The problem with experiments is very simple, says University of Toronto Professor Dan Breznitz.

They often fail.

Which presents a dilemma for those who want to foster innovation: In a world of limited resources, who should be placing the bets on potential winners? And when winners win big, to whom should the spoils go?

A new report by the Broadbent Institute and Atkinson Foundation wants to be part of the answer. It argues, against conventional business wisdom, that it is often the state — not the private sector — that is best-placed to pinpoint future trailblazers.

By moving away from its current reliance on indirect measures like tax credits, the report says the Canadian government could do much more to spur innovation success and ensure that its rewards are shared more fairly.

“By seeing (the state) as an impediment to a dynamic private sector, as something that needs to get out of the way ... (business) isn’t empowered to do big, bold things,” says Jonathan Sas, Broadbent’s director of research.

And, experts argue, Canada needs to do something big and bold, or risk being left behind in the innovation race. A 2011 report to the federal government said it needed to do much better at helping small businesses grow into global competitors.

Dan Breznitz, co-chair of the Munk Centre’s Innovation Policy Lab in Toronto, says the province should be ranked as one of the top-10 innovative places in the world.

“We are not there,” he says bluntly. “That’s just a fact.”

Luckily, according to Mariana Mazzucato, governments are good at enterprising behaviour. The British economist was recently invited to Toronto by the Atkinson Foundation (which also funds the Star’s Work and Wealth reporting position). She points to the success of countries like the U.S. and Germany at deploying state resources to fund innovation.

Take for example the iPhone’s personal assistant, Siri. A product solely attributable to Apple’s business acumen? Not so, argues Mazzucato’s new book.

The technology was actually developed after a U.S. government agency funded the Stanford Research Institute (SRI) to create a “virtual office assistant” for military personnel. That morphed into a start-up, which was bought by Apple in 2010 for an undisclosed sum.

Indeed, research by American academics Fred Block and Matthew Keller shows that 88 per cent of major innovations in the United States between 1971 and 2006 relied on federal research funding to get their start.

“Governments are the only the body in our society that can make the big bets on unproven research and unproven technologies,” says David Wolfe, a political science professor at the University of Toronto Mississauga.

Yet, although Canada has one of the highest levels of indirect innovation support through tax credits amongst wealthy countries, its direct research and development spending compares poorly to competitors like Germany and the U.S. Those governments spend 2.8 and 2.9 per cent of their GDP on R&D respectively, while Canada spends less than 1.7 per cent.

“(Tax credits) are very low risk politically,” explains Breznitz “You give money only to things that are already successful. They look good at the same time, and they help the very strong interests of companies that employ a lot of people and have a lot more money.”

Politically palatable, maybe, but not always the most effective innovation tool, argues Breznitz.

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“When you give R&D tax incentives, you’re giving them after the fact to a company that already did something, is already making money … and you’re basically channelling a lot of money to big companies.”

Wolfe says a competitive innovation tax regime is still important, particularly in encouraging businesses to invest more of their own money on research and development. That, most experts agree, is something Canada desperately needs, since it has some of the lowest business spending rates in the OECD.

Nonetheless, Wolfe believes direct government investment, through mechanisms like the country’s highly successful Industrial Research Assistance Program (IRAP), also needs to be seen as a critical part of innovation policy, and is worthy of more public money.

Ben Fox, who launched his web tutorial start-up Sidekick from Ryerson’s Digital Media Zone, has benefitted from both direct and indirect government support. He agrees that both can be important tools — tax credits helped alleviate end-of-year financial stress for the fledgling company — but says direct funding has been absolutely essential.

Admittedly, he says, the application process for IRAP was a bit cumbersome, but it gave the company the necessary upfront cash to solve early technological problems. And Fox’s favourite thing about IRAP? It requires successful companies to repay the loan once they reach a certain level of profitability.

“Basically, the government is helping to fund you and, if you’re successful, you’re going to help fund the next guy,” he says. “I love that. I think the start-up community has to be a community.”

Which gets to the heart of what the Broadbent Institute says is one of the major upsides of direct government involvement in innovation: the ability to help ensure its gains can be fairly redistributed.

According to a 2014 report by the International Monetary Fund, Canadian companies have been accumulating “dead money” at a faster rate than any other G7 country, rather than reinvesting profit into things like human capital or research capacity — suggesting that the rewards of innovative success are being captured by an increasingly narrow sliver of society, even when public money may well have been an early catalyst for achievement.

But in taking a more active stake in innovative missions, the Institute suggests, the Canadian government could help better spread the benefits of success, by doing things like taking equity positions in companies it helps start, making loans contingent on local hiring, or asking for grants to be repaid when firms are successful.

“Government is always, in a sense, picking winners. It’s picking races,” says Sas. “And so the conversation we need to have is around making sure the public sees returns on those bets.”