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Innovation Canada: A Call to Action

7. Filling the Gaps

This chapter addresses the third and final question in the charge to the Panel: "What, if any, gaps are evident in the current suite of programming, and what might be done to fill these gaps?"

The Panel is firm in its belief that the key to addressing Canada's well-documented business innovation challenges – including the significant commercialization gap – is to strategically target efforts to support the growth of innovative firms into larger enterprises. It is only by growing Canada's innovative firms that the country's business sector will achieve the scale required to become an innovation leader on the world stage.

Although many gaps can be identified in a policy area as broad as the support of business innovation, an overriding consideration of the Panel is to ensure that programs respond to industry's "demand-pull" as a primary means of helping innovative firms grow and prosper – a challenge that was raised repeatedly in the Panel's consultations. Three issues in particular stood out. How can the federal government's own procurement needs be used to foster innovation? How can business imperatives be addressed through large-scale, business–academic–government research collaborations? And how can risk capital be structured to respond to the needs of innovative firms at all stages of their development? Stakeholders told the Panel that addressing these issues would help meet the needs of firms seeking to innovate and create value.

Consistent with these views, an analysis by the Organisation for Economic Co-operation and Development (OECD forthcoming) of the innovation systems of several countries identifies weaknesses in Canada related to limited public–private research collaboration, difficulty in transforming knowledge into commercial applications, and a low volume of venture capital activity. Threats identified include a declining trend in the funding of entrepreneurial ventures. The same study also notes the dearth of "demand-side" measures – such as those that aim to strengthen the private sector's utilization of innovation inputs – in Canada's mix of innovation instruments. Procurement is the major demand-pull stimulus available to governments to complement the large existing array of supply-side programs.

Broadly similar findings have been reported by other panels that have examined the innovation problematique in Canada. The Council of Canadian Academies highlighted the need to "improve the climate for new ventures so as to better translate opportunities arising from Canada's university research excellence into viable Canadian-based growth businesses" (CCA 2009, p. 12). It also noted that Canada ranks low internationally for "government procurement of advanced technological products" (CCA 2009, p. 78). The Expert Panel on Commercialization (2006a; see also Annex B) made several recommendations to expand federal programs that support start-up firms in proving their business ideas and generally to increase the commercialization involvement of small and medium-sized enterprises (SMEs). That panel also recommended improved access to early-stage angel financing and expertise, as well as improvements in Canada's expansion-stage venture capital market.

The fact that the same shortcomings in respect of procurement, large-scale research collaboration and risk financing were identified in the Panel's consultations and through international comparative investigations as well as in prior studies of innovation in Canada is convincing evidence that these are the program gaps – and therefore the opportunities – most in need of focussed attention.

The Procurement Gap

The underlying premise of the procurement provisions of international and domestic trade agreements is that unrestricted competition for government purchases spurs business productivity and provides the best value for the taxpayer's dollar. Why, then, would governments want to adopt policies that favour certain types of suppliers for their purchases of goods and services? The general answer is that governments have a huge, ongoing need for an array of goods and services across a broad range of activities – for example, defence, health, and information and communication technologies. SMEs that supply sophisticated new products and services can potentially meet these requirements but may need to be nurtured by governments until they reach a point where they can compete without assistance. Also, procurement programs more geared to acquiring innovative products promise to boost public sector productivity and thereby lower the cost of providing public sector services.

The strategic use of public sector procurement can contribute to the viability and growth of firms, particularly of innovative SMEs, in a number of ways. For instance, when governments are demanding and sophisticated customers for innovative solutions to their needs, their purchases  – and the prospects for follow-on sales – facilitate equity and debt financing for firms. Moreover, firms supplying governments as lead users can then showcase their products and thus market them more successfully to customers in Canada and abroad. For these reasons, successful initial purchases are key to ongoing procurement and the building of critical mass for economies of scale and future growth. In the case of defence and security-related procurement specifically, governments may favour domestic suppliers in order to maintain capability for at least some self-supply of these sensitive assets.

While there are good policy reasons to use public sector procurement to help build domestic economic muscle, these will always have to be balanced in the context of value-for-money, trade obligations, and the risk of fostering supplier dependency and possibly disadvantaging other domestic competitors. Assessment of the balance of benefits and costs of using procurement to develop the innovation capabilities of SMEs will depend on the specific circumstances. Good judgment will always be required, since definitive data on the full extent of benefits and costs are rarely available.

Notwithstanding this caveat, Canada's use of procurement to enhance industrial innovation has been very modest by international standards, although recent federal initiatives like the Canadian Innovation Commercialization Program (CICP – see Box 7.2) 1 and a revised Industrial and Regional Benefits (IRB) policy suggest a new recognition of opportunities. The use of procurement to stimulate innovation has been a long-standing practice in other countries, particularly the US, with its enormous defence expenditures. The US has also led the way internationally with respect to promoting small businesses with vigorous programs, including procurement set-asides. The quintessential initiative in this regard is the US Small Business Innovation and Research program (SBIR – see Box 7.1), 2 now almost 30 years old. Recognizing that Canada can learn from the use by other governments of procurement to support innovation by SMEs, the Panel believes there is an opportunity for greater application of this kind of policy tool to promote innovation by Canadian business.

Box 7.1 Use of Procurement to Support SME Innovation

The US Small Business Innovation Research (SBIR) program mandates, by legislation, that federal agencies with more than $100 million annually in external R&D contracts set aside 2.5 percent for small businesses. This translates into annual expenditures of $2–3 billion, with the Department of Defense and National Institutes of Health (NIH) as the largest users. The program provides fully funded contracts for phase I proof of principle studies ($150 000 over six months) and for phase II R&D ($1 million over two years). Phase III is funded through conventional services, with just under half of projects reaching the marketplace for either government or business uses.

The implementation of SBIR varies widely in practice among US federal agencies, depending on their individual motivation for conducting intramural R&D. For some like the NIH, the SBIR set-aside is mainly a source of R&D funding. For others, like Defense and Energy, the set-asides are used for the actual first-user procurement of products developed with SBIR funding assistance.

The success of SBIR has inspired similar programs in countries such as Japan, Australia, the UK, Sweden, Finland, South Korea and the Netherlands. In the UK, the Small Business Research Initiative (SBRI) was launched in 2001 and is today administered by the Technology Strategy Board – the UK equivalent of the Industrial Research and Innovation Council (IRIC) proposed by the Panel in Chapter 5 (Recommendation 1.1). Like SBIR in the US, the program provides fully funded development contracts between SMEs and government departments, but on a voluntary basis, not mandatory as in the US.

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Recommendation 3

Make business innovation one of the core objectives of procurement, with the supporting initiatives to achieve this objective.

The Vision of the Panel

The government's procurement and related programming must be used to create opportunity and demand for leading-edge goods, services and technologies from Canadian suppliers, thereby fostering the development of innovative and globally competitive Canadian companies while also stimulating innovation and greater productivity in the delivery of public sector goods and services.

Getting There

To realize this vision, the government should incorporate the following practices in its procurement initiatives.

3.1 Innovation as an objective — Make the encouragement of innovation in the Canadian economy a stated objective of procurement policies and programs.

In practice, this broad recommendation requires the government to regard any significant acquisitions of goods and services as opportunities to build SME innovative capabilities and thus to strengthen both the base of suppliers for future procurement and, more generally, the innovation capacity of the Canadian economy. This will require the government over time to undertake a comprehensive review of procurement policies and activities to ensure that they are supporting innovation and that departments have the flexibility to work with private sector solution providers and then acquire and deploy the resulting solutions. As first steps for action, the Panel further makes the following recommendations.

3.2 Scope for innovative proposals – Wherever feasible and appropriate, base procurement requests for proposals on a description of the needs to be met or problems to be solved, rather than on detailed technical specifications that leave too little opportunity for innovative proposals.

The use of procurement to foster the innovation capacity of Canadian companies requires a revised approach to value-for-money based on outcomes-oriented specifications. Procurement on the basis of the outcomes desired sets a challenge for industry and thus motivates innovative solutions from potential suppliers. This has the dual benefit of bringing forward better products for the buyer and developing an innovation-focussed mindset in the supplier communities. The use of an outcome-oriented procurement specification does not need to be an invariable rule, since there will be cases where more detailed technical specifications for a particular procurement would be clearly appropriate and would not be inconsistent with the intent of this recommendation.

3.3 Demand-pull – Establish targets for departments and agencies for contracting out R&D expenditures, including a subtarget for SMEs, and evolve the current pilot phase of the Canadian Innovation Commercialization Program (CICP) into a permanent, larger program that solicits and funds the development of solutions to specific departmental needs so that the government stimulates demand for, and becomes a first-time user of, innovative products and technologies.

Federal departments and agencies, including those of major industry relevance, such as the Department of National Defence, undertake most non-regulatory R&D internally. According to Statistics Canada (2010a), federal in-house R&D is projected at $1.9 billion in 2010–11, while R&D contracted to businesses is projected to amount to $272 million or only about 15 percent of the in-house R&D total. More than 80 percent of the amount of R&D contracted to businesses is accounted for by two agencies – the Canadian Space Agency at $167 million and the Department of National Defence at $59 million. Setting specific department-by-department targets for external R&D contracts would promote business innovation while potentially improving outcomes for contracting departments and strengthening their ability to deliver on their mandates.

The current CICP pilot is "supply-push" in the sense that the applicants submit proposals to provide innovative solutions for trial and testing, though not as responses to explicitly identified needs of a particular department or agency (Box 7.2). A new pilot element is needed that would provide incentives for solving operational problems identified by departments. Making the revised CICP a permanent program, once performance of a revised pilot can be evaluated, would help change the procurement culture.

3.4 Globally competitive capabilities – Plan and design major Crown procurements to provide opportunities for Canadian companies to become globally competitive subcontractors.

The currently planned procurement of defence and security-related equipment and services presents a significant opportunity to greatly increase the technological readiness of Canadian industry. 3 There is a need for the Department of National Defence to be more proactive in promoting a defence industrial capability domestically. The key is to implement a long-term technology capability plan for each major procurement, jointly developed by government and industry and supported by tailored programs. For the Department of National Defence, this would mean accelerating its Project ACCORD with industry as well as Defence Research and Development Canada's Technology Demonstration Program. 4 As the experience of other countries has shown, even concerted efforts to promote global supply chain participation takes many years to produce results. Canada therefore needs to start immediately. It is emphasized that incremental investment for such improved long-term capability is scalable. Decisions on amounts should be relative to opportunities.

While the recent Industrial Research Benefits (IRB) policy enhancements – with multipliers for investments in innovation – are largely untested, an additional incentive to invest in technology commercialization would help increase global value chain participation for forthcoming defence purchases, especially by SMEs. (The commercialization model developed by Sustainable Technology Development Canada might be emulated.) There is urgency in this since, if Canadian capabilities were to remain underdeveloped at the time of contracting, IRB offsets would be directed more toward traditional "build to print" work, rather than leading-edge technology development and commercialization. In order to achieve critical mass quickly, the government could consider some form of matching formula with the prime contractors. It is emphasized that taking full advantage of Crown procurements depends on government and business investments early on, in order to get the desired innovation capacity-building leverage from an IRB, whose costs are borne by prime contractors. This might involve sharper focus of existing programs, rather than additional resources.

3.5 Working collaboratively – Explore avenues of collaboration with provincial and municipal governments regarding the use of procurement to support innovation by Canadian suppliers and to foster governments' adoption of innovative products that will help reduce the cost and improve the quality of public services.

Annual procurement by provinces and municipalities across Canada substantially exceeds federal procurement because of their responsibilities for health care, education and transportation infrastructure, among other public services. All orders of government should collaborate to develop and share best practices in the use of procurement to foster innovative Canadian companies and, where feasible, to develop joint strategies to enhance the leverage of public procurement in certain sectors.

Box 7.2 Canadian Innovation Commercialization Program (CICP)

The CICP is a $40-million, two-year pilot program announced by the federal government in 2010 and administered by Public Works and Government Services Canada. The program was created to help Canadian businesses bridge the pre-commercialization gap by procuring and testing innovations. The current calls for proposals require innovations to be valued at $500 000 or less, to have yet to be sold commercially, to be provided by Canadian bidders, and to include at least 80 percent Canadian content. The products must fit into one of the following categories: environment, safety and security, health and enabling technologies. Innovations are pre-selected based on their degree of innovation, the testing plan and the commercialization strategy. They are matched to federal departments that then test them and provide feedback on their operation. The program covers the costs of the innovation, delivery, installation and maintenance services, as well as any other direct costs required to test the innovative product. The program's process is fully competitive and consistent with trade agreements.

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The Large-Scale Research Collaboration Gap

The basic research performed by universities and other laboratories generates disruptive technologies that open up whole new industries. At colleges, polytechnics and universities, there is also a broad range of applied research relevant to both the business and non-profit sectors. This applied research can include business-oriented areas such as finance, regulation/legislation and organizational behaviour, and also covers the domains of applied science and technology – for example, forestry and geosciences, engineering, computer science and information systems, nanotechnology, chemistry, life sciences, and health research. Much of this research, even when investigator initiated and funded by government or non-profit agencies, is relevant to industry and is taken up in various ways. Reflecting the benefit of this system to industry, business-sponsored research in Canada's universities currently totals more than $785 million a year (Canadian Association of University Business Officers 2010). Across the country, there is an array of ad hoc small-scale, needs-based collaborations under way between the business and post-secondary sectors, assisted by the network and collaboration programs discussed in Chapter 5.

In recognition of the vital role that post-secondary education institutions play in our system of innovation – foremost, as the primary source of highly qualified and skilled personnel and, secondly, as a source of leading-edge ideas and knowledge – the Government of Canada has substantially increased its support for higher education R&D over the past 15 years. Given the foundational role that a strong post-secondary education sector plays in the Canadian system of innovation, this Panel (like the Expert Panel on Commercialization before it) urges the government to commit to investing in basic research at internationally competitive levels, and also to review and modernize the support for the total institutional costs of research. 5

Currently, federal support for industry–academic research collaboration is delivered through programs that fund projects with universities, colleges and polytechnics. The current suite of programs is mainly (but not exclusively) focussed on investigator-led "idea-push" projects, and the Panel's recommendations in Chapter 5 are oriented toward addressing this issue. However, there remains a gap with respect to collaborative R&D and innovation projects that are large scale, industry facing, demand driven and outcome oriented. Such projects can result in breakthroughs and can build capacity in existing and emerging industry sectors. Some may require longer time spans, others may require specialized equipment or personnel, and still others may require an extensive, ongoing collaboration between business, academia and government.

Reflecting this, other structures have emerged to partly fill this gap in the innovation system. For instance, FPInnovations for the forest industry, the National Optics Institute (INO) or the Consortium for Research and Innovation in Aerospace in Québec (CRIAQ) provide significant non-profit sector examples. Other countries have also established wider and more developed examples, including most famously the Fraunhofer system of institutes in Germany (Box 7.3).

The National Research Council (NRC) has the potential to play a similar role for Canada (Box 7.4). That said, in its present form the NRC has an overly broad – and therefore unfocussed and fragmented – mandate. Started in 1916 as a basic science entity, the NRC was a source of great pride at a time when Canadian universities were performing relatively little fundamental science. The NRC created, and then spun out, institutions as varied and important to Canadian innovation as the Natural Sciences and Engineering Research Council (NSERC) and the Canadian Space Agency. The research mandate of the NRC has been reshaped by the emergence of the federal granting councils and the growth of Canadian universities as the principal locus of basic research. Today, the NRC still performs basic research, runs the Canada Institute for Scientific and Technical Information, performs public policy services such as metrology, has "cluster" initiatives to spur regional economic development through innovation, engages in substantial industry research collaborations, manages Canada's investment in major science infrastructure, and has a national network of industrial technology advisers that deliver the Industrial Research Assistance Program (IRAP) to support SMEs with their business R&D projects. The sheer diversity of these activities raises the question of what is the most appropriate mission of the NRC. It is also unclear what the primary performance metrics of NRC institutes are. Should performance be measured in terms of the number of peer-reviewed publications in top journals, the number of patents and copyrights issued, licensing revenues from patents and copyrights or private research contracts, SME client satisfaction or the number of regional jobs created? Furthermore, other organizations now also provide basic research, regional economic development, support federal science policy mandates, and deliver business innovation assistance.

As part of clarifying NRC's mandate and promoting its evolution, the Panel has already recommended that IRAP should be placed under the aegis of the proposed Industrial Research and Innovation Council (IRIC). There is now also the clear opportunity for the NRC to address Canada's large-scale research collaboration gap by evolving the majority of its current institutes into a national network of institutes focussed on large-scale collaborative research motivated by industrial needs. To achieve this vision, great care will be needed to establish a process that, over time and in dialogue with partners, enables the NRC to focus on this opportunity without losing the value for Canada from its other activities.

Box 7.3 Germany's Fraunhofer-Gesellschaft a

The Fraunhofer-Gesellschaft (F-G) organization operates 60 Fraunhofer institutes in Germany. These customer-oriented, applied research institutes strive to transform scientific findings into useful innovations. The institutes' focus on application-oriented research is situated within the broader spectrum of the German research system – a spectrum that includes, at one end, the publicly funded, basic research-oriented Max Planck Society and, at the other end, privately funded industrial research.

The F-G's threefold mission is

  1. to promote and undertake research in an international context of direct utility to private and public enterprise and of wide benefit to society as a whole,
  2. to reinforce the competitive strength of the economy by developing technological innovations and novel systems solutions for their customers and
  3. to provide a platform that enables staff to develop the necessary professional and personal skills to assume positions of responsibility within their institute, in industry and in other scientific domains.

As institutes are encouraged to work with industry, only about a third of base funding comes from government. Institutes must secure the remaining revenue from other sources, which typically comes in roughly equal proportions from industry and public contracts and project funding.

The Fraunhofer institutes provide highly specialized expertise that may be too expensive for any mid-sized company to build up and may also be beyond the scope of consulting companies. By connecting with universities and technical institutes/universities of applied science, and by applying for competitive research grants, the F-G institutes retain an edge in science and technology. Indeed, the grants are used for advanced work that is well ahead of the marketplace but has been identified as potentially important to client companies in the years to come.

In summary, the Fraunhofer institutes are characterized by

  1. professional R&D services to industry,
  2. demand-driven research combined with scientific excellence,
  3. strong integration with academia and
  4. autonomy combined with simple corporate rules and a strong brand.

a Information drawn from the Fraunhofer website at: Fraunhofer (in German only); and Panel consultations. (Return to reference a)

The Panel's consultations elicited statements of strong support for IRAP's role in supporting R&D and innovation by SMEs but, notably, there was not comparable testimony regarding the relevance and role of the NRC's institutes. This, together with the other considerations outlined above, suggests that there is both the need and opportunity to focus and reorganize the NRC's national assets to more effectively and strategically support innovation in Canada. The Panel endorses the plans currently under way to reorient certain NRC institutes to place greater emphasis on industry priorities and collaboration, but believes that an even more comprehensive reform is needed.

Box 7.4 Institutes of the National Research Council within the Review

Total appropriations for the 17 NRC institutes within this review averaged almost $290 million annually over the four fiscal years, 2007–08 through 2010–11. The institutes referred to the Panel are:

  • Biotechnology Research Institute
  • Canadian Hydraulics Centre
  • Centre for Surface Transportation Technology
  • Industrial Materials Institute
  • Institute for Aerospace Research
  • Institute for Biodiagnostics
  • Institute for Biological Sciences
  • Institute for Chemical Process and Environmental Technology
  • Institute for Fuel Cell Innovation
  • Institute for Information Technology
  • Institute for Marine Biosciences
  • Institute for Microstructural Sciences
  • Institute for Ocean Technology
  • Institute for Research in Construction
  • National Institute for Nanotechnology
  • Plant Biotechnology Institute
  • Steacie Institute for Molecular Sciences

1 More information on the CICP is available from Public Works and Government Services Canada at: Canadian Innovation Commercialization Program (CICP) (Return to reference 1)

2 More information on the SBIR program is available at: SBIR/STTR. (Return to reference 2)

3 The Canada First Defence Strategy sets out a new long-term funding framework for the Canadian Forces, with projected purchases of $240 billion of equipment, infrastructure, and operations and maintenance services between 2008–09 and 2027–28. (Return to reference 3)

4 Project ACCORD is a Department of National Defence mechanism to bring together industry, academia and government in identifying Canadian Forces deficiencies and proposed approaches to solutions. Defence Research and Development Canada's Technology Demonstration Project funds contracted out R&D in collaboration with private sector partners, valued at $25.5 million in 2010–11. (Return to reference 4)

5 The Expert Panel on Commercialization noted that "publicly funded research across all disciplines is essential and must be funded at internationally competitive levels, along with the institutions and infrastructure that provide the capacity to conduct this research" (2006b, p. 16). (Return to reference 5)