The Committee has thus far provided a simple definition of an "innovation system" and has, in passing, mentioned it both in terms of the national and local context — in the case of the latter, more formally referred to as a geographically based sectoral cluster. Clarity demands more precision from the Committee and, indeed, it is now time to put "a little flesh on these bare bones."

            The Committee will not diverge from the term "innovation system" as provided by the experts appearing before it. The Canadian innovation system — a term used to describe both our S&T institutions and their various linkages — creates, disseminates and exploits the knowledge that fuels a productive economy, which, in turn, makes a prosperous society possible. To function effectively and to realize these social objectives, this system depends on the complementary strengths of three key sectors: the private sector, universities and other not-for-profit institutions, and governments. Each of these sectors has a unique role to play in the system but, in terms of the federal government, it has subsequently identified and assigned itself a dual role of performer and facilitator of research. It fulfils these roles both by performing research, using intramural capabilities and facilities, and by funding extramural research and fostering partnerships among the various research-performing sectors. As such, innovation systems are essentially national in orientation because national institutions finance and equip them, but they are largely organized and executed at the local level. Canada’s national innovation system thus comprises a number of geographically concentrated sectoral clusters devoted to innovation. Such clusters have several economic elements (see Figure 3.1).

            The Committee was provided a series of detailed diagrammatic representations of Canada’s innovation system and its various components and linkages. Though this personal project of Dr. Thomas Brzustowski was described as a "work in process," it is already sufficiently complete and accurate in portraying important parts of Canada’s innovation system for the purposes of this Committee. With the modifications made by the Committee, the average layperson should equally find the next three diagrams both insightful and quite self-explanatory.

            Beginning with Figure 3.2, a slightly modified version of that presented to the Committee, Canada’s innovation system is situated in an environment that is best characterized by five flows of knowledge. These sources embody knowledge differently and make distinctive contributions to the Canadian society and the world. The sizes of these arrows try to capture the relative sizes of flows of the different sources of knowledge in 2001, though not exactly (percentages are indicative of the relative inflow-to-outflow of the source, where information is available). The five flows of knowledge are: (1) codified knowledge; (2) tacit knowledge of migrants; (3) tacit knowledge found in foreign direct investment (mostly by multinational enterprises (MNEs)); (4) innovations; and (5) commodities. The last two knowledge flows are found in products and services, which are broadly distinguished by their relative availability from various sources and principal price-determining mechanisms, such as price-setting in the case of innovations and price-taking in the case of commodities.

            The first flow of new knowledge, codified knowledge found in books, academic and trade journals, manuals, etc., results from research that Canadian residents undertake. Canadian universities, Canadian government labs and Canadian industry are responsible for about 4% of this knowledge, so the lion’s share of about 96% of new knowledge arising from original research comes from elsewhere in the world. In this context, research is defined as original research and, therefore, does not include, for example, the knowledge a student obtains from his research efforts at a library.

            Although it is generally argued that this knowledge is a public good in the original sense of the term — there is no rivalry in its consumption and, therefore, one’s use of it does not prevent someone else from using it as well — a pre-existing stock of knowledge is required for any novel addition to be of any use.

            There are also two sources of tacit knowledge: one embodied in the in- and out-bound direct investments of MNEs, the other embodied in people. In terms of the first source, knowledge is embodied in the capital machinery and equipment, the blueprints of the plant layout, and in the organizational structure of an MNE or a domestic company that licenses, franchises, subcontracts, sells or allies with foreign companies. Canada has historically been a net importer of foreign direct investments (FDI), but since 1997 has become a net exporter of direct investment (i.e. flows, not stocks). In terms of the second source, it was summed up by one expert:

            It is widely known that Canada has been a destination of net migrant flows of people since before its confederation, but what is not always recognized is that the knowledge content of immigrant-emigrant flows has always favoured Canada. More knowledge, as indicated by the years of schooling and diplomas/degrees obtained, enters Canada than leaves Canada each year. The so-called "brain drain" is decidedly smaller than the "brain gain," though care should be taken when using even the official data because the schooling systems and the quality content of their grading classifications are not equivalent around the world. Moreover, not all highly educated immigrants to Canada qualify for employment in their area of expertise according to the professional licensing boards, thus leading to the newly-coined "brain waste" category.

            Finally, products and services embody knowledge. They can be divided into commodities and innovations. Commodities are defined as those products and services that are widely available from a number of sources on like terms and conditions (i.e., somewhat equal functionality and quality). Consequently, their producers are price-takers in competitive markets (and sometimes quasi-price-takers in regulated markets in terms of telephone, cable television, railway, airline, banking, insurance, auto leasing products and services, etc.). Innovations are defined as products and services that are not commodities. They are available from only a limited number of sources, often not on the same terms and conditions. For example, videoconferencing services are a recent innovation, but a VCR, while being an innovation in the 1980s, is no longer considered as such. New fashion apparel is an innovation, paradoxically even when it may in part be a copycat version from a previous generation. A telephone directory, while usually considered by most as a commodity to the extent of being an almost stale product or service (except for update portions), when first made available on the Internet was an innovation. Time thus eclipses most innovations, turning them into commodities, and the novelty of their embodied knowledge ages with them.

            Moving from the general to the specific, Figure 3.3 identifies important flows entwined in the Government-University-Industry research triangle (the colour scheme of flows as represented by arrows matches that of Figure 3.2 and 3.4 and, in this case, blue represents codified knowledge and mauve indicates an investment). Beginning with research undertaken at government laboratories, some of this activity is conducted under contract to provide solutions to specific problems that have been defined by the sponsoring company. University research also engages in this activity, sometimes further supported by government grants. There is also a flow of discoveries and inventions from both government and university research labs to industry, with the accompanying potential or actual intellectual property. R&D assistance often takes the forms of both knowledge and financial support, particularly to small and medium-size businesses (i.e. IRAP — Industrial Research Assistance Program).

            University research sometimes receives support from industry, both "in cash" and "in kind," that often includes proprietary knowledge held by industry. Government research also provides standards and certification, often addressing issues such as drug approval, automobile safety, building codes, "green" labelling, etc. Finally, there is also an active interchange of knowledge among university and government researchers, often with complementary objectives and facilities.

            Although quite intricate, the Government-University-Industry research triangle does not completely capture Canada’s innovation system; much more is involved and considerably more details are needed to fully appreciate the complexity and sophistication of the institutions engaged in innovation and their inter-relationships. Indeed, Canada’s innovation system has many dynamic participants who are involved in innovation in a variety of ways. For example, at the federal level, there are the research councils and laboratories, granting councils, centres of excellence, and the many departmental policy and program branches. Provincial governments, universities, hospital research units and other publicly funded research institutes are important elements of the system as well. Many major firms also perform R&D, particularly in the telecommunications, pharmaceutical, aerospace, energy, minerals and forest products sectors. As Canada’s Secretary of State for Science and Technology put it:

            The university, while being funded largely by the provinces and secondarily by students, maintains research labs and directly and indirectly finances both basic and project research. Federal government contributions by the Canada Foundation for Innovation (CFI) for infrastructure and the Natural Sciences and Engineering Research Council (NSERC) to students and research teams for basic and project or applied research are also pivotal. The Committee refers to one witness’ distinction between these two types of research activities:

Their motivations are sometimes different as well:

Most codified knowledge comes from basic research, though project research is also a source:

            These innovation processes across firms are not the same, however. Three classes or types of innovation systems used by industry were identified:

            The outputs of these processes are usually the inputs of R&D firms and innovation start-ups, the ones who introduce new production processes, products or services to the marketplace. This relationship between R&D firms and innovation start-ups is often a tricky one, as it was explained as an organizational solution to some internal frictions within the firm, sometimes between production and sales divisions:

            In any event, the innovations emanating from these firms make for new value-added economic activity. However, not all innovations make it off-the-shelf and not all innovations introduced to the market are successful. Failures are numerous.

            The successful innovations make for new value-added economic activity, which provides a return on investment to the innovative firm and generates taxes that flow back to both federal and provincial governments that may have even participated in the R&D impulse in the first place. Many highly skilled, high-paying jobs are created in the process. If governments are both wise and thorough in the research activities they conduct or help finance, and selectively and judiciously invest in "innovation infrastructure" so as to minimize systemic impediments, Canada’s innovation system should operate effectively and efficiently, whereby the spillover effects of both basic and project research will payoff handsomely. The Committee, therefore, recommends: