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Dialogue onInnovation & Commercialization

Road Map to Public Policy

Purpose• Build - common understanding and

language with respect to the Canadian innovation system and its components.

• Engage - in a provocative dialogue to explore key issues, perceptions and challenges.

• Explore - options for policy development and assessment that will stimulate more commerce.

Presentation, Exploration and Discussion

Premises for Discussion• System Structure - OK

– but pieces not working together• System Balance – wrong

– subsidize technology for the rest of the world• Focus – absent or misplaced

– Market assessment and capacity to follow thru– Clusters – small scale or driven externally

• Culture - Canada is not the US• Management capacity and skills - weak

– Marketing, entrepreneurial management• Capital – absent or unwilling?

– Deal flow - weak

Approach• Setting the Stage• Myths and Realities

– Topic Framing– Discussion

• Improve understanding• Confirm/reject• Issues• Policy implications

• Overarching Conclusions• Policy Options

Setting the Stage

Business Innovation Model per Doug Barber

Revenues

Shareholders Debt

Costs

Feedback

Pricing

CustomerNeeds

Ideas forSolutions

R&D OperateManufacture

Sales &Distribution

FulfillNeed

Innovation Commercialization

Debt

Economic Value Proposition

Moving to an innovation plus economy requires a substantial increase in technology and product development and technology commercialization.

ROLE Any Job Low End Manufacturing

High End Manufacturing

Value AddedManufacturing

INNOVATION INNOVATION PLUS

PLAYER Under developed countries

Lesser “developed” countries Highly developed Countries

Global leaders

STRATEGY COPY PRODUCTION EFFICIENCY

VALUE CREATION

LEADERSHIP

COMPETITIVEADVANTAGE

Cost Quality and cost (Value) Innovation Models

Insight and Opportunity

ForesightInnovation

SystemsCulture

OUTCOME Income Wealth Quality of Life Sustainable development

Most emerging economies first employ a copycat

strategy catch up and only then get into R&D themselves

(Japan, Korea, Taiwan, SE Asia, India, China, etc).

HQP and tacitknowledge

codified new knowledgearising from research

96% 4%

CANADA

WORLD

investmentby MNE’s

bringing tacitknowledge

commodities(price-taking)

innovations(price-setting)traded goods and services

The big picture - (KIPP diagram) - per Tom Brzustowski

Resource based economies have rarely been successful

in the long term. They do not make the transition.

Historical Context

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LONG WAVES

TECHNOLOGYACHIEVEMENTS

Cel

lula

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Energy/TransportCommunicationComputingBiology

A Short History ofNearly Everything

Innovation often occurs long after the invention

Kondratieff cyclesIn 1980, Marchetti analyzed invention and innovation

over 250 years. He found they tend to appear as highly structured waves. He predicted that the 4th wave would

reach its maximum momentum around 1990.

4th Wave - Post War Era• Major driving forces heavy and chemical

industries:– Automobiles and the internal combustion

engine– Petrochemicals and plastics– Consumer durable goods

• Petroleum energy a critical componentdue to its availability at low real costsand its role as both fuel and feedstock.

Technology in the 4th Wave• Technological system was enabled by the social

and institutional framework:– Spread of specialized research and development

departments of large corporations.– Large scale state involvement in military research.– Oligopolistic competition in key industries.– Hierarchical control of functionally specialized workers.– Emergence of a middle-income class which supported

large markets for homogeneous consumer products.– Public service spending and income redistribution

(enabling mass consumption thru disposable income).

5th Kondratieff Wave• New factors emerged as critical driving forces:

– Micro-processors– System integration– Flexibility– Quality– Environmental compatibility– Value and information intensive– Just-in-time, high turn-around, low inventory– Economy of scope rather than economy of scale

Technology in the 5th Wave• Social and institutional framework evolved:

– Decline of R&D departments in large corporations.– Large scale state (academic) involvement in research

emphasizing generic technologies and industry-university collaboration.

– Globalization of industries, specialization of economies.– Empowerment of workers.– Middle class support for sustainability.– Customized consumer products.– Reduced public service spending in favour of increased

reliance on market forces.

Getting Ready for the 6th Wave• Driving Forces

– Technology convergence• Nano, Bio, Cogno, Materials

– Real time, ubiquitous information– Complex intelligent systems

• Decision agents, visualization/inspection devices, etc.– Low cost, high reliability

• Social/Institutional framework– R&D – generic distributed, strategic tightly controlled– Custom(er) oriented– Decoupling of production and distribution– Global, flexible, reconfigurable

Conclusions

• Paradigm shifts take time• Fundamental changes in technology

require system changes as well• Technology can change faster than

most people are willing to accept• Clusters emerge when people are ready

for them – businesses emerge in response to needs

Myths and Realities

Six Myths• More early stage research will make Canada more

innovative.• More support to Canadian universities would substantially

increase innovation and commercialization.• Canadian infrastructure is adequate to transform Canada

into a leading innovative global economy.• Canada is dominated by small companies and so must

focus its innovation and commercialization efforts on SME’s.

• Canada has a host of early stage companies that should be commercial successes.

• There is a shortage of early stage funding in Canada.

Myth 1

Funding more early stage research will make Canada more

innovative.

Defining Innovation• A problem

– Something users want to deal with or satisfy• An invention?

– Solution to a problem• A business concept?

– Idea for commercializing an invention• Innovation

– Technological possibilities matched with market needs

– Successfully commercialized invention

Innovation Defined

Innovation, as it applies to business enterprises, is the “production, diffusion and translation of technical knowledge

into (commercially viable) new products and new production methods”.

Farina and Preissl (1999)

“Innovation is about commerce – meeting or creating market needs.”

The changing nature of innovation

OLD VIEW– Innovation is a specific thing, a mechanistic input

• Research Concept Prototype Production

– Innovation is researchNEW VIEW- Innovation is an integrating process for solving

complex problems – business, technical, and cultural- Innovation is enhanced through social exchange --

dialogue aimed at relationship building

Push versus Pull

• PUSH –– Researchers seek money to explore areas of

interest– Innovation is driven by invention

• Advances in technology• More solutions available

• PULL –– Industry seeks technology to solve problems– Innovation is driven by market need

Product/Process Life Cycle

Time$ 0

-

+

MarketIntroduction

MarketGrowth

MarketMaturity

SalesDecline

Industrysales

Industryprofit

TechnologyPush

Market Pull

Where academics workWhere innovators make money

Where Innovation Comes from

• Most new ideas are market pull –customer and/or application driven– Velcro fastener (space program)

• Some are luck– 3M post it notes (failed adhesive)

• Some are brand new technology– Instant photography

Market-Pull (79% of successful innovation)Technology-Push (21% of successful innovation)

Differences

• Pharma and health innovations come from universities because researchers live in teaching hospitals that give them market information.

• No other sectors look at universities for technology in that way.

Where Innovation Comes from• New to world (10%)• New (to company) product lines (20%)• Additions to existing product lines (26%)• Improvements to existing products (26%)• Repositioning (new applications for existing

products) (7%)• Cost reductions through modification (11%).

The most successful products (profit wise) are newto firm and new to world.

Reality 1

Successful innovation is driven 80% or more by markets and firms.

“Strong innovative companies move beyond the simple dichotomy of ‘market pull’ versus ‘technology push’ to embrace both sides of the equation.”

Conference Board of Canada

Myth 2

If we provided more support to Canadian universities, we would substantially increase innovation

and commercialization.

Understanding the innovation businessOutcome Disruptive

(Create New Opportunities)Evolutionary(Build the Future)

Incremental(Exploit what we know)

Time Horizon 5 + years 2-10 years 0-3 yearsDriving Force Curiosity, Serendipity - push Mission – pull and push Customer – market pull

Business Focus Blue sky ResearchDiscovery - Ideas

Product &Technology development

Production & Sales

Activities Basic Research, Applied Research, proof of concept

Applied research, demonstrations, prototypes,

standards development

Problem solving, adaptation, testing, manufacturing, consulting

Key Knowledge Foresight, research processes Competitive intelligence, science & engineering methods

Markets, production processes, standards, management

Success Factors Expertise, reputation Experts, IP, management Efficiency, quality, cost

Level of Risk High Medium Low

Share of Investment

5-10% 20-30% 60-70%

Funding Source Grants(Public)

Contracts + Equity + Grants(Industry + Public)

Contracts - Customers(Industry and Government)

Business Return Knowledge, HQP Social and Economic ROI Gross margin

Impact Jobs, quality of life Wealth, jobs, quality of life Wealth, employment

TECHNOLOGY

TRANSFER

UniversitiesNRC I-CAN Firms

TECHNOLOGY

TRANSFER

Fundamentals• The 3 forms of innovation are

fundamentally different businesses– Timeframe – determines who plays– Culture – align focus and motivating elements– Impact – ranges from outputs (“knowledge and

HQP”) to outcomes (“gross margins”)– Technology transfer – effectiveness and

difficulty depends on focus• Balance – necessary across the system

Public Sector R&D Performers

0

2000

4000

6000

8000

10000

12000

91-2

92-3

93-4

94-5

95-6

96-7

97-8

98-9

99-0

00-1

01-2

02-3

Private Non-profit

Higher Educ

Provl Govt

Federal Govt

• “Most university research yields raw technology, results that cannot be directly commercialized because it is circuits, processes, components, etc.

• Usually further investment is required for scale-up, packaging, clinical studies, prototypes, testing, demonstration, etc.”

Ron Freedman, The Impact Group

Industry R&D in Canada

0100020003000400050006000700080009000

99 0 1 2 3

LS

Energy

ITC

ITC exNortel

In Canada, nearly 70% of industry funded R&D in 2002 was in ITC.Statistics Canada

Nortel

Investment in industrial R&D is an investment in receptor

capacity.

Don’t solve the problem by pushing discovery support (NSERC) downstream.

Summary• $22 B Canadian R&D overall (2004)

– Health sciences research (22%) is growing faster than natural sciences and engineering and social science and humanities

– Federal spending on health and environmental research is $968 m, on agriculture $381 m (2004)

– Industrial spending on pharmaceuticals has remained more or less constant at 5-6% of industry R&D in Canada

– Industry is heavily biased to ITC.

• Bias is toward university research• But, creating excellence does not necessarily lead

to useful application• What does an effective innovation investment

portfolio look like?

Reality 2Academics seek money to do the research they

want to do and can absorb whatever level of resource is provided.

Pushing university professors to become entrepreneurs distracts them from their basic

strengths and role.

“Canadian universities perform a larger share of national R&D than most G-7 countries and the share of university research funded by industry is also substantially higher than in any other country. Yet, Canadian is one of the weakest countries in generating benefits from innovation.”

New Brunswick Research and Productivity Centre

Myth 3

There is adequate infrastructure in Canada to transform the country into a leading innovative global

economy.

Ideas (technology)+

Management (business processes)+

Infrastructure (facilities)+

Capital+

Sale and Marketing (distribution)

Knowledge

People

Products

Investment

Elements of innovation

National Infrastructure

• Universities, CIAR– Basic & applied research

• NRC - Nutrino, Nint, Steacie, etc.– Big science institutes

• Govt Labs – AFC, Env, NRCan, …– Sector specific R&D

• I-CAN – ARC, CRIQ, IRAP, ITC, RPC, SRC– Market based technology & product development

• R&D Intensive Enterprises– Product development and deployment

Exploring Roles and Cultures

Knowledge

Technology

Products

University

College

NRC

Industry Lab

ARC

Canada’s Commercialization Gap

DISCOVER DEPLOYDEVELOP, DESIGNand DEMONSTRATE

Invent Adapt Adopt

Create Transform Use Diffuse

Commercialization Gap

Bridging the gap

• Successful economies have organizations that work with industry and government to bridge commercialization gap– Southwest Research Institute, Battelle in US– Tekes in Finland– Fraunhofer in Germany– ITRI in Taiwan– A*star in Singapore

Canada Requires Rebalancing

DISCOVER DEPLOYDEVELOP, DESIGNand DEMONSTRATE

Invent Adapt Adopt

Create Transform Use Diffuse

Reality 3

Canadian infrastructure is heavily biased to the front end of

innovation and lacks critical mass for market driven design,

development and demonstration.Ratio of industry to public sector investment in R&D in most innovative

economies (Finland, Sweden, US) is 3 or 4 to 1.Canada is currently considerably less at 2:1.

DISCUSSION

Preliminary ConclusionsMyths and Realities 1 - 3

COFFEE BREAK

Myth 4

Canada is dominated by small companies and so must focus its innovation and commercialization

efforts on SME’s.

Sales from Newor Improved Products

Canada vs. Europe (per cent of firms)

Note: Numbers may not add, due to rounding.Sources: CBoC; Statistics Canada, Survey of Innovation, 1999; Europe: CIS-2, Eurostat;

Calculations by Pierre Mohnen and Pierre Therrien.

4131

7059

0

20

40

60

80

Less than one quarterof sales

More than one quarterof sales

Categories of AdoptersEarly Adopters Drive Trends

EarlyAdopters

EarlyMajority

LateMajority

LaggardsInnovators

When to lookfor industry partners

Commercialization Road Map

Knowledge Expertise

Technology

Product

Operating Company

Consulting

License

License, margins

Cost SOURCE OF RETURNMECHANISM

Dividends, Capital gain

The gapis where

SME’s live.

Ideation

Corporate R&D in Canada – 2001

121 COMPANIESSales: $264 B AV $2.2 B77.9% of TotalR&D: $1.74 B AV $14.4 M13.3% of TotalR&D Intensity: 0.66%

120 COMPANIESSales: $72.8 B AV $607 M21.5% of TotalR&D: $10.3 B AV $85.7 M78.8% of TotalR&D Intensity: 14.1%

141 COMPANIESSales: $537 M AV $3.8 M0.2% of TotalR&D: $903 M AV $6.4 M6.9% of TotalR&D Intensity: 168.4%

139 COMPANIESSales: $1.34 B AV $9.5 M0.4% of TotalR&D: $139 M AV $1.0 M1.1% of TotalR&D Intensity: 10.4%

>0% 3% 50%

R&D Intensity (R&D Expenditure/Sales in %)(from Research Infosource Inc.)

R&

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$3 M —

Key Questions

• Should Canada focus?• If so, on industries or firm size?• What drives those firms/industries?

– How are they structured?– How are they likely to evolve over time?– How do drivers differ between them?

• What drives the S-curve?– innovation, competition, customers

Concluding Thoughts• Strategy based on growing SME’s is long

term, high risk• Strength of SME’s is as suppliers to medium

and large established industry. Push supply chain innovation based on Canada’s (natural) resources.

• Focus should not be the size of company, it should be where we have a defensible comparative advantage (the hook).

Reality 4

For maximum impact, medium and large companies will need to

be actively engaged and play major roles.

“Only 228 firms in Canada currently have the size, R&D intensity and revenue to be R&D leaders.”

ITAC

Myth 5

Canada has a host of early stage companies that should be commercial successes.

Industry capacity suboptimal

• Largest source of innovation is business.• Only 228 firms in Canada currently have the size, R&D

intensity and revenue to be R&D leaders (ITAC).– Innovation intensive organizations spend 5-10% of sales on R&D,

so $5 million R&D requires $50 – 100 million in new sales. Innovation by SMEs requires infrastructure to support it.

• Goal is to increase product development, manufacturing and exports by globally competitive Canadian enterprises.

• Innovation infrastructure requires patient capital to build, equip and sustain it while business evolves to the new higher level of activity.

Fundamental Challenges

• Thinly distributed national innovation base and lack of critical mass– Limited capacity to transform ideas into reality.– Limited number of industrial receptors and globally

competitive innovative SME and manufacturing enterprises.

– SMEs have a lot to gain from research and innovation but are typically unwilling to invest in what they perceive as “high cost, low value” research without government help.

Business Environment• Most companies plan to sell or be bought out.

VC’s encourage early sale for a “quick exit”.• Government programs support R&D, but offer

little marketing and other business development support at home or abroad.

• Working with Canadian regulatory agencies also poses a challenge compared to other countries.

Causes of failure• Technology push – 28%

– better mousetrap nobody wants• No user benefits – 24%

– Me-too product meets competitive brick wall• One-up-man-ship – 13%

– competitor reaction foils launch• Technical Dog – 15%

– won't work or performance inadequate• Price Crunch – 13%

– price too high• Ignorance – 7%

Lack of experienced management

• CEO’s of many R&D intensive firms lack the necessary knowledge and experience in commerce.

• Post-secondary institutions pass on technical and scientific knowledge, but do not prepare graduates for human relationship challenges in the marketing, sales and management.

Attracting Management Skills• Stability

– Multi-year assurance of funding– Predictable future

• Growth opportunity• Excitement• Quality of life• Cluster of related industry

– alternative places to work in event of failure

Reality 5

Canada has a paucity of skilled entrepreneurs capable of

transforming new ideas into products and services that customers want.

“A narrow focus on the technology side of the enterprise rather than commerce, a shortage of people with management, marketing and sales skills,

and a societal distrust and suspicion towards commerce have created numerous challenges for CEOs of “greenhouse” firms.”

Barber and Crelinsten 2005

Myth 6

There is a shortage of early stage funding.

Commercialization Elements

Function

Structure

Personnel

Finance

Infrastructure

Knowledge

Individual

Scientists

Grants

University

NBO’s Prototypes Products Markets

Teams Business

Engineers FinanceMarketing

Contracts Seed Venture DebtIRAP

IncubatorsDevelopment Labs

Corporation

BDC IPO

Cluster

ProductionSales

Sales

Engineers

Accelerators

Tech Transfer

IDEA Place Development Place Market Place

CollegesPRO’s

Access to Capital• Sources of Capital

– Equity, loans, asset sales, etc.

• Most R&D firms finance their operations from investors and lenders rather than sales.

• Access to capital becomes an issue when capital market fails to supply funds at terms acceptable to business borrowers.– The institutional supply of venture capital in Canada grew

dramatically in the 1990’s.– It fell off in the past 5 years due to weak returns.

• Market failure to provide funds may be legitimate.– Investment or business may not be credit worthy for a host of

reasons including ability to repay; commitment and character of the proponents; the prospects for the industry sector and the availability of collateral.

Public IssuesCommercial Banks

Non-Financial CorporationsLater Stage VC

Wealthy Family Funds

Private InvestorsFamily and Friends

Personal Savings

Seed & Early Stage VC

Government Programs

Chart 1.1 - Sources of Capital for Emerging Companies

Stage of Company Development

Stage 1 Stage 2 Stage 3

Knowledge Acquisition

Concept Investigation

BasicDesign

Prototype Building

Market Entry Manufacturing Ramp-up

Perceived Gap

Source: Davitech Consulting Inc., Report on Barriers to Technology Commercialization, July 1996

It’s all about Risk

• New product game has huge amounts at risk with high levels of uncertainty.

• Worthwhile business projects may be denied access to the appropriate sources of capital because of gaps in the capital markets.

• Gaps in the capital markets may exist where sources of supply are unaware of the demand or lack information or expertise that prevents them from adequately assessing risks and benefits.

Risk Management Strategies• Risk management strategies poorly understood

– limit amount at risk when uncertainty is high– as uncertainties decrease, amounts at stake can be

increased– break all or nothing decisions into a series of stages– be prepared to pay for relevant information to reduce

risk– provide for "bail out" points– Build an experienced management team

• It’s all about building confidence.

Reality 6

There is an abundance of capital but it seeks “adequate” returns.

“Canada needs people who do commerce to win in the knowledge economy.”Barber and Crelinsten 2005

DISCUSSION

Preliminary ConclusionsMyths and Realities 4 - 6

Six Realities• Successful innovation is driven 80% or more by markets

and firms.• Pushing university professors to become entrepreneurs

simply distracts them from their basic strengths and role.• Canadian infrastructure is heavily biased to the front end of

innovation and lacks critical mass for market driven design, development and demonstration.

• For maximum impact, medium and large companies will need to be actively engaged and play major roles.

• Canada has a paucity of skilled entrepreneurs capable of transforming new ideas into products and services that customers want.

• There is an abundance of capital but it seeks “adequate” returns.

Session 4

Conclusions and Issues

Growing Innovative Enterprises

Key learning from National Dialogue• Need dramatic increase in industry-led R&D

– Ratio of industry to public sector investments in R&D in most innovative economies (Finland, Sweden, US) are 3 or 4 to 1 – Canada is considerably less at 2:1 (only 1:1 in Alberta and BC)

• Need for better balance between university-based discovery research and industry driven commercialization efforts.

• Need to integrate the elements of our innovation system and nurture collaborative alliances

Fundamental Issues• System Structure - OK

– but pieces not working together• System Balance – wrong

– subsidize technology for the rest of the world• Focus – absent or misplaced

– Market assessment and capacity to follow thru– Clusters – small scale or driven externally

• Culture - Canada is not the US• Management capacity and skills - weak

– Marketing, entrepreneurial management• Capital – absent or unwilling?

– Deal flow - weak

Session 5

Policy Implications and Options

Innovation in Canada

• What will it take to position Canada as a leading innovative economy and transition from resource dependence?– Significant leadership from industry– Balanced and integrated approach to innovation

system – A focus on market based outcomes– Organizations with the right culture to do the work

• AND - government and industry will both need to at least double their $ commitment to R&D

Priority Outcomes• Jobs and GDP growth

– Grow and strengthen companies– Critical mass attracts and retains internationally renowned talent

• Efficiency and Productivity– Increase utilization of scarce human and capital infrastructure– Target public investment into high priority, state-of-the art, high

impact, facilities and equipment• Leverage

– Assemble industry, government, and applied R&D organizations to tackle critical R&D and development projects on a national scale

– Increase industry investment in R&D• Innovation culture and expertise

Key Local Business Elements to Assess

• Skills - quality, accessibility, education and training.• Environment - policy, regulation and tax structure.• Access to capital – governments, companies, not-for-profit

agencies, venture capitalists, angel investors, etc.• Communications infrastructure.• Other R&D performers – universities, provincial and federal

agencies, private companies, other research organizations.• Clusters of innovators – start-up companies, established firms,

individuals, entrepreneurs.• Organizations and networks that facilitate knowledge and

technology transfer and services related to innovation.• Culture – leadership, entrepreneurship, risk tolerance.

Session 6

Concluding Remarks

Thoughts to take away• We fund R&D to move technology forward and

create social and economic benefits.• A better understanding of innovation system will

increase our ability to be successful.• What separates players and justifies investment is

not effectiveness, but efficiency.• To make the best use of resources and contribute

to success, each of us must:– Clarify role– Focus on strengths and proven impacts– Work with others to maximize efficiency and impact