INST Committee Meeting

STANDING COMMITTEE ON INDUSTRY, SCIENCE AND TECHNOLOGY

COMITÉ PERMANENT DE L'INDUSTRIE, DES SCIENCES ET DE LA TECHNOLOGIE

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, April 24, 2001

• 0911

[English]

The Chair (Ms. Susan Whelan (Essex, Lib.)): We're going to call the meeting to order now.

Pursuant to Standing Order 108(2), today we will consider science and technology policies. We're going to have one of our first round tables on science and technology contributions to a knowledge-based economy.

We're pleased to have with us Dr. John Baldwin, director of microeconomic studies and analysis at Statistics Canada. He has been at this committee before, and we welcome him back.

As well, from the Alliance of Manufacturers and Exporters Canada, we have Mr. Jayson Myers, senior vice-president and chief economist and co-chair of the Business Coalition on Cost Recovery. He has also been here before, and we welcome him back too.

I propose that we have opening statements from both parties and then move to questions, if that's okay. We'll begin with Dr. Baldwin, unless you prefer a different arrangement.

Dr. John R. Baldwin (Director, Microeconomics and Analysis, Statistics Canada): No, that's fine.

Good morning. I've been asked to discuss some of our research that's relevant to an agenda of innovation, and particular to today's topic of the impact of technology and science on the economy.

Our work originated from a Statistics Canada initiative of some six years ago, which was meant to give us a better understanding of the innovation process. It relied on developing several new data sources to provide us with information on different processes.

The first of these was on Canadian innovation, with special emphasis on the heterogeneity of the underlying process. It also attempted to understand the nature of the support network that facilitates innovation—including the role of multinationals, R and D, and outside parties such as universities.

The second set of data we developed was surveys on the nature of the small-firm innovation process. I know that's of interest to some of you here. In particular we asked, “Do small firms differ from large firms in the innovation process? Do they face particular difficulties in financing?”

Finally, we are developing a set of surveys that allow us to look at the relationship between human capital, worker skills, and the innovation process.

I'm going to try to briefly summarize the main lessons we've learned. Let me start with some findings from our innovation surveys.

First, innovation is widespread. It's inappropriate and unduly constraining to think of the world as divided up into the new knowledge-based economy, and, by inference, the “old” economy. Innovation is taking place in every industry. The form this takes varies dramatically, from minor changes and products that are primarily cosmetic to the development of brand new products that are world firsts.

Admittedly, at any point in time innovation may be more intense in some places. But in every industry, there are innovative firms that introduce new products and new processes, or both simultaneously.

Second, innovation is heterogeneous. Innovation consists of different types of outputs. Innovation intensity differs across industries and it differs across actors. There's no single dimension that dominates, but some are more important than others.

One dimension that has attracted considerable attention is the difference between product and process innovation. In the 1993 innovation survey, the largest group of firms reported process innovation without a simultaneous change in products. But it's inappropriate to suggest that Canada just specializes in this type of innovation. Quite close behind were a number of firms reporting that they introduced both new products that involved changes in technology, and a combination of both. Clearly, innovation in general is multifaceted in this country.

Our studies have also shown that innovations vary considerably in terms of their novelty. The most original, world-first innovations are understandably rarer than those that introduce to Canada new products or processes that were created abroad. But both are relatively important.

• 0915

Third, technological opportunity varies between industries, and so does innovation intensity. A large proportion of innovations are created in a few core industries, as they're referred to in the literature—the chemical, electronic, machinery, and instruments industries.

The more mature industries, in the secondary and “other” sectors, receive their new materials and intermediary inputs from the core sector, as well as new equipment and machinery. They typically produce more standard homogeneous products that compete on price, or differentiated consumer products that compete on brand name. Firms in the core sector are twice as likely to report innovations as firms in the other sector.

However, firms in the other sector are clearly introducing innovations. They're ingesting them, digesting them, and adapting them. That requires considerable effort.

So there is a core set of industries that produce new products and another set of industries that have learned to ingest the new machinery and materials, and whose economic growth and productivity comes from the core sector. That learning process is essential to productivity and growth in those areas.

Four, there is considerable specialization of function across different actors in the innovation process. The smallest firms report innovations at about half the rate of the largest ones, but they tend to be part of some innovation network involving large firms. This size effect is pervasive across most industries. The rate of innovation by multinational firms was considerably greater than for purely domestic firms. But if domestic firms are also exporters, then they tend to innovate just as much as foreign-owned multinationals.

Five, what's the impact of innovations? Innovations on the process side can be aimed at exploiting scale economies, or they can be directed primarily at improving the flexibility of the production process—by reducing economies of volume at a production line, by allowing the quick changeover of products, or by facilitating the more rapid customization of products.

We find that the innovation process in Canada has its greatest impact on a firm's ability to respond flexibly to customer needs. While innovation does indeed affect scale economies and improve costs, it's this advantage of being able to develop flexibility and respond to smaller customer markets that seems to dominate the objectives and the impacts of innovation on Canadian firms.

Six, innovation tends to be skills-enhancing. In the firms we've studied, innovation has tended to increase the demand for white-collar workers relative to blue-collar workers.

Seven, what are the sources of information? We've examined extensively how much the innovation process has depended mainly on internally generated knowledge, and the importance of one particular form of this knowledge, R and D.

We found that innovation depends on both internally generated knowledge and on knowledge acquired from outside the firm. Innovation processes are fed from multiple sources, some internal and others external. Ideas for new and improved products and processes are generated in the course of market transactions with clients and suppliers, with related and unrelated firms, and with other external sources. Ideas for new market opportunities are seized and adapted to a firm's advantage by its management, research department, and marketing and engineering personnel. So the innovation process depends upon many actors.

While there's a broad array of information sources, research and development is cited in most of these surveys as the most important source of new ideas—after ideas that come from management. While the results confirm R and D's widespread importance, they also show that in some instances, other sources are used to complement R and D.

Using statistical analysis, we discovered that there are effectively three clusters of firm types that combine external links with internal capabilities. The first two groups rely on R and D. One builds networks with market partners; the other relies more on its extensive internal resources, and develops the capacity to ingest outside sources of knowledge by combining internal R and D expertise with spillovers of outside knowledge derived from research institutes.

But there is a third cluster that's important in Canada, an alternative to the R and D-based model. It consists of those who focus on internal engineering capabilities and production expertise, and combine this with knowledge spillovers from universities. Universities appear to be an important part of the innovation process, particularly when it comes to supporting applied research.

In summary, the knowledge production process associated with innovation relies heavily, but not exclusively, on R and D.

• 0920

I'll say something about the R and D process. Canada does not lead most OECD countries in terms of R and D spending as a function of gross output. This is not because firms ignore the R and D function in Canada. Indeed, about two-thirds of Canadian manufacturing firms, in the 1993 innovation survey, actually report that they conduct R and D. While the R and D statistics show that over two-thirds were conducting some form of R and D, most of this activity was done only on an occasional basis. Far fewer firms conducted R and D on an ongoing basis, and even fewer conducted R and D on an ongoing basis in a dedicated facility.

The Canadian economy then is characterized by a relatively small group of innovators and of specialized R and D performers. As part of this, research networks are extremely important.

How key is R and D? Well, our work has asked whether R and D is critical to the innovation process. If R and D numbers are relatively small in Canada, there's some evidence that they actually don't perform, that they have no effect upon innovation once expenditures are made. We find no evidence of that.

We find, in particular, that the R and D process does indeed lead to innovation. Those firms that are doing R and D are far more likely to report innovations and the probability of this occurring is relatively large.

But we also find that the Canadian innovation system depends heavily on engineering knowledge and an ability to adapt advanced technology to production in Canada. In this vein, foreign multinationals play an important role since they provide a mechanism that allows for the licensing of technology transfer on a continuous basis.

Other activities are combined with R and D facilities sometimes as complements, sometimes as alternatives. And we found that being an R and D performer increases the probability of a firm reporting an innovation from about 10% to 40%—an increase of 30 percentage points. But placing a heavy emphasis on technology, the production and engineering side of the firm, also increases the probability of a firm being an innovator by about the same number of percentage points.

Ten, we found that the effect of science and technology is embedded into the innovation process in a number of different ways. One is the research and development process. But this is not the only way. Firms also embed science and technology in their products by developing or implementing new technologies. Indeed, one senior executive of a highly successful Canadian firm told me that the reason for his success was not because he spent a penny on R and D—in fact, he didn't spend a penny on R and D—but because he spent a large sum on having the best engineering technology group in North America, as he put it.

Eleven, intellectual property rights, as we all know, are meant to protect the investments that are made in innovation. The firms in our survey did indeed affirm their importance. They tended to use them. They tended to use patents and trademarks most frequently. And they did so most frequently when they were innovative.

Twelve, what is the importance of knowledge workers in this economy? Well, we found that the proportion of workers who have higher education requirements has been increasing dramatically across a wide range of industries. This fits with the earlier theme. The knowledge economy is in fact everywhere. And certainly the movement to the knowledge economy is occurring everywhere.

For example, the percentage of workers who might be defined as being in “knowledge” categories has gone from about 14% in 1971 in this country to over 22% in 1996. If we stick just to scientific professional categories, the same trend has occurred with increases of almost double over the same period.

Now, it is indeed true that there are some industries where the percentage of knowledge workers is higher than others, but the percentage that is actually in any industry has been increasing almost everywhere. Some of the largest increases have occurred in what are referred to sometimes as the old industries in this countries, forestry and mining. Some of the largest increases have occurred in the primary sector, in other words.

But finance and business services, about which we usually hear a lot of discussion, have also experienced dramatic increases. Increases of scientists have also been greatest in business services, communications, forestry, and mining.

While that's a general summary of how important R and D is, and technology, and where science is making a contribution to the Canadian industrial structure, I want to say just a few words about the use of R and D intensity as a measure of evaluation of where we stand relative to other countries.

I offer a word of caution, because I've been enthusiastic so far about its import.

• 0925

It's widely known that R and D is not done intensively in Canada. The ratio of R and D expenditures to GDP is lower in Canada than in many other OECD countries. But that does not mean our industry lags behind other nations in terms of our ability to benefit from the knowledge gained from R and D.

We have to recall that over half of Canadian manufacturing industries are foreign owned, and foreign-owned plants in Canada benefit from the R and D done abroad by their parents. Indeed, if you take into account both domestic R and D spending and what our plants pay for R and D done abroad, Canada increases its R and D ranking substantially.

Academic studies, done by people like Jeff Bernstein at Carleton, that have looked at this issue find very substantial spillover benefits to Canadian productivity growth arising from R and D expenditures in the U.S. Our own studies show that foreign-owned plants in the Canadian manufacturing sector have a higher labour productivity than domestic-owned plants and that the gap between the two has been growing over the past 20 years.

It should be noted that comparison of simple R and D to GDP ratios across the country is also misleading if corrections are not made for the different industrial structures of countries. As I pointed out in the beginning part of this discussion, innovation regimes differ across industries.

Studies have shown that there are some industries, like electronic industries and machinery, that are at the core of the innovation system. They do a large amount of R and D and they produce more innovations that they use. Others, such as food products, use new materials and machinery from the core sector and tend to expend money not on R and D but on technological, engineering, and production systems. The two sectors work together in a symbiotic relationship, but the former performs more R and D and the latter worries about expenditures on technology and production processes.

Some countries have more of the former, other countries have more of the latter, and those countries such as Canada that concentrate more on the latter will simply have lower R and D ratios because of that, even if they have a highly innovative industrial sector.

There's a second reason we should always be cautious about using input measures like R and D to GDP ratios when we come to evaluate ourselves against other countries. After all, the ratio of R and D to GDP is the ratio of an input to total output.

It's not obvious that we want to try to maximize the ratio of inputs to outputs. Do we want to try to maximize the amount of transportation expense we have, or the amount of labour we have? If we did, of course, that would mean we'd want low labour productivity ratios, not high labour productivity ratios.

We really want to maximize the output of the process relative to the inputs, or minimize the ratio of an input to an output. In some sense, having a strong, prosperous economy that accomplishes much with less, including R and D, should be our ultimate goal.

While R and D is not done intensively in Canada—and the R and D ratios are often quoted as indicating we have major problems—this should not be interpreted to mean that the Canadian scientific community is in some sense ineffective. There's ample evidence showing that Canadian universities that engage in R and D have a very successful output and that the number of papers produced and the number of patents are all relatively high when compared with the number of people in universities.

You can use the same yardstick to judge the effectiveness of R and D in Canada. If we create an index of the number of patents taken out in U.S. markets per R and D scientist in the home country, and calculate such a measure for Canada and most European countries, we sit right in the middle of the pack. Our R and D scientists are relatively effective.

That covers the initial part of my presentation. I have a number of other points made in the presentation that deal with small firms. I've already had a chat with Mr. Lastewka, and I can go into those later. But the same points are essentially confirmed on the small-firm side.

Small firms also engage in a large amount of innovative activity. They tend not to focus as much on R and D. They tend to focus more on production technology. Those small firms that are successful and grow are the ones that are far more innovative. Those small firms that implement new technologies, in fact all Canadian manufacturing firms that implement new technologies, have been growing more rapidly and improving their labour productivity. But the points are repetitive. I simply wanted to state that the small-firm sector looks as innovative in a broad and general sense as the large-firm sector.

Thank you.

The Chair: Thank you very much, Dr. Baldwin.

Now we'll turn to Mr. Myers for his opening comments.

Mr. Jayson Myers (Senior Vice-President and Chief Economist, Alliance of Manufacturers and Exporters Canada): Thank you very much.

Good morning, ladies and gentlemen. Thank you for the opportunity to speak to you today as you kick off hearings on an extremely important topic for the Canadian economy.

I've prepared some remarks more in the way of observations than an opening statement, and I'd like to share some of those observations with you this morning. They come more from a business view of the contribution of science and technology to a knowledge-based economy, particularly from a manufacturing view.

• 0930

I've also brought a couple of articles. One—and I was reminded earlier this morning that it has my picture on it—is an article that appeared in Canadian Manufacturers and Exporters' magazine on Canada's productivity paradox. I'll come back to this later, but I thought it might be useful today in tying some of the themes you're looking at in science and technology, the development of knowledge and investment in research and development, into the theme of productivity and competitiveness.

With regard to the second piece of information I've brought, I don't have a large number of these to distribute, unfortunately, but I have given them to the clerk. I'll leave you with this as well. It's a catalogue that outlines one of our most important membership programs, Innovation Insights. It's linked to another program that CME runs, Technology Visits.

The idea of both these programs is to demonstrate best practice, to share information about world-class manufacturing practice, the management of technology, the management of workforce, and new systems of production. These visits, which are based on plant tours, are open to all manufacturers. In fact, we run approximately 100 of these every year and about 3,000 people from manufacturing, largely at operations—vice presidents of human resources, operations, and R and D—take part in these tours every year.

I'll leave you this catalogue. The companies portrayed in here are some of the leading companies from our membership and from across Canada in terms of world-class business practice. I would like to extend the committee an invitation to take part in one of these Innovation Insights programs. If it might work into your schedule, we would certainly be very glad to host you in a tour of facilities wherever you would like. I'm sure we could show you some world-class practice when it comes to the investments that are being made, the way manufacturing companies are managing research and development, science and technology, and their workforce today.

The general remarks I would like to make, as I said before, are largely observations. Some are very general and some are a little bit more specific as to some of the changes that are occurring today in manufacturing and why science and technology, research and development, and innovation, as John Baldwin mentioned, are so important today for the future of not only the Canadian economy as a whole but also Canada's manufacturing sector.

Let me just start by making some very rudimentary and general points. I think they may be valuable in your future meetings and the way you are looking at the contribution of science and technology to economic growth.

The first point hardly needs to be made, but in a sense I think it may focus discussions a bit—that is, that the objective of science and technology policy should be to help encourage the translation of knowledge into value of some sort. Knowledge is fine for knowledge's sake, but if we're looking at contribution to the knowledge-based economy, what is important at the end of the day is how that knowledge is used.

For business it's important to commercialize that knowledge, to translate the ideas and the results of technology into high-paying jobs and into profit, because these are the two components of economic value. But it's also important from a public policy point of view to translate knowledge, science and technology, and the capabilities of Canadian industry into meeting other public policy objectives that companies are being expected to meet.

• 0935

In the environmental field, for instance, the area of energy efficiency improvement and how companies are meeting the climate change challenge comes down very much to their ability to innovate, use new science and new technology to allow them to reduce greenhouse gas emissions. That, in turn, depends on their ability to invest in these new technologies. The translation of knowledge to value is extremely important.

The second very general point is that knowledge is generated, as John has mentioned, in a number of forms. It does arise from the results of scientific research and experimental development. It is embodied in new technology. But this is not all of the knowledge that's important today in an innovative economy. Problem solving and the creative capacity of the workforce is also extremely important. The experience and technical skills of the workforce and the experience of management are also extremely important.

One of the biggest challenges I hear from our members today is not only their problem in retaining and attracting skilled labour but also the possibility, over the next 10 years, that manufacturing companies will be losing, through retirement, a number of extremely skilled and experienced people. I think the same is true in our innovation infrastructure. It's a serious challenge for universities and colleges as well, the turnover simply as a result of retirement.

How do we replace these people? It's not only how do we replace the skills, but how do we replace the experience and the expertise.

The third is another very general point and really echoes one that John has made, that knowledge is a global resource. Of course it's extremely important to make sure that we have a strong innovation infrastructure here in Canada, but it's also important to focus on the ability of Canadian companies to access knowledge, access skills, and access technology from around the world.

A fourth general point is that, although knowledge is translated through scientific research and technology, one of the most effective ways of translating knowledge to business is through education and skills development. This is, in other words, in the heads of the people who are working for manufacturing companies or in the skills they've developed and the knowledge that's embodied in people. This is extremely important and one of the most effective ways of transferring knowledge from both the world of research organizations and academic institutions into the world of business.

I might add a final very general point. Looking at the history of policy and programs in support of science and technology—both in Canada and in other countries—it's very important not to push technological information and scientific information into the business community. What works best is to build up the capacity of business and its demand for that information.

I think too many programs that have failed, both in Canada and in other countries, have been based on the premise that we simply provide business with information about new technological developments or simply build up a research capacity in this country and then expect business to pick that information up. Well, businesses have a lot of patents sitting in their files. Businesses have a lot of information about new technologies. Businesses can access information about scientific research today from a number of sources. What's important is to build up the receptor capability within businesses and their ability to not only develop new products but also invest in new enabling technologies.

Those are very general points. I won't go through all the observations here. I do want to outline, though, the importance of the manufacturing sector for Canada. As John said, this is not a matter of the new economy versus the old economy. I would be very hard pressed in the manufacturing sector in Canada—the sector that accounts for a great deal of our R and D, our exports, employment, and so forth—to point to any sector that is not a part of the new economy today. This is competing on the basis of either innovation and new product and service development or investing in knowledge workers, in new enabling technologies, and new customer services.

• 0940

I would like to say a few things, though, about the economics of the restructuring process we've seen in the manufacturing sector, especially over the past 10 years. Today, what is crucial for growth is the fact that companies are creating something of value for their customers. We've seen a significant opening of markets here in Canada and around the world. This has intensified competition for manufacturing companies, not just in this country but in other countries as well.

Few companies today can afford, or have the luxury, to be able to pass higher production costs along to their customers in the form of higher prices. In fact, if you look back over the last 10 or 11 years since 1989, manufacturers' selling prices have on average increased by only about 20% over the entire period of time. That's less than 2% per year. Yet there aren't very many costs of production that have increased by only that amount. Direct labour costs have increased by 45%. Costs of material have gone up by 52%. Energy costs have more than doubled and in fact have gone up by about 140% over this period of time, much of that over the past couple of years. Capital costs have also increased by about 36%.

So manufacturing companies today are facing a situation where there's not very much pricing leverage. In fact, for many sectors, prices are falling. Think of the electronics industry; think of the automotive industry where price decreases are being built into contracts. Yet costs of production are increasing.

The only way that companies can survive this cost squeeze is to increase productivity—in other words, to produce more of value for the value of inputs coming in to production. This is what companies have been doing. They've been aiming to lower their unit production cost by removing overhead in almost every form possible, not only in inventories and non-core business activities but also by reducing waste, by reducing the time to manufacture and get the product to market, by reducing the space it takes to manufacture. In that process, automation and new business practices have been key. That's where knowledge feeds into that process.

The second issue, though—and I think this is extremely important, because companies can all too easily reduce cost—is how do you reinvest in order to grow. What companies have also been doing in Canada is to increase the value of their products and services. They've been doing that in a number of ways—customizing and enhancing the design of products and service, specializing product lines, entering niche markets, and developing new products and services. That's the value-adding innovation role or activities that companies have taken on, and they've had to do this in order to make money.

The third, of course, is the expansion of business activity around the world. Of course I don't have to underline the importance today of the integration of Canada's industrial economy with that of the United States'. Over 60% of Canada's manufacturing production today is sold into the American marketplace. As John has pointed out, the United States is also an extremely important source of knowledge, of scientific information as well as technology.

I can point to almost any sector of manufacturing and give you examples of companies that are world class in what they are doing, and companies that have really turned themselves around. For me, the most inspiring example is Guigné International. I don't know if you've heard of this company. It's based in Paradise, Newfoundland. It was a company that was originally developed to commercialize sonar technologies to map the ocean bottom to find out where the fish are in Newfoundland. As the fish kind of disappeared, the company had to go into another line of business.

I visited Guigné International a couple of years ago. It's a very small company, 15 employees at that time. I walked in and there was this pot in the middle of the room. It looked like a metal pot, and in it there was a ping-pong ball suspended in mid-air held up by low frequency sound waves. They had made the transition from mapping the ocean floor to a new form of sonic levitation technology.

• 0945

The application of this is in the manufacture of advanced industrial materials, where you don't want anything to touch. If you're making pure fibre optic, you don't want anything to touch the material because that would introduce impurities. You levitate the glass. You shoot lasers through it. You can pull off a fibre optic thread that's fairly pure. The application of this is in a low-gravity atmosphere.

Guigné International is the only company, of any company in the world, that has been invited for the first commercial application of this technology in space. It's a tremendous success story and I would highly recommend that the committee hear from Jacques Guigné, because I think not only the technology is amazing but his view of what his company has done is also a story very worth telling.

I'll finish up very quickly by saying that the contribution of science and technology—of knowledge—has been apparent throughout that restructuring process. Introduction of new automation systems and the design, development, modelling, and testing of new products, especially the integration of information systems today that allows companies to do business in extended networks around the world, are all extremely important to meet new and changing customer demands.

The Canadian industry really faces some big challenges over the next five to ten years. First of all, there is a widening productivity gap between Canadian performance and that of the U.S. and other international competitors. The conclusion of the short article that I wrote for CME magazine is to say that one thing that really stands out in Canadian performance versus that of the United States is that we have not kept up with investments in technology. We have not kept up with investments in new capital and new productive capacity. As a result, our machines are working longer and the technology that is being used is not giving the type of improvement in labour productivity that we're seeing in the United States.

Small companies in particular are being faced today with a number of new responsibilities that are being placed on them—responsibilities to take over design, engineering, service, financing, as well as quality. Small companies are going to have to meet those new requirements in order to keep their customers, particularly when their customers are outsourcing as well as investing on a global basis. I've included other challenges, and you can take a look through that. I think they're extremely important.

Manufacturing itself is changing around the world. We're going to see manufacturing that is based more on science—the science of machining, the science of materials, as well as the science of business organization and management, and new and revolutionary enabling technologies. We've seen the impact of information technology. Wait until you see the impact of where that's going with artificial intelligence, nanotechnologies, biotechnologies, micromachining, and new advanced sensors and materials. This is really going to revolutionize not only manufacturing but also the products we have, as well as the organization of manufacturing business.

There are several other attributes that have been identified by a project, run by the National Research Council in conjunction with the National Science Foundation and a number of other organizations in the United States, called Next Generation Manufacturing Systems. That would be, I think, a very useful reference for your committee as well.

I've included some very general priorities for science and technology policy—in short, a couple of them. One is the support of research and development but throughout the entire life cycle of product development so that we are looking at not only the generation of ideas but the commercialization of products and services as well. Certainly support for our innovation infrastructure is a priority and that is not only for the staffing, but also for the education capabilities, the capital and overhead of infrastructure at academic and public research organizations.

Finally, we need support for the transfer of knowledge between research organizations, research institutions, and business, because in the end that is also key, as is the sharing of expertise and information within the business community itself.

Thank you.

• 0950

The Chair: Thank you very much, Mr. Myers.

Now we'll turn to questions, beginning with Mr. Penson.

Mr. Charlie Penson (Peace River, CA): Thank you for coming, gentlemen.

Mr. Baldwin, I gathered from your presentation that innovation can occur in many ways through research and development that comes into the country, through companies that are located here—foreign multinationals, I think you said. Canada can take advantage of that. Companies develop ideas where they need to innovate in order to be competitive, and if they have the proper research staff or engineering staff to adapt to a different production method, that can be another form. I think we see that all the time.

The old story is, necessity is the mother of invention, and the point is how far you can take that and still be competitive. But that does tend to drive companies, if they are having trouble being competitive, to be more innovative, as Mr. Myers has said.

Ideas can come from a lot of different sources, quite unlikely sources many times. In the case of agriculture and the oil industry in Alberta, companies would want to drill oil wells on farm land. After you get three or four wells per quarter, it makes it pretty difficult to farm. So farmers were complaining about the fact they were drilling so many wells—why couldn't they drill them from one site and go down and directionally drill? Ten or twelve years after that concept was put forward, oil companies have decided this is a great technology. We're hitting a lot more zones, a lot more pools than we were before, so it's not so tough to convince them any more. That's how things developed.

That brings me to my question, how should public policy work in respect of research and development? Should we just let these things bubble up from the need? Or should government be giving money for research and development to companies? I'm thinking of the Technology Partnerships program as an example of that. That would be my first question.

As to the second, Mr. Baldwin, you talked about the spillover of R and D. I think that's pretty evident. Companies coming into Canada bring their research capacity with them. They've already done a lot of research and development. We benefit from that. But don't Canadian companies also take that out of the country? Even with companies like General Electric, who would get research grants from the Canadian government, the results surely wouldn't be constrained to Canada. I would like your ideas on that.

The Chair: Mr. Baldwin.

Dr. John Baldwin: Let me deal with the second question first. No doubt there are large amounts of spillover in all directions. The academic economic profession justifies most interventions on the part of government in the area of R and D, which is your first question, based upon the amount of spillovers that essentially accrue to the rest of society from the expenditures private companies can't extract for themselves.

As a member of a non-policy department, I have to keep away from recommendations on policy, but I can refer to what I see as the evolution of our policies in this area. Certainly the economic and academic discussion revolves around where those spillovers tend to be rather high.

Our work has shown that spillovers exist and that an awful lot of them, in the academic jargon, are internalized: firms operate networks that effectively internalize spillovers, that allow them to extract the benefits for themselves. They find efficient ways to make markets work. When I talked about the various ways in which firms work in networks, especially small firms working with large firms, or the extent to which customers and suppliers work together, I was identifying effective ways the commercial sector has found to effectively internalize those spillovers.

But not all knowledge is protectable in that way. We have as a society looked at areas where we perceive that it is very difficult to internalize those spillovers.

• 0955

For example, in agriculture we've spent very large sums, both in the United States and Canada, for many years, essentially as R and D subsidies we see as producing something that will have huge spillovers and huge benefits to society. That's what public policy has been in part, as I see it.

The other part, of course, is that public policy has been directed over the last 30-odd years at something we call R and D. It's not easy to define R and D. I watch the statisticians in Canada and elsewhere try to coordinate the definition. They have established a manual, the Frascati Manual, in conjunction with the OECD, which tries to formalize and codify what can be placed within the expenditure categories of R and D. It's done so that we get good cross-country comparisons—that is, the numbers are the same. But there are an awful lot of those expenditures made in Canada that generate knowledge—and Jayson has referred to some of them—but aren't included as part of the official definition.

Mr. Charlie Penson: Mr. Baldwin, would not that same kind of innovation, same kind of R and D that's difficult to quantify, happen if government were not involved? There are two different pools you can look at. There's the pure research at universities, which is fine. But what I'm getting at is giving R and D credits to companies, as opposed to letting them innovate themselves. Wouldn't that innovation occur naturally?

Dr. John Baldwin: The argument generally made is that some of it would occur, but at the margin you wouldn't get as much as you would like. That is, to the extent that you cannot capture some of the benefits of your ideas, you'll do less investment in that area. It's not that you won't do any, you'll just do less, and it's been very difficult to quantify how much less. I have never seen any satisfactory studies that exactly explain how much less you get in those circumstances.

Mr. Charlie Penson: I want to follow the TPC model a little bit further. I know you say you're not in the business of policy, but you've done a lot of research—I see in your book—in many different areas. So you must have touched on some of these areas. A company like Pratt & Whitney, for example, benefiting from Technology Partnerships, certainly will use that technology here in Canada. But it also is used, through the spillover, widely across their network. Are we not also financing their international operations?

Dr. John Baldwin: Jayson, do you think you could respond more precisely to that?

Mr. Jayson Myers: Certainly the results of R and D are spilling over well outside of Canada, but the issue is also one of investment. At least in the aerospace industry, it's also important to level the playing field here and realize that we have a lot of subsidies going to some very large aircraft manufacturers outside this country. To some extent, it's difficult in that particular program to separate—

Mr. Charlie Penson: I would prefer Mr. Baldwin to answer, actually.

Some hon. members: Oh, oh.

The Chair: Dr. Baldwin, do you have an answer?

Dr. John Baldwin: I can come back and use a example other than Pratt & Whitney. We've just completed a survey of the food processing sector, technology and innovation therein—a sector that's very important to the agriculture community in Canada. We asked the companies, “What countries do you look to for most of your ideas?” There are several academics in French Canada that have been doing surveys in what they call “la veille de technologie”, the technology watch programs. They tell us it's Europe. They tell us that the ideas as to new technologies that are best incorporated in the food processing sector are coming out of Europe.

So we're benefiting from that part of the world at the moment. We do not benefit only from the United States. We benefit substantially from these ideas around the world. We interchange with them.

Mr. Charlie Penson: Isn't that a good thing—

The Chair: Mr. Penson, you'll have to save that until your next round.

Mr. Lastewka, please.

Mr. Walt Lastewka (St. Catharines, Lib.): Thank you, Madam Chair. Thank you, gentlemen, for appearing today.

• 1000

Over the last number of years, in visiting the various university and government labs involved in research and development, and in many discussions at this table, we've had people reporting concerns on the transfer of research and development out of universities and government labs, and we seem to have a lack of talent to be able to do that transfer properly.

My question to you is, have you had any studies done, any work done, concerning the transfer of technology out of universities to the public domain?

Dr. John Baldwin: No, I have not personally done so.

There is a new part of a Statistics Canada program that is looking at the interaction between universities and the commercial sector, and it would be producing information over the next year or two that we'll be able to call upon.

We have looked at areas that Canadian firms felt were providing them with impediments—impediments to innovation and impediments to success. We've asked both large and small firms the same questions. Both large and small firms tell us that the problem with skilled labour is perhaps the most severe they have, and Jayson has already referred to that.

When we then turn to look at other problems that have to do with information difficulties, information on foreign markets, information on new technologies, information that is obtained by collaborative exercises with other firms, small firms tell us that those are major problems; large firms don't.

Large firms are good ingesters of information. That's why they get large. They develop systems to obtain information. The small firms tell us they have problems with information on export opportunities, they tell us they have problem with information on new technologies, and they have problems with acquiring new technologies in collaboration with others—others being other firms and universities.

We know that what you see as a problem is indeed a general problem, but we have very little information on the way in which that can be resolved or should be resolved. That's really a matter for case studies rather than for large-scale surveys.

Mr. Jayson Myers: On that particular issue, I also sit as a member of the Board of Materials and Manufacturing Ontario, which is the centre of excellence established by the Ontario government to transfer the technology and scientific research results from Ontario universities to especially smaller manufacturing companies. I think it would be useful to contact Geoff Clark, the president of MMO. As far as I know, this is the only centre of excellence that is focusing on manufacturing technology.

From my experience, there are a number of difficulties here in the transfer process. One is devising an appropriate intellectual property protocol that does not frighten away business, yet attracts university research to become a part of that.

The second is just to make the contact and the communication between academic research and business in a way where there's a common purpose, and that's more difficult. They're more of a problem than you would imagine in many cases. It takes considerably more than just putting in money to make these partnerships work. MMO in particular has invested a lot of time in building relationships where you have researchers from universities actually working with companies, and R and D personnel in companies actually working with the universities as well.

Mr. Walt Lastewka: It's very evident to me that the transfer of technology to small and medium-sized businesses needs a lot of work to be done in order to find a better system in place for a small business to tap in to. That's why I was asking the questions relating to my experience in small business.

Mr. Myers, you talked about a productivity gap between Canada and the U.S., but you didn't explain the whys. Could you expand on the whys of the productivity gap, and what does your organization recommend the Government of Canada should be doing?

• 1005

Mr. Jayson Myers: I think there are a lot of factors that have really led to that widening productivity gap, and it's surprising, given the fact that Canadian industry and American industrial markets are becoming more integrated after free trade. You would expect exactly the opposite. The productivity performance should swing more in line. Instead, we see a widening gap, and there has been a significant amount of statistical research that's been done on that. You can look at the different structure of the Canadian and U.S. economies and the fact that we have different concentrations of industry. We have a higher concentration of smaller companies in Canada. That's also a contributing factor.

There are a number of arguments about the statistical definitions, but the main conclusion I drew in the article I provided—I didn't see it until after I wrote the article—was something that the Economic Council of Canada also identified way back in 1982 when it was looking at a growing productivity gap at that time between Canadian and U.S. manufacturing, and this is that Canadian industry is not investing at the same rate as U.S. industry in new technology and new productive capacity. As a result of that, the machines, the equipment in place, are working longer, the types of technology put in place are not being used to maximize the output and the value they could be used for.

Looking at all of the other explanations, I frankly think this is one factor that we should be paying more attention to, because you could have the most skilled employees, you could have world-class management methods, but if your tools are not world class and if you're not keeping up in terms of investment and technology, then your productivity performance is going to fall behind.

Mr. Walt Lastewka: Is that because, in many cases, large Canadian industries are branch plants of the U.S. manufacturers, or is it part of our method of writing off equipment?

Mr. Jayson Myers: As Dr. Baldwin said, the productivity performance of our largest companies and of our multinational companies has actually outperformed that of Canadian-owned companies and our smaller companies. We have much to value in what the larger multinationals are doing in this country.

I think a part of it is certainly the tax treatment of technology and we've seen an erosion of the ability of manufacturers to be able to write off equipment, to use tax credits to support their investments in new technology. But I think, more generally, since investment in capital simply follows profit performance, there are a lot of other factors that really affect the bottom line of a lot of companies, particularly smaller companies, that we also have to look at here. It's beyond that. Tax instruments are an important component of the problem, but certainly not the only one.

Dr. John Baldwin: Let me say a few words. The last time I was here I dealt extensively with where we are on the productivity ratings and I brought a publication that Statistics Canada has produced. It's a little different. There are seven or eight articles that deal with many of the issues that were posed to me before this committee on what are the causes of...

[Editor's Note: Technical difficulty]

The causes are always difficult. Where we are is a little easier.

[Editor's Note: Technical difficulty]

...first of all. Secondly, the big productivity gap...

[Editor's Note: Technical difficulty]

Over a longer period of time, Canada and the United States essentially performed very similarly. As you'd expect, technology is being transferred back and forth across the border. In fact, over a 30-year period the correlation between the rate of growth and productivity of U.S. manufacturing and Canadian industries is very high in a statistical sense. What you find down there is what you get up here, except for two industries: the machinery equipment industry and the electronics industry. These are basically areas where computers are having a big impact. In those particular industries, we're behind the Americans, but so too is every other industry in the States and here. The rate of growth and productivity in those industries is just phenomenal, and we don't have big sectors...

[Editor's Note: Technical difficulty]

• 1010

Elsewhere, our Canadian manufacturers are doing relatively well because elsewhere they do about as well as the U.S. does. So there's a big structural problem in that sense.

On the machinery, equipment, and investment side, we have a chapter in that text that deals with the issue Jayson has just raised, the extent to which Canadian firms are investing in plants. Productivity gains come from increased capital, improving the amount of capital you have to work with. Over the past 30-odd years, we've been more or less in step with the Americans except in one area, and that's machinery...

[Editor's Note: Technical difficulty]

Interestingly, the gap widened in the late 1980s and early 1990s quite dramatically. While it is true that investment in machinery and equipment improved in the last half of the 1990s, it's still trying to do a catch-up job relative to what the Americans have already put in place.

Now those are investment dollars and that's pretty aggregate. We've also done some studies about the implementation of high-tech and advanced manufacturing technology. We've put together a panel of people to find what those were and then we asked firms if they were using them. We've asked Canadian manufacturing firms that question on three separate occasions, in the late 1980s, 1993, and 1998. We've been able to look at what was happening to the use of these advanced technologies. In some cases, we've been able to compare it with the Americans.

Now these are relatively crude numbers. It's not a question of how intensively you use it in the plant—it's just a question whether you are using it. If you find you're behind on that score, you have to be worried about it.

Mr. Charlie Penson: Did you ask them why they're not investing?

Dr. John Baldwin: Yes, we did...

[Editor's Note: Technical difficulty]

The question then was how far behind were we. The answer was that, on the large-firm side—basically foreign owned—we were about the same. In the medium- and small-firm side, which has a big Canadian component, we were well behind. Now that was back in the late 1980s so we went into the 1990s being behind. What happened during the 1990s was that implementation and therefore the investment in those technologies virtually ceased in the Canadian domestic sector. Cashflow is behind the investment in these machines, and cashflow was terrible for five or six years. We went through a very long recession, for whatever reason. Over that period of time, between 1989 and 1993, the domestic sector falls even further behind.

Now as things get better in Canada from 1993 to 1998, the curves then are parallel, but we're already far behind—we being the Canadian small and medium-sized domestic firms. That gap has been essentially maintained, and except in one area, an area we found critical for productivity growth—the communications high-tech equipment sector, the LANs, the computers, and all of that within these firms—we actually fell even further behind.

So there's evidence that on the technology side, the side that I referred to earlier as being terribly important for innovation in Canada and productivity growth in addition to R and D, we were behind and we've fallen even further behind. There are several pieces of information to support that.

The Chair: Thank you. Thank you very much, Mr. Penson.

Mr. Penson.

Mr. Charlie Penson: Mr. Baldwin, the resource sectors of our economy, the base sectors if you like, agriculture, forestry, and mining... I know the mining industry would tell us there's a lot of potential for innovation in the mining sector and you talked about that a little bit. Would it not be a good idea to try to develop these sectors further through research and technology because they're here? They've been an historical source of growth for Canada. I know that some of them are concerned that government policy tends to write them off—they're not the new technology, new economies. But it seems to me that they can be, and should be, if they just have the uptake of the technology that we're talking about. But the other side is that there has to be a return on investment too in order to facilitate those kinds of investments.

• 1015

So I'm just wondering, Mr. Baldwin, what your thoughts are on further developing these base industries with increased productivity coming out of research and development.

Dr. John Baldwin: It's terribly important to introduce new technology and new innovation across all sectors. As I indicated before, we actually have some indication that what is referred to as our primary sectors—the forestry sector, the agriculture sector, and the mining sector—have been indeed innovative. We haven't had as many surveys aimed at those sectors. Manufacturing always gets the majority of the effort because it's easier to survey them.

But in some of the small-firm surveys that we've done, we picked up on what I call the highly innovative remarkable profile types. When we looked at the industries they were in, they were in our primary sectors. They're in industries that Statistics Canada classifies as auxiliary to the primary sector. Basically they're the very high-tech services to agriculture and the high-tech service groups to mining and forestry where the percentage of professionals, people with university degrees in science, has been going up quite dramatically, where the percentage of just knowledge workers defined more broadly—HRDC has the definition for you—has been going up rapidly. You can actually see the increases occurring. I don't think we have to say these guys are lagging by any means. In fact, they've been increasing their percentage of knowledge workers faster than some of our so-called great knowledge sectors, like computer science and computer business sectors.

There's sort of a public policy issue of how do you continue that.

Mr. Jayson Myers: As I mentioned, it turns on investment and it's extremely important, both on the side of commercialization of new products and services as well as investment in new technology. There are a lot of patents that companies have on their shelves and that are available. There are new technologies that companies should be investing in. And of course there should be other investments as well in restructuring and skills development that should also be going on.

There are two crucial questions, though, that any company faces. One is, where do I find the money to do this. As John has said, that comes from the cashflow a company has. This also is what determines, by the way, most of the financing that's available from external sources for investments in new technology. But any company would look at the return they can expect from investments in new technology. In fact, some of the work we've done looking at the average rate of return or the average hurdle rate for a Canadian manufacturer shows that on average—and you can't generalize across all sectors of course—manufacturers in Canada are looking at about a two-and-a-half-year period for payback on any form of capital investment, including new technology. So there is a hurdle rate, a return on investment, that businesses do have to meet. For smaller companies in particular, it's very difficult to look ahead and say, yes, we're confident that we will meet that return.

Mr. Charlie Penson: Mr. Myers, the accelerated capital cost depreciation is one that's been identified. In order to make these big investments, they have to know that they can write this stuff off quickly. Have you any other areas of impediment to companies or industries taking the uptake of this new technology?

Mr. Jayson Myers: Well, there are other tax instruments that act as an impediment. There are taxes imposed on new technology, provincial taxes, capital taxes, and the sales tax, for instance—not wanting to finger any province, but the sales tax in British Columbia is imposed on investments and machinery and equipment. One law of economics is if you want companies to do something, businesses to do something, then don't make it more expensive for them to do that.

• 1020

Mr. Charlie Penson: So if we're going to overcome this productivity gap, we have to design public policy in the area of taxation to help companies have an uptake in the new technology that would help them override those kinds of situations that would inhibit their investments.

Mr. Jayson Myers: I think tax policy is crucial, but there are other areas as well.

Mr. Penson, you were mentioning before the role of public policy in support of science and technology. If you look at the role of government in terms of encouraging things to be done that would not otherwise be done in the marketplace by business, then a role in reducing the risk—technical, market, or financing risk—is also very important, particularly for smaller companies. It's not just a matter of pure cost, but also the risks that companies are taking. The regulatory framework and the financial services framework that companies are operating in are also extremely important.

Mr. Charlie Penson: Okay.

The Chair: Thank you very much, Mr. Penson.

Mr. Bélanger.

[Translation]

Mr. Mauril Bélanger (Ottawa—Vanier, Lib.): Thank you, Madam Chair.

[English]

I take it, Mr. Myers, that... I've glanced at this one, I read this one, and you've written this, I presume. I'm sure you have written this one. What's the date on this one again?

Mr. Jayson Myers: I think that appeared in January or February of this year.

Mr. Mauril Bélanger: It's the post-economic statement of the thaw.

Mr. Jayson Myers: Right.

Mr. Mauril Bélanger: Okay, I just wanted to make sure of that.

I'm going to ask some questions and I'd ask you to try to keep the answers fairly short, if you don't mind. I want to follow up on some of the questions.

You talk about ensuring tax in a regulatory environment that encourages Canadian businesses to commercialize new products and services and invest in new technologies. You mention the capital cost allowance and some provincial sales taxes. Would you care to mention some more?

Mr. Jayson Myers: I think one thing that government could do is look at the effectiveness of its research and development tax credit system. There are three problems here. One is that the rules keep being changed from year to year by Finance. This makes it extremely difficult for companies to have a clear basis of the rules they're operating with.

Mr. Mauril Bélanger: The R and D tax credit rules keep changing every year?

Mr. Jayson Myers: That's right. Well, not every year, but on a regular basis. The rules are redefined by Finance, or clarified by Finance, and the rules are changed on a retroactive basis. So companies that have made an investment on one set of rules are finding then that they have to reassess—

Mr. Mauril Bélanger: Next.

Mr. Jayson Myers: The second area there is the administration of the system, and CCRA has been working on improving that. I think it still has some way to go, and—

Mr. Mauril Bélanger: CCRA?

Mr. Jayson Myers: The Canada Customs and Revenue Agency.

The third, though, is that the R and D tax credit system can be used only where companies are actually making a profit, and for the development of new research and development, particularly for high-tech companies and start-up companies, this is not always the most effective way of doing it.

Mr. Mauril Bélanger: You're not necessarily asking for tax reductions.

Mr. Jayson Myers: Well, a change in... effectively, there would be tax reductions, if you could use the R and D tax credit system as a way—

Mr. Mauril Bélanger: So you wish to enhance the credit and reduce taxes, because that's the priority—

Mr. Jayson Myers: That's right.

Mr. Mauril Bélanger: —for Canadian science and technology policy, essentially what I thought it was. Then the next is to increase government expenditure or government exposure to risk. How do you reduce the risk if someone else doesn't assume it?

Mr. Jayson Myers: I agree, and I think our government does have a role there.

Mr. Mauril Bélanger: So you want less tax, but more government investments?

Mr. Jayson Myers: In this area.

Mr. Mauril Bélanger: Okay. That's the first thing I wanted to check.

The second one is on page 3. My colleague asked that question. You identify one of the key challenges for Canadian industry as the lagging performance in investing in and adopting new technologies. I don't think we got a clear answer. Why isn't the private sector investing more in Canada? They realize that it's a key challenge, yet they're not doing the investments.

Mr. Jayson Myers: It's a key challenge, but companies as well are looking at return on their investment. They're looking at their cashflow situation. As John has pointed out, companies went through a major recession. I think—

Mr. Mauril Bélanger: Let me bring you to page 2 of your statement. You say that since 1989, manufacturers' selling prices have risen approximately 20%, and you list a whole slew of other things. Off the top of your head, do you have the figures for the corresponding time for return on equity—profits, pre-tax and after tax?

• 1025

Mr. Jayson Myers: I can tell you in 1991, after tax—

Mr. Mauril Bélanger: No, no. Since 1989, over that period of time. Not 1991—we're in the middle of a recession then.

Mr. Jayson Myers: I do have the information.

Mr. Mauril Bélanger: Would you care to share it with us?

Mr. Jayson Myers: Sure.

The Chair: I think you'll have to get back to us on that.

Mr. Mauril Bélanger: Has the return on equity been stable, decreasing, or increasing?

Mr. Jayson Myers: Return on equity has increased.

Mr. Mauril Bélanger: Why didn't you include that in here?

Mr. Jayson Myers: If I could get back to you, I would show you that the return on equity today is not as high as it was in 1989. It has increased since 1991, which was the depth of the recession.

Mr. Mauril Bélanger: Okay. But since 1991, the return on equity has increased, yet investments in R and D have not.

Mr. Jayson Myers: Oh, investment in R and D has also increased over that period of time.

Mr. Mauril Bélanger: And correspondingly? I'm just wondering here... you seem to attach the cashflow and return on equity to R and D investments. I'm just trying to see if they're... at least they're in step.

Mr. Jayson Myers: I can provide you with that. In fact, there's a very close relationship between cashflow performance and capital investment activity. I can show you that in one graph.

Mr. Mauril Bélanger: The last one is that I want to add to your very first sentence.

You say that with respect to Canada's science and technology policies and programs, the primary objective should be the translation of knowledge into value. That, for the private sector, may indeed be true, but it is only half, as far as I'm concerned, of public policy for science and technology policies and programs in Canada.

The other half, which is crucial to everyone, not just the private sector but everyone, is to expand the knowledge base. For that, you need money put into basic R and D, pure versus applied. I find this view of Canada's science and technology policies and programs rather narrow.

Mr. Jayson Myers: I explicitly said for business the issue is commercialization, but even in expanding the knowledge base, I still think there should be a point in doing that. What I'm saying is there has to be some value to society or value in terms of education, of training of technical personnel, for taxpayers' money to be put into that.

Mr. Mauril Bélanger: How do you determine that value, sir?

Mr. Jayson Myers: For business, it's easy.

Mr. Mauril Bélanger: For business, it's easy. For society?

Mr. Jayson Myers: I would imagine that's the objective of public policy—to determine what that value is.

Mr. Mauril Bélanger: Okay. So you recognize there's a need and a value to expanding the knowledge base, not just—

Mr. Jayson Myers: Of course.

Mr. Mauril Bélanger: —necessarily applying it or deriving value from it.

Mr. Jayson Myers: Clearly.

Mr. Mauril Bélanger: Thank you.

The Chair: Thank you, Mr. Bélanger.

Dr. Baldwin, I apologize. You wanted to say something earlier in response to Mr. Penson, so just before I go back to Mr. Penson, maybe you want to...

Dr. John Baldwin: Mr. Penson asked me whether we had asked on a survey or had any information about where the impediments to the adoption of advanced technologies might lie. I didn't get a chance to respond to him.

The largest percentage of businesses that responded that they faced impediments informed us that they lay in the financial area, that the problem lay either with the risk they perceived that comes from investing in new technologies, or the lack of internal financing that has to be used for the introduction of new technologies.

When I first started working in this area, I thought of new technologies as being machines that were difficult to implement in a plant but could be purchased off the shelf, and I learned that there's a substantial expenditure that's associated with putting those new machines in a plant way beyond just the machine.

In fact, when we've asked firms what percentage of their total investment budget was devoted to training or R and D... We get numbers that are even bigger when we come to the question on the buying of the technology, the right to use the technology—not the machine, but the right to use the technology—and those things get financed, as R and D does, by cashflow. They perceived that this was a major problem.

After that, I come back to this other issue about the expansion of the knowledge base, and it was lack of skilled labour. Not that this is something that stops them from implementing new technologies, because most of them tell us the lack of skilled labour didn't stop them from implementing the technologies. They did various things, such as implementing new training programs, to resolve that problem.

• 1030

We go back and post surveys, to see if they're answering the same questions we think we're posing. And one particular president said to me, “My biggest problem is getting engineers. I have a world mandate at this plant in southern Ontario, because I've got six of the best engineering schools in the country within 300 miles of Toronto. That's why I've got the world's mandate, and that's why we do so well.”

That's knowledge creation in the public sector, and it serves that particular firm.

The Chair: Mr. Penson.

Mr. Charlie Penson: Well, to follow that up, look at the salary figures for engineers starting work in Canada versus the United States, and their after-tax situation. I think that would explain part of the problem.

Mr. Myers, when you talked about impediments in response to Mr. Bélanger, I noticed you didn't talk about market access. Isn't that also a big problem for Canada? Look at the softwood lumber situation now. If companies make huge investments, as many of them have, and then are not able to have assured delivery because of problems with market access—isn't that a huge problem?

Mr. Jayson Myers: It's a problem, and it works both ways. If companies are investing in new technology, investing in research and development, then they need a market for very specialized products, which means a market outside Canada. Our marketplace is simply too small.

So yes, you do need market access—and not only into the North American market but into Europe, the Americas, and Asia as well for many of the high-tech companies. We do see a number of small companies with new and very innovative high-tech products, but they're selling those products around the world.

So market access is extremely important, and it cuts both ways. There are a number of problems in our regulatory system, such as cost recovery, which make it more expensive for other companies to export leading technologies or new products to Canada. Again, the Canadian market is relatively small—particularly when we're talking about very innovative products.

Mr. Charlie Penson: But hasn't that driven the Canadian business sector to be more innovative, the fact that we don't have barriers to foreign countries coming into Canada any more, especially through the United States, where there are essentially no tariffs? All of a sudden U.S. companies can come in and operate here, where we used to have a protected market for Canadian business.

Hasn't that led to part of the gap that developed in the nineties, when Canadian business had to adjust to that reality? They don't even have their home market to themselves any more. They have to scramble and be competitive against the international business sector.

Mr. Jayson Myers: Well, yes, certainly, I think competition has made it very important for Canadian companies to innovate and develop those new products. That's right. I wouldn't want to say, though, that we're a totally open market. There are a number of regulatory restrictions that do impede the entry of new technologies into Canada: product approvals, and the cost of getting them. In some cases, this is all very good. Regulatory approval should be given for the entry of particular products, such as drugs and food and so on.

Mr. Charlie Penson: But it takes many other forms too, doesn't it? Foreign investment limits in the airline industry, for example—that's a barrier to business and technology coming in.

Mr. Jayson Myers: There are barriers on foreign investment in particular sectors. That is an issue. There may be other reasons why those barriers are there, but if you're looking at our ability to commercialize technology and be innovative in Canada, then yes, that's—

Mr. Charlie Penson: But we're talking about the need to look at public policy as it affects Canadians' ability to do business. To have an uptake in the new technology, the R and D would come from foreign multinationals, as Dr. Baldwin said. There's some advantage to that as well.

• 1035

Mr. Jayson Myers: Yes, and I think we really do need to review some of our regulatory policies around investment, around product regulation, that should be a very important part of the review of science and technology policy, in order to encourage innovation.

The Chair: Thank you very much. Thank you, Mr. Penson.

Mr. Alcock, please.

Mr. Reg Alcock (Winnipeg South, Lib.): Thank you, Madam Chair.

Mr. Baldwin, let me start with a couple of quick points. In this range of studies—and I see you've got quite a number of products—do you make any interprovincial comparisons, or are they all Canada-wide?

Dr. John Baldwin: We have interprovincial comparisons, but we looked mainly at the take-up of advanced technologies. We asked, to what extent do you find large interprovincial differences in terms of the patterns we see, the benefits people perceive, the problems that come to the fore.

On the innovation side, we have not done those studies as frequently. One reason is simply that it's very difficult to place a large company as belonging to a particular province, and therefore to ascribe a particular innovation ambience to one province rather than another.

Mr. Reg Alcock: Yes. In those areas where you have done that, would you make that information available to the committee, please?

Dr. John Baldwin: Certainly.

Mr. Reg Alcock: Mr. Myers, same question to you. In looking at these factors, has your organization done any interprovincial comparisons?

Mr. Jayson Myers: We have done a few. We tend to look at some of the same issues around the adoption of new technology, but also at some of the other challenges smaller companies face—acquiring skills and developing change management, for instance. We have a few interprovincial studies, and I'd be pleased to provide them.

Mr. Reg Alcock: Thank you very much.

I believe it was Mr. Myers who commented that the writedowns and tax credits in the U.S. were better than in Canada. I wonder if you could provide us with data to support that claim.

Mr. Jayson Myers: I don't think I said the writedowns and the tax credits were better in the U.S. than in Canada, but that the tax treatment of Canadian investment in capital had eroded over a period of time as a result of the demise of the manufacturers' tax credit system.

Mr. Reg Alcock: Let me go back to that. The question raised was, what accounts for the difference in the productivity gap between the U.S. and Canada. One of your comments related to the writedowns and tax credits available in the U.S.

Mr. Jayson Myers: Well, certainly the tax treatment of investment in capital is better in some areas in the United States. I'll provide you with the information.

Mr. Reg Alcock: Would you do that? I'd be interested in information that supports that claim, because we are often told something rather different.

I also want to speak to an issue that seems to come up here: your comments about the R and D tax incentives. We are constantly told that these are among the most generous in the world, and yet they don't produce the kind of investment that one would expect. If that statement about them being among the most generous is not true, I'd be interested in having some factual basis for that.

Another particular issue is retroactive application by CCRA. Is there a substantive basis for that? I don't say that as a question so much; I have similar cases. I'd be interested in that coming forward. If you have a compilation of information on that, we'd be very interested in seeing that.

• 1040

I do want to make a comment though about what seems to come up around here all the time. It seems that a tax credit is not considered an expenditure while a grant is, and I have a great deal of difficulty in differentiating between the two.

On your comment about value and defining value in response to Mr. Bélanger's question, I do want to make one point. This comes out of—I can't think of their name. They used to own Bell. It wasn't Monty... it was BCE. They restructured their organization with the big nerd ranch there. They went through this change where they felt what they had to do was extract value from their R and D business lines. They attached all their R and D to their business lines and drove them hard to produce value for the R and D they had.

Peter Nicholson, who is their VP for strategy, got involved in this because they discovered something after a few years. They found they could run down their intellectual capital, but if nobody was filling what he calls the pipeline of possibilities, the capital eventually ran out. Investment in pure research may not have an immediate value attached to it, and in terms of a profit line there may only be a return 20 or 30 years down the road. I think those investments have been significantly devalued over this last decade or so, and certainly in some of the larger company research labs we're hearing a different story now, that you can only go so far in mining value out of existing research. Someone has to conduct the core research, so I would get a little concerned if you were making a suggestion that we should attach research to product value.

The final comment I would make is one I would raise as a question for both of you. One of the arguments that might be made about why there's a difference between productivity in the U.S. and Canada is that until very recently, until the incredible competitive threat—and at the risk of shocking some of my colleagues or changing their view of me, I almost agree with Mr. Penson on this one—

Mr. Charlie Penson: It's almost.

Mr. Reg Alcock: It's almost, yes. I think Canadian business in general, large and small, has been relatively lazy in the sense that it has been able to get fat and profitable by riding on this huge U.S. market and has been able to ride in on their innovation and their technologies. It's only as they've had the whip put to them that Canadian business has had to move more quickly.

I still hear some of that coming out of them in terms of needing more public sector help to compete in this area, and I worry about it.

The Chair: Thank you.

Did you have a response to that, Mr. Myers?

Mr. Jayson Myers: Could I respond on just a couple of issues?

One is the issue of value. I agree. It wasn't my intention at all to say that public policy in support of science and technology should not also promote investing in the development of a knowledge base. The value of that is to make sure we have the knowledge base, the knowledge infrastructure, here in Canada.

However, from a business point of view I don't think that's necessarily where business people see the value. I'm not saying they should, and I'm not saying that's—

Mr. Mauril Bélanger: They should.

Mr. Jayson Myers: That's right.

The Chair: Thank you. Just wait until he's finished.

Mr. Jayson Myers: I agree. One of the most important things for business is to be able to find people who can think for themselves, who can solve problems, who can communicate, who are literate, and who have numeracy skills. Many of those skills are not taught through applied scientific research programs in schools, so yes, business should see the value in developing the knowledge base, and in fact we are saying that this is also important.

What I'm simply saying is that if you're looking at transferring knowledge from the academic world to business, then business is looking at how that knowledge can be commercialized. That was the point I wanted to make.

The second thing is that I agree, one of the biggest challenges we have in developing better innovation capabilities, in investing in new technology, and in increasing productivity rests with the management of Canadian companies. The vision, the view on return on investment, the changes, and to some extent the low dollar... The large American market has made it relatively easy for businesses to continue doing much of the same. It's one of our key challenges to show companies that if they don't change the way they do business, they're not going to be around very long.

• 1045

The Chair: Mr. Alcock, if you feel the need to respond, you may.

Mr. Reg Alcock: In a sense, I think part of the point Mr. Bélanger is making... and I would share his concern to this extent: too often when some of the groups that represent business come before us, they set it up as a question of a choice as opposed to a complementarity. I think the experience from the larger labs shows that without that public investment you don't get the secondary benefits for too long. Rather than coming here arguing, as some do, for the diversion of resources away from the universities into the corporate sector, I think you should be arguing for both.

Mr. Jayson Myers: In fact that's what I am doing. It wasn't my intent to argue that you divert—

Mr. Reg Alcock: No, but—

The Chair: Thank you, Mr. Alcock.

I have Ms. Torsney and Mr. Penson.

Ms. Torsney.

Ms. Paddy Torsney (Burlington, Lib.): Thanks.

One of my questions was about regional differences. Certainly there was some information yesterday about post-secondary education levels in Alberta versus those of other jurisdictions, and I wondered if there was some information that can be teased out on technology adaptation or what have you.

The second question I had was, is there any information that relates our investment in business, new technologies, and innovation to our personal choices? Is there some issue with national culture? Are we early adapters? Do we have the latest in technology and design in our personal lives as compared to people in other jurisdictions, and how does that affect people in their professional life as well? I also wondered if there were any comparative data and if we could help adjust that national culture.

My next question is addressed particularly to you, Mr. Myers. In Burlington, for instance, there's a really good business-government working group established through the Burlington Economic Development Corporation, and some other communities probably have similar bodies. They're really focusing on the issues, namely skills development, encouraging innovation, figuring out what the management issues are, and creating a culture of innovation and energy that gets people out of their smaller businesses and creates an opportunity for them to feed off each other and be a more innovative microeconomy.

Certainly at our chamber of commerce meeting the other night, Contact, which is a newer company in Burlington, was saying to get out there and tell your kids to become technicians, engineers, and everything else. There's a skills shortage. Of course we know that for young people making decisions about career opportunities, it's not just about money. They also want to be doing really cool things, really innovative things, so they have to know that there is that culture in the various businesses in Canada.

The last question I had—because it's better to load them all on—concerns that issue on taking up new patents and what have you. There's a guy in Burlington who's fairly famous, Lou Eckebrecht, who for sixty years has been trying to get people to adapt new patents and to take up new technologies. Part of the issue is that people just have their heads down, they're just working through, and they're using equipment that seems to be acceptable. They're so busy servicing their market that they don't have time to look for the next opportunity, or they're forced into it when this market dries up—I don't even know where to begin to look, and I can't be bothered. So he's always been matching people up and trying to drive that, and if we need some kind of an organization that helps do that, whether it's private sector or a public sector combined effort... So there you go. Those are my issues. If you could address some of those, that would be great.

The Chair: I'm going to have to ask you, gentlemen, to try to be brief because we do have another committee coming in here to meet at 11 a.m.

Mr. Myers or Mr. Baldwin.

Mr. Jayson Myers: I'll go first, and on three points... If you look at the use by Canadians of Internet technologies, we were among the earliest adapters of that type of technology. As individual Canadians, we are in a number of areas world leaders in terms of our personal adoption of new technologies, RIM products, and so forth.

• 1050

But at the same time, there is a very conservative approach to investment in these new technologies. When you get to the business stage, you're absolutely right that companies often are focused on getting the product out the door and keeping their businesses going, especially smaller companies.

I think there's another issue here too, and we're all guilty of this. How many people have software packages on their computers that no one really knows how to use and yet might be valuable in the work they're doing? I certainly have on mine, and I don't know why I bought them. But I think many companies have technologies or machinery and equipment in place that they're not using to the full advantage that they should be used. I think that's another issue.

Regarding the economic development group you've mentioned, I think one of the most important things we can do is to have consortia or groups of business people and people from the community, academics, people from the services sector, and young people, getting together to discuss these ideas, because we really don't live long enough to make all the mistakes in the world, and people really do have to share experiences, particularly when it comes to innovation, new technology.

Finally, if we can't convince our young people that there is a vibrant future ahead of them in the use of technology in industry or in business, then I don't think the business community is doing its job. I don't think it has done its job well, but that's crucial if we're going to make sure we have the skilled and experienced people we need.

The Chair: Dr. Baldwin, do you have any comments?

Dr. John Baldwin: I don't really have a lot more to add. There are these new surveys that are allowing us to look at the extent to which Canadians are linking themselves up and the connectedness agenda. Of course, that's only a very small part of this exercise.

Do we know a lot about how conservative businesses are? Coming back to your earlier question, are they lazy? Those are extremely difficult things to evaluate. We do know from these surveys that it takes far more to succeed in the innovation world than simply being a technologist. This is not a world in which science... Well, science is important, but ultimate success depends upon management in most of these organizations. It involves managers looking around and not just satisfying their core markets, but thinking ahead, not just in terms of investing for some years in the future in terms of R and D, but about what new markets they might try. Over and over, these surveys show that those managers who have more foresight seem to succeed better.

In addition, there are other skills within these organizations that are critical. The human resource management skill is important in small firms. It just means getting the right people. That takes a lot of time and effort, whether it be science people or marketing people. Again, the small firms tell us that if they're worrying about it... We see evidence that if they worry about it, they also tend to grow and be more innovative, using outside evidence.

So all those things are terribly important. Whether we're behind other countries is far more difficult to evaluate.

The Chair: Thank you.

Thank you, Ms. Torsney.

Sixty seconds, Mr. Penson.

Mr. Charlie Penson: Dr. Baldwin, I understand that over at StatsCan you're starting to use a different method for evaluating information in terms of productivity that may change the way we are rated versus the United States, for example. Can you tell us if that's the case and if you are using that at the moment?

Dr. John Baldwin: I'm not really sure what the question is. In the productivity group, we're always looking at various alternatives for measuring productivity. In the volume I left with the clerk, there is some discussion about alternate measures.

However, you may be referring to the new measures of gross domestic product, which include software as an investment as opposed to just an expenditure. That's an ongoing process to re-estimate the GDP. We expect those estimates to come out sometime this summer. I can't speculate on what that will show relative to the United States. It will show more growth than we've had in the past, but I don't know the final answer. They're still putting those numbers together.

The Chair: Thank you.

Sixty seconds, Mr. Lastewka.

• 1055

Mr. Walt Lastewka: I have a very quick question for Mr. Myers.

We talk about exports and exporting to more countries. Every time we do that, we end up exporting more to the United States. Why?

Mr. Jayson Myers: We're very fortunate to have that open market next door, for one reason. A large part of our exports, of course, are exports within the structure of multinational corporations, so it's Ford exporting to Ford, IBM exporting to IBM, and Nortel exporting to Nortel.

For smaller companies, though, this is one of the easiest markets to get into. It's also one of the most competitive and one where you can expand and find the markets for the technology.

I should say, too, if you're looking at exports, it's not just export of product that's important today, it's export of service. If you can't provide the financing, the technical service... that's extremely important.

The Chair: Thank you.

I know there are many more questions, but I need to put a few comments on the record.

Mr. Myers, you were talking about impediments. Some of these impediments or barriers are important to Canadians.

We talked today about what we see as business impediments, but there are also the environmental issues that are tremendously important to Canadians and public policy when we talk about business investment. Coming from an area that has one of the worst air quality problems, knowing that the large majority of our smog is coming from the United States, I think we have to keep these things in mind.

We also have a tendency to talk about barriers when it comes to investment, regulatory investment and measures, but we never talk about the other side of the coin. We always talk about Canada; we never look at the United States. Having had the opportunity to have some education in the United States and study tax law in the United States, I'm always amazed at how we talk about tax law in the United States as if it's in a little volume like this.

When I was in law school in Canada, I got a book like this for Canadian tax laws. I got six volumes like that in the United States. So I think people have this misconception about laws, regulations, and process in the United States, and we compare ourselves on a regular basis to something we don't understand and really don't know about.

Then we talk about branch plant economies and investment. I look at Windsor, where I come from, and Michigan right across the border, and I look at DaimlerChrysler as a good example of investment in Canada being good for Canada and for their entire company worldwide. Investment in the United States is good for the United States, but also for their entire company worldwide, which benefits Canada.

I have jobs in Windsor because there's a huge tech centre right across the border in Rochester Hills that employs 5,000 people, which employs a lot of Canadian engineers who actually live in Canada and drive to work over there. There are cross-border benefits to these types of operations, and I can't see that an investment in automotive research in Canada could be a bad thing because it benefits a worldwide company.

In fact, if we don't do things like that, we won't have those jobs in Canada and we won't continue at that pace. That's one place where we're really falling down. I'd love to get into a whole automotive discussion here, because when you look at what the United States is doing and at what the U.K. is investing in automotive, and you look at what we're investing, it's a sad story.

So I really think we should come back to this at another place and time, but we are out of time and the health committee is waiting for us.

Mr. Mauril Bélanger: I want to thank Dr. Baldwin for this, and I was wondering if those are available to us at no cost.

Dr. John Baldwin: Of course.

Oh, the studies. I'm sure Johanne will make sure that whatever you need is provided to you.

The Chair: I want to thank Dr. Baldwin, Mr. Myers, and everyone today.

Thank you. The meeting is adjourned.