INDU Committee Meeting

STANDING COMMITTEE ON INDUSTRY

COMITÉ PERMANENT DE L'INDUSTRIE

EVIDENCE

[Recorded by Electronic Apparatusro]

Tuesday, November 2, 1999

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[Englishro]

The Chair (Ms. Susan Whelan (Essex, Lib.)): I call the meeting to order pursuant to the committee's mandate under Standing Order 108(2), a study concerning productivity, innovation, and competitiveness.

We're very pleased to welcome today Dr. Art Carty, president of the National Research Council. He's been here before, and we appreciate him returning to the committee to brief us once again. Dr. Carty.

Dr. Arthur J. Carty (President, National Research Council of Canada): Madam Chair, thank you very much. I'd like to begin by saying how much we appreciated the support the industry committee gave us in their last report. Thank you for inviting me back to speak about innovation, research and development, and productivity. I'd like to make the presentation.... Do I have an hour and a half or two hours? How long is the meeting?

The Chair: The meeting's scheduled for two hours, but we don't want you to give a two-hour presentation.

Dr. Arthur Carty: Of course not. I'll try to do it in two parts. In the first part I'll look briefly at some of the components of innovation and economic growth and try to assess where Canada has got to and whether we're on target to meet those challenges. In the second part I'll try to focus a bit more on productivity and innovation.

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My message in the first part is that Canada is making real progress toward developing an innovative society and meeting some of Canada's global competitiveness needs. The last federal budget, and in fact two budgets before that, included significant new investments in programs that will foster innovation, the knowledge-based economy, and ultimately, productivity.

The thrust of my argument is that the investments have been focused in two principal areas: the research-based university side of R and D, and the industrial or development side. There is a critical area between these two sides that can be described as the innovation gap, and that's where we need to focus our attention in the future because it desperately needs some support.

I'd also like to try to convince you that the National Research Council is the government's most dynamic and diverse organization for innovation and influencing economic growth here in Canada. I'd like to demonstrate some of the examples we have, to show that it can produce results.

I think there's a strong consensus in both the research and business communities that innovation is the key to economic growth in the knowledge-based economy, and the key to a country being able to compete in the global marketplace. The action agenda expressed it pretty well, and I'll quote from it:

We need a steady stream of new ideas, a well-educated work force for the knowledge economy, and...mechanisms to transfer ideas effectively from the laboratory bench to the marketplace.

I think that expresses it very well. I want to underline “mechanisms to transfer ideas effectively from the laboratory bench to the marketplace” because that is the essence of the innovation gap.

In terms of productivity, it's very difficult to invest in productivity itself, but we do know that two key components of productivity are research and development and innovation.

Let me first of all say a few words about research and development, and look at Canada's performance. I think you have this on your hard copy; there are also overheads. Let's just look at these figures. In 1997, you can see that Canada is well down the list of highly performing countries, as far as R and D is concerned. Sweden and Finland are two of the countries at the top end, but you'll also note that some of the smaller Asian tigers, like Korea and Taiwan, have grown significantly and are now above Canada. The 1998 figures show that Singapore has also risen above Canada.

So our performance, in terms of investment in R and D as a percentage of gross domestic product, is not as good as our neighbours'. In comparisons, particularly with our large neighbour to the south, the United States, that is a key factor in productivity. The United States has managed to keep up its investments in R and D and enhance them. So there is quite a big competition there that I'd like to point out. Canada has to continue to invest, in order to catch up with its competitors and also reap the benefits that come from a knowledge economy.

Let me show you the positive points of this. Over the last three years, Canada has invested significantly in a number of areas. For example, in 1997 the networks of centres of excellence program was strengthened, and the Canada Foundation for Innovation was established, with funding of $800 million. That was in the 1997 federal budget.

In 1998 the budget restored the funding for the granting councils NSERC, NRC, and SSHRC to the 1994-95 levels. That was the reverse of program review cuts. The government also, at that time, made permanent the base of funding for the networks of centres of excellence.

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In this last budget, 1999, the government carried the process further. As you know, $1.8 billion was invested to support the creation, dissemination, and commercialization of knowledge in support of employment.

There is a number of measures in there, including $465 million over three years for the youth employment strategy and $110 million for the Canada jobs fund. I can list several initiatives to improve the capacity to produce knowledge: an extra $200 million this year for the Canada Foundation for Innovation; $75 million for NSERC; $15 million for the Social Sciences and Humanities Research Council; and $90 million over three years for the networks of centres of excellence. Those examples, just themselves, are $400 million.

The recent Speech from the Throne, as you may remember, added the promise of 2,000 new research chairs in universities, in part to bring back highly qualified people from other countries to establish their presence in Canada and also to halt the brain drain.

That's the investment on what I would call the research base side. If we look at the other side of the equation, the development side, there have been investments there as well, including $150 million for TPC. The Business Development Bank of Canada received $50 million of an equity injection. There was an investment in geomatics systems of $60 million over five years, and $60 million for Smart Communities. Again, the investments total more than $300 million.

Those two things together—that is, investments in the research base in the universities principally and for development of Technology Partnerships, the SRED tax credits, and of course some additional funding for IRAP—have been a great help. There is no question: It is enhancing Canada's capability to innovate, to carry out R and D, and to be more productive.

But in the middle of this spectrum, this research and development spectrum from basic research to development, there has been in fact very little happening. This is where the innovation gap lies. As the OECD has expressed it, our capacity to translate ideas into products for the marketplace is not as good as other countries'.

So this is the overall picture. We are doing very well at the sides, but we need to invest in the middle. We're facing major challenges, I think, because of that innovation gap.

Now, I would like to convince you that the National Research Council has all of the tools to be able to contribute to the solution to that innovation gap. The National Research Council is positioned, as you see, in the middle of that spectrum. We do carry out basic research and development, and in all of the areas in which we invest, we expect to be competitive with the best in the world.

We also, in certain sectors, contribute substantially to the right-hand side of this, to development. But our principal activity is bridging the gap, is actually working in partnership with other players—large and small enterprises, universities, and other government labs—to not only develop technology but also translate that technology into products for the marketplace. So we're very much an innovation organization. We're a knowledge and innovation organization.

As far as our own sources of funding are concerned, let me try to summarize what I've been saying here. I'm going to show you a list of the things a country needs to innovate through research and development and science and technology.

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I've mentioned long-term investment in the research base, and that's absolutely crucial, but in addition to that, you need an investment in the middle of the spectrum—namely, focused strategic research in areas that are crucial to Canada's economy, such as the wealth-generating areas of aerospace, biotechnology, and advanced manufacturing.

That has to be focused. In order to ensure that the technology transfer occurs, much of the work has to be done in partnership. So from the beginning of a project, you work in collaboration and ensure that this happens.

Obviously, highly qualified resources are needed. We need to ensure that we have those.

National facilities and infrastructures are a key component, as are partnerships and networks—regional networks, national networks, and international networks. One must be plugged into the research and technology that is going on in other places right around the world.

You have to invest in the knowledge and information infrastructure and be able to access information when needed. You have to have mechanisms such as IRAP provides to provide support to innovative firms. IRAP is the world's best program for supporting small and medium enterprises in R and D. Technology transfer and risk capital, of course, are also very crucial.

Now let's compare that with what NRC does. What I want to emphasize here, looking at this next slide, is that we do a number of things that are crucial to innovation and crucial to our capacity to innovate.

First of all, we're a national organization. We're the federal government's principal R and D organization. We have a presence right across the country. We have labs and facilities in areas crucial to Canada's growth through sixteen institutes and four technology and innovation centres. We provide crucial parts of that national infrastucture, including wind tunnels, research aircraft, and bio-process facilities.

We have elements of the information infrastructure through the Canada Institute for Scientific and Technical Information, and we have through IRAP a network of technology advisers that links up to the small companies in this country so crucial to growth and provides them with technology advice and financial support.

If you put those two things together, I think you will see that we provide significant elements of the national infrastructure.

I'd like just to pause here and mention what happened to NRC in the program review exercise, and then point to the challenges we have as a result of that.

Very briefly, in the program review exercises, we lost close to $89 million. Our only saviour over the last four years has been the fact that through our own innovative capacity, and our own ingenuity and agility, we've been able to raise revenue. That revenue this year amounted to about $78 million.

Now, I would also point out that for every dollar we raise in revenue we have to provide a service, so it's a dollar gained for a dollar spent.

In terms of that erosion of our research base, we did in the last budget receive a $5 million increase to our research base. That of course is ongoing, so it's $15 million over three years. That's a relatively small portion of what we lost in program review.

I'm not trying to make the case for reversing that, but I'm trying to make the case that this has posed real challenges for us in doing the things we are most capable of doing—that is, contributing to the nation's economy and to competitiveness.

As this next slide demonstrates, here are some of the challenges. I'm going to talk to you in a few minutes about regional and community innovation.

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We have put together a program of regional and community innovation using the capacities of local communities to innovate, which we believe is something Canada has to do. It is appropriate for the way innovation works, and it will provide clusters of expertise and technology growth right across the country. But we're unable to follow through on that because of the fact that we have a shortage of funds.

There are lost opportunities in some strategic research areas because we don't have money to invest, for example, in partnerships with others. We are losing people from NRC to other countries and we're less able to attract the brightest and best researchers.

We work very much on the basis of collaborations in partnerships and alliances, but if you don't have resources to bring to the table it's actually very difficult to build alliances and partnerships and therefore to lever the results. And of course resources have been eroded, and our infrastructure has been eroded as a result of that.

So that is the overall picture as far as NRC is concerned. I'd like to show you that we're in every part of the country. The squares here represent our institutes. The circles represent where we have an IRAP presence. And there are triangles in Alberta where we have virtual innovation centres.

I think you can see from this that we are truly a national organization. We have a federal presence right across Canada, almost in every community.

I'd like to also give you some insights into why I say we are a knowledge and innovation organization. I've chosen to illustrate that by having across the top of this overhead a number of locations. These happen to be the cities in which our institutes are located.

On the left side are the key components of the innovation spectrum to which we contribute. So going from the top elements of the national research and development infrastructure, all of our institutes have some components of the national research and development infrastructure. For example, here in Ottawa, you know that we have wind tunnels at the airport. In Victoria, we have telescopes that provide services to the academic community.

Second from the top is research and development training. Where there is a bar across the graph, it means we carry out the activity in all of those locations. Where there is a cylinder, it means we have special activities in that particular area. So in research, development, and training we have sites in Winnipeg, Ottawa, and Montreal. This means that we have a special program to train special kinds of people. In Winnipeg, it's collaboration with Red River College to train technologists in magnetic resonance imaging for hospitals and research centres. That has been very, very successful. It's a targeted program to a particular type of expertise.

In Ottawa, we have specialized here in the national capital region in reskilling scientists and engineers to become software engineers. That has been again a tremendously successful program in which every one of the students involved has found a job and been placed in the companies that are sponsoring the program.

We also have research going on across the country. That's the third line down. We do technology development in all of our locations. IRAP, the Technology Partnerships Canada industrial research assistance program, pre-commercialization assistance program, plays a great role in technology diffusion and commercialization with small companies. So we link up there to small companies. Our laboratories interact with both small and large companies.

We have contributed to innovation through the development of incubator facilities that help small companies to start off and grow in our facilities. For example, in Montreal—and I'll show you an example of this later—we have an incubator associate with our biotechnology institute that has 16 small companies incubating. In other words, they're given support, facilities, expertise, and access to everything we have in our institute to help them grow and create jobs and wealth for Canada. And we've been involved, going down that map, in regional innovation systems and national codes and standards, which are also very important.

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On the left-hand side are all elements of the innovation spectrum. We have a presence and are expanding our presence in a number of those areas, particularly in incubators and regional innovation systems.

The next overhead shows some of the lessons we've learned about what it takes to drive innovation—what it takes to drive technology transfer and knowledge transfer.

There's no question that the best way to help companies to innovate through R and D is to work with them, to have shared collaborative projects in which both the National Research Council and the company understand the nature of the project and the objectives of the program from the beginning. That way you can transfer people, ideas, and technology effectively into the private sector.

We know that it's necessary to invest for the long term. We get into R and D in areas, and it's essential, if you want to have maximum impact, that you continue to invest in productive areas over a long period of time.

Standards are important. We need to manage intellectual property. We need to think ahead to what is coming next in terms of technologies, what will be the next disruptive technology, what will be the next breakthrough. We need to do that technology forecasting and then invest for that in the future.

In a minute I'm going to say a bit about support for local and regional innovation initiatives and working with local champions to form strategic technology clusters.

You've probably seen this before. Michael Porter says “Innovation is the central issue in economic prosperity”. I tried to convince you at the beginning that NRC is the government's best agent for innovation and the most successful engine of economic growth.

Now let's just take a little bit more time to analyse how innovation works, because I mentioned that R and D and innovation are crucial to productivity. Innovation is not a linear thing. We used to talk about an innovation line or an innovation chain, but it isn't like that. Innovation is a complex phenomenon. It's a series of feedback loops in which all of the players interact all the time.

Let's have a look at a typical innovation system. Now, I would point out that innovation is often a local phenomenon. And I think you all know, from your experiences, that in communities the exchange of information, insights, and technology that can occur can often help spur economic growth by fostering clusters of firms.

This is an innovation system here. Right at the middle of it are the innovative companies, small or large. Now, any company that is going to be innovative in the knowledge-based economy has to clearly have access to R and D. It needs to either have its own R and D or it needs to find it, to interact with a player such as a government lab or a university. They need to have other elements of the science and technology structure, such as information sources. They need to know where the other sources of technology are and how they can access them.

Government has a key role to play in this innovation system by providing the right environment in which innovation can occur by setting the policy and the regulation. It's also important, of course, to have highly trained people, and the educational institutions must be linked into this system of innovation. And firms need financing, so you have to have links to the financial sector.

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Any breakdown in these linkages shown by the connections here will make an ineffective innovation system. On the other hand, if you can make all of these things work and you can get all the partners here talking to one another, interacting and working together, then you have a much more effective opportunity for growing companies under moving economic growth. Of course we also need to know that even though innovation might occur locally, it has to be put in a global context, because we live in a global marketplace, and somehow it has to also be sustainable. So this is what we would call a system of innovation.

NRC has had a good deal of success in fostering this community and regional innovation. A key example is Saskatoon, where there is now a cluster of about a hundred firms in the agriculture biotechnology area. They have grown up in Saskatoon, a most unusual place to find a leading-edge high-tech community. They have grown because of a realization of agricultural biotechnology in the community; of how they were going to grow their economy by the presence of an NRC lab, the Plant Biotechnology Institute, the University of Saskatchewan, and Agriculture and Agri-Food Canada; of working together with the local community; of drawing companies into the region like a magnet; of having a research park where they could incubate and grow. As a result, Saskatoon is now a town that the New York Times and the Wall Street Journal write about as a centre of innovation. That's just an amazing transformation over a period of fifteen years.

I don't have time to do them all, but let's have a look at another example. Here's a quote from Philippe Walker, the director of molecular biology at the Astra Pharmaceuticals research centre in Montreal—and I think he puts it correctly: “We found that NRC was the centre—the heart and soul—of a cluster of expertise. A large pool of talent....”.

That institute now has 500 people, 250 of whom are guest workers, visitors working in the labs, collaborating with our people, and making innovation happen. A large pool of talent has been drawn to the Montreal area largely in response to the opportunities provided by the equipment and the expertise. BRI has acted like a magnet to make that region grow. It hasn't been solely responsible for Montreal's pharmaceuticals industry, of course, but it has helped.

And here's a little bit more on this, emphasizing NRC's role. One of the main areas that BRI has been involved with is the identification and characterization of promising drug targets. The expertise, the physical presence, and the facilities attracted what was Bio Intermediair initially, but is now called Dutch State Mines, a major multinational from Europe that established in North America for the first time, adjacent to our Biotechnology Research Institute. They now have a hundred researchers in that building adjacent to our facilities. Astra itself co-located in the building before its own facility was finished, and Merck Frosst, which was building new space, had also co-located in BRI.

You can see the list of the major clients there, but one of the added features is this concept of incubating small companies, starting them from scratch and growing them from small and medium-sized enterprises into bigger organizations. We have a record in Canada of growing a biotechnology industry from scratch, and we have several big players now, such as BioChem Pharma, Quadralogics PhotoTherapeutics, and a whole host of small companies that have done that.

Around this institute—actually, in a building that we opened last October—are sixteen incubating companies, four of which came to BRI from the United States, and there are a very large number of workers in those buildings. These are companies that will grow and become the giants of the future biotechnology industry.

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I'd like to move on and try to give you some examples of how productivity can be influenced in many ways by R and D and by innovation. I might be prepared to answer about why we think the U.S. is somewhat more productive than Canada at the present time.

If we think of productivity as output per worker, an increase in productivity means output for work has to be increased. You can think of doing that in a significant number of ways, the first of which is by being more efficient at doing things—in other words, by increasing efficiency in a process, by allowing more people more time to engage in other activities that could also be productive.

One example is a project we undertook with Syncrude in Alberta. What it involved was working with Syncrude to develop injection systems and nozzles in their cokers, which are used to separate the oil from the tar sands, to fractionate the oil and to then refine it into crude. We've worked with Syncrude, and through innovative nozzle designs and improving the process of producing aerosols from the fuel, the manufacturing efficiency of these cokers has increased many times. In fact it's going to save many millions of dollars for Syncrude simply through an increased efficiency.

I'd like to give you another example, and that's an integrated diagnostic systems project that we've undertaken with Air Canada and General Electric, two companies that have been collaborating with NRC since 1993. This is basically to develop a ground-based diagnostic system that is capable of monitoring aircraft in flight. It's therefore capable of providing faster, more accurate and more consistent decision-making to technicians and to people on the ground. Simply through its Airbus 320 fleet, this is going to save Air Canada a great deal of money.

This is really categorizing real-time aircraft generated information for aircraft in flight to the ground. It speeds up the decision-making in handling a problem. It spots a problem before it occurs, so it can improve repair maintenance turnaround time and will save millions of dollars annually in maintenance costs for the companies that are involved. Ultimately, of course, it might be possible to help spot problems and therefore save aircraft that might run into difficulties. That, of course, is going to save money, it's going to save time, and it's going to be very efficient for the aircraft companies. It's another example of increased productivity.

A third element there is the urban infrastructure guide that we are developing with municipalities across the country. I think most people know that we have a major problem in Canada and the western world in terms of our infrastructure. Many of our pipes and sewers were built fifty years ago, are in serious need, and are deteriorating.

Canada will be able to save itself a great deal of money and a lot of effort if we can rationalize and standardize the way in which we deal with urban infrastructure. In other words, we standardize and have regulations and codes so that when infrastructure is replaced it's replaced in the same way right across the country. This is a large task, but it's very important that we do it in a standardized fashion. Of course it will save money , because there will be standardized processes, standardized equipment. Again, you can call this increased efficiency.

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There's another example there of how our nozzles have been used for agricultural spraying, reducing the cost of pesticides and reducing environmental impacts.

Now, you can become more productive and more effective by improvement or diversification of an existing industry—in other words, creating an opportunity for an industry that might not have been there before, enabling it to expand or continue. An aquaculture station in Nova Scotia, associated with the Institute for Marine Biosciences, has recently, working with Connors Brothers in Nova Scotia, found a way to aquaculture haddock for the first time. We have grown haddock from very small fish to much larger ones and shown that it can be done consistently. Haddock has never been aquacultured before, so this is going to create a new opportunity for Canada in an area where we certainly need innovation. This is a very innovative, new development.

The next one is new manufacturing processes. In the summer we opened a virtual environment technology centre in London, Ontario. This is a manufacturing virtual environment centre that allows companies to see in virtual reality how their manufacturing cell, or their process, will look in reality. So a company, rather than going through tedious model designs and experimentation, trial and error, can actually do this now in our facility via high-powered computation and virtual reality, can actually see in real time what their manufacturing facility will look like. This is a fantastic way to plan manufacturing, to save a lot of money, and to do it absolutely precisely. This is going to revolutionize manufacturing and revolutionize prototyping. So this is again reducing costs and improving productivity by using innovation and innovative R and D.

There is another way you can innovate and become more productive, of course, and that is by developing entirely new processes, new technologies that will, in some people's words, be disruptive, will do new things in different ways.

I don't have time to go through all of these, but just look at the bottom one, wavelength division multiplexing. This is a technology that is now revolutionizing the communications industry. In 1989 we began a six-year project with Nortel, with EG&G, a communications research centre, and with five universities in a consortium at a time when wavelength division multiplexing was just a dream.

Now, in 1999, you've seen companies like JDS Fitel and Nortel putting tremendous emphasis on wavelength division multiplexing. All of their growth is occurring in this area. What wavelength division multiplexing means is you can put many wavelengths of light down an optical fibre and then take them out at the other end and deconvolute them and increase the band width of information you can transfer. You can communicate very large amounts of information very quickly by using wavelength division multiplexing. This is the key, of course, to the Internet, and it's the key to the growth of much of the communications industry.

That was just a dream in 1989. If we hadn't been there to invest in this and the companies hadn't really realized that this was ultimately to be a great growth area, it might not have happened.

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Here are some other areas where there's a bit of a revolution. NRC has one of the best thin film groups in the world, and we've developed that over 25 years. It's a great example of how a long-term investment in a technology will pay off in the long term. Thin films are crucial to wavelength division multiplexing because the deconvolution of the wavelengths actually depends on thin films and filters that go into the multiplexers.

Our thin film group is in so much demand that we simply can't satisfy the requirements of industry. We've spun off a small company called Iridian Spectral Technologies in order to be able to accommodate some of the demands, which now of course are almost certainly outside of development and into manufacturing. That company started only last year, and in June had 12 employees, and is growing rapidly.

Another one is silicon germanium chips. Germanium is an element very close to silicon. We, together with others, have found how to grow wafers of silicon germanium. This is again extending silicon technology to make it more applicable to areas such as GPS and wireless. Again, this is what you might call a disruptive technology. It's going to see significant growth in the next few years. Nortel is gearing up to do some silicon germanium. We also have a spinoff company here, called SiGe Microsystems, which has 25 employees, and is now in the business of attracting major investment.

There is also 3-D imaging, the ability to capture images in three dimensions and full colour, which is again something we had invested in for a very long period of time. It has really innovative applications in manufacturing, in mining, even in mundane things like scanning roads. This ability to capture the image of something in three dimensions very rapidly through 3-D synchronized laser scanning is revolutionizing many industries. There are three spinoff companies here.

One of the major applications, though, interestingly enough, is in culture, because this technology is capable of capturing the images of ancient artifacts—paintings, sculptures—capturing them and storing them and making them available on a computer screen so the viewer can then manipulate them in three dimensions and see them in much greater detail than the object itself.

Our group in the Institute for Information Technology has done projects now in the Three Gorges in China, capturing some of the images of the sculptures in the Three Gorges, which will be submerged when the water fills the dam. We've done some scanning for the Louvre to capture some very valuable paintings that can't be shown in public. We've done some work on Michelangelo's David in Italy. We've had projects in Israel. This technology is just about ready to take off in terms of creating the virtual museum and virtual reality for a number of things.

These are what we call breakthrough or disruptive technologies.

The Chair: Dr. Carty, I know there are only a few slides left, but if possible could you wrap it up in the next five minutes?

Dr. Arthur Carty: I think I'm just about through.

I would like to mention the global context. I put that on the innovation system because Canada is a large country geographically, a small country in terms of population, and we produce about 4% of the world's knowledge. So it is necessary for Canada to be linked internationally, and it is important that we have organizations that can open doors in other countries through our R and D connections. The credibility and stature of NRC in other countries does in fact do that. So we've now undertaken almost a dozen missions with small and medium enterprises to other countries. We've used our relationships internationally to open doors for those companies and to help those small companies establish businesses. The latest one was in China three weeks ago. We've had missions to Taiwan, Singapore, Korea, and a number of others.

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Of course the international presence helps attract international investment, and it also plays a role in bringing excellent researchers back to Canada.

I mentioned last time that NRC had done a lot of homework and thinking about which technologies Canada must invest in for the next century. We winnowed down from a number of proposals to these five, which are crucial.

The aerospace industry is growing very rapidly in Canada, and investing in aerospace manufacturing capabilities and also in a gas turbine environmental centre is badly needed to help keep our companies competitive, small and medium companies.

We see a need to follow on from the microelectronics revolution to build an optoelectronics prototyping facility. Optoelectronics is the marriage of optics and microelectronics, light and microelectronics. This would provide world-leading capabilities—in fact capabilities unique in the world—for prototyping of these new kinds of devices, which are going to drive the telecommunications revolution in the future.

Linking our sources of information up in Canada through a scientific knowledge network is important. Molecular biology and genomics are going to be the keys of the first ten years of the next century. We propose a genomics initiative.

Fuel cells are also an industry where Canada has at the present time the possibility of being the lead country in the world, through companies such as Ballard and a group of small enterprises. We've proposed an initiative, which has been announced, actually—a national fuel cell initiative. The Nikei projects that fuel cell business will be a $100 billion business by 2020. So you can see the opportunity for Canada there if we invest in the right way and if we're innovative and use R and D correctly.

Last, we're very much convinced at NRC that regional and community innovation is one way we can really move our economy forward. Growing clusters in communities—clusters of activity, clusters of firms—and this emphasis on regional innovation strategies will really pay off for Canada.

There's evidence that in other parts of the world it's paid off. We've done it in Saskatoon, in Montreal, and here in the national capital region. We'd like to expand our activities. We're proposing expanding these existing regional activities we have, some of which I've mentioned, and getting into five new community innovation initiatives in those regions I've pointed to.

Investing in innovation through utilizing the resources and the capabilities of communities, putting NRC's resources to work to help that, and bringing communities together is a strategy we'd like to invest in. Also, an investment in our national infrastructure to enable that will be crucial. So we're asking for $70 million in new funding to be able to do that.

You might remember that our request for A-base funding last year was $75 million. We did get $5 million in the budget, so we've focused our activities on regional innovation and reduced the request to $70 million. So we'd like to ask for your support in this, because it is a program that's unique to NRC and that we can exploit for Canada's benefit.

Thank you.

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

Now we'll turn to questions. Mr. Brien.

[Translationro]

Mr. Pierre Brien (Témiscamingue, BQ): I'd like some information on the clients, on the private-sector firms that do business with you. Are they mainly large corporations? I have the impression, and it's perhaps a wrong impression, that it is mostly large corporations that are responsible for innovation and research and development, rather than our small and medium-sized enterprises.

In terms of the private-sector clients with which you do business, how do you see the situation?

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Dr. Arthur Carty: That's not really the case. We conducted a survey and also a review of our client base at several institutes and we found that most of our clients were SMEs. Of course, there are some large corporations, but most of the firms with which we work are SMEs.

The Industrial Research Assistance Program—IRAP in English and PARI in French—works exclusively with SMEs; most of these companies have fewer than 50 employees. Its sole purpose is to provide advice and opinions, and investment in research and development, to these firms.

Mr. Pierre Brien: I see that the gap between Canada and the United States is very wide, as far as productivity is concerned. In the United States or in other countries, does the government provide more funding for an organization such as yours, or is this something unique to us? Or is it because of our way of doing things that we must provide greater funding for research? Do other countries, and in particular the United States, provide a great deal more funding than we do?

Dr. Arthur Carty: In the United States, there are national laboratories:

[Englishro]

Argonne National Laboratory, Los Alamos, Brookhaven, Oak Ridge, Berkeley, and Lawrence radiation laboratory.

[Translationro]

I have to say that they are much better funded than ours. Most developed countries have national laboratories. As far as the IRAP is concerned, there is an equivalent program in France, for example, which is called Anvar. It's a program that provides assistance for industrial research. However, it is widely known that IRAP is the best program in the world.

We have received requests for cloning IRAP in other countries, including countries in Southeast Asia. It is well known that IRAP is a very good program.

Nevertheless, as I showed on the first slide, the majority of developed countries—that is, our competitors—provide greater assistance to research and development than Canada.

Mr. Pierre Brien: I have a final question for now. What about your ability to attract first-rate researchers, to pay them well and to keep them on your teams? Do you have trouble setting up solid research teams?

Dr. Arthur Carty: Yes. In a number of fields, there is a great deal of competition. For example, in the field of information and telecommunications technology, there is a lot of competition here, in the City of Ottawa, and in several other cities across the country for graduates with degrees in electronic and electrical engineering and in computer sciences. The competition is strong. In this field, we are competing not only with the universities, but also with the private sector.

I must also point out that we have an advantage at the NRC. The research environment is excellent. We have considerable expertise, even though it's true that this is being eroded. A number of our laboratories have infrastructure and equipment that are on the cutting edge of research. We offer researchers an excellent working environment. If they are to convince a researcher to leave the NRC, companies have to offer a salary that is between 30% and 40% higher. This excellent environment that we are in a position to offer them represents a very great advantage. Researchers are able to work on innovations alone or in teams, which is important.

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In the private sector, research is often conducted over a period of one or two years, which means that researchers must change fields frequently. A number of factors come into play, but up until now, we have been successful. On the other hand, in the fields of information, telecommunications and computer sciences, the problem is more serious.

[Englishro]

The Chair: Thank you.

Mr. Murray.

Mr. Ian Murray (Lanark—Carleton, Lib.): Thank you, Madam Chairman.

Dr. Carty, it's good of you to join us again.

I don't want to be unfair, but I have the impression after listening to you that our problems with productivity and innovation would be solved if NRC got more money. It's sounding to me as if perhaps the sky is the limit as long as there is sufficient funding for NRC. I'm sure you didn't mean that. Perhaps it was the focus on specific examples, when we've been taking a rather broad-brush approach to the subject of productivity and the innovation gap.

I had a few questions as you were going along. I jotted down some notes; they're a little scrambled.

When you're talking about having various technological clusters across the country, what clusters do you envision? Say the money was there to do this. What are we not doing now? As a corollary to that, if we were able to fund something that would help create those clusters, would we be able to find the talent we'd need as well? Or what kind of time lag would there be before those people became available? Obviously it depends on what discipline we're talking about, but have you given any thought to that?

Dr. Arthur Carty: Yes. For each one of the locations on the slide, we've given preliminary thought to the ones listed under “Potential”. As well, for example in Saskatoon, we have a blueprint for innovation, which we developed with the Saskatchewan government and the local community. That's a well-defined blueprint and action plan, but we don't at this point have the resources to fulfil the action plan.

Mr. Ian Murray: When you say resources, do you mean financial?

Dr. Arthur Carty: Yes, there are implications that in order to move this ahead several steps, we need to invest in new initiatives in Saskatchewan, whether it's training or research partnerships. We're just strapped, and that's the case for several of those things.

In terms of thinking about how we can be innovative, for example we've had preliminary discussions with Nova Scotia on developing a medical diagnostics sector in Halifax, because Dalhousie University and the local hospitals have considerable expertise in this area. They believe that with our help—and we have an institute that's devoted to bio-diagnostics—they can put together a strategy for creating an industry in Halifax based on diagnostic medicine. It would include magnetic resonance imaging and some infrared imaging, and it would link up a number of players in the Halifax community.

In Alberta we've had discussions with the Alberta government. We don't have a physical presence in Alberta, so there is a lot to be gained by having an investment there. The Alberta government is quite interested in working with us to develop some activities in biotechnology, where they have great expertise at the University of Alberta, and perhaps also in Calgary.

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So we've done some preliminary scoping out of what could be done with extra resources, and from previous experience we think this has great potential.

Mr. Ian Murray: You mentioned the example of fuel cells, and obviously we have Ballard Power Systems out in Vancouver, or at least in B.C.—I'm not sure if they're in Vancouver. There has been significant investment by major auto manufacturers in their technology. When you mentioned that, it raised the question of whether you thought we had not invested enough or appropriately. There was some federal money that went in there.

Dr. Arthur Carty: Into Ballard?

Mr. Ian Murray: Yes.

Do you think we should have been doing more? Is that an example of someplace where we could have done more, or has that taken off on its own now? It's a very promising technology, and it seems that it has been recognized as such.

Dr. Arthur Carty: Yes. Ballard has had investments from DaimlerChrysler and also—

Mr. Ian Murray: Ford.

Dr. Arthur Carty: —from Ford, and they've had some orders for fuel cells from Nissan and Toyota. Those are not strictly collaborations, such as the other companies they're working with.

The whole thrust of our fuel cells initiative was actually to embed companies like Ballard in an R and D infrastructure and a network of component suppliers that would ensure that Ballard didn't move somewhere else, because Canada really is at the frontier of what's going on in the fuel cells area. That's why you get investment from Daimler-Benz, DaimlerChrysler. It's because of the recognition that the Ballard technology is superior, and also the recognition that there are companies like Quester and Global Thermal Electric, smaller companies but with excellent technologies of their own, that can contribute to our manufacturing industry.

In order for Canada to benefit from this and to become the leader in the manufacturer of fuel cells, you have to not only have the fuel cell stacks, which is Ballard's expertise, but you have to have companies that specialize in the storage of hydrogen, in the systems, and in the catalysis of the production of hydrogen from other fuel sources.

The thrust of the fuel cells initiative is to do that, to have an infrastructure of R and D in Canada through small companies, through universities and through NRC, that will essentially prevent Ballard from doing anything elsewhere, not in Canada. We don't know whether it will work, but this is an opportunity that only comes up once every fifty years, to become a world leader in the manufacture of a major power source.

Mr. Ian Murray: But are we doing this the right way? That is really my question. Are you suggesting that we are going about this the wrong way, or should we be pumping more money into Ballard? I'm not clear on how you feel on that. We made an investment, but others have stepped in now who have much deeper pockets, if you will, than the federal government for that.

Dr. Arthur Carty: No, I don't think the federal government can do everything for private sector investments. As I said, government can create the environment, the regulation, and can provide some help for R and D, but it really can't go any further than that. So I can't say that what has happened is wrong. After all, Ballard has reached this point with significant government support.

The small companies that have grown up around Ballard recognizing that there's a fuel cell capability and that they have components that can be used for the fuel cells have been supported by IRAP. They have also been supported by government. So the cluster is developing.

It isn't surprising that major companies that see the internal combustion automobile engine disappearing are going to invest in fuel cells wherever they find them. So the question is, can you keep it here and can you provide the infrastructure that will ensure that Canada is the major manufacturer of these things?

The Chair: Thank you.

Mr. Lastewka, please.

Mr. Walt Lastewka (St. Catharines, Lib.): Thank you, Madam Chair.

I have a couple of questions. You mentioned that we didn't have any presence in Alberta, but I noticed that Alberta was the only area where they had virtual innovation centres.

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Dr. Arthur Carty: The virtual innovation centres were an experiment we started two years ago. They are essentially one-person offices. The thrust of those two offices in Calgary and Edmonton is to bring partners together to create the glue, if you like, for innovation to happen on another scale, and also to evaluate the potential for technology growth. So that's an experiment we tried. It was funded through IRAP, and it has been successful up to the limits it has, but you have to go beyond that. I think it has helped NRC to establish credibility there. We now have a physical presence.

Mr. Walt Lastewka: We talked during this morning's session about innovation and patents, and so forth. How many patents would NRC register a year?

Dr. Arthur Carty: We would have probably in the order of a hundred patents come out in one year. We're a significant source of Canadian patents, but by no means the total.

Mr. Walt Lastewka: You touched on IRAP in a number of areas. I've had the opportunity, especially in the last two years, to do a lot of travelling across the country and work with IRAP people and NRC people. The one thing that really comes home to me is that the IRAP funds reach into rural and smaller communities much better than the other funds. You mentioned the $70 million. Right away, that goes into Halifax and some of the other areas that you mentioned. Naturally it goes into larger communities and urban areas; let's put it that way.

Dr. Arthur Carty: It doesn't exclude companies in urban areas from participating in the cluster, of course.

Mr. Walt Lastewka: I realize that, but so often across this country we have so many applications for IRAP and we always run out of funds. I'm a little bit surprised that you didn't mention that this is the case continuously, because so much bubbling up goes on across the country and we end up not funding because we're short in IRAP.

Dr. Arthur Carty: I suppose I should have mentioned that IRAP in fact, as you say, has run out of money again. The economy is growing. The recognition that R and D and innovation are essential is also making companies think they need to do new things and be innovative, and it's creating a demand that quite honestly we haven't been able to satisfy. IRAP could use significantly more money than it has.

Mr. Walt Lastewka: It seems to me that IRAP hits rural areas, smaller communities and small businesses, and gets the message across that businesses need to do research and development for their own benefit. It seems that those companies that did get IRAP funds, either to get kicked off or got IRAP funds and worked with the IRAP people, are the ones that come back, because they innovate again and again; they don't just stand still.

Dr. Arthur Carty: I would say, though, that these days in NRC the relationship between the IRAP program and our institutes is much stronger than it has ever been. That is a very positive thing, because it enables us to interact more closely with SMEs and for them to see what we have within NRC in the research and development institutes so they can get opportunities to move it out and to collaborate with us. So the integration has been very positive in that sense.

Mr. Walt Lastewka: I have one more question.

Dr. Arthur Carty: I agree that it is a question of relative priorities. We are pretty desperate for funding of the kind I described, and it is also true that IRAP has run out of money.

Mr. Walt Lastewka: I looked around, and I know there are a number of us who are always searching for more help for smaller communities. That's an area that's missing because of the demand.

• 1645

We talked a number of years ago about the importance of commercializing and transferring government research. Could you comment on that and comment at the same time on research done in departments other than the industry department and the NRC, like the environment department and so forth? There was a committee crossing all departments that was to work on commercializing government research. Could you comment on that?

Dr. Arthur Carty: Yes. In terms of commercializing research and ensuring that knowledge and technology are transferred to society and to the private sector for its benefit, I think we do that much better these days, because we think actively about it and we promote it.

I don't know whether the industry committee knows this, but over the last four years, NRC has recognized that just licensing technology to companies is not necessarily the best way to transfer the technology. Often there will not be a receptor in Canada that can easily take on the technology or the invention being discovered or the technology being developed.

In such circumstances, rather than have it go outside the country, it is best to start a new company. So over the last four years at NRC, we have actually fostered the start of 27 new companies. These are staff of NRC or entrepreneurs from inside or out who have actually seen an opportunity for a technology to be developed and provide a commercial opportunity. Companies have been started on that basis.

At NRC, I think we have made entrepreneurship one of the elements of our vision. We actually teach business skills to people who are interested. We teach them how to be more entrepreneurial. We set targets for our institutes. It's a very different place from what it was five years ago.

I'd like to respond, if I could, to Ian Murray's comment about innovation, productivity, and NRC's role. Of course, NRC plays a small role in this globally. We think we play a larger role now than we've ever done, because we have planned it, we know more about it, and we've had experience and successes.

Innovation is a major undertaking. We can't do it all, of course, but we can help, and we can also transfer experiences that will help others. That's the key point I'd make: that we have very valuable things we can do to influence innovation, to make it happen, and we can affect others in that way.

The Chair: Thank you.

Monsieur McTeague.

Mr. Dan McTeague (Pickering—Ajax—Uxbridge, Lib.): Thank you, Madam Chair.

Dr. Carty, thank you very much for that presentation. I'm going to take a little different tack by asking a question. The second graph you showed us gave a rather unfavourable reflection of Canada's overall R and D investment. I take it that with that less than 2% percentage of GDP we're including private and public sector investment in R and D.

Dr. Arthur Carty: It's actually about 1.65%, and yes, that includes both private sector and public sector investment in R and D.

Mr. Dan McTeague: I've worked with a foreign national company a good part of my life—when I had a real job, in the private sector—and four, maybe even five, of the first countries that are listed are nations that are characterized to a great degree, in small and large enterprises but particularly large enterprises, by a dearth of foreign control of their economy.

You pointed out some success stories in the pharmaceutical industry and the aeronautics industry, the aerospace industry. I am wondering how we have the means to carry out....

• 1650

Maybe before I ask that question I could get to this point: Do you see Canada's high level of foreign ownership in significant areas of our economy as inhibiting what would otherwise be natural investments in R and D? More specifically, do you believe there is in fact a correlation? Is Canada's openness of ownership to countries from around the world one of the components in why we have such a low R and D investment scale relative to our competitors?

Dr. Arthur Carty: Let me answer that in two ways, first of all by saying there is very much an historic component to this. In the past, Canada has had largely a resource-based economy. Resource-based companies have generally invested very little in R and D. The past reflects the fact that we have been a resource-based economy.

It's also true that in the past we have had in Canada a large number of multinational organizations that have invested principally in their home bases in terms of R and D, mostly in the United States but also sometimes in Europe. There are one or two exceptions. The Xerox Research Centre in Mississauga, for example, is a case in mind, where Xerox decided to give a world product mandate for material science to the Xerox Research Centre. It has been extremely successful, worldwide, for Xerox.

Mr. Dan McTeague: I will just ask a question on world product mandates. You mentioned the pharmaceuticals. Do we know how many world product mandates are actually made in Canada in the pharmaceutical industry?

Dr. Arthur Carty: How many world product mandates there are—

Mr. Dan McTeague: Or for that matter, in the automotive industry?

Dr. Arthur Carty: In the pharmaceutical industry, there are some notable examples. Merck Frosst is a Canadian company. It is associated with Merck in the United States, but in R and D it has always done its own thing. It just had a tremendous success with a new drug this last summer. It's a Canadian drug developed entirely in Canada with R and D investments they've made. Merck Frosst has been expanding rapidly. That's an exception to the rule of the multinational having invested and reaped the benefits. It's a tremendous example.

There are other examples in the biopharmaceutical area and the medical area, where Canadian companies have grown by themselves. Quadralogics PhotoTherapeutics is now a multi-billion-dollar company in terms of its valuation. BioChem Pharma is a homegrown company.

What I'm basically saying here is that there's a bit of history to this. We've come a long way from the point where we were a resource-based economy. We're now a knowledge-based economy, and you can see from the telecommunications and information technology sectors what impact that's having. There were some announcements this morning, which I didn't hear, incidentally. Nortel and JDS Fitel are growing enormously quickly. So are some smaller companies.

Mr. Dan McTeague: In Canada.

Dr. Arthur Carty: Yes. That also illustrates the point that nobody these days, no company, can actually just simply expect to be located in Canada and have a global impact. Nortel has investments in R and D in China, where it's building a new lab, as well as the massive investment here.

Mr. Dan McTeague: Right. My point, which is formulated in the question, is this: if we are investing in young people, if we are investing in the NRC, in IRAP, and in many others, the question is, of course, how much and to what effect? The means to carry out point and purpose for the innovations may be somewhat removed by the fact that Canada really has no control. For instance, a Japanese company may use its own head office as the means to which there is point and purpose for all of its innovative inputs. Does that place Canada at a distinct disadvantage, reflected in these figures you've given us today?

Dr. Arthur Carty: I don't think so. I think the historical aspect is important. Canada has begun to invest; you'll see some changes. If the current investment profile that has happened over the last three years continues, Canada will go up. Industrial R and D investment has been increasing at about 4% to 5% per year. Public sector investment, which is very important.... I would argue that because of our industrial profile we don't have many large companies that invest heavily in the middle of that R and D spectrum. That's why NRC has a very important role, because in the middle of that, how many companies can you name that invest more than $1 billion in R and D? One in Canada.

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Why is it so important to have good, strong NRC-industry interactions and good, strong university-industry interactions? It's because in the middle we don't have that strong investment in medium-term to long-term strategic R and D in wealth-creating areas. The U.S. has hundreds of Nortels, and so does Europe and Japan. So our medium enterprises, our small enterprises, and our government labs are very important to the industrial structure of this country, because they fill a gap.

Mr. Dan McTeague: Very good. I think that's an excellent answer.

By the way, in thinking of pharmaceuticals, I thought of Connaught Laboratories, of course, which came out with somewhat astounding results but today is owned by a foreign entity. One would hope that notwithstanding that, there is the opportunity to make these wonderful discoveries that bring and keep our young and keep the investments here at home as a way of our opportunity to the rest of the world.

Thank you, Doctor.

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

I don't have any other questioners on my list. I want to thank you, Dr. Carty, for being with us this afternoon. I appreciate you attending on such short notice, and we appreciate your presentation.

Dr. Arthur Carty: It was my pleasure.

The Chair: We look forward to seeing you again.

Dr. Arthur Carty: Thank you very much.

The Chair: Thank you.

The meeting is now adjourned.