The Commercialization Conundrum

By Ron Freedman

It’s clear from the February throne speech and subsequent ministerial statements that technology commercialization is going to be a major theme of a new Liberal government. Here are some considerations that those charged with putting meat on the commercialization bones will need to take into account.

R&D Companies Stalled. The commercialization capacity of Canada’s private sector can be expressed as the number of firms performing research times the amount of R&D they perform. If fewer firms have an R&D capacity it will be harder to transfer technologies from laboratories (their own labs, or university or government labs) to markets. Recent StatCan data, soon to be released by Research Infosource Inc., indicate that at a time when the number of businesses was exploding, the number of firms performing R&D was not. This is a critical issue for innovation policy in general and for specific government program initiatives.

Industrial Research Structure Changing. The past few years have witnessed the closure of a number of Canada’s leading corporate research laboratories: for instance Noranda, MacMillan Bloedel and BioChem Pharma. Others, such as JDS Uniphase and GSI Lumonics, have relocated their R&D to the US. These labs were the engines of innovation in their companies and further afield. Another significant change is that a number of provincial research organizations no longer exist, depleting the pool of commercialization entities even more.

Meanwhile, there has been an increase in the number of “4th Pillar” (not-for-profit) research organizations, often linked to universities. Clearly, the structure and function of industrial research in Canada is changing. But we know little about the long-term trends and their implications. Does the economy still need in-house corporate labs a la Nortel, or can R&D be contracted out to the least-cost performer or country? This issue requires serious consideration by bodies such as the Advisory Council on Science and Technology.

The Rise of Services. About the same number of Service companies (3,300) undertake R&D as Manufacturing firms (3,000). Yet public sector commercialization (and innovation support) policies and programs usually focus on manufactured goods rather than services. Given the growing importance of S&T-based services, an effective commercialization strategy needs to address commercialization in the services sector, especially in the three leading sub-sectors: Computer and Related Services (1,034 R&D firms), Engineering and Scientific Services (882) and Wholesale Trade (640). Policy makers have struggled unsuccessfully to develop commercialization strategies and programs for this vital sector. New and innovative thinking is called for here.

Universities, the Great White Hope. The amount of research performed at Canadian universities more than doubled from 1997 to 2003 (from $3.7 billion to $7.8 billion). With most new federal research dollars having flowed to universities, there are huge expectations for commercialization in this sector. Universities have committed themselves to “triple their commercialization performance”. But the obstacles are not inconsiderable. University research typically yields ideas, proofs-of-concept, components, and other items that are not marketable products in and of themselves.

University research often requires additional investment to reach a (prototype) stage where it can be commercialized. Universities must either license inventions or establish new companies to produce and market them; the latter route is lengthy, costly and risky. Besides, Canadian universities already out-perform US universities in spin-off company formation, which raises questions about the prospects for further improvement. More commercialization will require more investment at industry liaison and technology transfer offices. Finally, there is considerable resistance to the notion of technology commercialization within universities. Only a minority of university researchers are interested in commercializing their research; most joined academe to be academics, not entrepreneurs.

Federal Labs Undernourished. Once the principal drivers of technological innovation in Canada, federal labs have been undernourished for the better part of a decade. Many are no longer the vibrant scientific and technical entities they once were. A declining number have the potential to spin off or nurture great industrial enterprises. Labs have made enormous strides in professionalizing their commercialization and spin-off activities in recent years. But their core research activities have diminished. The bottom line is that there is less to commercialize. Successive governments have declined to consider the role that in-house federal research can play in revitalizing industrial innovation. Every indication is that federal labs will be kept on short rations for the foreseeable future. This will inevitably constrain their commercialization performance.

Fiscal Policy in the Doldrums. Once the paragon for the OECD, Canada’s fiscal policies for research — notably the SR&ED program — are now being caught up by other countries. Current tax rules result in a situation where successful entrepreneurs are penalized (taxed) when they move money earned from one successful commercialization investment to another. Such constraints on investment will inevitably affect future commercialization prospects. Canada’s fiscal policies for innovation and commercialization need a thorough review to re-position them for the next decade.

Direct Government Funding Problematical. Essentially, governments have two routes to enhance commercialization. The first is indirect. They can improve the business climate for research and commercialization: for example through improvements to the SR&ED program, or changes to the income tax system to encourage investment in early stage companies (e.g. labour-sponsored venture capital funds). Or, they can directly intervene by providing more funds to universities for commercialization, adding resources to the Industrial Research Assistance Program for expanded technical services to SMEs, and so forth. But international trade agreements are increasingly limiting options for direct funding of commercialization. Besides, Canadians are wary of government’s ability to spend their money wisely.

The bottom line? The commercialization row will not be an easy one to hoe.

Ron Freedman is CEO of Research Infosource Inc and co-publisher of RE$EARCH MONEY