[Recorded by Electronic Apparatus]
Thursday, October 24, 1996
.1005 
[English]
The Chairman: Good morning. Pursuant to Standing Order 108(2), our review of science and technology and the innovation gap in Canada will now commence.
Before we say hello to the witnesses and begin our work there are three housekeeping items I'd like to look after. One is to approve the mandate of the committee, the science and tech review.
I circulated the terms of reference to members of the committee and asked them for a response. I believe everyone is in agreement with the terms of reference. If everybody is, I'd like to have a simple motion. If people have some concerns we'll schedule a discussion of that for another time, but no one responded over the last few weeks.
Mr. Schmidt.
Mr. Schmidt (Okanagan Centre): This is not on the terms of reference but rather on the other business we will be doing. This is a pretty intense schedule, and I suppose some other meetings will also be scheduled between these to deal with some of the other business.
The Chairman: Yes.
Mr. Schmidt: Okay.
Mr. Bodnar (Saskatoon - Dundurn): Mr. Chairman, I move that the mandate of the committee be adopted.
Motion agreed to
The Chairman: The second motion is that the proposed study schedule be adopted. Obviously this is the round table for now.
Mr. Bodnar: I so move.
Motion agreed to
The Chairman: As well, does the committee agree that next Wednesday, October 30, at 3:30 p.m., we hear from the banking community on the quarterly review of financing to small business?
Some hon. members: Agreed.
The Chairman: Mr. Lastewka will be the chair of that meeting.
I'd like to welcome our witnesses. As you were told in your invitations, this is the beginning of a science and technology review by the House of Commons Standing Committee on Industry. This is new territory for us as a group.
We appreciate that those of you who are experts have taken the time to come and join us. You're dealing with generalists in the truest sense of the word. I guess another word for ``generalist'' can be ``amateur'' at times, but we all believe this is a very important topic for the future of the country. We'd like to learn. We've set up a study schedule for the next few months to hear from you and others.
We'd appreciate your indulgence in that you're dealing with people who are just starting a study topic, so there will be questions you've thought about for years and think have been resolved but will be for us new questions. So we want to get a chance to hear from you.
The round table is set up so that we have a chance to hear different points of view and then to have committee members intervene. Normally a committee meeting is a two-hour session. We have booked this room for three hours. We'll just see how it goes between noon and 1 p.m. If members feel their questions have been exhausted and if you feel your points of view have been exhausted, we'll by agreement end it somewhere in that range. We'll just play it by ear for now.
I'd like members to also see this as a round table, which means although we'll move in the traditional fashion it will also allow some flexibility for members who have a particular interest to pursue them. Over the next few months we'll all have a chance to raise questions, and we won't do it in the strictly traditional fashion of everybody getting five minutes. I'd like to be as easy as possible on the time allocations per member - unless we run into a problem, in which case I'll have to start exercising that.
.1010
I'm going to start with the witnesses from outside government to begin our discussion. We have some people here who have spent their professional careers in this field.
Perhaps I could ask Professor John de la Mothe to begin, followed by Professor Palda.
Professor John de la Mothe (Director, Program of Research on International Management and Economy, University of Ottawa): Thank you, Mr. Chairman.
Members of the committee, ladies and gentlemen, it's a pleasure to be here today. I think we'd all agree that questions relating to science, technology and innovation are of the utmost importance for a committee such as this to be focusing on. Coming to talk to you here is a welcomed opportunity.
As you may guess, being a professor at the University of Ottawa I'm used to talking in three-hour blocks. I will try to contain myself to 10 minutes.
By way of introduction, I suppose, I'm an associate professor of science and government at the University of Ottawa, director of the program of research on international management and economy. I have spent some time in the Canadian federal system - ten years in science policy - and a few years with the OECD. I've also taught at Harvard and at MIT.
To get us going I'd like to talk in a fairly general way, in eight and a half minutes, about the new economy and the role science, technology and innovation plays in that. We use a number of very broad terms in glib ways throughout the media and throughout our daily professional lives - terms such as ``globalization'' and ``new knowledge economy'' and so on. We use them so regularly we often forget that they actually refer to very real, changing dynamics - the way we create jobs, the way we stimulate growth and the way we shift demographically and industrially in terms of our industrial output, our trade performance and so on.
Focusing a little bit on what we mean by the new economy, or what we've come to learn that the new economy is all about, is not an imprudent exercise. If I can make some simple contrasts, over the past 50 years or so Canada has become a very wealthy country based, as you all know, on raw material inputs, raw material or tangible trade in physical outputs. For many years our preoccupation throughout the OECD as well as in Canada has been to focus on costs, price competition and labour-capital combinations to improve productivity. We focused on trade in tangibles, such as exporting cars or lumber or minerals. If you were working within a sector, you pretty well have known who your competition was. You had visible enemies. If you were a steel company, you knew who your top five competitors were, what they were paying for pig iron, what they were paying for transportation, who their major clients were, etc.
To make a stark juxtaposition, you could say in the new economy the new competition is really based much more on intangible assets and on intangible or invisible enemies. We have knowledge, for the first time in really the history of humankind, becoming a major factor of production: creativity, organized research and development, not just the sorts of things you find around you, such as trees, rocks or water, but things we can create out of our imagination. Organized research and development has become a driving force for Canada and for the advanced countries of the OECD.
In a sense you could see this dramatically taking place. I'm not going to get into any kind of economics lecture or trade theory, but in a sense you could go back to, say, the 1950s or up until the 1970s, and if you were looking at the macro indicators of economic performance you'd see there was in effect a dance taking place. From the point of view of economic analysis and the point of view of policy-making, this was very comforting. You were able to see that trade flows, investment flows and productivity increases were more or less related in some magical way. We didn't see the connecting threads, but we were able to see that over time there were gains in trade and gains in investment that usually went into physical plant and equipment.
.1015
So there was a physical investment taking place. This translated through plants and equipment, technology and machinery into productivity gains where if you bought the more recent technologies that you could put on the shop floor, productivity would increase and this would be reflected in one way or another in increases in your trade performance.
The explanation of our trade content was pretty well laid out. In the academic literature it is sometimes referred to as neo-Ricardian trade theory. It basically says that if we can more or less understand the content of trade as well as our trading partners.... For example - I'll make a very simplistic shot in the dark - Canada has lots of raw materials, lumber and minerals, so it makes sense that our exports in a certain historical period would be intensive of those kinds of materials. Similarly, up until the 1970s we didn't make a lot of wine for export; Portugal did. Brazil might be expected to export rubber. There are natural endowments, natural features of the economy that led to this kind of specialization, this kind of job content, this kind of a sectoral profile.
If you were to follow that logic through, it made you very comfortable at night. Things started falling apart, however, when you realized simple things, like during the 1960s, by that theory, Germany, which manufactured hand power tools, would not export to the United States, which also manufactured hand power tools, but in fact they were trading rather aggressively on these product lines. You'd say, well, they shouldn't be, because they both have a comparative advantage - they can both do it, so why trade?
The answer, we discovered, came to be found in the simple observation that the Germans were exporting power tools that were earmarked for the construction industry, very heavy duty, high-power performance, extremely good design and they would never burn out.
The Americans were exporting Black & Decker, which are designed to be hung in a garage and never used. Do-it-yourselfers would go into the garage, say ``Goodnight, dear, I'll see you later'', and have a beer with their buds and hammer away, make some sawdust or something, but never actually do anything. If you ever tried to build a building with Black & Decker, you'd burn the engine out on your power tool within the morning.
So quality, performance and design started bringing our attention to different niche markets. We started realizing this in a more dramatic way, and a gross indicator way, by realizing that around the 1970s we became attentive to the fact that productivity was falling. At the same time, we were buying a lot of mainframe computers, which were new on the market. Investment flows were going through the roof, and typically, we had always thought of investment as being caught up in physical investment, plant and equipment, and factory purchases. Trade was still growing, but not at the level of investment.
To cut to the chase, what was essentially happening was we started having globalization through new technology, satellite system. Capital flows began to appear at a much greater level and land in a footloose way at universities like MIT, McGill, University of Toronto, Heidelberg, and Milan Polytechnique. You started seeing a phenomenon whereby companies could make an investment in new ideas without physically building anything, without physically going somewhere. They were able to buy intellectual property rights, spend $5 million at Manchester University, and pick up all the research results that went into that telecommunications project, and so on.
So we saw a major decoupling in other areas of the economy. At the time, of course, we were distracted by the simple fact that we had the oil shocks, we were coming off the gold standard, and there were other things going on in the world economy that seemed to be destabilizing. But underneath a lot of that there was also a fundamental restructuring in the nature of economic growth, job creation, and so on.
We see that today in Canada where the majority of jobs and new businesses are starting up in the services industry, and these are no longer restaurants and hotels, but software design houses, computer works, business suppliers, computer services, and banking. These are what Robert Reich, the Secretary of State in the United States, calls symbolic analyst-type jobs, people who are now getting the majority of their employment from playing with information, manipulating numbers, playing with interpretation, rather than shovelling coal, and so on.
.1020
So we became acutely aware during this period, and a little bit earlier - indeed, during the 1960s - of the important role of science and technology from a government point of view, from an economy point of view. We became acutely aware of it, of course, with Sputnik in 1957 and with the dropping of the atomic bomb in 1945, but the civilian or economic spillover effects were only made evident in the 1960s and 1970s.
What we realized then was that governments were very heavily rushing in to fund, at a national level, scientific research and technological development. This went on throughout the OECD, to the point now where we spend collectively, as an OECD group, over $380 billion a year on science and technology. The benefits have been manifest, even by this room. It's a technological achievement, with the microphones, the lights and the embedded technologies that we all take for granted.
During the 1980s we got ourselves into a bit of a confused state throughout the OECD. We started focusing on research and development as a competitive tool, in and of itself, and we started worrying about targets for R and D. The macro-indicator was GERD-GDP, which is the gross expenditure on research and development as a percentage of gross domestic product. We started looking throughout the OECD to compare where we were, relative to other OECD countries. So you'd find that the United States was up around 3% and Canada was around 1.5%.
There's a fellow in town who has been in science policy for probably 25 years, who is writing his autobiography right now, called From 1.5% to 1.5%: My 25 years in Canadian Science Policy. We've had a very consistent sort of performance in that regard. We're at the bottom of the G-7 or G-8, and that's not surprising. Sweden has a much higher GERD-GDP than we do, and so on, but this in itself is not problematic.
We became fixated in the 1983 election campaign with GERD-GDP targets. Of course, if you were at the OECD at the time, the joke was that the fastest way to double your GERD-GDP was to depress the economy, which is standard arithmetic. But the idea that you can double GERD-GDP overnight is a dangerous and misleading notion. It is not something that responds simply to spending another billion dollars this afternoon. It has to do with user capacity, technological up-take potential, and the availability of users in the civilian sectors to be able to make use of this stuff.
So during the 1970s and 1980s we had a very strong argument about the nature of innovation, which was typified by the linear model of innovation. The linear model of innovation came in three forms: the science push, the technology pull, and the market pull. Essentially it viewed innovation and the getting of ideas to the marketplace as a very straight line.
On a science push deal, you would have scientists doing whatever they want to do, throwing lots of research results over the fence. Engineers or technologists would rummage around in the dustpan, find something useful from time to time, put it into a product, and then you would move on to the marketplace. It was fuelled by scientific ideas.
In the technology pull model, technologists or engineers would determine that they're working on new product development, for example, and would say, ``Oops, we have a bottleneck: how do we get from here to here? It's basically a problem of scientific research.'' They'd throw the problem back to the scientific community. They'd fix it, on a contract basis perhaps, bring forward the answer to the engineering community, and it would continue in its normal mode.
In the market pool, someone would wake up one morning and say ``We as a consumer society would like to have a colour television. Can you please give us one?''
Obviously each model is highly unrealistic about how the world of research actually takes place, how innovation actually takes place, and how the economy and consumers respond to new ideas and new products and technological improvements.
So we have moved away from that to some degree, even though there are still tremendous vestiges and tremendous interest in having that kind of model. First, it's appealing because it's very simple. It's also wrong. As Mencken used to say, for every difficult problem there is an answer that's simple, elegant and wrong. It also leads one to a natural policy perspective or stance that is fairly centralized, heavily centralized, where you can have a top-down answer, where you could say okay, we're going to spend money on these things because we know how the system works. All of this is not terribly helpful.
.1025
We've moved in recent years to a much more useful discussion, and this is thanks to a lot of work on the economics of innovation. Professor Palda has been involved in this work.
We've come up with a whole new understanding of trade theory, of economics of innovation and how innovation results in catching up from an economic perspective from falling behind, of job creation, skill development, and the role of various sectors and various players in the economy. I'll just give you shorthand: it focuses not on research and development, but on innovation.
Innovation, as Joseph Schumpeter, the economist, typified it, comes in five basic forms: process in innovation, which allows you to make things better, the process of manufacturing is smoothed; product innovation, which is a new package, a new toy, a new consumer good; social reorganization, how you organize the firm inside to achieve your productivity gains - Ford was very strong on this and reorganized the shop floor along the lines of Taylor; market innovation, that is, discovering or opening up new markets for the firm; and access to new materials, and you can do that either through factor substitution or finding entirely new materials that have better properties, better elements that make it more malleable in the production process.
But focusing on innovation rather than R and D is extremely important. This involves partnership - not waiting for the scientists to come up with the idea, not waiting for the technologists or the market to dictate magically that these are the things we need, but allowing that partnerships will come up with synergies, allowing for user-producer linkages. So you see a lot of innovative firms now deliberately working with their suppliers on their shop floor to say this is how we use your product - can you help us smooth the process? You find all kinds of management implications from this sort of thing. There's a whole role of knowledge creation, which means you don't have to have a PhD. You can actually have vocational college training and still run a high-tech company by buying things off the shelf at Radio Shack.
It means that everybody, through entrepreneurial spirit and creativity, can be part of the solution rather than waiting for the boffins in the labs to come up with the only range of possible inputs. This does a number of things: it allows government to focus on what it can do; it allows people to be part of the solution; and it allows scientists and engineers in the labs to get to the work they do best, which is the technical problems of advancing knowledge and coming up with that new stockpile that is going to result in the Radio Shack types of elements.
All of that has been reflected in terms of a model called the national system of innovation, which is very new. It's a catch-phrase that is problematic in some degrees, but you see it in the new science and technology review documents, particularly in the strategic plan of the National Research Council and in some of the overview strategies put out as part of that package.
It allows you to focus on priority setting from a government point of view, on harmonization as is promised in the S and T review, and on coordination. Rather than being a top-down dictation of how the system will work, it allows the government, in my view, to reconfigure how it's going to be involved in funding, performing, organizing and stimulating research and development, and creating science and technology and innovation-based jobs, new sectors, technological opportunities.
I think 22 minutes is more than 10 minutes, so I will stop there.
The Chairman: Thank you very much. You've given us a great introduction to this, and we will be coming back to some of the ideas. The only reason I have the 10-minute rule of thumb is that with the number of people around the table, the time will pass pretty quickly.
The next panellist will be Professor Palda. Perhaps you can tell us a little about yourself and what your major themes are.
Professor Kristian S. Palda (Professor Emeritus, Queen's University): Thank you very much, Mr. Chairman, for inviting me, and members of this committee, for hearing all those 10 minutes.
In your opening statement you referred to the fact that this committee is eager to learn about some new matters, some new things that are coming up. I'm a professor emeritus at Queen's and I have the age to remember that I was in front of this committee in 1988 and similar questions were coming up. I was in front of a Senate committee in 1984 and all these things...not just my talks that have been printed up in reports.
I would like to say that institutional memory is embedded in these parliamentary reports, and perhaps you could have recourse to them, because many of these things that are going to be discussed today have been discussed before.
.1030
Professor de la Mothe has very ably summed up a history of ideas and economics over the last 30 or 40 years. He has also mentioned that the new strategies of the government seem to be more attuned...or he would recommend that the new strategies of the government be more attuned to the current thinking on innovation and innovativeness.
I have some difficulty in believing that this is so, because I have been bandying about the idea that government should be present less, spending less money, and interfering less in the economics of R and D, in the subsidization of applied science.
I have been asked to bring 20 copies of this paper that were going to be distributed to members of this committee, but I was told that they have not been translated. I can provide the very same talk in French if you prefer. But it would be very handy if you had them in your hands because I could then refer to three graphs in those papers.
The Chairman: We have the copy here. I need the permission of the committee to distribute it in English only and then it will be translated.
Monsieur Leblanc.
Mr. Leblanc (Longueuil): Okay.
Prof. Palda: I can start without this being in your hands.
Since I would like to stick to 10 minutes at most, I would simply like to speak about the three major implications of my continuing study of Canadian innovation policies, which essentially were embedded in a book that I published three years ago with the Fraser Institute.
The essential implication for federal government and provincial government innovation policies is that governments should first ask whether we lack innovativeness. Then perhaps a question should be raised as to whether government can provide some impetus to innovativeness. Third, we should ask how to do it.
The first thing would be to make an international comparison of Canada's innovativeness or lack of innovativeness. If you look at figure 1, you will see that when I speak about innovativeness I don't speak only about innovations - new products and processes, as has been pointed out here - but also about the diffusion of innovation, the adoption by customer firms or by consumers of the innovation.
An innovation's positive diffusion gives us a notion of innovativeness. Therefore, both things have to be taken into account somehow. Both things are very difficult to measure. And to speak about apples-and-oranges measures of innovativeness is certainly misleading.
However, when we concentrate only on the innovation part, we know from experience that industrial innovation frequently entails work in research and development, that the responsibility of bringing it to market is that of management, and that to bring innovation out to the market or onto the factory floor entails a large investment, not necessarily just investment in research, but investment in pushing it through to the market, the advertising, the marketing implications, and so on.
Therefore, these innovations will not only be dependent on the skill of management and on the skill of the R and D labs, but also on business conditions.
We can think about business conditions as being cyclical but especially as being environmental, that is to say, whether governments run fiscally responsible shows where taxes are reasonably low, where they don't overburden the firms with regulations, and so on.
In effect, all of these things go into innovation and creation, just like basic research, of course, that often comes from universities and like something else that is called spillovers, innovative work that has been done in other industries, both at home and abroad.
.1035
This is, however, a reasonably complex view. If you want to descend to the GERD-GDP measure, which is so much bandied about by politicians.... I remember politicians from the 1960s trying to put into their platforms the aim of bringing up the gross expenditures on research and development divided by gross domestic product from the then about 0.85% or 0.9% to 2% or 2.5%. It's not quite true that it's been stuck at 1.5% over the last 25 years; it has improved somewhat. But this GERD-GDP ratio, which is very simple to understand, is particularly misleading as a measure of Canada's innovativeness, or anybody's innovativeness.
Let me just say a few words about that, because this is often the heart of the discussion. Why is it misleading? Why is this economy-wide intensity ratio misleading? It is for several reasons.
One, research and development is but one of the input factors to innovativeness. For a long time after the war, the U.K. was in the top league of the research intensity race. And I'm perfectly convinced that in the Soviet Union that particular ratio was in the order of 5% or 6% and has not led to anything else but new missiles and some other products in the weapons armoury. Particularly it has little to do with the readiness of firms to adopt new products or processes. Japan, in the 1960s and 1970s, was very low on this ratio. It was absorbing, not creating, technology.
Economy-wide research intensity is heavily influenced by defence spending. Canada spends, obviously, a much smaller fraction of its GDP on defence than, for instance, France. Also, since much of industrial R and D is undertaken in manufacturing, and Canada's share of manufacturing in its gross domestic product is less than that of Japan, we can expect that, other things being equal, Canada's GERD-to-GDP will be lower.
But in particular in Canada, we have the presence of the multinationals. If we were to follow studies of Industry Canada in the 1970s and some further studies since then, we would realize that Canadian subsidiaries - mostly of American firms, but also of Swiss, British and German firms - have received a lot of benefit from research abroad. This is because, once in the multinational chain, if a lab, let's say in the south of France, makes a contribution, the lab in Mississauga will get its results essentially free of charge.
This invisible importation of R and D is not accounted for in the GERD-GDP ratio. We could very well say that if these invisible imports were really counted, Canada's GERD-GDP ratio would rise to well above 2%.
So I maintain that Canada's performance in innovativeness is not very well researched but is very likely not as dismal as it is always painted when people refer to its being, with Italy, the last of the G-7 members on research performance.
The next question is what can the government do about it, if anything? We have a rich history of failures, starting with the very largest one, which is Atomic Energy of Canada. The deficits there are absolutely the largest ones in science in Canada. But we have also Canadair, Bombardier, Telidon and so on.
But these are particular items. What one should ask is what is the support of government to industrial R and D in Canada? The answer is: more than generous. From the investigations of several serious institutes in Canada, Canada has probably, apart from Singapore, the most generous tax support of R and D in the world.
.1040
There are two kinds of federal support. If you look at figure C, you will see that support is split between grants and tax credits. Since time is getting short, I'll simply say a few words about tax credits.
Tax credits are given to you if you have undertaken R and D. If the Department of Revenue has approved your expenditure, then you receive the money automatically. Nobody asks whether that R and D would have been undertaken whether that tax subsidy were here or not, or whether somebody else was undertaking the same type of research, leading to the same type of product or process.
Grants can, however, be researched much more thoroughly, and one can establish whether a firm deserves the grant and needs the grant. How one goes about it is briefly noted in this paper. But of course for that you need a bureaucracy, for that you need advisory committees and so on, and you need a much more pinpoint investigation. That's why the tax route is so much easier and also much less exposed to, should we say, lobbying pressure and so on.
The tax route.... Apart from letting firms write off 100% of their expenditures in research, we also give them by now over $1 billion in tax credits, whether they would have undertaken that work, as I mentioned, with or without those tax credits.
We can therefore say that perhaps the taxpayer is not as well served by these investments in incipient innovation as he might be otherwise. One can perhaps ask, to come back to the initial statement, whether the general business climate is such that industry, services, and so on will invest in research without necessarily, should we say, sucking at the breast of the taxpayer. Perhaps you should weigh this thought, which has been fairly common coin among economists for the last ten or fifteen years at least.
The Chairman: Thank you very much, Professor. You gave us a very challenging point in your summary. I think it's one we're going to have to come back to and deal with.
Could I ask Jim Goodfellow, from Deloitte and Touche, to be the next presenter?
Mr. Jim Goodfellow (National Director, Deloitte and Touche): Thank you, Mr. Chairman.
I'm a chartered accountant with Deloitte and Touche, and in that role I occupy a position of heading up our innovation function within the firm. I'm also deeply involved with the Canadian Institute of Chartered Accountants. I thank you for the opportunity to participate in the discussions this morning.
The issue of improving our innovation systems and research capabilities and developing our intellectual capital I think is of critical importance. Professor de la Mothe has outlined that issue in terms of the new economy. What I'd like to do this morning, from my perspective, is give you more of the micro-view and share with you my experiences in working with the clients I've worked with, which are a lot of high-tech companies, but other companies as well. I think they illustrate a number of the points that have been raised here this morning.
My experience, which comes from serving a number of clients, particularly in the high-tech area, but also from working with the Canadian Institute of Chartered Accountants on the issue of accounting standard-setting, where I have been deeply involved over the years, as I'm a past chairman of the Accounting Standards Board and have worked with securities regulators around public disclosure and a whole bunch of measurement issues, has taught me two things. One is that innovation, effective research and the development of intellectual capital are critical to companies and their ability to compete. I have seen a significant change, particularly in this decade, as we have heard about and experienced the new economy. I've seen my clients disappear. I've seen new clients emerge. I've seen clients reinvent themselves. The changes are significant.
.1045
The switch from tangible assets to intangible assets, and the kinds of issues Professor de la Mothe talked about in terms of invisible competitors and the need to create and manage intellectual capital, are absolutely critical and will be fundamental both at the company level - the ability to compete - and to the country in terms of our ability to be competitively successful in this global marketplace.
So that's the first thing I've learned. The second thing I've learned is that innovation, intellectual capital, research and development are very hard to measure at an individual company level and an overall economy level, although I don't operate at that level. At an individual company level these new critical assets are very difficult to measure. Our previous systems don't work very well. We need new measurement tools and new measurement methods.
As I think Tom Peters, one of the management professors and consulting gurus, says, what gets measured gets managed and gets done. If your key assets are invisible and intangible intellectual capital that you have a great deal of difficulty measuring, then it's going to be very difficult to manage those. You only have to look at the price-to-earnings ratios of high-tech companies and look at the tremendous spreads between the market value of their issued stock and their book value, and this discrepancy can be attributed to their intellectual capital. If you go and ask them what it is, or whether they have systems that will tell them in the current year whether that intellectual capital has grown or been eroded, they struggle with those kinds of issues.
I would urge this committee, as you're looking at solutions, to put on your plate the challenge of developing better measurement systems even though they are very difficult. Right now we don't have clear answers for what those measurement systems might be.
The accounting profession can be a help and also, I think, a part contributor to the problems we face, although I don't want to paint the accounting profession as being responsible for any innovation gap that may or may not exist. If you look at accounting and think of the economic measures that have been talked about, gross expenditures and R and D to gross domestic product, these kinds of things, accounting measures only the inputs at this time. All we capture in the way of measurement of intellectual capital is the amount one spends on something called R and D. That causes some problems.
Similarly, in training and other issues around the development of intellectual capital, we really only measure the inputs. We don't measure the outputs. The inputs, which are classified as costs, are regarded as costs of doing business. Therefore, in hard times these costs can be slashed and cut back, and the accounting results then give you a perverse effect. Things improve. Yet you may be cutting at the heart of your intellectual capital. So it goes back again. If we do not have measures that tell us what our intellectual capital is, then unfortunately the present system treats them as a cost. When you cut back those things, the short-term result is that things improve or look better. Your earnings go up.
This situation was probably not as desperate in previous years because accounting really grew up in the industrial age, when the prime issues in accounting were how to account for plants and equipment, how to estimate their useful life, how to allocate their cost over time, how to apportion revenue recognition into periods and this kind of thing. These problems were not acute. In a new economy, as Professor de la Mothe says, where your main assets are intellectual capital and your main competitors are invisible, a system that focuses only on accounting for tangible things becomes more of a problem.
.1050
The answers to this are not clear. It's going to be a huge amount of work, because if you look at an approach that says we have to put a numerical value on the intellectual capital of a business, immediately all sorts of measurement problems come to mind. I'm not sure what these solutions are, but it's clear we must start addressing these issues.
In that regard, the Canadian Institute of Chartered Accountants has, as part of its new vision for the profession to address these kinds of issues, set up a group, which we've called the Canadian Performance Measures Initiative, to try to initiate collaborative research with companies, universities and whoever else might wish to be involved in developing these measures and working on this problem to see if we can come up with better tools and measurement methods.
The other thing I'd like to say in closing is when one looks at the practices of companies, and when I look at the practices of my clients, which include some very large Canadian-based multinationals and some very large foreign-owned multinationals, the point raised previously about the favourable tax system in Canada is very real. Both of these companies have conducted studies and concluded that aside from Singapore, Canada is by far the best place to do R and D.
The challenge of the Canadian-based subsidiary of the foreign multinational was trying to convince the foreign management of the validity of that case so more R and D would be done in Canada. So within the internal market system of that company was how to make the case.
R and D in multinationals is organized on a global basis. It flows at the speed of light. It is invisible and moves around the company. But I don't think we have done enough in the way of promoting the attractiveness of Canada as a place to do and locate R and D, particularly within the community of multinationals, and in arming Canadian executives of foreign multinationals with material to convince their managements that this is the place that should be seriously considered for locating R and D.
The other thing I'd like to point out is our whole concept of R and D is in need of change. The old paradigm in industry was the lab at the end of the hall or the lab in some research park, and my job was to run the factory and the job of the lab was to produce the ideas. What we're seeing now is the engaging of the entire firm in the innovation process to try to empower all employees to participate in the four kinds of innovation that Professor de la Mothe talked about.
This requires significant changes in management. To create these kinds of environments, we need to develop new kinds of managers, or re-educate and retrain managers, who are comfortable operating and understand how to operate these empowered creative processes without losing control of the whole place at the same time. Sometimes when they impose old command-and-control techniques, they kill the underlying process.
I welcome the opportunity to share these thoughts with you. I encourage this committee to pursue its efforts, because your task is a very important one, both for individual companies and for the country.
I thank you.
The Chairman: Thank you very much, Mr. Goodfellow, particularly for raising again the question of how to use our tax system to encourage R and D and what's appropriate. So far we've heard that from a couple of people.
I'd like to now turn to Chris Albinson from the Canadian Advanced Technology Association. Mr. Albinson.
Mr. Chris Albinson (Director, Consortium and Government Relations, Canadian Advanced Technology Association): Thank you, Mr. Chairman.
With your permission, I'd like to circulate the eight slides I'll talk about, if that's appropriate.
The Chairman: Yes, that would be fine. The clerk will help you with the circulation of them.
Mr. Albinson: Great.
By way of introduction, my name is Chris Albinson. I'm a director at Newbridge Networks, which is a company based in the west end of Ottawa. I'm here today representing CATA, the Canadian Advanced Technology Association.
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Our organization has 1,000 members across the country and is currently the largest technology association in the country. About 85% of our members are small and medium-sized enterprises. As a result, I'm here to try to advocate to you very strongly the real problems those companies are facing and also the real opportunity they are facing, and what this committee can do to help realize that opportunity. That's what I hope to speak to you about today.
By way of background on myself, I taught at the Ivey Business School at the University of Western Ontario, worked overseas in eastern Europe and Russia helping them adapt technology for about three years, and am currently in business development, starting technology companies for Newbridge as spin-outs, which I'll be speaking to the committee about on the 31st of this month. Also, I currently sit on the Canadian Institute for Telecommunications Research, CITR.
I want to talk to you today about CATA's view of the five main requirements for an improved innovation economy. I will talk to you about one example, because we can talk about the economics of this and about macro-comparative figures, but if you can see real examples of how the innovation cycle creates wealth and jobs for the country, that's very important. I will talk about one example that I know very well.
Then I want to spend a bit of time talking about the innovation system itself and our view of where it's working well and where it's not working well. I will talk about the competitiveness of that system and the connectivity there, and lastly touch on recommendations. Hopefully I will do all of that in ten minutes, so I have my work cut out for me.
There are five thrusts that we believe are critical for an innovation-based economy. Number one is a competitive cost tax environment for R an D. I can't stress enough that a stable, cost-effective environment for R and D is absolutely critical for innovation and for developing wealth and jobs in Canada by Canadian for-export companies. I'll talk to you a bit about the power of that.
Also a critical input is a well-trained, dynamic and knowledgeable workforce. We do have a well-trained workforce today. I would argue pretty strongly that we don't have a dynamic workforce. That's a difficult thing to work on, but it needs to be addressed.
We also need an aggressive opening of international trade barriers and promotion of exports. We need a competitive, open and healthy indigenous home market, and we also need early and aggressive procurement of small and medium-sized enterprise products that are focused on an export...larger market space.
The example I want to talk to you about is Newbridge Networks, which is one I know well. This company chose to locate in Canada primarily because the cost of doing R and D was comparatively very attractive and the access to markets was very attractive. As a result of combining that with a well-trained workforce, the company believed it had a competitive footing to move forward and started ten years ago.
The company, as you can see, has grown very dramatically. Sales this year will be well over $1 billion, from a ground-zero start ten years ago of just about $2 million.
What is the impact of that kind of wealth creation from a company point of view? It means 4,000 new high-tech jobs in Canada, 1,000 in the last year and 1,000 more in the year coming; total export revenue of $3.8 billion and growing; 580,000 hours of annual workforce training by us. There is also a substantial amount of supplier development: 800 direct jobs and $400 million in Canadian purchases - which, by the way, would be much higher if Canada had a silicon fabrication capability. We're the only G-7 country that doesn't have that capability currently, which is sort of like having an auto parts manufacturer with no parts business, if you want to think of it that way. That is a problem for us in going forward.
Also, $675 million in direct tax dollars has been paid back to the federal and provincial governments. And there are ten spin-off companies creating another 600 jobs and $400 million in the local economy in Kanata alone.
I just wanted to bring that example to the committee. I'm not saying this is typical, but I am saying this is the power of innovation if well harnessed and well focused. Canada could do well by having Canadian owned and managed for-export companies, and having more of them. I think we can accomplish that if we put our minds to it.
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What's on the potential side and the problem side? I think we do have a very competitive cost of R and D. As the committee well knows, R and D decisions are not made in a day; they tend to be decisions that are taken over time. Having a stable, cost-effective, comparative place to do R and D is very important for R and D to be done in Canada. You can point to Ericsson in Montreal as a company that started with a very small amount of R and D as an offset to a cellular network that the government licensed and now has, I believe, three world product mandates out of Montreal, with over 1,000 engineers off a base of about 150.
Canada is very competitive, and I'd like to reinforce the comment Jim made earlier. What we don't do right now is market that ability as aggressively as perhaps we should. Ericsson by happenstance put a facility in Montreal and by doing so learned this was actually a hell of a lot better place to do R and D than Sweden, and it has grown their operations here quite dramatically. We could do well to market that to others as well.
Real growth in both private sector R and D spending and training is a real trend that we can see from the economists. Growth in high-tech as a percentage of exports is real, up from 10% to about 15% now. We have a stable and attractive environment for R and D, and we need to protect that aggressively, including the tax credit environment. We've done a phenomenal job, even in the last three years, of improving access to markets and capital, but more work needs to be done.
So what are the problems? What's preventing us from creating another hundred Newbridges? One of the issues we're concerned about is that the R and D personnel per thousand in the labour force has basically been flat. There are a number of reasons behind that, and one of the ones I'm going to talk about relates to that.
We've heard a lot about GERD as a percentage of GDP, so I'm not going to dwell on it.
Brain drain is a real concern right now. One of the most innovative, most connected institutions this country has is the University of Waterloo, partially because of the co-op program and partially because of their active engagement of industry. That institution has produced some of the best and brightest computer science engineering graduates in the country consistently. It's no surprise that Bill Gates says it's his number one recruiting school in the world.
The problem with that is last year there were 30 Silicon Valley companies recruiting at that school. This year there will be 100 Silicon Valley companies recruiting at the University of Waterloo to take those graduates south of the border. We have a 20,000 shortfall in the type of people we require to grow the industry. The more of our best and brightest who are drained off to the United States, the more difficult it's going to become for us to succeed.
There are a number of ways to improve this, both in the short term and in the long term. In the short term, allowing people with those kinds of degrees to immigrate to Canada from countries such as India, Russia and China has helped, but in the long term the country has to address the fact that we're still producing 2,000 teachers a year who have no jobs and we have companies that can't find computer scientists and electrical engineers. There's a discrepancy in the system and it needs to be addressed.
That goes to my last point. There's continued poor what I call ``connectivity'' between the private and the public sector efforts in S and T, and that's very much hampering our innovation system. I'm going to talk a little more about that on the next slide.
I admit out of the gate that this is a rather simplistic view of an innovation system, but I think it's important to talk about what gets....
I talk about the 18-month challenge. In Silicon Valley today, if you come up with an idea, you can finance it, staff it, have the structure in place, have early customers, have all of your distribution channels lined up and have that product from concept into customer hands within 18 months. I ask you, is there any place in Canada today where you can do that? I would argue probably not, and that's a real challenge for us.
What is innovation? Innovation is about creating something that is worth something to somebody and having it out and in customer hands before somebody else does. Unless we can be more dynamic about our innovations system, make it faster and more reactive, we're going to have a substantial problem competing in the long term.
If we look at the inputs, what are the reasons for this? I'll start on the public research side. We have limited ingress measures for connectivity, meaning there are limited mechanisms that force those people working on research to actually make sure it's meaningful to industry and can eventually be used and deployed. We have basically no egress mechanism, meaning once the research is done, there's no mechanism to ensure that research goes out into industry. As a result, we spend huge amounts of money on very good research done by very competent people and that sits on shelves and never gets out, never gets to the market. This is a major problem.
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On the people side, personal taxes are certainly a major problem. CATA just completed a study of fourth-year students and alumni at the University of Waterloo, asking them where they would prefer to locate. We're getting a second-generation effect, which is very frightening from our perspective.
The second-generation effect is that the first wave of graduates that went down to the United States were concerned about things like health care and crime. The problem now is that about 1,000 Canadians working in Silicon Valley are coming back and saying, by the way, there isn't a problem with crime; by the way, your taxes are lower; and by the way, there isn't a problem with health care - the firms look after it.
So a lot of the things that used to keep our graduates here and at home are now starting to go away. If you're talking about young graduates, especially, who don't have any ties, who don't yet have family, it's a very easy thing for them to do, to take those positions and move south of the border. This is going to hurt our innovation cycle because the key ingredient to innovation is people. So we're very concerned about that.
In terms of capital, I'd say on large the government has done a very good job and continues to do a good job on both the public and private side.
Funds like TPC and CANARIE help small and medium-sized enterprises share the risk of their projects. On the public side, there's increased access to capital markets, especially in the United States, that allows companies to take that capital and put it into R and D very successfully. So I think we're doing a good job there.
Structure and regulations are also improved but there are still some issues. We still have to pound into our collective knowledge that made-in-Canada solutions are not helpful. Our innovation cycles have to be fundamentally export-oriented. As a result, we need to make sure we produce things for the world market faster and better than do other places in the world. Protecting our innovation companies is not in our interest in the long term. Again, I think this is one of the critical economic levers that causes firms to do more R and D.
Speaking as just one company, we've decided not to increase R and D in other places in the world but to increase R and D dramatically in Canada. That's a trade-off for us. It means our R and D is not being done close to our customers. It means our R and D is being done here.
The economic decision was that it's more cost-effective to do R and D here. We're willing to sacrifice the fact that this R and D is not being done close to our customers. There are costs associated with that, but we made that decision. So if we keep that environment stable and promote it, I think you'll find more companies doing R and D in Canada.
Finally, on early procurement and deployment, I think on the procurement side we've been slow and not very strategic. If you're going to buy from a small or medium-sized company, make sure you do it quickly so that they can get some feedback, and help them get that product to export. That's strategic procurement, not procurement for use. If that's the lever you're going to use, make sure it's export-oriented.
On deployment, I think the government's done an excellent job in areas of, say, PCS, Cellular and LMCS. If we deploy these technologies and if we move aggressively on things such as convergence, Canadian companies can actually prove their products, figure out the problems and have it done before other countries actually license the technology. As a result, we have technology that works, that's proven and is export-ready right out of the gate. So I think aggressive deployment is good.
On the export side, things such as NAFTA and telecommunications work in reducing barriers have been excellent. Things such as Team Canada, that promote Canadian products abroad, have also been excellent and need to be continued. The free trade agreement with Israel, for example, also helps.
I'll cut to the recommendations. What should we continue to do? We should continue to have a competitive and stable environment for R and D. That's the cornerstone of this policy and we should not tinker with that.
In terms of improving access to markets and capital, we're doing well and need to improve. Then there's the financial risk-sharing of R and D through the connectivity I talked about, the sharing of research.
Rapid deployment is also very important. We need to take an innovation cycle designed basically in the 1960s and the 1970s and the institutions thereof and make them much more responsive. Waterloo did this through a co-op program. Their students would cycle out into industry and come back in front of the teacher. If the teacher wasn't teaching something relevant, they heard about it, as opposed to other institutions that for four years teach people who go out the other side and figure out they don't know anything.
That is not healthy. We need to have more connectivity throughout the process, both in training and in research.
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What do we need to be aggressive in fixing? Again, connectivity of institutional research and training is a must. We have to make that system more dynamic. We have to make it more responsive to what's going on. If product can go from concept to market in 18 months, there are literally very few if any institutions that can do meaningful research on your market product.
What you need to do is have better connections between industry and the institutions so the institutions do things that are enabling and longer-term but relevant, and so that technology comes out quickly and is deployed by industry and brought to market very quickly. You can't do that without the glue of connectivity.
Brain drain, again, is a growing problem. This is going to be a major inhibitor of growth and wealth creation.
The last one is to be aggressive in procurement and deployment. If we can do this, the result will be innovation, growth, jobs and wealth creation, a wealth spiral, as we've seen in the Silicon Valley research, Triangle Park, etc. The best wealth cluster this country has may be the one on the west end of the city, called Silicon Valley North. Unfortunately that cluster is about the 26th-largest cluster in North America, just behind Austin, Texas. I know we can do better, and hopefully with your help we will.
Thank you very much for your time.
The Chairman: Thank you so much, Mr. Albinson. You've given us an enthusiastic overview from your perspective, and I know committee members will have lots of questions when we come to it.
I turn now to Dr. Bruce Hutchinson, who's from the Canadian Association of University Research Administrators. Dr. Hutchinson.
Dr. Bruce Hutchinson (Canadian Association of University Research Administrators): Good morning. It's a pleasure to be here.
In terms of background, I'm a chemist by training, worked for 10 years in the petrochemical industry as director of a corporate research group, managed one of the networks of centres of excellence for four years and am currently director of research services at Queen's.
Before I start my comments I'd like to indicate that I think Professor de la Mothe has done an excellent job of overviewing the innovation process and bringing the committee historically up to date in that area. In my comments I want to pick up on comments that some other people have made here as well.
The Chairman: Dr. Hutchinson, you have a presentation, so with the permission of the committee I'll distribute it in English.
Dr. Hutchinson: That's fine.
I'll proceed. I will be following my presentation.
I'm here today representing the Canadian Association of University Research Administrators. Our organization includes vice-presidents of research or their equivalents and the people who work in their administrative offices in large and small universities across Canada. We assist scholars and researchers in identifying sources of research funding and applying for funds, administering the funds once received, and in many cases protecting and exploiting the intellectual property from our institutions.
Given the organization I represent, my comments will be limited primarily to the university sector. This is the sector, as Mr. Goodfellow has indicated, that represents significant intellectual wealth, which of course we have great difficulty in finding hard measures of.
I want to make three points in my presentation today. First, Canada needs to continue to invest in the intellectual wealth in its universities. Second, we believe more government departmental basic research should be transferred or contracted to universities. Third, picking up on a point made by Mr. Albinson, there should be increased support for programs that support partnerships between universities, government and industry.
My focus in my talk is on the S and T review documents released earlier this year. In our view, the science and technology review does not adequately recognize the importance of the intellectual wealth of universities, in terms of both research capability and the value of having highly skilled graduates as a major factor for the innovation system in Canada.
Our scholarship in research in Canada is currently recognized as internationally competitive, even though the system costs less than similar systems in other developed countries. It is important that this resource not be further eroded by reductions in support for the granting councils, the major support of funding for scholarship in Canada.
We believe there's a strong connection between research and scholarship and the quality of education received by our students. Thus the support of research not only leads to new discoveries of importance commercially, socially and culturally; it also provides the intellectual stimulus needed in the teaching of students. We will need both state-of-the-art technology and skilled people to compete internationally.
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Continued support for the peer-reviewed basic research programs of the granting council is essential to having a viable science and technology strategy for Canada. This is really the underpinning - and we've heard this from other speakers - of the quality of graduates of universities and the science and technology capability thereof.
One point I'd like to make specifically is that the federal government must work with its provincial partners to improve the infrastructure in Canada's universities. Although the university infrastructure is not as visible to the public as roads and sewers, for the new economy the research infrastructure of Canada is just as important. This includes improvements to university buildings, new library and information resources, and new equipment needed for research and teaching, along with the required support personnel and the maintenance contracts. It's no use to put a lot of new equipment into university labs and not provide the resources to operate those. This is an important and pressing problem that needs a solution.
While I agree that we need more than the basic research capability of our universities to have solid innovation - and we've heard this from other people this morning - it's clear to us that this is one of the foundation building blocks that is important to the country.
Secondly, while we recognize that the federal government and its associate research departments have an important role to play in research in areas of public interests, safety and standards, we believe the government is missing opportunities to leverage the expertise and resources of the university sector. We believe there are advantages to the movement of some of the research, researchers and resources in selected areas to universities where the added synergy would provide improved research capability. We think the science and technology review did not give adequate attention to the potential for this move of fundamental research in government departments to universities.
There's quite a lot made in the review about advisory bodies for research in government labs, and while this is better than using only in-house approval systems, we believe it is not as effective in fostering excellence in research as a peer-reviewed system. So we believe there is scope for improved research performance by moving some of the fundamental departmental research to the university sector.
The last point I'd like to talk about relates to connectivity, which Mr. Albinson talked about this morning. I've referred to that as partnerships. I think this is one of the things that the government has been doing rather well, supporting a number of partnerships involving the private sector, universities, and government departments and agencies. Such partnerships should be supported and increased. It achieves this function we've talked about of connecting our best researchers to industry and to companies where the need is seen, and we believe this is an effective way to transfer this intellectual wealth or connect it to the private sector for economic benefit to the country.
Initiatives such as the networks of centres of excellence program deserve continued support. Given the success of these centres, I would like to make the case that funding should be stabilized. By stabilized I mean that this funding should become part of the S and T funding we provide for the country and be placed as an A budget in an appropriate place so that we don't go through the process every four years of, do we continue to do this or not? We have a significant investment in this linkage mechanism, and I think most people would agree that it has been useful.
They've been particularly successful in connecting the best researchers in the country. I would make the case that we have researchers across the country that are very capable. We are not going to have them all in one location because of our geography, and focusing the research of these folks in areas of importance to Canada and linking this research to private and government sectors is very important.
The existing partnerships programs of the granting council should also continue to be strongly supported. I'd make the case that the Social Sciences and Humanities Research Council should be encouraged to increase significantly its partnership program with government departments and the private sector. This particularly relates to the new management structures that would be required in the new economy, and I believe there are many opportunities, in the social sciences particularly, for partnerships that would be very useful in this regard.
The last point I'd like to make is that in order for universities to participate as strong players in partnership programs they need a strong technology transfer capability. I don't believe our situation is as bleak as Mr. Albinson says in terms of connectivity, but certainly I think we need to improve that capability.
There's a new NSERC program to support technology transfer capabilities at universities, and that's just being put in place, but more needs to be done to provide sustainable support to the universities' ability to protect, identify, and provide professional expertise in the exportation of intellectual property with partners. A partner wants to have a competent, professional organization at the source of this technology to talk with, and I would make the case that we need to improve that capability in Canada. The current NSERC program is a step in the right direction, but that's still only a three-year shot of money and we think it should be longer term.
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I want to thank you for the opportunity to talk this morning. I focused my comments specifically on the university sector, although I hope they link to points that other speakers have made. Thank you very much.
The Chairman: Thank you very much, Dr. Hutchinson, for bringing the perspective of the universities to bear on this discussion, because it is in the long run a very important issue.
I would ask the witnesses, particularly those who have written briefs they're working from, to take a deep breath once in a while and let our translators catch up. They do a very good job, but they have to follow this, and it's sometimes a little difficult when they don't know you. They know how the rest of us mumble from having to deal with us for ages.
I'm going to turn now to a couple of people from the government who have been working on these issues. Our first witness is Richard Flageole, the principal of audit operations from the Auditor General's office.
Mr. Richard Flageole (Principal, Audit Operations, Office of the Auditor General of Canada): I would like to thank you for this opportunity to participate in this round table discussion. It's a very important sector of federal activity, and our office has devoted a fair amount of audit efforts to science and technology projects in the last three years.
I'm accompanied by Jacques Goyer. Jacques is the principal responsible in the office for human resources management audit, so he was leading the part of the audit dealing with the management of scientific personnel. Personally, I am a chartered accountant. I am responsible in the office for the science and technology portfolio. Both of us have been quite involved in all the audit work we've done in the last three years.
I will also give a break to your English-to-French interpreter. I will have a bilingual presentation, and we have speaking notes in both languages.
I'll divide my remarks this morning into three parts. First, I would like to give you an overview of the main findings of our audit. If you look at our 1994 report, it's about 85 pages long, so I'll try to summarize that within one and a half minutes. We also released last month our follow-up report on two of those chapters, and I'll be very brief and give you a good summary of that.
Next, I'd like to insist maybe on two specific aspects. I was looking at the questions on your mandate document. There are two things that might be of particular interest to the committee. Those deal with the need for a results-oriented strategy and the need to make sure the government will be fully accountable for its activities in science and technology, including the progress made in implementing the strategy.
I will conclude by stating what we believe as an office to be some essential conditions to the successful implementation of the strategy.
Briefly, in 1993-94 we conducted what we called a sectoral audit of science and technology. It was a major project. We looked at four specific elements of that sector: the central machinery in place for the overall government-wide direction and coordination of activities; the management of activities in five specific departments and agencies - Fisheries and Oceans Canada, Environment Canada, the National Research Council, the Communications Research Centre, and Natural Resources Canada; the management of scientific personnel; and the provision of tax incentives for research and development, which was touched on by other speakers.
I will concentrate this morning on the government-wide aspects. I won't get into the details of any specific departments.
I think it's important to note that in the February 1994 budget the government made a very firm commitment to put in place a true strategy with real priorities, real direction, and a real review of results. To that end, the government launched the S and T review in June 1994. That was right in the middle of our audit. I think in our November 1994 report we really supported that announcement. I think we were quite pleased with it, but we also noted that similar efforts in the past had failed to produce results.
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If you look in our 1994 report, we have a whole chronology of studies going over 30 years starting with Glassco in 1962. Mr. Palda, who spoke this morning, was here in 1988 and 1984. So we have all the history of that.
Looking at history, we came out with suggestions and recommendations to the government on the design and implementation of the strategy they were working on at the time. Mainly, what we said at the government-wide level was about clear priorities, clear direction, about really deciding what to do. We talked about departments and agencies working together to address issues of common concern, instead of their own particular interest. We talked about the need for better consultation and collaboration with provinces, industry, universities, and other stakeholders. We put emphasis on the need for a results-oriented action plan. We talked about the need for an effective mechanism for overseeing the global S and T portfolio, government-wide.
We put a lot of emphasis on the need for better information for the government, for parliamentarians, and the public on S and T activities and performance. We also looked at the human resources aspect, as it's a very important part of the whole system. We made some comments about the need for a legislative and administrative framework better suited to the management of scientific personnel. They are different from other public servants, and I think these differences should be recognized. We talked about a stronger capability in research management in departments and agencies. Finally, we talked about having a more strategic approach to the management of scientific personnel. These are the key messages that came out.
In March 1986 the government released its strategy documents. We did a follow-up on that, and reported last September. Overall we are quite encouraged by the progress made in addressing the concerns we had in 1994. There are a lot of elements in both the strategy and the framework for the management of human resources that are aimed at addressing some of the concerns we had. As we stated in September, we believe they probably represent the best attempt yet at resolving all of these issues.
It is important to note, though, that on a number of those issues there is still a lot of work that remains to be done. Some of these initiatives are far-reaching. These issues are complex; they will take time to resolve, and a fair amount of initiatives, especially in dealing with the strategy, are still at the statement or planning stage - i.e., ``we have the intention to do this; we have the intention to do that.''
[Translation]
I would now like to focus on two specific aspects: the need for a results-oriented strategy and the need for full governmental accountability for science and technology activities.
On the issue of results, I believe the Strategy introduces some very important features. Departments and agencies will be required to set targets and clear objectives, to establish performance measures, to develop evaluation frameworks, all within the context of the new Expenditure Management System that is presently being put into place by the Treasury Board Secretariat.
When we carried out our 1994 audit of specific agencies, we observed that many are far from meeting such expectations. We believe the intent is excellent, but we have to be realistic: it will take time because it will not be an easy task.
At the government-wide level, a number of projects are nevertheless underway. For example, Statistics Canada is working on a project to design, develop and implement an information system on science and technology performance. There are additional initiatives which we detail in our report. Again, these are complex matters and it will take some time before these changes can be implemented. So these are two essential elements of the Strategy, but given the complexity of the task, we believe progress will have to be monitored closely.
With regard to information to parliamentarians, the Strategy offers good potential for improvement.
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There will be a new Expenditure Management System. All departments will be required to report on their priorities, initiatives, spending plans, management challenges as part of their departmental plans. This new Expenditure Management System also provides for separate departmental performance reports to be tabled in Parliament each Fall. I believe there is a good potential for improvement in this area.
In our 1994 report we emphasized the need for information not only at the department level but on a government-wide basis. We considered a consolidated report that would provide information on the performance of departments and agencies and government-wide and horizontal issues, since many issues go beyond the areas of responsibility of individual departments, as well as on Canada's performance in science and technology overall.
We believe this is essential to provide parliamentarians with a basis to assess whether the government's expenditures on science and technology reflect Canadian needs and opportunities and to hold the government accountable for results.
But the Strategy does not provide for a consolidated report to Parliament. However, following discussions we had with representatives of Industry Canada - and Mr. Silverman may discuss this later on - we have been informed that the Minister of Industry will recommend to the Economic Development Policy Committee of Cabinet that such a report should be prepared for Parliament and the larger public.
[English]
To conclude, I think the federal government has certainly demonstrated a will to make sure S and T expenditures will be more effective and relevant. As we noted in 1994, such a will has not been sustained over the years. When you look at history, we had reviews and public consultations announced with great publicity, and the same thing with the release of public reports. But in 1994 we found that the results really had not lived up to the expectations we had.
During the follow-up work we did in the last four or five months - and I think it's very important to mention this - we noted a very substantial level of support and commitment, even enthusiasm, from many stakeholders about the actions now being contemplated. We also noted a significant level of skepticism - some people mentioned ``prudent optimism'' - about the implementation of those actions. I think this skepticism stems mostly from the numerous unsuccessful attempts in the past to address this same issue. So I think this time it's very important to make sure it works.
There's a tremendous challenge ahead to implement all of that material. We believe there are probably four ingredients that will be essential to the successful implementation of both the strategy and the framework.
We first stress persistence and leadership at all levels of government, from ministers to scientific people in the labs. We stress the need for results-oriented, time-phased implementation plans. There are a lot of initiatives in the strategy and the framework, and I think it would be very important to have a very good idea of what should be done first - when, how and by whom. What are the implications in terms of resources? Who's going to be accountable for the results, for implementing the strategy?
Finally, we really believe parliamentary oversight in progress in implementing the strategy and the framework will be very important. I think the work of that committee is really related to that.
Finally, I think the litmus test of the value of the strategy and framework will be the degree of acceptance and implementation by the government, Treasury Board and its secretariat, and science-based departments and research establishments. We believe your committee can play an important role in ensuring this will happen.
Thank you.
[Translation]
The Chairman: Thank you very much for your comments and ideas on point 19 dealing with our role.
[English]
I think you've raised some very important questions. It's good to have somebody from the inside who has been watching it in detail over the years, seeing it evolve. Thank you very much.
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Mr. Silverman has been asked to join the round table. The department had an opportunity last June to give a full presentation as to what they thought the science and technology process was all about. I've asked them to say a few words about any developments since June. Then we'll open it up to the members to begin to ask questions.
Mr. Silverman.
Mr. Ozzie Silverman (Director General, Science Strategy Branch, Department of Industry): Thank you very much, Mr. Chairman.
I don't plan to say anything about the science and technology strategy. Rather, I want to address primarily questions one and two of your mandate.
First, by way of introduction, I've been with the federal government for over 20 years in various capacities. Prior to that I was in what was then called the ``high-technology industry'' in the private sector.
I'm currently director general of the Science Strategy Branch in Industry Canada, which deals with more than science. It also includes innovation. I'm chairman of the OECD committee on scientific and technological policy in Paris, which provides Canada with quite a window on the thinking that's going on in OECD countries in bringing about the harmonization of policies and dealing with the critical issues many of the witnesses have mentioned this morning.
I'd like to deal primarily with questions one and two. Question one in your mandate seeks to identify critical industries and technologies that will create opportunities for Canada into the next century.
Insofar as the critical industries are concerned, from the research we've carried out at Industry Canada we find that from 1980 to 1990, in that decade, it was the high-knowledge industries that outperformed the medium- and low-knowledge sectors in terms of output, employment and wage growth.
The principal researcher, Dr. Surendra Gera, is with me here. If the committee wants to pursue that at any point, either today or in the future, we can do that, and provide you with those papers.
This finding is consistent with the conclusions of research undertaken at the OECD on OECD countries - namely, that it's the high-performance firms and high-technology industries that are characterized by more innovative behaviour or the use of more advanced technologies. It's these firms that have above-average employment growth and employ more highly skilled workers.
When we look specifically at the high-technology sector.... I'll look at the experience of the United States. 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.
There's no reason to believe that's much different from Canada. The anecdotal evidence we have from what was just referred to as Silicon Valley North, for example, suggests that numbers are the same in Canada. We've been having discussions with CATA about carrying out a similar piece of analysis here to verify those figures.
As impressive as that is, it shouldn't be taken to mean that countries should focus exclusively on high-tech industries. There's also considerable evidence that technology diffusion really has an important positive impact on productivity, employment and large parts of the economy, especially in information, computer and telecommunications segments of services.
Let me turn now to critical technologies. With respect to that, I think the most important of what you might call ``critical technologies'' are enabling technologies. These can be defined as the technologies that have the potential to transform the basis of competition in whole industries and create new ones.
We've seen that happen. For instance, the whole basis of agriculture has moved from chemicals to a biological basis. It's a complete transformation. These kinds of technologies are really key to developing and maintaining an internationally competitive industrial base.
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As well, one might mention the technologies that are required for sustainable development, because if you implement sustainable development practices, then you'll get what also is referred to by some this morning as the spillover benefits in the rest of the economy.
This leads us to question two, about the role of government in promoting emerging technologies. I think one can identify a number of cases where there is a legitimate role for government. First, if there's an unlevel playing field, I think there is a justification. There are instances where other governments are mobilizing national resources, basically to convey comparative advantage to their own firms, and that way they create an unlevel playing field.
There's also a situation of what the economists call ``market failure'', which at a practical level could mean two things. First, the development of high-risk, uncertain, and relatively high-cost technology requires a scale of effort and a risk that exceeds the capacity of most firms in Canada. Where is the legitimate role for government in risk and benefit sharing? That's one aspect of market failure. Another one is where firms are reluctant to invest because they can't capture all of the benefits that result. This is very frequent. This, as a matter of fact, is the nature of the market failure that justifies the R and D tax incentives in Canada and a number of other countries.
What we find is the firms that would invest can't reap all the benefits, but in the wider economy we can. There could be other spillovers to other companies, sectors and the public at large, so there's a rationale for government to play a role, particularly when these spillovers are going to be large.
There are other cases where there's a legitimate role for government, in what you might call emerging technologies or critical technologies. Another one is maximizing research transfer and spin-offs from government laboratories - for example, Communications Research Centre has an incubator capacity. Another example is removing barriers to international technology collaboration. For example, the agreement that Canada concluded with the European Union now allows Canadian companies and universities to collaborate as partners with European Union countries. Prior to that it had only been possible to subcontract to European companies. What this does, of course, is to expand the range of partners, share risks, and open up markets in Europe. That's a major advantage and it's a legitimate role for government to do those things. I simply give that as one example. There are a number of other such examples, as with the United States, that I could mention.
Framework policies are important and should not be underemphasized. They establish the conditions under which businesses operate - for example, how the Standards Council operates and how Canada runs its standards-setting operations and its collaboration abroad in international bodies and how bankruptcy operates and so forth is extremely important.
Another example is support of university research and strong university-industry linkages, and as Dr. Hutchinson mentioned, particularly the Natural Sciences and Engineering Research Council has been very heavily involved in that.
There are also areas where there is private and public sector collaboration on strategy, for example the idea of having complementary and reinforcing agendas - as an example, the Minister of Industry being abroad recently and seeking to attract that microelectronics fabrication plant that Newbridge just mentioned is needed as a critical piece of infrastructure. That's a good example of private and public sector collaboration. There are many things that go on like that, most of which are not recognized very much, or not seen as a collective effort on the part of the public and private sectors.
Yet another one is federa-provincial collaboration. There is a commitment in the science and technology strategy to closer collaboration with the provinces. For example, just last week, on October 17 in Edmonton, the federal government signed a memorandum of understanding with the four western provinces on joint collaboration in science and technology planning.
Even prior to the signing of that MOU, there had already been a task force between the federal government - the National Research Council, Industry Canada, and Western Economic Diversification on the federal side - with the four provinces at work. Indeed there has been a major study completed of technology clusters and opportunities for all four western provinces, which is an impressive piece of analysis, and it's all through the collaboration.
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Frequently there's a sort of caricature that this type of collaboration is in fact not going on, but in many instances it is. I'll also note that the premiers, after their recent meeting, also called for closer collaboration with the federal government, and we're going to put that into motion. The Prime Minister has committed himself to doing that in replying to Ralph Klein recently.
Insofar as future challenges are concerned, I think we can see two key ones. First, going beyond the high-tech sector, there is a real need to increase the stock of innovating firms in Canada. This is essential in order to improve productivity performance of the economy, which in turn would increase economic growth and wages.
The second challenge is that what we're finding - and Dr. de la Mothe mentioned it right at the outset - is that countries will compete increasingly on the basis of how well their economies create, distribute, and use knowledge. With that idea the innovation performance of an economy is not simply the sum total of the innovation activities of individual firms and institutions, but rather that the overall performance of the economy will depend on how well organizations are networked and collaborate interactively to share knowledge and learn.
The management of knowledge will become extremely important. It already is, but it's becoming even more important, not only at the level of companies but at the level of governments and individuals. The individual level will be most difficult to deal with. As an example of how important this has become or how it has reached the consciousness of companies, early in December the first European conference on knowledge management will take place in London, England.
I might also add that there's a need to be careful about the difference between knowledge and information. With Internet, for example, a lot of knowledge is becoming codified and then becomes information, but that's not the same thing as people having the tacit knowledge of how to do things - the know-how of how to do things. It's one thing to have all that information on the Internet, but if you had on the Internet how to do a brain operation you would still not be able to go into an operating room and do surgery, unless you had 15 years of background, of training. Even then, the reason residents are sent to hospitals is to get them to do the training so they'll know actually how to deal with human beings.
This kind of acquisition of tacit knowledge is what is critical in the knowledge-based economy, and that is going to be a big challenge, because individuals will have to take more responsibility for acquiring that knowledge, and institutions will have to be flexible in how they provide that knowledge - how that knowledge is acquired.
Why is all this innovation important? Because Canada has been lagging in total factor productivity growth. The figures put out by the OECD show that from 1979 to 1994 Canada performed worse than the United States, Japan, Germany, France, Italy, and the United Kingdom. Total factor productivity growth has been lagging in Canada and this has an effect on output and real income levels in the country. So it's critical that there be a focus on innovation in order to push that TFP up.
In closing I want to just deal with two points that were raised by previous witnesses. First, Dr. Palda referred to the fact that the GERD - the gross expenditure on research and development - divided by the GNP has not been a good indicator of innovation or of innovativeness or innovation performance. He's absolutely right.
There is a major shift now in thinking. I think for too many decades there was a focus totally on input side, and as was also mentioned, this is a problem at the company level as well - measuring inputs instead of outputs. Within the federal government there has recently been an allocation of quite substantial funds, roughly I think $4.5 million over about four or five years, that will be funnelled through Industry Canada in collaboration with Statistics Canada to develop a new generation of output indicators and statistics for the innovation-based economy. This will look at many aspects of output, including not only the government, but industrial output as well. It's absolutely critical that we get a better handle on innovation performance.
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In parallel with that, I think it's fair to say that we played the lead role at the OECD in Paris in terms of getting other countries to climb on board that kind of work. There is now an established program at the OECD on developing new output indicators. The idea there is to lever our own work, because, as was said earlier, this is complicated even at the level of a company; one can therefore imagine that it's even more complicated at the national level. As was just referred to, if we can get other countries working on it simultaneously, we can speed up the innovation cycle, we can speed up getting an answer to these kinds of questions. Eventually, we hope to develop common indicators so that we can then compare ourselves to other countries.
Finally, Richard Flageole mentioned that the science and technology strategy doesn't commit the government to report to Parliament - I think that's correct. He also said that in discussion with Industry Canada, officials of Industry Canada said they would recommend to the minister that this be the case. I'm pretty confident the minister is going to take that up with his colleagues, but I can't predict the outcome. At a political level, they certainly are conscious of that issue and will be taking it up.
Thank you.
The Chairman: Thank you very much, Mr. Silverman. I'm sure the committee will come back to your experience not only in the Canadian government, but also at the OECD.
I'll now turn to Monsieur Leblanc.
[Translation]
Mr. Leblanc: I think we received a lot of answers to the questions we asked.
In my view, the fact that there still is a high percentage of very competent people who are willing to work but have no work is simply disastrous.
Earlier on, Chris Albinson stated that a good many of our young scientists were leaving the country, which is very worrisome and disastrous. Furthermore, it is very costly. Mr. Silverman said earlier that we may have to pay our scientists more to keep them in the country and he gave part of the answer to the question I had wanted to ask.
I know that all of this is very complex and that the situation cannot be changed overnight. But I would like you to elaborate further on the fact that we have a very high percentage of very capable people who are unable to find work at the present time.
Each of you spoke briefly of this problem and I would like you to tell us more clearly what should be done in order to create jobs in the middle term so as to re-establish a balanced economy, because as the concern becomes greater, fewer and fewer investors want to come. This is why I believe that we need to readjust things quickly so as to restore the confidence of investors in order for them to come to Canada.
I am asking you a very broad question. You have already given us some general answers, but I am wondering if you could not go a little further still.
I will perhaps ask the young man to answer first, because I much appreciated his intervention and the question ties in more with his report.
[English]
Mr. Albinson: Monsieur Leblanc, unfortunately my French is only from Kingston, Ontario. It would embarrass me and embarrass you, so I can't respond in French. I'll try English instead.
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I think we have some systemic problems, mostly on the educational side. This comes back to the point I made earlier about connectivity. We still have a culture that tells our young people they should become doctors, lawyers and teachers. We do not have a culture that says it's good to be an engineer or a computer scientist or to build things. Canada has about one-third of the per capita graduates in engineering and science that Japan has, for example, and less than that of Germany.
There are some fundamental, long-term cultural issues that need to be addressed. I agree with the member that we need to move on these very quickly because the results of these changes take literally years to materialize in the workforce, from our perspective.
There are some short-term things we can do that are already happening, such as retraining people coming out of the institutions so they have the skill sets to be effectively employed. My firm alone will be trying to hire 1,000 people next year and we're going to have a difficult time, quite frankly. Our company currently is paced by our ability to hire people. We cannot hire the people we need in this country. We have to go to China, to India and to Russia to find the right kinds of skill sets and bring them back to Canada. This is a real tragedy when we're spending immense amounts of money on our educational institutions, and people are going through that process and coming out the other side unable to find work. We need to resolve that.
I would again point to the University of Waterloo as a model that allows industry and the educational institutions to interact on a regular basis so that the graduates of that institution are relevant, prepared and ready to go to work. If we had six more Waterloos in the country we'd be a lot better off.
We also need to do a better job of letting our young people in the CEGEPs and secondary schools understand the opportunities of technology, understand where the jobs are going to be. Why don't we have Internet access in every guidance counsellor's office across the country so they can see where the jobs are? Why don't we have placement figures for universities available to young students so they can see what universities are doing to get their students jobs?
If you ask students why they go to university, some will talk about getting a broader understanding, some will talk about learning a broad amount of things, but most will say it's to get a job. We're not providing them with the fundamental input to show that if they go into the following areas their likelihood of getting a job is x; if they go into these other areas their likelihood of getting a job is y. Today in Ottawa alone there are 2,000 teachers on the waiting list to become teachers who have no hope of becoming teachers. It's wrong. We've deceived them. We've wasted our funds and we've hurt our future. We need to address that.
The Chairman: Professor de la Mothe, would you like to add to that?
Prof. de la Mothe: There is no precise response I can give, just anecdotal evidence. One problem we have is unreasonable expectations on the part of some students. There is tremendous institutional change going on at the University of Ottawa, for example. Chris has mentioned Waterloo as a tremendous example of outreach, cooperation and partnership with the community. We're starting to see this here in Ottawa.
One of the problems with training in science, for example, is that science students are not led to expect jobs in the high-tech industry. They spend a lot of time on theory and lab-based materials. I've told you about several dozen companies that complain that if they have a scientist, even a PhD scientist, who is very good but is not interested in the firm, the business, the products, that person might make $25,000 or $35,000 a year and do very nice chip work, silicon manufacturing or design work. If you're interested in the business, then there are more opportunities for you within the organization.
One thing I'm very pleased about at the University of Ottawa is that we'll be offering, as of September, a science and technology management specialization in the school of business, in collaboration with the engineering school. We're working very closely, as Chris knows, with OCRI, the Ottawa-Carleton Research Institute, with Carleton University and with a lot of the Kanata-based firms to get better signals from the business community about what they need.
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We're changing our course content very rapidly. Not everyone is doing it, of course. You know intellectuals. They're the only ones who eat their young. They're very hard people to retrain. But it is taking place. It is an indirect, slow-moving reaction. It is not government-led, but it is happening very positively in Saskatoon, in the Waterloo-Kitchener area, in the Ottawa-Carleton area. I don't know if it's happening fast enough, but the changing expectations and better connectivity between the partners is a very important thing.
The Chairman: To the panel and members, we're not taking a break so if anybody wants to get up and stretch or have a cup of coffee, please go ahead.
[Translation]
Mr. Leblanc: We noticed that in countries such as Japan and Germany, for example, split studying is a much more common occurrence; in other words, students spend a year or two in university, then a year or two in private enterprise, and then they go back to university or to a technical school. You say that we need more engineers. In Quebec, there are approximately 32,000 of them, but only 10,000 have work. The others just struggle along. It is very unfortunate.
I do not think it is a matter of there not being enough, but perhaps one needs more specialized training, training that is more directly linked to the needs of the private sector. So what must be done? You gave a partial response to my question, saying that our students must shift back and forth between university and the private sector so as to have an education that is relevant. All of this seems to me to be very important and I would like to ask you what changes should be made.
[English]
The Chairman: Would you like to start, Professor de la Mothe?
Prof. de la Mothe: That's a tough question. The labour market is a very difficult animal to try to coordinate. A lot of students who go into electrical engineering because there's a demand this year will come out in four or five years' time and the demand will have passed.
Chris mentioned some innovative ideas about using the Internet, for example, to improve information across the country about the labour market, where jobs are available. Quite often there will be jobs available for someone in Montreal in chemical engineering, but there may not be enough chemical engineers in Montreal at the moment. The information needs to be better transmitted. NSERC has tried to have a registry of science and engineering graduates from Canada who are working in the United States so that they have a hope of luring them back in. In a lot of what The Globe and Mail calls ``smart cities'', there seem to be a lot of institutions trying very hard to find innovative mechanisms on their own so that they have better communication tools.
If you go out to Kanata and have breakfasts regularly, you can find out who is offering jobs and who is shedding jobs. It's quite well known that in Kanata, for every four or five jobs advertised in the local paper there are probably 200 jobs actually available. It's a question of knowing how to network into that community so that you can have better information.
I personally think it's the job of professors like me to know what's going on in Kanata. If I have students, I can adjust their expectations and perhaps put them in contact with someone like Chris and network that way. It's a very informal, ad hoc sort of mechanism, but the labour market runs on such signals to some extent.
I don't know if there's a top-down, overarching strategy that would have any chance of working in the short term, but the things that have happened in the Ottawa-Carleton area over the past three years show that it's quite dynamic and robust. People are talking to each other. People are changing expectations. People are trying to be involved. They know that the livelihood of their students and the livelihood of the region are at stake.
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The Chairman: Mr. Goodfellow, do you want to comment on the same point?
Mr. Goodfellow: I have a brief observation. I think Waterloo University is a really good example of a situation where we create a world-class institution that produces a world-class product that we lose to the world because the world finds out about it.
I think our challenge and our solution to that is the ability to create a vibrant, growing, dynamic kind of business community that Chris talked about, that will feature the collaboration between universities and industry and government, that will attract our people to stay home and say we want to be here because this is where we want to be. They will create the opportunities for our people.
The Chairman: Dr. Hutchinson, and then I will turn it over to Mr. Schmidt.
Dr. Hutchinson: I have one more point on this issue. I can remember sitting at a session - I think it was in 1988 - where NSERC predicted that we were going to be tremendously short of engineers. Through the early 1990s, in fact, many engineers were unemployed. Things move quickly in this sector. Really, Mr. Albinson's point about retraining is a very important one.
The only additional thing I'd like to say is that there's a significant amount of effort to teach entrepreneurship and mentorship through some of the Ontario's centres of excellence and the federal centres of excellence, which is really reorienting students to think about working in industry.
Waterloo has been given as one example, and we have Ottawa. I can point to half a dozen start-up companies in Kingston that came out of Queen's University, where in fact graduate students have started their own companies. I think there's a significant change in culture happening in our universities, but it is difficult to switch these things around tomorrow.
The Chairman: Continue, Mr. Schmidt.
Mr. Schmidt: Thank you very much, Mr. Chairman. I found this morning a most exciting exchange of ideas, and if this is the beginning of the committee's work, I think it augurs well for a very successful report to come out of this study. I certainly hope so.
I want to commend each of you for the presentations you've made. I want to ask some questions that follow out of that, and hopefully they will lead into other aspects of the study.
One of the first questions I'd like to address is the government structure that in my opinion could mitigate against the kind of thing that we've heard could happen. I want to refer particularly to the abolition of the National Advisory Board on Science and Technology and the substitution for that board of another one, which is to act as an advisory group, and that group was supposed to somehow coordinate aspects that will go to the economic development policy, and then finally that apparently goes to cabinet to make some decisions.
I want to ask, both from the university perspective and the industry perspective, as well as the Auditor General's perspective, how is it possible for an outcome-based strategy on science and technology to actually become operational if in fact you have no place where the buck seems to stop?
Mr. Flageole: Look at our 1994 report. We talked about the structure, but I don't think it's the role of the Auditor General to tell the government how they should organize themselves to manage. But I think your point is valid.
The point we made is that there's a need to have somebody, somewhere, who's going to have an overview of what's going on a government-wide basis. I think it's more important today than it maybe was fifteen years ago because there's a lot of S and T work that is done not only to support the basic mandate of an organization, but for other purposes, such as economic growth or creating jobs.
There are different models, and I think Mr. Silverman might be more apt to answer that question. There are different ways. We looked at different countries. What we said in the follow-up chapter is it's the decision of the government, and it would be very hard for us to comment. We'll have to see how it works, because, again, we have something on paper.
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They replaced NABST with another committee. They're going to advise a cabinet committee on economic development, who will bring forward priorities and decisions to cabinet. So I think in our case we'll have to wait. Maybe it's going to work; maybe another structure would be better.
Mr. Schmidt: That's all very well. I don't think it was a secret we needed that kind of a change. But it has been my experience in other organizations that when an auditor comes forward and looks at a system that's not working, they make some recommendations as to what could happen. In this case, they went simply to the level of ``you have to do something about this'', so the government did something about it.
It would seem to me, then, one of the functions that exists...not only with the Auditor General, but I really want to appeal to universities as well as to industry as to whether they believe this structure could actually do the thing you asked them to do.
I appreciate that you don't want to evaluate what the government has decided to do, but I still want to ask us in this roundtable discussion, because that's what we're after here, solving problems. Is there a likelihood, a probability, this will work better than what was before? I guess that's the real question.
The Chairman: Do any of the other witnesses have any observations from their dealings with government? Then I'll go to Mr. Silverman.
Mr. Silverman: As Richard Flageole has said, we in government have also looked very carefully at the governance structures in other countries. You'll find these governance structures vary quite a bit, whether you're looking at Britain, Germany, France, Japan, or the like. Whatever country you look at, you'll find a system that reflects the political realities and the socioeconomic structure, and also historical factors. We really don't find any one governance system that's clearly better than another. You can look from today until next year on this, but that's the conclusion you'll come to.
In Britain, for instance, they changed their governance system about two or three years ago to have a cabinet office dealing with science and technology. But with a subsequent shift of some ministers, they suddenly made the decision to take that office out of John Major's cabinet office and put it right into the department of trade and industry. So there are constantly shifting governance systems in countries, and it's virtually universal.
In the science and technology review, ministers discussed it collectively and the decision was made to have a system where each minister has the accountability and authority for those science and technology funds. That is, for each minister, science and technology is not an end in itself, but a means to an end. If it's the agriculture minister, then that minister has to decide where he's going to put his or her priorities to reach their mandate and objectives.
At the same time, the commitment was made that there would be a collective process looking at expenditures and priorities, and indeed this is what the Economic Development Policy Committee, or EDPC, is going to be doing.
Insofar as the abolition of NABST and the creation of the Advisory Committee on Science and Technology by the Prime Minister is concerned, I don't think we should read into that the buck doesn't stop anywhere now. Clearly, the buck does stop with the government. The government has to deliver on its commitments.
I think if you look at any country today, there are various advisory structures. Some, like in Japan, are inside the system; some are outside the system. In experimenting with various advisory bodies and the experience of NABST, the work it did was excellent, but carrying out studies of a long-term nature and delivering reports that eventually become published was not responding to the sort of innovation cycle time that Newbridge is looking for - you know, let's get moving here.
So with the Advisory Committee on Science and Technology, which is meeting next week here in Ottawa - and by the way, they will meet with members of the cabinet committee at the same time - there will be more of a speeding up of the cycle time on innovation, of dealing with issues. As the Prime Minister said in his press release a while back, their first mandate will be to look at innovation in the economy and how to improve the performance, particularly in the private sector.
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So there you have it. I think we have a lot to be confident about that the system will work. Of course time will tell, and we'll see what the results are.
Mr. Albinson: I agree with your concern. I haven't been on one of these panels for the last 20 years, but I have seen a dramatic change in the speed with which technology, innovation adoption, jobs and wealth are created, even in the last three years. It's increased dramatically.
A curious thing happened recently in Ontario and also with federal government funding. When the cutbacks happened to university research in particular, we found ourselves inundated with university researchers pounding on our door saying they had this neat technology, and asking, gee whiz, wouldn't we like to help fund this and possibly use it?
I'm not saying that's necessarily a positive mechanism, but it is an indication of this question: Why wasn't this happening before? To be fair, so that we can track our progress and be very visible about it, there needs to be mechanisms in which we can understand the dollars we're investing in innovation and what kind of tangible results they have. Everyone across the panel said how difficult it is to measure. How do you measure it, etc.?
It needs to be done regardless. There needs to be visible accountability. Maybe we should have some type of science and technology or innovation index reported on an annual basis - for example, how are we doing on the following key ten factors as a country? - be that the number of technology workers trained and actually placed in companies or be that a royalty stream resulting from technology the government and the universities have actually managed to transfer to the private sector, with the private sector willing to pay a royalty stream back - nothing so significant that it becomes a barrier, but at least as an indicator that the private sector sees worth in some of the technology.
So I'd agree with your concern that if we don't measure how we're doing, if we don't make it visible, if we don't have an annual look at what we're doing, it's unlikely we're going to see dramatic change.
Mr. Schmidt: May I ask another question?
The Chairman: I know Mr. Bodnar is going to be leaving. I'll come back to you. There's lots of time. Are you okay with letting Mr. Bodnar go ahead of you?
Mr. Schmidt: Yes.
The Chairman: Mr. Bodnar.
Mr. Bodnar: Thank you very much, Mr. Chairman.
I found this a fascinating morning. The comments I make today are more to explain some of the matters that have been brought up rather than to be critical. I try not to be critical of people whom I'm sure know a lot more in the area than I will ever know.
I'm very pleased that Professor de la Mothe mentioned Saskatoon. It's close to my heart, as is Innovation Place and the relationship between government, university and private business at the University of Saskatchewan in research in the agricultural biotech industry.
That's why I found it interesting that Professor Palda mentioned that evidence on successful stimulation by government intervention is sparse when we have such examples. I saw nothing to indicate that the intervention was sparse.
Perhaps I'll just make my comments and you can enlighten us on some of these, professor.
Prof. Palda: Excepting agriculture.
Mr. Bodnar: I guess we can read between the lines to see that.
When we proceed down the page there's a comment on taxpayer subsidization of private sector research. You then indicate that there is really no overall study on this. You indicate that, more likely, the absence of published evidence merely means that ``subsidization of innovation does not bring hoped-for results''. I wonder if this is just a cynical inference because there is no study. I see nothing in the paper to support that particular statement whatsoever.
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I would also bring forward another comment made in the paper, where you conclude:
- To ensure a welcoming climate, the government policies of frugality and abstinence are
required, policies much more exacting than just direct support to R and D.
Finally, on the comment you made with respect to tax credits, where you indicate that it's important to look at whether the research would have gone ahead even if the tax credits were not available, is that the only question that really has to be asked? Or does there have to be another question asked: Would this research have gone ahead in another country instead of Canada, if this tax incentive was not given - in other words, a transference and further brain drain from Canada had such policies not been in place, therefore resulting in nothing but a loss to this country?
Professor Palda?
The Chairman: We'll start with you, Professor Palda. I'm sure other panellists would have some comments too.
Prof. Palda: There are quite a few remarks there.
Mr. Bodnar: I'm trying to enlighten myself.
Prof. Palda: Frugality and abstinence means lower taxes, less government activity.
When you speak about employment, think about payroll taxes. We are now getting into a system where we finally have a flat tax, even though everybody around this room is against the flat tax, simply because the proportion of payroll taxes will be growing in comparison to income tax.
Again, if you look at frugality or less expenditure in support of R and D, the prime example is Japan, where government subsidies are very low and where government-performed research is probably only one-fifth of total research expenditures.
On the tax credits, the basic issue about government support of industrial R and D - I'm not talking about university science, fundamental research - the fundamental issue is one of appropriability or inappropriability. Mr. Silverman has already mentioned this. That is to say, is it true that there is a market failure because firms cannot protect very well their knowledge work, because they cannot patent it, or because it's going to spill over very soon, and so on?
The question as to whether there is appropriability or lack of appropriability cannot be resolved in a mechanical tax system. It can only be resolved on the basis of some kind of investigating committee under a bureaucracy typically run by Industry Canada, with the support of experts from the outside. That process is, of course, slow and costly, and perhaps open to outside pressures.
But we are going to a different process, namely tax support by tax credits, which cannot investigate this issue, which cannot say firms may have undertaken it in any case but we don't know, and on general principle, we'll give them the money so that they do the research. If we don't give them the money and the research is supported in some other country, is it true that we shall not see any benefits from it?
If you ask Newbridge or if you ask Industry Canada, you will see that the research spillovers are coming from all over. What we spend as taxpayers will benefit to a large extent German, French, British, and Japanese industry, and vice versa. So I think the globalization presence is now so strong that it is very difficult to say if we don't support something here it may happen elsewhere, and elsewhere they are going to be much better off than we are.
The Chairman: Are there any other comments?
Mr. Albinson: I've come down on the other side of this.
First, I'd like to take issue with the comparison to Japan not doing government research. In fact, having just spent two weeks in Japan earlier this year, it's very clear what Japan is doing.
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On the telecommunications side, for example, they have a company called NTT, which is now the largest telecommunications company in the world. Every single person in the country, through the rather high cost of telecommunications services, is providing an indirect tax that is funding a $4 billion R and D investment by NTT. It in turn is being given to the industrial partners in Japan basically free of charge. It may not appear on the overall statistics, but they've done a very good job of coupling the industrial need to subsidize R and D through their service provider into their manufacturers and then allowing that technology to be exported worldwide.
So I take strong issue to this, that Japan is not doing it. They're doing it, and they're doing a lot more of it than we are.
On the scientific R and D tax side, this basically acts the same way as the Japanese mechanism. It allows industries to make decisions about where they want to put their R and D dollars, and government helps them make that investment. That's basically how the mechanism works. Industry puts in 80% of the R and D dollar and government, through the scientific R and D, helps with 20%, which allows us to be 20% more competitive than the U.S. As a result, companies, instead of doing their research where their customers are, either in the United States or Europe, choose to do their research and development in Canada.
It is the cornerstone of our innovation policy to make sure that those 4,000 jobs at Newbridge, for example, are in the west end of this city and not in Herndon, Virginia. I'd like to stress that point as being very critical.
The Chairman: Professor de la Mothe.
Prof. de la Mothe: It's no secret that Professor Palda and I disagree, and have for some time disagreed, on these points. I'll admit to being a good Huguenot. In most cases I understand abstinence and such matters, but in this case I'm not sure what it means. There is a vast literature that suggests that case by case, region by region, sector by sector, the role of government in stimulating growth in the high-tech and medium-tech sectors has been extremely important.
If you simply visualize the idea that we're interested in economic growth in Canada and throughout the OECD, then you come to the realization, let's say, that the estimates for next year suggest we will have 4% growth. We understand intuitively that this growth will not be evenly distributed across all Canadians, across all sectors, across all regions. There will be growth poles and there will be areas that do not benefit. That leads to a very simple observation: in any national economy, in any national system of innovation, there are magnets, attractor capacities. These are the smart cities and smart regions we were talking about.
If you look at the driving forces of the European economy over the past 20 years, you can quickly observe that there's been technology specialization, skills specialization and economic opportunities driven by growth poles. Baden-Württemberg, Catalonia, the software design group around Milan - these have had tremendous spillover effects. And these are not only in the core technology areas - in the case of Baden-Württemberg, airframe design, aerospace and automobiles - but also in a range of supplier industries and related industries.
The university systems in those regions have understood the skill sets required by those industries locally. If you tried to set up a software house in Baden-Württemberg, the bankers would look at you as if you were slightly odd. But if you tried to set up a software house in Milan, the banking system understands software. The same thing is true in Canada, the same thing is true in route 128, Silicon Valley, Silicon Hills, the Baltimore Triangle. You find a whole range of direct benefits from this clustering effect. There are reasons why Newbridge is in Kanata. There are reasons why Gandalf and Nortel are located where they are.
The interesting observation, though, is that if you go back over the history of technological change, even recent history...look at Hewlett-Packard. Sure, it started in a garage, but Hewlett-Packard's success is directly related to the military industrial complex in the United States, which is government-business relations. The same thing is true of all of Silicon Valley, all of Route 128.
Oh, you're stopping me on this one?
The Chairman: Thank you.
Mr. Bodnar: Mr. Chairman, could I just take 30 seconds?
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The graph attached to Professor Palda's paper as figure 3 refers to federal grants to industry. This graph only goes to 1990. In 1996, and in particular from 1993 to 1996, grants have been to a large extent eliminated, especially through the regional agencies and all other agencies. Had this progressed through 1993, the graph would look significantly different.
The Chairman: Mr. Schmidt.
Mr. Schmidt: I'd like to focus on a different area, NSERC and the network of the centres of excellence.
I would like to ask whether the network of the centres of excellence has demonstrated that there is really a partnership among a variety of the industries, universities and professionals outside the university complex; whether in fact there is a higher or more qualitative return on moneys spent in the network of centres of excellence compared with the NSERC grants. In many instances, those seem to be run by a group of university-oriented peers. The centres of excellence seem to be in a broader milieu, as was just mentioned by Mr. de la Mothe and other people. Ought we to shift the process and structure within which the NSERC grants operate so that they operate on a more parallel basis with the network of the centres of excellence?
The Chairman: Let's start with Dr. Hutchinson.
Dr. Hutchinson: Thanks for that question. I think it's an important one that we should address.
The first point I'd make is that most of the researchers in the university sector who are part of the networks of centres of excellence are also well funded within either NSERC or MRC. We aren't talking about two sets of individuals here. We're talking about a set of individuals who are -
Mr. Schmidt: So we're paying them twice?
Dr. Hutchinson: We are supporting research aimed in two different directions. I think that's quite important to understand. If you do not have as a base the basic research, the fundamental research - I think NSERC is now calling it basic research - which is not directed, then you do not really have a base on which to build the centres of excellence, which are more targeted. I would make the case that one needs funding in both areas.
Mr. Schmidt: That wasn't my question. My question wasn't whether there should be funding. It was a question about how decisions are made with regard to the projects approved and funded by NSERC.
Dr. Hutchinson: I will address that. I should indicate that in the networks of centres of excellence, because one has a partnership with people in government and in the private sector, one is taking excellent research and orienting it towards the needs and interests of that particular sector. I think what you're saying is viable and a useful thing to do. It addresses the area of connectivity that Mr. Albinson raised.
There are two programs within NSERC, however. There is the basic research program, which is so-called operating grants or the curiosity-driven research, and there's also the partnerships program within NSERC. We've seen some growth in the partnerships program and we should not forget that it is a significant part of NSERC's funding, aimed more at individual collaboration between companies and researchers at universities.
My experience in watching the centres of excellence function is that we need to fund research in the curiosity-driven area. I've seen many cases where the curiosity-driven research has in fact been picked up by a centre of excellence and funded in a more directed fashion.
So from the university side, I would make the case that peer review of our basic research, which is a foundation, is essential. That should not be further eroded.
Mr. Schmidt: I agree, but that wasn't the question.
The Chairman: Mr. Shepherd.
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Mr. Shepherd (Durham): Thank you very much, Mr. Chairman. I was looking forward to asking some questions. It has been very interesting this morning.
A number of the witnesses touched on the issue of the multinational corporation, and Mr. Silverman talked about the difference between knowledge and information. I sort of have a general prelude to my point, which is that the Canadian tax credit system seems to me sort of a shotgun approach. It doesn't really matter whether you're a multinational, a domestic, a small company, a big company - everybody gets a kick at the can.
I wonder whether there has been any research to show - I guess I look at the evolution of science and technology requiring a critical mass - that the multinational corporations that are possibly controlled outside of our border, whether in fact what they are bringing into this country is information rather than creating a knowledge-based industry, and whether our science and technology policy in the area of tax credits shouldn't be more focused either on smaller firms or uniquely Canadian-owned multinational corporations. Maybe Mr. de la Mothe could respond.
Prof. de la Mothe: Yes, that's a very important clutch of questions. Anecdotal evidence suggests that the kind of R and D that we get spilling over into Canada from say an American-based firm seems to be geared towards the ``D'' end of the spectrum. So you're talking about the intellectual capital that companies like to keep close to headquarters, and I think this is true of Canadian-based multinationals as well. I think by and large this is certainly still true.
There are other questions relating as well to the definition of R and D in the tax code, and Professor Palda and Jim Goodfellow could talk to this. This, to my recollection, is fairly broad. There have been complaints that the banking community, for example, takes advantage of the R and D tax credit system. Whether or not that's a reasonable sort of thing.... It's not something I've looked at, and it's not something I have any direct connaisance regarding, but that could be a problem in terms of how you should direct the tax definition. Jim may have something to say on this, and perhaps Ozzie as well.
The Chairman: Yes, if it's okay with the member, Mr. Silverman would like to add something.
Mr. Silverman: Thank you, Mr. Chairman.
Just off the top of my head in answering your question, I think we should be very careful about taking the R and D tax incentives and having a rifle approach, for a number of reasons. One, by discriminating against certain firms by size or ownership, this could be viewed by other countries as discrimination, as lack of national treatment. The Canadian government has been adhering to the idea of national treatment, so that when our companies, like Nortel in the United States, can gain access to U.S. support through their system.... We have to be very careful about this because we're dealing with a globalized industry.
Secondly, foreign-owned MNEs are making a very important contribution to Canadian economic growth and innovation. The third point is that there are very important relationships between large and small companies. In the aerospace industry, for example, the large companies act as drivers of innovation development in small companies, so you have hundreds.... I think Pratt & Whitney alone has at least 1,200 suppliers, not all of them in Canada, but a large number are here in Canada. Those demanding customers that are the large companies create the drive for improving innovation capacity in small companies - you have these kinds of relationships.
This comes back to the multiplier effect of large high-tech companies. A high-tech company that has x number of employees creates a large multiplier of employees elsewhere in high tech and elsewhere in service sectors and suppliers and so forth. I think it is this churning around and innovation in the economy of relationships between small and large companies that actually creates the jobs. We have to look at how the overall system functions and be very cautious about selectivity, at least on the tax side.
As a final comment, the whole tax side is premised on the idea that you don't target. I think the targeting takes place on more direct support rather than that indirect support through the tax system. This is why in countries you find hardly any experimentation with targeting on the tax side, insofar as R and D is concerned.
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The Chairman: We have a couple of other members who have expressed an interest in responding to your point, Mr. Shepherd. First, Mr. Goodfellow.
Mr. Goodfellow: I have a couple of observations. First of all, when you're thinking of multinationals, don't just think just big multinationals. We have a huge number of growing mid-market and small multinationals in this country, and I suspect that Newbridge was a multinational from day one. So the issue of R and D and funding multinationals is not just about big multinationals.
Second, remember, in any kind of tax credit system, in order to get the benefit from the tax credit you have to be making money, you have to pay taxes. Part of the success of a tax-credit-based system is that you actually are funding successful corporations so that the funds and the benefits are accruing to people who are actually, in the case of R and D, transferring knowledge and generating tax.
The disadvantage is that companies that do not, that are in the development stage or trying to get their product launched and that kind of thing - this may not be as attractive to them. So you have to have a mechanism by which those tax credits can be utilized - either sold or some other mechanism they can use to tap that feature.
I would echo the points that Chris has made; I think it's one of the foundations of our success in developing R and D and technology in this country. I think that one of our disadvantages is that we just do not publicize it and we do not support our people, particularly those who are in multinationals who do operate with an internal market within those companies. As Professor de la Mothe said, the natural tendency is to keep your intellectual capital close to headquarters.
So if you were a Canadian-based subsidiary and you are trying to compete for the new research lab in such and such, the natural tendency would be to keep that intellectual capital close to headquarters. We need to arm our Canadian executives with as much information as possible so that they can compete and attract and get that research lab located here, because guess what: that's going to help keep the graduates here, and that kind of thing.
The Chairman: Professor Palda.
Prof. Palda: Yes, just a small technical reminder. I believe the main reasons were outlined by Mr. Silverman, but there is something called Canadian controlled private corporations, and I'm pretty certain they already benefit from an advantageous tax regime as opposed to the others.
You can see it in the report of the Auditor General of 1994. On page 32-12 there is there is an exhibit that gives you the tax credits obtained by these corporations, and then another on a succeeding page for all the other corporations. They make the distinction between those two.
The Chairman: Mr. Flageole.
Mr. Flageole: Mr. Chairman, as was just mentioned by Mr. Palda, we have a specific chapter in our 1994 report that gives a fair amount of information on how that whole system works, and I think Mr. Palda was right in pointing out that there are different rules depending on the type of corporation.
The general comment I would like to make - and it was referred to this morning - is that a tax credit is an easy way, on the administrative side, to encourage something. It's a lot easier than having a grant process where you need a committee and assessment. One of the difficulties, though - and it was referred to by Mr. Silverman - is that it's difficult to target, because the way the tax system works, you often have to arrive at a general definition of something.
As Mr. de la Mothe mentioned this morning, the definition of science and technology or research and development in the Income Tax Act is very, very broad. The risk there is that you might be subsidizing things you don't really want to encourage. We're back to two things: there is the ``what'' and the ``who''. If you agree on the ``what'', then it's very difficult to differentiate on who's going to get it.
Mr. de la Mothe was referring to questions that were raised in 1994 about granting credits to the banking industry. I think that has been changed; that situation has been corrected. But I think it's a good example of what might happen. The way the tax regulations were designed, the work that was done by the banking industry to develop their own computer systems for their own purposes did qualify under the Income Tax Act. So they were benefiting from four tax credits as another corporation was doing R and D to market the things.
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It's very important that Finance and Revenue Canada have a very good idea. They need information on who's getting what money. They need a monitoring mechanism to make sure they're really subsidizing what they have the intention to subsidize. That's a general feature of a tax mechanism.
The Chairman: Thank you.
Mr. Albinson, you can have a final comment on this question and then we'll go to Mr. Leblanc.
Mr. Albinson: I agree with your concern about the fact that it is a major part of the S and T budget and we need to be very cognizant of how we're using it to make sure it's going well.
I'm not sure the committee's aware that over the last 12 months the Department of Finance and Revenue Canada have been actively reviewing that whole program and have actually significantly changed the regulations to curtail some of those people who had received the benefit and weren't perceived to be in line with the program. The regulations have been changed substantially over the 12 months.
One of the problems with that is, as was mentioned earlier, when you define what, sometimes you can't define who. As a result of even cutting back in the last 12 months on who's eligible, we now have small and medium-sized Canadian companies that were fully eligible and doing very good work but are no longer eligible.
You always have this dilemma of where to draw the line. We've moved the line significantly in the last 12 months to reduce eligibility, and that's hurting some of our small members of CATA, especially small software firms that are no longer eligible.
I just wanted to bring that point up too. It's a very difficult thing to do and we're cognizant of that, but it's something you have to work at.
On the multinational front, again I bring up the example of Ericsson. The government was very active in actually requiring Ericsson to establish an R and D facility in Canada as part of their ability to get the cellular equipment market when that was licensed off. Once Ericsson had established a facility here, as an offset they actually found it was a very competitive and good place to do R and D.
You can have multinationals that do excellent work in the community and really do have intellectual capital here, and I don't think we would want to exclude those either. Ericsson is now employing about 1,000 engineers in Montreal and doing excellent work on taking the products they've developed there and marketing them worldwide. They're not just for the Canadian market.
If we market that capability and are careful about how we administer the programs, we can get a lot of benefit out of it.
The Chairman: Thank you.
We have three deputies who want to say something. I'd like us to keep in mind that we're heading close to 1 o'clock and we've kept our witnesses here for a good three hours, so I think we should aim towards that.
Mr. Leblanc.
[Translation]
Mr. Leblanc: Before you arrived, Mr. Chairman, and before your party was in power, I myself was part of the Progressive Conservative government and I was Chair of the Science and Technology Committee. At that time, we were asking a question that I thought important: are the results of our research work sufficiently well disseminated? We are aware that the transfer of research results is often deficient, which means that the sectors that need them are unable to use them. That is my first question.
My second question ties in with this somewhat: could we better market research results? Some companies, for example, drop product lines or activities and they could sell the fruits of some of their research work. Should we not try to find a better way of marketing the fruits of our research in order to make this work more accessible? That is a very broad question. We had discussed it at the time, but I believe it is still very current today.
[English]
The Chairman: Is there any witness who would like to start with this?
[Translation]
Mr. Flageole: We talked a lot about that when we looked into the labs of the various departments and the specialized federal labs. I believe that the answer to the question of whether or not the results are well enough disseminated is no. Could these results be better marketed? The answer, clearly, is yes.
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A panellist this morning talked about results of research work that sit on shelves collecting dust in departments. We have seen that. I truly believe there is a need - and we put a lot of emphasis on that - to improve the capability of all federal organizations to market their results by bringing them out of the labs. One of the difficulties in this regard is that this requires some experience. It is difficult to ask a scientist who has been working on his own particular project to do marketing work and to come out of his lab to go and meet with representatives of private companies to tell them that he has an excellent idea.
Scientists do not do this for two reasons: they do not have the time and in many cases, it does not interest them. We greatly emphasized this need for departments and federal labs to put their results out in the market place. There have been some interesting initiatives in certain organizations, such as the National Research Council, for example, where a structure was set up to do this kind of thing. The Communications Research Centre was also doing very interesting things. CANMET is doing a lot of work with industry.
This certainly is an area where it is imperative to improve the situation because its possible impact is so great.
[English]
The Chairman: Thank you.
Mr. Silverman wishes to add something briefly.
Mr. Silverman: Right now on the Internet you can get information on what all the federal laboratories are doing and researching. In the near future we expect to have a situation where you will also be able to get on the Internet all the research they're making available, and the technology as well.
The Chairman: Dr. Hutchinson.
Dr. Hutchinson: I'd like to make the point that as valuable as Strategis is - and Strategis, which is a web site that gives information on what's going on, is quite important - this business of linking suppliers of research to potential users is a people-intensive business. It doesn't just happen. It's the difference between information and knowledge.
In the past three or four years I have personally seen a significant change in government departments in terms of their attention to this particular effort. There are significant changes in that. That's what I was referring to when I said universities are now paying more attention to this whole area of building partnerships and making that linkage to users.
It isn't just knowing what's there; it's actually understanding and having someone at the creation end who understands it well enough to explain it to the user. One needs to bring the researcher into that process. I'm finding that increasingly researchers at the universities are happy and willing to do that.
One needs to some extent an interpreter to help in that process. That's what technology transfer officers do. That is a process where people are involved.
At Queen's University we've had a spin-off company called Neurochem come out just in the last two weeks, which has had one of the highest first placements of biotech money into a medical biotechnology firm. That has taken six years, from the beginning, when we had the research idea, to finding the entrepreneurial venture capital to put these kinds of things together.
Perhaps it's in shorter than that period of time that we've actually seen a significant change, but it has required our technology transfer office to do a lot of work in putting the capital together and putting the researchers together with potential users.
It's a people-intensive process. I wouldn't want you to think an Internet site is going to solve the problem.
The Chairman: Mr. Lastewka.
Mr. Lastewka (St. Catharines): Thank you, Mr. Chairman.
First of all, I would like to thank the witnesses very much for their presentation. I really enjoyed their at times varied viewpoints. It's been helping me to understand.
Some of you have re-emphasized the fact that we're going from the old economy to a new economy and we need to move more on the global scene; we have no choice.
The witnesses also brought out the fact that somehow there was some advertising. We knew what was going on in universities where we didn't before. Why not? What's changed there?
The Auditor General's office talked about who, what and when and the goal and so forth. I guess that applies to all areas also, from the discussion I heard today.
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It would seem to me, as I hear more of what you're saying, we're all going to be changing from the old economy to the new economy, to knowledge-based, and we need to understand the system better, who is doing what, when and how it's being transferred, how we are moving up the education of students to be fitting into what I call the system - maybe that's the wrong word. But we all need to look at how we can do things faster, I heard.
I'm not sure we've agreed on that. I heard from the Auditor General's office a little bit about getting to that goal. I heard from industry that the time we have out there is short, and the sooner we can get there, it happens; if it's too long, it doesn't happen and it sits on a shelf.
So my question, maybe to the university group and Mr. de la Mothe, is are we into the designing of a better system, a Canadian system, understood by all here?
It's becoming very clear to me in my discussions that with small businesses and some universities many things are taken for granted and assumed to be how they were three or five years ago, and by the way, everything has changed. We just heard a change.
The Chairman: Professor de la Mothe.
Prof. de la Mothe: Are you referring to the general awareness of the national system of innovation, or just how...?
I sense in my first-year undergraduate class, for example, they're very much more attuned to cyberwork than five or ten years ago. Their expectations are changing. They're much more entrepreneurial. They're much more flexible, which is surprising. They're much more cross-disciplinary. They're looking for solutions rather than waiting for someone to do something for them. Their expectations of support are dropping away rather rapidly, even though they don't necessarily like that.
So I think there is a fundamental mind shift going on, from where I sit, anyway. Certainly at the university we just lost $23 million from this year's budget, and nothing focuses the attention like a loss of $23 million.
My sense is that there is no smooth transition. There are sectors that are deeply problematic in terms of how much flexibility or how many degrees of freedom they actually do have. But I see tremendous change in the overall economy in the way institutions, government, firms, universities and colleges are approaching the problem, defining the problem. Their willingness to collaborate, to my mind, is a healthy sign. I'm quite optimistic about the general direction.
There are problems. There are always difficulties in transforming a workforce that is, say, 45 or 50 years old that isn't used to being retooled or hasn't been taught to retrain itself or be in continuing education. I think those are areas for close attention and assistance in making that transformation, but overall I think the system of innovation idea is getting through.
You listen to Peter Gzowski in the morning, for example, or various radio stations, and people are talking about people who are doing it - to quote the Nike slogan - and I'm generally fairly optimistic about our ability not only to catch up, but to keep up.
The Chairman: Dr. Hutchinson wanted to speak.
Dr. Hutchinson: Yes, I would not want you to leave this room with the impression that there have not been major changes in the universities over the last five years. Those changes are in fact increasing in pace, given the current financial situation.
I come from Queen's University, which is probably very traditional, having been a somewhat conservative university in the past. Since I've been there in 1990, the university has...it is in the process right now of building a bioscientist complex. It was inconceivable before 1990, I think, to have a university building going up with the idea of having an incubator inside it. But this building is going up, and there's actually an incubator for new businesses being built right into the building. So we're recognizing that the university will play a role in terms of start-up companies.
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You talk about retooling professors. Yes, we have a large cadre of people in this age range whose attitudes we do have to change, but many professors have taken early retirement. The more entrepreneurial ones, in fact, are the ones who have taken it. I can point again specifically to Queen's. With the idea of building this bioscience complex and the incubator in it, there have been three biology or biotech-type companies set up at Queen's, funded and grown out of the faculty within that university over the last three years. At least one of those is a faculty member who has taken early retirement and is setting up a plant biotech company, which recently received venture capital funding and is off the ground.
We're seeing these changes happening, perhaps not as broadly as you might like, but there are significant efforts. We've heard about Saskatoon and the significant interaction between the government labs and Innovation Place. So I wouldn't want you to come out of the meeting today thinking there have not been significant changes in orientation at universities. I think there's a significant move in that direction.
The Chairman: Are there final comments or questions?
Mr. Lastewka: I agree that there's a lot of change going on in each area - in the government area, in the industry area, in the universities. I come from a large multinational and I must make the point that although multinationals might not do research here in Canada, they sure spend a lot of money in small and medium-sized businesses doing research in Canada. That should not be overlooked.
I'm going to go back to the Auditor General's statement about whether in all areas we need to take a good look at how much of what some people call basic science, pure science, whatever it is, needs to be done in government labs, and how much should be done in universities through the various systems. How are the areas being linked together better? I know some good work has been done through the networks of centres of excellence. Should we be saying to ourselves, because we're all working together on this, that it needs to be taken to a higher area? I know there was concern from some universities about whether that was working and whether it was going to be funded. What system do we need to review to make sure the taxpayer is getting the best dollar return for any money spent, wherever it's being spent?
Mr. Albinson: We talked about technology transfer agents; we talked about how to keep track of our dollars. If organizations are not measured on how well they invest their research dollar and transfer that research to industry, you're not going to see the benefit. I think it's the same for universities as for NRC.
I don't want to touch basic research. We need to do that and it needs to be partitioned. But when we do applied research, why not have a royalties frame so that institutions, both government and universities, are required to meet a certain royalty target on the technology they develop? That's not to say all technology is successful, but some of it should be. Some of it should be transferred, and industry should be willing to pay for it through a royalties frame. If the institution can't meet its royalty targets, then it's not investing the dollars as appropriately as it should. There needs to be some kind of measure.
The Chairman: Thank you very much. I'll go to Mr. Duhamel.
[Translation]
Mr. Duhamel (St. Boniface): I have greatly appreciated this exchange of information and I have two questions to ask.
[English]
I'm a replacement for a colleague and I've not heard all of the testimony, so if the questions I'm about to ask have been answered, I simply need to be told, Mr. Chairman. I'll look up the information in the transcripts.
As a member of the finance committee, I can say that we are now hearing testimony from a number of individuals with respect to our pre-budget consultations. We've heard from representatives of colleges and universities and from health care promoters, and they have expressed concerns not dissimilar to your own.
Is there a formal interactive mechanism for you to talk to each other, or is this somewhat coincidental? If there is not a formal mechanism or a series of formal mechanisms, should there be? Would that be useful? I ask this because it seems to me that the weight of a number of communities speaking together, focused upon some changes that appear to be required, might move governments more quickly than at other times.
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I heard the testimony within the last hour that there are problems with the system. You've documented those and we can look at those. There are also money problems, if I've understood and interpreted it correctly. How much are we talking about in order to be competitive with our major partners?
The reason I ask is when I listened to the testimony of people from post-secondary institutions as well as health care providers, there were sums put on the table. My suspicion is they're not necessarily additive, because they are in fact speaking about basic research and other types of research, innovation and technology.
Could someone help me sort that out?
The Chairman: Would anybody like to respond to those two points raised by Mr. Duhamel?
Prof. Palda: On the second question,
[Translation]
you ask how many there are. Well, the question is so tricky that we are unable to answer, but you might ask yourselves what the government would be able to do if it reduced the tax burden that drains the investment possibilities of the trade and industrial communities, so that we might reach the objectives that have been put forward and the level of competitiveness that we would like to have in the area of science and technology. And there is this question: how much more should be spent? This is a question that you and many other people have asked themselves. It is the opposite of the question we should be asking: by how much could we reduce the burden imposed on all of us so as to be able to perform better?
Mr. Duhamel: But would we not arrive at roughly the same answer? It seems to me that we would.
Mr. Palda: Yes, but then it would not be necessary for the money to circulate through the government and the whole bureaucracy of all these paragovernmental organizations.
Mr. Duhamel: I understand. Thank you.
[English]
The Chairman: Does anybody else have a final comment on this point? Dr. Hutchinson.
Dr. Hutchinson: I guess I didn't understand. Your first question was related to...?
Mr. Duhamel: Any kind of interaction with post-secondary.... Obviously I know you do, but is there a formal interactive mechanism or series of them so you can talk about these topics with colleges, universities and health care providers? I'm speaking of financial and other types of systems needs for research and like matters.
Dr. Hutchinson: Certainly the universities talk a significant amount with each other. Universities have people sitting on the granting councils. The Medical Research Council, for example, has university people sitting on those kinds of bodies.
I may not be as well qualified to address that question as some others are.
The Chairman: Why don't we have a final comment from Mr. Albinson and then we'll end this session?
Mr. Albinson: I think Dr. Hutchinson talked earlier about the centres of excellence. I sit on the Canadian Institute for Telecommunications Research, where you have industry and the universities sitting at the same table talking about their research programs. Industry is actively funding the research in universities and the universities are using their budgets. There are those mechanisms and they do work.
The only point is we need to make those mechanisms stronger so the research dollars we're putting into the public sector are complementary to the research dollars we're putting into the private sector, so that together we're producing more jobs and more wealth.
Dr. Hutchinson talked earlier about doing more in that area. I think it's a good thing to do.
The Chairman: Thank you.
I must say, just before I thank everyone, that Mr. Lastewka, who's a vice-chair of this committee, is heading up an internal government-led task force on commercialization of research and collaboration. If any of you have an opportunity to follow up on this point with him, he might appreciate it, and vice-versa. They're trying to bring some of these different ideas together on behalf of the government.
Speaking as chair, I can't say how pleased I am by your being here. You've covered the areas we set out. You've given us the benchmark responses that we're going to follow up on. I for one thought the three and a half hours went by very quickly. I know it's a long time to be here as witnesses.
As somebody said, they've been through this before. We appreciate that. It takes a lot of patience for experts to come into a new group and start over again, but we still have a long way to go to make sure the public understands these issues, supports science and technology research and knows the good stories and the tough stories.
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The two of you sitting beside each other is very symbolic, I think, and you've brought those different perspectives to bear.
I also want to thank the researchers and the clerk for putting together this first session, and the researchers in particular for this document. For those of you in the committee who haven't had a chance to look at your background document, it's tremendously well prepared, and I'd like to thank the researchers for that.
We're going to do site visits on Tuesday morning, so check your schedule and make sure you get back to the clerk on where you're going and so forth.
The committee is adjourned until Wednesday, October 30, at 3:30 p.m., at which time we'll have the banks in front of us.