The Environment for Innovation in Western Canada

To provide a context for understanding the role of WD in promoting innovation, we conducted a review of the environment for innovation in Western Canada. Innovation performance in any region is a function of:

• The extent to which the Federal and Provincial Governments are able to establish a political, legal and macroeconomic environment that is conducive to innovation. Some of the key issues that affect the willingness and ability of organizations to innovate are the strength of the business environment and a regulatory environment that promotes competition and innovation.
  
• A microeconomic business environment that both triggers innovation and supports innovation activity. A strong microeconomic business environment features: customers that demand innovation; a highly competitive business environment; ready access to key inputs including technology, R&D infrastructure, human resources, capital, production inputs, physical infrastructure, and commercial information; and clusters of related and supporting industries, suppliers and institutions. Clusters are the building blocks of a productive, innovative economy.
  
• Company strategies, culture and climate as well as the structure, processes, resource and linkages that have been put in place to promote and support innovation.

A review of the characteristics of the innovation system in Western Canada, with respect to each of these factors, is provided in Appendix IV. The key findings are highlighted in the table below.

These findings are further discussed in the following paragraphs.

1. The Basic Foundations of an Innovation System Have Been Established
   
   Key elements of a regional innovation support system include research institutes and organizations, sources of funding for R&D, technology transfer organizations and facilitators, education and training organizations, sources of business capital, and other sources of business assistance as outlined below. Examples of leading players in Western Canada in each of these areas is provided in the following table.

   
   
   

   Component	Examples of Leading Players
   Research Institutes and Organizations	475 research institutions are based in Western Canada of which 162 are based in BC, 106 in Alberta, 156 in Manitoba, and 103 in Saskatchewan.
   Sources of Funding for R&D 5	Examples of leading funding programs (the respective percent of national funding that, on average, is awarded to Western Canada is shown in brackets) include:· Canada Foundation for Innovation (31%)· Technology Partnerships Canada (15%)· Industrial Research Assistance Program (32%)· National Science & Engineering Research Council (29%)· Canadian Institute of Health Research (23%)· SR&ED tax credit programs in BC, Manitoba, and Saskatchewan and through Revenue Canada.· Provincially funded programs.
   Technology Transfer Organizations and Facilitators	There are 6 university industry liaison offices, 3 university owned arms-length companies, and 4 Vice President of Research offices with technology transfer functions.
   Education and Training	There are 14 universities, 3 university-colleges, and 7 technical institutes in Western Canada with active R&D programs. The universities have annual sponsored research budgets ranging from as high as $260 million for large universities to as a low as $500,000 for smaller universities. Universities in Western Canada lead or administer 6 of the National Centres of Excellence.
   Sources of Business Capital	Sources of business capital include 90 Community Futures Development Corporations, the Business Development Bank of Canada, investment fund programs, chartered banks and credit unions as well as venture capital and investment pool sources and angel investors.
   Other Support for Commercialization	Examples of organisations that provide information, advice, and other forms of support to assist in the commercialization of new products include 71 S&T industry or business associations, Canada Business Service Centres, 90 CFDCs, and business incubators located throughout the western provinces.

   
   

2. The Macroeconomic Environment for Innovation Has Improved in Recent Years
   
   For example, in recent years:

   • There have been significant cuts in Federal and Provincial Government personal, corporate and small business tax rates;
     
   • The after tax costs of R&D in Western Canada have decreased since 1996 and now compare favourably to other Canadian provinces and internationally. With the exception of Alberta which does not have a provincial SR&ED program, the after-tax R&D costs are lower in Western Canada than in Ontario or Quebec. An analysis by Statistics Canada indicates that Canada’s combined federal provincial corporate income tax system remains the most attractive of all G7 countries in its treatment of R&D; and
     
   • Interest rates and inflation rates have declined sharply, creating a much more attractive environment for investment.

   However, the weak Canadian dollar has been an impediment to innovation. The low dollar both reduces motivation for innovation and makes the cost of acquiring foreign technology more costly. In addition, in spite of the North America Free Trade Agreement, trade barriers continue to impede economic growth.

3. The Relative Level of Investment in R&D in Western Canada Remains Low
   
   Gross Expenditures on Research and Development (GERD) is a statistical term used by OECD Member countries to indicate the total intramural expenditures on research and development in a given territory during a given time period. It includes all the R&D activity undertaken within the territory (e.g. BC or Canada), whether it is funded locally or from outside the region. According to Statistics Canada data, GERD represents 1% of GDP in Western Canada, which is significantly below the national average of 1.7% as indicated in Table 2.3.

   Table 2.3
   Gross R&D Expenditures (GERD), 2000

   Region	GERD (millions)	GERD as a % of GDP
   BC	1,386	1.1%
   Alberta	1,188	0.8%
   Saskatchewan	321	1.0%
   Manitoba	360	1.1%
   Western Canada	3,255	1.0%
   Canada	18,324	1.7%

   These lower rates of investment in R&D are reflected in fewer R&D workers and fewer patents being filed in Western Canada. A key constraint to increasing investment in R&D has been the limited number of leading-edge research institutions in Western Canada capable of attracting significant investment from government and industry.
   

4. There Are Skill Shortages in Selected Areas
   
   While the general population of Western Canada tends to be well-educated, there are skill shortages in selected areas. For example, Western Canada lags behind other jurisdictions with respect to the number of science and engineering graduates. Out migration of educated workers is also a key issue, particularly for Saskatchewan and Manitoba.
   

5. Access to Early-stage Patient Capital Is More Restricted
   
   It often takes seven years or longer to bring a new product to market. As such, the availability of knowledgeable and patient capital to finance and nurture the commercialization of new technologies can be the single most important factor determining the success of businesses.

6. Statistics indicate that it is more difficult to access venture capital in Western Canada than in other jurisdictions. Although the four provinces account for 30% of the population and 32% of the GDP in Canada, Western Canada:

   • Receives only about 14% of the venture capital investments made in Canada; and
     
   • Accounts for about 12% of the venture capital under management in Canada. There is a strong geographic correlation between where venture capital is managed and where it is invested.
     

   Ontario and Quebec, which account for 62% of the population and 55% of the economic output, manage 87% of the venture capital in Canada. In addition, access to angel capital in Western Canada is constrained by the relatively informal structure of the angel investor network. Access to funding for technology demonstration and commercialization activities has also been identified as a constraint to innovation.

7. Stronger Linkages Need to Be Developed Across the Innovation Support System
   
   Although progress has been made, stakeholders note that the innovation system in Western Canada is still characterized by relatively weak linkages and limited collaboration between participants.

8. Regional Clusters Are Evolving but in a Relatively Early Stage of Development
   
   Technology and knowledge based industry clusters are small by national and world standards - all Western Canadian clusters may be considered developing or emerging. There are relatively few world-class technology anchor businesses or research facilities around which other technology firms can cluster. Overall, companies in Western Canada tend to be smaller than those in other regions, there is a greater reliance on the traditional resources industry, and the manufacturing sector is less developed and innovative than in Central Canada.

 

⁵ Funding percentages are drawn from Table IV.13 in Appendix IV.