The IPL newsletter: Volume 14, Issue 281

INTRODUCTION

This newsletter is published by The Innovation Policy Lab at the Munk School of Global Affairs, University of Toronto, and sponsored by the Ministry of Research and Innovation. The views and ideas expressed in this newsletter do not necessarily reflect the views and policies of the Ontario Government.

The Evaluation of the U.S. Small Business Administration Regional Clusters Initiative – Year Two Report

Mark Turner, Alexandre Monnard, Laura Leete, SBA
The Regional Clusters Initiative provides funding to cluster organizing entities to increase opportunities for small business cluster participation, to promote innovation in focus industries, and to enhance regional economic development and growth in cluster regions. The Initiative incorporates two types of clusters: seven Regional Innovation Clusters(RIC) focused on innovative and leading technologies in a variety of industries, and three Advance Defense Technology (ADT) clusters focused on industries of interest to the U.S. Department of Defense. The evaluation described here aims to provide an understanding of how the Regional Clusters Initiative was implemented across the 10 clusters, to describe and assess the services provided by clusters to participating businesses and organizations, and to measure changes in key business and organizational outcomes. In particular, this evaluation focuses on both short- and intermediate-term outcomes that may be influenced by cluster activities and services (e.g., development of alliances among cluster participants, commercialization of new technologies, and improved export and marketing strategies) as well as on longer-term outcomes (e.g., employment and payroll growth, business revenue growth, and new business formation). These longer-term outcomes are compared with various benchmark measures for comparable region/industry combinations derived from alternative sources.

The State of Industrial R&D in Canada

Council of Canadian Academies
The Minister of Industry, on behalf of Industry Canada, asked the Council of Canadian Academies to assess industrial research and development (IR&D) in Canada. To conduct this assessment the Council assembled a 14-member expert panel who met over the course of 14 months to consider the most relevant evidence possible.

This report provides an in-depth analysis of research and development activities in Canadian industries and is one of the most detailed and systematic studies of the state of IR&D ever undertaken in Canada. While many reports have documented Canada’s historical weakness in industrial R&D, the Panel’s report sheds new light on the subject by examining areas of strength and how these strengths are distributed regionally. The report also examines the alignment of IR&D strengths with Canada’s areas of excellence in science and technology research and economic performance.  Barriers and gaps that limit the translation of Canada’s S&T strengths into innovation and wealth creation are also identified.

The State of IR&D in Canada

The Canadian business sector invests relatively little in IR&D compared to peers abroad, although some industries are highly IR&D intensive by international standards. The first part of this finding is consistent with previously published studies, and continues to be troubling given Canada’s persistent record of relatively low productivity growth. Most significantly, the low level of IR&D investment suggests that IR&D is not the principal strategy followed by many Canadian firms in maintaining their competitiveness. Expressed as a share of GDP, IR&D expenditures in Canada are now roughly half the U.S. level and declining. Several Canadian industries, however, show higher IR&D intensities than those of other G7 countries. These include communications equipment manufacturing, office and computing machinery manufacturing, coke and refined petroleum products manufacturing, and pulp and paper.

The IR&D intensity gap between Canada and the United States is largely driven by Canada’s low IR&D intensity in the manufacturing sector. The relatively large share of the Canadian economy accounted for by natural resource industries has almost no impact on this gap. Instead, some of Canada’s high-technology manufacturing industries, such as semiconductor and computer equipment manufacturing, form a smaller share of the economy in Canada than in the United States. This smaller size drags down the manufacturing sector’s aggregate IR&D intensity. The declining share of these high-technology manufacturing industries in the Canadian economy in recent years has further exacerbated this effect. While a relatively high degree of foreign ownership may act to lower IR&D in some industries, such as motor vehicle manufacturing, it is unlikely that this fully explains the overall picture in Canada.

Many industries that traditionally do not spend as much on IR&D have either increased or maintained their IR&D expenditures and intensity in recent years in Canada. Some of these industries reflect Canada’s traditional comparative advantage in natural resources, such as oil and gas extraction and pulp and paper manufacturing. The dominant source of competitive advantage for these industries is not development of new technologies. Rather, it comes from the rapid adoption of new ideas and technologies, which is facilitated by IR&D investment in these industries.

IR&D in Canada is relatively personnel intensive and less capital intensive when compared to other countries. Although Canada’s rank by IR&D intensity is low among OECD countries, the share of the population employed in IR&D places Canada in the middle of the pack. Implicitly, the labour costs of Canadian IR&D personnel are low in comparison to other countries. Expenditures on capital equipment to perform IR&D are also proportionately lower. The full implication of these findings is unclear and warrants further study.

Fewer large firms undertake IR&D in Canada than in highly IR&D-intensive countries. The average size of firms performing IR&D in Canada is smaller than in other countries, and the share of total IR&D performed by smaller firms has increased. The relationship between IR&D expenditures and firm size is complex: IR&D intensity tends to be lower in larger firms, but larger firms are more likely to perform IR&D. Although it may be encouraging that smaller firms are undertaking relatively more IR&D, this could be holding back Canada’s overall IR&D performance. There are economies of scale in IR&D, and larger firms may be needed to take the successes of smaller firms to a broader market.

Canada has the 12th highest rate of patents granted in the world, and the impact of Canadian patents is relatively high. Canada is responsible for 1.1 per cent of patents filed in Europe, Japan, and the United States, and around 4 per cent of the world’s scientific journal articles. Canada also accounts for a relatively large share of world patents in pharmaceuticals and medicines (drugs), and communications technologies. Canadian industry patents are cited in other patents about 20 per cent more than the world average, suggesting a relatively high impact on development of related technologies.

Canadian firms report relatively high levels of innovation compared to firms in other countries. According to a series of innovation surveys in Canada and abroad, Canadian firms repeatedly report relatively high levels of innovation in contrast to their relatively low expenditures on IR&D. This suggests that Canadian firms do not rely on IR&D to generate innovation as much as firms in other countries. Innovation comes from other sources such as organizational change. It is less clear that Canadian firms perform as well in translating innovation into additional sales.

When judged by many of the traditional indicators, Canada’s overall IR&D performance is relatively weak. Canada, however, has substantial IR&D strength in several key industries. In addition, there may be many other niche areas of Canadian excellence and technological development. Nothing precludes Canadian researchers and businesses from making advances and contributions across all industries (or all scientific domains). A single, small firm can have a large impact on a globally dispersed industry with the introduction of the right technology at the right time.

Inevitably, the future commercial successes or failures in many industries will hinge on the extent to which Canadian firms are capable of adopting, developing, and marketing world-leading technologies. Building a strong foundation of IR&D is an essential part of developing that capacity for the future, thereby ensuring that Canadian firms can successfully compete in a global economy increasingly centred on knowledge and technology