State of the Nation 2012

Chapter 2: Understanding Science, Technology and Innovation


Before looking at Canada’s science, technology and innovation (STI) performance story, it is important to understand the context in which this story unfolds. It is useful to first define “science and technology (S&T),” “research and development (R&D),” and “innovation,” and to explain their importance to the economic and societal well-being of Canadians. In addition, we describe the key players in the Canadian STI ecosystem and the distinguishing characteristics of the modern STI enterprise.

Defining the Concepts

Consistent with international practice, scientific and technological activities are taken to include the generation, dissemination and application of new scientific and technological knowledge. For statistical purposes, these activities are broken down into research and experimental development (i.e., R&D)—the central activity—and related scientific activities (RSA). RSA, performed predominantly by governments and their agents, include activities such as education support, technical surveys, statistical surveys, information services, special services and studies, and museum services.

The Science, Technology and Innovation Council’s (STIC’s) 2008 and 2010 State of the Nation reports presented the definitions used in the Frascati Manual (OECD 2002) for R&D and the Oslo Manual (OECD/Eurostat 2005) for innovation.

The OECD’s Frascati Manual (2002) defines R&D to encompass three activities: “‘Basic research’ is experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundation of phenomena and observable facts, without any particular application or use in view. ‘Applied research’ is original investigation undertaken in order to acquire new knowledge. It is, however, directed primarily towards a specific practical aim or objective. ‘Experimental development’ is systematic work, drawing on existing knowledge gained from research and/or practical experience, which is directed to producing new materials, products or devices, to installing new processes, systems and services, or to improving substantially those already produced or installed.”3

Whereas S&T activities, and more specifically R&D, involve the creation of new knowledge or technology, innovation requires the introduction of that knowledge or technology into the marketplace, where value is created, or into an organization, where efficiencies are generated. The Oslo Manual (2005) defines innovation as: “the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organizational method in business practices, workplace organization or external relations.”4 The main types of innovation are further elaborated as follows:

  • Product innovation involves a good or service that is new or significantly improved. This includes substantial improvements in technical specifications, components and materials, incorporated software, user-friendliness or other functional characteristics.
  • Process innovation involves a new or significantly improved production or delivery method. This includes noteworthy changes in techniques, equipment and/or software.
  • Marketing innovation involves a new marketing method with significant changes in product design or packaging, product placement, product promotion or pricing.
  • Organizational innovation involves a new organizational method in the firm’s business practices, workplace organization or external relations.

The definitions of STI activities in the Frascati and Oslo Manuals are critical to this report because they form the foundation for allowing data comparisons across countries. Building on the Oslo Manual definition, STIC defines innovation as the process by which individuals, companies, and organizations develop, master and use new products, designs, processes and business methods. These can be new to them, if not their sector, their country or the world. Innovation activities include R&D, invention, capital investment, and training and development.

Innovation may involve gradual changes to existing products, processes or organizations, or it may entail radically new technologies or ways of doing things. While the latter are easier to identify and count, the former can have as great or greater impact over time on individual firms and the overall economy. The essential ingredient is that something new or improved is being introduced to an organization or directly to the marketplace.

Despite the importance of innovation as a driver of economic growth, it is often difficult to determine how much innovation is taking place in an economy. While traditional measures, such as R&D investments, machinery and equipment investments, and venture capital funding capture many of the innovative activities taking place, they miss some important innovative practices. For example, the significant investments that Canada’s natural resource industries make in exploration and evaluation activities and in field testing facilities, while not R&D, nonetheless rely heavily on innovative processes and STI. STIC’s State of the Nation 2010 report recognized the importance of this type of innovation that is not captured through traditional indicators. Furthermore, the high degree to which some Canadian industries are integrated into multinational companies and global supply chains means that Canadian companies can benefit from R&D performed elsewhere and often protect their innovations by patenting elsewhere. These types of knowledge flows and other investments are difficult to track. Anecdotal information, however, helps us understand where and how this type of innovation takes place.

The Importance of Science, Technology and Innovation

STI provides the foundation for a strong economy by increasing productivity growth, creating high-value jobs, and creating and growing firms. Investments in R&D also help address pressing challenges by providing the knowledge, technologies and processes needed to avoid or mitigate the harmful effects of health, environmental and social problems.

Productivity Growth

Productivity growth is a major source of improvement in economic well-being in the long run and is essential for rising wages and increased profitability for investors.5,6 International analysis also finds that the most productive firms create the most jobs.7 Innovation is widely considered to be a major driver of productivity. At the firm level, analysis shows that firms that invest more in innovation per employee have higher productivity levels.8

Productivity measures the total amount of goods and services produced in a country for each input to production, such as labour, capital or land. Productivity is usually expressed in terms of growth rates or levels. The most common measure of productivity is labour productivity, which measures the amount of goods and services produced by one hour of labour. However, labour productivity (output per hour worked) does not explicitly account for the effects of capital or changes in its composition on output growth.9 Multifactor productivity (MFP) measures the efficiency with which the combined inputs of capital and labour are used in the production process. MFP captures such factors as improvements in technology, economies of scale, capacity utilization and managerial skills. While this indicator provides a more complete picture of the drivers of productivity, it is also more difficult to measure than labour productivity.

In a number of leading economies (including Austria, Finland, Sweden, the United Kingdom (U.K.), and the United States (U.S.)), it is estimated that between two-thirds and three-quarters of labour productivity growth between 1995 and 2006 was attributable to MFP and investment in intangible assets such as software, databases, skills, exploration and efficient organization design.10 In many OECD countries, firms now invest as much in innovation-related assets as they do in physical capital, such as machinery, equipment or buildings.

In assessing productivity performance, it is more meaningful to examine growth over long periods rather than in specific years. Figure 2-1 provides an international comparison of average annual labour productivity growth rates of OECD economies over the 2001–2011 period. It shows that Canada’s labour productivity growth has been generally weak relative to other advanced economies, with Canada ranking 28th among 35 comparator countries.

Of particular concern is the significant gap between Canada and the U.S. in the level of productivity, which is highlighted in Figures 2-2 and 2-3. These figures show that there was a widening of the gap between Canada and the U.S. in terms of both labour productivity and MFP from 2000 to 2010. With respect to labour productivity in the business sector (i.e., the weighted average of all industries included in Figure 2-2), Canadian levels over this time period fell from 80 percent to 70 percent of U.S. levels. Several industries, including oil and gas extraction, manufacturing, transportation and warehousing, information, and professional and business services, saw declines in labour productivity levels relative to the U.S. from 2000 to 2010. On the other hand, other industries, including agriculture, forestry, fishing and hunting; mining, excluding oil and gas, and support activities; utilities; construction; wholesale trade; retail trade; and, other services saw their gap with the U.S. decrease over this period.

With respect to business sector MFP, Figure 2-3 shows that the Canadian level over this time period also fell, from 79 percent to 70 percent of the U.S. level, widening the gap with the U.S. This is attributable to the fact that many Canadian industries saw a relative decline against the U.S. MFP level. Those industries that did not experience a decline include: agriculture, forestry, fishing and hunting; mining, excluding oil and gas, and support activities; utilities; construction; retail trade; and other services. Estimating MFP is complex, and using different approaches can influence the results. State of the Nation 2012, like its predecessors, uses the same methodology in estimating MFP for both Canada and the U.S.11

In general, labour productivity levels and their growth in Canada vary significantly among industries. Figure 2-4 shows that the 2010 labour productivity level in the oil and gas extraction industry was about eight times higher than that of the overall business sector, and the utilities industry was more than three times higher than that of the overall business sector. The mining and oil and gas extraction industry, however, showed a negative annual average growth of -5.4 percent while the utilities industry showed zero growth over the 2000 to 2010 period. A number of industries experienced above average growth, with the agriculture, forestry, fishing and hunting, and wholesale trade industries leading the way.

Increased business investment in STI-related assets, such as information and communications technologies and advanced machinery and equipment, are crucial for improving productivity. These issues are addressed in more depth in Chapter 4: Business Innovation.

Employment Growth and Firm Creation

Evidence suggests that investment in STI can create new jobs and expand overall employment, although it may lead to substantial job shifts across industries. By helping firms to become more competitive and thereby access new markets, STI is a key driver of firm expansion and employment growth. STI also encourages the creation of new firms as an avenue for commercializing new products and processes. New firms are a particularly important source of new jobs. In 2007, for example, firms less than five years old accounted for over two-thirds of net new jobs in the U.S.12

In some cases, inventions, such as those emerging over the past century related to communications, computing, biotechnology, transportation and nanotechnology, can create entirely new industries that grow to employ large numbers of people. Of course, new technologies can also make the goods or services of some firms obsolete or less competitive, and thereby lead to firm closures. The gains and losses should be considered at an overall societal level, over the short-, medium- and long-term, with appropriate policies to address the disruption and displacement that may result.

Health, Environmental and Social Challenges

World-class scientific research can lead to breakthrough discoveries and technologies whose applications can address pressing health, environmental and social challenges. On the health front, aging population, the growing impact of diseases such as diabetes, HIV/AIDS, and emerging infectious diseases remain major challenges for the coming decades. In addition to providing new diagnostic techniques, therapies and medicines, STI can help meet these challenges by improving performance of health systems and making them more efficient and effective.

The need to address environmental challenges, such as climate change, air and water pollution, chemical contaminants and hazardous waste disposal, is high on the priority list of many governments around the world and has motivated considerable investments in prevention and mitigation technologies. For example, technological advances that allow for more efficient combustion, the capture of emissions or substitution of fossil fuels by renewable energy sources aim to reduce atmospheric emissions, while advances in bioremediation and other techniques have enhanced our ability to remove contaminants from soil and water.

Concerns over social challenges around food security have driven research and innovation in Canada since the early 20th century, when government scientists developed hardy new crop varieties that could flourish in the Canadian climate. Current work on genetically modified crops aims to improve crop yields, while reducing the amount of fertilizer, pesticides and herbicides used.

The Science, Technology and Innovation Ecosystem and its Key Players

Canada’s STI ecosystem involves numerous players, including governments, businesses, universities and colleges, nongovernmental organizations (NGOs), communities and individuals. The links among these players are complex, multi-dimensional, dynamic and continuously evolving. These links facilitate the exchange and creative deployment of the knowledge, capital, talent and other resources required for innovation. For example, the higher education sector may provide new knowledge and talent; suppliers and customers may provide crucial information about market demand and technical improvements; community associations and NGOs may link to financial, business and legal services; and various levels of government may provide a wide variety of financial, knowledge and networking support. While all of these players have important roles in Canada’s STI ecosystem, the most active sectors are government, higher education (universities and colleges) and business.

Government Sector

Federal and provincial governments in Canada play significant roles in supporting STI by developing policies that create the environment in which STI can thrive and delivering programs that fund R&D and innovation activities.

In Canada, federal and provincial governments are jointly responsible for the framework conditions that support the production of many of the inputs required for STI. Federal and provincial strategies to strengthen STI include policies related to fiscal and tax systems, intellectual property rights and labour mobility; regulations concerning health, safety and the environment; and policies shaping competition, foreign investment and trade.

Stable and predictable government policies are particularly important to firms to enable them to better calculate the potential returns on investments in research, product development and process improvements. Regulatory regimes influence the size, dynamism and funding of firms, the degree of competition they face, their ability to appropriate the returns on their intellectual property, and whether new products and services can be released into the marketplace. Rigidities in labour markets can also make it difficult for firms to adapt to changing market conditions and may hinder the retention and redeployment of skilled personnel.

Framework conditions also impact R&D carried out in the higher education sector and government laboratories, primarily by providing the economic resources needed to support this work, but also by encouraging STI partnerships with the private sector. Intellectual property regimes also provide some incentive for researchers to pursue potential commercial applications of their discoveries and inventions.

The expansion of markets has been one of the main drivers behind STI, as reductions in tariff and non-tariff barriers and the liberalization of capital markets have opened up new opportunities for trade and international investment. This has expanded markets for innovators and consumers, while facilitating the spread of knowledge, technologies and innovative business practices.


Federal Programs Supporting Science, Technology and Innovation

The federal government provides a wide variety of programs to support STI in both higher education and business. The federal government’s three granting councils each provide individual and team research grants, fellowships and scholarships, and help fund collaborative projects with industry, government and not-for-profit organizations. In 2011–12, the Natural Sciences and Engineering Research Council of Canada (NSERC) and the Canadian Institutes of Health Research (CIHR) each provided approximately $1 billion to Canadian researchers and students, while the Social Sciences and Humanities Research Council of Canada (SSHRC) provided approximately $340 million.

The granting councils also manage a number of joint initiatives, including some of the government’s largest direct support programs. These include programs directed at building research networks (including networks led by industry), through the Networks of Centres of Excellence (NCE) suite of programs. Tri-council initiatives are also aimed at attracting and retaining top research talent to Canadian universities—notably through the prestigious Canada Excellence Research Chairs program, the Vanier Canada Graduate Scholarships and the Banting Postdoctoral Fellowships.

Through the Canada Foundation for Innovation (CFI), the federal government also funds the infrastructure necessary to enable Canadian research and technology development. CFI funding includes support for equipment, laboratories, databases, specimens, scientific collections, computer hardware and software, communications linkages and buildings. As of March 2012, CFI had invested almost $5.7 billion in infrastructure at research institutions across Canada.

The Government of Canada also provides support to business innovation through the provision of financial capital and assistance for product development and commercialization. In addition to the Scientific Research and Experimental Development ( SR&ED ) tax credit, which is the single largest source of federal government support for business innovation, the government contributes to the overall financial resources available to help firms innovate through programs such as Business Development Bank of Canada Venture Capital and the Venture Capital Action Plan. A key program that supports product development and commercialization in small and medium-sized enterprises (SMEs) is the National Research Council Canada Industrial Research Assistance Program (IRAP), which is the government’s largest direct support program for industry. IRAP also delivers the Digital Technology Adoption Pilot Program, which is aimed at speeding up the rate at which SMEs adopt digital technologies and build digital skills. As well, the federal government supports commercialization by procuring and testing pre-commercial innovations through the Canadian Innovation Commercialization Program. The Government of Canada also supports industry-relevant research, through programs such as the Strategic Aerospace and Defence Initiative, which targets the aerospace, defence, security and space industries.

The federal and provincial governments make significant investments in research performed by higher education institutions and by industry, as detailed in Chapter 3: Canada’s Funding for Research and Development in an International Context. The Government of Canada provides substantial funding for universities and, to a lesser extent, colleges, to support research projects, associated infrastructure, development of talent, and creation of collaborative R&D networks. This funding is distributed largely through the three federal granting councils—CIHR, NSERC and SSHRC—and through the CFI. Provincial governments are responsible for funding the operating costs of Canada’s public universities and colleges, and thereby contribute considerably to the overhead costs associated with the research funded by the federal government. They also support the direct costs of research and talent, through various funding programs.

The federal and provincial governments’ support for private sector R&D (also detailed more in Chapter 3) is delivered both through direct funding to firms and through the indirect mechanism of tax credits. The federal program mix is heavily weighted towards indirect support, through the SR&ED tax credit program, considered one of the most generous in the world. Most provinces and the Yukon offer similar R&D tax credits to supplement the federal program.


Provincial Programs Supporting Science, Technology and Innovation

Canada’s provincial governments support science, technology and innovation through a variety of programs aimed at stimulating business innovation, knowledge development and transfer, and talent development and deployment. These programs vary from one province to another. A sample of these programs includes:

Alberta

The Alberta Innovates Connector Service, launched in 2010, is a free, personalized service that helps entrepreneurs, inventors and companies with innovative ideas connect to Alberta’s research and innovation system. Supported by Alberta Enterprise and Advanced Education, the Connector Service assesses business needs, facilitates introductions and directs individuals to programs and service providers, including the Alberta Innovates corporations that offer technical expertise, business services and funding. The Connector Service focuses on the client—determining needs and priorities, and making connections to the information, people, facilities or organizations required to move innovative ideas into the marketplace. The Connector Service has been handling approximately 800 inquiries per year.

British Columbia

The British Columbia Innovation Council (BCIC), a provincial Crown agency, launched a province-wide Mentor Program in January 2011 to improve the success of technology entrepreneurs through access to expert guidance and know-how. Modelled after the MIT Venture Mentoring Service, the program trains and accredits volunteer mentors who are matched with entrepreneurs in the BCIC Venture Acceleration Program (VAP), a structured program designed to accelerate the growth of early-stage technology companies. VAP delivery partners include Accelerate Okanagan, VIATeC/Accelerate Tectoria, Wavefront, the Innovation Island Technology Association and Kamloops Innovation Centre. BCIC is working with additional delivery partners to make these programs available throughout the province. BCIC reports that, as of 2012, more than 170 ventures have received mentoring from the program’s 115 active mentors.

Newfoundland and Labrador

The Research and Development Corporation’s Petroleum Research and Development (R&D) Accelerator Program aims to stimulate R&D in the petroleum industry by funding, on a non-repayable basis, up to 25 percent of eligible R&D costs, to a maximum of $5 million per project for up to five years. The program targets industry-led projects and leverages 75 percent or more of eligible R&D costs from the applicant (the offshore supplier/technology provider), offshore petroleum producers (collaborators/end-users), R&D partners, and/or other sources.

Ontario

The Ontario Research Fund—Research Infrastructure (ORF-RI) program provides funding for infrastructure in Ontario’s publicly funded research institutes to support research and technology development. The Large Infrastructure Fund component of the ORF-RI program assists institutions in developing their research strengths by investing in facilities and bringing together researchers from a range of disciplines, as well as technology experts and industry partners.

Quebec

The Fonds de recherche du Québec provides support to basic research through provision of funding for collaborative and inter-sectoral initiatives. For example, the Fonds de recherche du Québec–Nature et technologies Strategic Clusters Program supports collaborative academic research in areas such as forestry, oceanic and Arctic studies, biology, health, climate change, and information and communications technologies (ICT). Approximately 30 strategic clusters have been created so far, involving researchers from, on average, six Quebec universities, as well as companies and government agencies in the province. Currently, more than 1,300 researchers from universities, colleges, industry, and government are associated with the clusters and contribute to the training of about 3,000 graduate students and 350 post-doctoral fellows.

A number of federal and provincial programs supporting research performed by higher education institutions and industry complement one another. Examples include: the tax credits that the federal government and a number of provincial governments provide for eligible R&D expenses; joint funding of the operating and capital costs of some research programs; and support for large-scale research infrastructure such as TRIUMF (the subatomic physics laboratory located in Vancouver).

Finally, the federal government, through its science-based departments and agencies and their laboratories, engages both in R&D and in the related scientific activities that support its regulatory responsibilities. With few exceptions, provincial governments have not invested heavily in intramural government R&D.

To guide its STI investments, the Government of Canada outlined four broad priority areas in its 2007 science and technology strategy, Mobilizing Science and Technology to Canada’s Advantage. The four priority areas are: environmental science and technologies; natural resources and energy; health and related life sciences and technologies; and ICT. To provide further focus, in September 2008, the Minister of Industry announced 13 sub-priority areas, identified in the table below, as recommended by STIC. In order to build critical mass in Canada—at a global scale—it is vital that the federal government focus greater resources on these STI sub-priority areas, while at the same time supporting the best ideas regardless of research area. The sub-priorities identified by STIC represent areas where the government can leverage investments to stimulate leading-edge solutions to health, environmental and social challenges and, at the same time, develop practical applications that sustain and deepen the competitive advantage of Canadian business in these domains.


STI Sub-Priorities

(Recommended by STIC and Endorsed by the Government of Canada in 2008)
Priority Areas Sub-priority Themes
Environment Water • health
• energy
• security
Cleaner methods of extracting, processing and utilizing hydrocarbon fuels, including reduced consumption of these fuels
Natural Resources and Energy Energy production in the oil sands
Arctic: • resource production
• climate change adaptation
• monitoring
Biofuels, fuel cells and nuclear energy
Health and Life Sciences Regenerative medicine
Neuroscience
Health in an aging population
Biomedical engineering and medical technologies
Information and Communications Technologies New Media, animation and games
Wireless networks and services
Broadband networks
Telecom equipment

Sub-priorities listed above are not ranked within or across categories.

It is estimated that the three federal granting councils collectively funded approximately $516 million in research focused on the sub-priority areas in fiscal year 2011–12, or just under 22 percent of their combined $2.3 billion in extramural R&D expenditures that year. Specifically, NSERC devoted approximately $255 million to the sub-priority areas ($666 million to the four broader priority areas); CIHR about $255 million; and SSHRC about $6 million ($63 million to the four broader priority areas). The specific amounts devoted to each sub-priority area are detailed in Appendix A.

This funding reflects both responsiveness to researchers’ proposals and proactive targeting of sub-priority areas in research funding competitions. For example, the NCE program targeted the 13 sub-priority areas in its last two competitions in 2009 and 2012. As a result, six new networks were announced, with an NCE investment of $141.6 million. These six networks covered the following sub-priority areas: water; cleaner methods of extracting, processing and utilizing hydrocarbon fuels; biofuels; neuroscience; health in an aging population; and new media, animation and games.

The Canada Excellence Research Chairs (CERC) program is another example where granting council funding has been targeted. Budget 2008 announced the creation of the prestigious program, to award up to $10 million for 20 chairs over seven years to support universities in attracting and retaining world-leading researchers in the four priority areas of the S&T Strategy. Canada’s inaugural 19 CERCs were announced by the federal government in April 2010. While the competition did not explicitly target the sub-priority areas, the extent to which proposals addressed these areas was considered when evaluating them for funding. Budget 2011 announced further federal investment to appoint additional CERCs, with new awards available under a second competition that will be finalized by early 2014. Again, one of the criteria by which proposals will be evaluated is the extent to which they fit in one or more of the priority and sub-priority areas.

Higher Education Sector

The higher education sector (universities and colleges) plays a number of important roles in the STI ecosystem, described by the OECD to include “education, training, skills development, problem solving, creation and diffusion of knowledge, development of new instrumentation, and storage and transmission of knowledge.”13 Universities and colleges can anchor clusters of innovative activity in their local communities and act as bridges between businesses, governments and other countries.

At the heart of the innovation process are the people who “generate the ideas and knowledge that power innovation, and then apply this knowledge and the resulting technologies, products and services in the workplace and as consumers.”14

Universities and colleges play a critical role in developing young talent, providing them with the specific skills, knowledge and trades to help them become productive contributors to Canada’s economy, and exposing them to the exciting potential of research and innovation. Universities and colleges also provide education for future entrepreneurs and business leaders who are integral to enhancing Canada’s competitive advantage and improving productivity. Perhaps most importantly, these institutions impart critical thinking and problem-solving skills to young talent, as well as the adaptability and flexibility necessary for success in the global knowledge economy.

Canada’s universities and colleges also play a critical role in developing and advancing knowledge and its application. Much of the knowledge underlying today’s innovation resulted from research conducted in the higher education sector. While the link between research and innovation is complex and the task of commercializing new knowledge is extremely difficult and uncertain, advances in knowledge are necessary to most innovation processes. In high-technology areas such as ICT, biotechnology and nanotechnology, the basic research conducted by universities has been essential. The uncertainties and long-term horizon of this type of research and the impossibility of capturing all of its benefits make it very difficult, if not impossible, for private firms to carry it out. These firms are, however, increasingly recognizing the innovative opportunities that arise from working closely with universities and colleges.

Through their research activities, Canadian universities also play a critical role in linking Canada to the global pool of knowledge, technology and talent. Through research collaboration with foreign counterparts and through attraction of world-class researchers and scholars to their institutions, universities advance Canada’s knowledge and talent advantages.

Business Sector

Firms constitute a fundamental part of the STI ecosystem, as they translate new knowledge and technologies into jobs and wealth and practical solutions to health, environmental and social challenges. They carry out significant R&D of their own, patent and license new knowledge and technologies and, most importantly, take that knowledge into the local and global marketplace. Firms also enhance Canada’s talent advantage by providing training to employees and working collaboratively with universities and colleges to offer internships and co-operative programs. Firms also fund some of the R&D carried out in universities and colleges.

Large, established firms are able to finance significant in-house R&D and are able to perform the difficult and very expensive task of translating potentially useful new knowledge into goods and services that people buy. New and young firms are also important, as they often exploit technological or commercial opportunities that have been neglected by more established companies.

As noted above, firms also work closely with others in higher education and government on a wide array of STI activities. These partnerships include jointly funding research and research infrastructure with the public sector, collaborating with universities and colleges to develop and commercialize discoveries and address technical challenges, and providing opportunities for highly skilled personnel to unleash their potential.

Characteristics of the Modern STI Enterprise

The global economy has become more integrated, and increased competitiveness and challenging economic conditions have forced governments and firms to reduce expenditures and look for more efficient ways to create and commercialize knowledge and technology. The modern STI enterprise is characterized by increasing internationalization of activities and a related rise in collaboration, including open innovation, among different players and across national borders. These developments impact Canada’s pursuit of STI excellence.

Internationalization

STI is an increasingly global process. Firms are expanding their activities worldwide, not only as a way to enter markets and lower costs, but also as a means to source technological capabilities, tap into local centres and clusters of knowledge, and gain access to highly skilled workers. Multinational firms play a leading role in the globalization of innovation, with close to half of the world’s R&D expenditures accounted for by only 700 firms. These firms have been a key factor in the emergence of global innovation networks.

It is not only firms that are engaged in global STI activities. Modern ICT and increasing mobility, coupled with the escalating costs and complexity of research, have driven the increasing internationalization of the research enterprise. Almost one-quarter of research articles in 2010 featured authors from more than one country, up from 10 percent in 1990,15 while many developed economies are host to many scientists who were born elsewhere.

New global players are also emerging on the STI landscape, with the increased presence of the BRICS countries (Brazil, Russia, India, China and South Africa) in STI activities. China alone accounted for almost a third of the global increase in R&D between 2001 and 2006, as much as the increase in Japan and the European Union combined. It is important to note, however, that while many emerging economies have been investing significantly in R&D, resulting in some improved performance on associated indicators, there is still scope for further improvement in the quality and impact of the research. At the same time that R&D investment has grown, talent in both advanced and emerging economies has become increasingly mobile, willing to follow opportunities around the globe and, in so doing, contributing to the international diffusion of knowledge.

Collaboration

Collaboration and partnerships are important sources of competitive advantage, within sectors and across the economy. As the complexity and costs of engaging in STI have increased, so has collaboration between and among firms and public sector researchers. Through partnerships, firms seek to stay abreast of developments, expand their market reach, gain access to a larger base of ideas and technologies, and get new products to market before their competitors. Data show that firms that collaborate spend more on R&D than those that do not, an indication that collaboration is not simply a means to save on costs but a means to extend the scope of a project or complement firms’ competencies. In addition to increasingly sourcing external knowledge, firms also increasingly seek external partners to commercialize innovations that are not used internally. In most countries, collaboration with foreign partners is at least as important as domestic co-operation, a sign of the formation of global networks of innovation.

As a form of collaboration, some firms are increasingly embracing open modes of innovation. In open source innovation, the activities of both creating knowledge and disseminating or commercializing it are open. Open source innovation relies on communities of innovators who freely and reciprocally reveal their innovations to others who subsequently build on these innovations. For companies, using open innovation as a business strategy can provide access to a larger base of ideas and technologies than available within the firm. By pooling with others the development of knowledge, the costs and risks of R&D can be decreased, while the speed of knowledge development and acquisition can be increased. As knowledge becomes more valued as an input to production, and rapid advances in ICT enable greater sharing of knowledge, open modes of innovation may gain greater currency in the global economy.

Collaboration between the private and public sectors increases the possibility that research in the higher education sector will be relevant and applicable for the business and government sectors. Private sector-led clusters are especially effective at fostering research collaboration and partnerships, as they create a web of interconnected companies, universities, colleges and research institutes. The need for increased collaboration among partners of Canada’s innovation system was one of the key messages of previous editions of this report. Canada’s performance in this area is explored in Chapter 5: Knowledge Development and Transfer.

Conclusion

The three main players described—governments, universities and colleges, and businesses—form the cornerstone of Canada’s STI ecosystem. The chapters that follow look at the funding these players devote to STI, their performance in terms of STI inputs and outputs, and Canada’s success in developing and deploying the talent that drives it all. The discussion not only gives a snapshot of where Canada is relative to its key competitors but where it has come from. This evidence-based analysis serves to provide a comprehensive assessment of Canada’s science, technology and innovation system and benchmark Canada’s performance against that of key competitors, providing insights into Canada’s relative strengths and weaknesses.

3 OECD Frascati Manual: Proposed Standard Practice for Surveys on Research and Experimental Development, Paris (2002), p. 30.

4OECD/Eurostat, Oslo Manual: Guidelines for Collecting and Interpreting Innovation Data, 3rd edition, Paris (2005), p. 46.

5Bank of Canada, “Productivity,” Backgrounders (2010), p. 1.

6The Conference Board of Canada, Canada’s Lagging Productivity: The Case of a Well-Educated Workforce Lacking the Much-Needed Physical Capital (2010), p. 1.

7OECD, Entrepreneurship at a Glance 2012, Paris (2012).

8OECD, Innovation in Firms: A Microeconomic Perspective, Paris (2009), p. 13.

9 Baldwin, R. John, Wulong Gu and Beiling Yan, The Productivity Review: User Guide for Statistics Canada Annual Multifactor Productivity Program (Statistics Canada Catalogue 15-206XIE, no. 14), 2007.

10OECD, “Key Findings,” Ministerial Report on the OECD Innovation Strategy (2010), p. 4.

11A recent study by Diewert and Yu (published in the Centre for the Study of Living Standards’ International Productivity Monitor, Fall 2012, pp. 27–45), while using Statistics Canada raw data, comes to a different conclusion. It estimates average MFP growth at 1.03 percent per year over the 1961–2011 period. This compares to the official Statistics Canada estimate of 0.28 percent over the same period. The main reason for the difference seems to lie in the estimates of capital services growth used by the two different approaches.

12J. Haltiwanger, R. Jarmin and J. Miranda, “Business Dynamics Statistics Briefing: Jobs Created from Business Start-ups in the United States,” Ewing Marion Kauffman Foundation (2009). Cited in OECD, OECD Innovation Strategy: Getting a Head Start on Tomorrow, Paris (2010), p. 24.

13OECD, Performance-based Funding for Public Research in Tertiary Education Institutions: Workshop Proceedings (2010), p. 9.

14OECD, “Key Findings,” Ministerial Report on the OECD Innovation Strategy (2010), p. 9.

15U.S. National Science Foundation, Science and Engineering Indicators (2012), Chapter 5, p. 5-36.