Canada’s recent record in acquiring knowledge relative to other OECD countries has been impressive: our educational investment record is superb; our scientists are among the most productive in the world and have distinguished themselves in a number of fields, which are likely to be key catalysts of the biotechnology revolution. So, on this score, Canada is well placed to be a leading economy in a knowledge-based world. If there is weakness, it is on the R&D front. Canada trails virtually all G-7 countries (leads only Italy) and most West European countries in terms of its expenditure on R&D relative to GDP. Indeed, what is surprising is Canada’s relatively high standing in terms of productivity and standard of living in light of its laggard R&D performance.

            This somewhat paradoxical finding suggests that Canada, although blessed with highly productive and successful scientists, has and employs too few of them. Perhaps, more than anything else, it is a reflection of the twin facts that Canada relies heavily on FDI and that R&D tends to be a centralized activity of firms. This results in innovation being too narrowly diffused about the country; essentially, it flows strictly from U.S. parents to their Canadian subsidiaries, leaving those Canadian domestic SMEs, particularly those without a global mandate to strategically seek foreign markets, too technologically far behind their rivals. Although Canadian-owned SMEs have been developing networks of excellence of their own to climb their way out of this "innovation gap," their productivity remains too low and they are falling further behind.

            Canada’s historical pursuit of comparative economic advantage in exploiting its natural resource base — industries that are very capital intensive — and its consequent reliance on foreign capital, while successful, will be challenged in the twenty-first century. The Committee does not mean to suggest that Canada should abandon this historical pursuit. Indeed, Canada’s large geography and diverse geological topography will ensure that it remains relatively well endowed in natural capital and will be a net exporter in natural resources forever. Be that as it may, the composition of Canadian industry will likely continue to change towards more R&D-intensive products and services. The knowledge-based economy to which Canada is headed demands that we lose this highly specialized economic status and move beyond such a simplistic strategy.

            In this vein, Canada’s industrial structure is responding to these new realities, probably more than any other major OECD country; the evidence being that Canada is the sole OECD country in the past decade to show R&D-to-GDP increases largely due to a shift towards more R&D-intensive industries. Without any national policy guidance, industry has been boldly adapting to the new prevailing circumstances. The final step is to have the Government of Canada join this effort in a substantial and meaningful way. In fact, government needs to refocus its industrial strategy towards the pursuit of more R&D-intensive activities and industries.

            The Committee recommends two avenues of pursuit: (1) the federal government should ensure more R&D is done in Canada; in fact, the Committee endorses the government’s target of being within the top five R&D performers in the world by 2010; and (2) the federal government should broaden its current innovation targets to include indicators of commercialization and diffusion of Canadian and world R&D. The Committee also set out a research agenda for itself to delve deeper into specific areas of concern.

            Along the first avenue, the Committee recommends that the federal government: (1) actively pursue FDI from R&D-intensive industries; (2) increase its funding of not-for-profit and for-profit private sector R&D, which would include paying universities for the indirect costs of research, and improving the scientific research and experimental development tax credit system for SMEs while broadening the Technology Partnerships Canada investment portfolio rules; (3) facilitate R&D partnerships and collaboration through the National Research Council’s cluster strategy; (4) restructure the current governance structure for federal science and technology within government by transforming the Secretary of State (Science, Research and Development) to a Minister of Science and Technology; and (5) develop a definitive advisory process for large scientific research projects, particularly those with an international component.

            Along the second avenue, the Committee recommends that the federal government: (1) develop a comprehensive policy on the commercialization of university and college research that would include rules on disclosure, ownership of results and administration issues; (2) immediately double the funding of the National Research Council’s Industrial Research Assistance Programfor Canadian SMEs; and (3) improve Canada’s record in financing innovation start-up companies through the development of a joint National Research Council and Business Development Bank incubation/technology-transfer assistance strategy.

            By casting a wide net of investigation, the Committee uncovered what appears to be a number of problems permeating the processes of decision making at the Canada Foundation for Innovation and the three granting councils, as well as in the allocation of the Canada Research Chairs program. The Committee also has unanswered questions on the application of the National Research Council’s cluster strategy and on the best federal-provincial funds transfer mechanism for post-secondary education. These problems and questions need to be investigated further and the Committee intends to do exactly that in the fall. This report is, therefore, the first in a series of reports on Canada’s innovation system.