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PRIMER ON R&D
Canada and Nova Scotia in a Global Context
Presentation to One Nova Scotia Coalition
By Peter Nicholson
May 19, 2015
OUTLINE
 MOTIVATION
 CANADIAN R&D IN A GLOBAL CONTEXT
 NOVA SCOTIA’S R&D IN A CANADIAN CONTEXT
 DISRUPTING OUR LOW-INNOVATION EQUILIBRIUM
 WHAT ROLE FOR PUBLIC POLICY ?
WHAT IS R&D AND WHY DOES IT MATTER
The term “R&D”, and its statistical measurement, encompass three broad activities:
 BASIC RESEARCH—acquisition of new knowledge without a specific application in view
 APPLIED RESEARCH—acquisition of new knowledge relevant to a specific “practical” objective
 EXPERIMENTAL DEVELOPMENT—application of existing knowledge to create or improve products or processes
How R&D Contributes to Growth and Prosperity
Breakthroughs
R&D
Innovative
activities
Competitiveness
Growth &
Prosperity
Steady
Improvements
R&D INTENSITY CORRELATES BROADLY WITH ECONOMIC DYNAMISM
CANADA’S R&D EXPENDITURE IN A GLOBAL CONTEXT
TOTAL R&D AS PERCENT OF GDP--2013
4.5
CANADA RELATIVE TO 20 PEER COUNTRIES
4
Percent of GDP
3.5
3
2.5
Total R&D
Percent of Ave Rank
67%
16/20
Higher Ed R&D
151%
6/20
Government R&D
56%
14/20
Business R&D
50%
17/20
2
1.5
1
0.5
0
CANADA’S RELATIVE POSITION HAS DETERIORATED SINCE THE EARLY 2000s
EVOLUTION OF CANADIAN R&D AS % OF GDP
1.2%
Business
Per Cent GDP
1.0%
ABSOLUTE $ CHANGE
IN R&D: 2011-2014 (%)
0.8%
Higher Education
 TOTAL
-2.9%
 Federal
-13.0%
 Business
-6.9%
 Higher Ed
+4.5%
0.6%
0.4%
Federal Government
0.2%
0.0%
2004
2006
2008
2010
2012
2014
THESE TRENDS ARE INCONSISTENT WITH THE NEEDS OF A 21ST CENTURY ECONOMY
EXPLAINING CANADA’S BUSINESS R&D “GAPS”
Business Expenditure on R&D (BERD)
as Percent of GDP
2.5
Gap relative to US is due
to much higher BERD
intensity of US Mfg. sector
USA
2.0
Decline since 2001 due
principally to reduction in
Manufacturing’s share of
Canada’s economy.
1.5
1.0
End of tech boom and
decline of telecom
equipment sector
CANADA
0.5
0.0
1981
1986
1991
1996
2001
2006
2011
MACRO AND STRUCTURAL FACTORS HAVE BEEN MORE POWERFUL THAN POLICY STIMULUS
COMPONENTS OF N.S. BUSINESS R&D
NS BUSINESS R&D BY SECTOR : 2009-13
60
Manufacturing
50
$ Million
40
Services
30
20
Other
10
0
2009
2010
2011
2012
2013
AS MANUFACTURING HAS DECLINED, R&D IN SERVICES HAS NOT BEEN MAKING UP
R&D PERFORMANCE SUMMARY: NS VS. CANADA
2012 Data
TOTAL R&D ($B)
Growth Rate 2008-12
Canada
$31.30
0.5%
Nova Scotia NS Rank
$0.50
7th
-1.1%
8th
Top Rank
ON $14.2
NF 8.8%
As a Percent GDP
Total R&D
Business R&D
Higher Educ. R&D
Government R&D
1.71%
0.88%
0.66%
0.16%
1.32%
0.21%
0.98%
0.13%
4th
10th
1st
5th
QU 2.27%
QU 1.31%
NS 0.98%
ON 0.27%
Percent performed by
Business
Higher Education
Province
51.6%
38.6%
1.1%
16.1%
74.4%
0.0%
10th
1st
10th
QU 57.8%
NS 74.4%
AB 4.0%
Percent funded by
Provincial government
Federal government
6.5%
19.1%
3.2%
31.2%
9th
2nd
NF 11.0%
PEI 42.9%
FOR R&D….NOVA SCOTIA IS TO CANADA AS CANADA IS TO THE WORLD
CANADIAN BUSINESS STRATEGIES DO NOT FOCUS ON INNOVATION
 Canada has benefited from unique
adjacency to the 20th century’s
technological and economic leader
 Canadian industry thus carved
profitable niches in integrated,
U.S.-dominated value networks
Complementary Business Strategies
US: Full-spectrum, end-userfocussed innovation strategies
Canada: Truncated, branchplant innovation strategies
Resource
extraction
Processing
Assembly
Marketing
Sophisticated
end products
HAS ALWAYS BEEN EASIER AND CHEAPER TO GET “INNOVATION” FROM THE U.S.
DISRUPTING THE LOW-INNOVATION EQUILIBRIUM
NEW MARKETS
More opportunity,
More competition
RESOURCE CHALLENGE
Sustainability,
Volatility,
Substitutes
NEW
INNOVATION
IMPERATIVE
NEW TECHNOLOGIES
ICT, Nano, Bio,…
Disruption
AGEING POPULATION
Labour shortages,
Productivity necessary
BUT… SHOCKS ARE USUALLY NEEDED TO CHANGE ENTRENCHED BEHAVIOUR
WHAT ROLE FOR PUBLIC POLICY?
 The four disruptive megatrends will force business to be more innovative…or else!
 The right policies can make the transformation faster, and of greater benefit for society.
KEY ELEMENTS OF AN INNOVATION POLICY STRATEGY

Allocate resources strategically to areas of strength, need, and global opportunity
tough analysis and a willingness to focus

Build on Nova Scotia’s demonstrated university research strength with targeted initiatives in
areas of exceptional economic opportunity—e.g., marine bio- and IT-related technologies;
opportunities from the Irving contracts; viticulture; clean sustainable aquaculture….

Harvest the best ideas by engaging at the political and officials levels with the world…Travel.

(Re)build analytic and economic policy capacity inside government.

Commit to sustained collaboration across ministries, among governments and with
academia and business…A rising tide will lift all boats!
PRIORITY FROM THE TOP AND A SUSTAINED COMMITMENT ARE SINE QUA NONS
ANNEX
SUPPLEMENTARY SLIDES
FUNDING R&D IN N.S. AND CANADA
FUNDING BUSINESS R&D IN N.S. AND CANADA
FUNDING HIGHER ED. R&D IN N.S. AND CANADA
60%
100%
N.S.
N.S
50%
80%
Can
TOTALS (2012)
40%
Nova Scotia
Canada
$374 M
$12,099 M
30%
20%
TOTALS (2012)
%Provided by Funder
% Provided by Funder
Can
Nova Scotia
$81 M
Canada
$16,153 M
60%
40%
20%
10%
0%
0%
Higher Ed. Fed. Govt.
Business
Provinces Non-Profit
Funding Entity
Business
Foreign
Fed Gov
Provinces
Funding Entity
AMONG PROVINCES, N.S. FUNDS A MUCH SMALLER SHARE OF HIGHER ED R&D THAN AVERAGE
ECONOMIC POLICY PARADIGM IN TRANSITION
End of the Golden Era
Mid 1970s
“Neoliberal Consensus”
1980—Mid 2000s
 Productivity growth
collapses in OECD
countries
 “Market knows best”
 Rise of China et al
 Trade liberalization
 Growing income inequality
 Deficits become
endemic
 Tax cuts/fiscal probity
 Financial crisis: 2007-09
 Business subsidies cut
 Global Commons issues
(e.g., climate change)
 Stagflation undermines
faith in the Keynesian
paradigm
End of Market Fundamentalism
Mid 2000s—Present
 Tax-based incentives
 Government science
de-emphasized
 Search for a new, pragmatic
microeconomic policy
paradigm
 Microeconomic policy
capacity eroded
POLICY PARADIGM FOR THE NEW ERA—A WORK IN PROGRESS
A PROFITABLE LOW-INNOVATION EQUILIBRIUM
From the Lamontagne Report on Science Policy (1970)
“Since 1916…the main objective of Canadian science policy has been to promote
technological innovation in industry….Almost every decade since the 1920s has
witnessed renewed attempts by successive Canadian governments to achieve it, but
on the whole they have all failed”
Canadian business has been as innovative as it has needed to be.
 Corporate profit margins, in aggregate, have long matched or exceeded
those in the US … So where is the motivation to change?
 Strong job growth has offset the impact on per capita GDP of poor
productivity, and a weak $C made productivity growth less urgent
 When the $C strengthened after 2002, putting heavy pressure on
manufacturers, a commodity boom mitigated the overall impact, despite
regional strains…But what now?
BUSINESS STRATEGY WILL NOT CHANGE UNLESS THE SUCCESS FACTORS CHANGE
DETERMINANTS OF INNOVATION ECOSYSTEM BEHAVIOUR
Below are arrayed the principal elements of the innovation ecosystem which, through the interaction of supply and demand conditions,
determine the extent to which an enterprise (public or private sector) undertakes innovation in support of its objectives (e.g., sales
growth, profitability, fulfillment of mandate). Public policies are not explicitly represented in the “model” but they are assumed to
promote or inhibit enterprise innovation primarily through their impact on certain of the Supply and Demand conditions.
SUPPLY CONDITIONS
Availability of:





Entrepreneurs
Qualified People
Risk Capital
Natural resources
Enterprise Supports
INNOVATION-RELATED ACTIVITIES
In support of enterprise objectives:
 Employ/train skilled people
 Acquire/deploy advanced equipment
 Invest in advanced “intangibles”
 Adopt/adapt (global) best practices
DEMAND CONDITIONS
Prevalence of:
 Competition
 Market Opportunities
 Demanding Customers
 Regulation
Entrepreneurial management is almost always associated with innovation. It can be developed through education/experience
or (more often) attracted by opportunity.
Qualified people are the main vectors by which innovative ideas/methods are transferred into and applied within the enterprise.
Innovation involves novelty, thus creating uncertainty and requiring investment before the payoff occurs. The supply of risk capital
depends on the presence of opportunities whose risks are familiar to the relevant investors—e.g. resource and real estate plays in Canada
Natural resource abundance can create opportunities, through innovation, to upgrade and to develop (local ) ecosystems to support the
sector (e.g. technical, environmental and financial specialization). But resource-based prosperity can “trap” an economy at the commodity
end of the value chain by reducing the necessity to innovate.
“Enterprise supports “ are the nutrients of the ecosystem. They include professional services (e.g. consulting, legal, financial, advertizing)
and a great variety of publicly-provided support including infrastructure; education and research; incubators; financing/subsidies.
 Competition generates the necessity that is very often the “mother of innovation”. It stimulates competitive fitness.
 Market opportunity is the flip side of the challenge of competition. The larger the market opportunity, the more likely that an enterprise will
accept the risk of innovation—hence the importance of export market development as a spur to innovation. Procurement, if focused on
innovative products, can create new market opportunity and is thus a direct way in which public policy can promote innovation.
 Demanding customers, in the context of a competitive environment, provide the incentive to innovate and potential partners in the activity.
 Regulation can impede innovation by protecting vested interests, or curtailing experimentation, or imposing costs that impair
competitiveness. Or it can foster innovation by setting challenging requirements that force an innovative response.
Advanced intangibles include R&D, data and analysis, marketing, organizational development. They are hallmarks of “knowledge intensity”
The great majority of innovation occurs through application of new or better methods developed outside the enterprise. An innovation is
thus typically “first in enterprise” rather than “first in world”. Adopt and adapt is the principal channel by which innovation affects the
economy and society.
CONVERTING “RESEARCH” INTO “INNOVATION”
Trained People; Promising Ideas; Consultation
Tech Transfer Offices
Universities
& Colleges
Public Research Facilities
Commercial
Businesses
Extension Services (e.g. IRAP)
Incubators
Angels and VCs
Basic
Research
Knowledge Transfer & Mobilization
(Innovation Intermediaries)
Development
& Marketing
NEED MORE BUSINESS ‘DEMAND-PULL’ TO COMPLEMENT ‘RESEARCH-PUSH’
Degree of Focus
Degree of Focus
Research Problem Identification
THE CHALLENGE OF MULTI-INSTITUTIONAL COLLABORATION
UNIVERSITIES
Research
Motivation
Create and
share knowledge
TRANSLATION &
MOBILIZATION
Ideas to
Innovation
BUSINESSES
Use and control
knowledge
Time
Horizon
Mid-to-Long
Variable
Short-to-Mid
Individual
Rewards/
Incentives
Tenure, promotion and
professional
recognition
Variable
(Major challenge for
organizational design)
Money and
authority in the
firm
Ranges from
bureaucratic to
entrepreneurial
Goal-focused,
organizationallytight
Institutional
Temperament
Institutional
continuity,
organizationally-loose
ORGANIZATIONAL INNOVATION NEEDED TO MELD CULTURES AND INCENTIVES