Thank you very much for having me.
My colleagues Eliot and Graham have both touched on a number of things that I would have touched on. I guess that, coming late in your proceedings, some of the things I would say have perhaps already been said by others, but I'll have a go. I'll try to summarize my presentation, accordingly, to move it along.
I would like to begin by highlighting the critical importance of R and D to manufacturing and to industrial competitiveness. We see R and D all around us. We see it in our lives; we see it in social and environmental applications. But we also see it most directly in how it supports prosperity. In our 21st century global economy, our competitiveness going forward is going to increasingly rely on R and D and the application of R and D to create competitive advantage.
R and D creates competitive advantage in a number of ways, as you probably know. It helps firms develop new products and services that they can use to create market niches for themselves; it supports process innovations that increase the productivity of their industrial production; and it also is embodied in the latest machinery and equipment they buy.
Canada produces a small amount of innovation in the world. We're big consumers of innovation. One of the main ways we consume it is through purchasing goods and services to be used in the production process—investment in M and E.
Investment in R and D brings a lot of rewards as a result: companies have new product offerings, they're move adaptable companies, they're more efficient in their production processes. It makes the companies more robust and able to withstand the processes of change in the marketplace that we're experiencing.
Looking at the importance of R and D for industrial production, for manufacturing, and for competitiveness, we have to ask ourselves how we are doing as a country in supporting R and D.
Canada has made tremendous gains over the past ten years with respect to building up the R and D capacity of the country. We've seen this through the substantial investments that have been made in our higher education R and D capacity. Eliot, of course, is here representing one of the initiatives that is from that investment in building capacity to do R and D.
In fact, we've gotten to the point where Canada is now first in the G-7 and second in the OECD with respect to the amount of R and D that's done as a proportion of GDP in the higher education sector. So we have a strength there; we've achieved a position of leadership.
We also are doing very well in the outputs from those investments. It's not just that we're spending highly; we're also generating good output. Canada ranks very well with respect to the volume of publications. We are a major source of advancement of knowledge in the world. We also are doing good-quality research. Canadian researchers are frequently cited. So we do well with respect to our higher education R and D.
Higher education R and D is important not just for producing raw ideas or basic research; it's also where we train our talent, our young innovators of tomorrow, our highly skilled people, who are going to move out of the university or the college system into the marketplace, into government labs, into the university labs doing research. And there Canada does relatively well also.
We do extremely well in producing post-secondary education, but when you start to deconstruct that post-secondary education performance, we see that we do less well in the production of advanced degrees—science and engineering degrees, the kinds of things that are important for having a more innovative economy going forward. In fact, if you looked at our ranking for the production of all levels of post-secondary education, we're first in the OECD—but that includes colleges, just some post-secondary education. If you move to the production of advanced degrees, such as PhDs, we're actually eighteenth. So we're not supplying necessarily the level of talent that's required for an innovative, R and D-intensive economy.
Another interesting aspect is our use of highly qualified people. If you look at Canada and at the United States across almost all industrial sectors, you'll see that Canada uses fewer advanced research degrees than the United States for the same industrial sector; and then secondly the remuneration for those advanced degrees is lower. The more advanced a degree becomes, the more that gap, the difference in the premium for having that advanced degree in the labour market, diminishes.
So we may produce fewer degrees, we may produce not as many of the right kind of research degrees, and we may as a society have a softer labour market. Now, that labour market is strongly influenced by private-sector demand for advanced research degrees, because R and D in Canada is 54% located in the private sector. That's an indication to us that we have soft demand in the private sector for investment in the kind of input they need to perform R and D. In fact, when you look at the performance of our R and D in the business sector, you begin to see that finding reinforced.
As a proportion of the R and D done, Canada ranks below the OECD average for the proportion that's done in the business sector. The R and D intensity of the Canadian economy in the private sector is lower in Canada than it is the U.S. and lower than the OECD average. We're sixth in the G-7. Canadian companies tend to spend less on R and D.
Also, when we do spend on R and D, we tend to generate fewer innovations from each dollar we expend. There is some evidence done by Pierre Therrien and some others around the return on investment from the innovations that the private sector generates, and again, Canada's a bit weak in that regard. Overall, some surveys suggest Canadian companies tend to use innovation less often than cost reduction as a competitive strategy, although the findings are a bit mixed there.
If we look at what kinds of factors explain why Canada spends less on business R and D, why we underinvest in business R and D, there are a number of explanations, but we have to say that we don't have the definitive answer. Some analysts have pointed to our industry structures in Canada--the profile of our economy, as it were. If you look at some industry sectors like pharmaceuticals or ICTs, Canada's very competitive vis-à-vis the United States with the level of investment in industrial R and D, but they are smaller parts of the economy than they are in the United States.
In contrast, as Graham was just mentioning, the auto sector's a big part of the Canadian economy, and it invests surprisingly little in R and D. If you look at other countries with automotive sectors, there's a much richer investment in innovation going on.
As for other factors, we have a large natural resource endowment. Because innovation or competitiveness there works on a longer cycle time than perhaps ICT, you see that they might underinvest, and that might be a contributing factor to our overall R and D performance. Others note that we have a large preponderance of SMEs. Others point to foreign ownership, the idea being that headquarters tend to be the places that attract the R and D mandates; since Canada does have some foreign ownership, that's influencing our outcomes. Lastly, others point to framework policies, asking if we have the right competitive intensity in Canada, and so on.
Understanding why we have an underinvestment in business R and D is an area of inquiry that's getting a lot of attention. Industry Canada and many others have been researching it for some time, but it continues to be an area in which further research is required and further advice is required on what could be done to improve. What underlies the underperformance of business R and D, and what specifically could be done in this area?
To sum up, R and D plays a key role for long-term competitiveness. R and D in the higher education sector, in fact, is very strong in Canada, and our challenge is to sustain and maintain that level of excellence. However, that translation of those ideas, the translation of those young people into private-sector applications that would see an influence on productivity, is weaker.
Governments around the world play a role in these areas. One of the foremost things the government seeks to do is create a competitive environment in which companies are incented to compete on the basis of innovation, as opposed to cost reduction.
Also, governments work to ensure that we have effective marketplaces, good regulatory environments in which consumers understand biotechnology products and understand health and safety around new products. Government is providing a regulatory framework that allows an effective market operation around innovative products.
Government also plays a key role in supporting basic research. As I was mentioning earlier, the Government of Canada makes a sustained investment in support of higher-education R and D. We spent about $2.2 billion annually, 2004-05, on supporting research, supporting students to participate in research, supporting professors, attracting professors to come to do research here, supporting the indirect costs of research at universities, and supporting networks of the nature that Graham touched on when he mentioned ISIS, which was in the networks of centres of excellence and a government-supported initiative, among other players as well.
Lastly, the government can play an important role encouraging linkages, trying to connect up universities with that talent flow and that idea flow coming out of the university system. There are many ways that can be done, and there is a range of programs in place at this time. Whether it's the National Research Council's cluster initiative, whether it's the networks of centres of excellence, whether it's Precarn or others, the idea is to bring together researchers and users of R and D to get those practical applications of innovation.
As a concluding word, my minister was here two days ago. He mentioned that he is bringing forward a science and technology strategy, and it will speak to these issues over the coming period.
Thank you very much.