BUSINESS

A CRITICAL SCIENCE GAP

CANADA’S SPENDING ON RESEARCH IS FALLING FAR BEHIND THAT OF ITS COMPETITORS

JOHN DALY May 21 1990
BUSINESS

A CRITICAL SCIENCE GAP

CANADA’S SPENDING ON RESEARCH IS FALLING FAR BEHIND THAT OF ITS COMPETITORS

JOHN DALY May 21 1990

A CRITICAL SCIENCE GAP

BUSINESS

CANADA’S SPENDING ON RESEARCH IS FALLING FAR BEHIND THAT OF ITS COMPETITORS

For Canadian scientists, it was a rare financial windfall. Late last month, a U.S.-owned drug manufacturer, Bristol-Myers Squibb of New York City, gave a team of five researchers at Toronto’s Mount Sinai Hospital $5.75 million to study the genetic transmission of cancer and other diseases in laboratory mice. The pharmaceutical industry is one of the few businesses increasing its investment in basic research largely because Ottawa ordered drug manufacturers to double their spending on research and development in Canada, in return for granting them greater patent protection in 1987. Elsewhere, even in sectors as critically dependent on new technology as telecommunications and computers, Canada’s research spending is falling increasingly far behind that of its competitors. Even in the booming pharmaceuticals sector, a huge gap persists. Said Dr. Alan Bernstein, associate director of the Samuel Lunenfeld Research Institute at Mount Sinai: “We’re always receiving offers to go south. With the promise of more research money and better facilities, it’s hard to keep resisting.” Canadians have not traditionally initiated a great deal of research and have been slow to adopt new technology developed abroad. Last year, Canadian companies spent just 1.3 per cent of the gross domestic product (GDP) on research and development—down from a peak of 1.42 per cent in 1986—while the United States spent twice as much, 2.6 per cent, and Japan spent even more, 2.9 per cent. But, at a time when policymakers—including Prime Minister Brian Mulroney and Science Minister William Winegard, as well as business leaders—say that Canada must adopt new technology much more quickly in order to keep up with international competition, both business and government are trimming their research budgets.

In his February budget, Finance Minister Michael Wilson reduced spending on industry, science and technology programs by $172 million to $1.07 billion. In the private sector, the Conference Board of Canada predicts that research expenditures will lag behind inflation for the next five years, a prospect that alarms many business leaders. Says John Roth, executive vice-president of product lines manage-

ment at Northern Telecom Ltd., the giant Mississauga, Ont.-based multinational telecommunications equipment manufacturer: “We can’t afford to remain hewers of wood and drawers of water. If we don’t adapt, our standard of living will crumble.”

The effects of the slowdown have already spread to key sectors in which Canada has shown a traditionally strong ability to develop and market new technology. Ten years ago, Canada manufactured four per cent of the world’s electronic products. But last year, Canada’s share fell below three per cent, while it imported six per cent of the world’s production, resulting in an $ 8-billion deficit in electronics trade. Overall, Canada ran up a technology trade deficit of $53 billion between 1978 and 1987.

While there is a consensus that a serious problem exists, there is disagreement about who to blame and what to do about it. According to Winegard, “everybody is blaming everybody else” for the current slowdown. For his part, he says that Canadians have always been complacent about research because they have relied on resource industries to produce a high standard of living. He adds that many of those industries have never had to invest large amounts in basic research, because they have been able to prosper in an economy protected by high tariff barriers.

Added the minister: “Canadians have been able to cut it down and dig it up.” But many academics, business executives and provincial politicians say that the Conservative government is failing to provide leadership in the midst of a crisis. Last year, the 10 provincial science and technology ministers

agreed at a conference in Halifax to work towards de» voting 2.5 per cent of the GDP to research and development by the year 2000. But Ottawa has not endorsed this target. Declared Monte Kwinter, Ontario’s minister of industry, trade and technology: “When we are competing against countries like Japan, which has announced that it plans to increase its research and development funding to 4.5 per cent of the GDP by the year 2000, it is clear that the

federal government must send out a signal— and it’s not doing that.” Academic researchers also criticize the Mulroney government for not giving adequate funding to universities and nonindustrial organizations for basic research. Said Bernstein: “They are making a fundamental error in committing the vast majority of its funding to applied research. Any company or country that’s going to apply new knowledge has to understand the roots of that knowledge.”

Roy Woodbridge, president of the Ottawabased Canadian Advanced Technology Association, claims that, even before students enter university, they are discouraged from choosing careers in science or mathematics. Woodbridge says that is because Canada does so litte to recognize its technology heroes. He added, “The average high school student doesn’t even know who (Nobel Prize winner for chemistry) John Polanyi is.” As a result, Woodbridge and other critics say that the supply of highly skilled domestic engineers and scientists is not keeping up with demand. In 1972, doctoral degrees in natural sciences and engineering accounted for over 60 per cent of all PhDs granted by Canadian universities. But, by 1988, the figure had declined to 50 per cent.

But Winegard says that Ottawa’s share of research and development spending amounts to 0.6 per cent of the GDP, which he maintains compares favorably with government spending of between 0.5 per cent and 0.7 per cent in other industrialized countries. The gap in re-

search and development expenditures between Canada and most other countries, Winegard claims, is a result of industry not contributing a greater share.

Indeed, both Winegard and his critics say that most foreign-owned branch plants, particularly in the critical auto-manufacturing sector, have tended to import new technology from their corporate parents. Said Douglas Wright, an engineer who designed the futuristic domed Cinesi.here at Ontario Place in Toronto, and who is now president of the University of Waterloo: “We’ve always depended on other people to do the innovation.” There are, however, several notable exceptions among the foreign-owned firms. U.S.-owned aircraft engine-maker Pratt and Whitney Canada Inc. of Montreal spent $247 million on research and development last year, and Toronto-based IBM Canada Ltd. spent $181 million, making them the secondand third-largest private research and development spenders in Canada. The leader, by far, is Canada’s giant telephone and telecommunications conglomerate, BCE Inc. of Montreal, which owns Northern Telecom and which spent $813 million.

But only a handful of large private and Crown-owned companies spend effectively on research and development. A study released last year by the federal government’s National Science and Engineering Research Council found that just 10 firms were responsible for 40 per cent of all industrial research spending.

Historically, much of Canada’s research and development investment has been concentrated on a small number of large projects. These include the Candu nuclear reactor, developed by the federal government’s Atomic Energy Canada Ltd., and the Canadarm, developed by Spar Aerospace Ltd. of Toronto. For AECL, which has not sold a reactor to a foreign country since 1983, but which still employs 230 scientists, the returns on that investment have been disappointing. Meanwhile, according to Kwinter, “we have a situation in Ontario where 80 per cent of companies have no technically trained person or engineer on staff.”

Many analysts say that the Conservative government’s current high-interest anti-inflation policy is choking off new research expenditures, particularly in the volatile and risky hightechnology sector. According to Denzil Doyle, president of Ottawa-based Doyle tech Inc., a consulting firm that raises start-up capital for small hightech companies: “Unless someone has a personal fortune or a rich aunt, the vast majority of new high-tech companies are stillborn from Day 1. Very few investors are willing to back a new firm when they can turn around and get a 15or 20-per-cent return on treasury bills or mortgage loans.”

The high cost of capital is even making it difficult for huge firms with a strong commitment to research, like Northern Telecom, to justify large research investments with no immediate payoff to their shareholders. Says Roth: “The cost of money is ridiculous in this country.”

The highly specialized smalland mediumsized high-tech companies clustered around Kanata, Ont., in Canada’s so-called Silicon Valley North just 25 km southwest of Ottawa, have always suffered through sharp swings of expansion and contraction. Moreover, because they have been unable to raise enough research funding from Canadian sources to continue to develop new products and technologies, many have had to sell themselves to much larger foreign firms with better access to global markets. Mitel Corp., for example, developed highly innovative computer systems for libraries and grew spectacularly during the 1970s and the early 1980s. But, by 1986, Mitel found that it lacked the financial resources to invest enough to remain in the forefront of new technology. As a result,

Mitel’s management allowed British Telecom to purchase a 51-per-cent controlling interest in the company.

Another recent made-in-Canada success story has had an even more dramatic, and tragic, ending. In 1988, Leigh Instruments Ltd., an Ottawa manufacturer of defence-related electronics systems and components, also decided that it needed a partner with cash and an

international network. It sold itself to British electronics giant Plessey Co. PLC. But last fall, Plessey, in tum, was purchased by GEC Siemens PLC of Britain and West Germany, which found that Leigh had accumulated about $88 million worth of debt and appeared to be in trouble with its largest project, Shincom, an $ 80-million shipboard communications program for the Canadian government. The sad

end to the tale: the 29-year-old Leigh declared bankruptcy last month.

In order to improve the position of high-tech firms, the Silicon Valley companies have been among the most vocal proponents of more tax breaks from Ottawa. Michael Cowpland, a cofounder of Mitel, said that he had to spend $7 million of his own money to found his new firm, Corel Systems Inc., which invented a software system that enables IBM-compatible computers to achieve the same graphic quality as those manufactured by Apple Computer Inc. Says Cowpland: “The government of Canada is doing absolutely nothing. To qualify for the 20-per-cent tax credit on research and development spending, they put firms through an annoying audit and, more often than not, they inform you that your claim has been disallowed because your research was not risky enough.”

Ottawa, however, is clearly reluctant to repeat its unsatisfactory experience with the generous Scientific Research Tax Credit program that it suspended in October, 1984. During the year before it was eliminated, finance department officials estimated 8 that Ottawa lost $500 million in revels nues as a result of companies fraudu^ lently selling their tax credits to other I investors, who had no plans for any ~ research work and who often spent I the funds on lavish offices or company 1 cars.

But hard-pressed scientific researchers point to several provincial programs and Ottawa’s own pharmaceuticals legislation as examples of successful ways of promoting greater investment in research and development. In Quebec, for example, the provincial government last year created the $300million Technology Development Fund, introduced new tax credits to offset the cost of joint research projects between government and industry, and increased university research funding by $27 million. Since Parliament passed the 1987 Drug Patent Act, which called for drug manufacturers to double their research and development spending—to 10 per cent of their sales by 1996—or risk losing their patent monopolies, manufacturers boosted their spending to $211 million last year from about $100 million in 1987.

Still, such increases will likely continue to be the exception rather than the rule. And, for the moment at least, both Ottawa and private industry’s prescription of continued financial stringency will be a difficult one for cash-strapped scientific researchers to swallow.

JOHN DALY

SHONA McKAY