prototype development process.  

The biggest difference between SBIR and ISC is scope. Total federal spending for SBIR in 2023 was 6.3 billion USD, dwarfing ISC (147.6 million CAD converts to 106.2 million U.S. dollars).

It should be noted that SBIR has faced similar criticisms in the U.S. to that ISC faces in Canada. Some critics, such as Senator Rand Paul, describe the SBIR program as inefficient, with funds going toward administrative costs and overhead rather than directly supporting research and development. Paul also argues that the program lacks focus and scatters resources across too many projects, hindering the development of truly groundbreaking innovations.

Any U.S. federal government agency with an external research budget greater than 100 million USD is required to set aside 3.6% of that budget for SBIR. At a much smaller one percent requirement and taken from a much smaller pool of overall federal R&D expenditures, ISC faces challenges by design in greatly influencing the federal R&D direction toward commercialization.  As a result, ISC has a stronger focus on procurement, using government contracts to stimulate innovation and purchase innovative solutions. SBIR, while it can lead to procurement opportunities, is primarily focused on funding innovation-driven R&D tied to the research missions of the participating agencies. That said, ISC often uses a challenge-based approach, where government departments issue challenges to businesses to solve specific problems. SBIR typically uses a more traditional grant and contract mechanism.  

This article was prepared by SSTI using Federal funds under award ED22HDQ3070129 from the Economic Development Administration, U.S. Department of Commerce. The statements, findings, conclusions, and recommendations are those of the author(s) and do not necessarily reflect the views of the Economic Development Administration or the U.S. Department of Commerce.