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Home | Features | October 17 | Why R&D Spending is Good for Canadian Business

WHY R&D SPENDING IS GOOD FOR

CANADIAN BUSINESS

By Charles McMillan

“Science finds – Industry Applies, Man Conforms”

- Theme of Chicago’s World Fair, 1933

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Canada’s Knowledge Sector: The Hardball Issues

Globally, governments invest more than $1.7 trillion annually on research and development,
primarily on the ‘r’ side, or long-term mission research, as distinct from the ‘d’ side, development,
that takes the form of product and process innovation found in private firms. What does this mean
for Canada?

High technology is a loose term in the media, but refers to firms that are primarily knowledge-
based – the key assets are not embodied in physical assets like machinery, buildings, or raw
materials, but in knowledge or intellectual capital. The competitive advantage is in people’s brains,
algorithms in group work (problem-solving), and patents and copyright materials. Software,
biotechnology, media, and electronics are cited as proto-type knowledge firms, but other examples
range from fast fashion to medical imaging, or composite materials as a substitute from aluminum
or copper.
Scarcely a week goes by without discussions decrying Canada’s innovation gap. What is missing
is a clear eye on the changes taking place globally, and what they imply for Canada.

Canada’s Science Ecosystem

There is good news and bad on Canada’s science infrastructure and ecosystem. The good news is
that a blue-ribbon panel, headed by Dr. David Naylor, President Emeritus of the University of
Toronto, has completed a comprehensive and far reaching analysis. Their report, entitled Investing
in Canada’s Future: Strengthening the Foundations of Canadian Research, undertook
comparative benchmarking with peer countries, including those with smaller populations like
Canada. The bad news and core conclusion is stark: Canada’s federal research ecosystem, despite
many strengths, is weakly coordinated, inconsistently evaluated, and lacks consistent oversight.

Overtime, successive governments have added funding to new agencies and programs, yet there is
wide variation in the level of annual funding, regional or national coverage, and range of
disciplines. As the Panel study notes,

It is hard to imagine another developed nation that would allow more than 40 years to pass before
undertaking an integrated and integrative review of functions that have such clear-cut national importance
and involve billions of dollars each year. This unfortunate vacuum may explain why the landscape we have
been exploring embodies and supports tremendous professionalism and accomplishment, but also features
a proliferation of small agencies and one-off investments in research facilities and programs. Moreover,
notwithstanding some fine collaboration on varied fronts, many examples of inconsistencies and poor
coordination are clearly visible across the four pillar agencies (p. 10).

After extensive consultations, including with the business community, the Panel made numerous
recommendations. The current external advisory body, the Science, Technology and Innovation
Council, has no independent reporting authority and a constrained disciplinary mandate. The
appointment of a new Chief Science Advisor, a central part of a related bundle of recommendation,

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by an Act of Parliament, would give voice for “an independent National Advisory Council on
Research and Innovation”, which would

… advise on evaluations for all programming in both the research and innovation spheres,
including proposals for new agreements with external entities and renewals of extant agreements,

To bring funding back to competitive levels, The Panel suggested …. a four-year phase-in
involving base increases averaging 9 per cent each year… New spending would be balanced
across investigator-led research operating grants (the highest priority); enhanced personnel
supports for researchers and trainees at different career stages; targeted spending on
infrastructure-related start-up (small equipment) and operating costs (Big Science facilities);
and enhancement of the environment for science and scholarship by improved coverage of the
institutional costs of research.

The cumulative base increase would move annual spending from approximately $3.5 billion to
$4.8 billion. The steady-state increase in base funding by the end of four years is small, amounting
to 0.4 per cent of the federal budget. By comparison with peer countries, with targets exceeding
3.5 per cent of GNP, the Panel’s recommendations keep Canada in the global game. The Panel
urged more emphasis on support for “independent, investigator-led research by frontline scientists
and scholars” while sustaining current levels of priority-driven and partnership-oriented research.
More vitally, the Panel correctly believes that these commitments produce “the very highest-yield
investments in Canada’s future”.

Canada’s Knowledge Sector

Research and development (R&D), the major driver of knowledge-economies, is based on total
R&D/GNP spending for countries, and on R&D/total sales for corporations. Countries with strong
economic performance have industries that create the pull for technological innovation. Industry
creates the demand for R&D by providing funding, and conducts a majority of the R&D. The ratio
of industry-applied R&D is at least twice that of universities and governments combined. Private
sector R&D spending as a percent of the total ranges from a high of 77.9 per cent in Japan, 76.2 in
Korea, 72.3 in China, 71.9 in Germany, 63.2 in France to 56.1 per cent in Canada. Canadian
corporate R&D spending, about C$15 billion, has not increased in ten years.

For Canadian firms, whether measured by domestic patents, by scientists and engineers in the
labour force, or by sectors with a positive trade balance, science-based innovation remains weak.
Despite having a rich tradition of invention and discovery, and a record of leading firms in many
sectors, Canadian private firms rank last on average in company-funded R&D. In time, will Canada
be caught in the middle, between the growth sectors represented by high-technology trade, and the
low-cost sectors increasingly dominated by Asia, where skilled labour and engineering
applications are key to competitive success.

While foreign ownership plays a role in reducing Canadian R&D spending, it is as much a
symptom as a cause, because other factors are at work. Canada has an anemic record in applying
existing technologies. For six advanced manufacturing technologies — computer-aided design,

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NC-CNC machines, program controllers, inter-company links, LAN for technical data, and LAN
for factory use —Canadian usage is significantly less than US firms, and the gap is greatest among
small firms, i.e., fewer than 500 employees. Other barriers include aging plant and equipment, and
too little appreciation of the enabling impacts of investing and using IT (Exhibit 1), vital for the
digital world of ecommerce.

Exhibit 1

Of the leading Canadian firms in the Top 100 Fortune 500 companies, seven of the eleven largest
are in the financial sector. To be fair, firms like Spotify, SNC, RIM, IBM Canada and Open Text
have mobilized a cluster of knowledge workers, suppliers, and customers. For a country so well
endowed with natural resources, Canada has few global leaders in agribusiness, dairy, or food
production. Firms like Saputo, McCains, or FPI are large by domestic standards, but small relative
to global players. In some sectors like pulp and paper, management practices have centered on
turning cut trees at sawmills into logs, boards, and plywood, and shipping outputs to the US market
or Asia, or upgrading the timber to low grade products like newsprint. Ironically, Canada’s record
in scientific research by researchers stands up well by international criteria, and the
recommendations of the Naylor Report can reinforce that competitive edge.

In science-based sectors like medicine and biotechnology, advanced materials, and IT and
electronics, progress requires long timr horizons, critical mass of researchers, and the desire to
move the technological frontier forward. According to Statistics Canada’s first-ever Survey of
Intellectual Property Commercialization, Canada’s 12 largest universities account for 77 per cent
of invention reports, 68 per cent of new patent applications, and 74 per cent of active licenses. In
short, Canada needs to improve the two sides of the innovation game – strong linkages between

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publicly-funded support for science-based research, outlined in the Naylor Report, and business-
university linkages for idea commercialization. In this game, to quote from a technology leader,
3M, research is the transformation of money into knowledge, while innovation is the
transformation of ideas/knowledge into money.
Conclusions

In this non-linear world, corporate strategists need to focus on being first to market, where scaling
fast is vital, and a mindset to pursue relentless production innovation. Firms everywhere face the
paradox of long lifecycles - the ‘r’ side of R&D - but short time frames to meet the ‘d’ side of
product innovation. Canada requires getting the two frameworks right. If implemented and funded,
the recommendations of the Naylor panel and their report, Investing in Canada’s Future, will put
the country’s independent research program on a greatly improved footing, emphasizing long-term
funding for quality research that in turn has long-term payoffs for industry and civil society. The
second framework now needs to be stepped up – the corporate-university nexus to focus on the ‘d’
side of R&D where discoveries and ideas are transformed into products and services.

In this sense, science-based innovation has become a never-ending match of wits, much like a
game of contract bridge, with three identifiable variables. The first, akin to classical economics, is
the lay of the cards. The players can only play the cards in their hand — i.e. governments and firms
are at the mercy of uncontrolled market forces and national resource endowments. The second
variable in the bridge analogy is how players play their cards. Here, strategy, cunning and guile all
play a role (surrogates for international trade policy, political pressure groups and management
competences and capabilities). But that relates to the third: how the competition plays the game.
The international benchmarks in the Naylor Panel’s report show the opportunity to win is also
Canada’s to lose.

Charles McMillan is Professor of Strategic Management, Schulich School of Business,

York University, Toronto, Canada (charlesmcmillansgi@gmail.com).