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TRANSCRIPT
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
r
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&
D E
xpen
ditu
re
$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