Business leaders debate internal and external challenges to performing R&D

RE$EARCH MONEY Conference

Canada’s domestic and foreign-based industrial R&D performers are examining their options for maintaining and expanding their operations in Canada in the face of a rapidly changing global environment. A strengthening dollar, the increased complexity of many areas of R&D, high-speed global connectivity and movement up the innovation value chain by nations such as India, China and Brazil are compelling Canadian firms to alter their strategies and operations or risk losing competitive edge.

Company executives from large and small companies gathered with representatives from government and academia in Ottawa on November 8 to debate the challenges facing the private sector at the fifth annual RE$EARCH MONEY Conference. Entitled The Future of Industrial R&D in Canada, the conference featured two keynote presentations from two of Canada’s most prominent technologies firms — Nortel Networks Corp and Open Text Corp.

Outgoing Nortel CEO William Owens set the tone for the day’s discussions with an appraisal of Canada’s strengths, his company’s recent emphasis of collaborative partnerships, the Canadian environment for corporate R&D and the expansion of Nortel’s R&D operations in India and China. Owens said Canada remains one of the most cost-effective jurisdictions for R&D among the western democracies, but warned that the advantage could erode with time.

“Before we see the equations change in the next five years, let’s put in place government policies working with academia and industry that will cause the equation to stay where is and even drive to put in more and more R&D here,” he said. “It’s the tax structure, the R&D credits and a lot of different issues such as tax losses and how long you can keep them on the books. It’s a strategy — and it must be seen as a strategy — for building innovation in this country.”

The message delivered by Tom Jenkins, executive chairman and chief strategy office for Open Text, was similar to that of Owens. But his reading of the challenges posed by China, India and other emerging nations carried a greater sense of urgency. By his estimate, the illusion in Canada created by surging natural resources wealth and the current cost advantage for conducting R&D could be shattered in just a few years.

“Fibre optic cable and a good education gives you a researcher anywhere in the world. We have an accelerated case of change. Innovation, post-Internet, will be about flexibility, our ability to emulate and drive our ideas faster to market. It will be about whether we can create wealth,” said Jenkins. “The world is changing very rapidly (and) the next 10 years are going to be a lot harder for Canada than the last 10 years.”

Jenkins compared the impact of the rising Canadian dollar and the emergence of China and India on global technology markets to a tsunami — an initial earthquake followed by a wave that threatens to swamp all before it. He said that Canada can’t rely on measures such as generous R&D tax credits but must look at the complete business environment to ensure competitive advantage. Also critical is ensuring advantage through time-to-market. If a firm can’t turn R&D into wealth quickly, it probably shouldn’t bother.

“We have to understand the diffusion of events,” he said. “These events have not caught up with us yet but they will.”

Jenkins’ perspective was reinforced by Frank Maw, president of Alexander & Associates and former president of Motorola Canada Ltd. Maw said Canada’s R&D advantage is evaporating, not just due to nations like China and India but eastern European countries.

“They’re coming on strong, dealing with complexity, quality and time-to-market,” he said. “Canada needs to be specialized in highly complex, highly creative R&D and look at the top tier of research.”

CANADIAN BUSINESS R&D LAGGING

A feature presentation by Statistics Canada’s Dr Fred Gault underscored the challenge facing Canada as it strives to become more innovative. Gault, the director of StatsCan’s Science, Innovation and Electronic Information division, said that Canada’s business expenditures on R&D (BERD) as a percentage of GDP trail virtually every other OECD country. The latest data show Canadian BERD at 1.1% of GDP, with the top 100 R&D performing firms accounting for 60% of the total, which is projected to be $13.8 billion in 2005.

Gault also addressed the issue of R&D offshoring but noted that the current data are insufficient to determine the extent of the phenomena. StatsCan does not collect information showing how much R&D Canadian firms perform abroad. He said Canada needs these data to study offshoring and suggested that StatsCan should begin collecting the data itself or press the OECD to collect more detailed information from other countries. “We need to do one or the other,” he said.”

GETTING CANADA’S HOUSE IN ORDER

Tony Rahilly, acting DG of the Industrial Research Assistance Program (IRAP), said there is much more Canada can do to help Canadian companies face global competitive challenges. He said government must streamline the “plethora” of R&D assistance programs which he described as “confusing, overlapping and with no coordination”.

For its part, Rahilly said IRAP is beginning to make significant shifts in its positioning to improve the service it delivers to business.

“We still have a technology focus but we want to put more focus on markets, growth and products,” he said. “It will take time but we’re moving in that direction. Developing flexibility is a big challenge.”

The extent of the challenge for firms competing globally was described by Dr Hany Moustapha, Pratt & Whitney Canada’s chief technology officer. He noted that while P&WC has been active in Canada for 77 years, the task of maintaining and even expanding R&D operations grows more difficult since many competing nations offer better incentives than Canada for the aerospace sector.

“We need more incentives for collaboration,” he said. “Pratt & Whitney Canada is profitable and that gives the Canadian operations financial freedom and independence. We have programs like Technology Partnerships Canada and SR&ED. They’re OK, but we have to be lean and mean and demonstrate high productivity.”

A complete description of the conference proceedings will be posted in the next few weeks at www.researchmoneyinc.com.

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