Massive hike in R&D spending called for Martin's New Economy speech sets ambitious goals for R&D spending, investment and education

Finance minister Paul Martin has challenged Canada's S&T community to dramatically increase its annual R&D spending to $47.5 billion by 2010. The astonishing target was contained in Martin's September 14 New Economy speech to the Toronto Board of Trade and represents a three-fold increase over the total of $14.9 billion in spending projected for 1999. It was one of five aggressive goals outlined the presentation, which has been the dominant subject of discussion throughout the S&T components of industry, government and academia.

The speech provides fresh indicators that the federal government may be prepared to spend much more on rebuilding the nation's depleted capacity to compete and thrive in the knowledge-based economy. In a presentation laced with allusions to ongoing and proposed funding initiatives, Martin laid down a challenge to all social and economic sectors to embrace a new model for technological change.

Proclaiming that the world is "in the early stages of an unprecedented revolution", the Finance minister outlined a series of lofty targets for R&D spending, financing, e-commerce and human capital, upon which he contends Canada's future competitiveness and prosperity depends.

There is concern, however, that in the case of R&D, the goal may be too lofty. Martin's call for Canada to dramatically ramp up its Gross Expenditures on R&D as a percentage of GDP (the GERD to GDP ratio), would move Canada from its current ranking of 15th among OECD nations to 5th within 10 years. Such a jump would require a massive increase in R&D expenditures, not to mention- the huge number of additional people required to conduct the additional R&D.

The latest data from the Organisation for Economic Co-operation and Development (OECD) show that Canada's 1999 GERD to GDP ratio is just 1.6, far below the top-ranked nations of Sweden, Finland, Japan, United States and Switzerland (see chart next page). For Canada to move into the top five, it would have to achieve a GERD to GDP ratio of at least 2.7, necessitating an increase in R&D expenditures of nearly $33 billion. The challenge issued by Martin assumes that other nations will not increase their own GERD to GDP ratio over the next 10 years (which is unlikely), but it does account for Canada's growing GDP, which was estimated using consensus forecasts based on projections by various private sector economists.

At a recent OECD meeting in Ottawa, a senior official with that organization expressed serious doubts that Canada could achieve the necessary increase in R&D spending to meet the target, adding that an increase of such a scale takes years to accomplish. Some Canadian officials are also expressing skepticism, with one noting that a call to double Canada's GERD to GDP ratio by former Prime Minister Brian Mulroney in 1984 failed miserably.

A Finance official says that all of the objectives outlined in Martin's speech are ambitious targets that require participation from much more than just the federal government, and are based on recent R&D spending data combined with consensus forecasts on GDP growth.

"The key is to consider the spirit in which the goals were advanced," says the official. "They're stretch targets the minister articulated the country should move forward on, to be a leader in the New Economy."

As for achieving the R&D target, the official says success will depend upon action on a number of fronts, and assumes that industry will continue to contribute approximately two thirds of the total.

"The target is really the first step, with the intent to see a roll-out in the next few months. It's working toward the federal Budget and subsequent budgets."

Securing and mobilizing the people to actually conduct the R&D presents an additional challenge. OECD data estimate that Canada's current total R&D personnel in 1998 amounted to 137,198 in 1995 (the last year for which data are available). But if Canada wishes to raise its R&D spending to $47.5 billion, it will require more than 400,000 additional R&D workers over 10 years, in a tight global labour market that's likely to get even tighter.

For many members of the S&T community, Martin's focus on the New Economy comes as a pleasant surprise, and several groups have been quick to praise the speech. Bob Crow, VP policy for the Information Technology Association of Canada (ITAC), says his organization is "absolutely delighted" with its contents and messages.

"The specific significance of the minister's speech is that is demonstrates that interest and understanding of the New Economy is spreading beyond the Industry department and the Industry minister," says Crow, adding that ITAC's upcoming brief to the Standing Committee on Finance makes similar points. "Maybe stretch goals like these will make us focus on R&D and highly qualified personnel."

A partial answer to the R&D manpower conundrum may lie in Martin's response to the human capital shortage that many groups are now addressing with new funding proposals. Many contend that the biggest challenge facing Canada is the lack of appropriate expertise and mix of skills required in a knowledge-based economy.

The minister's speech addresses the human capital equation in its widest sense, from early childhood education to dramatic improvements in science and math skills. He states that more resources must be directed towards education at all levels to ensure that students regardless of income level have access. And he argues that for Canadians to become more computer and Internet literate, the traditional three R's should be augmented by "the three C's of computation, calculation and communication".

Martin seems to be on more solid ground with his goal for venture capital (VC), although once again the target is extremely aggressive and outstrips the objectives of the association representing the VC industry - the Canadian Venture Capital Association (CVCA). Martin says Canada must improve its ranking of 10th in VC investment per capita to 3rd, and "raise as many IPO dollars per capita for growing enterprises here in here in Canada as American companies do per capita in the United States". He also says Canada must increase the per capita dollar value of initial public offerings (IPO) to equal that of the US.

Finance officials say that VC investment per capita is a floating target, but that Canada must improve its 1999 performance of $70 per capita to at least $135 per capita - the level Sweden achieved the same year.

Ron Begg, CVCA president and head of Canada's second-largest labour sponsored VC fund, says that earlier this year, the CVCA resolved that Canada should strive to build a pool of VC equal to the highest of industrial nations as a percentage of GDP.

"Martin's goal is more ambitious than ours and would require a larger pool of capital," says Begg, who has completed an international comparison of VC investment. "But he's dead right when he says it is fundamentally important to future competitiveness."

To achieve an increase in the capital available to new and expanding technology firms, Martin is somewhat vague, but he does point to a streamlining of the regulatory framework governing the financial markets. More importantly, however, he says Canada must "change the prevailing culture of our large capital pools" - namely pension funds and other large institutional capital pools.

"The traditional funds and pension funds represent the biggest upside, breakthrough potential, but all three segments of the venture capital market have to grow," says Begg., adding that the CVCA is embarking on a new research project to generate company-level independent performance data of the industry.

Hubert Manseau, president of Société Innovatech du Grand Montréal, says the trick is to convince smaller, conservatively managed pension funds to increase their appetite for risk. He says government can help by lowering capital gains taxes, adding that it should also examine the also examine the Israeli government's example, which guarantees as much as 70% of the share value of VC investments.

For corporate VC, Manseau says Canada faces a structural problem which could be more challenging to resolve. "It takes critical mass but in Canada there aren't many large firms that have corporate venture capital and it's not clear how we should handle this."

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