INST Committee Report

            The public good (non-rivalrous) and non-exclusive (non-proprietary) nature of basic research, and some applied or project research, means that the innovator cannot appropriate all of the benefits associated with his or her invention. Without recourse to other institutional responses that would overcome the market’s failure to adequately capture these spillover benefits as a reward to the innovator, governments were encouraged to consider actively stepping in and providing incentives and funding to restore a healthier level of R&D. Long-standing public policy was certainly simple given this rationale: we should be looking for the areas of research that have the largest spillover effects and fund the R&D work either directly through intramural government facilities or by provision of subsidy to the private R&D performer, or indirectly through the tax system. Although this seems relatively straightforward, it turns out that, in many cases, other institutional responses have in fact been open and available to the private sector.

            These findings suggest that policy based on the traditional linear view of innovation (basic research?applied research?patenting (sometimes)?technology development? commercialization?production?marketing), which was heavily focused on basic research due to the much larger appropriability problem associated with this activity, was not as effective as one had previously thought and that other strategic pursuits might be more rewarding. Moreover, there were also practical lessons to be learned from past public policy initiatives:

Though perhaps this overstates the case when we consider the plight of small business:

            These and other discoveries convinced the S&T community to shift the emphasis of public policy away from the government being a performer of R&D, as well as attempting to pick between "winners and losers" when subsidizing private R&D projects, towards the government being a catalyst, facilitator and strategic investor of R&D.

            The S&T community had thus come to realize the futility in trying to pick the "technology winners," preferring instead that the winners emerge on the basis of their creative skills and business acumen within a strengthened innovation infrastructure. In this context, the public policy approach has been to invest in the innovation infrastructure, not individual performers, while attempting to bridge the talents and activities of different institutions engaged in the innovation process. Partnership initiatives and leverage funding thus became the operative direction of federal S&T strategy in the last half of the 1990s, as systemic failures, rather than market failures, became the principal hurdle to overcome.

More formally, the federal government began to take a new strategic direction as set forth in its 1996 publication: Science and Technology for the New Century — A Federal Strategy. On the basis of this strategy, the government set out three goals for the federal investment in S&T:

            This federal strategy provides direction to departments and agencies, and sets out the elements of a federal governance structure for their S&T activities. The strategy document was further accompanied by action plans for departments and agencies involved in S&T. While simplifying the role of each government agent or program, Figure 4.1 positions each along the innovation continuum according to the strategy’s design.

            Finally, in the Throne Speech of 2001, the federal government committed itself to making Canada one of the top five most innovative countries in the world by 2010.

            The government intends to partner with provincial/territorial governments, businesses, educational institutions and individual Canadians to realize this goal. More specifically, the government has committed to:

            The Committee believes that the doubling of federal expenditures on R&D, should it leverage private sector spending by traditional amounts, is a tall order that would have Canada’s GERD-to-GDP ratio approach 3% and would definitely put Canada in the top five R&D performers of the world, holding everything else constant. However, the facts are that everything else is very unlikely to be the same; other countries are also likely to significantly increase their government expenditures on R&D over the next decade to ensure their successful transition to a knowledge-based economy. Indeed, the Committee was made aware that:

            While the Committee supports the federal government’s R&D funding goal, it nevertheless has two misgivings with the above goals and fiscal commitments. First, the Committee believes that the objective of being one of the top five R&D performers is too narrowly focused. A broader approach that would encompass target goals of intermediate inputs to innovation, such as scientific publications and resident patent applications, should be included. Although the Committee understands that the government does not have direct control over these outputs of R&D, it is not without some influence. Because it is outcomes and not inputs that matter when it comes to innovation, the Committee recommends:

4. That the Government of Canada target the number of scientific publications (per 100,000 population) and resident patent applications (per 10,000 population), which are surrogate measures of scientific discoveries and technological innovation, respectively, produced and processed each year in Canada. Canada’s relative performance should be benchmarked — and government policy should be assessed — on these terms against comparable countries of the world.

        The Committee also believes that the government’s fiscal commitments to implementing its strategy omit a couple of key ingredients. There is little or no new commitment to the improvement of technology development and diffusion. Although later chapters will discuss this issue in greater detail, the Committee recommends:

            In the course of its S&T review, which began in 1994, the federal government decided to make a number of changes to the structure and processes of its decision-making. The Cabinet Committee on Economic Union (CCEU) was given the mandate to review the performance of federal S&T activities on an annual basis and to recommend priorities to Cabinet. To facilitate its review of S&T priorities, the CCEU is to receive advice from a new body, the Advisory Council on Science and Technology. The Council — which is composed of 12 eminent Canadians who represent academic, voluntary and industry stakeholders — replaces the National Advisory Board on Science and Technology that was disbanded at the beginning of the 1990s.

            The improvement of top-level advisory and decision-making structures is not enough to ensure that the Canadian innovation system would yield best results, however. The government also recognized that an improvement in the management of its investment would also be required, which, first and foremost, necessitated more coordination of intramural S&T activities among federal agencies, as well as greater collaboration on major horizontal issues — those that cut across departmental and agency boundaries. This coordination function resides with the Minister of Industry and the Secretary of State (Science, Research and Development), who are supported by another new body, the Council of Science and Technology Advisors, comprising 22 advisors from outside government and chaired by the Secretary of State. Exhibit 4.1 provides a schematic of the decision-making structure and reporting lines concerning S&T activities in the federal government.

            The present federal governance structure for S&T has a number of deficiencies related to overall coordination and the addition of the increasing number of councils has worsened the situation. This issue and a possible solution used in other countries were well presented by the Secretary of State (Science, Research and Development).

Given the importance of maintaining a coordinated and cohesive federal role in S&T, the Committee recommends:

6. That the Government of Canada review its current governance structure for federal science and technology and transform the Secretary of State (Science, Research and Development) to a Minister of Science and Technology responsible for overall federal science and technology issues and programs.

            The Committee is also of the view that there is merit in further exploring the creation of a Science and Technology Advisory Body, or modification of the current Advisory Council on Science and Technology that reports to the Prime Minister, that would report to Parliament. Indeed, the Committee intends to pursue this governance issue in greater detail in its next S&T report.

            In fiscal year 1999-2000, the federal government spent more than $6.3 billion on S&T (see Table 4.1). Intramural expenditures amounted to $3.3 billion, while extramural expenditures were at an all-time high of $3 billion; the growth of the latter being largely attributable to the CFI. Of this latter $3 billion, more than one third is allocated to Canadian business enterprises, $1.6 billion to Canadian higher education, $240 million to foreign S&T performers, $98 million to private non-profit institutions, and $33 million to other Canadian S&T performers, including provincial and municipal governments.

* Consolidates data of 39 federal departments and agencies, including Parks Canada, HRDC, DFAIT, the CFIA and Transport Canada.

            Figure 4.2 provides us with another perspective of federal expenditures on S&T and R&D. It indicates the federal government’s commitment to its new innovation agenda over the last decade. Recalling from Chapter 2 that Canada’s GERD-to-GDP fluctuated about 1.5% but managed an increase to somewhat more than 1.6% by the end of the decade, federal government gross expenditures on R&D has fluctuated about 3% of total government expenditures, also ending at an all-time high of 3.2%. The absolute dollar figures present a slightly different story, having peaked in 1993 at $3.59 billion before the federal government began its deficit reduction plan. While the trajectory of R&D expenditures was initially downward until its bottom was reached at $3.19 billion in 1997, the federal government’s commitment to R&D is demonstrated by the fact that other expenditures were held more in check than those on R&D. The higher priority assigned to innovation is also confirmed in the S&T data. The absolute dollar figures spent by the federal government on S&T were down from its peak of $5.95 billion in 1993, bottoming out at $5.45 billion in 1997. At $6.3 billion in 1999, representing an average annual increase of 7.5% over the last two years of the decade, these expenditures are one of the fastest growing items in the federal government’s budget.