Canada's Innovation Strategy

Thanks to the hard work, ingenuity and creativity of our people, we enjoy extraordinary prosperity and a quality of life that is second to none. Ours is a history of adaptation and innovation. We have grown from a small agrarian nation at the time of Confederation to a global industrial powerhouse. And we have done this in the Canadian way: by building a partnership among citizens, entrepreneurs and governments that encourages new ideas and new approaches and which energetically seizes new opportunities.

The Canadian way also entails an abiding national commitment to sharing prosperity and opportunity; to the belief that economic success and social success go hand in hand; and that all Canadians should be afforded the means and the chance to fulfill their individual potential and to contribute to building a higher Canadian standard of living and a better quality of life.

In the new, global knowledge economy of the 21st century prosperity depends on innovation which, in turn, depends on the investments that we make in the creativity and talents of our people. We must invest not only in technology and innovation but also, in the Canadian way, to create an environment of inclusion, in which all Canadians can take advantage of their talents, their skills and their ideas; in which imagination, skills and innovative capacity combine for maximum effect.

This has been an overriding objective of our government and was the basis of our 2001 Speech from the Throne. And it is why we are so committed to working with the provinces, the territories and our other partners on a national project to build a skilled workforce and an innovative economy.

To stimulate reflection and to help crystallize a Canada-wide effort, we are releasing two papers: Knowledge Matters: Skills and Learning for Canadians and Achieving Excellence: Investing in People, Knowledge and Opportunity. From this starting point, we look forward to building a broad consensus not only on common national goals, but also on what we need to do to achieve them in the Canadian way.

Ingenuity has always been crucial to human progress. It brought us the printing press, the steam engine, electricity and the Internet. Each of these inventions forever altered the way we live our lives and the way we relate to each other. Today, dramatic advances in medical research, telecommunications and science are changing the world in which Canada must compete.

Canadian ingenuity has contributed to the world's innovations — the telephone, insulin, the pacemaker, the Canadarm. We have the most highly educated work force on Earth. In recent years, Canada has eliminated public deficits, kept inflation low, dramatically reduced unemployment, improved our debt-to-GDP ratio, and made significant investments in the infrastructure that supports research and development. This has helped to make Canada a competitive and desirable place to do business. But it is not enough.

Now, we must take it to the next level. We need to find ways to support the Canadian research teams that make groundbreaking discoveries; our companies that have captured new markets with innovative products and services; our traditional industries that continue to innovate, proving they can compete globally; and the Canadian communities that have attracted world-class expertise and entrepreneurial talent.

It is time to take what Canada has done well and ask ourselves: How do we do more of this, faster? How can we multiply our successes across the country and into the future? It is time to galvanize a truly national effort to achieve excellence in all we do: to be the best and nothing less.

If we succeed, the reward will be an improved quality of life for all Canadians. We will need a partnership among all levels of government, researchers, academia, businesses and all Canadians. Achieving Excellence: Investing in People, Knowledge and Opportunity gives us the blueprint to develop that partnership. Now, we must debate these ideas as a nation. We must understand that our success will allow Canada to define itself in the world.

We have all the imagination, creativity and ingenuity we need. Our challenge is to put these to work for Canada and for all Canadians.

Through innovation, knowledge is applied to the development of new products and services or to new ways of designing, producing or marketing an existing product or service for public and private markets. The term "innovation" refers to both the creative process of applying knowledge and the outcome of that process. Innovations can be "world first," new to Canada or simply new to the organization that applies them. Innovation has always been a driving force in economic growth and social development. But in today's knowledge-based economy, the importance of innovation has increased dramatically.

The factors governing a firm's economic success in the past, such as economies of scale, low production costs, availability of resources and low transportation costs, still contribute to a firm's economic success today. The difference is that today a much heavier emphasis is being placed on knowledge and the resource that produces it: people. Knowledge is the main source of competitive advantage, and it is people who embody, create, develop and apply it. One need only look at employment creation in Canada to see how important knowledge has become (Chart1).

Innovation is also now seen as something that can be promoted systematically across the economy, and not only in research and development (R&D) laboratories. We used to think of innovation as something that just happened based on individual entrepreneurial spirit. Now we view innovation as something that can be encouraged as part of a deliberate strategy to improve national productivity growth and Canadians' standard of living. The conscious promotion of innovation has become an important focus of economic and social policy.

New knowledge is being built upon the stock of old knowledge more quickly than ever before. New products are rapidly replacing old ones. New production technologies are being applied over shorter time frames. The "product cycle" in many industries is becoming shorter.

Rapid technological advances in the information and communications technologies sector are important innovations in their own right. Of even more significance, they are the drivers behind new waves of transformative research and technological developments in other sectors, including the life sciences, natural resources, the environment, transportation and advanced manufacturing. Just as computers and telecommunications are transforming our lives, so too will the promise of biotechnology and genomics — the science of deciphering and understanding the genetic code of life.

Barely a decade ago, it was common to equate the knowledge-based economy with specific sectors, such as information and communications technologies, or with regions, such as Silicon Valley in the United States. Now the knowledge-based economy knows few, if any, industrial or geographic boundaries. In all industries, from natural resources to manufacturing to services, new knowledge and new means of adding value are being developed and applied to improve economic performance.

Truck Drivers and Technology

Commercial operators are required to communicate with their companies, dispatchers, shippers, and customs officers using sophisticated on-board computers and other high-tech communications equipment. Drivers are required to operate and interpret on-board systems that dictate speeds and vehicle configurations for optimum fuel efficiency. Overall carrier efficiency and competitiveness increasingly depend on commercial operators having these skill sets.

Precision Farming

A new farming practice called "precision farming" relies on the Global Positioning System. A yield monitor installed inside a tractor uses the system to nail down vital information on different fields. Using this technology, a farmer can figure out which areas need higher pesticide application and moisture. Precision farming is earning a reputation as one of the best ways to increase yields and profit — simply by helping farmers make better choices.

In agriculture, for example, advances in biological sciences and computing technology have combined to accelerate the development of new products from renewable agricultural resources. Crops are now being grown for new uses such as renewable fuels and "nutraceuticals" — sources of medicinal substances. These products are capturing premium prices by meeting high safety and environmental standards, and by meeting increased demand in specialty markets for customized products.

In the cultural sector, innovation, knowledge and creativity are combining to generate new forms of artistic expression. Canadian artists are using leading-edge technologies such as broadband and multimedia. Live performances powered by wireless microphones, new materials and fabrics for costumes and sets, and sophisticated computer-operated stage lighting have transformed the performing arts. A vibrant cultural community is both a product and a part of a modern knowledge-based economy, generating new ideas, stimulating creativity in the wider economy and society, and contributing to a rich and rewarding quality of life.

The application of innovations in health, education, sustainable energy, transportation, security and eco-efficiency is making a direct contribution to improving quality of life in Canada. Innovations such as fuel cells, water filtration membranes and new bioremediation technologies are improving the quality of our air, water and soil. Innovation is contributing to better health outcomes for Canadians with new, more effective drug therapies, surgical techniques, diagnostic procedures and prostheses. New gene-based therapies are on the horizon, promising to unleash a wave of more effective and, in many cases, less invasive treatments for a host of diseases and conditions. Improved security measures at airports, including facial recognition systems, iris scans and automatic thumb printing, will be made possible by new and innovative technologies.

Innovation not only crosses all sectors, but also reaches into every urban centre and into the smallest rural, remote and First Nations communities. Today, in every region of Canada, communities are seizing the opportunities of the knowledge-based economy, building on local strengths and developing new areas of expertise.

First Nations — Seizing Opportunities

The fiscal accountability and business savvy of the First Nations community based in Membertou, Cape Breton, is transforming the community. The band has attracted the attention of business partners across the continent, and has received ISO9000 certification of its governance process — the seal of approval in international business. Last year, Membertou's 1,000members generated $52million in economic activity, and the community's social conditions have improved significantly.

Canada Will Secure its Competitive Advantage in the Global, Knowledge-based Economy by Maximizing its Capacity to Innovate

For Canadian businesses, innovation means greater competitiveness in markets that are increasingly global. Canada's most innovative industries have better productivity performance, grow faster, and generate higher quality, higher paying jobs. Our most innovative industries are also outward-oriented — competing more successfully in world markets.¹

Next Generation Wheelchairs

Calgary's Southern Alberta Institute of Technology is helping a small company with the design and prototyping of an innovative wheelchair drive mechanism. The modified drive system will allow the operator to manually propel the chair through horizontal motion rather than the traditional rotational motion. The novel wheelchair will alleviate muscular, joint and other health problems related to the rotational movement of arms.

For Canadians, innovation means a better standard of living, higher incomes, and more and better jobs. When new technologies and other kinds of innovations are developed here, Canadians enjoy the double benefit of the improvements they bring to quality of life and the economic benefits they yield in terms of job creation. With innovation-driven economic growth comes more opportunity and greater choice for citizens — including the wealth needed for new social investments in areas such as education, health and culture.

Seabed Mapping

Using Canadian seabed mapping technologies, a Nova Scotia-based company improved its productivity and reduced the environmental impact of its activities. Seabed mapping technologies generate three-dimensional images of the sea floor through state-of-the-art data collection and remote sensing technologies. These technologies have helped the company pinpoint the optimal locations for scallop harvesting, and avoid harvesting in environmentally sensitive areas.

Firms are at the centre of innovation, particularly in the development and commercialization of new products and technologies. Many Canadian firms — large, medium-sized and small — are developing new products. Many more are applying new technologies in their businesses to improve their productivity performance and to advance the eco-efficiency of materials, manufacturing processes and products. Others are innovating through new means of organizing, financing, marketing and managing. Being innovative involves many things. It can involve research but it is also about focused business strategies, a global approach, competitive financing, risk management and organizational change.

The business acumen and entrepreneurship of individual firms are key drivers of innovation in Canada. But innovation does not come without risk. Often, the payoff for investing in the development of new products, processes or techniques is uncertain. Competition is fierce, and ever-larger investments are required to bring new discoveries to market.

Universities, colleges, research hospitals and technical institutes play an important role in performing research and advancing the creation of knowledge. They help the private sector develop and adopt innovations. They are also the dominant players in terms of training the highly qualified people that create and apply knowledge.

Governments are responsible for research in support of the "innovation environment" — the policies that define many of the incentives to innovate and protect the public interest. Governments also perform research, often with longer time horizons than the private sector, to support their economic development mandates. Governments provide the financial support that enables academic institutions to perform research and train the next generation of highly qualified people. Government laboratories are increasingly forming partnerships with each other, with academic institutions and firms, and with organizations around the world. Partnerships are increasingly key to creating and applying the knowledge that underpins sound regulation and economic development. In performing these functions, governments should themselves be more innovative and contribute to a public environment that is more supportive of creativity and innovation.

Countries that are Innovative Welcome Change and Embrace it as a Fundamental Value, Viewing it as an Opportunity

Innovative countries are constantly on the lookout for new opportunities — new ways to improve their economic prospects and their quality of life. Innovative societies are entrepreneurial. They create wealth, reward individual initiative, strive for international excellence and contribute to a higher quality of life for all their members. Innovative countries are open and inclusive. They value knowledge wherever it originates and offer world-class opportunities, not only to all their citizens, but also to talented individuals from around the world. Innovative countries place a high priority on investments in innovation and strive to maintain their investments during economic downturns.

Wildland Fire Information System

Some 10000 wildfires burn roughly 2.5million hectares of forests every year at a cost of roughly half a billion dollars. The Canadian Forest Service of Natural Resources Canada is a world leader in developing wildland fire information systems that help fire managers evaluate the risks and spread of forest fires. Components of this system are now being used in Alaska, New Zealand, Florida, and ASEAN (Association of South-East Asian Nations) countries to address this problem.

Canada's goal should be no less than to become one of the world's most innovative countries. To achieve this goal, we require a national innovation strategy for the 21stcentury. Achieving Excellence: Investing in People, Knowledge and Opportunity is an important step to this end. It provides an assessment of Canada's innovation performance, proposes national targets to guide the efforts of all stakeholders over the next decade, and identifies a number of areas where the Government of Canada can act to improve the nation's innovation performance (See Appendix A). This alone is not enough. To succeed, all levels of government, the private sector, academia and other stakeholders must contribute to making Canada more innovative.

Achieving Excellence: Investing in People, Knowlegde and Opportunity will form the basis for discussions between the Government of Canada and key stakeholders over the coming months. The objectives are to:

Governments, academia and the private sector have made significant investments in innovation in recent years. As a result, Canada's innovation performance is improving at a quick pace, and we enjoy the fastest rate of growth in some areas. However, a number of other countries moved earlier. Consequently, we lag behind many developed countries in terms of our overall innovation performance. There is no time to waste. International bodies, such as the World Economic Forum, believe that Canada's future economic prospects are significantly more promising than our current performance. This gives us confidence that we are on the right track. But we need to build aggressively on our strengths to realize our potential.

The global economy began showing signs of weakness early in 2001. The International Monetary Fund reduced its forecast for global growth significantly, reflecting the situation in the U.S., persistent difficulties in Japan, poorer prospects in Europe and a marked decline in several emerging countries. The events of September11 significantly worsened the state of the U.S. economy.

For the first time in 25years, Canada is in the midst of a slowdown that is happening concurrently in every major market in the world. More than 40percent of Canada's economic activity is generated by exports, and these have been hit hard by the global slowdown. This was reflected in our weaker performance in the first half of 2001. The events of September11 further affected our performance, particularly in sectors such as transportation and tourism.

In this period of uncertainty it is important to restore a sense of personal security, and that was a key goal of the Government of Canada's 2001 budget. But the budget also set out a series of important investments to provide stimulus in a time of economic slowdown and to advance Canada's medium- and long-term economic prospects. The government found the room to sustain its commitment to the innovation agenda through strategic initiatives.

Our economic success will be determined by the degree to which we understand the great currents that are shaping the world of tomorrow. They are to be seen in the transforming impact of new technologies. They are to be secured through strong economic fundamentals. They are to be seized by focusing on the ingenuity and innovation of our people. Since 1993, the Government of Canada has pursued a long-term plan that speaks to these priorities and lays the foundation for strong and durable growth.

By world standards, Canadians enjoy an outstanding standard of living and quality of life. Income levels are high, life expectancy is long, the population is healthy, our communities are safe and our natural environment is second to none. Canada consistently ranks at or near the top in terms of the best country in the world in which to live. But we also have significant challenges that we must collectively face and overcome. Achieving Excellence: Investing in People, Knowledge and Opportunity focuses necessarily on those challenges. It encourages Canadians to confront them confidently, with faith in our abilities and knowing that we are building on a base of strength.

Canada's standard of living is high by world standards. We are the seventh highest ranking country in the Organisation for Economic Co-operation and Development (OECD) in terms of income per capita. Only two countries surpass Canada by a significant margin: Luxembourg and the U.S. (Chart2).²

However, real incomes in Canada have been steadily falling relative to the U.S. over much of the last two decades (Chart3). The income gap narrowed somewhat in 1999, and again in 2000, suggesting that we are making progress in this important area. The outstanding gap with the U.S. is, however, cause for concern because the U.S. is our closest neighbour, largest trading partner and key competitor.

We must continue to narrow the standard of living gap with the U.S. by innovating and providing more opportunities for Canadians. If we do not, we risk an outflow of talent and capital that could contribute to a decline in our standard of living.

There are only two ways to raise a country's standard of living: increase the number of people working and/or raise the level of productivity. Canada cannot rely on the former, given demographic pressures. An ageing labour force and a smaller youth cohort mean relatively fewer workers will be supporting the Canadian population in the future. We must, therefore, become more productive, and we must improve at a faster rate than the U.S.

Most of Canada's standard of living shortfall with respect to the U.S. is due to our markedly lower level of productivity. Canada's overall productivity level — measured in terms of GDP per hour worked — is about 19percent lower than that of the U.S. (Chart3). Productivity has grown significantly in Canada over the last number of years; but the gap with the U.S. has continued to widen because we are not improving as fast.

Canadian productivity levels exceed those in the U.S. in some industries (Chart4). We are performing relatively well in the crude petroleum and natural gas sector, and in the manufacture of primary metal, paper and allied products, lumber and wood, and transportation equipment.

Much of Canada's overall productivity gap with the U.S. is due to differences in the size and productivity growth of the information and communications technologies sector. The U.S. has been able to more rapidly shift its industrial composition toward highly productive industries such as electrical and electronic equipment, and communications. Within Canada, these are the industries that are leading growth in productivity, albeit not as fast as in the U.S.

Innovation is the key to improving productivity. Canada's overall level of innovation capacity is near the bottom in the G-7 (Chart5). We continue to exhibit what the OECD referred to in 1995 as an "innovation gap."

The Conference Board of Canada recently reinforced this point. Its report, Performance and Potential 2001–02, rates Canada as a relatively poor performer in innovation (TableA). We do not compare well to benchmark countries across a range of indicators, including R&D spending as apercent of GDP, number of external patent applications and number of researchers relative to the size of our labour force. Building high-performing innovative organizations in both the public and private sectors requires the commitment of top management and all employees. According to The Conference Board, Canada's corporate leaders need to become more passionate about innovation and commit their organizations to it.

Category	Canada's Performance	Top Performer
Economy	Average	U.S.
Labour markets	Top	U.S.
Innovation	Poor	Sweden
Environment	Poor	Sweden
Education and skills	Average	U.S.
Health and society	Average	Japan

The World Economic Forum similarly ranks Canada's current performance as weak, with a "current competitiveness" ranking of 11th in the world (TableB).

	Canada	U.S.
Current Competitiveness	11	2
Growth Competitiveness	3	2

Canada has significantly improved its innovation performance over the last few years across a range of key indicators (Chart6). We have achieved the fastest rate of growth in the number of workers devoted to R&D, in external patent applications, and in business expenditures on R&D among the G-7 countries. Patent activity has been particularly strong for our information and communications technology and biotechnology sectors. R&D expenditures (as apercent of GDP) have also increased at the fastest pace in the G-7.

These gains demonstrate Canada's commitment to innovation. But they are not enough. On most innovation measures Canada started from well back and our gains, while impressive, have not been sufficient to position us strongly in a North American and international context.

Canada's future prospects are brighter according to the World Economic Forum, which gives us a "growth competitiveness" ranking of third. The optimistic assessment of Canada's future economic prospects suggests that we have been making the right policy choices and that businesses are moving in the right direction.

This document is organized around three key factors that profoundly influence innovation outcomes: knowledge, performance, skills, and the innovation environment. These elements of the national innovation system come together at the community level. Subsequent sections develop a more detailed diagnostic and prescriptions for action.

Many Canadian firms are developing new and improved products for world markets and are actively investing in new and advanced technologies. However, to match world leaders, we must invest in more R&D.

Canada's gross expenditures on R&D reached $21billion in 2001, up 9percent over 2000, which, in turn, had increased by 11percent over 1999.³ Despite these significant investments, Canada ranks only 14th in the OECD in gross expenditures on R&D relative to GDP.⁴ Our weak performance results from low levels of R&D spending in all three key sectors: businesses, universities and governments. Increased investments in R&D are required to generate the knowledge that fuels innovation.

Canadian firms also need to form more of the technology alliances that are key to innovation. In addition, Canada's venture capital industry needs to provide more specialized services to firms with rapid growth potential and tap into new sources of capital.

These challenges must be addressed because the creation and commercial application of knowledge is critical to the competitiveness of the private sector. Governments also require access to a strong knowledge base to protect the public interest in terms of health and safety, for example, and to promote innovation through good policies and smart regulation.

The Knowledge Performance Challenge: Canadian firms do not reap enough benefits from the commercialization of knowledge, and Canada underinvests in research and development. (Section5 addresses these issues in greater detail.)

Canada's educated population and highly skilled work force are key strengths in the global economy. However, our supply of highly qualified people is far from assured in the medium term. Canada will have great difficulty becoming more competitive without a greater number of highly qualified people to drive the innovation process and apply innovations, including new technologies.

Skill requirements in the labour market will continue to increase at a rapid pace. Firms will be looking for more research personnel — technicians, specialists, managers — to strengthen their innovative capacity and maintain their competitive advantage. Universities, colleges and government laboratories have already begun launching a hiring drive to replace the large number of professors, teachers, researchers and administrators reaching retirement age. This will result in a huge demand in Canada for highly qualified people.

On the supply side, Canada has experienced sluggish growth in higher education participation rates in recent years. In addition, we do not compare well to other countries in terms of upgrading the skills of the existing work force through employee training. While our track record in attracting skilled immigrants is good, we will need to more aggressively seek out highly qualified immigrants in the next decade. If we do not address these issues, Canada will face persistent shortages of the skills required for success in the knowledge-based economy.

Shortages will be exacerbated by international competition for talent as the most advanced economies experience many of the same economic and demographic pressures. If Canada does not take measures now, we will certainly face critical shortages in the talent we need to drive our economy.

The Skills Challenge: Canada must ensure that in years to come it has a sufficient supply of highly qualified people with appropriate skills for the knowledge-based economy. (Section6 addresses these issues in greater detail.)

Governments must protect the public interest while encouraging and rewarding innovation. A world-class innovation environment suffers no trade-offs between the two.

Governments carry out their "stewardship" responsibility using instruments such as legislation, regulations, codes and standards. Canada has a strong record in using these tools to ensure that citizens enjoy the benefits of innovation without fearing adverse health, environmental, safety or other consequences.

The accelerated pace of scientific and technological discoveries is, however, putting pressure on governments' ability to respond. If government policies are not equipped to address new scientific and technological developments, the public may not have confidence in new goods and services. Businesses, in turn, may not have sufficient confidence in the stability and predictability of the environment to invest in the risky business of innovation.

Good stewardship relies on a strong knowledge base, access to specialized expertise, and a willingness to think and partner globally. Governments need to make pro-innovation policy choices and pro-innovation investments to create a climate that is predictable and efficient, accountable to the public, and deserving of the confidence of investors.

Tax policy is among the important levers available to governments to encourage investment in innovation. Canada will soon have one of the most competitive business tax regimes in the world, and reductions to personal income taxes will help to attract more highly qualified people.

It is not enough to put in place the conditions for innovation success. It is essential that investors and highly qualified people recognize Canada as a good location in which to invest and live. Too often, they do not consider Canada. Their perceptions are important and must be addressed, or we risk being bypassed in the intense international competition for investment and talent. Governments in Canada must rise to the challenge of being facilitators of innovation and promoters of the "Canadian brand."

The Innovation Environment Challenge: A "public confidence gap" may emerge if stewardship regimes do not keep pace with innovation and technological change. A "business confidence gap" may emerge if businesses are not assured that the policy environment is supportive of innovation and investment, and is recognized as such. (Section7 addresses these issues in greater detail.)

It is in communities where these elements of the national innovation system come together. Innovation thrives in industrial clusters — internationally competitive growth centres. Governments need to recognize the earliest signs of emerging clusters and provide the right kind of support at the right time to create the conditions for self-sustaining growth. Innovation should not, however, be viewed as exclusively based in large urban centres. Many smaller communities have significant knowledge and entrepreneurial resources. They may, however, lack the networks, infrastructure, investment capital or shared vision to live up to their innovative potential. By coordinating efforts, federal, provincial, territorial and municipal governments can work within the private, academic and voluntary sectors to build local capacity and unleash the full potential of communities across the country. (Section 8 addresses these issues in greater detail.)

There is a strong convergence of views among decision-makers and observers on Canada's innovation challenge. Governments, businesses and their associations, academic commentators and research institutes share the view that innovation is essential to improving Canada's overall economic performance.

In September 2001, federal, provincial and territorial science and technology ministers forged a consensus on the need for Canada to become one of the most innovative nations in the world. Ministers recognize that reaching this objective is a tremendous challenge and will require complementary efforts and approaches on the part of all governments. They adopted principles to guide future action to advance innovation within their respective jurisdictions, and agreed to meet again this year to review progress.

Principles for Action

Federal, provincial and territorial governments support the goal of making Canada one of the most innovative countries in the world. Ministers recognize that this will require a sustained effort on the part of all players, and that different parts of the country require different policies to achieve this goal. The following principles will help governments put in place a framework to take Canada from 14th to 5th in research intensity among industrialized countries. Governments will make best efforts to:

create a competitive business climate conducive to industrial innovation;
make Canada's university-based research and innovation system among the best in the world; and
monitor the innovation system as a whole, report on the health of the system, adjust government policies to correct any deficiencies and encourage all parts of the innovation system to work together.

The Conference Board of Canada has published three annual reports on Canada's innovation performance. These reports conclude that Canada's innovation performance is weak, and that this is affecting productivity levels and economic performance. The Conference Board is promoting the need for simultaneous action at the national level and at the level of the individual firm. Many support their "Call to Action": Canada must strengthen its commitment to innovation, and firms must improve their practices and capabilities to foster innovation. Business associations, such as Canadian Manufacturers and Exporters, have identified the need to use best business practices in change management, and make innovation a priority in all aspects of business operations.

Universities and research hospitals are increasingly seeking out private sector partners to commercialize their research-based discoveries. Meanwhile, technical institutes and colleges are increasingly supporting the product and market development needs of the private sector. Academic institutions have an essential role to play in strengthening Canada's innovation performance. They have acknowledged that they too must continue to strive for excellence and rise to the innovation challenge.

This convergence of views presents an exceptional opportunity for the main partners in innovation to work together to improve Canada's performance. There is also a growing international consensus on the importance of innovation to nations' economic and social well-being (see Appendix B ). This provides all the more impetus and urgency for Canada to succeed in positioning itself as one of the most innovative economies in the world.

An Emerging Consensus on the Importance of Innovation

Federal-provincial-territorial governments agree on the goal of making Canada one of the most innovative countries in the world ... Ministers recognize that this overarching goal cannot be met by government actions alone and call upon all players in the innovation system to play their part.

Principles for Action, Federal-Provincial-Territorial Science and Technology Ministerial Meeting, Québec, September20–21,2001

It is time for Canada to adopt a true culture of opportunity and innovation, one that will enable all of us as Canadians to get on with building better lives for ourselves, for our families and for our communities.

Business Council on National Issues, Risk and Reward, Creating a Canadian Culture of Innovation, April 5, 2000

The realities of the market today — intense international competition, the rapid pace of technological development, and the ease with which information, investment and knowledge flow around the world — mean it is more important than ever for companies to strengthen competitive capabilities based on productivity and innovation.

Canadian Manufacturers and Exporters, Canada's Excellence Gap: Benchmarking the Performance of Canadian Industry Against the G7, August1,2001

Canadians must become more innovative. Improvements in our innovative capacity are critical to productivity growth and wealth creation. Companies that are innovative are more profitable, create more jobs and fare better in global markets.

The Conference Board of Canada, Performance and Potential 2001–02, 2001

The private sector, including my own industry and company, needs to be part of the solution as well. We need to foster more innovation to fuel the growth we need to meet our standard of living objective.

A. Charles Baillie, Chairman and CEO, TD Bank Financial Group, Speech to the Canadian Club, Toronto, February26,2001

In innovative economies, concerted action on the part of all levels of government and the private sector is the norm. In Canada, federal, provincial and territorial governments have all made innovation a priority.

Each region in Canada has made significant progress in its innovation performance since the early 1990s.⁵ All provinces have reduced internal barriers to trade and have increased their trade orientation with the rest of the world. Ontario was out ahead, with trade in goods and services (imports plus exports) representing 90percent of its economy. Atlantic Canada experienced the largest increase in enrolment in post-secondary science and engineering programs. The Prairies posted the strongest growth in investment in new technologies — machinery, equipment and advanced technologies. Quebec led the way in terms of attracting increased private sector investment in R&D relative to the size of its economy. British Columbia had the highest adult rates of participation in education and training, and the largest share of household computer use. All regions are increasing their share of highly qualified labour as apercent of the labour force. All governments have significantly improved their fiscal situations — many have eliminated their deficits and are now running surpluses. Canada's successful transition to a knowledge-based economy ultimately depends on the progress of our regions.

The Government of Canada has also made innovation a priority. Early in its first mandate, the government recognized that improving Canada's innovation performance requires action on several fronts.

Northern Research

The Yukon's Mining Environment Research Group comprises government agencies, mining companies, Yukon First Nations and non-government organizations. It promotes research in mining and environmental issues. The Nunavut Research Institute is part of Nunavut Arctic College. It develops and promotes traditional knowledge, science, research and technology. The Aurora Research Institute, headquartered in Inuvik, works to improve the quality of life in the Northwest Territories by applying scientific, technological and indigenous knowledge to solve northern problems and advance social and economic goals.

Knowledge Infrastructure

The Nova Scotia Research Trust Fund, the British Columbia Knowledge Development Fund, the Manitoba Innovations Fund and Saskatchewan's Innovation and Science Fund invest in infrastructure to ensure that their researchers have access to facilities and equipment that will enable them to perform leading-edge science.

The Government of Canada initially focused on improving the environment to support innovation by eliminating the disincentive effects of some policies. The government eliminated most subsidies and other direct interventions in the marketplace because competition, not protection, generates innovation. The government continued to liberalize domestic and international trade to open up markets for Canadians across the country and around the world. The Prime Minister and premiers have led Team Canada trips to promote trade in Canadian goods and services and, more recently, to attract investment into Canada. Regional development and sectoral programs were reoriented to support the private sector's transition to the knowledge-based economy.

Putting public finances in order was also a key priority. The Government of Canada eliminated the deficit and is now paying down the public debt. The federal debt represented 52percent of GDP in 2000–01, and is expected to fall to 47percent by 2003–04. This progress is impressive given our starting point — the public debt was at 71percent of GDP in 1995–96.

Lower public debts free up resources to spend on the social priorities of Canadians, such as health care and education. These investments are important in their own right. They also help Canada to attract the highly qualified people that drive innovation because people want to live in safe, clean communities with high-quality services. In addition, a healthy and educated population attracts investment. The Government of Canada is committed to creating a "virtuous circle" where good economic policy creates the wealth to address social priorities, which, in turn, fuels more innovation and economic growth.

Interest rates are very low as a result of the low and stable inflation rate. Taxes are going down, providing relief to Canadian households and businesses. Business and personal income taxes, including taxes on capital gains, will be reduced by a remarkable $100billion over fiveyears. This combination of low interest rates and tax cuts is providing a stimulus to the economy that will lessen the impact of the current slowdown and will hasten the return of strong growth.

The Government of Canada is also committed to ensuring that stewardship policies protect the public interest in our rapidly changing and ever more complex world. Progressive marketplace policies have been put in place, as in the case of the Electronic Commerce Strategy, which promotes economic development in a manner that respects consumer privacy and other concerns (see Section7). The government also committed resources to improve the regulatory system for biotechnology — a field that holds incredible promise and opportunity for Canadians, provided we anticipate and manage risks.

Getting the economic fundamentals right enabled the government to address other priorities. Since knowledge is the key to creating economic opportunities and improving quality of life, the government launched a number of complementary initiatives to:

"One of the most consistent threads that runs through our policies in recent years has been a recognition that innovation is key to both the strength of our economy and to the quality of our lives. Budget 2000 and the October Statement built on that imperative, making large, long-term investments in the knowledge infrastructure of our country — our universities and research institutes."

The Honourable Paul Martin, Economic Update, Department of Finance, May17,2001

The government's expenditures on science and technology are estimated at $7.4billion in 2001–02, an increase of 25percent from the previous peak. A key component is the government's growing investment in the three granting councils to support research at Canadian universities and hospitals. As part of this overall effort, the Canadian Institutes of Health Research was launched in 2000. The government brought various research disciplines together for the first time to address the priority health concerns of Canadians. The granting councils' combined budgets are at their highest level ever at more than $1.1billion annually, with the 2001 federal budget announcing an additional $121-million contribution. The budget also announced $25million to sustain the Canadian Institute for Advanced Research (a non -profit corporation that supports long-term scientific research) for fiveyears.

Of great significance to the academic community was the 2001 federal budget announcement of a one-time investment of $200million to help universities and research hospitals cover administration, maintenance, commercialization and other indirect costs associated with federally sponsored research.

The government also launched Genome Canada, a not-for-profit organization dedicated to making Canada a world leader in genomics research. Five new genomics research centres are drawing together researchers from universities, research hospitals, government laboratories, and private companies. This field has the potential to improve the health of Canadians in ways we could not imagine just a few years ago. The 2001 budget announced a further contribution of $10million to the BC Cancer Foundation to support ongoing research at its Genome Sequence Centre.

To complement investments in research, the government created the Canada Foundation for Innovation to enable universities to renew their research infrastructure — laboratory equipment, facilities and networks. By 2005, the Foundation's total capital investment, along with those of its partners, will exceed $5.5billion.

Complementary Provincial Initiatives

Alberta's Heritage Foundation for Medical Research supports biomedical and health research at Alberta universities, affiliated institutions, and other medical and technology-related institutions. Quebec has three R&D granting councils to support research in the health, natural sciences and social science fields.

Oil Sands

Canada's oil sands are a world-class, uniquely Canadian resource. We continue to improve the technology to find safe and environmentally sustainable ways of recovering the oil, and to create tens of thousands of jobs developing the oil sands. In cooperation with governments, academics and industry, researchers have helped reduce economic and environmental barriers to the development of this important resource. With $51billion in new capital expenditures, the oil sands will be Canada's largest natural resource development opportunity in the next decade.

A Collaboration That Really Took Off

Productivity is soaring at a Canadian company — a world leader in the design, manufacture and support of aircraft engines, gas turbines and space propulsion systems — thanks to a mechanical engineering professor at the University of British Columbia. The professor helped the company save millions of dollars on the manufacture of components for jet engines. He developed adaptive control software to optimize the machining process. The system enabled the firm to cut waste, reduce shutdowns and improve productivity by 50percent. The technology is now in demand by manufacturers around the world. The research collaboration between the professor and the company was supported by grants from the Natural Sciences and Engineering Research Council of Canada.

As part of the Connecting Canadians agenda, the government has supported the development of CA*net3 to ensure that Canadian researchers can share data, work collaboratively and network with other partners, both in Canada and abroad. As announced in the 2001 budget, the government will provide $110million of funding to build CA*net4, a new generation of Internet broadband network architecture that will link all research institutions, including many community colleges, via provincial networks. Successful innovation today depends on the ability of researchers to access and share vast amounts of information quickly and reliably. CA*net4 will accelerate next generation network applications by enabling medical and genetic research, environmental research and complex simulations. Investments in CA*net4 will also help to brand Canada as an international network technology leader.

The Government of Canada has also been promoting research and the subsequent development of innovations that are of strategic importance to Canada. Technology Partnerships Canada was created to share the risks of developing strategic world-first technologies with the private sector in priority fields: enabling technologies, environment and aerospace.

Sustainable development is an integral element of the innovation agenda. The government created the Sustainable Development Technology Fund and the Climate Change Action Fund to address global warming and other environmental challenges. These funds support research that will lead to the development of new technologies that will help Canada improve the quality of its air, water and soil. The Canadian Foundation for Climate and Atmospheric Sciences was launched to foster scientific research on the climate system, and environmental indicators are being developed to monitor progress on the status of the environment. In addition, the government has supported complementary sector-specific initiatives, including the Program for Energy R&D, which contributes to a sustainable energy future for Canada, and Technology Early Action Measures, which supports technology projects leading to reductions in greenhouse gas emissions.

Complementary Provincial Initiatives

Many provinces facilitate the commercialization of discoveries. Quebec's Centre de recherche industrielle du Québec responds to industry needs and contributes to the transfer of expertise and know-how to the manufacturing sector. Nova Scotia's Life Sciences Industry Partnership facilitates the identification and development of opportunities in the life sciences industry. Ontario has created Biotechnology Commercialization Centres in Ottawa, London and Toronto. The Atlantic Technology Centre in Prince Edward Island will stimulate new partnerships to encourage innovative applied research and development projects.

The government is committed to bringing university researchers together with firms to ensure that our best ideas make it to the marketplace. The Networks of Centres of Excellence program, which supports collaborative research in priority areas, was made permanent. The networks connect researchers in academic institutions, government and the private sector across a wide range of disciplines and across the country. It is often at the intersection of their fields that the most important innovations emerge. This program has attracted worldwide attention.

The government is also committed to ensuring that it has access to the R&D it needs both to make sound stewardship decisions and to stimulate economic development. The 1999 federal budget committed $65million to modernize and strengthen the federal food safety system, $42million to improve the management and control of toxic substances in the environment, food and drinking water, $55million over three years to support biotechnology research in federal departments and agencies, and $60million over five years to support the GeoConnections initiative, which makes geographic information more accessible.

The Industrial Research Assistance Program helps small and medium-sized firms in Canada develop and adopt new technologies by offering both technical and financial assistance. Meanwhile, the Business Development Bank of Canada's role was reoriented to finance the emerging needs of knowledge-based firms. The Bank not only offers financial services, but also runs a mentoring network to help companies develop and upgrade skills that are critical to their ongoing success.

Ensuring that Canada's regions and communities are all able to make the transition to a knowledge-based economy is another key priority. The Government of Canada created the Atlantic Innovation Fund to improve the Atlantic provinces' capacity to create, adopt and commercialize knowledge. The fund will support partnerships and alliances among firms, universities, research institutions and other organizations in Atlantic Canada.

With research institutes, centres and programs spanning all regions of the country, the National Research Council Canada is making a significant contribution to the development of clusters of research and commercialization activity. The 2001 budget provided an additional $110million over three years to expand the National Research Council Canada's innovation initiative beyond Atlantic Canada.

The Government of Canada broadened its strategy in 1998 to encourage the development of highly qualified people.

The Canada Research Chairs program was launched to help Canadian universities and research hospitals attract and retain top academic talent from around the world. Budget 2000 committed $900million over five years to create 2000new research chairs. With this program, the Government of Canada has gone a long way toward unleashing the full research potential of Canadian universities and affiliated hospitals. They now have the resources to attract and retain top talent, and that talent has access to the funding and infrastructure that will enable them to perform at the leading edge.

The Government of Canada launched Canada Millennium Scholarships to enable more Canadians to pursue a post-secondary education, Canada Study Grants to help students with dependants and disabilities, and Canada Education Savings Grants to enable parents to save for their children's education. Tax measures were also implemented to help Canadians finance their education needs.

The Internet and computer skills are as fundamental to an individual's success in the knowledge-based economy as basic literacy and numeracy skills. To capitalize on the many potential economic and social benefits of innovation, it is essential that all Canadians and businesses have access to the Internet and the skills to use it. Therefore, an element of the Connecting Canadians agenda involves improving access by First Nations and by rural communities, and people with disabilities, to the transformative economic and social benefits of the Internet.

Canada is now recognized as a world leader in connectivity as a result of programs such as SchoolNet, the Community Access Program and Smart Communities. Yet the speed of change continues to accelerate and Canada must continue to develop and strengthen its information infrastructure. Looking ahead, as indicated in the 2001 Speech from the Throne, the government will work with Canadian industry, the provinces and territories, communities and the public on private sector solutions to further broadband Internet coverage in Canada, particularly for rural and remote areas.

Smart Community

In Ontario, the Keewaytinook Okimakanak First Nation, in partnership with governments and the private sector, developed an information and technology service supported by a high-speed broadband network. The network is bringing social and economic advantages to seven communities. It provides a new telephone system with standard telecommunication products, such as e-mail, Internet services and video conferencing. More importantly, the network enables distance education, tele-medicine and multimedia production.

The Government of Canada is confident that its approach to improving Canada's innovation performance is the right one. A solid foundation has been laid by systematically focusing on all of the elements of innovation. Moreover, investments in one area often serve to strengthen another component of our innovation system. We are getting tremendous synergy from our investments. It will, however, take time for these investments to pay off. The government is confident that they will. But innovation is a race that is run over and over again as other nations continue to invest in their capacity to innovate. The Government of Canada will do its part by continuing to invest in priority areas.

To address the challenges we face and become an innovation leader, Canada needs a consolidated, coordinated and aggressive plan. The Government of Canada will work with the provinces and territories, businesses, academia and others to develop a national innovation strategy for the 21stcentury. As announced in the 2001 Speech from the Throne, the overall objective should be to ensure that Canada is recognized as one of the most innovative countries in the world.

Clear, shared, long-term goals (e.g. for R&D performance, stewardship and skills development) must form an essential part of the strategy. The Government of Canada is also committed to developing an innovation strategy that will achieve measurable outcomes. Monitoring and reporting on innovation outcomes will make it possible to track performance, make course corrections and improve accountability.

To kick off the development of a national innovation strategy, the remainder of this paper elaborates on Canada's innovation challenge and proposes goals, targets and federal priorities in the following three principal areas.

Knowledge Performance Challenge	Create and use knowledge strategically to benefit Canadians: promote the creation, adoption, and commercialization of knowledge.
Skills Challenge	Increase the supply of highly qualified people: ensure the supply of people who create and use knowledge.
Innovation Environment Challenge	Work toward a better innovation environment: build an environment of trust and confidence, where the public interest is protected and marketplace policies provide incentives to innovate.

"In 1991, Canada chose the familiar and comfortable path of replication, benchmarking and operational improvement. In 2000, the nation must choose the alternative path of innovation and bold strategy. . . . Canadian firms must understand that competing in Canada alone will eventually destroy them. They must decide to compete globally and compete on the basis of unique products and processes. This road will be profoundly worrisome, even frightening at times, but it is necessary for Canada to prosper and not continue to slowly decline relative to other leading nations."

Roger L. Martin and Michael E. Porter, Canadian Competitiveness; Nine Years after the Crossroads, Toronto, Rotman School of Business, January2000.

To become one of the most innovative countries in the world, Canada must manage knowledge as a strategic national asset. We need to be able to turn our best ideas into new opportunities for global markets. In a global economy where Canada contributes an important, albeit small, portion of the total pool of knowledge, we must also be able to make use of knowledge and technology that is developed around the world.

Many Canadian firms are developing and successfully commercializing new or significantly improved products and services in world markets. Many more are adopting innovations, be they new technologies or improved business practices, which embody the latest thinking from markets around the world. Canada needs to celebrate its successes as we move to create a culture that values innovation and supports innovators.

Canadian investments in machinery and equipment as apercent of GDP are now among the highest in the OECD. Governments compete to attract R&D investment, and Canada lays claim to one of the most favourable R&D tax incentives in the OECD. The private sector is increasing its investment in R&D at the fastest rate in the G-7, and the number of people devoted to R&D in Canada has grown at the fastest pace in the G-7 in the last two decades. Canadian firms are hiring an increasing share of these workers, demonstrating a growing commitment to innovation. The communications equipment and service sectors in Canada are particularly strong R&D performers relative to their counterparts in the OECD. Canada's R&D intensity and external patent applications have grown at the fastest pace in the G-7. Canadian firms also rely on universities as a source of important research-based innovation more so than in other G-7countries.

Canada has made impressive advances in recent years. But these have not been sufficient to catch up across a range of innovation indicators, relative to other countries, because we started from a long way back. The private sector in Canada needs to develop more aggressively its capacity to commercialize and adopt technologies to remain competitive. This will require an increased investment in research and development, more strategic alliances and improved access to risk capital.

Throughout the 1990s, many Canadian firms responded to globalization by restructuring operations, with an emphasis on cost reduction.⁶ This adjustment was eased by the depreciation of the Canadian currency relative to that of our main competitor, the U.S. Cost competitiveness is not sufficient to position companies in a global marketplace where competition is increasingly driven by quality rather than price. To succeed, firms need to apply and commercialize knowledge — to innovate and be first to market with better products and improved processes.

Many firms, large and small, see innovation as the way to keep up with competitors, meet changing client needs, grow profit margins and increase productivity. In recent years, at least 80percent of Canadian manufacturing companies successfully introduced a new or significantly improved product or process (Chart7). Fully 26 percent of Canadian manufacturing firms were "first innovators." They introduced innovations that were entirely new to Canada or, in some instances, new to the world. First innovators share common characteristics. They are more likely to be large, in the high-technology sector, perform R&D and protect their intellectual property.

On the surface, Canada's manufacturing firms appear to be more innovative than their counterparts in select European countries for which there are comparable data. But the real test of an innovation for the firm is whether it has value in the marketplace. Firms in Germany, Spain and Ireland enjoy substantially more sales from their innovations (Chart8). Canadian firms trail in their ability to capture economic benefits from their innovations. This was confirmed by The Conference Board of Canada. The Board's first annual innovation report served as a challenge to the private sector in noting that:

"While most large Canadian firms innovate in one way or another, there is significant room for improvement. Only two thirds of them innovate in all areas, and only about half of them use all key inputs for technological innovation. Furthermore the level of product innovation in large Canadian companies seems to be weak, given the reduction in product life cycles and the increasing number of new products and services being introduced into the marketplace by competitors. While the report does not investigate smaller firms, there is some evidence that the problem is worse than among larger companies."

Canadian firms are investing heavily in machinery and equipment. Over the past decade, Canadian investments in this area, as a percent of GDP, went from among the lowest to the highest levels in the OECD.⁷ This is important because the adoption of new technologies enables Canadian firms to become more productive and competitive. In addition, new machinery and equipment is often a necessary element of a broader strategy to develop or significantly improve new products for global markets.

Innovative firms do not just adopt new technologies, they adopt advanced, leading-edge technologies. Almost all of Canada's large manufacturing firms are using more than five advanced technologies (Chart9). Even more encouraging, 24percent of plant managers surveyed believed that they were using more advanced technologies than their U.S. competitors, while another 33percent rated themselves as equal. On balance, however, the evidence suggests that small, domestic firms are considerably behind foreign-owned firms in the use of advanced technologies.

Canadian firms of all sizes are also considerably behind their U.S. counterparts in adopting the technologies and implementing the innovative business practices required to take advantage of electronic commerce market opportunities. Canadian investments in information and communications technologies (per employee) are well below U.S. levels, and the gap is widening. One effect is to limit Canada's ability to capture electronic market sales (Chart10).

Information and communications technologies and the Internet are revolutionizing the way companies do business. The transformative impact has been felt in the explosive growth of business-to-business electronic commerce in such areas as procurement, direct sales, inventory management, marketing and product development. Increasingly, customers, partners, suppliers and employees of a firm are connecting among themselves and networking through real time, sharing critical knowledge and information. Decisions and processes that once took days now occur in seconds, driving the entire organization and its partners to higher levels of efficiency, productivity and innovation. There will be serious competitive consequences for firms that fail to take full advantage of these new important technologies.

Three factors have a considerable impact on the private sector's capacity to innovate: R&D, strategic alliances and access to risk capital.

The private sector performs about 57percent of Canada's R&D.⁸ Many firms across Canada engage in R&D, and they have access to one of the most generous R&D tax credits in the world. The private sector increased its investments in R&D at a faster pace than did businesses in any of the other G-7 countries. There has also been significant growth in the proportion of total R&D workers in Canada that are employed by industry.

The service sector is among the strong R&D performers in Canada. It accounts for about 28percent of all business R&D activity, well above the 17percent OECD average. Canada's communications equipment industry is another bright spot. It invests more in R&D as apercent of value added than its counterparts in major OECD countries.⁹

Spider Silk

A Canadian company has produced the most realistic, artificial spider silk to date. The fibre is derived from goat's milk genetically modified with spider genes. The resulting material is tough enough to protect spacecraft from flying debris and fine enough to be used in the medical field as sutures.

Ocean Nutrition

A Nova Scotia company is a world leader in the research and production of marine-based natural health and nutritional products (dietary supplements and functional foods). The company employs more than 30research scientists and operates the largest privately owned marine natural products research facility in North America. It has discovered and developed effective, stable and bioavailable nutrients, which are essential for healthy human cells and reduce the risk of brain disorders. Its high-quality products meet Good Manufacturing Practice standards.

Overall, however, R&D performed by Canada's private sector continues to lag behind major OECD countries. Canada ranks 13th in business spending as a share of GDP, well below internationally competitive levels.¹⁰ To some extent this reflects the larger presence of foreign-controlled firms in Canada (which tend to spend more on R&D in their home countries), a smaller presence of high-technology firms (which tend to be the big R&D spenders), and the predominance of small firms in Canada (which have fewer resources to dedicate to R&D).¹¹

Private R&D expenditures are also highly concentrated in Canada. Four firms account for 30percent of all private sector research.¹² One sector alone, information and communications technology, accounts for 44percent.¹³

In the global, knowledge-based economy, firms that invest significantly in R&D are more likely to thrive. They are better able to compete in global markets by offering their customers new or significantly improved products and services. Firms that continue to offer the same goods and services are forced to compete largely on the basis of costs. They face increasing numbers of global competitors with lower costs of production. R&D should be seen as an investment in the future of the firm rather than a cost of doing business.

Universities perform 31percent of Canada's R&D;¹⁴ this contribution to national R&D is high compared to other countries.

Universities are key players in Canada's innovation system. They develop a highly qualified work force and perform the research that will fuel Canada's long-term competitiveness. They are collaborating with Canadian firms to develop new technologies and are an important source of new spin-off companies.

Universities play an important role in stimulating innovation in all countries, but their ties to the private sector make them a particularly important player in Canada. Canadian firms contract out over 6percent of their R&D to universities — well above levels in other G-7 countries (Chart11). The strong tie between firms and academia in Canada reflects the private sector's need to access scientific knowledge that it does not possess in order to remain competitive, and universities' desire to diffuse their knowledge in ways that result in social and economic benefits for Canadians.

The R-2000 Home

North America's first cost-effective, energy-efficient home, the R-2000, was a joint effort of the University of Saskatchewan and Natural Resources Canada. A professor of mechanical engineering developed the first heat-recovery ventilator. The system recovers the energy from stale exhaust air and uses it to warm the fresh air coming into the house, resulting in better air quality. The system has been especially beneficial for people with asthma or allergies. The Natural Sciences and Engineering Research Council of Canada has also supported the professor's research throughout his career.

Most countries believe that their innovation potential is strengthened by a sustained commitment to funding university research, and Canada is no exception. The Government of Canada has invested significantly in university research in recent years and is committed to unleashing the full potential of universities.

University research is crucial to the education of the next generation of researchers and highly qualified people. According to the Association of Universities and Colleges of Canada, universities face a projected 20–30 percent increase in enrolment by 2015. At the same time, nearly two thirds of current faculty will retire. As many as 30000faculty members will need to be recruited from Canada and abroad. This will occur as international competition for highly skilled workers increases. Younger faculty members, most of whom will have been trained in a research-intensive environment, expect to conduct research. Adequate research funding will, therefore, be essential for Canada to develop, attract and retain top quality faculty — and train the next generation of highly qualified people.

Another critical challenge for the university community is that funding has not kept pace with a research endeavour that has become increasingly complex and sophisticated. Research today is characterized by teams that operate globally and under increased demands (e.g.animal care, human ethics and environmental assessment). The costs associated with these new demands, often termed the "indirect" costs of research, are not fully covered by federal or provincial/territorial governments. Researchers in the U.S. and U.K. have had these costs covered for many years.

Reports by the Prime Minister's Advisory Council on Science and Technology concluded that the Government of Canada should support a greater share of the cost of the research that it sponsors, recognizing the relatively higher costs of smaller universities. Small universities provide a similar range of research infrastructure with fewer resources. The challenge for smaller universities, however, is not to replicate the diversity of larger universities, but to strategically position themselves in specialty areas and lever their relatively scarce resources for maximum impact. Budget 2001 took initial steps to support the indirect costs of research by providing a one-time investment of $200million. The government will need to work with the university community to define the basis for ongoing support.

University research results are often published in academic journals, contributing to the global knowledge pool. Canada has reason to be proud of its post-secondary institutions. We perform comparatively well in scientific papers generated for every million dollars invested in research. The high quality of these papers is clear given the frequency with which Canadian research is cited in other countries' work.

Security Enhancing Innovations

A Canadian mechanical engineering professor at the University of New Brunswick is developing new technologies for detecting materials that pose a threat to security, safety, health and the environment. His newest device produces three-dimensional images of concealed objects in items such as luggage and cargo. These imaging systems were developed with the help of the Natural Sciences and Engineering Research Council of Canada.

Canadian investments in university research, both private and public, are also generating economic benefits. In 1999 Canadian universities and research hospitals earned $21million in royalties, held $55million in equity, generated 893invention disclosures, were issued 349new patents and executed 232new licences.¹⁵ To date they have spun off as many as 818companies, posting a strong record relative to the U.S.¹⁶ The Association of University Technology Managers estimates that the commercialization of academic research in Canada resulted in more than $1.6billion in sales and supported more than 7300jobs in 1999.¹⁷ The evidence suggests that universities can contribute to economic growth and benefit from industrial funding without compromising their role as key performers of basic research, and without compromising their ability to disseminate results widely through publishing.

A comparison of the 139 U.S. and 20 Canadian universities that report to the Association of University Technology Managers suggests that there is still room for improvement. Although the U.S. universities perform about 14times as much research as their Canadian counterparts, they receive 49times as much licensing income — a key indicator of the value of innovations.¹⁸ Recommendations by the Advisory Council on Science and Technology centred on the need for the government to provide financial support to enable universities to increase their level of effort.

In return, universities need to focus on areas of excellence, train greater numbers of highly qualified people in the skills required by the private sector and government, and more aggressively seek out commercial applications for publicly funded research. Key commercialization performance outcomes should at least triple over the next decade. This will require the development of long-term innovation strategies, supported by stretch goals and targets. It will require clear intellectual property policies, and aggressive efforts to develop the technology transfer practitioners that are in short supply. Most important, it will require a serious commitment to ensuring that, whenever possible, Canadians benefit from the public investment in research. Universities need to be held more accountable for reporting on the benefits that accrue to Canadians from the very substantial annual public investment in research.

Governments perform about 11percent of Canada's R&D. This is comparable to the average for OECD countries.¹⁹ There are approximately 200Government of Canada R&D laboratories with a $1.7-billion research budget and 14000research scientists and engineers.²⁰

Over much of the 20thcentury, a high level of government R&D was necessary because there was little university or private sector R&D. Today, Canada enjoys a strong system of universities, and our private sector has one of the fastest rates of growth in expenditures on R&D in the G-7. In response, the government has focused its efforts in areas where its R&D needs cannot be met by others. In the area of public interest (e.g.health and safety, environment and stewardship of natural resources) governments are the agents charged with the duty of carrying out or funding the research upon which sound regulatory policies rely. Governments also have key roles to play as builders, holders and facilitators of a research infrastructure that supports Canada's innovation system.

UV Index and Prediction Program

Government scientists developed the UV Index to help Canadians gauge the strength of ultraviolet radiation and take precautions against sunburn. The UV Index is calculated from data collected at 13monitoring sites across Canada. The Canadian Meteorological Centre uses these data to issue nation-wide daily forecasts of the next day's UV Index. This program has set a global standard. The Government of Canada granted a licence to manufacture the necessary equipment to a Canadian firm, which is now selling the equipment around the world.

Over the past several years, the Council of Science and Technology Advisors has been examining the role of the Government of Canada's laboratories in Canadian society. Their studies have shown that the government's system has many strengths. It is responsible for Canada's outstanding record on public health and safety, it has established a strong system of industrial standards, and it has built infrastructure that supports economic development. Historically, several sectors of the Canadian economy have depended heavily on the government for R&D, notably the agriculture and fisheries sectors.

The R&D performed by the Government of Canada, as measured by research papers published or the extent to which these papers are used by other researchers, is high quality and productive relative to other countries. In a number of specialized areas, including natural resources and the environment, the greatest concentration of research expertise in Canada is located within the government's laboratories.

When the research has commercial potential, departments actively seek out private sector partners to take their discoveries to market. In 1999 alone, the government was issued 89patents, granted 191licences and received $12million in royalties.²¹ Government of Canada laboratories have spun off 48new companies to date and outperform U.S. government laboratories (relative to the size of our research base) in terms of royalties, new licences and patent applications.²²

Key Roles for Government Science and Technology

Support for decision making, policy development and regulations:

Environment Canada's research activities support its ability to develop policies and enforce regulations on environmental protection and quality.
Health Canada's Health Products and Food Branch carries out research to ensure the safety of drugs and food, as well as the safe implementation of new health-related technologies.

Development and management of standards:

The National Research Council Canada's Institute for Research in Construction provides research, building code development, and materials evaluation services.

Support for public health, safety, environmental and/or defence needs:

The Canadian Science Centre for Human and Animal Health in Winnipeg is the first facility in the world to accommodate research into established and emerging diseases in humans and animals at the highest level of biocontainment.
Defence R&D Canada not only supports research into new technology for Canada's military, but also develops and adapts technologies that improve the security and safety of Canadians.

Enabling economic and social development:

The Research Institutes of the National Research Council Canada form the nuclei of technology clusters in areas such as biotechnology, aerospace, fuel cells and nanotechnology across Canada.
Agriculture and Agri-Food Canada supports research with the private sector that is readily transferable to the client for the generation of new business and economic growth.

Source: Council of Science and Technology Advisors, Building Excellence in Science and Technology: The Federal Roles in Performing Science and Technology, Ottawa,1999.

As has been noted by the Council of Science and Technology Advisors, government laboratories face a number of significant challenges. Renewal of an ageing researcher population will be a pressing issue over the next decade. As knowledge continues to advance in areas such as biotechnology, the skills required to provide government with the knowledge necessary to take sound decisions are changing rapidly. Not only is there a need for renewal because of demographics, but there is also a need for new skills because of advances in knowledge.

Help from Space

Environment Canada's Ice Service and Natural Resources Canada's Centre for Remote Sensing performed the R&D that led to the operational use of RADARSAT-1 data for sea ice monitoring. The transition from aerial reconnaissance to the Canadian Space Agency's RADARSAT-1 satellite improved the quality and coverage of the sea ice monitoring service, while saving over $6million per year.

The government's ability to protect health, safety and other public interests increasingly depends on access to high-quality scientific knowledge. Governments need a deep and broad understanding of the latest breakthroughs and their potential impacts on people and their environment. The public and the business community need to be confident that governments are keeping up with current developments in science.

It may be appropriate to consider new partnership models across government departments, and including other R&D players, to address key emerging issues such as security and water safety. Stronger networks among government, academia and private sector researchers would enable the government to benefit from the best expertise the country has to offer.

Innovation can be both risky and costly, and often requires expertise from outside the firm. The pooling of resources, expertise and risk is particularly important for smaller firms. Beyond mitigating risk, alliances enable firms to reduce research costs and to access new markets. Canada's more innovative firms form collaborative alliances with public and private sector organizations at home and abroad.²³ They range from informal sharing of information, to structured strategic alliances within the country, to international alliances with suppliers, customers and even competitors.

The Conference Board of Canada, in its second annual innovation report, confirmed that "firms that collaborate are more likely to draw a higher share of revenue from the sale of new products. These firms are significantly more likely to introduce breakthrough (world-first) innovations."

In general, Canadian firms have a strong international track record in forming strategic alliances for joint marketing and sales activities. Compared to our competitors, however, Canadian firms form fewer of the alliances that are key to the development of new technologies (Chart12). Technology alliances involve the pooling of resources to reduce the risks and costs inherent in innovation.

According to The Conference Board, large firms are well advanced in terms of their level of collaboration. Small and medium-sized enterprises, however, face particular challenges given the management time required to develop alliances while dealing with the day-to-day demands of running a successful business. Governments can play a role in facilitating more alliances, but the private sector must take the lead in recognizing and acting on opportunities to benefit from the best science and expertise the world has to offer.

Venture capital investments are typically placed in smaller firms to support and accelerate the commercialization of new technologies. In keeping with global trends, Canada's venture capital industry has shown strong growth in recent years (Chart13). In 2000, total capital under management reached an impressive $19billion. This represents the value of current plus past year investments and commitments by Canadian venture capitalists.

Incremental venture capital investments in Canada amounted to $6.6billion in 2000 alone (annual disbursements). Disbursements have grown at a compound annual rate of 56percent since 1994.

As expected, with the recent downturn in the economy, venture capital investments will likely be lower in 2001. Preliminary data for the first nine months suggest that an additional $5billion will have been invested in Canada in 2001 — below the 2000 peak, but still well above the 1999 level. The U.S. is expected to drop to below the level it posted in 1999.

Canada appears to be narrowing the gap with the U.S. in terms of venture capital invested per capita. The U.S. per capita investment was $349 more than that of Canada in 2000, dropping to only $53 more in the first nine months of 2001.²⁴ Canada also compares well internationally in terms of venture capital investments relative to the size of our economy.²⁵

The Canadian venture capital market, however, remains proportionately smaller than its American counterpart. The more mature, experienced and competitive venture capital industry in the U.S. makes it easier for American firms to secure larger capital investments to commercialize scientific discoveries and support their company's growth over a longer time frame than is generally the case in Canada. This has contributed to the United States' remarkable success in innovation.

Canadian firms with rapid growth potential will increasingly demand specialized services and longer-term support from venture capitalists — Canadian and foreign. The Canadian venture capital industry needs to respond by developing specialized management expertise in emerging fields. Complex scientific and technological developments are making it increasingly difficult for the industry to evaluate market opportunities and risks without such specialized expertise.

The Canadian industry also needs to tap into new sources of capital. Pension funds could play a more significant role. Canadian pension funds typically accounted for 5–10percent of all new venture capital investments in Canada. In 2000, their share rose significantly to 22percent. Despite this gain, they remain a less important player than U.S. pension funds, which account for 50percent of disbursements.

We are beginning to witness an increased foreign component to venture capital investment — both in terms of investments by foreign venture capitalists in Canadian firms and by Canadian venture capitalists in foreign firms. This is a positive development. Canadian firms will benefit from increased competition among venture capitalists, and the Canadian venture capital industry will be able to develop more specialized expertise as it seeks out global niche markets.

The private sector needs to strengthen its ability to develop innovations for world markets and adopt leading-edge innovations from around the world. Relatively low levels of investment in R&D, too few strategic technology alliances and limited pools of risk capital contribute to the private sector's relatively lackluster innovation performance. Addressing these challenges is critical to the competitiveness of the private sector and requires leadership by the private sector.

Governments also require access to a strong knowledge base in order to carry out stewardship responsibilities, inform policy development, and meet economic development and social objectives. Governments need to work with academic institutions to increase the supply of research personnel in Canada and the stock of knowledge.

It is not enough, however, for governments and academia to increase the supply of researchers and the knowledge they generate. The private sector in Canada must demand, purchase, perform and, ultimately, use more research to fuel its competitiveness. Firms also need to continually search out and implement best practices from across the country and around the world in business financing, marketing and production. This will require a cultural shift in behaviours and attitudes. It will require a much more aggressive approach to managing and extracting value from knowledge.

To address these challenges, the public and private sectors in Canada need to identify long-term goals and measurable targets that can guide all of our efforts over the coming decade. Some of the goals and targets proposed by the Government of Canada have been previously announced in the 2001 Speech from the Throne, federal budget and ministerial speeches. Others are proposed for the first time. Together, they respond to the need for more firms to develop and adopt leading-edge innovations, in part through increased investment in the creation of knowledge, more strategic alliances and improved access to risk capital.