Address to the Economic Club of Canada

May 14, 2009

Universities and The Innovation Economy: Reflections from Toronto

Address to the Economic Club of Canada
David Naylor, President
May 14, 2009

Introduction

Good afternoon. Thank for your being here, and thank you, Mark, for that kind introduction. I’m also grateful to today’s sponsor, TD Insurance.

In the light of my topic, I should first acknowledge that the Economic Club of Canada is itself an example of innovation and entrepreneurship. Mark Adler – a University of Toronto alumnus – congratulations on your leadership as the creative force behind this “podium of record”…

Ladies and gentlemen,

We live in challenging times. The Great Crash of 2008 has taken a huge toll on employment and on trade. Famous companies have collapsed after decades of success. Trillions of dollars of wealth has evaporated. Governments have joined forces to shape a new economic order. And they have embarked on massive stimulus spending while cutting interest rates to unprecedented levels.

I’m grateful that universities and colleges are among the major beneficiaries of infrastructure spending by both the federal and provincial governments in this country. And we are all hoping that the current jolt of infrastructure spending will defibrillate the economy. But I think we must also face two incontrovertible facts.

Fact number 1: When Canada comes out of this recession, our economic profile is likely to be ‘less of the same’. That won’t cut it at a time when millions more people in China and India are acquiring advanced education, and when many other nations are making long-term investments to build innovation-based economies.

Fact number 2. Before this recession, and before the recent outburst of self-satisfaction about our comparative fiscal probity, Canada was losing ground in the race to build a successful and sustainable innovation economy. We’ve seen it in one report card after another, including a very insightful report released last week by Canada’s Science Technology and Innovation Council.

Talent and Innovation

When one examines how other nations are moving ahead in the global innovation race, it’s clear that talent is a key ingredient – including talent development through advanced education. For the period from 2006 to 2015, for example, Human Resources and Social Development Canada estimates that 2/3rds of all job openings will require post-secondary education… a transformation in our labour markets.

Canada is therefore fortunate to have attracted a tremendous number of ambitious and highly-educated immigrants in recent years. As well, Canadians have the highest post-secondary participation rates in the OECD.

That said, those participation rates are driven overwhelmingly by high community college attendance. Canadians go to university at about the OECD average rate – 18th out of 27 nations in 2005, without much movement in the past couple of years. Furthermore, in graduate education, we are laggards, sitting well down any list of the per-capita output of persons with either Masters or Doctoral degrees.

This shortfall is a concern. Data from the Institute for Competitiveness and Prosperity at the University of Toronto suggest that our graduate education gap is costing Canada billions of dollars in productivity each year.

Among Canadian provinces, the Government of Ontario has made major investments over the last four years to narrow the gap in advanced degree-holders — a visionary and bold step. Arguably, every province needs to follow suit. Put simply, we need to grow graduate education if we are to compete and win in a globalized innovation economy. That is an eminently achievable medium-term goal for Canada.

STEMs and Flowers

At this point, I do want to address one zombie concept about talent and innovation – a misconception that just won’t die. It goes as follows: “Prosperity and Innovation depend entirely on the STEM disciplines — Science, Technology, Engineering and Mathematics. Bring on the Engineers, and ditch the English Majors and Economists…”

It turns out, however, that the inter-jurisdictional data don’t really support the presumption that our national prosperity will be greatly enhanced by a massive increase in the output of scientists, technologists, engineers and mathematicians.

Please don’t over-interpret this caveat. I’m all for creating a stronger culture in support of excellence in the STEM disciplines, starting from primary school – we need to start early.

As to a modest increase in the numbers of students enrolled in STEM programs, I’d buy that too – more on intuition and inference than on hard evidence (with a nod to Gretzky’s axiom : Go where the puck is headed, not where it is now). I would also add the proviso that we must focus on the quality of our graduates and undertake to boost the numbers of STEM Masters and Doctoral degrees.

But let me offer three caveats:

First: Successful societies are built around creative and well-balanced communities. You can’t have them without the social sciences, the arts, and the humanities.

Second: The high-tech sector is critically dependent on broad creativity and business acumen. Research in Motion really didn’t get rolling until they brought in a guy named Jim Balsillie, a commerce graduate from the University of Toronto, to serve as co-CEO and take the BlackBerry to the marketplace in a serious way. Simultaneous technological innovation is extremely common. Management creativity and business acumen are what separate the winners from the losers in the global market place.

Third: The ultra-high-tech sector is only a modest part of our economy and every other industrialized economy. As a corollary, innovation is not unique to the STEM disciplines – a huge range of other disciplines drive sectors that enrich our society. In that regard, I might note that Cirque de Soleil probably does as much for Canada’s global reputation as the Bombardier Regional Jet.

Research Excellence

Let’s switch our focus to research – the pipeline of innovation.

In research productivity, Canada punches well above its weight as a country with a small population. For example, at the University of Toronto, we publish more scholarly papers than any other university in the world except Harvard and, perhaps — depending on how you count publications — another U of T – the University of Tokyo.

That said – and in the presence of John Polanyi, our most recent Nobel laureate – I am disappointed, as are many observers, that Canadian universities are not doing better in the race to win major international research prizes. According to last week’s report from the STI Council, between 1941 and 2008, Canada received 19 such prizes, tied for 12th with Israel, a country not even established until 1948. Ahead of us: the United States with 1403, the UK with 222, France with 91, Germany with 75, even Australia with 42 prizes.

How does Australia do so much better than Canada? Let me hazard one irreverent guess. If Australia were next door to Britain, Britain would do even better and Australia would do much worse. And let me also guess that at least 50 or 60 of those major US prizes were won by expatriate Canadians who went to America at some stage in their careers.

A word on that latter point: Like many of you, I wonder whether President Obama’s agenda is fiscally sustainable. But there is still a massive engine of innovation south of our border, along with pools of risk capital that, while shallow or even frozen for the moment, will eventually flow freely again. If America’s innovation engine gets re-tooled and re-fuelled, we are going to lose some of our most talented people.

That’s why we have to create environments that make it possible for young stars to imagine world leadership in research and in research-driven companies right here at home in Canada. And that’s a challenge for our schools, our universities and colleges, our business leaders, our governments – indeed, our entire society.

Hat’s off on this score to the federal government for introducing 500 new Vanier Scholarships for doctoral students. Valued at $50,000 per year, and desiged to compete with Rhodes and Fulbright scholarships, these top-tier awards for domestic and international graduate students send a very positive signal about Canada’s commitment to nurturing outstanding talent.

Another Zombie: Basic Research is Irrelevant

Unfortunately, when it comes to research excellence, we again have to confront a conceptual zombie. I still hear smart business people grumble that “We should cut spending on all that irrelevant Basic Research.”

This zombie turns into Frankenstein when you add a related idea to it: Governments pay the research bills with taxpayers’ money and governments should tell researchers what to study.

Yes, we need more, not less, collaboration between university-based researchers and innovation-based enterprises. And yes, it’s reasonable for governments to set some broad priorities.

However, the last hundred years have shown us time and again that basic research, driven by curiosity and arbitrated by peer review, is absolutely essential to human progress – and its practical impacts are totally unpredictable.

Let me give you just one example from the University of Toronto.

Tony Pawson is one of a handful of U of T scientists currently in the running for Nobel prizes. Working from Mount Sinai Hospital, Professor Pawson studies how cells communicate with each other. Sounds arcane, doesn’t it? But Pawson’s work, in combination with the work of Tony Hunter at the Salk Institute, enabled Novartis to create the drug Gleevec. And Gleevec is saving and prolonging the lives of countless patients around the world with leukemia and gastrointestinal tumors.

Think of it this way. When industry does or sponsors applied research, necessity is the mother of invention. That’s an excellent source of incremental innovation. But when basic research is taken to the marketplace, invention becomes the mother of necessity…And whole new industries can emerge on the backs of disruptive technologies.

Research Spending

Since we’re in the Economic Club of Canada, I must acknowledge a hierarchy of evil. If zombies are bad, misleading economic indicators are even worse. In the realm of university research spending, we have one such statistic.

It measures the ratio of Higher Education R&D spending to the Gross Domestic Product, and is commonly termed the HERD ratio. By this indicator, we stand proudly second in the entire OECD.

Unfortunately, this statistic is flawed. It takes all the external research funding that universities receive, and then uses creative estimation to tally all the unfunded mandates and liabilities that universities incur when their professors do that research. This includes our unfunded institutional costs of housing, managing and supporting research operations. It also includes estimates of all the professorial salary costs attributable to research activity.

In the US, most of those costs are determined precisely by granting agencies such as the National Science Foundation and the National Institutes of Health, and they are fully reimbursed by those agencies.

In Canada, this guesstimated measure, including its unfunded mandates, by definition overstates the amount of government funding directed specifically to university research, and buries the subsidy to research that Canadian provinces and students pay through, respectively, education grants and tuition fees.

These unfunded mandates in research, like the graduate education gap, can be readily remedied without a huge cost. Similarly, we can and must get the three federal Granting Councils back on a modest growth trajectory – not to match the hectic spending south of the border, but to make sure that our researchers can take full advantage of the generous support for infrastructure put in place recently by the Government of Canada and the provinces.

While those fixes are relatively straightforward, there’s another fix that is not.

Our total R&D spending as a percentage of GDP is middle of the pack in the OECD, well below leading innovators such as the US, South Korea and Finland. A key reason for this middling total is Canada’s disappointingly low level of spending in Business R&D. In fact, R&D spending by Canadian businesses has been decreasing since 2002.

And here’s an unsettling footnote. The majority of the private sector investment in R&D is actually done by a small handful of companies: in 2007 the top two private R&D investors spent more on R&D than the next eight investors combined. Those top two were Nortel and BCE…

Moving this set of indicators in a positive direction remains a major challenge for Canada – and that movement will in turn be the best evidence that we are building a strong innovation economy.

The Four C’s

Given this picture, what is to be done? How do we create a successful innovation ecosystem? How do we start a positive cycle, with innovation-based companies that reach global prominence and spur business R&D spending?

For starters, Canada is already doing a number of things right and spending a rather substantial amount of money in the innovation space. Many of our current problems relate to the four Cs: coordination, collaboration, capital, and culture.

First, on Coordination: For understandable political reasons, every Government loves to create new boutique programs. That problem is greatly augmented by Canada’s sometimes fractious federal arrangements. Today, the CEO of an innovation-based start-up looking for a boost from the public purse has to navigate a confusing array of agencies and programs, some specific to his or her province, others national. I believe Ottawa and the provinces need to sit down, sort out who is doing what to support early-stage companies, and communicate it more effectively to the private sector. Ideally they might also agree on how to fill in the missing pieces that will create a true national innovation system.

Second, on Collaboration: I recognize that lots of great collaborations are happening among companies, universities, municipalities and non-profit enterprises right across Canada. However, last week’s Science, Technology and Innovation Council report contains some unsettling data. For the period 2002 to 2004, Canadian manufacturing firms of diverse sizes ranked near the bottom of the OECD in collaboration either with university and college researchers, or government labs.

Furthermore, a survey last year suggested that Canadian manufacturers saw themselves as more likely to get valuable information from trade shows than from university or government researchers.

Canadian governments spend countless millions of dollars on agencies and programs designed to help innovation-based businesses or to facilitate collaboration between universities and industry. For example, Ottawa spends $850 million a year on the National Research Council. Now 93 years old, with a distinguished history, our NRC has spent the last two or three decades grafting a new market-facing skin onto its regional development muscles and its applied research bones. It’s an interesting hybrid with some great institutes and programs, but its mandate has become very diffuse.

It’s time we took a close look at what all these important agencies and programs do, and how we can connect them more successfully across levels of government and, above all, with industry and university partners.

What about our third “C”: Capital? Helene Desmarais is the founder of a technology incubator in Quebec. Writing in the Financial Post just a few weeks ago, Ms Desmarais lamented the shortage of seed-stage and venture capital in Canada. She observed that Canadian governments have a habit of “intervening at almost every stage of economic development, from subsidizing fundamental research to facilitating exports” but those same governments largely ignore the crucial start-up stage of young companies.

To its considerable credit, the Ontario Government has recognized this gap and, in its 2009 budget, committed $250M over five years for a new Emerging Technologies Fund. That Fund will match seed-stage private investments for new companies working in clean tech, life sciences, digital media, and the ICT sector.

Risk-capital, of course, leads one to the question of risk-taking. And here we have Culture, the last of our four Cs.

The culture of Canadian universities is changing as the Ivory Tower of the nineteenth century gives way to the Intellectual Commons of the twenty-first century. As but one example, the MaRS Centre here in Toronto runs a lecture series called Entrepreneurship 101 (for which no credits are given). Those lectures now draw hundreds of undergraduates, graduate students, postdoctoral fellows and faculty members.

On a related note, I also question any assumption that there is some inherent deficiency in Canadian business culture… that we’re genetically doomed to run branch-plants. If we create the right conditions, Canadian companies will compete and win on the world stage.

I worry, instead, about the culture of Government in relation to all these new programs designed to promote innovation or flow out risk capital. Governments understandably have to be risk-averse – sometimes politics is the ultimate contact sport. In the public sector, process sometimes trumps outcomes. That’s why we need to find ways to move many of these activities away from Government and into more nimble vehicles that are still held accountable for their use of public funds. Not an easy task, but essential, in my view.

Time to Build an Innovation System…

Let me draw together these thoughts and observations.

Looking abroad, one can see that countries like Finland, Israel, Singapore, Taiwan and South Korea are all working to connect the dots and build national innovation systems. To varying degrees, they have brought strategic clarity and coherence to their programs. They have carefully developed domestic capacity to incubate and nurture early-stage companies based on innovation. They have augmented – but not controlled – pools of risk capital. And, rather than push money primarily into programs designed to force-feed university-industry collaboration from the supply side, they have built market-facing demand for both disruptive technologies and incremental innovations by helping to grow successful companies.

Such systems can’t be implemented overnight. But their impacts can be felt within a generation. In the 1950s, for example, 70 per cent of Israel’s exports were agricultural. The comparable figure today is 2 per cent. Much of what Israel sells to the world now comes from high-tech companies based on discoveries at leading research institutes and universities.

As I wrote in the Globe and Mail last year, the Israelis have recognized two important facts. First, ultimately, it is the private sector that does commercialization, not universities or governments. Second, to kickstart an innovation economy, governments need to underwrite risks, incubation, and collaboration, but otherwise – with respect – stay out of the way.

Commercialization of publicly-financed discoveries works if the main players – governments, universities and the private sector – are linked in a system where each plays its own role. And once the innovation flywheel gets turning, talent – not technology, people – not patents – become the key enablers of change and prosperity.

Conclusion

We all know that Canada is a remarkably successful nation in many ways. We are part of a stable liberal democracy, exemplary in its pluralism and inclusivity. Over the last two decades, we have moved from profligacy to prudence in the management of our public finances. Our prosperity has been anchored by a strong financial sector, and sustained by massive natural resource advantages. In this context, a meaningful number of highly competitive firms have emerged that owe their success to a relentless focus on innovation. However, as the Science, Technology and Innovation Council has rightly concluded, Canada by almost all indicators is “a solid middle-of-the-road performer” when it comes to research and innovation today. While we dawdle, other small and mid-sized countries are making the investments and policy changes required to put innovation at the centre of their economic success.

We may have the benefit of some time – arguably a generation or more in which our standard of living can be undergirded by our natural resource advantages. We benefit from a talented domestic work force and an ongoing influx of ambitious and skilled immigrants. But while there is ample reason for optimism about our prospects, I am not sure we really have any time to waste. When this recession ends, the international economic landscape will look very different. Those nations that have cultivated the creative and innovative potential of their communities and their companies will see a wonderful flowering in the decades ahead. Those that have not, those that do ‘less of the same’, will find that their ground becomes more barren as the years pass.

For one, I believe it is fully within our capabilities to move from mediocrity to excellence in innovation. Making the necessary changes to build an innovation economy is our shared and urgent responsibility if we are to secure the prosperity of future generations in this great country.

Thank you for your kind attention.

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