STANDING COMMITTEE ON INDUSTRY

COMITÉ PERMANENT DE L'INDUSTRIE

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, May 27, 1999

• 0910

[English]

The Chair (Ms. Susan Whelan (Essex, Lib.)): I call the meeting to order, pursuant to Standing Order 108(2), study on a document entitled Sustaining Canada as an Innovative Society: An Action Agenda.

I'm very pleased to welcome today Dr. Arthur Carty, the president of the National Research Council of Canada.

What we have proposed is to have two sessions this morning. The first is to continue on the Sustaining Canada document. The second is to go on to productivity. There are two different statements, so we'll do the first statement, have some questions, and then we'll do the second statement. I believe that's what we've decided to do.

Dr. Carty.

[Translation]

Dr. Arthur J. Carty (President, National Research Council of Canada): Madam Chair and members of the committee, good morning. First of all, I would like to thank you for having invited me to speak here this morning.

[English]

I'd like to begin my thanking the industry committee for its support in the past year. That was, I think, extremely useful to us.

As you have requested, I want to cover two areas this morning. In the first part I'd like to make some observations on our progress as a government, a country, and a nation toward the development of an innovative society and of course an innovative economy. I'll try to look very briefly at the key components of innovation and economic growth and assess whether we're on target for getting the most out of our knowledge resources and our business resources.

[Translation]

In the second part of my presentation, I shall deal more specifically with the links between productivity, innovation and competitiveness, and I shall identify one of the main obstacles to our success.

[English]

Basically, my message today is that the government has made some good strides in addressing many of Canada's needs. The recent federal budget included significant new investments in programs to support both the university community—the research base—and Canadian industry. However, in my view there is still critical ground in between. I call that the innovation gap—the gap that separates the new knowledge that's created and its application. That, I believe, still desperately is in need of support.

I am convinced that the only organization at this point in Canada that can bridge that innovation gap successfully is the National Research Council. Quite simply, it's our thesis that NRC is the government's most dynamic and diverse public instrument for innovation in Canada, and I'm here to try to describe to you the impact we can make and of course also to ask for your continued support.

I think there is strong consensus in both the research and the business communities that innovation—and I'll focus on that word—is the foundation for economic and social prosperity and our ability to compete in the global economy. And let's be aware that in fact we are in a global economy these days.

• 0915

I think the action agenda that you have been discussing expresses it very well: “We need a steady stream of new ideas, a well-educated work force for the knowledge economy, and”—let me underline this—“mechanisms to transfer ideas effectively from the laboratory bench to the marketplace.” I think there's also a pretty good agreement that research and development is one of the key elements or key ingredients of innovation. So let me just look briefly at Canada's relative performance in research and development as seen by the GERD-to-GDP ratios for various countries.

This is shown here on the overhead that you have up on the screen. This is really investment in R and D as a percentage of gross domestic product. Along the bottom are the countries. Unfortunately, with statistics you never get everything at the same time in the same form, so some of these years differ. Nevertheless, it does allow a useful comparison. This is GERD-to-GDP ratio, and it varies from about 3.5% in Sweden down to below 1.5%, just above 1%, for Italy.

Now, there are some very interesting things about this. First of all, with regard to Canada, which is in the red, our GERD-to-GDP ratio is at about 1.6%. That number hasn't really changed greatly over 10 to 15 years. It's been at about that point. Of course the last three budgets, and particularly the last two, will have changed that somewhat. And these figures, I will admit, don't reflect the recent reinvestments.

Some of the other interesting points are that there are newcomers in this list compared to five or ten years ago. Korea, for example, in 1996 got very close to the top of this list. The United States has continued to invest in R and D at a very high rate. You can see a number of the other G-7 countries. There are some small countries too. Sweden is at the top and has been very heavily investing in R and D for a long time. So has Finland, which is a little surprising perhaps.

Other newcomers include Taiwan, which has grown enormously over the last ten years. As it has invested, it has passed Canada. Singapore, which isn't on this list, has also passed Canada. So we do see that we have some ground to make up in the competition, and this really is a global competition. Research and development is driving innovation, and innovation is driving the new economy.

Over the last three budgets, the government has taken a number of steps that will help Canada to improve this competitive situation. For example, in the 1997 budget, to ensure that our innovation process would rest on a strong and healthy foundation, the government made some key investments. Some of those key measures included strengthening the networks of centres of excellence program, establishing the $800 million Canada Foundation for Innovations, and renewing and restoring the funding for the NRC's industrial research assistance program.

Then again in 1998, the federal budget restored funding for the granting councils—NSERC, MRC, and SSHRC—to 1994-95 levels, reversing program review cuts. It also provided a permanent base budget for the networks of centres of excellence. Again, this February the government carried the process further and allocated more than $1.8 billion to support the creation, dissemination, and commercialization of knowledge, and to support employment.

Let's just look at a few of those elements that have been included in the recent budget. There were two measures to support employment. One was $465 million over three years, which represents a 50% increase over the preceding three-year period, for the youth employment strategy. That's a big increase there. And there was $110 million per year to create sustainable jobs in high-unemployment regions through the Canada jobs fund. Altogether, that represents $600 million.

• 0920

Several initiatives were specifically designed to improve the capacity to produce knowledge—for example, funding for the Canada Foundation for Innovation for research infrastructure in the areas of health, the environment, science, and engineering. In the February budget, there was also $75 million for the Natural Sciences and Engineering Research Council over three years; $15 million for SSHRC, the Social Sciences and Humanities Research Council; and $90 million in additional funding for the networks of centres of excellence. Those four examples add up to $400 million.

I think we can say that those allocations together represent a very laudable and substantial investment in our university community and also in the creation of knowledge.

So that's, if you like, the knowledge side of it, the creation of knowledge. If we look at the other side of the ledger—that's new investment in the industrial sector and application and commercialization of knowledge and ideas—there were also some new initiatives. Technology Partnerships Canada received $150 million. There was a $50 million equity investment in the Business Development Bank to expand financing for small and medium-sized knowledge-based and export-oriented industries. There was $60 million over five years to make available, through the information highway, a comprehensive and integrated data system for Canada's geography, environment, people, and resources. Then there was another $60 million for “smart communities”, associated with the effective use of information technology to enable innovation. So again, that's $300 million.

You can see, once again, there was a targeted investment by the government, but this time on the industry side.

This brings me to my main point. You will recall that a few minutes ago I mentioned there was a middle ground between research ideas and results and commercial products, the so-called innovation gap that really separates new knowledge from applications. We know that if you don't have that gap filled, you have real difficulty in translating ideas into products on the marketplace. So this innovation gap is something we have to focus on. Until we understand and invest strongly in that area between the knowledge and the commercial products, the system of innovation we have in Canada will not run as smoothly as it should. And that's precisely where the National Research Council fits in, because I think we're the only organization at this point in time that can bridge the innovation gap and successfully unite these two sides of the house, so to speak.

Well, what have we seen there in the recent federal budget? I think unfortunately, in that area, investment from our government has fallen well short of the new funding that's been provided for the university community and the industrial sector. In NRC's case, we'll receive $15 million over the next three years in A-base funds, and that represents about 20% of the minimum we felt was required.

You can contrast that with the $76 million budget cuts we took in program review one, and another $13.1 million in base budget cuts we took last year as a result of program review two. And of course, unlike the granting councils NSERC, MRC, and SSHRC, NRC's R and D budget was not restored to 1994-95 levels in the 1998 federal budget. So in fact what has happened is that our ability to generate revenue has essentially saved our bacon. This is the capacity that NRC has itself to work with partners and to generate revenue as a result of collaborative research programs, fee-for-service activities, etc.

By our estimation, we've reached the limit of that. I don't really see how we can generate more revenue ourselves internally without compromising the research base on which everything is built. So we're facing major challenges. We've been unable to invest in new emerging strategic R and D opportunities for Canada—and I'll come back to this in a minute. These are opportunities Canada must take to be industrially competitive in the 21st century.

• 0925

As well, our equipment facilities and infrastructure are eroding. We're losing and having difficulty attracting highly-qualified personnel, and we have a reduced ability to provide hands-on training for young researchers.

We've also been very limited in our ability to enter into new partnerships. I think everybody knows that these days new partnerships are crucial to innovation; that's the way things work. That's because of a lack of resources. With the resources we have, NRC has played and is playing a very key role across the country in community and regional innovation. We have been working with communities—our IRAP program is present right across the country.

We know what it takes to produce innovation in terms of both people and programs. We believe we can make a much bigger impact, but to do so we need an investment of new funds into our A-base to enhance our capacity to help communities be present regionally and affect productivity in Canada. We need to look right now at where we should make strategic investments for the future. Those investments in innovation are both immediate, in other words in the next few years, and longer term. They're also very critical.

I know many of you are familiar with NRC, but let me just take you through our current situation and show you exactly where we are. This is an encapsulated form of it, of course. We're a national organization, meaning we have a presence right across the country. We're a government agency but a schedule II agency, one step away, you might say, from a crown corporation.

In terms of employment, we have about 3,000 full-time-equivalent employees. One of the unique aspects of NRC is that we have a very large number of guest workers. These are people from industry, universities and other government labs who work with us in our facilities on projects, collaborations and partnerships.

We have labs and facilities across Canada. As you know, the industrial research assistance program and the Canadian Technology Network have a human network of technology advisers right across the country. In almost every region and community we have ITAs. They help small and medium-sized companies access technology, acquire it, develop it, and take it to the marketplace.

We are also a principal source of science and technology and medical information in Canada. The information has to be made available to those who need to use it—the researchers and the organizations. The Canada Institute for Scientific and Technical Information is therefore a critical part of the national infrastructure, providing that information right across the country—these days, very much electronically.

On our budget, if you add up everything it comes to about $456 million, of which we generate now about $78 million. So we've helped ourselves enormously get over the difficulties caused by decreasing budgets by raising our revenue, but there are limits to how much we can do there.

The R and D number is down significantly by at least $80 million over what it was in 1994-95. Our budget was not restored, and that's at about $317 million this year.

IRAP hasn't fared as badly as that because the IRAP base was restored in 1997-98. IRAP received new funding in the February 1998 budget, and that enabled us to start a new program called the pre-commercialization assistance program, in collaboration with Technology Partnerships Canada. The CISTI budget is $34 million, of which we generate actually $18 million of our own money.

We also have another role, in that we provide essential parts of the national infrastructure. For example, we are responsible for the Tri-University Meson Facility in British Columbia, which is a joint venture among four universities that is coming up for funding in the next year. We also operate and maintain the telescopes for the Canadian academic community in Canada and abroad, through international collaborations. We are the organization that provides the linkages to the Canadian professional societies and academic sector through ICSU, the International Council of Scientific Unions, for which NRC is the affiliating organization in Canada. That totals $41 million. Municipal taxes, which we now pay, amount to $10.6 million. That's of course because we have facilities and properties across the country. So that gives you a brief indication.

• 0930

The next slide shows a map of Canada and points out where we're located. Where we have a physical presence, it's shown as a green square. We have NRC institutes or innovation centres in St. John's, Halifax, Montreal, Ottawa, London, Winnipeg, Saskatoon, Penticton, Vancouver and Victoria. The red circles are where we have IRAP offices, and you can see that those are in every province and even in every territory. So we are very much a national organization spread right across Canada, with significant presence in all of the provinces.

We've experimented with virtual innovation centres, and we have two of those in Alberta. There's one in Edmonton and one in Calgary. This is not where we have a physical building, but where we're innovating by bringing all the partners together through a very small operation. Not many people are involved; in fact it's essentially a single person and a secretary. But their role in those virtual innovation centres is to bring all the players in the innovation system together to decide how they can move forward economically. That's a very important new initiative.

I will spend just a few minutes showing you how we are what I call an innovation organization. This is what we call innovating through science and technology. The map shows the innovation spectrum—most of the things that contribute in one way or another to innovation. Across the top are our physical locations where we have institutes. Running from top to bottom, the first is the national research and development infrastructure, where we provide components of the national base for research and development. In St. John's, for example, we have world-class marine engineering facilities in our institute. In Saskatoon we have a transgenic plant centre, which is available to the community for agricultural biotechnology. In Ottawa we have wind tunnels, which are a critical component of our aerospace industry. You see those at the airport.

The next one is where we have very specific initiatives in R and D training. I should point out that where there's a solid line, it means we do the activity in all these locations across the country. Where there's a cylinder it means there's a special activity. In Montreal we have a special program associated with our biotechnology pilot plant. It provides training for bio-process engineers—people who are going to be technologists who know how filamentation biotechnology equipment works, how to run it, and what is needed in order to be in that technology area. So we provide dedicated training for technologists on our pilot facility. That has been very successful. The people who are trained there, as many as 20 to 30 a year, are snapped up by industry because they're very valuable.

In Winnipeg we have a program with Red River College for the training of technicians running magnetic resonance imaging facilities. Again, this is such specialized training that there's absolutely no problem with these people finding jobs; in fact there's a great demand for them.

• 0935

In Ottawa you may have heard of an innovative initiative called Ovitesse, for reskilling scientists and engineers to become software engineers. It's a very innovative program.

We have, of course, research programs right across the map, and I won't go into all of the things we do there. Technology development is a key aspect of what we do. Again, that happens everywhere. We have technology diffusion and commercialization, and the tools that are available there are IRAP and the IRAP/TPC pre-commercialization assistance program. I had the pleasure last week of being with Mr. Lastewka in his riding, where we provided an IRAP/TPC grant to an innovative high-tech company in St. Catharines, Biomedical Implant Technology.

We have also focused on starting up and incubating small companies. The best example of this is in Montreal, where we built an incubator last September. It was opened by Minister Cauchon. That incubator is not only full, it's overflowing. We have 20 companies in there, and the number of people associated with those companies and the jobs created are really quite significant. We also have an incubator in Ottawa, which is fully associated with our information technology institutes in Winnipeg and Saskatoon.

We've also been heavily involved in regional and community innovation right across the map in Canada, but specific initiatives are focused on key areas. For example, Winnipeg has a lot of small companies and a key research and development activity in medical devices. So we have an innovation initiative called the western medical technology strategy. It is based in Winnipeg but is focused on developing companies in the medical technologies area in the west. Of course you also know we're responsible nationally for codes and standards—a very important part of the economy of innovation.

So we're involved, at the NRC, in most of the elements of innovation in one way or another: we do R and D; we help commercialize and transfer the technology; we have the tools to do that; we're directly involved at the local level in innovation; and we also provide the national infrastructure.

Last year we took a look ahead at NRC. What resulted came up from the grassroots and has been refined into five major strategic initiatives—opportunities we believe Canada must take in the next century. These are things we can't ignore.

Genome science is one of the activities. Fortunately, in the last budget, as a result of an investment the government made in biotechnology, we managed to round up an activity in genome science, based in Montreal but also involving our other biotech institutes. That has been put together with an organization called Genome Canada, which is the fusion of an initiative from the Medical Research Council and the National Research Council.

We have a national fuel cell initiative, which we believe provides a key opportunity for Canada to be at the forefront in the world in the manufacture of fuel cells. We believe this is important because embedding a company like Ballard in R and D and an infrastructure is critically important to keeping that potential here. Fuel cells are going be big business in the next ten years, and it's essential that Canada take advantage of the current lead it has by embedding the companies in an R and D base and an infrastructure base.

We believe the next generation of devices will be optoelectronic devices for the telecommunications and information technology industry. Opto-electronics is the marriage of optics—that's light—and micro-electronics. It's the creation of a new kind of device that will maximize the ability of light to transmit information more quickly than simply through electrons down an electrical wire. So opto-electronic devices are certainly in use now, but there will be a much greater emphasis on that. We've proposed an opto-electronic prototyping facility, which will give our SMEs a much better opportunity in the future to prototype.

• 0940

We've proposed two aerospace initiatives: an aerospace manufacturing facility in the Montreal area and an environmental gas turbine facility here in Ottawa, to push ahead with the aerospace industry.

Then, in terms of national infrastructure for information, there is the scientific knowledge network.

So, Madam Chairman, those are some of the things we would like to do. We're very pleased that the government recognizes the importance of R and D and innovation to Canada, as we are increasingly dependent on a knowledge-based economy.

After four years of declining base budgets at NRC, we were very happy this year to see it turn around. While the increase was modest, it was extremely welcome. We were disappointed that none of the strategic initiatives themselves were specifically funded, but we do look on the increase we did get as, if you like and being optimistic, a down payment for the future. We 'd certainly like to see these things move ahead, and this shot in the arm is helping.

We're very hopeful that this year's budget will provide NRC with the resources to forge ahead with its community and regional innovation initiatives right across the country and particularly to bridge that innovation gap in which we haven't yet invested very heavily.

Let me conclude my remarks there in this first part of this presentation. Thank you very much.

The Chair: Thank you very much, Dr. Carty. What I propose is that we have questions on the first part of the presentation for 25 minutes or half an hour and then move to the second part, depending on how many questions there are.

I'm going to begin with Madam Lalonde.

[Translation]

Ms. Francine Lalonde (Mercier, BQ): Mr. Carty, thank you for your statement, which is admirably candid for someone who is the head of a Crown agency. However, I find some of your reactions restrained. Some statements are very clear. The first troubling fact is on page 7, where you point out that 44% of Canadian expenditures in research and development are undertaken by a small number of very large multinational companies.

Dr. Arthur Carty: I believe that statement is in the second part of my presentation. However, I can reply now.

Ms. Francine Lalonde: No—

A Voice: We were given two documents.

Ms. Francine Lalonde: I know, since I looked at both of them. May I, nevertheless, continue?

[English]

The Chair: During the first part of the meeting we're supposed to be dealing with sustaining growth. Then we'll have the presentation on productivity, followed by questions. Do you have any questions on the first presentation on sustaining growth?

[Translation]

Dr. Arthur Carty: This statement is a little shorter than the other.

[English]

The Chair: Maybe what I could do is move to Mr. Bellemare and then come back.

[Translation]

Ms. Francine Lalonde: I have prepared questions that deal with both documents. Are you telling me that I should be referring to the document entitled “Sustaining Growth”?

[English]

The Chair: There are two separate sessions.

[Translation]

Ms. Francine Lalonde: I fully understand that, but I want to know which issue we are dealing with in the first part of our meeting.

[English]

The Chair: The first one was on sustaining growth.

[Translation]

Ms. Francine Lalonde: You say it's the one that he has just presented and which finishes with tables. That's fine. So we are starting backwards. In my opinion, this is illogical.

Dr. Arthur Carty: Excuse me, I should have specified the title.

Ms. Francine Lalonde: In any case, I have your budget before me, where it states that the NRC received $15 million in new money over three years.

Dr. Arthur Carty: Yes.

Ms. Francine Lalonde: Contrary to the granting councils, your budget was not restored to the 1994-95 levels.

Dr. Arthur Carty: Yes.

Ms. Francine Lalonde: You continue by saying that you were able to maintain many of your research programs because of your ability to generate revenue, but that you have now reached the limit.

Dr. Arthur Carty: Yes. Would you now like me to answer this question?

• 0945

Ms. Francine Lalonde: You could develop it. Basically, you are saying that you could do much more, but that you would need more money.

Dr. Arthur Carty: Yes. I can give you the example of our Aerospace Research Institute. Because of cuts in the 1995, we had to reduce the funding for this Institute by approximately $6 million, almost by one half. However, because of the Institute's efforts to set up partnerships with Canadian aerospace companies, it improved its financial situation and obtained $8 million. It received financing from the private sector and other departments, which replaced the funds that it had lost. However, I must point out that the funds that we received in this manner were targeted for specific short-term projects that we are undertaking in conjunction with industry. We do not have the base necessary to invest in new technologies and to develop innovative technologies. We have had some success in compensating for the damage, but we are not able to invest in the base of this Institute, and this is a problem. We can always get funding for short-term projects in partnership, but you must remember that it is important to reestablish the base. In this specific case, we succeeded in getting a lot of money to replace the funding that had been cut, but this way of proceeding is no guarantee of excellence in the future in this industry and in this Institute.

Ms. Francine Lalonde: The report that you presented deals with fiscal year 1999-2000?

Dr. Arthur Carty: Yes.

Ms. Francine Lalonde: Are you forecasting a further increase in expenditures?

Dr. Arthur Carty: Are you referring to this year or last year?

Ms. Francine Lalonde: I am referring to fiscal year 1999-2000. It states that expenditures in 1998-99 were $489 million; this year, they are $480 million; it is expected that they will be $464 million next year and $447 in the following year.

I am inclined to want to go further and to ask you whether, like Mr. Brzustowski, of NSERC—

Dr. Arthur Carty: Yes, Mr. Thomas Brzustowski of NSERC.

Ms. Francine Lalonde: He told us that the weakness of the Canadian dollar, and underfunding of the universities, which are partners that previously assumed indirect costs, created major problems. Are you also affected by these factors?

Dr. Arthur Carty: Yes, they have had a major impact on NRC, in two ways.

Although we buy certain chemicals, materials and equipment in Canada, we sometimes have to buy very sophisticated products in the United States. It is almost impossible to find alternative products in Canada. Therefore, the drop of the dollar has had a major impact on us.

Furthermore, our Astronomy Institute in Victoria must pay international fees when it cooperates with other countries on projects. Because of the drop in the dollar, we have had to spend an additional $1.5 million because the amounts were set in American and not Canadian dollars.

• 0950

These two examples show very clearly how we have been affected by the decline in the dollar.

The Chair: Do you have another question?

Ms. Francine Lalonde: Yes, a last one. In view of the drop in the dollar and new costs, how much money would you need to get back to a level equivalent to 1994?

Dr. Arthur Carty: To replace the funding cut from our research base and the programs and to correct the resulting decline, we had asked for $75 million over the next three years, ie., $25 million per year.

Ms. Francine Lalonde: That would be just to replace those funds?

Dr. Arthur Carty: Yes.

Ms. Francine Lalonde: If we were to talk about development that would be an entirely different issue.

The Chair: Thank you, Ms. Lalonde.

Mr. Bellemare, go ahead please.

Mr. Eugène Bellemare (Carleton—Gloucester, Lib.): Thank you, Madam Chair.

[English]

Dr. Carty, I've always been, and I still am, full of admiration for the NRC. I feel very supportive, and I want to know how I can be more effectively supportive.

From the time I was young, a long time ago, you were involved strictly in basic research, and now you've gone to applied science with a welcome tint of commercialization. Am I correct to say that?

Dr. Arthur Carty: I think you're right in making the observation that NRC has changed, and it has changed quite dramatically. It has changed because there was a national need to change. There was a time in the 1950s, 1960s, and early 1970s when NRC was much like a university. The work going on at NRC, at least in the science area, was basic research. The reason for that was that there was a need at the time to build up the universities' capacity to produce high-quality people and to evolve graduate programs and research programs of their own. NRC very much did that in the 1960s.

Now, at this point in time the situation has changed. NRC sees itself as being very much at the middle of the R and D spectrum. We contribute basic research in focused areas that are of importance to Canada, but we also translate that knowledge into real world applications through work in partnership with others, through strategic research, and through technology transfer. So it has changed and it has changed dramatically. We are very much more linked these days, I think, to industry, universities, and other government laboratories than we ever were in the past. So it's a critical time for Canada. We're investing principally in that area where there is an innovation gap. We provide the glue that helps bridge pure research to commercialized products by strategic R and D and by technology transfer.

Mr. Eugène Bellemare: Would there be a need for a marketing division in your organization? Could that marketing be in association with another department, such as the industry department, for example, or should it be a commercially based organization, a private organization, that would do the marketing for you?

Dr. Arthur Carty: Each of our institutes in fact has a business development office. There are usually several business development offices, whose key role is just what you're saying, to market what we do in order to build partnerships with innovative companies, to work with them, and to establish those relationships.

• 0955

Mr. Eugène Bellemare: Is it proactive?

Dr. Arthur Carty: It's extremely proactive. We have about 1,650 active research and development collaborations that by and large have been established through the relationships the business development offices have established with our clients.

Mr. Eugène Bellemare: On page one there is a graph that shows what is given by Sweden, Italy, etc., and we're at the bottom. We're always near Italy. It seems as if in every report I see, we're always....

Dr. Arthur Carty: There are some beyond Italy. The Soviet Union is much worse than Italy, and there are many countries that are much worse—

Mr. Eugène Bellemare: I know, but every time I look at a report I find Canada either in front or behind Italy. I don't know why. There must be some kind of relationship here.

The Chair: This will be your last question, Mr. Bellemare.

Mr. Eugène Bellemare: There has to be a payback, and there have to be indicators to show paybacks on these countries when they invest.

Dr. Arthur Carty: Can I give you an example—

Mr. Eugène Bellemare: My question is really practical, and you'll love it. Do you just present your budget to Treasury Board and say this is what we need, and you have a group of people over there who are sitting with paring knives and their work order is to pare and not necessarily to promote the country? What is the process? How can this committee improve your lot, when you say that you received roughly 20% of the minimum you felt was required and that you want better industrialization of our country? We're sitting in this committee and we're asking, who pushes these buttons? Are you on your own with these guys from Treasury Board? How can we be useful?

Dr. Arthur Carty: I think the answer to the question is that the committee itself can be very influential. Obviously, budgets are set and devised by the Minister of Finance working with key players in the government. The Minister of Industry is obviously important, as are other key ministers, and for NRC itself to influence those is a difficult task. We need the help of the industry committee and other parliamentary committees and of parliamentarians in general in order to convince the Minister of Finance, the Minister of Industry, and other players around the cabinet table that an investment in NRC is not just worth while but actually vital to the country. You do have a role and an influence in that regard.

Mr. Eugène Bellemare: Thank you.

The Chair: Thank you very much, Mr. Bellemare.

Mr. Jaffer, did you have any questions?

Mr. Rahim Jaffer: Most of my questions pertain to the second part, so I'll just wait until then.

The Chair: Okay.

[Translation]

Mr. Dubé.

Mr. Antoine Dubé (Lévis-et-Chutes-de-la-Chaudière, BQ): I would like to get back to the $75 million over three years that Ms. Lalonde mentioned, the amount that would allow you to correct the losses that you sustained as a result of budget cuts. But you also mentioned something else, namely that it would be important to look at the development aspect. Government investment has an impact on its partners, which, consequently, invest. It's a full circle. Have you estimated how much additional money would have to be invested for you to achieve this optimal level?

Dr. Arthur Carty: We had asked for $75 million over three years for the base. I must admit that we were not proposing to use these $75 million in the same way as we did in 1994-95, because we have made some changes following the cuts. We have made progress, the environment has changed and there are new developments and new technologies. We would not necessarily invest in the same fields as before.

• 1000

We have already spoken about our five strategic initiatives which include genomics science and research infrastructure, which require sustained efforts. In these fields, we had a critical masse that allowed us to advance in this sector of the economy and its related technologies. Each of the five strategic initiatives will require additional funds.

Mr. Antoine Dubé: How much?

Dr. Arthur Carty: For example, we had suggested a program in the area of environmental technology, which includes fuel cells among other things, that would require an additional $30 million over five years.

The two initiatives for the aerospace industry, which mostly require equipment, would necessitate an investment of $45 million, while the creation of an aerospace materials manufacturing centre would require more additional funding. It would cost $60 million to implement this strategy, half of which would come from industry and the other half from our budget.

Mr. Antoine Dubé: Over how many years?

Dr. Arthur Carty: Over five years.

Mr. Antoine Dubé: You always use a five-year period. Have you determined the total additional funding that would be required to carry out these five strategic initiatives over the next five years?

Dr. Arthur Carty: Yes, we have determined that the entire set of initiatives would require an investment of approximately $300 million dollars over five years.

Mr. Antoine Dubé: So, $60 million per year?

Dr. Arthur Carty: Yes.

Mr. Antoine Dubé: A few weeks ago, we visited the Canadian Space Agency in Saint-Hubert. The president of the Agency and his officials were telling us that they had had to cut back and make adjustments, and that they had decided to carve out a spot for themselves in the world by targeting the areas where we excel. I think it's very timely to raise this point, because this morning, Ms. Payette and her fellow crew members are in space. The famous Canadarm is one of our specialties.

When you identified these five strategic initiatives, did you take the same approach and choose targets in areas where we have a chance to be among the leaders, not necessarily the best in the world? Is this how you analyzed the situation?

Dr. Arthur Carty: Yes, absolutely. These are areas of research and technology where Canada needs investment to be the best in the world, to be a leader. For example, nowhere in the world is there an opto-electronics centre similar to the one that we have suggested. Establishing such a centre would provide a tremendous advantage to our small and medium-sized businesses. This example holds true in each particular case.

If we make the necessary investment, Canada will be able to lead in these areas.

Mr. Antoine Dubé: Not only are we having a hard time keeping our best scientists in these fields, but we also seem to be unable to attract new ones. Could we solve that problem if Canada were to make this investment?

Dr. Arthur Carty: Yes. If we had the equipment and the laboratories that we would like to have, we would not only be able to convince our best scientists to stay in Canada, we would also be able to convince those who have gone to the United States to return. That would be the case if we established our opto- electronics centre, which would benefit scientists and small business. The ones who have left to study in the United States would come back here.

• 1005

The Chair: Thank you, Mr. Dubé.

[English]

We're going to take Mr. Lastewka and Mr. Shepherd, and then we're going to go to the second part. Mr. Lastewka, please.

Mr. Walt Lastewka (St. Catharines, Lib.): Okay, I'll be brief. I have only a couple of questions.

I believe the time period that we went through when we had to go and do cuts forced us to really take a look at ourselves and pick priorities and look at any duplication, and forced us to do more partnerships.

Now that we've turned the corner, my concern has always been—and I talked of this before and I just want to have you assure me once again—that there is a need to have a system in Canada on science and technology and research and development to minimize, and I say minimize, the amount of duplication that could very easily come back into the system as more money is available. Can you assure me that we are putting in a system that's going to minimize the duplication and the fact that we're going to be able to have across the country and in every province good science and technology research that's more linked, that's more in partnerships, that's more focused?

Dr. Arthur Carty: I think Canada has made great strides over the last five or seven years in actually building partnerships. In some ways it has come about through the realization that, first of all, we don't have the resources to do everything, and secondly, we may not have the resources to do anything unless we work together with partners to combine our resources to tackle a problem.

I think from the point of view of culture in the research community, things have changed a lot. There is more collaboration. There's more cooperation. There's more effort made to pull together critical mass rather than having separate pieces that are contributing non-optimally to programs.

Certainly in the NRC the concept of partnership and collaboration is the principle these days, and that's not just in collaborative projects with industry. The collaboration extends to community and regional innovation, where the focus is not on the NRC imposing something on the community but actually working with the various players in the local innovation system to see how we can all come together to maximize the benefit of what we're doing. We can provide a relatively small amount of resources in many cases, and with the resources that others can provide and the synergy that comes from interacting, we can put together an innovation initiative that is much more effective than if we dumped a large amount of money in there willy-nilly. So I think that realization is quite important, and we've made it work in a number of communities.

I think you all know about Saskatoon and how that's now a centre for agriculture, one of the major centres in the world for agricultural biotechnology. It has come about as a result of community involvement in that area, the community realizing that it can grow its economy through a very specific investment with all of the partners involved.

I think we can do that right across the country. It's happening in Winnipeg. It's happening in Vancouver. We have innovation initiatives in Montreal of a different kind with our institute for biotechnology, where that institute has acted as a magnet to draw companies around it, again feeding off the resource that's there. This is a new way of doing business, and the NRC is very much into it.

Mr. Walt Lastewka: For my second question—

The Chair: Is this your last question?

Mr. Walt Lastewka: —and my last, you did mention the various large centres, like Saskatoon, Winnipeg, and so forth. When I've travelled across the country, especially in the last two years, and I've had to deal with smaller communities, rural communities, to me, the IRAP program is the connecting link with these centres. In many cases where we could meet with small business, it was the IRAP person who was able to deliver and be the link.

• 1010

Dr. Arthur Carty: IRAP is extremely important to us, and the addition of the Canadian technology network to IRAP, of course, has given it a nationwide electronic network, with business links added onto the technology advice and support that IRAP provides.

The IRAP ITAs are absolutely critical to this country. SMEs are driving economic growth, and the IRAP program is recognized as the best of its kind in the world. I never get any opposition internationally when I mention that IRAP is a world leader in helping SMEs. Everybody knows it. They're all trying to duplicate it.

We have programs to actually clone IRAP in Thailand and Indonesia. We're looking at Taiwan. They want to know how we do it. It's the key to the growth of our SMEs.

Mr. Walt Lastewka: My only comment is that they are stretched in the areas that they cover—

Dr. Arthur Carty: Yes.

Mr. Walt Lastewka: —because as we go from large corporations to more and more small businesses, it's the ITAs that are the link. They're the key; they can be the success or failure of a small business because of their link to other researchers.

Thank you.

The Chair: Thank you.

Last question, Mr. Shepherd.

Mr. Alex Shepherd (Durham, Lib.): I have a whole bunch of questions, but I will probably get shot down here, so I'll try a few.

One question is on the number-crunching. I couldn't quite understand from your presentation; you seemed to be saying you needed $75 million just to bring you back up to speed.

Dr. Arthur Carty: I should perhaps explain that the $75 million is not simply to replace what we were doing before. This will enable us to invest in, for example, new community and regional innovation, which we believe now is critical to Canada's growth. So it will enable us to do that. It will enable us to replace equipment that is no longer state of the art. It will enable us to continue to operate programs like Women in Engineering and Science, the post-doctoral program that is so critical to replacing our human resources.

So it's a $75-million base investment that will help restore our infrastructure, re-establish and keep going our human resources programs, get involved in local and regional initiatives, and invest in new areas of research, which we haven't been able to do and—

Mr. Alex Shepherd: But is the $300 million in addition that?

Dr. Arthur Carty: Yes. The $300 million is really to put in place these strategic initiatives, as we call them, that are critical to Canada in the next century.

Mr. Alex Shepherd: The real problem I noticed, the more we're getting into studying this whole area of productivity, is Canada's seemingly poor take-up on embracing new technologies. I think our small-business sector is one of the worst. Quite frankly, we've seen this in the Y2K issue; we see it in all kinds of areas. We, as politicians, are having some great problems getting the message out there to the public. How do you think the NRC could assist us with that? How can we make the connection between innovation and standard of living, that people's lives will be better off if we make these investments?

It's quite frankly what we're talking about here today, because clearly when it's all said and done, it's what's politically saleable. We have to be able to say this is a great investment because it's going to empower you and your children and your children's children. How can we make those messages better somehow?

Dr. Arthur Carty: I think the way to really convince people is by showing them successes and success stories of companies that are growing on the basis of technology, are creating jobs on the basis of technology and are actually helping a community, a region, or a city prosper. There's nothing like success stories to convince people. On principle, it's more difficult, but when you have something concrete to show them, have a company that has been provided with the technology from NRC, has taken it with help from IRAP, has converted it into a viable company employing employees.... I have some examples in my next presentation where that has happened.

• 1015

That is the best way to convince people. And people find the Saskatoon example very convincing, because they know they can see a hundred companies in a research park, most of them associated with agriculture or biotechnology. And they shake their heads and ask why this has happened in Saskatoon. Why Saskatoon? Where would you think this would happen? Not Saskatoon. It's happened because of innovation and it's happened because people have worked together and made an impact.

The Chair: It's the only place that didn't have its funding cut. It actually had its funding increased in research during the cuts. There are enough reasons.

Dr. Arthur Carty: There are lots of reasons. I want to note that there are other successful communities too, ones that have managed to make it work.

Mr. Alex Shepherd: I agree with you, but on a broader scale, the entire mass of population, I still think you're talking about a small group of people who would appreciate the Saskatoon experience. I'm one of them. I get off the plane in Taiwan and people start talking about the Saskatoon experience. It's fantastic. But for some reason in this country we don't seem to be getting those messages out to a broad-based public. And quite frankly, if I went around my riding and talked about the NRC, people wouldn't know what I was talking about. That is a profound problem for politicians in saying this is all about allocation of resources. We're going to take x number of dollars and we're going to do this with it, or we'll do that with it, so why are we spending all this money on research? How are the people in my riding going to benefit? That's the message I have to sell.

Dr. Arthur Carty: It's not an easy sell, and I'm trying my best as president of NRC to get out there and tell people that we live in a different world.

We live in a world where knowledge, research and development, and innovation are actually driving economic growth. It isn't just your natural resources. It's adding value to natural resources through research and development technology, but it's also creating new technologies and being competitive globally.

I think you can see that in this town. Twenty years ago, Ottawa was essentially making matches and wood products, and look at it now. All the growth is on the basis of technology, and the technological base is diversifying, so there's now a growing bio-sector in Ottawa. It's not just all information technology, telecommunications.

There's another example that one can cite, and I think you can pick other communities where this has happened. Beauce in Quebec is an example of a very small community that is very successful. We have to pick those success stories of individual companies and communities and tell them and have others realize. And I think it's happening.

Walt was telling you about some of the things happening in southwestern Ontario, in the Niagara region. I think it's happening. It's beginning to happen across the country. We have to keep up the momentum and push it as hard as we can.

The Chair: Thank you, Mr. Shepherd.

Thank you very much, Dr. Carty. I'm sure we could go on with this session, obviously, much longer, but I'd like to move to the second session, which is our consideration of the study on productivity, innovation, and competitiveness. I'd ask you if you would present your second paper, and then we'll move to questions. Thank you.

Dr. Arthur Carty: Some of it we've already gone into, Madam Chair, in a number of ways.

Can I have a couple of seconds here?

I'm going to start with a quote from Michael Porter. He's an influential person, and hopefully he can influence people. He made a recent statement that “Innovation is the central issue in economic prosperity”. Translating that to the public is a bit of a challenge, but I'm going to move on through some of first aspects I was going to talk about and then come right to the point about economic growth through innovation.

• 1020

Let me just spend a few minutes to begin with pointing out how innovation works in Canada, because I think we're very different from other countries in this regard. And I think it's an understanding of this that is crucial to the need for investment.

I'll give a definition, first of all. We consider and define innovation as the creation of new ideas and the application of those ideas into new products and services in the marketplace. That's our definition. So it's a holistic one, if you like: creation of new knowledge, new ideas, and translation of those into the marketplace.

I think it's important to note that innovation isn't a linear thing. It's not basic research here and then moving to applied research and then moving to development along a chain; that's not how it works any more. It's actually very different from that. The days of this innovation chain are really gone. What we have is that the people who create knowledge and the people who put those applications to work must interact. So this innovation is a series of constant feedback loops between the various components in the innovation system. So the people creating the knowledge must talk to those who are creating the products and getting them into the market. And this really results in what we call a dynamic system of innovation.

I think I'd like to show this. This looks like a complicated diagram; it's a system of innovation, but I think it explains very nicely what we need. So you see that this has a number of components. Up here you have research and development; you have science and technology infrastructure, you have the educational system, you have learning systems, apprenticeships and technology training down here. Then you have finance. You have business organizations and you have government. And really at the centre of this innovation system are the innovative firms, because ultimately it's the companies that get innovative products into the marketplace.

Now, what is important about this is that these are not isolated things. Research and development on its own in isolation does nothing for you. What has to happen is that all of these things have to be linked, they have to work together. The research and development organizations have to have the research infrastructure; they have to be linked to the innovative firms. We have to provide highly skilled people, both from the university system and from the colleges for technology, in order to provide the personnel to enable this innovation system to work. In order to get innovative firms to put products on the market, there has to be financing, venture capital; you have to have money from the banks.

Government has a key role to play in providing funding, but also in setting the environment, the regulations and the policy. And of course business associations can also play a role. A real working innovation system, whether it be national or at a very local level, has to have all of these elements, and they have to interact. So that's, if you like, a regional community innovation system.

The other thing we have to realize is that we live in a global economy. So this has to be embedded into a global environment, and of course somehow or other it also has to be sustainable. This is what we would call a functioning dynamic system of innovation.

I think I'm going to say that to add value to what we produce we need access to knowledge. We need scientific research. But we need all of the infrastructure and all of the elements of this innovation system to work.

Let me turn to the next overhead. I've already mentioned that Canada has an innovation gap. You might ask from that innovation system, what is it that a country needs to innovate through science and technology? Here are some of the elements, and I can go through these, because I think it's important to realize the ones that are missing at the present time.

• 1025

First is the research base. We've already seen that over the last three years there's been a significant new investment in the research base and we've partly repaired—it isn't over—some of the damage that was done earlier in the decade. We need focused strategic research in areas of wealth generation. We haven't got to that point yet, the strategic research and the innovation gap, the strategic research gap; there's still a need for a major investment in targeted, focused research in areas of wealth generation.

Next is highly qualified human resources. We've made progress in there through the universities. In some cases it's happening more than in others, but we've made progress there.

On national facilities and infrastructure, the CFI is helping in that regard. Partnerships have developed. I talked about that earlier. University-industry-government have developed significantly and are a key to the innovation system.

Networks: the networks of centres of excellence, local networks, regional networks, bring in the international component. Those are important, and we've also put things in place there. NRC alone has established many international connections over the last three years in recognition of this.

Knowledge infrastructure: we talked about CISTI and the scientific knowledge network. We're actually a leader there in the provision of knowledge electronically, the provision of information electronically, right across the country. And there's a program to develop digital libraries based on the CISTI concept.

Support mechanisms for innovative firms—we have some of that. IRAP does a lot of that. TPC, Technology Partnerships Canada, is doing that. We need more of that. As the economy grows, obviously that's going to become very much more important. IRAP is running out of money and there are more demands than it can satisfy. It's going to run out of money this year, I can guarantee, before the end of this calendar year, never mind the fiscal year.

I mentioned technology transfer and entrepreneurship. We still have an innovation gap, and both of those components, technology transfer and entrepreneurship, are important. And risk capital and financing has improved. We now have a lot of venture capital corporations. So what is missing in here is technology transfer and entrepreneurship, focused strategic research in areas of wealth generation, the innovation gap.

In summary, then, on the one side we've been pretty good at creating ideas and building the knowledge base, and on the other side we seem to have some programs for industries that are capable of turning those into commercial success, but in between we still have this problem of bridging the gap. You might say that our hard-earned intelligence doesn't easily build products or generate applications unless we have all of those other elements for that innovation system in place.

You might say that Canada's innovation gap is a bit like standing on separate mountaintops across an Alpine valley. You have those two pieces up there, and getting things in the middle to bridge and provide a flow of ideas and technology from one side to the other is important.

I've tried to emphasize that at NRC we try to address that innovation gap up front, not just by focusing on the creation and the application, but particularly on the transfer of technology. We've been able, we think, to transfer the language of science into the language of business—and I did respond to a question earlier about our marketing and business. So we believe that we fill a very special niche in Canada, and we've learned, I think, through the years what it takes to drive innovation. Some of these things I've mentioned: focused teams with industry partners, work with partners from the beginning of a project, work in collaboration; early and sustained funding for strategic research; standards and prototyping; intellectual property management; thinking ahead to next-generation technologies, and I showed you our strategic initiatives in this regard; support for local and regional initiatives, which is very important, as the national system of innovation is the roll-up, if you like, of all of the local ones; and working with local champions to bring clusters of firms together, as in the Saskatoon model or the Montreal model.

What I want to talk about now is the particular nature of the Canadian industrial base, the Canadian R and D base, and it's shown here. This is what I call bridging the strategic research gap. This is really a map of the research spectrum, with the relative allocation of resources given. So here on the left-hand side is the basic research, large “R”, small “d”—a lot of research, a small amount of development—and on the other side, a small amount of research and a large amount of development.

• 1030

The red part, really, is industry. Development work is very much the goal of innovative firms in industry. On the other hand, much of this in the blue part is done by the universities, some by NRC, and the networks of centres of excellence and the partnerships help bring this over a little bit.

NRC's unique role is across the spectrum, but largely in the middle of this. We help bridge between the knowledge and the applications by working in partnerships, by investing in strategic areas of wealth creation, and filling that gap. That's a crucial role we play through our institutes and through IRAP, and it's a unique role.

I think you know that in Canada we don't have very many large research-intensive industries where there is a significant investment in R and D. After Nortel, you drop down to a company like Pratt & Whitney. Nortel invests $2.1 billion U.S., Pratt & Whitney about $400 million Canadian. You can see from the NRC numbers that NRC, strangely enough, is up there as one of the major investors in R and D because we don't have many large companies that invest heavily, and that really stifles innovation.

So with very few of these large enterprises in medium- to long-term R and D, helping to drive innovation, there's a very special need for government labs to invest in this area. There's a real role in Canada, because of this unique situation, for government to invest in the middle of the spectrum, and that's the point I want to make. We're not like the United States, where there are large corporations, or France or Germany, where they invest heavily in medium- to long-term R and D. We're quite unique in the structure of our industry, and it's very important to be investing in the middle there.

So I would like to say that NRC institutes have been ideally placed to crystallize this view of filling the innovation gap, filling the strategic research gap, and helping to draw together players from both sides of the spectrum to drive innovation. Some of the things I've already covered. We have the makings of a world-class innovation structure with some of those essential elements, and I've pointed out what we need. We have invested in knowledge, on the one hand. There's funding for IRAP and TPC on the industry side, but we don't always tie them together. So my thesis is that NRC is the backbone of the innovation infrastructure. We manage national facilities, we do R and D, and we help fuel economic growth.

I think we are uniquely placed to help in translating ideas from the research side into practice. Our strength is in building partnerships, and I'm going to give you now a couple of examples of how this has worked.

The first example is a small maritime company called Acadian Sea Plants. It's a company from Dartmouth, Nova Scotia. This firm has used NRC's expertise in proprietary technology to develop high-quality edible seaweeds for the Japanese and Southeast Asian market. The company, over the last few years, has become one of the major suppliers on a global scale of this product, which is now sold in 35 countries. Acadian Sea Plants employs 50 people permanently and hundreds on a seasonal basis, and it's a great example of how community innovation fosters growth.

The technology and the expertise came out of our institute. By working with this small company, we were able to help their business, and now they're a thriving, essentially export-oriented company. So we have affected innovation in that way, in a local and regional sense.

• 1035

One of the roles of our institute, just as in the case of Acadian Sea Plants, is to bring small and medium companies together to provide the expertise in which they can gain a critical mass and become self-sustaining. We think that in this way, both through the institutes and IRAP, we have a significant impact on the technological competitiveness of literally thousands of small firms in communities across Canada.

What we believe we have to do at NRC is to be a leader in the knowledge economy by capitalizing on intellectual resources and business resources in all of the sectors. R and D itself helps increase productivity in the high-tech sector, we know that, and there's a tendency to think of innovation as only involving the high-tech sector. But it also has the capacity to build on the very strong resource base that we have in Canada. Our resource industries can become more competitive by adding value through technology, and our institutes and IRAP can do that too. I think we're making important contributions to productivity and sustainable development and sustainability in the resource sector industries.

How does R and D and innovation enhance productivity and create jobs? Well, I could spend the rest of the day perhaps telling you of recent examples, but there's not enough time for that, and there are documents here that I think will provide you success stories that clearly demonstrate how this works.

Just let me give you another example. If you think back 20 years ago, the laser at that point in time was just a research tool; it was just emerging. It was valuable in the lab but a curiosity, you might say, in the marketplace. Today, where is the laser? Well, you see it everywhere. It's everywhere in our everyday lives. It's the common component of CD players. You find it in office and business equipment. You meet it every day in the supermarket. Perhaps we don't really realize how a technology like the laser has impacted on our lives. The impact technologically and commercially has been staggering.

You would probably not be surprised to know that NRC was a leader in the development of lasers in the early days, and we're still at the leading edge of laser research. We have one of the best laser groups in the world, right at the cutting edge of what's happening in laser technology.

So in the same way, we think the technology areas that I identified, the strategic initiatives, will pay off and the opportunities will pay off ten years from now, but unless we as a country are willing to invest on the ground floor, others will move in quickly and have the opportunities all to themselves. So I think we have to take a look at where we want to make strategic research investments. I've mentioned the need to invest in the centre of that R and D spectrum. We think we have a unique role in bridging that knowledge to real-world applications, and we need to be able to enable Canadian businesses to take full advantage of the investments that have been made in the creation of knowledge and in getting the products into the marketplace.

I'd like to finish by saying that the need for investment and innovation hasn't gone away. In fact, Canada has made some critical investments in the last three years in two sides of the innovation spectrum. We need to focus on the innovation gap, on technology transfer, and on marrying those two things together.

That's really what I'm going to leave you with today.

• 1040

The Chair: Thank you very much, Dr. Carty.

Just so members know, this meeting is scheduled for us to move in camera at 11 o'clock on the Y2K report. We may go over by about 10 minutes, but we'll see how things go.

Mr. Jaffer.

Mr. Rahim Jaffer (Edmonton—Strathcona, Ref.): I'll keep my questions short.

One of the big gaps, as you mentioned, is to take ideas from the basic research stage and hopefully have enough funding to take them right to the marketplace, and the area of development within industry and other forms of taking that out, to get good ideas to the marketplace. In your opinion, what are some of the obstacles that are currently facing more investment from say the industry side here in Canada when it comes to R and D, and looking at trying to get more of that partnership happening, given that hopefully the trend of investment will continue within organizations like yours from the federal government's commitment?

From what I understand, we do have quite an attractive form of R and D tax credits when it comes to investing in basic research, yet we've got some of the lowest investment when you compare us to the G-7 countries. I might be wrong on those figures, but that's what I think I understand.

Dr. Arthur Carty: That's a very good question and an important one. I think in order to understand it you have to understand the structure of Canadian industry. It does have a large number of branch plant operations in which multinational enterprises are active in Canada but not investing in R and D here because they do it at their home base. That's one of the problems.

Now, it is true that industrial investment in R and D is increasing. It has been increasing for a number of years. That's both on the small company and the large company scene. I think the key is, though, that we're going to have to grow in Canada. If we really want a strong industrial base and we want to have companies that invest very heavily in medium- to long-term research as part of their investment, we're going to have to grow the companies, and we're going to have to grow them from small companies. We're going to have to grow the Microsofts.

There are some good examples. If you remember, in 1983 there wasn't a biotechnology industry in Canada, and by a focused government investment in the mid-1980s we now have a number of large companies like BioChem Pharma, which is a major player internationally. Quadralogic Technologies is another major player with new things coming onto the marketplace. We have a number of those things that we've grown, home-grown companies that are competitive. So I think the key thing is to make sure we have the environment whereby small and medium enterprises can grow large. Magna is now a big company; it started off small. We've got to grow those things and have the right environment to do it.

Mr. Rahim Jaffer: I guess that's the key, the environment too, because R and D is obviously significant, but if you don't have the right environment—I think Madam Lalonde touched on it earlier, the simple issue of the dollar, and then how other companies in say the U.S. would move in and pick up some of our—

Dr. Arthur Carty: There's a story about Silicon Valley that I'll convey to you, which I think is a lesson in many ways. People believe the reason Silicon Valley is so successful is partly that there is a clustering of companies there, and there is such a fantastic exchange of people and ideas in Silicon Valley. The synergy that has come about as a result of companies and individuals interacting has helped that grow. You don't find quite the same thing in the Boston area. It's not as successful.

So the idea of community and regional innovation in Canada, where you cluster companies that have a common interest and you help them feed off one another, so you have a local or regional economy that can really move ahead, I think that's key. If you've got the environment, the instruments in place within communities, it can really happen. Again, to come back to Saskatoon, Ottawa, Montreal, Winnipeg, and to a certain extent Vancouver, it's happening. It's beginning to happen.

Mr. Rahim Jaffer: The last question I have is specifically on that point. Obviously you've brought up the issue of Saskatoon and what successes have happened there, and you mentioned at one point, I believe, the interest of the NRC to look at local and regional development and those sorts of partnerships. It sounds good, and I know there are initiatives obviously at the provincial level and different areas to look at development and innovation. In your approach, if you can expand on the direction, especially on the local and regional partnership issue, my only concern is then would the NRC maybe come into conflict with some of those provincial areas?

• 1045

I know a lot of this stuff is global anyway in some of the focus, but maybe you could expand on what's happening there so there wouldn't be any duplication, or what sorts of innovations and what your thoughts are on where that's going.

Dr. Arthur Carty: First of all, I would say the focus of our regional and community innovation initiatives is actually to bring people together so that there isn't any conflict between what the province wants and what the federal government as seen by NRC and perhaps the regional development agency in some cases and local industry is capable of doing. So the whole thrust of this is to work together with a common goal in mind.

You don't want to duplicate resources and you don't want to be in conflict with what a province sees as their priorities. That's very important.

The Chair: Thank you very much, Mr. Jaffer.

Mr. Lastewka.

Mr. Walt Lastewka: Thank you, Madam Chair.

My first question was similar to Mr. Jaffer's. We still have that branch plant mentality. I'm glad you said, and I've heard more people say, that we have to grow our small businesses to be large businesses, to be Canadian businesses, to move forward. You talked about new products and innovation and so forth, but I didn't hear you say too much about the work you can do in your area on helping systems in industry. There's a lot of work being done at NRC to develop and fine-tune systems. You talked about the laser a little bit. Could you tell us a little more about new technology and productivity improvements in those fields other than the Canadarm and so forth?

Dr. Arthur Carty: Yes. I think there's an example in my text about Air Canada. I didn't describe it specifically.

Mr. Walt Lastewka: That's the 320 monitoring airplanes, on page 3?

Dr. Arthur Carty: Yes, the diagnostic system. This is an example of systems where the thrust for the project was the expertise we've developed in software and expert systems over a period of time in our Institute for Information Technology.

We've worked with Air Canada and also with General Electric Aircraft Engines to develop an integrated diagnostic system that essentially provides diagnostic information from the aircraft when it's in operation to the ground so that it can be analysed and processed and provide feedback to Air Canada ground staff. It can provide information that will enable the company to plan its operations better, to schedule maintenance to project potential problems before they arise.

So this is an expert system that is amassing data from aircraft operations, analysing it on the spot, making it instantly available, but also over a period of time allowing better planning. This is now being implemented with Air Canada, and they believe that from the A-320 fleet alone—they've got something like 30 or 40 A-320s—they'll save millions of dollars annually on better planning, better scheduling, better maintenance of their aircraft. Also, they'll avoid accidents as a result of this intelligent system that has been developed and put in place, again through several years of a working collaboration between NRC and Air Canada. And Aérospatiale and other aircraft manufacturers are interested.

• 1050

Mr. Walt Lastewka: So I see this as a safety and up-time project. Improving the up time improves the productivity of the equipment, in that case being airplanes.

When you look at new products and new systems, is there any priority, from your experience?

Dr. Arthur Carty: Do you mean our investments in R and D? I suppose you could say investments in computers, in software, in information technology in general is enabling and it will affect productivity. I think in fact the gains we're beginning to see in productivity in Canada are due to the fact that there was a lag in the response to the new generation of information technology that has come onstream and been implemented. I think productivity gains are resulting from that. New technology does impact very much on innovation and it does impact very much on productivity. I wouldn't try to separate the two. There's a role for both.

The Chair: Last question, please, Mr. Lastewka.

Mr. Walt Lastewka: What would be the best way to explain productivity to the ordinary individual, like Stan Keyes? How would you explain that?

Dr. Arthur Carty: How would you explain productivity? I think the best way to explain is perhaps to ask, in a conversation, what is it in your workplace that would enable you to do your job better? That's where you see productivity advances, when a person can actually, using the technological tools at hand, better improve their output and their productivity. I think you can see that rather nicely via the use of computers in the workplace.

People tend to think that technology puts people out of work. It doesn't, actually. It creates jobs. It's rather like the story people were telling about computers and information and technology doing away with paper. That's not the case. Technology doesn't do away with jobs; it actually increases the number of jobs. It provides completely new opportunities. So that's nonsense, that technology does away with people.

The Chair: Thank you.

[Translation]

Madame Lalonde, please go ahead.

Ms. Francine Lalonde: I would like to continue talking about productivity. We know that introducing technology into a company does not necessarily improve productivity if the labour force and management are not prepared for it.

When I was at university, I taught what had happened at GM when they introduced the Saturn plan. They had a great deal of difficulty getting as high a productivity as beforehand, when the work was organized differently. Perhaps you'll discuss that later.

Organizing work differently is one way of increasing productivity. Just reducing the number of foremen increases productivity. We don't talk about that enough.

Dr. Arthur Carty: Managing and organizing the workplace are very important.

Ms. Francine Lalonde: Yes. Here's something else. We have known for a long time that the large multinationals rarely invest elsewhere than in their parent company's country. Pratt & Whitney is an exception.

So Canada has a major structural problem, and in my opinion, everyone must know about it. I'm speaking of Canada and Quebec. Canada is a small country.

Dr. Arthur Carty: Indeed.

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Ms. Francine Lalonde: In terms of investment, Canada is lagging behind in relation to other G-7 nations, and that's well documented, because several multinationals do not do a research here. So either we accept this situation or government must intervene. Tremendous efforts have been made in Quebec, particularly by the government of Bernard Landry. He prepared a plan entitled Bâtir le Québec, which focussed strongly on developing technology. At the time, people even thought that he was going too far.

We must become aware of this problem. I think that parliamentarians must be the first to know about the situation in Canada, but that doesn't mean that we must not try to ensure that businesses invest in R&D.

The same thing holds true for labour force training. In Quebec, we tried to encourage business to invest in labour force training, but finally we passed legislation, as many other countries did, to force business to invest in their labour force.

What is the National Research Council doing to help the provinces, for example Quebec, that devise their own development and innovation strategies? What is your partnership strategy? It is nowhere to be found. I do know, however, that the Industrial Research Assistance Program, for instance, is carried out in conjunction with the CRIQ in Quebec.

Dr. Arthur Carty: The IRAP program plays a very important role in the growth of small- and medium-sized companies in Quebec, but the NRC also has two of its larger institutes in Quebec. We have the Biotechnology Research Institute, which now has nearly 500 people. It has doubled in size over six years thanks to partnerships and thanks to the companies in the incubator in Montreal. The BRI and the biopharmaceutical and bioenvironmental companies in Montreal interact a great deal. We also have the Industrial Materials Institute in Boucherville, which is itself important and which has dealings with the universities, such as the Université de Montréal, the Université du Québec and McGill, as well as with companies in Quebec that are involved in the area of industrial materials, namely plastics, polymers and metals.

These are partnership models thanks to their interaction and their integration in the province of Quebec and in the Quebec industry, as well as within Quebec's innovation culture.

The government of Quebec recently published a report entitled Innovation au Québec, and the NRC's two institutes get very good marks in this report. They are models.

Ms. Francine Lalonde: Talking about partnerships, you mentioned BioChem Pharma. That company started with research that was done at the Microbiology Institute, which had a hard time living with researchers...

Initially, the research being done there was supported by the Fonds de solidarité and the Caisse de dépôt. There was local support, and it became a very large company, and you said that it was important at the domestic level. When people really pull together, these partnerships become possible.

Dr. Arthur Carty: Yes. It is important for small and medium- sized companies to be in an area that promotes innovation. To grow, they need not only support for R&D, they also need to be in an area where there are other companies working in the same field. We call that clustering.

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To be able to grow, they also need the support of government in terms of regulation and policy. Finally, they need managers who are familiar with innovation.

Ms. Francine Lalonde: Thank you.

The Chair: Thank you, Ms. Lalonde.

[English]

You're going to speak, Mr. Shepherd, then Mr. Keyes, and then we're going to have to stop. Mr. Shepherd, please.

Mr. Alex Shepherd: Getting back to this branch plant economy thing, I don't know how far down the road we go with that. It seems to me we're saying that foreign ownership inhibits domestic research, leading to lower standards of living. Is that a fair statement?

Dr. Arthur Carty: I think it's a difficult equation to balance. After all, if you bring a multinational to Canada, they do create jobs and they do pay taxes. And creating jobs and paying taxes is important. So let's not say that a company that's in Canada creating jobs and wealth is not welcome because they don't do R and D. I don't think that's the case.

Mr. Alex Shepherd: No, but we're focusing on the innovation gap, and presumably the innovation gap is between us and the Americans when it gets right down to it.

When you talk about technology transfers, to what extent are those technology transfers going right out of the country?

Dr. Arthur Carty: Well, you know, we live in a global marketplace, and things are changing at a rapid pace. To think that we can isolate ourselves from the world is not very sensible. For example, in our approach to technology transfer at NRC, when we have developed a technology we think is useful it's usually done from the beginning in collaboration with a company.

Suppose that something has happened in R and D that has brought something to light and in which we haven't had a partner at the beginning. What are the choices? Well, you look for a Canadian company that has expertise in the area and could possibly accept the technology, take it and run with it—license it, for example. That's one option. If you don't have a Canadian company that has the capacity and the capabilities, what do you do? Well, you have two choices. You start a company. In other words, you create a company from scratch. That is increasingly a very valuable mode of technology transfer. NRC is very much in the business of spinning off and starting companies when there isn't a natural receptor in Canada.

In the past there might have been situations where, if there wasn't already a Canadian company and you wanted to see your technology in use, you'd transfer it to somebody outside the country. There's much more emphasis these days on starting new companies, incubating them, growing them, providing them with the oxygen initially to get them on their way and making it work that way.

So I'm less concerned about that. I'd be more concerned about small and medium companies being inward-looking and not looking at world markets and world opportunities, because I think that's really going to be one of the criteria of success in the future: how much you can attack the world markets, the global marketplace.

We're a small country, you know. The market is small.

Mr. Alex Shepherd: I understand that, and I'm not talking about closing our borders or any of those good things, but—

The Chair: Last question, Mr. Shepherd.

Mr. Alex Shepherd: You mentioned a collaborative process with General Electric. Presumably when all the smoke clears, General Electric owns the technology.

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Dr. Arthur Carty: No, they won't own the technology. Air Canada is the principal collaborator on that. General Electric is also working on it. The best they would do would be to license the technology from NRC and put it into use in Canada. Air Canada would be the major licensee.

Mr. Alex Shepherd: But in a case like that, General Electric could take the technology and market it in the United States.

Dr. Arthur Carty: Their interest is of course in the engine side of it. And yes, we would expect that if it was a multinational.... There are many in Canada to whom we would license technologies who are operating here, like Merck Frosst, for example. You know, we do business with Merck Frosst. Merck Frosst is a big company. They're one of the principal investors in R and D. We don't have any problems with investing in Merck Frosst, even though the products will be on the global marketplace, because they have a big presence in Canada. They employ a lot of people and they also do R and D. We have no resistance to that.

The same would be true of Pratt & Whitney. We have strong interactions with Pratt & Whitney in Montreal and Toronto. They're a multinational, but they are creating jobs and wealth for Canada. The aerospace industry in Canada has grown enormously—partly Canadian, partly multinational. They're all multinationals. Bombardier is a multinational company these days.

The Chair: Thank you very much, Mr. Shepherd.

Mr. Keyes, please.

Mr. Stan Keyes (Hamilton West, Lib.): Thank you. Just some quick questions, Madam Chair.

Thanks very much, Mr. Carty, for your presentations to us today.

When you speak of GE, Pratt & Whitney, Frosst, the aerospace industry, etc., these are big companies. You can see where their institutions understand things link NRC, IRAP, ICAST, you name the program. But have you ever had complaints that given the size of NRC and all these different fingers from NRC, maybe NRC is a little bit user unfriendly to a small enterprise trying to get up off the ground, that it comes up to a monolith called NRC and maybe is intimidated by what it has to do in order to progress through this system?

Dr. Arthur Carty: I would say yes, that is a possibility. We are a technology and an R and D organization, so to a company that isn't involved in R and D, there might not be a way for us to really help them very much.

I think we've tried to get over the problem of small companies not being able to access our resources. That has been something we've focused on. We have a much closer relationship these days between IRAP and the IRAP ITAs and our institutes. I'm sure there are companies that will have difficulties with this, but we tried to minimize that as much as possible. I think we're more open than we've ever been at NRC.

Mr. Stan Keyes: Oh, I don't question your openness or your abilities even. I fully agree that NRC is doing a fantastic job. I'm one of those who have spoken up to ensure that you have the funding to continue the job. I'm just looking at.... If you're looking at some kind of a flow chart, for example, and at the bottom of that flow chart is SMEs, and SMEs have to work up through this system through the ITA and through up into NRC and try to get the funding and all that kind of thing, you can imagine how intimidating it would be for a small enterprise to enter this.

Dr. Arthur Carty: But I think from the ITA's point of view, it isn't really intimidating. In terms of the statistics, 80% of the companies IRAP works with have fewer than 50 employees.

Mr. Stan Keyes: Good. I'm glad to hear that.

Dr. Arthur Carty: These are largely small companies.

Mr. Stan Keyes: I agree with your message that NRC is the government's best agent of innovation. Do we do any work with steel plants?

Dr. Arthur Carty: Yes. Over the years we've done a lot of work with companies like Dofasco.

Mr. Stan Keyes: Yes, that's exactly what I was going to use, being from Hamilton, of course.

Dr. Arthur Carty: In fact we had a major project called the Bessemer project, which was to develop—

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Mr. Stan Keyes: Dofasco in particular—let's focus there. They've done one heck of a great job with the innovation and technical changes, etc., to produce the product they do now. They seem to have not run into this innovation gap. It seems there is no innovation gap, from what I've seen, at Dofasco.

If there is a concern about an innovation gap, do officials from NRC ever go to a place like Dofasco and say “How did Dofasco close this innovation gap, and how can we apply those principles or those techniques to ensure that we can close our innovation gap?”

Dr. Arthur Carty: One of the things I haven't talked about, but which is a very important part of what we do at NRC, is that we take advice from companies very seriously. Each of our institutes has an advisory board that is by and large drawn from the industries and the clients that particular institute would serve. So all those boards are chaired by people from the private sector, from outside NRC of course, and the makeup of them is external. That advice we consider very seriously. We consult people very broadly through workshops and round tables whenever we have a change of program, whenever we're looking at something new, to ask which directions to go in.

For example, manufacturing technologies is an area where Dofasco and Stelco and also General Motors and other large and small players would be involved. We have an advisory board that is being drawn together to look at the future of manufacturing in Canada. They will tell us where we should be going. We get that advice.

So we do very much listen. Our clients are extremely important. Every year each of our institutes has to report back on their client interactions they reach. We have a performance framework that does this.

Mr. Stan Keyes: Thank you.

The Chair: Thank you very much, Mr. Keyes.

Dr. Carty, I want to thank you very much for being here. I apologize for our late start and for keeping you overtime, but we do have rules that we have to wait for opposition members to arrive before we can begin. So we apologize for that. We do appreciate both presentations and the interesting discussion. We look forward to meeting with you again soon.

We're going to suspend now for about three minutes. We're moving in camera to do the Y2K report. We need all members to stay for that, because we have votes.

[Proceedings continue in camera]