Commercialization and clusters will dominate Paul Martin’s S&T agenda

RE$EARCH MONEY Analysis

By Vincent Wright

If Paul Martin is truly a shoe-in to become the next Prime Minister, as most political pundits predict, then it appears quite reasonable to expect that S&T will gain even greater weight on the federal policy agenda. In his campaign to succeed Jean Chrétien — both inside and out of Cabinet — Martin has been busy enunciating priorities on at least four key, inter-related S&T fronts: the twin themes of technology commercialization and cluster development, coupled with possible new directions for human capital and environmental innovations.

Throughout the summer, RE$EARCH MONEY interviewed policy observers, insiders and members of the Martin camp to determine how Canada’s S&T policy may evolve under a Martin-led government, and what current initiatives will be maintained, cut or modified. A review of Martin’s decisions while Finance minister, and an examination of subsequent public comments, strongly suggest that Canada’s commitment to S&T will continue under new leadership, although some priorities will likely shift.

Martin is already credited as being the chief architect of the current government’s innovation policies, and a long-standing champion of the Canadian R&D community. While highly respected as the Finance minister who repaired Ottawa’s fragile fiscal condition, Martin was also widely regarded by many federal S&T policy experts as the de facto Minister of Science — at least in the powerful inner Cabinet circle.

Martin actually laid the groundwork for boosting the profile of S&T well before the Chrétien regime assumed office in 1993. It was Martin who ensured that research and technology were priorities in the Liberal’s first election victory. From the standpoint of new spending promises, S&T measures ranked second only to public works infrastructure in the Liberal Party’s first of three Red Books (R$, October 13, 1993).

Although it would take several years to deliver on the spending vows, it is now clear that S&T was top of mind in Martin’s budget process, particularly during the latter half of his career at Finance. During the five-year period between 1997 and 2001, federal S&T spending soared more than 25% in constant 1997 dollars from about $5.5 billion to almost $7 billion, hoisting its total share of the federal budget from 3.7% to 4.5%. Remarkably, aside from public works infrastructure investments, no other major area of federal spending grew as much as S&T during the same period.

“In every Budget from 1996 on, Paul Martin has strengthened the federal S&T portfolio, with a particular emphasis on restoring funds to previously cash-strapped higher education researchers,” notes a key policy advisor in the Martin camp. “On that basis, I believe it’s reasonable to conclude that as prime minister, Paul Martin would continue to add incrementally to, and therefore definitely not subtract from, federal S&T spending.”

Ironically, the one fiscal plan that Martin didn’t deliver (that handled by Finance minister John Manley earlier this year) contains the most new S&T funding of all the Chrétien administration Budgets tabled during the last decade (R$, March 7/03). Nonetheless, because many of the new S&T spending initiatives have been under consideration for years, some policy analysts believe that Martin’s imprimatur was evident in the last Budget as well.

MOVEMENT ON COMMERCIALIZATION LIKELY

Based on Martin’s public comments to date, it’s obvious that he — like so many others in S&T policy circles — has been concerned about the sorry state of technology commercialization in Canada. While the former Finance minister acknowledges that his measures significantly boosted the country’s basic research capacity, he reportedly remains uneasy about the lack of progress in moving ideas from the lab to market.

“The truth is, we need to do a better job at commercializing our research and innovation, and a critical element of that is innovative financing,” stated Martin in a May/02 speech to the Canadian Venture Capital Ass-ociation and the Toronto Stock Exchange.

Martin offered no specific remedies, but did provide some clues as to where Ottawa might focus. In commenting on the stark differences between Canada and the United States when it comes to early-stage equity for innovative enterprises, he noted that between 1996 and 2000, large institutional pension funds accounted for just 12% of all venture capital investments in Canada. By contrast, their counterparts in the US supplied roughly half that country’s risk capital during the same period.

“Quite frankly, we need to change the prevailing mindset,” Martin stated. “We simply have to narrow that gap and we must use every means at our disposal to do so.”

In the same speech, he lamented that major institutional investors in Canada have made little headway in developing the innovative “funds of funds” concept that has been embraced by their equivalents in the US. “Funds of funds” involve sharing of capital and investment expertise among institutional fund managers to mitigate the inherent risks associated with venture investments and to ensure a diversified portfolio of innovative enterprises.

Martin did note that Canada is making progress in his self-stated bid to rank among the world’s top three nations in per capita venture capital investment. But he cautioned that the progress is attributable more to foreign inflows than the development of dom-estic sources. “We welcome this foreign participation…but it’s legitimate to ask whether we have done enough on the Canadian side.”

Developing local sources of venture investment is part and parcel of Martin’s over-arching platform of economic sovereignty. It’s also central to his much-ballyhooed promise for new municipal funding schemes to develop stronger, more internationally competitive Canadian cities. anchored by technology-intensive clusters.

“By definition, clusters build on local strengths in research, entrepreneurial talent and financial expertise. Thus, the capacity to finance growth from within becomes a self-sustaining advantage,” he stated

Ottawa’s plan to create 10 viable clusters by 2010 was criticized as excessively ad hoc in a report by the Information Technology Association of Canada (R$, October 21/2002).

But a Martin policy advisor disagrees. He says the National Research Council-conceived initiative builds on identifiable pockets of strength and dovetails into Martin’s so-called New Deal for Canadian cities.

“Our great cities are our global signature,” stated Martin in a campaign-style address to the Federation of Canadian Municipalities in May/02. “With the capacity to move capital with the click of a mouse and the freedom of the world’s best and brightest to locate where they choose, global competition, increasingly, is not between countries - it’s between cities,”

PRIORITY PLACED ON CITIES

Martin’s New Deal for Cities aims to replace today’s funding system — based largely on a property tax system hatched in the 19th century — with a much-vaunted 21st century approach involving the private sector (presumably even pension funds) in partnerships with all levels of government. Among the ideas that Martin is pondering is the creation of local foundations, and he’s indicated a willingness to pony up a hefty chunk of the lucrative federal tax on gasoline to back his New Deal. The ultimate goal is to institutionalize municipal development funding and extend budgetary planning horizons from two to 10 years.

With assurance of long-term funding, Martin’s policy aide says Canadian cities will be in a better position to undertake the kind of long-term investments required for effective technology cluster development. He adds that NRC and other federal science-based departments and agencies can play a “catalytic” role in the development of clusters.

And he acknowledges that active involvement in clusters could be a way for many federal labs to restore credibility after decades of skepticism concerning their relevance. That skepticism is reflected in recently-released data showing the federal share of the country’s total R&D performance continuing to slide, from 11.7% in 1997 to 10.7% in 2002.

SHIFT IN SUPPORT FOR UNIVERSITIES

For federal labs, and all R&D organizations public and private, the question of relevance in an increasingly knowledge-based economy could be moot if Canada is unable to train, recruit, and retain sufficient highly qualified personnel (HQP). On that point, Martin has signaled to the higher education community that there could be a shift from additional dollars for science to new funding for teaching resources.

“I think we’ve put a lot of money into professors doing research” Martin told a Toronto Town Hall in April. “I think there’s going to be a lot more focus on expanding faculties.”

Martin’s generous outpouring to university researchers — more than $1 billion has been added to annual budgets of the federal granting councils and other higher education initiatives over the last five years — is mirrored in the disproportionate share of R&D now performed by schools. In 2002, higher education institutions performed an astonishing 33.5% of Canadian R&D, up from 26.5% in 1997.

IMMIGRATION REFORM

Martin has also vowed major reforms to immigration policy and procedures to afford greater opportunities for importing talent. At a town hall meeting in Montreal earlier this year, he expressed alarm upon learning that it’s often more difficult to get a work permit in Canada than it is in the US, which is far more security minded.

“There are people who have come here who have qualifications, but we do not recognize them. This is unacceptable. There are a wide number of very specialized occupations that we are not able to fill here in Canada. We’ve got to be very proactive and go out and try to get people in to deal with them.”

Just what Martin means by “proactive” is difficult to ascertain at this point, although he may want to consider the experience of the Quebec government, which utilized income tax holidays as means of enticing certain highly qualified R&D personnel to the province. Apparently, the jury is still out on the effectiveness of that mechanism, although many of the measures were either reduced or eliminated by the new Liberal government in its inaugural Budget (R$, June 23/03).

At the recent Town Hall in Toronto, Martin questioned the effectiveness of something altogether different — Ottawa’s strategy for global climate change and related environmental innovations.

“I think if you’re going to bring in something like Kyoto, which is going to provide a huge national cooperation, you owe it to Canadians to lay the plan in front of them, so Canadians know what is being asked of them. Unfortunately, we ratified Kyoto without that plan in place, and since then we have not heard a great deal about the plan.”

In ratifying the Kyoto treaty late last year as a back-bench MP, Martin called on the government to divest of its $1.5 billion stake in Petro-Canada, and apply the money to Kyoto-friendly technology and innovations. Martin has repeated the call as a pledge on the campaign trail. But it’s not evident whether the $1.5 billion would be incremental to the $1.4 billion dedicated in his Y2K budget, or the $2 billion in environmental innovation spending declared in this year’s federal budget.

From the tone of his past speeches, Martin has touted himself as a strong advocate for ecology-minded S&T enthusiasts.

“For Canadians of all ages, protecting the environment is not an option — it is something that we simply must do. It is a fundamental value — beyond debate, beyond discussion,” he told a Toronto breakfast gathering organized the National Round Table on the Environment and the Economy two years ago.

“Given the importance of natural resources to our country and because of the severity of our climate, leadership in this area of our economy is not a matter of choice for Canada. Quite simply, we must apply the same innovative thinking, the same spirit of enterprise, the same technological ingenuity, to protecting and enhancing our environment, as we have to becoming world leaders in the fields of telecommunications, transportation and so many others.”

When it comes to environmental S&T, it’s widely accepted that the Chrétien government has been long on promise, but short on delivery. While Martin must accept some responsibility for the failings, he may soon have the necessary clout to deliver on his own convictions.

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