INDUSTRY
High-tech industry converts ideas into products and services to create jobs and wealth. These jobs create indirect employment and wealth elsewhere in the economy. Many successful innovative firms and trade associations took part in our hearings. Their views on the problems of finding financing, skilled labour, and linking to sources of research and innovation are detailed in other sections of this Interim Report. In this section, the testimony on the economic impact and structure of this part of our economy will be presented.
Statistics Canada has undertaken a number of useful studies of innovation and technology in the Canadian economy, based on longitudinal records and special surveys. The results of these studies strongly underline the benefits of innovation.
Innovation is the key to success. . . More successful firms (those gaining market share and profitability) not only place greater emphasis on their innovation capabilities but they also devote more effort to activities in these areas. More successful firms are more likely to have an R&D unit and to make expenditures on R&D. . . Technology adoption is associated with superior performance. Establishments that use advanced manufacturing technologies were found to have been gaining market share and to be paying higher wages than non-users. . . the wage gap between technology using and non-technology using plants has been increasing.
The potential for future economic growth in high technology was very evident to many of our witnesses. They had seen what their companies had done and knew what trends were achievable.
In the United States, after just six years in business, a typical life sciences company can create as many as 282 jobs. That's a lot of jobs, because 100 companies will create 28,000 jobs. That's exactly what Saskatoon has done in Innovation Place; they have 100 companies I believe they've developed in less than six or seven years. I believe that pockets of excellence can be developed in every single major city in Canada.
The average technology company grows at a compounded 20 per cent growth year after year. This is a tremendous record, and we must share in this kind of success.
In our industry, and I think this is typical of technology companies, one company creates a few companies, it spins off, and a few companies create clusters. When clusters get to a critical mass, they start to lift off and form industries. I do not see any reason why Canada cannot take part in such tremendous growth. Look at Ottawa-Carleton's telecommunications community, I believe there are about 750 companies now, maybe 36,000 value-added jobs. I believe there are 5,000 vacancies. It's something we would like to see happen in the life sciences community within Canada. Naturally, more innovations will generate more new products, and the spiral goes upwards continually rather than downwards.
In 1985 a study carried out by the U.S. Department of Commerce concluded that a high-tech company - I think you can summarize it this way - that exports its output and directly employs 1,000 people creates another 1,839 additional jobs elsewhere in both the high-tech and non-high-tech sector, or elsewhere in the economy. In total you have 2,839 jobs.
The high-tech sector of the Canadian economy is characterised by a few large firms and many more small firms and often a high level of foreign ownership. For example, the information technology and telecommunications sector (IT and T) is dominated by a few large companies such as NORTEL and IBM Canada. However, in the software and services sector very small companies predominate, with the average company having only six employees. They have an average R&D expenditure of less than $25,000 per year per company.
First, at the macro-level the strength of our IT and T sector, especially relating to balance of trade and R&D issues, is vulnerable to the fortunes of a few large players in their respective markets. Besides maintenance of a domestic framework that does not disadvantage these larger players, the real action for them will be in international markets, where trade agreements and deregulation of telecom regimes around the world are critical factors.
The second conclusion is, putting the very large players to one side, that the future health of the IT and T sector in Canada is highly dependent on our ability to nurture the creation and development of successful small- and medium-sized enterprises, especially in export areas such as software and equipment, where the need might be greater for such support in these areas as, first, a framework that encourages commercialization and increases the receptor capacity of industry; second, targeted R&D incentives; third, the provision of international market intelligence that's relevant to smaller companies; and fourth, processes to support the development of partnerships involving Canadian companies, including international partnerships.
In short, Canada's IT and T sector is essentially bimodal, and we have to recognize the important contribution to the creation of economic growth in this country of both the few very large companies and the numerous relatively small companies.
The Committee was told that small companies are crucial to the creation of jobs, but their smallness is accompanied by a lack of the skills and resources necessary for expansion. Such small firms lack the range and depth of skilled, specialized management that large firms can accumulate. The need to market internationally strains both resources and management capacities. Even tax credits for R&D are less useful for small firms. Credits do not immediately improve cashflow unless there is another source of profit.
The external environment is such that [these emerging] companies operate in new global markets with a limited client base and with non-standard products.
From an internal perspective, the companies have an incomplete business strategy, when they have one. They have an inexperienced and incomplete management team, limited management information systems and limited financial reporting systems.
Tundra, at this point in time, is spending 20 per cent of its revenues on R&D to get new products out. We're at the limit of what we can do in terms of R&D spending, yet, at the same time, support for R&D funding from government is declining. We need more R&D funding for the industry.
Secondly, within the university community, because of the financial pressures, universities are actually cutting back on spending on engineering. They're cutting back the number of professors, and they're cutting back on the services they provide. They are doing this at the very time when there is a massive shortage of engineering talent, not just for semiconductors but also for all industries. This is a very detrimental situation.
Thirdly, at this point in time we have no foreign semiconductor investment in Canada - none. This is a situation that we must change if we're going to grow the critical mass in the country.
The final point is that we are unable, at this point in time, to attract U.S. talent into Canada because of the way our taxes are structured.
With a thought-provoking reference to the very successful Japanese system of strategic alliances, Newbridge Networks described to the Committee their affiliate system that seems to combine the best of both small and large firm size. The affiliates can move fast and innovate, but they have access to the considerable management know-how and market reach that only a large company can build up.
In an innovation company, there are two fundamental barriers between their concept of what they want to do and their ability to execute. I would say one is the administrative things that get in the way, that slow the entrepreneur or the innovator in getting the product done. One of the things Newbridge does is to tell the affiliate not to worry about finance, not to worry about human resources, not to worry about their information systems, not to worry about their health insurance; we'll look after all of that. We tell them to concentrate on getting the product done.
The second thing that normally hurts a Canadian innovation company is that because we're expert-oriented by definition, it's very difficult and expensive for a small company to suddenly take its product worldwide very quickly. What Newbridge does for our affiliated companies is to say, our global distribution channels are yours; if you want to use the office in Paris, use it as your own; if you want to be introduced to a customer in China, we're happy to do that.
So we do two things that basically shorten the cycle from product concept to export. One is to tell the innovator not to worry about the administrative side but to concentrate on the product. The other one is that we'll help you sell your product worldwide as soon as it's ready, which is a great competitive advance for a small company.
One of the things I think you also have to highlight with the affiliate model is the mentorship that exists with the structure next door. You can turn to the people who have built Newbridge, the people who have pulled together, whether it's technologies that are required, the teams to build those technologies, access to the capital, or methods they've used to access that. There is a global perspective and the expectation that success is measured in the same terms, with the same scope of growth and accomplishment, as Newbridge has succeeded at.
Canada only has a limited number of Newbridge-sized companies, but when companies set up close together, they can informally network together more easily as well as generating sufficient demand to make economic the specialized services they need.
I think the idea of focus is important, but just think of it in terms of clustering. If you look at any of the successful clusters, and even if you go back to the older technologies - the auto sector - government played a very important part in setting up the auto pact in 1967, creating probably the largest economic engine the country has right now in the Golden Horseshoe. It took a lot of time and effort to set up that cluster. Knowledge clusters similarly need that kind of effort.
Silicon Valley was in large measure set up by the U.S. government. If you look at most of the clusters around the world, it was active government participation in moving the required resources, both on the public and the private sides, together in concert with a very clear objective to develop a world-class cluster in X, Y, Z, to make sure they were the best, that they have the exportability to make it happen - and they've done it.
I'm starting to see some of that happen in Ottawa in the IT sector, where you're actually seeing that the venture capital is now intelligent. The companies are starting to spin out, but it's certainly not Silicon Valley yet. We can't get a law firm that will work for equity yet. That's my measure of whether we made it yet.
In Silicon Valley you can get a law firm, an accounting firm, a distributor and a manufacturer that all work for equity. We don't have that yet. We don't have that mentality. We have a way to go to catch up. If we focus our efforts on creating a couple of clusters that are competent in ensuring that the resources both from the public and private sectors are working in concert aggressively for a target, we can win. But you need that kind of directed action.