Some Thoughts on Innovation in Canada

Peter HackettExecutive Professor, School of Business, University of Alberta Fellow, National Institute for Nanotechnology

phackett@ualberta.ca

CULTURAL FACTORS

The experience of Canada has been that the largest and most quickly obtained fortunes, whether private or public, come from resources – furs, timber, apples, fish, coal, iron, nickel, gold, silver, grain, cobalt, uranium, aluminum, potash, hydro-electric power, oil. Societies, like individuals are shaped by their experiences. Canada’s get-rich-quick economic experiences have helped shape all the country’s major institutions: the national government, the provincial governments, the banks and other financial institutions. They have shaped the way venture capital is used, the ways subsidies are used, the kinds of development schemes considered most attractive, and the thinking of almost everyone in authority. These are not easy things to change. Even most of the Canadian nationalists who object to foreign ownership of branch plants here do not seem to be aware that ownership is a superficial matter if Canada, in reality, does not create industry and develop branch plants of its own.

Jane Jacobs, The Massey Lectures, 1979

“

Canada is a very rich country• Canada is rich in natural resources and our

natural resources are in great demand• Canadian dollar closely tracks the price of oil• Natural resources will remain in demand• Canada will prosper as a smart supplier of

resources to the world• Canada lacks the incentives to attend to

growth in other sectors of the economy

INNOVATION

Knowledge and innovation systems

• The value of innovation is a product of two very different things, knowledge and an innovation system

• Highly qualified people provide the vectors between these two

• An innovation system consists of the actors and the policies that define a local commercial advantage

If I had a seaweed of a different colour, I could sell it.

Louis DeveauFounder, Acadian Seaplants Ltd.

“

COMERCIALIZATION

Technology and commercialization• From time-to-time, new knowledge is

embodied in a new technology.• Companies listen to their customers and scan

the world for technologies and knowledge to incorporate into products for their customers to buy.

• Technologies are not commercialized; products are.

… the students as graduates will commercialize everything they learn – whether discovered in Canada or discovered somewhere else. They will form the society of our future based on the education they’ve experienced.

Mike LazaridisCEO, Research in Motion

“

In the 20-year history of Research In Motion, I have licensed exactly two technologies from university research teams. Over that same period I have hired more than 5,000 students as co-ops, interns, and full time employees. I’ve even hired some of their professors. When I decided to build radios and introduce CAD into our engineering processes, I didn’t go looking for patents. I went looking for great people and found them in our universities.

Mike LazaridisCEO, Research in Motion

“

Missing a culture of commerce“While Canada is second to none in technology, there is a significant lack of commerce skills among our technology entrepreneurs. Companies often find themselves dependent on U.S. and other foreign nationals for executive talent especially for customer-facing experience and skills. If we are to succeed, the notion that technology coupled with sufficient venture capital will lead to success in the knowledge economy must be complemented by a deeper understanding of the human dimensions of enterprise and of the value exchange that is commerce.”

“The disappearance of firms was not due uniquely to the inexperience of the technology-focused founders. The suppliers, supporters and specialized partners in the financial, legal and public sectors also lacked the essential commerce skills, experience and enterprise savvy to contribute to success. Developing enterprise competence in these groups would substantially improve Canada’s success in knowledge-based commerce.”

Douglas Barber and Jeffrey CrelinstenUnderstanding the Disappearance of … R&D Performing Firms, 2009

STRUCTURAL FACTORS

High knowledge industries are a small fraction of the economy

Statistics Canada, 2003 Data

Structural barriers to innovation

Innovation and Business Strategy: Why Canada Falls Short, CCA 2009

Canada is “upstream” in many North American industries. This positioning is the result of Canada’s resource endowment and development history as a commodity supplier and technology adopter. Canada’s upstream position in many continentally integrated value chains limits contact with ultimate end-customers – who are a strong source of motivation and direction for innovation – and shapes the nature of business ambition in many sectors.

Canada’s domestic market is relatively small and geographically fragmented. Small markets offer lower potential reward for undertaking the risk of innovation and tend to attract fewer competitors, thus providing less incentive for a business to innovate in order to survive. On the other hand, the innovation success of countries like Finland and Sweden shows that the disadvantage of a small domestic market can be offset by a strong orientation toward innovation-intensive exports.

GOVERNMENT INTERVENTIONS

Canada lags in PhD production…

OECD Data, Conference Board of Canada

1998 1999 2000 2001 2002 2003 2004 2005 20060

20

40

60

80

100

120

140

160

180

SwitzerlandFinlandGermanyUKAustraliaUSANetherlandsCanada

PhD

Grad

uate

s per

100

,000

(20

to 3

9)

…despite growth in expenditures on R&D in Canadian universities

Research Infosource

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 20090

1

2

3

4

5

6

7

CAN

ADIA

N R

&D

EXPE

NDI

TURE

S /

$BIL

LIO

NS

Ontario has structural problems. Its manufacturing sector has been eroded by global competition. Growth in its workforce will soon grind to a near-halt; already the province falls far short of producing enough workers with graduate-level degrees to help drive the province’s growth and standard of living. It’s a problem for the entire country; Canada ranks roughly 25th among industrialized countries for the number of PhDs per capita. There is a cost to turning inward.

EditorialThe Globe and Mail, November 16, 2010

“

Low direct assistance to companies

Innovation and Business Strategy: Why Canada Falls Short, CCA 2009

Government expenditures on business R&D in 2004

2004 GBERD was $636M or 14.1% of $4,513M GERD

INDUSTRY CSA DEFENCE NRC NRCAN NSERC CIHR SSHRC CFI AAFC0

100

200

300

400

500

600

700

800GERD GBERD

GOV

R&D

EXPE

NDI

TURE

S/$m

illio

ns

Government support of companies

• There are over 530 government programs in support of innovation in Canadian industry

• Some give fiscal support: IRAP, SDTC• Some give fiscal support to partners• Some give advice• How effective is the 500th most effective

programSOURCE: GFUNDS ONLINE, Global Advantage, 2010

Weak venture capital performance

The first three values for Canada are for 1995-2001 (seven years), 1995-2002 (eight years), and 1995-2003 (nine years), respectively. SOURCE: CVA, 2007; NVCA, 2008.

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-080

5

10

15

20

25

30

USA CANADA

Ten

Year

Inte

rnal

Rat

e of

Ret

urn

(%)

Innovation and Business Strategy: Why Canada Falls Short, CCA 2009

The impact of interventions in the venture capital arena• Government policies created a number of subsidized

investment vehicles in Canada• The rate of making investments was mandated• Return-on-investment (risk) assumed a lesser role• Companies receiving investment did not succeed• More stringent venture money was displaced• The smart in smart money is more important than

money

US venture capital is different“The interesting thing about academia is that its more interesting to the people in it than it is to anyone else …”

“In Silicon Valley, we build businesses around an idea and then we figure out how we will make money…if you want something to really work you cannot hire people who are motivated by a pay check”

“Venture Capital exists everywhere but the companies that have been best at using it are in Silicon Valley – because we work well together and because we are more likely to be compelled by a big idea and put monetization second.”

Alexander Karp, Co-founder and CEO of Palantir

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Date Modified: 2008-11-24 Date de modification : 2008-11-24Important Notices Avis importants

Canada’s Innovation Strategy of 2002

Weak national agendas

GOOGLE “Canada’s Innovation Strategy”

1981 1986 1991 1996 2001 2006

Canada’s Innovation Strategy 2002

• Move from 15th to 5th in BERD

• Implied $200B of innovative products

• In fact BERD has declined

Innovation and Business Strategy: Why Canada Falls Short, CCA 2009

Summary…

• Production rate of PhD falls far below other developed countries. Despite increased spending Canada falls further behind.

• Government interventions to increase VC supply have been counterproductive.

• Government support of industry R&D is fragmented and ineffective.

…Summary• Efforts to mobilize national attention to the

issues have not met with success.• Fragmentation between Federal and Provincial

levels has not served the interests of Canadian innovation.

• This patchy record is only tolerated because of Canada’s natural resource wealth

• Government may be irrelevant

UNIVERSITIES

Canadian universities 2000-20091999/00 2008/9 change

Research IncomeAll Universities $2.2 Billion $6.3 Billion 186%

Research Income University of Toronto $306 Million $858 Million 180%

Full Time FacultyAll Universities 31,537 37,332 18%

Full Time FacultyUniversity of Toronto 2772 2445 -12%

Research IntensityAll Universities $70,000 $167,000 139%

Research IntensityUniversity of Toronto $134,000 $351,000 162%

Research Infosource

Share of national research income

Research Infosource

1998 2000 2002 2004 2006 2008 20100.0%5.0%

10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%

ALBERTA Linear (ALBERTA) BRITISH COLUMBIALinear (BRITISH COLUMBIA) Linear (BRITISH COLUMBIA) ONTARIOLinear (ONTARIO) QUEBEC Linear (QUEBEC)

Share of national research income

Research Infosource

1998 2000 2002 2004 2006 2008 20100.0%5.0%

10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%

ALBERTA Linear (ALBERTA) BRITISH COLUMBIALinear (BRITISH COLUMBIA) Linear (BRITISH COLUMBIA) ONTARIOLinear (ONTARIO) QUEBEC Linear (QUEBEC)

Alberta stationary for a decade…

Research Infosource

200920082007200620052004200320022001200019990.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%ALBERTA

While BC was on the rise…

Research Infosource

200920082007200620052004200320022001200019990.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%ALBERTA Linear (ALBERTA)BRITISH COLUMBIA Linear (BRITISH COLUMBIA)

Alberta losing leadership in West

Research Infosource

1998 2000 2002 2004 2006 2008 20100.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

ALBERTA Linear (ALBERTA) BRITISH COLUMBIALinear (BRITISH COLUMBIA) Linear (BRITISH COLUMBIA) SASKATCHEWANLinear (SASKATCHEWAN)

Alberta universities: a flat decade…

Research Infosource

1998 2000 2002 2004 2006 2008 20100.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

University of Alberta Linear (University of Alberta)

BC universities were on the rise…

Source: Research InfoSource

1998 2000 2002 2004 2006 2008 20100.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

University of British Columbia Linear (University of British Columbia )Linear (University of British Columbia ) University of Victoria

Summary

• Research expenditures at Canadian universities tripled over the decade

• Research intensity has tripled at leading universities

• British Columbia and Ontario have made the greatest gains

• Little change in relative rankings of individual universities

INSTITUTIONS

People, not institutions, are intrinsically innovative. Institutions are not intrinsically innovative; rather the reverse.

Peter Hackett A Creative Economy in Canada?

“

Research Money, 24 (2010) July

Waterloo: An entrepreneurial university• COOP model is ubiquitous. Students are

engaged with industry throughout their education.

• Professors are expected to consult with industry.

• Professors own the IP generated from their research.

SOURCE: David Wolfe

NINT: Building ($40M)

NRC/UofASharedNanotechFacility

($40M)

NRC

• ResearchPrograms

• Innovation Program

• Incubator

Adjuncts

University AlignedNanotechResearchPrograms

NRC Fellows

$2M

/a

$40M

$40M

$12

M/a

$20M

InterdisciplinaryGlobal Scale

$?M

/a

$20M

National Institute for Nanotechnology

DESIGN: Hackett and Church, early 1999

I believe so much in this model that I’ve picked an area of research I believe is fertile for Canada – quantum information theory and quantum computing – and have invested heavily in it. It’s a fresh, green valley just waiting for us to claim. I have put $133 million so far into the Perimeter Institute for Theoretical Physics and the Institute for Quantum Computing at the University of Waterloo.

Mike LazaridisCEO, Research in Motion

“

Institute for Quantum Computing

MESA+ must remind industry of the cruel and conveniently overlooked fact that when it focuses on the comfortingly familiar activities of cash management, engineering improvement of existing ideas and commoditization of its products, it loses proprietary advantage , cost advantage, margin, and ultimately the business itself. Universities and industry must cooperate – to mutual advantage – around nano to keep fresh ideas and fresh minds coming.

George M. WhitesidesHarvard UniversityMESA+ Scientific Advisory Board

“

Summary

• Institutions are challenged to maintain relevance in face of global change

• There is a feeling that the pace of institutional innovation is too slow

• Those institutions that adapt and seek out more effective models will be the leaders of tomorrow

INDUSTRY

Industry expenditures on R&D

Research Infosource: Top 100 R&D performing companies

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 20090

2

4

6

8

10

12OTHER COMPANIES NORTEL

CAN

ADIA

N IN

DUST

RIAL

R&

D EX

-PE

NDI

TURE

S/$

BILL

ION

S

Expenditures on R&D

Research Infosource : Top 100 R&D performing companies

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 20090

2

4

6

8

10

12

NORTEL OTHER COMPANIES UNIVERSITIES

CAN

ADIA

N R

&D

EXPE

NDI

TURE

S /

$BIL

LIO

NS

-1.8

-1.3

-0.8

-0.3

Canada-USA BERD intensity

Innovation and Business Strategy: Why Canada Falls Short, CCA 2009

First year patents for drugs approved

Friedman, Nature Reviews Drug Discovery, 9 (2010) 835

2000 2001 2002 2003 2004 2005 2006 2007 2008 20090

50

100

150

200

250

USA UK JAPAN GERMANY SWEDENFRANCE SWITZERLAND BELGIUM DENMARK CANADA

SOURCE: FDA Orange Book

Where were new drugs invented?

USA UK JAPAN GERMANY SWEDEN FRANCE SWITZERLAND BELGIUM DENMARK CANADA0

100

200

300

400

500

600

700

800

900 838

115 101 67 62 44 30 25 20 13

FIRST YEAR PATENTS FOR DRUGS APPROVED IN 2000 to 2009

Friedman, Nature Reviews Drug Discovery, 9 (2010) 835

COUNTRY FRACTIONUSA 63.7%UK 8.7%JAPAN 7.7%GERMANY 5.1%SWEDEN 4.7%CANADA 1.0%

SOURCE: FDA Orange Book

Canadian technology billionairesName Fortune Source

Bernard Sherman $5.2 Billion Apotex

Ted Rogers $4.9 Billion Rogers Communications

Jeffrey Skoll $4.2 Billion E-bay

Mike Lazaridis $1.7 Billion Research in Motion

Jim Balsille $1.6 Billion Research in Motion

Sir Terry Mathews $1.5 Billion Mitel

David Cheriton $1.4 Billion Google

Doug Fregin $1 Billion Research in Motion

Nancy Knowlton and David Martin SMART Technologies

Michael Potter $550 Million Cognos

Lee Ka Lau $450 Million ATI Technologies

TSX Top 1000 companies in 2009

Top 100 100 to 200 200 to 300 300 to 400 400 to 500 500 to 600 600 to 700 700 to 800 800 to 900 900 to 10000

5

10

15

20

25

Technology Biotechnology and PharmaceuticalsIndustrial Products

Top 1000 Public Companies by Profits

123 companies overall

Companies in the Top 1000Top 1000

DECADE

Biotechnology and Pharmaceuticals Industrial Products Technology

SAMPLE 2009Profit $M SAMPLE 2009

Profit $M SAMPLE 2009Profit $M

Top 100 BIOVAIL 199 -none- RIM 1,892

100 to 200 QLT 134 ENERFLEX 65 OPEN TEXT 53

200 to 300 CANGENE 29 BALLARD 34 GENNUM 27

300 to 400 PALADIN 10 MAGELLAN AEROSPACE 13 MATRIKON 9

400 to 500 -none- PFB CORP 1 COREL 4

500 to 600 BioMS (0) DYNATEK (3) 20-20TECHNOLOGIES (2)

600 to 700 NUCRYST (3) POLARIS GEOTHERMAL (5) DRAGONWAVE (6)

700 to 800 METHYLGENE (9) HYDROGENICS (14) ENABLENCE (11)

800 to 900 THERA-TECHNOLOGIES (49) ATS AUTOMATION (23) ZARLINK (48)

900 to 1000 ANGIOTECH (741) PROTECTIVE PRODUCTS (69) NORTEL (5,799)

Summary…• A strong and effective innovation system in

energy and mining with a positive BERD intensity advantage

• Weak venture capital sector and fragmented support for building small companies

• Weak supply of HQP destined for business• Despite this many examples of successful

entrepreneurs and technology companies

…Summary• However, outside of the energy and mining

sectors, there are weak systems of innovation at both the national and local levels

• Consequently single firms, e.g., Nortel, JDS Uniphase, QLT… rise to prominence and dominate our outlook and view of the future

• We need to attend to systematic growth of firms that are significant in global markets

THE REMAINS OF THE DAY

Global research (1981 to 2009)All publications

Engineering

Materials science

Molecular Biology and Genetics

Thompson- Reuters Web of Science

EU-27USAASIA PACIFIC

Global research in transitionShare (%) of world publications

2004-2008

EU-27USACHINA

Thompson- Reuters Web of Science

Growth of nanoscience papers

Thompson Reuters Web of Science1990

19911992

19931994

19951996

19971998

19992000

20012002

20032004

20052006

20072008

20092010

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

GLO

BAL

PRO

DUCT

ION

OF

PAPE

RS

PER

YEAR

Emergence of China

Thompson Reuters Web of Science

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%CHINA USA

PERC

ENTA

GE O

F N

ANO

PAP

ERS

Emergence of India

Thompson Reuters Web of Science1990

19911992

19931994

19951996

19971998

19992000

20012002

20032004

20052006

20072008

20092010

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

ALBERTA INDIA

PERC

ENTA

GE O

F N

ANO

PAP

ERS

Big shift to Asia

Thompson Reuters Web of Science1990

19911992

19931994

19951996

19971998

19992000

20012002

20032004

20052006

20072008

20092010

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

ALBERTA CANADA USA GERMANY JAPAN S KOREA CHINAINDIA

PERC

ENTA

GE O

F N

ANO

PAP

ERS

By 2004 quality is uniformly highCOUNTRY PAPERS

PUBLISHED 2004CITATIONS RECEIVED

CITATIONS PER PAPER

h-index

USA 8163 226804 27.8 174

CHINA 4293 76727 17.9 94

JAPAN 3253 60696 18.7 87

GERMANY 2399 50621 21.1 92

FRANCE 1603 34432 21.5 72

S KOREA 1489 25437 17.1 69

INDIA 805 14668 18.2 51

Thompson Reuters, Web of Science

Nanoscience grows in Canada

Thompson Reuters Web of Science

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

20100

200

400

600

800

1000

1200

1400

1600

1800

CANADA ALBERTA

PRO

DUCT

ION

OF

PAPE

RS P

ER Y

EAR

But global share begins to decline

Thompson Reuters Web of Science

2000 2002 2004 2006 2008 2010 20120.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%CANADA Polynomial (CANADA) INDIAPolynomial (INDIA) ALBERTA Polynomial (ALBERTA)

PERC

ENT

OF

NAN

O P

APER

S

ALBE

RTA

PERC

ENTA

GE

Technology Development Strength

Nan

ote

chn

olo

gy

Act

ivit

yRating Nations on Nanotechology

David Hwang, Lux Research, August 2010

Entrepreneurs

“The universal in starting an indigenous economy is getting firms under way…”

“The magic of Singapore and of the Indian and Chinese economies is their adoption of the entrepreneurial economy.”

Carl Schramm CEO Ewing Marion Kaufman Foundation

Entrepreneurship in China

“China needs 300 million jobs – only small companies can provide them”

Jack Ma Founder and Chairman Ali Baba

Global developments• Urbanization in China, 300 million people

moving to the cities• Many small companies will be created• Those companies will scan the world for

technology to incorporate into products for sale around the world

• India, Brazil, Turkey… will do the same• How will Canada respond?

Canada, rich from natural resources, will likely remain rich for a while. Canada has to live as a rich society if it is to attract and retain the people who will build the creative economy. Living rich comes with responsibilities. Rich societies live rich by making large investments in the education of their people and by taking on issues of global human development.

Peter Hackett A Creative Economy in Canada?

“

Research Money, 24 (2010) July

A balanced scorecard…MEASURE VALUE FLAG TARGETVC ROI (10 years) 3 percent 20 percent

PhD Production Rate Conf Board Rank 15th of 15 Double production

Connect to businessDirect Funding of Business R&D 8 percent 20 percent

High Knowledge Industries 7 percent No target

Recent Technology Billionaires 4 6

High knowledge firms in TSX Top 1000 100 + 150 +

Summary• Need to greatly increase the supply of PhDs• Need to pay attention to commercial skills and

industry engagement• Incent the ROI of venture not the supply• Radical overhaul of industry support programs• Individuals not governments will make the

difference• NEED A SENSE OF URGENCY

Many men easily do without truth but none is strong enough to do without illusions.

Gustave Le Bon (1841-1931)French social psychologist

“