John Shepherd

National Innovation Strategy, Part One

By John Shepherd

“In themselves inventions are passive … waiting for a sufficient store of force to have accumulated to set them working. That store must always take the shape of money, not hoarded, but in motion.” — Brooks Adams, “The Law of Civilization and Decay, edit 1912.

Mark Henderson’s editorial in the September 3/04 issue of RE$EARCH MONEY raises an issue that is central to the whole debate on innovation in Canada. He refers to the “National Innovation Strategy” announced in February 2002 and presses the Federal Government to make its current intentions “crystal clear”.

Mr Henderson will not see his aspirations realized. The National Innovation strategy will not materialize as originally proclaimed — for two very good reasons.

First, the initiative was associated with the political aspirations of the then Minister of Industry and it virtually died with his departure.

Second, the targets set out in that document will not be met. The Strategy will not be disavowed, just left dormant or morphed into a lesser outcome.

Whether the National Innovation Strategy’s targets were ever reasonably achievable goals is open to question. What is clear is that in the two years since its launch, progress has been entirely inadequate. The revolution has faded and the Strategy as a whole is dying from neglect.

THE TARGETS

The National Innovation Strategy announced a series of extremely ambitious targets which included:

* To rank among the top five countries in terms of R&D performance by 2010 (Canada is currently 15th) . This would have meant increasing our GERD to GDP ratio from 1.89 to 3.0 (representing more than $44 billion per year);

* To increase the R&D funding contribution of the private sector to 46% of total national funding;

* To raise venture capital investments per capita to prevailing U.S levels .

Implicit in these targets was the assumption that, although the federal government would provide strategic leadership, by far the major burden of funding would fall on the private sector, thus significantly driving up the rate of innovation and implicitly the rate of commercialization. This would represent a sea change in the entire spectrum of innovation in Canada. If private sector funding in 2010 was to reach at least 46%, or $22 billion, it would be equivalent to the current total of all national R&D expenditures.

There is no sign that a transformation on this required scale is as yet taking place. The targets of February 2002 have become even more unreal and even then were not adequate to reach the goal of fifth in the OECD rankings. Although we set the goal of 3% GERD/GDP, many of our competitors have already intensified their own research spending, so that the goal posts may in fact be receding .

THE PRIVATE SECTOR SHORTFALL

Since the Innovation strategy was launched, both federal government and university funding has increased. Private sector funding (the engine of the Strategy) is thus far massively short of its target. In fact, 2003 expenditures in this sector fell over the preceding year and may not yet have recovered. It is not hard to understand why. The innovating base in Canada is fragile. Flagship companies such as Nortel Networks Corp are struggling to maintain growth. Four firms in Canada account for 30% of all private sector R&D. The base of private sector innovation is too narrow. Unless that base is broadened substantially in terms of many more companies funding and performing R&D, the targets are virtually impossible to achieve.

We have too few innovating companies to sustain the National Innovation Strategy. Out of 1,800,000 SMEs, only 1,100 requested risk capital for innovation in the year 2000. In terms of companies performing R&D, a report by the Information Technology Association of Canada TAC identified only 120 companies committing 3% or more of their revenues and investing at least $3 million dollars per year in R&D. This situation has not materially changed since then. Even our currently strong economic performance is not strengthening our technology base. Unless,and until, we greatly increase the number of R&D performing enterprises in Canada, national productivity will continue to lag behind that of our competitors .

BASIC PRINCIPLES

The federal strategy for innovation will continue to fail in its objectives, at least until some basic principles are grasped and executed. First, the national goals for innovation can only be achieved by massive increases in funding from the private sector. Canadian governments can lead the strategy but cannot themselves fund the immense effort required to convert the national economy to an innovating base.

Second, government must refrain from tinkering at the margin with inadequately funded initiatives. While each initiative is praiseworthy in purpose, they are in general administratively complex and indifferently managed . Some incentives deal with R&D, some with marketing support, some with partnerships, some with export credits – none of them with the entire range of innovating costs, and all of them with their separate and distinct procedures, audits, reviews and criteria.

Third, in the context of innovation, government has only five roles: formulate a realistic national strategy; create and sustain a tax framework conducive to innovation; perform basic research in government and universities that is essential to national well-being; sustain links with national laboratories in other regimes; and, perhaps most importantly, create a strong base of skilled and technically educated people.

Everything else — technology partnerships, technology funding, industrial bid support, offset procurement, etc — should be phased out as the private sector fully assumes its role as the engine of the national economy .

The engine needs fuel and the fuel is private sector investment on a major scale.

John Shepherd is chairman of Gemprint Corp, a member of the Council of Science and Technology Advisors and founding chairman and current member of the Defence Science Advisory Board. He was also founder and chairman of the board of Leigh Instruments. Part Two next issue.