[Recorded by Electronic Apparatus]
Tuesday, November 19, 1996
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[English]
The Chairman: Pursuant to Standing Order 108(2), the committee will resume its review of science and technology and the innovation gap in Canada.
Welcome to the committee, and to the members of the committee who had a week in their constituencies, welcome back. You probably had a good time and worked hard, right? Good.
We have with us witnesses who specialize in the financing of technology and new technology firms.
I very much appreciate the fact that you are taking the time to come and join us today. We've had a very good series of round table discussions on different issues. We look forward to your contribution.
Our style is to ask you to make a short opening statement of ten minutes or so. Give us a sense of where you think the problems are and what the solutions are. Then we will turn it over to the committee members. We've found in the past that the discussions have been very animated and very engaging. We assume it will be so today.
Richard Charlebois, can I ask you to introduce yourself and begin our proceedings today.
Excuse me. There's one other point. We have three written presentations in English only, from Capital Alliance Ventures, from the Royal Bank and from the Conference Board of Canada. With the permission of the committee I'll distribute them.
Mr. L. Richard Charlebois (President, Capital Alliance Ventures Inc.): Thank you very much, Mr. Chairman. Thank you for the opportunity to be here today.
I'd like to begin by telling you a little bit about my background. I'm a venture capitalist who focuses exclusively on the technology sectors. These sectors include computer hardware and software, telecommunications, data communications, semiconductors, some medical technologies - but not biotechnology - and some environmental technologies.
Our fund is headquartered here in Ottawa. It has $34 million in assets and nine investee companies located in Ottawa, Toronto and Kitchener-Waterloo. The investments range in size from $500,000 to $2.85 million. The companies range from start-ups with no revenues to the largest one, which is going to have revenues of approximately $17 million this year.
My comments today will touch briefly on a number of the topics mentioned in your review mandate and focus more closely on one or two that I believe should receive more attention.
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There's no question in my mind that knowledge-based industries will continue to play a critical role in the Canadian economy. My definition of ``knowledge-based'' includes any industry that devotes a significant portion of its resources to research and development. Examples of these industries include computer-related technologies such as data communication, software, semiconductors, and health-related ones including biotech, advanced materials, and environmental technologies.
I've been involved in some of these industries for the last 15 years and the evidence of their growth is indisputable. In the Ottawa-Carleton region alone we have gone from a handful of public technology companies to the high teens. I actually counted the number yesterday. I think we've crossed twenty. We now have over twenty public technology companies in Ottawa. In addition, there has been significant growth in a number of communities, including such places as Kitchener-Waterloo, Burlington, Markham, and other communities north of Toronto.
As these technologies have matured they have become critical for many of the more traditional sectors. One example is the impact of networks of computers on the banking sector. Banks have been heavy users of computer-related technologies for over twenty years, and the expectation is that computers are going to become even more central to their operations in the next few years, to the point where some people in the industry believe data-com networks are going to start having an impact on the existing network of branch operations.
This brings us to the role of government in promoting these knowledge-based industries. Traditionally, governments have been heavy users of computer-related products. I expect this will continue, and it should be encouraged when these purchases show they provide good returns for the taxpayers.
In addition, the government should continue its participation in the investment tax credit for scientific research and experimental development. These tax credits continue to play a very important role for all knowledge-based companies. This is especially true for companies at both ends of the development spectrum, the young Canadian technology company at one end and at the other end the multinational one that does research and development in a number of countries.
The one possible cloud on the horizon for ITCs is the tendency for Revenue Canada to reject larger and larger portions of claims. This is being done through administrative measures, and it means activities that were eligible for investment tax credits in previous years are no longer considered eligible. This has the impact of increasing uncertainty on the collectability of ITCs and thus reducing their value to the companies. To the best of my knowledge, it is not yet clear to what extent it is harming knowledge-based companies, but it is certainly a trend this committee might want to monitor.
I would also encourage the government to continue its effort to reduce the existing deficits. Some progress has started but much remains to be done. The objective of zero deficit must be achieved fairly soon and we must find ways to begin reducing the debt that has been accumulated over the last two decades.
When one considers impediments standing in the way of knowledge-based companies, I would like to focus on financing aspects. By and large, our medium and large knowledge-based companies have access to the capital they require to grow. Our public equity markets are healthy and remain open to initial public offerings. For the smaller and medium firms there is an adequate supply of venture capital. The labour-sponsored venture capital pools remain a very important part of this supply.
The one area that remains a problem is the young start-up situation that requires anywhere from tens of thousands of dollars to approximately $500,000. This is a sector that has traditionally been serviced by the ``angel investors'', who now remain on the sidelines. Angel investors who are willing to accept the higher risks in return for greater rewards now find the rewards no longer compensate for the risks. Higher tax costs and increased directors' liability, created in part by government regulation and practices, discourage these investors. The start-ups are then deprived not only of their cash but also of their knowledge and experience. It is very difficult to convince a potential investor to risk investing in a small start-up technology company when that investor can earn significant returns by purchasing common shares of banks, for example, as well as a number of other -
Here, Susan, I apologize. I don't want to pick on banks, but I think returns on the public equity marketplace have been very good over the last little while, and partially as a result of that, it's difficult to encourage people to do the small start-up ventures. Some of the banks have recently announced initiatives to address this start-up sector, but in my opinion it is still too early to tell what impact these will have.
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An alternative that the government might want to consider would be some type of preferential capital gains tax rate for this type of investment. Clearly this type of program would have to be under very restrictive parameters to ensure that the cost does not get out of hand. These costs would be somewhat deferred, since the expectation of this type of investment is that liquidity can be achieved somewhere between five and ten years from the date of investment.
The above measures might be useful in attracting cash, but do not necessarily help to provide knowledge and experience. The issue is quite different here since it involves directors' liability under a number of different statutes. The angel investor who accepts an invitation to join a board of directors is faced with the prospect of not only losing his or her investment in the company, but having to incur significant liabilities. In many of these cases the liability is payable to the federal government, relying on provisions included in a number of statutes, including the Income Tax Act. This is a significant impediment when one is trying to attract qualified individuals to sit on boards of directors.
Turning now to promoting a climate that encourages entrepreneurship, I would like to encourage you to maintain directions adopted over the last few years. This would include staying out of the grant business. Our knowledge-based companies do not require these subsidies, which often disrupt markets and lead young companies into areas that are not in their best long-term interests.
In the high-tech industry, skilled individuals are much like capital - there is never enough. Our educational institutions turn out some outstanding researchers. I would not hesitate to match the people doing research and development in our technology companies against the best in the world. We seem to have the right mix of creativity and discipline to produce outstanding products. I can only conclude that one reason for this is the solid base they receive in our universities and colleges.
My only reservation in this area is that there is often a shortage of graduates from technical programs, such as engineering, mathematics and computer sciences. Anything that could be done to encourage young people to enter these programs would be beneficial.
In conclusion, I would like to thank you for the opportunity of sharing some of these thoughts with you, and I wish you success in finding ways to improve the environment for knowledge-based companies in this country.
The Chairman: Thank you very much, Mr. Charlebois. You've given us some interesting ways in which the government can change its programs. I'm sure people will come back to them.
I would like to turn now to Susan Smith of the Royal Bank, and ask her to make her presentation as well.
Ms Susan M. Smith (Vice-President, Knowledge-Based Industries, Royal Bank of Canada): Thank you very much, Mr. Chairman, committee members, guests. It's my pleasure to be here.
I'm going to have to swallow a little bit of vanity in a moment and put my glasses on, because the print in my copy is not large enough.
By way of background, I was the one who actually started Royal Bank's knowledge-based industry initiative almost three years ago. In the learning part of that initiative - which continues to this day - I've crisscrossed the country an awful lot, talking to leaders in industry, leaders in government, leaders in business and in universities, to try to find ways in which we can very innovatively work together to find answers around some of the issues that we're talking about today. The presentation I'm going to make today is pretty much a summary of the kinds of things I have learned as I've talked to these various groups over the last three years.
I would like to make two opening statements. One is that there is no real financing gap in Canada per se. The country is awash in capital. I think Richard would agree with me that there are billions of dollars in uninvested capital in this country. On the other side, I would also say that there is first-class commercializable science and technology in Canada that is not able to attract that financing. The gap is therefore in attracting the financing to early-stage endeavours. Most of this funding - and Richard pointed this out - is attracted to later-stage enterprises where the risks are lower, the due diligence costs are no higher, and there is a relatively good supply of investment opportunities in this country.
The real gap in Canada comes in what I call the ability to create companies, or the company creation capability. We lack the ability to create and build the kinds of companies that will attract the available capital at earlier stages. I truly believe that we have to develop this capability or we're going to start to lose our science and technology to countries that have very good capabilities and commercialization, and who will then sell us the resulting value-added products.
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Today, I'd like to address the concept of company creation, and I'll suggest areas where government might want to re-examine the role it can play to significantly improve Canada's performance. While I'm suggesting that governments re-examine roles, I want to state categorically that I do not believe this is a government-only issue. I do not believe it is a banking-only issue. I do not believe it is only an issue for universities or industry. I really believe that we all have a critical role to play, that our roles must intertwine and be aligned to an unprecedented extent. The time for bashing and blaming must be over and we must work together. It's what I like to call the spirit of the positive conspiracy. I'm not quite sure where I stole that word, but I love what it conveys and what it connotes.
We all must work together. We share a common goal. We want the same things to happen. We want Canada to be world-class in terms of commercializing its science and technology. We each must find a way to play a role to make that happen. Turfdoms, private agendas, and traditional roles must be put aside.
So what are some of the gaps that I would identify and that must be closed in order for Canada to be a real leader? I would say that the number one thing is leadership in the area of science and technology. By this I mean that we, as a nation, have not put a stake in the ground and declared our objectives and our intention to be one of the top six nations in the world in science and technology. I don't know if six is the right number, but we have not put a stake in the ground anywhere and I believe we must do that. This involves examining the best practices of nations who are performing very well to decide what we must be good at. I don't believe the benefits of clear objectives and foci can be overestimated. I also believe that we need loud and credible voices who speak for this in the most senior management levels in government, university and business, with all of them saying the same things and singing from the same song sheet about the critical importance of science and technology to Canada's economic future.
The second area I would ask us to all think about centres around the regulatory environment and the taxation environment. I won't dwell on taxation - Richard talked about that - but the regulatory environment is incredibly important. We must be globally competitive in the kind of regulatory environment that we create. An example of where we need to be looking is that of biotechnology.
Biotechnology is considered part of the science and technology area - and so it should be - but it is an enabling technology that affects forestry, agriculture, health care, mining, etc. It covers the whole gamut. In the way that we are positioned, all of these areas fall under the various ministries, most of which have different opinions on appropriate policies and regulations. Failure to reach across these functions and these silos, and to drive hard for effective, globally competitive policies, will leave us behind in the area of biotechnology - and this is an area in which I believe we can be globally competitive.
To speak to the tax environment, I believe we have to be able to provide an overall package that attracts and retains our scientists, our engineers, our investors, our experienced technology workers, and world-class management.
The third point I'd like to raise is the lack of management expertise. I believe that the kind of management expertise required to manage these new kinds of companies that operate under a much more complex environment is becoming a real gap in this country when compared to the days when you set up and manufactured widgets and sold them across the street. Also, I believe that the skill level of technology employees is an issue that really needs attention. We need to do more than train people. People are going to work in enterprises where their skills in technology are becoming obsolete within years. We need to have a way to retrain and re-equip people for the workplace, and that involves a number of us within the positive conspiracy.
The fourth thing is marketing expertise. These companies, even if they are very small, deal in a global environment. They may have very few employees, but their very first sale can be to Japan, to Germany, or to the United States; they may not have any sales in this country. Imagine the environment in which managers who are basically engineers or PhDs are trying to run an operation with complex science and are selling into global markets.
The fifth area that I think we need to look at is that of informed, experienced investors. Just having money is not the answer. There's a lot of money, but it's a question of having smart money. I think we need to find really good solutions to the first four issues that I raised. If we can do that, there will then be more venture capitalists who will come to the table, and there will be better banking opportunities.
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There's no doubt that early-stage investment is higher risk, and there's no doubt that the costs of due diligence at the early stage are very high. It's therefore critically important that we develop the skills and processes to better identify good opportunities at the early stage and to work together to get the due diligence costs down.
Sixth, we need better informed entrepreneurs in the science and technology community. They need to understand the roles and expectations of financial partners, and that's a place where we all have a role to play. We also need a better informed public that understands the importance of science and technology in terms of their children's education, in terms of creating a better quality of life for all of us, and in terms of providing good investment opportunities for all of us. Here, I'd like to say that I believe the media has a very critical role to play as part of a positive conspiracy, but we tend not to invite them to tables like this. There are people within the media who are informed science and technology participants and I believe they should be part of the solution.
The last thing I would like to say is that perfect plans and perfect policies are of less relevance today than they were in the past. I believe that in this new world, if we want to effect change and not lose windows of opportunity, we must embrace broad principles and then be willing to test, model, pilot and work together while policies are being refined.
Those are the seven areas in which I think we can give some thought to working together. I think I'd like to end on a positive note: there is a great deal that is exceptionally good in this country. As I travel across it, I see excellent science and technology being identified by strategic partners around the world as world-class. We have a good system of R and D tax credits, we have a good quality of life, a relatively skilled workforce, what I believe is a growing entrepreneurial attitude, and what I also believe is this positive conspiracy starting to really take root in Canada. So I think we need to get much better at the areas that I have identified today, but I think we can and are getting much better.
Thank you very much for the opportunity. I've appreciated it.
The Chairman: Thank you. I like your list. You gave us a lot of specific ideas, and again, I think the committee will come back to them.
Next, we have Mr. Jacek Warda, who is a principal research associate with the management of innovation and technology program of the Conference Board of Canada.
Welcome, Mr. Warda. Please proceed.
Mr. Jacek Warda (Principal Research Associate, Management of Innovation and Technology Program, Conference Board of Canada): Thank you very much for inviting me to speak at this important event. Just to give you my background, I'm an economist who has been dealing with the comparative analysis of tax incentives for over ten years. I have done a number of updates of the Canadian position vis-à-vis other countries in terms of tax incentives. My presentation will deal with tax incentives. I'm not going to venture into other means of financing of R and D.
The purpose of this presentation is to provide the Standing Committee on Industry with a policy context for its discussion of the role of tax-based instruments as tools for financing innovative firms. Before I begin discussing the results of the recent study conducted by the Conference Board on this topic, however, I would like to stress the fact that innovative firms are not always those that spend more money on research and development and that have high R and D intensity. As you know, the claim that Canada has an innovation gap is largely attributed to our low R and D spending as compared to that of other countries. Indeed, we may have an R and D spending gap, but do we have an innovation gap? That is not necessarily as obvious. What we can say with confidence, however, is that we have a gap in the measurement of innovative activity. We have difficulty with what to measure in innovation and with how to measure innovation.
Take the textile industry, for example. Although largely viewed as a traditional manufacturing industry spending little on R and D, textiles are one of the leading industries in Canada in terms of introducing world-first and Canada-first innovations. Textiles are ahead of such industries as machinery, paper and light products, rubber, plastics and transportation equipment - and that's based on Statistics Canada survey catalogue number 88-513. But textiles also purchase and use state of the art machinery and equipment in their production processes. Keeping abreast of new technology by using and diffusing it in the industry certainly helps innovation to happen; however, this kind of innovative activity is not captured well by our statistics.
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This example shows that innovation is a much broader concept than R and D. When discussing innovation gaps in Canada, and in particular the role of financing in closing this gap, the committee needs to take this perspective into consideration.
The Conference Board's recent report, Performance and Potential: Assessing Canada's Social and Economic Performance stated that:
- Ways must be found to ensure that our R&D activities are complemented by a stronger
capability to acquire, apply and diffuse technology and knowledge.
We simply don't have much data on tax incentives for innovation. Canada and other countries, when granting tax incentives, as you know, conform to the convenient definition of Frascati Manual, which basically sets out R and D as a prime source of innovation.
Let me go now to the findings of the study that's now forthcoming. It will be published jointly by the Conference Board and the Organization for Economic Cooperation and Development in early 1997. It's called R&D Tax Treatment in OECD Member Countries. Its purpose is to compare R and D tax incentives existing in 25 countries and determine what policies there are with respect to R and D tax incentives. It also involves a comparison of the relative attractiveness of Canada's portfolio of R and D tax incentives. I hope it will help you to establish a perspective on the relative value of Canadian R and D tax incentives.
Very briefly, what are the main findings? Canada's R and D tax treatment is very attractive by international standards. The study shows that Canada's federal government incentives in combination with the two provinces we have examined, Quebec and Ontario, give the second most favourable tax treatment in the OECD.
Of the 25 countries included in this study, 40% employ tax credits or special deductions from taxable income for company R and D. These nations generally fare better in the international ranking of R and D tax systems than the remaining 15 OECD countries.
Countries that offer the most generous tax incentives are Spain - it's number one - Canada and Australia. The countries of Korea, the Netherlands, France, Austria and the United States offer less generous tax credits or allowances, but still have a significant impact on lowering the cost of doing research.
Canada ranks second in the provision of R and D tax incentives to small firms. The six countries of Italy, Canada, the Netherlands, Korea, Japan and Belgium have specific programs that provide selective tax credits for small company R and D. That's a rather small group. Other countries basically rely on general tax incentives for small business.
Only a few countries allow an immediate write-off of R and D capital costs, and Canada is one of them. Machinery and equipment can be deducted in such countries as Australia, Canada, Denmark, Finland, Ireland, Spain, Turkey and the United Kingdom.
What does it all mean? First we have to rate the rates. Canada's tax system continues to offer a relatively more attractive incentive for firms engaging in R and D, except for Spain. A high ranking of Canada's R and D tax treatment is the result of a strong federal tax incentive package enhanced by special tax treatment in those provinces that offer it.
We have examined the two provinces of Quebec and Ontario, but we also know that four other provinces offer tax incentives, namely New Brunswick, Nova Scotia, Manitoba and Newfoundland.
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Tax incentives remain an important way, based on this study, of stimulating R and D activity among OECD member countries. Fifty-six percent of the 14 countries have some sort of an R and D tax incentive. However - and I would like you to remember this, if possible - it is also true that the remaining 11 countries do not have R and D tax incentives, yet many of them appear to be highly innovative economies. It may be equally true that these countries - for example, Germany - employ different incentives than tax credits, such as grants and subsidies.
I will conclude my remarks by quoting from the forthcoming Conference Board study entitled Building Innovative Canada: A Business Perspective. The objective of this paper is to raise the awareness of the business perspective on issues that profoundly impact on the effectiveness of Canada's national system of innovation. Guided by the insights of the Conference Board of Canada's working group on technology policy, the paper focuses on human resources, regulatory environment, and fiscal regimes, stressing the need to ensure the level playing field in these areas for companies operating in Canada.
We believe that R and D tax incentives need to be viewed from the perspective of their place within the overall tax system. They are an important mechanism of stimulating innovation in Canada, but their positive impact can be diminished by other elements in the tax system - it can also be enhanced - such as corporate and personal income taxes.
There are other important factors outside the tax system, such as direct subsidies and procurement policies that are used extensively in other countries, that influence a company's decision to invest in technology. Therefore, R and D tax credits need to be seen as part of the overall effort to ensure that Canadian firms, both small and large, have at least the level playing field to innovate and compete effectively in international markets. Their role in leveraging the investment in technology by transnational companies, in particular, should not be taken for granted.
As non-discretionary market-oriented policy instruments at the government's disposal, tax incentives need to reinforce the predictability and stability of the R and D environment. This way, tax incentives will have the potential to enhance the private sector's involvement in R and D. In order to achieve this objective, the incentives themselves need to be stable and predictable. In this respect, Canada has a good record. Our R and D tax incentives have been stable and dependable, becoming a cornerstone of Canada's innovation policy.
It needs to be recognized, however, that the playing field is constantly changing. Policies government chooses to follow to encourage innovation need to be viewed from the perspective of the dynamics of international competition. Their effectiveness in stimulating investment in general, and innovation in particular, is influenced by their overall attractiveness in comparison with other countries. Therefore, there is a need to monitor the situation in this area to ensure the level playing field for the companies operating in Canada.
Finally, let me re-emphasize the argument that tax incentives work only as a part of the entire package of incentives a country has to offer its businesses. There are many other factors affecting corporate decisions nowadays, each requiring different attention on the part of business and government. To name a few, there is the supply of highly qualified people, accessibility to the sources of finance - the venture capital - and proximity to a knowledge base, such as universities and government labs. From this point of view, R and D tax incentives perform an important and integral role in providing the right climate for investment in the stock of knowledge, reinforcing the effect of other contributing factors. Clearly, the tax system is one of the many factors, albeit an important one.
Thank you.
The Chairman: Thank you very much, Mr. Warda, for reviewing the tax system and how it affects the work we're doing.
I'm going to turn now to David Mowatt, who is the senior vice-president, emerging markets, from the Business Development Bank of Canada. Welcome.
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Mr. David Mowatt (Senior Vice-president, Emerging Markets, Business Development Bank of Canada): Thank you very much, Mr. Chairman and committee members. It's a pleasure to be here to talk about the Business Development Bank's products, particularly as they relate to high-technology firms. Like Susan, I've been part of our bank's gearing up and changing of focus to cater to technology and knowledge-based businesses.
I have the pleasure of talking to many businesses every week and every month across the country. I can tell you that technology or high-technology or knowledge-based is a very difficult thing to see these days. It comes in all shapes and sizes in a whole variety of industries. It's easy to identify companies that are actually developing technologies, but just as often we see fairly traditional businesses taking that new technology and dramatically improving their processes. The lines are blurring between what a technology company is or isn't.
I'll take a bit more of a micro approach and talk about the access to capital those businesses have and how they can finance growth in their businesses.
I want to leave you with three things today. One is that a gap exists in the way the markets work in actually matching up the amount of investment that is available, as Susan says, and getting it to the businesses. Second, I want to give you an idea of the kinds of products the bank is working with, along with the other players in the marketplace. Third, we have developed a specific product for high-technology businesses to address what Richard talked about at that very early stage, seed venture capital for technology businesses.
I've provided a very brief handout in both French and English for the members. The first slide shows the positions of companies in the capital markets. While it's a bit of a generalization, when companies have well-established products, well-established markets, known technologies and traditional assets, they tend to find their capital and their financing solutions in conventional sources.
The chartered banks have very strong networks to provide term loans and operating credits. Generally, the more well-versed the company is in its technology, the easier the financing is to find.
As companies develop new solutions and have unproven markets with unconventional assets entering into the mix, you see companies trending away from the traditional term lending sources to companies like Richard's that are providing higher-risk venture capital.
So what emerges is in between. On the one hand we have the conventional sources of capital. On the other hand we have higher-risk venture capital. In the middle are a large number of very successful businesses that, for whatever reason, whether it's the stage of the development, the type of assets they have, or perhaps even the amount of money they require, don't have a foot solidly in either camp. Our bank is trying to develop a range of development capital that combines both the features of debt financing and equity financing to try to bring the features of both of those into the small and medium-sized business market.
The second page in that handout lists some of the products that the bank is developing. We have working capital for growth, venture loans, patient capital, term loans, micro-business and venture capital. These are just a lot of names on this page, but the third page is probably the one we can work from. I will take you through it.
It attempts to position companies. There are really two axes that they work on. One is the amount of money they require and the other is the stage of development they're in. I'll try to position the various products that the bank has and give you an idea. I'll highlight the ones that I think apply specifically to the science and technology businesses.
First, term loans would be the one we're probably most familiar with, where companies have conventional collateral and are able to access a conventional source of term loans. We have an SBIL program that works very well in this country.
But there is a whole range of businesses that don't quite fit into that category. Probably the first one - and between you and me and Susan, I know we see an awful lot of them - is companies that need less than $50,000. We have a micro-business program that provides funds up to $25,000 for companies to start a business and up to $50,000 for companies to expand their business.
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Another area in which we see significant amounts of demand is working capital financing, particularly in some of the knowledge-based industries and companies that are growing very rapidly. Often their working capital requirements outpace the rate at which they can conventionally finance their businesses and at which they can margin their operating credit. We've developed working capital for growth to work with the chartered banks to supplement existing lines of credit to top up a company's working capital to allow it to sustain its growth.
The third product is venture loans. Particularly here we're dealing with technology businesses and knowledge-based industries. Here it is businesses that typically are too small for venture capital. Venture capital tends to have an appetite of about $1 million or more but they don't have the tangible assets to support term financing.
What we have developed in venture loans is really a term loan, but there's no requirement for collateral. It acts as a term loan, but it also has some of the features of equity. There isn't a collateral requirement for it. The risk is higher because there is no collateral for any of these loans, but the risk premium we attach to this is timed to the success of the business. So instead of just charging a very high interest rate we charge a combination of interest rate and royalties.
What the royalties are designed to do is this. The actual outflow to the business is fairly low at the front end of the project, or its development stage, and as the risk premium is charged it's charged in relation to the company's sales. So when the company pays the risk premium for this kind of financing it's paying it out of cashflow that's coming into the business; profits are being achieved in the company.
The third product is patient capital. Just as the name implies, it's more patient. It's very similar to venture loans in that it's a term loan. It has a combination of an interest rate and a royalty payment, but in this case we're targeting to businesses such that their products are developed and they probably have some orders on hand but at this point they need to increase their inventories, increase their production, and maybe even expand their sales force. It's all money that's required to go into the company, but it's going to take a while before the returns actually come out of the company.
With patient capital what we can advance is sums up to $250,000, which can stay in the business with no principle, no interest, and no royalty payments for up to three years. We're letting that money work in the company to grow the business. It's acting very much like equity at this point. There aren't any servicing requirements to it. But then as the company growth comes up it switches over to act like a debt instrument. Then over the next four to seven years the company repays a combination of principal, interest, and royalties.
The last area of product is our venture capital division. Richard has talked well about venture capital and its operation. One of the things he noted, and it's one of the things the bank has seen also, is a gap at the very early stages for technology businesses. The bank has recently announced and is developing a seed capital equity product specifically for technology companies.
This is an extremely early-stage product. It's in amounts of $100,000 to $500,000, and what it's aimed at is almost a pre-company stage. It's really a technology or a science that is being developed. What is needed is both a management team and financing to come together. I think Susan used the term ``company creation''. Company creation in a very micro-aspect starts to happen. We are teaming up with other venture capital companies and other institutional investors to get a very broad range of expertise so we can bring our network of resources to these companies and actually help them build a company around the science or technology they have developed. This is extremely early-stage financing.
An example of one is that we are involved right now with a scientist on the west coast who has developed a new test for carcinogens. Everything we eat or we put on our bodies we need to test to see if it's cancer causing. Her science is that she's able to test faster and less expensively than with current testing techniques. It's just a science in the laboratory right now, but you can see it has huge potential as a company and for a variety of industries.
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So there is something that required a very small investment. It is under $100,000 in the initial round of investment. Probably there'll be millions of dollars of venture capital required before it actually gets to market. What we're trying to do is target science like this in an extremely early stage to make sure it has the ability and the funds to build a management team and actually bring this kind of technology to the market.
I'll leave it at this, Mr. Chairman. My point would be that there is a gap in bringing capital to businesses. The bank is pitching in and trying to bridge this gap with some of its products and in particular our seed financing equity product for technology businesses.
The Chairman: Thank you very much, Mr. Mowatt. I appreciate hearing what the BDBC is doing nowadays. I think they even had an announcement last week about the new product.
Mr. Mowatt: It was on seed capital. That's right.
The Chairman: That's good. We now turn to Claude McMaster, who came in after our proceedings began and is from the AVINGCO groupe conseil. Sir, we welcome you here to make your presentation and to participate in the meeting.
[Translation]
Mr. Claude McMaster (President, AVINGCO groupe conseil inc.): My presentation will be interactive rather than didactic. Our recommendations will be made in the course of the presentation.
Before I begin, I would like to take 30 seconds to introduce myself. I must admit that I am a bit surprised to find myself here before you today.
First, I'd like to explain our name, AVINGCO: AV stands for avocat, lawyer, ING for engineer, and CO for accountant. To our knowledge, we are the only firm in Quebec which has brought together under the same roof three different types of technology management specialists. Technology management is all that we do. We are present in 14 research centres, two of these being universities, and our purpose is to disseminate technology and add value to the technology that has been developed by the research centres in order to market it. We also have about 40 clients in the technological field, mostly in Quebec, and two in Ontario. One of them has just gone public.
The documentation we were given contained six questions and I will attempt to answer all six. As to the role of industry and technology, we all agree that value-added businesses will constitute the very basis of our economy in the future. I don't have much to add to that.
However, I do want to talk about the role of government in promoting technologies. When I invest a dollar in technological research and development, I may have costs which will be five times higher simply for pre-marketing work and the scaling of technology, and ten times higher for marketing.
I am happy to note that there are bank representatives here today. In fact, I worked for the Federal Development Bank in 1989. At the time, I was considered a black sheep because I promoted technology. No one believed in it, but now they do. I also have cases involving the Royal Bank. Contrary to what we all say, there may be a lot of capital, but the capital is not necessarily there for businesses because bankers want to control risks.
In order to be able to identify risk and control it, one has to understand what is going on. The big problem for investors at this time is to understand what is going on. At this time, for the research and development phase, one has income tax credits, subsidies from the National Research Council programs, and from NSERC and FCAR. So, there are various subsidy programs that provide a good part of the necessary funds.
But when you get to the scaling work and the pre-production phase, the bankers are no longer there. The bankers are there when you get to the marketing phase, when the market is available. There is venture capital, and banks and public calls for savings will come into play. But, for scaling, people want to know whether there is a potential market and whether there will be possible sales. Prove to me that there will be sales and I will invest. This may be where the government could play a role. Bankers need reassurance, or smaller risks. It's quite amusing. Last week, I was with the president of the IDO and this morning with the president of the Caisse de dépôt et de placement du Québec, the president of Sofinor which is their high technology capital subsidiary.
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At this time, the problem is precisely the one we have identified. We talk about new programs, about the Federal Bank, etc., and that is excellent, but I am anxious to see how this is going to be administered. If we have trouble finding venture capital when we get to the $10, when people know there is a market and that things will work, how will people assess projects in a subsequent phase? I am very anxious to see how people are going to go about this. This may be where organizations would need some type of government support.
As to the role of government, here are my suggestions or recommendations. Since I work a great deal with SMBs, I recommend that the funds put up by the State be reimbursable by business. Subsidies are not necessarily appropriate. There have been a lot of abuses in this area. Thus, the State should provide reimbursable financial support. For instance, businesses that have to show that their technology works have a great deal of trouble obtaining funds.
Can something be done? For pre-production and the start-up of marketing, I think we should have an investment tax credit, based on the same principles as the research and development tax credit. How should it be set up and monitored? The businesses with which we work have this problem and it is quite a severe funding problem.
I'd like to talk about the obstacles to the emergence of new technologies. We all know that for a project to work you need good management, good technology and a good market. Where funding is concerned, you need good management, good management and good management, because theoretically the technology will work and theoretically studies have proven that the market exists.
You can have very good technology and a very good market but if you have bad management, your business will go nowhere. However, if you have bad technology, a bad market and good management, you will manage to sell something else. How can you evaluate this? At this time, there is a lack of experienced promoters.
There are other organizations that work in Canada with similar funds. How will they be organized? I don't know yet. As for us, we are setting up a $30 million fund with American partners.
There is a pressing need. I know that governments have less money now, but we must find some way of making all of this more secure so that money will be invested in this sector.
There is another problem. How do we lighten the burden of innovative businesses? First, the reimbursement of the funds that are provided to them must be postponed till later. I'm thinking of the patient capital of the Business Development Bank and the Royal Bank, the two banks that have this type of capital system at this time.
Half a million dollars is all well and good, but after two years a business has to begin paying back the money and the payments are quite high. The banks don't always have enough patience for technology which requires much more than two years to reach maturity on the market.
Five years ago, no one was interested in this. We have made giant steps, but we have not yet gone far enough to allow our businesses to gather the necessary momentum to become profitable.
We have to reduce paperwork because this kills business because of the resources required to deal with it. And those resources are not productive.
We have to facilitate access to the protection of technology. No one talks about the protection of technology. It's funny. This is the number one factor for technology. If you can't protect yourself someone will copy what you've done. There are no resources for such protection.
I have a business in Quebec which is a spin-off, a business we have launched on the basis of work done at Laval University. It has a $5.6 million turnover and the product concerns the field of vision. Everything is fine. Do you know how much it costs to register intellectual property throughout the world? It costs $200,000. Where will we find those $200,000?
We're in the start-up phase and we finally decided to invest venture capital because it really is a very nice company, but that is an exception. Most businesses don't have the means to protect themselves. Bankers demand that the technology be protected, and they are right to do so. But what do you do?
This would be an interesting avenue for the government to pursue, since it could certainly find some way of facilitating access to technology protection through certain credit arrangements and by making it possible to postpone the lawyers' fees, the lawyers who will be working on the file. In any case, there are certain things that could be considered in this regard.
Let's talk about the climate which will foster technological entrepreneurship. First, success stories should be publicized. They are not sufficiently promoted.
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Secondly, we should demonstrate the importance of partnership. I think that it has been demonstrated. Getting lawyers, engineers and accountants together is difficult. At the university level, we have to promote joint projects. That is fundamental, because new businesses are often started by university students.
So, rather than letting faculties become isolated in their ivory towers, we should be setting up joint projects. This should be encouraged: people get to know each other. Rather than having a researcher start up his business without any knowledge of the market, or someone who has a very good knowledge of the market but does not know what to market, those two people could be brought together and then we run a greater risk of having projects that will fly. That is one of the things we could try.
Finally, we were asked to talk about follow-up criteria concerning the application of the government strategy that will be set up. I would say that we are talking about indicators that can be measured objectively; that is to say that we can measure the sales of the business before the government gets involved. We can look at new markets that have been developed and the number of new patents. Canada lags behind with regard to the number of patents that are granted. We are quite far behind other countries of the world. As for research, it is in Canada, and mainly in Quebec, that it is the least costly.
So that is paradoxical. Something is wrong somewhere with the system. Canada is the place where research costs the least, but it is the country where the fewest patents are granted. If we want to conserve our enviable position on the market, something will have to be done.
That is what I had to say to you. Thank you.
The Chairman: Thank you very much, Mr. McMaster, for your presentation. I hope that your testimony will give rise to numerous comments.
[English]
I'd like to turn this over now to the members. The member speaking asks a specific question of a specific panellist, but feel free to jump in. Just catch my eye to participate in the answer on any question if you have something you'd like to put on the record.
[Translation]
Mr. Leblanc, do you want to begin?
Mr. Leblanc (Longueuil): I would like to put my first question to Ms Susan Smith from the Royal Bank of Canada; she talked about the commercialization of technology. This is something that interests me a great deal. How can we improve the marketing of technology either abroad or within Canada, among businesses? That is something that has interested me for a long time. I would like you to elaborate.
[English]
Ms Smith: May I speak in English?
I referred to the positive conspiracy as a way to bring various people together to help find ways of effectively commercializing Canada's technology.
I'd like to give you two or three examples of what we are really doing. One of them is a partnership called ViaTech This is a partnership of professionals. There would be a lawyer who specializes in protection of intellectual property. There would also be an accounting firm that has a high-tech practice and does nothing else but focus on this part of our economy. There would be a marketing firm that focuses on helping small companies develop global marketing plans. There would also be several sources of financing, very often including the Business Development Bank of Canada. These people, and in one case the National Research Council, are also part of ViaTech.
We have launched about 10 ViaTechs across Canada in the last several months. In each case what they do is set up shop in an incubator or in an office space where they just hang up a sign saying ViaTech. They give free professional advice and counsel to young emerging companies about the most critical issues they might face. So those who don't even know whether they should be actually starting a company have the opportunity to go to five professionals and have one-stop shopping. We have been able to effectively work together to help launch a number of companies.
My goal is over a period of time is to have these ViaTechs linked together across Canada so they're sharing this expertise not just among themselves and in their community but across Canada.
This is one enterprise or partnership we have started that has proved exceptionally popular and useful. Another is the technology launch initiative. This was a coming together of private sector enterprises. It is Quorum Growth Inc., a venture capital firm, Andersen Consulting, and the Royal Bank of Canada. Each of us has global reach and partnerships. Each of us has a focus on this part of our economy. We have come together to create a company-creating initiative.
It's not a fund. We believe there is lots of money out there, but the other things I've talked about are missing. So we have created the technology launch initiative. We call it TLI.
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TLI is, in part, working in partnership with various universities and their technology transfer offices. We actually go into the universities looking for the very best science they have that we believe would have global application and global markets. We bring in the management, the marketing, the business plan and all the other needed expertise at the very early stages. Then we take this enterprise to market to raise capital. When it is Royal Bank and Quorum and Andersen taking the enterprise to market, it isn't one individual scientist operating on his or her own.
We just launched this year. We are just starting to get fully operational and reviewing opportunities. But I believe it is a model that will help us identify some of the real pitfalls and help us get Canada's science to markets first. There is a big advantage in these kinds of companies getting to market first or second. Once you're third, fourth, or fifth the economic benefits really diminish.
[Translation]
Mr. Leblanc: I want to make my question more specific. We are a small country compared to the United States, to France, to Japan and to other much more important industrialized countries. We don't have the means to perfect cutting-edge technology.
Wouldn't there be some way for Canadian businesses to set up a type of clearing-house where technological data could be kept and made accessible to others? It would be a type of clearing-house where certain technologies that are no longer being used could be put at the disposal of business. Then they could be more accessible to those who need them.
As for marketing, people could sell the technology they no longer need, and others who do need it could pay to obtain it. This would even be one way of making the research we do profitable and increasing our productivity from every regard.
The Chairman: Mr. McMaster.
Mr. McMaster: To create a database, you have to have access to technologies. I am sure you can imagine that in certain research centres, in certain universities, people don't even know that some professors have perfected good technologies. As we say, they bypass the system to become the main beneficiaries of their technology.
Secondly, you have to realize that all research centres or institutions are suffering from a lack of funds. I was at another committee or conference organized by the federal government two weeks ago to see how we could promote technology. How are they going to pay Andersen Consulting or some other firm to help them prepare their business plans and the marketing of their products? That is quite an important problem.
As we were saying earlier, rather than talking about big companies, we should see to it that in these technology centres we talk about entrepreneurs or individuals instead. They are more frightened of these big companies than of the assistance they might be able to get. They are not on the same wavelength and that is a problem. The solution would be to set up an interface between science and finance, where someone with technological knowledge would be able to listen to those people.
That sort of thing is rarely done in Canada. People who have training in both finance and science exist but they are few and far between. And when there are such people, they work in large corporations. They are not there to help small businesses; they are in upper management positions. There are not very many people who help our universities or our research centres. Personally, I find that there is a great deal of work out there; what is missing, rather, are qualified people to do it.
There are many technologies. There are very excellent technologies in the army. How does one access National Defence technologies? First, they are classified. Secondly, when they are ready to be marketed, it is because they are no longer attractive to the military. The excellent technologies with an enormous potential that have been developed by the military have been developed because a lot of money was invested to do so.
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I could refer to three cases that I'm well acquainted with. A military technology is ready to be marketed; what do I do? That is always the way things go.
[English]
The Chairman: Is there any other witness who wants to speak to this issue?
Mr. Mowatt.
Mr. Mowatt: Susan talked about company creation and storehousing technology. There is a lot of technology available today. What seems to break it through the barriers is a champion, somebody who can visualize applications for the technology that is developed. We're a society catching up when it comes to how to use the things we've invented right now.
I think the concept of opening the doors to some of these institutions is there. I know at the National Research Council they're working to try to open the access to their technology. For sure, getting those doors open and letting our entrepreneurs in to create businesses around the technology we have already developed as a country is where value is going to be developed.
I have one ancillary point on military technology. I had the pleasure of listening to some people from Israel. They have a tremendous wartime machine and economy. They are spending an awful lot of time right now taking all their developments and applying them to the business community. It's a very successful incubator approach there. They are a marriage of government, military and private industry. They do not have much government support; they just have enough to get the ball rolling. They have some fabulous successes as far as commercializing existing technologies is concerned.
[Translation]
Mr. Leblanc: I want to repeat the word ``marketing'' again. That means making the results of research profitable. It means that if we can manage to market the fruits of our research, we will reinvest those sums, be more productive, etc. That is what I mean.
Are we going to be able to market technology more easily one day? We know that large businesses like Pratt & Whitney sell patents. They no longer use them, but they can still be useful to other businesses. This is done by big companies, but how can we manage to find ways of marketing research and making it profitable in order to have it serve some purpose? Thus, everyone would not be looking for the same things and we could save enormous sums of money, improve our productivity, etc.
How can we manage to buy and sell the fruits of research, at some point?
[English]
The Chairman: Perhaps we can go on. We'll come back to you, if you don't mind.
Mr. Schmidt.
Mr. Schmidt (Okanagan Centre): Thank you very much, Mr. Chairman.
I found this most interesting. What I found particularly interesting was the openness of the banking community. I don't think I've heard anything like this for quite some time. To think they would actually have a technology launch initiative - I've never heard of them actually doing something like this. I think it is very commendable.
Taking off from some of the points Nic has made here, I'll say that technology also becomes obsolete and so there is a negative part to this. There is some technology you couldn't find a market for. It outlives its usefulness. Right now we're not concerned about this. We're trying to adapt the technology we have.
I was particularly intrigued by the comment made by Susan Smith from the Royal Bank. She said we should be nation number six in the world. I think this is exciting. I think this is the first time somebody has dared to say Canada should be higher than it is. There have been all kinds of academics who have said it, but I think this is the first time I've heard a commercial person say it. This is critical.
If there is one recommendation I'd like to make, it is that this should go to the Prime Minister. The Prime Minister should say Canada shall be the number six nation in technology in the world.
I think we can do this. But if we are going to do it, we need to marshall all the resources we've heard right up to this point, not only the group before us today but all those we've heard so far.
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That raises a very significant question in my mind of turf wars. There are two kinds of turf wars that I think I can recognize. Number one is the turf war that exists within the industrial world. Number two is the turf war that exists among bureaucrats.
It's all very well for the Royal Bank, together with its entrepreneurs, to go to the university and say what the best science is and that they want to commercialize it. But now I ask you, how would you do this with the 13 science departments that exist in the Government of Canada?
Each one has its particular turf. They do all this research and development, but they don't even talk to one another half the time. In fact, they fight for the same dollar. One says another project is no good while their project is a thousand times more important. So the other one can't have any money, but the first one will get the money.
I'd like to ask this: within a big organization like the Royal Bank, how could you do away with those turf wars or at least minimize their impact?
Ms Smith: That's an excellent question. We do have one or two turf issues in our organization. I came up against exactly that issue. If you are going to implement change - I come back to a point David made - you have to have someone who's willing to champion that. That's someone who is willing to be unpopular because they believe in the final goal and objective.
With this positive conspiracy, I have not gone to the same person in every organization across Canada. I have gone to people who will be champions. These are people whose eyes light up the way yours did when we talk about what we're talking about. Put them in a room together, and they will get the job done. The bureaucrats can go to another room, thank you very much.
Mr. Schmidt: So would it be fair to assume, Mr. Chairman, that the implication of that answer is for us to set up an independent group that is non-bureaucratic that would tell these 13 science departments where to go, and they will decide where this money ought to be spent? This is so the R and D budget, which is around $7 billion, could be distributed by this non-bureaucratic, non-government body.
Ms Smith: Can I just make one comment?
I don't think we have a choice. I think if we sit and talk and talk and talk about these issues and come up with perfect answers and perfect policies, then the window of opportunity will have passed Canada by.
That might be quite a statement to make, but I do believe it's true. I believe there are countries that are going up that OECD list because they've decided to really focus on what they're going to do to be the top number, whatever it is, on that list. If we don't decide we're going to do that come what may, we're going to be sitting here in five years talking about the same issues.
Mr. Schmidt: Mr. Chairman, that's a great scenario.
Mr. Mowatt: It's a huge problem. It's almost a snowball that's too big to roll.
Here's one of the things that I think is going to have a significant impact. Lots of time we see things like you mentioned. It doesn't make any sense to us. Why would somebody compete for this or do something different? It's often because they have different objectives. They're doing the right thing. They're good, honest people doing the right thing in their departments, but we can coordinate the objectives.
I can find an example between our bank and the Royal Bank. There have been times when we didn't always get along in history. But we developed a good understanding of what we're trying to do, how we do it and the fact that we're different. As we went toward a common objective, we developed a specific alliance. We're working together with different products and objectives, but with the same ultimate goal in mind.
So there might be something there as far as coordinating the objectives goes. You don't have to put everything in one big, huge department, but at least coordinate the objectives of some of those departments.
Mr. Schmidt: Mr. Chairman, it's a very key observation that the Business Development Bank of Canada has a new president. That's a major change that's happened.
The other thing that's happened is that you get people like Mr. Mowatt and Susan Smith who are doing exactly this type of thing. They are champions in that area.
I'd like to spend the rest of the afternoon on this, but I do want to get a question in to Mr. Warda as well. That has to do with using the R and D measurement as some sort of criterion on the basis of which we can rank the nations of the world.
I thought the disclaimer was more important than the actual result of the study. I was rather surprised at that. It seems to me that if we're really going to get serious about becoming number six in the nation, then we had better look to an organization like the Conference Board of Canada to show us exactly what it is that we should be looking at.
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It's all very well to say the OECD is wrong, and then turn around and present the study based on the very thing you said you should be measuring it on. But when are we going to get to the very things that ought to be the issue in terms of establishing what the innovation gap is? We have a technological innovation gap in Canada. We do not perform at the levels we ought to.
You heard the Royal Bank make a statement. You had various industries that made that statement. I think it really is incumbent upon the Conference Board of Canada to show some leadership, and not simply take the OECD criteria. We should develop our own. I think we can get it somewhere. As long as we take their framework and admit that it's wrong, how are we going to progress?
Mr. Warda: That's a very tough, interesting and challenging question. The Conference Board has done a number of studies. There isn't one that deals with the assessment of Canada's performance and potential. The study was released at the end of September 1996.
The study showed that we do have a productivity gap, which is basically the result of a number of factors. We find that one of the factors is lower technological innovation. However, we haven't found necessarily that this was just because of low R and D. We think that what Canadian companies are missing is a receptive capacity to adapt technology from whatever source.
We thought the diffusion of technology, the distribution side of technology, was very important in Canada. This is the area in which perhaps we have difficulty. R and D should be treated as a kind of natural resource with which new ideas and knowledge are being developed.
The application of it is the diffusion of technology. We thought there was a gap here, especially in traditional Canadian industries and in smaller businesses. Of course, there were other factors that contributed to a relatively weak Canadian performance of productivity, but technology was definitely one of the important factors, especially this one on the diffusion side.
Another aspect is the quality of people. We have also considered that aspect in the performance and potential report. We found that Canada produces lots of people who are very qualified; however, there is a potential shortage of people in the area of engineering and science. We have difficulty with that. When we look at some statistics that deal with the number of engineers or science graduates employed in Canadian companies per thousand in the labour force, we see that we rank a little bit lower than that of other countries.
We have discussed this. We even produced a call to action in the performance and potential report. I have a copy of it. I could leave it with the clerk of the committee.
My purpose was to show, basically, that we are providing generous tax incentives. The question is, why don't we then have good performance in the area of S and T? We cannot provide a single answer to that.
Mr. Schmidt: Mr. Chairman, this is at the root of my question. The whole business of technological advancement is a many-faceted question. It requires not only good money in R & D, basic research, but it applies to the application of the results of that research and the diffusion of that application, because one application isn't good enough; it has to be diffused.
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It seems to me, Mr. Chairman, that in order for us to get a really good handle on that, we need to look to organizations like OECD, the Fraser Institute, universities - I don't know which is the best group, but somewhere there needs to be a compilation of the variables that are involved, five or six variables, and then the company should be tested or measured on all of those. The financial institutions should be measured on all of them. Then I think we might get to the point where we can indeed get the diffusion of the technology that needs to be done.
I'm thoroughly immersed with the concept that we are barely touching the surface of what it is we really have to get to as a committee. We need to get much deeper into this thing. So I would hope these and the other witnesses we've heard will come to us with more specific recommendations. I like the seven or eight that came from the Royal Bank, and I think we need to get into them a little further as well.
The Chairman: Thank you very much, Mr. Schmidt.
Mr. Lastewka.
Mr. Lastewka (St. Catharines): Thank you, Mr. Chairman. I have a number of short questions I need to point to the witnesses.
In his report, Mr. Charlebois mentioned the investment tax credit and some of the changing administrative measures that had gone on in Revenue Canada. Could it be a fact that we were giving investment tax credits wrongfully in the past?
Mr. Charlebois: I'm not sure. I think the types of things I'm talking about are certainly elements companies consider part of their research and development program, so these are activities that are required to get a product to market.
In some of these elements there is not necessarily a lot of uncertainty. There's a lot of drudgery, a lot of mundane work required to go from a scientific concept to a marketable product, and it's in some of these areas that it would appear Revenue Canada seems to be taking a different interpretation. They seem to be breaking down projects into smaller units and saying there's not sufficient uncertainty in that bit of work to make it eligible to receive an investment tax credit.
I'm not an expert in the area. There are a number of accountants that work for the national firms who could give you a much better understanding of exactly what it is, but I do sit on some audit committees and we certainly have been getting reports that Revenue Canada seems to be taking a different approach in defining exactly what research and development is. I can't comment whether or not it was the wrong approach previously.
Mr. Lastewka: I guess I would be looking for examples, Mr. Chairman, because on numerous occasions where I've had the opportunity to back up some of these tax credits, I personally, coming from the business and industry, would not consider it as research and development in its true sense. I'm very interested to see if there are other examples.
Mr. Charlebois: One of the things that would be useful in defining research and development would be a requirement that this research and development be towards the development of a product that the company is selling.
We tend to look at the activity today without necessarily putting in place a requirement for a product a company sells at the end of the process. I believe if that type of criteria were put in place, and perhaps not be quite as specific in some of the allowable activities, or breaking it down into very small chunks, it might be beneficial for everybody.
Mr. Lastewka: Thank you. I'd like to ask Susan Smith a few questions on what she really meant with company creation.
The reason I ask that question to you is because you place a lot of emphasis on that, and so do I. I'm looking for the helpers out there, and that includes the banking and financial institutions, the government, universities, and so forth. Could you expand on the point you made there on company creation?
Ms Smith: I guess that's what fundamentally it all comes back to. As bankers, what we started out learning was: how can we be better bankers to existing companies? That initially was our focus: how can we better understand these kinds of companies with intellectual assets who deal in global markets, who might be very small but need better banking?
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So we focused in on that, and I very soon realized that we probably have a bigger responsibility than that - by ``we'' I mean all of us - because if we don't get better at getting our science and technology out of the labs and out of the basements and into global markets, our future is diminished. So we have taken it upon ourselves as part of our responsibility. I guess I call it enlightened self-interest. I believe if we all get together and find ways - and there are ways to do it if we all put our best brains together - to get more and more of our science out and into global markets, then we are all beneficiaries.
That's why we have put together partnerships like ViaTech, because we've all mentioned the same aspects, I think, of what is needed here. There's the legal part; we need to be sure we have good patent protection and understand how to protect our intellectual property. The universities have a huge role to play in terms of helping to commercialize their technology, identifying technologies, and working with us and training people. The accounting firms have recognized that they have a role and a responsibility, and we certainly have. In many jurisdictions, we have government partners. IRAP, if not part of these groups, has made their services available to these groups.
I think by taking those kinds of steps and finding out what we must do to be very, very good is the only way. I don't think there is an answer out there. If somebody knew what the answer was, how to successfully commercialize science and technology, they'd be worth a hell of a lot of money - excuse my language. But some of us know a little bit and we're sharing that learning together. I think that is the only way to go.
Mr. Lastewka: I'm glad of what you just said, because one of the questions I've always asked to bankers is: why can't we in regions or communities and the financial institutions all get together and work on a program to help create companies? There's always a standing-off feature going on because, well, we compete. Isn't it time now when numbers of banks or financial institutions, including credit unions and others, could work together with the government, with universities of that area, especially in outlying areas where you don't have a major engineering university?
Ms Smith: I think it's absolutely critical that we do come together. We and the Business Development Bank have two strategic alliances where basically it's one-stop shopping for the customer. They just know they need cash, so they come, and we decide if it is their particular product line or our particular product line or a combination of both. So we are doing that.
Quite frankly, getting more bankers around the table is not necessarily the answer. You don't want a lot of people around the table. You want a lot of good brains who represent various aspects of the missing pieces. So I don't think getting three more banks there is as useful as making sure you have the right mix of the legal, accounting, marketing, entrepreneur, and financial communities, and scientists.
The Chairman: Mr. McMaster.
[Translation]
Mr. McMaster: A lot of emphasis is put on the banks as sources of funds, but in my humble opinion, it is not in the culture or the mentality of banks to take risks. When we talk about technology, we are talking about risk.
I don't know how you are going to deal with this, but in the past when investments were made in cement, investors demanded guarantees on equipment, buildings, etc.; there was a reason for that. Where technology is concerned, there are no guarantees. I have employees who go home at five o'clock at night and come back to the office at six the next morning. How do you guarantee that? How are you going to deal with that, in light of the fact that it is not part of banks' missions to get into risky investments? Certainly, they are the institutions with the most money, but how -
[English]
Mr. Lastewka: I thought that was a good question.
[Translation]
Mr. McMaster: That wasn't really a question, but rather a comment. Everyone says that the banks are the cornerstone technology is supposed to build on. I am not convinced that insofar as their resources are concerned, they have the necessary expertise to tackle that market at this time. In 20 years, they could probably do so, because the resources will have been trained by then. But today, they simply don't have the necessary resources.
For instance, when you talk about royalties, receivables, credit margins on royalties, you have to explain what a royalty is to the banks.
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Some people already know what it is, but if you go to the regional branches, you would be surprised to find out that they don't even know what a royalty is. We're talking about the essentials here, technology, licenses and patents.
[English]
Mr. Lastewka: I would agree it's not solely on the bank's shoulders. I think it's time we all understood that we all play a part, and the sooner people stop pointing fingers and we get together - as many as possible to create that atmosphere of creating new companies.
One question I have for the group is this. The government spends money throughout Canada on granting systems for research and development or in their own labs, which they partner and try to commercialize, but we also have in place the networks of centres of excellence. I would like to have any comment on the experience you've had with the networks of centres of excellence.
Ms Smith: I'm on two boards. One is a provincial centre in Ontario and another is a federal centre of excellence. I'm just learning - I'm not an expert in either of the areas - but I think it is a tremendous way to go. It is doing exactly what we're talking about with the positive conspiracy. It's pulling people together. I think it's quite terrific that they have invited a banker to be on each of those boards.
I think they are fulfilling a very useful purpose. There are very good people on the boards. Again, it's pulling us together and having us work together in new ways.
The Chairman: Mr. Mowatt, do you want to contribute here?
Mr. Mowatt: I would echo those remarks. If you tie that to your company creation and if we're searching for ways government can be involved - Company creation is a very private sector thing that happens. It's champions, it's people with a vision, and it's people who have a motive to build a company and build value.
Things happen fast. When we see companies that grow, it's because Jane knew Joe, who had a contact in Silicon Valley who knew somebody in Boston who finally got it made in Montreal or something. It's not a perfect world, and companies get built in a really imperfect way. So if we can look for a role, it's going to be in data banks and communication.
All the comments come back to it time and time again: there's lots of capital in this company, there are a lot of dollar bills in the bank; what we need to do is somehow to match up - And it's not a matchmaking service, it's just a conduit, so I can talk to you and find out what you're interested in.
If I come up with a flat-screen TV technology, do I use it for making watches, for making tanks, for making TV sets, for making computers? The world is open to me. Somehow I've got to get through that maze and talk to somebody who is making watches. Is this something that's going to work for you? If not, I'm on to the next one. If it does, you would be amazed at how fast it clicks.
It's going to be that network that puts people together. But nobody is investing in it. There isn't any return for building that network, perhaps.
Mr. Warda: I have a comment about the network. I think innovation is networking. We have to remember, this is the most important thing. Innovation is people and networking is people.
To give an example of the network of centres of excellence, I know of one that basically acts as a kind of provider of contacts between the university and industry. Most important there is this mechanism that brings two sides together - you can call them two solitudes - so they become one entity. That network is one that is Ontario based, the Ontario network of centres of excellence. It recently won a Conference Board award for excellence in bringing university and industry partnerships together.
The Chairman: Mr. Shepherd has some questions.
Mr. Shepherd (Durham): Thank you very much, Mr. Chairman.
I came back from Taiwan just last week. It's a model of a nation, one of the tigers of southeast Asia. One of the things I did, of course, was talk to some of their science and technology people, but in particular I sat down with the president of their stock exchange.
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Susan, I noticed that - Susan and I crossed paths about a year or so ago - you mentioned the best practices of nations in your first point. This is a very highly managed economy. They did one thing that I thought was rather unique. They had a certification process whereby they actually certified that a certain technology was a marketable technology. I'm not quite sure exactly what happens if it's not. In other words, they - maybe this independent board or whatever - sat down and said they believed a technology had a marketable application. And once they have this certification in place - it's also used in their stock market and so forth - people put greater confidence in them and therefore they get access to capital and so forth.
What do you think of that kind of process for Canada?
Ms Smith: I'd be very interested in understanding what is behind that process. I truly believe we need to identify the four or five critical things that we must do to be successful, go out and find the very best practices out there, get behind them and find out what is in that we in Canada must do.
I don't think we have to be absolutely the best at each of the seven things that I put on the table. We have to find the two or three or four that, as a package, make us globally competitive.
I think that's exactly the right way to think: who is doing something that's truly differentiated and that seems to be working? And let's find out how we might make it work for us.
Mr. Charlebois: I want to mention in passing that some of those practices do exist in Canada. The Vancouver Stock Exchange, and perhaps to some extent the Alberta Stock Exchange, when dealing with junior companies, will sometimes require a junior company to obtain a statement from an expert who comments on marketability and things of that nature. Some of our exchanges follow those types of practices currently.
Mr. Shepherd: I guess I'm not thinking of just primarily the stock exchange. I'm looking for a universal, maybe a national, certification process much like what we do for safety and some of these things. If we had a national certification process so that everybody could say yes -
This leads to my next question, Mr. Chairman. We talked about investment tax credits, and it seems to me your analysis is almost solely based on inputs as opposed to outputs.
It's also interesting to note that the Auditor General did a study on investment tax credits and basically asked the same question. Seventy-five percent of the investment tax credits are basically going to what I would consider multinational corporations - not that multinational corporations are necessarily bad; however, there's also an indication that a lot of their pure research is not happening in this country.
So shouldn't we refocus the whole concept of investment tax credits more towards the outputs and what they're doing to drive this economy rather than the simple expenditure of money?
Mr. Warda: I have done an analysis of trends in R and D tax credits across the OECD countries, and you can see that there are countries that do start having targeted tax credits in place. By targeted tax credits I mean something that goes specifically to a given technology or a given activity.
For instance, Japan is such a country. A few years ago it introduced a tax credit that solely promotes basic research, largely in all possible disciplines. That's a tax credit for basic research. Denmark is another country that has quite a generous allowance for companies that conduct basic research.
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So we see that largely incremental changes are happening to tax credits in countries that have tax credits. The trend is towards maintaining the tax credits, due to various reasons. One of the reasons may be that they want to keep companies within the country. I'm not talking only about Canada, but about other countries too.
Another trend is to really play with tax credits in order to make them selective, something like grants but still through the market system. That's an interesting thing. I believe that in the face of budgetary deficit programs in a number of countries, more and more countries may be inclined to really target R and D tax credits to a given R and D activity. For me, it's especially nice to see that there are some countries that really target basic research.
There is another aspect of giving incentives to innovative activity. As I mentioned in my presentation, R and D is part of the innovative activity. There is all the array of using, adopting and distributing new technologies through various sectors of the economy, diffusing technology. This perhaps doesn't have clearly defined incentives for doing that. Some of the incentives come through the accelerated depreciation systems. For example, if you are using the latest computers you may even get a full write-off. Perhaps there should be some incentives to allow our companies to use technology if they have an interest in accessing technology and using it. Perhaps we shouldn't just have incentives for producing new technology like we have now, and like most countries have.
Mr. Shepherd: Getting back to my first comment, I suppose that an ideal way would be to link certification of a process with investment tax cuts. In other words, we'd be saying it's a certified marketable application. Scientific tax cuts have to be applied against revenue in any case, so the thing is being marketed. Then in some ways you could even take that one step further and say that we're only interested in certain specific technologies. You could use that as a way of targeting the $1 billion a year we're spending in scientific tax credits now. It could be directed more towards driving specific technologies.
Mr. Warda: Usually countries do it through direct grants and subsidies, although we want to really move away from this. We have to remember that there are countries that really have a quite pronounced level of subsidies. With a subsidy you can aim directly at a given technology or at a given sector. Of course, there's a danger that it doesn't work through the market system, so there's a danger that you may favour some industries and some technologies over others.
Mr. Shepherd: I guess the beauty of an investment tax is that it's related to profits. It's related to success as opposed to a subsidy, which may not - in other words, to get the investment tax credit you would actually have to be successful and you would have to be taxable.
Mr. Warda: In this OECD study I have noticed that there are very innovative countries. We know that when you use an ordinary indicator such as the R and D to GDP ratio, they do not have tax incentives, especially Scandinavian countries. What they have instead is low corporate tax rates. They have reduced their corporate tax rates. But we have to remember that those countries also have high value-added tax rates on personal consumption, so their tax structure is not really very low.
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For corporations, however, those countries have very low general tax rates, in the range of 25% to 30%. Canada doesn't compare too badly with those countries. Our average corporate tax rate is probably about 35% for manufacturing.
The Chairman: Mr. Murray.
Mr. Murray (Lanark - Carleton): Thank you, Mr. Chairman.
I would like to come back to the idea of the positive conspiracy. I don't want to appear too cynical, but I think we've been doing a lot of wheel-spinning in this country for a long time. It's not that long ago, 1984, when a new government came in and promised to double the amount of R and D we did in Canada. I think it was around 1.24% of GDP at that time and it's probably about the same now. We find the country is awash in capital, we find the only country that has better tax incentives is that technology powerhouse Spain, and we start to question what it is that we're doing wrong.
The word ``conspiracy'' fits in with what maybe has to be done. It's very difficult in the egalitarian society we have, where perhaps we don't publicly value one activity over another and therefore reward people for doing that. This is what I wanted to ask the panel about.
We just heard about Scandinavia and the corporate tax rates. I would suggest probably the problem in Canada is more personal tax rates than corporate when it comes the kind of people we need to attract and retain to do the things we want them to do in this country. We're not willing - I'm not sure I'm even proposing that we do this. I'm asking for your learned thoughts on this. I'm just suggesting that as a country, as part of this conspiracy, we may need to decide we do value certain individuals over others such as politicians or lawyers or whatever. We want to encourage them to do what they can do and therefore we want to reward them, probably through the tax system.
Is that possible in this type of society, or am I totally off base here? I would just like your opinion on that.
Mr. Charlebois: I can confirm that the personal tax rate in this country - When we are talking to American citizens, for example, trying to attract them to join the management teams of Canadian companies, the personal tax rates are an issue and we have to overcome that issue in presenting an opportunity where they're going to make so much money that the tax rates don't make any difference.
There's no question it's an issue. On what we can do about it, I'm afraid I don't have any constructive suggestions for the committee, but from personal experience in trying to convince those people across the border, it's not easy.
Ms Smith: I would echo that there are incentives and there are disincentives, and we have to have a package that's attractive to people. It may not mean we have to have the lowest tax rate, but it probably means we can't have the highest tax rate plus the most sluggish regulatory system plus all the other things we talked about. So it does need to be looked at.
On your other point, we do need to learn how to focus. It doesn't mean we think one sector or one group is better. It's that we know we have particular world competence in certain areas, and if we can do certain activities there will be great economic benefit to us. So it makes sense to focus on those areas. We cannot be number one in everything. We need to focus on certain areas. I think that means we have to look at the total tax system and see if it's a major disincentive and if it does need some adjustment.
Mr. Murray: In other words, you're suggesting we reward the potential winners, or at least try to support potential winners, and recognize that perhaps we have to let others struggle along on their own. Am I correct in that?
Ms Smith: I'm a believer that a country or a company cannot be number one in everything. We have to make certain choices and put our resources behind those choices if we're going to be truly globally competent and globally competitive.
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Mr. Murray: Would that involve such things as what we saw with Bombardier a few weeks ago: grants, the tax incentives? Are you talking about anything for individuals? What form will those support measures take?
Ms Smith: Well, I don't pretend to have all the answers to that, but what I have endeavoured to do is look at the link that is the commercialization process and ask where the weak spots are in that process and where we together should be examining. I do think one of the links in the process that's critically important is the regulatory environment and the tax environment.
They are big issues, and I think we need to discuss those. I don't have the answer to that question today, but I do believe it's time we stopped thinking we can be everything to everybody, and be world competent in certain areas. It's not going to happen by magic; it takes a lot of focus.
Mr. Murray: It's not easy to make those decisions when you're a politician either, as I'm sure you well understand.
Ms Smith: It's not easy, and that's why it takes champions and people who are willing to step outside of those kinds of constraints. It is difficult. It's difficult within a corporation as well.
Mr. Murray: Yes.
Mr. Warda: I have specific comments on personal income taxes and brain drain. We have produced a report on this issue, not analysing but signifying its importance.
I think another group at the Conference Board will be starting a project on the possible impacts - first, whether we have brain drain, and possible impacts of brain drain. So we will be researching this.
What's interesting here, however, is that in a number of discussions with business executives what you are seeing is that largely after-tax pay includes also the level of salary that is offered here vis-à-vis - usually the comparisons have been made with the United States. Then you apply a personal income tax rate on this level of salary.
So I think the fact is that it's not only personal income tax that may be higher than in any other country but also the nominal level of salary, especially when you take this comparison with the United States. So we have to understand this in terms of after-tax pay.
Mr. Murray: To come back to this idea that we need a kind of breakthrough strategy, that's what I'm trying to address here and it think it means really going beyond anything that has been done in the past.
We've had stellar groups advising the Prime Minister directly, going back a dozen years or more. Ms Smith, you're on the advisory body now for science and technology. I just don't see the breakthrough unless Canadians are willing to accept that we want this kind of culture, and then what we do to get there and have broad public support for it. As somebody mentioned, perhaps Ms Smith, the media plays a large role in this as well.
Ms Smith: I'm sorry, Mr. Chairman; I keep jumping in.
I'll go back to the first point I made about leadership. I think if we do not have that at the very highest level, and true committed leadership, it won't happen.
Mr. Murray: Thank you, Mr. Chairman.
The Chairman: Thank you. Mr. Mayfield is next, please.
Mr. Mayfield (Cariboo - Chilcotin): Thank you, Mr. Chairman. This has been most stimulating and kind of interesting.
There are three points I want to raise that come out of your paper, Mr. Charlebois. It's not that I want really to comment on them but to highlight them and have perhaps one or each of you comment on these in some depth, because I believe these are points that need to be highlighted and I'd like to hear the how and the why.
You mentioned, sir, that particularly in the young start-up situations, higher tax costs and increased directors' liabilities created by government regulations are really an impediment. I would like to have you perhaps comment on that in such a way that those who are responsible for this legislation might hear it in such a way that the legislation, if needed, might be amended.
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The other comment I'd like to have you each address is the comment about staying out of the grant business, why that is so important, particularly in the free market economy we have. Expand on those three points, if you would.
Mr. Charlebois: The first point was the issue of directors' liability, if I remember correctly.
Mr. Mayfield: They were directors' liabilities, the higher tax costs, and then the grants.
Mr. Charlebois: The directors' liability is one that in my opinion is very real. It's one that prevents young companies - because young companies are the companies that have the greatest tendency to go out of business.
When we talk of risk, that is the risk we're talking about. The company disappears; it becomes bankrupt in some way, shape or form. When that happens, the directors of that company become liable for a number of payments having to do in some cases with employees, in some cases with withholding taxes of different types, or having to do with the GST, I believe. I've seen a study, and I think it's 30 or 40 statutes that place special liabilities on directors. As a result of these liabilities, people choose not to become involved in helping these young companies.
In some cases these are people who have been successful, who have helped to grow companies previously, and who can make a contribution. We've all said that to build these technology companies you need a lot more than money. You need experience. It's not an easy task; it's a very difficult task. The more help you can get the higher the probability that you are going to be successful.
I'm not prepared to go into a detailed list of all the different statutes - there are a number of them - but if anything could be done to review this situation, to help these individuals, to make it easier for these individuals to join these boards of directors, I think it would be beneficial for the companies.
I don't know if my fellow panel members would care to comment.
The Chairman: Mr. Mayfield, would you like to continue?
Mr. Mayfield: Yes, if you would, I'd like you to also -
Mr. Charlebois: On the tax issue, many of the investments we're talking about are extremely long term.
When you are investing in a start-up company - and we by and large do not typically invest; there's a small portion of our fund that is dedicated to young companies - by and large you are investing in companies that already have $2 or $3 million of revenue. When you are investing in a start-up company, you're looking at five to ten years between the time you make the investment and the time the company gets to a stage of development where it can become a publicly traded company, where the investor can get liquidity in that investment.
In our case, our typical timeframe is somewhere around five to seven years, but because we will often invest after the company has been in existence already for two, three or four years, it shortens that timeframe.
So we're talking about very long-term investing, and that significantly increases the risks. As a result of that, if there was some way of providing some type of incentive for that investor, I think it would have to be fairly restrictive; it would have to be only for start-ups, or something like that, to encourage individuals to invest in these very young companies.
The third point you raised was -
Mr. Mayfield: Staying out of the grant business.
Mr. Charlebois: Okay. I think the government is right. I think the government has been following a policy over the last number of years of by and large cutting back on grants.
I think it perhaps goes back to a point Mr. Shepherd was raising of trying to select sectors in which we are going to fund ITCs. I think that's a very, very difficult thing to do. I wouldn't want to have to make the decision that these are the sectors we're going to invest in and these are not. By their very nature, when governments start handing out grants they are making those selections, and in my opinion, the markets are in a much better position to make do so. As a result of that, I think that would be part of the reason for not doing grants.
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Often grants will encourage companies to go in a certain direction, to do a certain type of R and D, to develop a certain product, because that fits the criteria of whatever program it is. If the company is perhaps going to the left, and the criteria would force it to start veering to the right, it's not necessarily what's best for that company, and I think they're embarking on some of these programs for the wrong reasons.
Mr. Mayfield: I very much appreciate your comment, Susan Smith, that we should be involved in a positive conspiracy here. We have perhaps heard all our lives about how blessed we are with the resources that Canada has. I'm not just thinking of the minerals in the ground and the trees in the forest, but also of the people we have, the native intelligence that Canadians have brought to our country, our climate, and our culture. Now I hear people saying, well, gee, we have lots of money, too, if it can just be focused in the right direction.
It seems to me that in this positive conspiracy the government is always a major player. It's involved from the time we're born until the time we die, and it's not going to be out of this. But if we can focus its influence at precisely the right point, even in a regulatory way, stay out of the way and let the people who have the intelligence, initiative and the desire to do these things - just to know what the rules are, to be able to follow them, and build our country so that we're at least number six in this area you're talking about.
I thank you so much. If there are any other comments you can add, please do so.
[Translation]
The Chairman: Do you have another question, Mr. Leblanc?
Mr. Leblanc: I don't believe I got an answer to my previous one. Mr. Warda indicated that the major problem in Canada was the distribution and diffusion of technology. Earlier, Mr. McMaster said that it was extremely costly to obtain a patent. Everyone is talking about the difficulty in developing and obtaining technology.
We have given banks the opportunity to manage our money. Banks have become brokers. Therefore, I don't see why our technologies couldn't be managed by a broker. Personally, once my political career is over, I might be interested in joining the business world. I could look at new ways of making money. I'm a businessman. Again, I wonder if it would be possible to become a millionaire overnight by getting involved in the commercialization of technology.
I could become a technology broker. Technology owners could advise me so that I could extract information from technological data banks and anyone interested could come and see me. I would then request a commission. I wonder if this would not be a good thing. I would like an answer to my question. I have been wondering about this for over 10 years. Everyone tells me that it is difficult to distribute and diffuse technology.
Technology is a well-guarded secret and no one can tell me if it's possible to have a sort of technology broker who could make some money on this. This could be a private sector venture, initially supported by the government. We give our money to the banks. Why then couldn't we have technological data banks accessible to those wishing to sell or buy technology?
Mr. McMaster: The British Technology Group specialized in this area. After the war, it acquired a number of technologies for which it issued licenses worldwide to the tune of $50 million in royalties. A good technology broker needs the following qualifications: sound training, a sound scientific mind and good salesmanship. It is rare for a person with a strong background in science to be a good salesperson. Therefore, we would need a good entrepreneur.
Mr. Leblanc: You could have lawyers, scientists and so forth working for the same outfit.
Mr. McMaster: That's exactly what happens with the research centres. We develop the technologies and then we market them.
Mr. Leblanc: That's why I wanted you to answer the question.
Mr. McMaster: This can be done. Technology lists do exist. Universities are in the process of drawing them up. The Canadian Technology Network created by the National Research Council of Canada has prepared a list of technologies available from the various centres and organizations.
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What we need is a promoter, but in order to market technologies, the promoter needs start-up capital.
Mr. Leblanc: Could he not simply act as a broker? He doesn't need to buy the technology in order to resell it. He can simply take -
Mr. McMaster: Yes, but before he does that, he needs money in order to seek out clients.
Mr. Leblanc: Of course.
Mr. McMaster: That's where the problem lies. Find me the money so that I can go out and do that.
Mr. Leblanc: The banks earn profits on our money. Perhaps we could borrow a little from them.
Mr. McMaster: That would be wonderful.
Mr. Charlebois: I think Mr. McMaster has answered the question. We need much more than technology to build a successful company. I too know some technology brokers. Therefore, the market does exist.
Mr. Leblanc: Is it possible for a country like Canada to do that?
Mr. Charlebois: Are you asking if the government of Canada could -
Mr. Leblanc: I'm asking if it could take on this responsibility.
Mr. Charlebois: No, that would be impossible.
Mr. Leblanc: Why?
Mr. Charlebois: Because this should be handled by a private, for-profit business. In my opinion, the government should not get involved in this area.
Mr. McMaster: Several universities have a business-university liaison office to get out the message that the technology does exist. However, these offices operate within the university structure. Nothing is being done with industry because there is no level playing field as far as negotiation is concerned.
This matter needs to be placed in the hands of business people so that business relations can be conducted on an equal footing, without the whole structure - This is one of the problems that universities face.
Mr. Leblanc: It's a persistent problem. Why is it seemingly so difficult to disseminate and distribute technology? Perhaps the reason is that there is no interest in the marketing side of things.
Mr. McMaster: The interest is relatively recent. I did my masters degree in this subject not even 20 years ago and at the time there was no interest in this matter. I mentioned earlier that while working for the Business Development Bank in 1989, I earned my masters degree. The bank paid for my studies and then shelved my thesis. I left because I was 10 years ahead of my time.
Technology has been a timely topic of discussion for three years now. It is considered a critical area because everyone is cutting and there is no more money. The question is: how to make more money? To make money, we need new solutions, or in order words, we need to market technologies already developed. This was not done in the past. There was no need to do it because the money was flowing in. Why make the effort? The same thing is happening with large companies which now have less funding. They want to gear their research to the benefits that they can ideally recover in the short term. Considerably less fundamental research is being done.
One important issue was not mentioned. Large industries are increasingly withdrawing from research. They let small and medium- sized businesses do the research which involves a risk. Tax credits play a very important twofold role: they allow small business to continue to do research and then to turn to big business to provide it with new sources of technology involving a lesser risk and secondly, they allow small business, when financed with risk or other types of capital, not to be lose their majority interest in the company.
When US companies operating with risk capital get involved in a business, they take over 51% of it. In most cases, they assume control whereas here in Canada, with our research taxation provisions, our business people are able, during the initial stages, to keep control of their company. Another consideration is the money that they will be able to make when they begin to market the technology.
[English]
The Chairman: You have your answer now.
[Translation]
Mr. Leblanc: Mr. Chairman, I won't become a millionaire in this business, from what I can see!
[English]
The Chairman: Mr. Schmidt.
Mr. Schmidt: Thank you, Mr. Chairman.
Susan, I'm intrigued by your seventh statement in your Royal Bank presentation. What intrigues me here is the word ``principles'' and the suggestion that the common desire to create perfect plans and perfect policies is not a skill that would help us compete in the new world. It seems to me if you read a textbook on bureaucracy it says you have to have perfect plans and perfect policies and then things will work; and you say that's exactly what we don't need. You have said we need some principles.
I want to ask you to tell us for for our edification what are one, two, three of the principles, or maybe all of the principles, we should do in order to achieve item seven. I think you're on to a major major point here. Could you illustrate maybe just one or two principles? Clearly there are some. Have you been able to find what some of them might be?
Ms Smith: That's a tough question.
Mr. Schmidt: It is.
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Ms Smith: To answer it properly I'd need some time to think about it, and I could probably write a book. But part of it is accepting that there has been fundamental change and the way we have approached problems is no longer necessarily the most appropriate way.
One of the things I have found, working in a very large corporation that has done business in a particular way for 127 years, is that you cannot wait until you have a perfect plan in order to approach the market. If you do, you miss the opportunity and it's not the best way to approach a new market. The best way, in my opinion, is to minimize your down side, maximize your up side, get in and start trying, testing, piloting, and do it together with people who are better than you are. Always find people who are better than you are and know more than you do. That is the principle I have taken in terms of networking and the way we work throughout networks across Canada.
I'll tell you a little story - and this is not taped or televised - about our organization. Two or three years ago when I started doing this we said, we can't do that. We can't put Leo, our logo, out there partnering with people we don't really know. There's a lot at stake in doing that and we can't go to the marketplace and tell it we don't know what we're doing with knowledge-based industries. I said, well, I think the marketplace knows it; I don't think it will be a big shock and I think people will find it refreshing if we say we don't know our way but we're very determined to find our way and will you work with us. I think it's that kind of thinking we all have to take.
I don't mean to be very pessimistic about this, but I believe if we sit and try to find the perfect policy for this area, the perfect policy for that, and the perfect way of approaching that, the marketplace will have passed us by. That's one of the other reasons why government shouldn't be doing a lot of these things, because it simply isn't fleet of foot enough to be able to operate in this kind of environment. Somebody mentioned something about having good basic policies in place and then stepping back and getting out of the way, and I truly believe we need to do a lot more of that.
Mr. Schmidt: I think you've enunciated one principle there. But I wonder whether the other gentlemen - I'm thinking particularly of Mr. Charlebois and Mr. McMaster - have discovered what some of these principles are, because here are two businesses that have made a success of getting into the innovative area and you're doing it a little bit now with the Royal Bank. Are there some other principles you could enunciate that would help? I'm sure you're still looking for some of them. We don't have them all, I'm sure, but maybe we have a few and we can get one step further.
[Translation]
Mr. McMaster: You're referring to models, are you not? The fact is, I don't really have any. I find what you're saying amusing, because many people would have liked to see what the model was. You are not the first. The trick is to successfully identify the good players so that the project works and the business gets off the ground. Ultimately, it comes down to a feeling, to experience and to knowledge of technology. I don't know if that answers your question, but that's all I can say for the moment.
[English]
Mr. Charlebois: I just want to make sure I understand what principles you want. Are they the principles required to build good companies or the principles required to get on with things?
Mr. Schmidt: Probably both, but we'll take the latter one first.
Mr. Charlebois: That's principles required to get on with things. I think there are a few there. Probably one is don't try to take huge steps. Take many smaller steps and keep moving. I think it's a good management principle for any company. In some cases a large step is required, and I fully realize that, but I think in most cases you want to keep taking small steps. The problem with a large step is if you trip you could hurt yourself very badly, whereas if you take a number of small steps and you trip, you can recover much more easily.
Keep on moving. Keep on looking for feedback. Are you going in the right direction? Are you making progress?
[Translation]
Mr. McMaster: You have to persevere.
[English]
Mr. Charlebois: Yes, persevere. Absolutely.
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[Translation]
Mr. McMaster: I have an interesting anecdote. When calculators were invented, Hewlett-Packard had no market for this product, or so it seemed. Look at how far calculators have come today. Therefore, you have to be careful about market studies, but if an entrepreneur believes in what he is doing, and if he has the technology and the network, he will succeed.
[English]
The Chairman: Mr. Warda, do you have a point on this?
Mr. Warda: I guess we'd like to comment on your question.
First of all, I would say something about commercialization from the university-industry partnerships perspective, because this is the experience I went through in preparing one of the research studies on best practices in university-industry technology partnerships.
First of all, technology is often called a contact sport and it takes two to dance. So largely speaking, brokerage is something that eventually may help, but may not help either. We have to really wait for it somehow.
In our experience, we have selected a number of winners of awards for excellence in this kind of collaboration in technology between university and industry. This is called university-industry partnership. We have found that in order to be successful in commercializing, or getting close to commercialization and innovation to this point, it was really the two people who mattered. On the one side it was an industrial champion, and on the other side it was a university champion. It wasn't the ILO, the industrial liaison office, but just a professor, an inventor, somebody who really played a role in developing a given innovation.
We found that one of the characteristics of successful partnerships was a well-defined need and clearly identified objectives, roles, and expectations on the part of all participants. So in this case, largely speaking, it was the industry champion and the university professor. Projects were run as private business ventures with timeframes, deliverables and financial management. Having professionals in the timely delivery of tangible results was key.
Also what was interesting was that it happened somehow that those award winners were in long-term partnerships. They weren't partnerships that were created one or two years ago. These relationships were long-term. The shortest one was four years and the longest was over 20 years. I didn't calculate the mean age of the partnerships, but you can see there are some common traits.
The important elements here - and I think you develop them over time - were continuous communication, honesty, and non-formality. It was like a university researcher becoming part of the company team, you could say.
Intellectual property issues were resolved at the beginning of the process. It was also interesting to see that the university played a role of stepping back. It just provided the framework conditions or infrastructure. There was willingness on the part of the university, really, to provide this infrastructure and encouragement in terms of time off, acknowledgement for non-academic activities and so on.
It was interesting to see that there was no direct involvement of the university administration. Perhaps that's something that could be a ground for the principle when we look at the growth of the government. Maybe it could be less directly involved but provide the framework conditions.
We talked about taxation. We talked about regulation and other issues such as education. It's easy to say, because we all feel like this, but much more is needed to really create a policy.
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The Chairman: Thank you, Mr. Warda.
Mr. Mowatt, do you have a point on this? I'd like to go on and give Mr. Lastewka a chance for a last question.
Mr. Mowatt: I have just a quick point. I think there's an opportunity to combine whatMr. Shepherd and Mr. Schmidt said with what Susan and others have said. The breakthrough strategy, the big hit that's going to be required, is in the leadership. It's in saying what we want to do. It's in setting those big goals.
What's actually going to get it done is a whole series of little steps. Twenty years ago, Taiwan said it wanted to be a leader in trans-shipment and in education, and today it is. When Kennedy talked about putting a man on the moon he had no idea how to get one there. A whole bunch of little steps along the way got it done.
My second point is about the principles you're looking for. I think there's another one: it's the principle of concentration. We're a small country and every day when we're in business - I'm sure these people here see just how small we are. Sometimes we're doing things to make ourselves bigger. We're trying to spread ourselves out, and if we can concentrate - If you want to see the aeronautics industry come to a spot, just build a university and say that it's going to have nothing but aeronautics instruction and professors and research. That will bring people. These businesses need research and they need trained people.
I used the example of universities, but if we can concentrate - and in this day and age sometimes it's through data channels and data bases and sometimes it's geographically - somehow we have to reduce all of those transactional problems of people talking to each other, borrowing money from each other and investing money with each other. If we can put them closer together, I think we'll see more things happen, and happen faster.
The Chairman: Thank you very much, Mr. Mowatt.
Mr. Lastewka.
Mr. Lastewka: Thank you, Mr. Chairman. I was doing well until I heard Ms Smith say governments should get involved in policy and then step out of the way.
Voices: Oh, oh!
Mr. Lastewka: And I wasn't quite sure what you really meant there, after we had talked about how we all need to get together and cooperate and facilitate.
Ms Smith: What I meant was that in terms of policy and bureaucracy, let's not add on unneeded policy. As government, let's add on a lot of support of activities, but not more policy than is necessary. Am I making myself clear?
Mr. Lastewka: It's very good for bankers or industrial people or university people to come here and say ``if we had the proper policies'', but we never go on to the next step, which is this question: what do you really mean by that?
So we let people make policies and then you come back and tell us the policies are wrong. We're trying to get out of that, all right?
Ms Smith: Yes.
Mr. Lastewka: Let me say this to each one of the panellists: let's get on with making things happen, so tell me which policies or issues you think the government should be involved in and which it should not be involved in with respect to science and technology.
Don't give me a general answer, either. What is it? And what is it not?
Ms Smith: Is there somebody who feels qualified to answer?
Mr. Charlebois: I think I've given you two or three items that you noted earlier on my list. The only other one I would add that you didn't pick up on is this idea of trying to encourage more technical graduates from our universities and colleges.
These companies need a lot of people. There are good jobs in these types of industries. Often they cannot find some of the people they're looking for. It comes and goes in phases. We'll go through a period of years where they are getting a good enough supply, but currently in the Ottawa area I can tell you that virtually every technology company out there is desperately looking to add people to its staff and they're having difficulty finding them.
Mr. Lastewka: Maybe I'll go back to Mr. Shepherd's earlier questions on how you get more engineering people out there. How do you get more co-op graduates? We have the situation with the University of Waterloo, where 75% of them go to the States. It happens to be a co-op school. How do we say to the universities that more of them have to do more co-op schooling?
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We've had industry come here - I mean, it gives an opportunity. I was in that situation many times before and I always liked to have a university co-op graduate. You always knew what you were getting much better than when you just interviewed someone.
So do you think government should be playing a role in forcing that onto universities?
Mr. Charlebois: I think governments do play a role in financing a lot of university education in this country, so if there was some way to encourage the universities to focus more on these disciplines, I think there would be a benefit. But that is not to say that we don't need any arts graduates. I think we do. We also need business graduates and we need people in other disciplines. But we clearly need more of the technically oriented graduates, and if there is anything you could do - Unfortunately, I'm not an expert in education. I don't know enough about universities to give you some specific suggestions as to how you could change your policies to get that outcome, but I think it's one that would be beneficial to the knowledge-based sectors in this country.
[Translation]
Mr. McMaster: I think the government could try and do more to promote science. For example, among professionals, engineers and scientists are still the poor relations in Canada. They have only begun to get some recognition in the last several years. This is a recent development.
In the past, other professions where in the spotlight and these categories of professionals did not necessarily get the public recognition they deserved. An engineer in Germany is held in high esteem. An engineer in Canada does not get the recognition another professional gets.
If you want to encourage young people to go into sciences, they have to see the possibility of a return on their investment, because university sciences is one of the most difficult fields of study. I have three degrees: one in accounting, one in law and one in engineering. On balance, I have to say that engineering was considerably more difficult than the other two fields of study. When a student chooses his area of study, he chooses the one that will pay the most and that will be the less difficult. Perhaps there is some work to be done at this level. We could help people chose fields -
[English]
The Chairman: I'll allow one final intervention from - I'm sorry, Mr. Lastewka. Go ahead.
Mr. Lastewka: I wanted to get some action items from the panel.
The Chairman: I'm sorry, my apologies to you. Does anybody else want to respond to his specifics?
Mr. Lastewka: Let's go down to where the rubber hits the road. What are the action items that you would want us to do or not want us to do?
Mr. Warda: I think government should provide framework conditions, should step back. I shouldn't say ``should''. I can imagine perhaps less direct involvement in the area of innovation and more to the market forces. I think government could be involved in providing an innovative climate. A climate for innovation is the area of regulation that could be made more transparent. ``Transparency'' means providing information about regulations - what it costs to comply, and so on.
Second are fiscal policies. As I mentioned before, so what if you have good tax incentives when you don't spend as much on R and D as other countries that do not have such good tax incentives. Perhaps there is something that is not in balance. So balanced fiscal policy is very important.
There is also human resources policy. The government perhaps could focus on this area of action by encouraging universities and colleges to really produce employable graduates without, let's say, overdoing this, because there still has to be a kind of free choice for people. This is what is important in our education, especially in the university system. Adopt a notion of employability, of developing employability skills. You know it is very difficult for the federal government to get involved in this because of provincial jurisdictions, but this has to be ingrained not just at the university level but starting from kindergarten and then going on through all stages.
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I think you have such university graduates because perhaps there is something missing. You can't just say that university graduates do not provide us with people. This isn't the final outcome, because something is on the road there. Again, there has to be some kind of concerted policy whereby the federal government, within its jurisdiction, could perhaps provide some framework conditions with regard to provincial education.
Mr. Lastewka: When you say ``framework'', you don't mean incentives, do you? Is that right?
Mr. Warda: I would say incentive maybe in a way that is different from pecuniary incentives. We should probably try to limit the number of incentives available. For instance, companies very often say they will do more training if they get some employment tax credits or incentives for training and so on, because this is an investment. Training, for instance, is an investment. It's like R and D, and it's basically a long-term investment because you are investing in people. But who should provide the incentives for this?
I think many of us, as individuals, should have our own incentives to invest in our training. If we are getting it free from the company, though, we really should be diligent and should be looking at it very seriously, not just as spending good time somewhere else. That's very important. It comes to the point that some change of culture or mindset is also important. Why provide tax incentives for training if people really don't treat it seriously?
So it starts from the very beginning - I'm going again to kindergarten, if I may say so - and it's a process that really lasts.
Mr. Schmidt: What you're referring to is a shift in attitudes and values, and a shift towards a science and technology culture in our society, so that people who have these skills and abilities are valued.
The Chairman: Can we go on to Susan? She wants to speak.
Ms Smith: I want to get a little bit specific. I don't pretend to come with the answers you're seeking; I don't think any one person has the answers. But I think government has a very clear role in terms of the regulatory environment. By that, I mean having a globally competitive patent registration system that isn't clogged up and backlogged and all that kind of thing, and a biotechnology approval process that is competitive. If we can't do that, then use another country's approval process, because these are global issues and not Canadian issues. We can't pretend that if we don't like something it will go away. The thing is, it will get done elsewhere. Those are the kinds of things in which I think government has a very clear regulatory role.
I think government's role in the other things I've listed in my seven issues is more a role of working together with the rest of us who have an obligation to get it done. It's a way of thinking and a way of doing business and of bringing the best you have - the information, the influence and capability, the knowledge - together with what we have to get it done. But the first thing that has to happen before we do any of those things is to establish a clear objective, what it is that we're trying to accomplish. Just to be a society that enjoys a quality of life and thinks science and technology is a commendable thing is not a good enough objective. It's not a coalescing objective.
Mr. Murray: I wanted to give a quick response to Mr. McMaster's concern about the perceived value of engineers in society - and I won't even suggest it has anything to do with the initiation rites of first-year engineering students.
Voices: Oh, oh!
Mr. Murray: My suggestion is not profound. I'd just like to suggest that as students in high school recognize that you can make big bucks if you go into engineering, I think they'll naturally gravitate towards engineering as an occupation just because that's human nature at work again. As is so much of what we've been discussing around this table, a lot of it's human nature.
One concern I would have, though, is that because graduates from engineering schools can command very healthy salaries immediately, we tend to lose some of our future teachers in engineering schools because it's not worth their while to remain behind getting graduate degrees in engineering. We're going to need those people in the future as well.
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With supply and demand, the marketplace will take care of itself, again recognizing that not everybody can be an engineer or a scientist. You're right, it is tough. It's very difficult, and I'm sure we'll still have to import many - especially women - but I think more and more are convinced that it's a career path they should follow. They won't have to climb up the greased poll during that first month of university to get the prize at the top and all that, but maybe the whole perception of engineering will change.
Just as another aside, I should mention as well that I worked in high-tech companies as a non-engineer for quite a number of years, and I worked with engineers.
A voice: Good people, eh?
Mr. Murray: Well, they're not the best at self-promotion, if I can put it that way. Therefore, they probably do need somebody else to bang the drum for them and to promote them at a national level. So I do agree, we need more.
[Translation]
Mr. McMaster: I was merely saying that the best way for the government to intervene was to validate this profession, but not necessarily in a monetary fashion. It could be a question of recognition. Some lawyers don't have a penny to their name, but when they come into a store, everyone kowtows to them because they are lawyers. Why shouldn't others get the same treatment? Why not recognize the value of other professions?
I see this as a showdown between the old professions and the new professions of the future. Quotas are being placed on lawyers, doctors and accountants. However, there is apparently a shortage of engineers and scientists, value-added professions at the core of society. We need to promote these professions and recognize their true value. That's all there is to it. If we make the effort, people will know that if they decide to chose these fields, they will have an impact. Talk to young people. You'll see.
[English]
The Chairman: Thank you.
I think I can speak on behalf of all of the committee. You can tell by how everybody stayed involved so intensely that we really appreciate the close to three hours that you have spent with us. They've been very helpful, and we're trying to get our minds around these things.
I'm struck by the juxtaposition of the ideas that we need a big push in political leadership and that, on the other hand, things should be done one small step at a time. I think that what we have to do is tip the mood and regenerate this discussion in Canada about science and technology. On the other hand, we should not make suggestions that are so far afield that people don't know where to pick up the pieces. Those are the deliberations that we have to go into, and while we'll have different perspectives, I think you can say that all parties share this desire to put it on the front burner - or whatever cliché you want to use. It has to be put it out there so that people understand this is a real concern to everyone.
On behalf of the committee, I want to say thank you again. We appreciate that in your busy lives in the private sector and in the banking industry you were able to come forward to spend the day with us.
The committee is adjourned until Thursday, at 10 a.m.