The Socio-Economic Importance of Scientific Research To Canada

The Socio-Economic Importance of Scientific ResearchTo CanadabyDavid A. Wolfe, Ph.DProgram on Globalization and Regional Innovation SystemsCentre for International StudiesandDepartment of Political ScienceUniversity of TorontoandAmmon SalterScience Policy Research UnitUniversity of SussexA Discussion Paper Prepared forThe Partnership Group for Science and EngineeringOctober, 1997

The Socio-Economic Importance of Scientific Research to Canada Page 1© David A. Wolfe and Ammon SalterINTRODUCTION:The recognition of the value of investing in basic scientific research has grown steadily sincethe end of World War II. In part, it reflected the requirements of the Cold War and the spacerace; but, it was also a response to the apparent economic benefits that flowed from theincreased public investment in scientific research. Particularly influential in fostering thisbelief were the civilian spinoffs from several large national science projects in the US — thegeneration of electricity from nuclear power that developed out of breakthroughs achievedduring the Manhattan project and the commercialization of the integrated circuit that wasfacilitated by demands of the US space program in the 1960s. The scale of science projectswas considerably smaller in Canada, but the critical role played by the Chalk River nuclearfacility in early atomic research, and the successful transfer of nuclear technology to peacetimeusage by Atomic Energy Canada, contributed to the same perception in this country.It is difficult to quantify the direct social and economic benefits derived from scientificresearch, but the emergence and rapid growth of a whole range of new products and entireindustries derived from Nobel–prize winning breakthroughs in fields such as magneticresonance imaging, superconductivity, lasers, antibiotics and transistor action, supports theidea that they exist. Canada has not enjoyed the same proportion of Nobel prizes as the US orUK, but prominent scientists, such as Frederick Banting, Gerhard Herzberg and John Polanyi,have received the prestigious award. Although the time from scientific discovery to thecommercialization of research results is often quite long, many examples can be found ofinnovative Canadian products and start–up companies that grew out of scientific researchconducted by their founders — either as part of their graduate education or their academiccareer (Voyer and Ryan 1994). These instances further contribute to the popular belief thatpublic investment in basic science generates sustained economic and social benefits. But atwhat cost? How should these benefits be measured or evaluated? Does the eventual outcomejustify the overall level of investment in scientific research? Once we leave the realm ofassumptions and popular perceptions, and enter that of economic research and scientificevidence, the arguments become more difficult to judge, if only because the problems ofmeasurement and proof are extremely difficult to gauge.As the Cold War fades rapidly in our collective memory, and public budgets are subjected togrowing constraints, the ready acceptance of the popular rationale for investing in scientificresearch is losing its appeal. Some authors suggest that the end of the Cold War heralds amore critical stance by public authorities towards funding the large science projects associatedwith it. This new stance is symbolized by the decision of the US Congress to cancel funding1

The Socio-Economic Importance of Scientific Research to Canada Page 2© David A. Wolfe and Ammon Salterfor the Superconducting Super Collider in October, 1993 (Sarewitz, 1996) and is paralleled bythe decision of the Government of Canada not to proceed with the KAON project to upgradethe TRIUMF particle accelerator at the University of British Columbia in the 1994 federalbudget. If the strategic rationale for supporting public investment in scientific research islosing its appeal as a factor influencing public policy, it becomes all the more important toassess the broader benefits that flow from continued public support for basic scientificresearch.It is ironic that these fiscal constraints on public funding for scientific research have emerged atexactly the same time as a number of public commentators point to the expanding role ofknowledge as a source of value in the information–intensive economy. Since the late 1960s,the phrase ‘post-industrial’ or ‘information’ society has been used to characterize this neworder. Central to it is the generation of knowledge and the processing of information as asource of innovation and growth in capitalist economies. Peter Drucker provides a ratherdramatic statement of this view, “the real, controlling resource and the absolutely decisive‘factor of production’ is now neither capital nor land nor labour. It is knowledge.”(1993, p.6).This theme has been taken up in a number of recent policy documents. In the policy paper, ANew Framework for Economic Policy, released in November, 1994 as part of the Agenda forJobs and Growth, the Department of Finance stated: “In the advanced countries, information isreplacing energy and raw materials as the key resource in the creation of economic value. Amicrochip, a new drug, or a piece of software has almost no material value. These productsare the pure embodiment of information, here in the form of highly specialized knowledge”(Government of Canada 1994a). It was repeated in the federal government’s strategy paper,Science and Technology for the New Century, released in March, 1996, “Today, knowledgeand information — their applications and technologies — are at the root of the economic andsocietal shift now underway” (Government of Canada 1996, p. 3).The same theme is prominent in current work of the Organisation for Economic Co–operationand Development, which now labels the emerging economic order as ‘the knowledge–basedeconomy’. The OECD recently proclaimed that the adoption of the label, ‘theknowledge–based economy’ reflects a growing recognition of the role played by knowledgeand technology in economic growth. As such, the OECD economies are becoming moredependent on the production, distribution and use of knowledge than ever before, both in thehigh–technology manufacturing industries and in the rapidly growing, knowledge–intensive2

The Socio-Economic Importance of Scientific Research to Canada Page 3© David A. Wolfe and Ammon Salterservice industries. At the centre of this emerging economy, and critical to both its productionand use of knowledge, is the science system, “A country’s science system takes on increasedimportance in a knowledge–based economy. Public research laboratories and institutions ofhigher education are at the core of the science system, which more broadly includesgovernment science ministries and research councils, certain enterprises and other privatebodies, and supporting infrastructure” (1996, p. 237).Despite these assertions about the role of knowledge in the emerging economy, the exactrelationship between public support for scientific research and the level of economicperformance and social well–being remains more a matter of affirmation, than a set of factsbased on measurement and analysis by science policy researchers. There are several reasonsfor this uncertainty relating to the nature of knowledge, government programs, and theinnovation process. The postwar consensus on the benefit of investing in basic research failedto produce a clear methodological or empirical approach for gauging its benefits. Researchersare confronted with the near impossible task of measuring a process that is characterized byheterogeneity, subtlety, and multiple causality. Most economic studies have attempted tomeasure statistical correlations between inputs, such as the level of public funding for researchand development, and various economic outputs. Science policy studies, on the other hand,have tried to understand the detailed dynamics underlying the relationship, drawing onsurveys, bibliometrics, and case studies. Both approaches have failed to generate simpleevidentiary measures of the relationship between government–funded research and economicperformance.In this report, we situate these issues in the context of current debates about science andtechnology policy in Canada. We review the results of empirical research into the relationshipbetween public funding for scientific research and the level of economic performance. Ourreport surveys several recent reviews of the economic benefits of publicly–funded research (USOffice of Technology Assessment 1986, David et al. 1992, Smith 1991, Popper 1995, Swann1996, Martin et al. 1996). These reviews conclude that government funding of basic researchhas substantial benefits for industrial performance, but the size or location of the benefits mayvary considerably among sectors, firms, and areas of government activity. They underline thedifficulties encountered by economists and science policy researchers in developing simple andclear measurements of the benefits. All suggest the need for caution in evaluating the work inthis field, given the preliminary, limited, and, sometimes, even misleading, nature of theevidence presented to date.3

The Socio-Economic Importance of Scientific Research to Canada Page 4© David A. Wolfe and Ammon SalterAfter assessing the various attempts that have been made to measure the social and economicreturns to publicly–funded scientific research, we draw together a composite list of benefits.We suggest that public support for basic research should best be seen as an investment ingenerating and sustaining a learning capability, which is closely linked to the elements of thescience system described above. The development of a learning capability promotes theformation of skills, networks, and a capacity for technological problem–solving on the part ofa society. Government funding also expands the pool of technological opportunities availablefor firms to draw upon in their process of innovation and offers institutional support to thesefirms as they draw from the pools. In the last section, we compare the insights derived fromour analysis with the recent experience in Canada and assess recent trends in the state of publicsupport in Canada for scientific research and its implications for the future economic and socialwell–being of the country.THE CONTEXT FOR SCIENTIFIC RESEARCH IN CANADAQuestions about the relative status and contribution of publicly–funded research in Canadamust be situated within the context of the current debate over the federal government’s role inscience and technology policy. This debate has been framed, in part, by the expectationsgenerated in the science and technology community by the results of the 1993 federal electionand by the subsequent S&T policy review launched by the new government. The LiberalParty’s policy platform, released at the outset of the 1993 campaign, the famous Red Book,noted the importance of innovation in the new ideas–based economy. It emphasized thedynamic role of small and medium–sized enterprises in a growing economy, the need torevitalize the manufacturing, resource and service industries, and to enhance the idea–basedsectors of the economy, and the importance of supporting the communities in which thesebusinesses are grounded. It emphasized the need to move research results from the lab to themarketplace more effectively and to help Canadian business adopt and use new technologymore effectively.Many of the themes raised in the Red Book were repeated in the consultation documents forthe federal government’s Science and Technology review launched the following year. Theopening sentences of the consultation document echoed some of the themes outlined in theintroduction to this paper, “Knowledge is becoming the most important factor contributing tothe health of the economy. It is the essential ingredient permitting people and investment tobecome more productive” (Government of Canada 1994b, p. 2). However, the consultationdocument also took note of the critical challenge facing Canadian S&T policy — the need toovercome our historically low level of investment in knowledge intensive–activities. It4

The Socio-Economic Importance of Scientific Research to Canada Page 5© David A. Wolfe and Ammon Saltercommented that, “Canada’s investment in research and development, about 1.5 percent ofCanada’s gross domestic product, remains proportionately lower than that of all other Group ofSeven (G–7) most developed countries, except Italy” (Government of Canada 1994b, p. 3).These themes are not new — they have been an integral part of the debate around science andtechnology policy in this country since the mid–1960s. Numerous advisory reports since the1960s have urged government to take the lead in improving the country’s investment in scienceand technology–related activities. While they did not always agree on the source of theproblem, nor the most effective means to overcome it, these reviews generated a large numberof incremental changes, both in institutional structures and policy initiatives over the past twodecades. Nonetheless, the basic challenge remains unmet while ongoing developments in theinternational context for science and technology intensify the pressure to improve ourperformance. 1However, the S & T Review also signaled some additional problems arising from the pressureon government to manage its fiscal resources more effectively. The consultation documentindicated a number of concerns about the direction and benefits flowing from the federalgovernment’s $7 billion in spending in this area. 2 It noted that at a time when all governmentsmust exercise discipline in their spending, the federal government needed to ensure that itsS&T activities were generating the maximum return for its social, economic and environmentalgoals. It posed two basic questions for the review: “First, given current needs, what shouldCanada do in the area of science and technology?” and “Second, given these nationalpriorities, is the federal government doing the best it can with the resources it has?”(Government of Canada 1994b, p. 8).In a subsequent part of the document, the government expanded on these themes with a moredetailed set of questions. It noted the need for the federal government to be able to set clearpriorities for the effective management of its investment in science and technology. In order todo this, it needed a clear delineation of the components and characteristics of Canada’s nationalsystem of innovation. It needed an effective assessment of the state of the country’s scienceand technology infrastructure. It also required a clear set of criteria to guide the prioritysetting among the competing investments in science and technology with the potential to create1For a useful overview of many of the themes and issues raised in these reports, cf. Dufour, 1994.2The composition of this spending is considered in more detail in the last section of the paper.5

The Socio-Economic Importance of Scientific Research to Canada Page 6© David A. Wolfe and Ammon Salterwealth and generate employment in the coming decades. It needed to deal with the issue ofmeasuring results from its investments in science and technology. And it needed to assess thecontribution made by Canada’s colleges and universities to the achievement of our science andtechnology objectives (Government of Canada 1994b, pp. 13-15).The consultation document made little reference directly to the role of scientific research in ournational innovation system or the federal government’s science and technology policy;however, the questions it posed conveyed grave implications for the current system offinancing and conducting basic research. Implicitly, it questioned whether our system of basicresearch should continue to occupy the privileged position within the innovation system that ithas traditionally been afforded. Is the level of public investment in basic research justified bythe economic and social benefits produced? How should these results be judged or evaluated?And, implicitly, it questioned whether an investment of the same level of funds in otherelements of the national innovation system would produce a higher level of benefits? Thesequestions pose a serious challenge for the current system of conducting basic scientificresearch. As we noted at the outset, the state of the literature does not provide us with readyanswers to these questions. Nonetheless, it does afford a wealth of insights into some of thesequestions and suggests a number of ways to evaluate the contribution that our investment inbasic scientific research makes to the economic and social well–being of the country. Thebody of this report presents a survey of the insights derived from these studies.THE ECONOMICS OF PUBLICLY–FUNDED SCIENTIFIC RESEARCHMuch of the problem in assessing the social and economic benefits of publicly–funded researchstems from the limitations of the models used to evaluate those benefits, including theirinability to distinguish broader social outcomes from the narrower, and more quantitative,economic ones. The traditional view of the economic benefits derived from governmentsupport for scientific research argues that government action serves to correct a market failure.The language of market failure, rooted in neoclassical economic theory, is based on theassumption that a purely market relation would produce the optimal situation and thatgovernment policy should be limited to redressing situations where market failures develop.As Metcalfe points out, this is a very demanding task to impose on policy–makers. Hesuggests that an approach based purely on the notion of market failure is insufficient fordealing with the case of science and technology policy. From this perspective. . . future markets for contingent claims in an uncertain world do not exist in any sensesufficiently for individuals to trade risks in an optimal fashion and establish priceswhich support the appropriate marginal conditions. Because the appropriate price6

The Socio-Economic Importance of Scientific Research to Canada Page 7© David A. Wolfe and Ammon Salterstructure is missing, distortions abound and the policy problem is to identify andcorrect those distortions. [Yet] the innovation process both generates and is influencedby uncertainty and this aspect of market failure is particularly damaging to thepossibility of Pareto efficient allocation of resources to invention and innovation . . . .[T]hus innovation and Pareto optimality are fundamentally incompatible (1995, p. 4).Metcalfe offers the evolutionary approach as an alternative for analyzing and prescribing in thecase of government–funded basic research. In evolutionary theory, the focus of attentionceases to be “market failure per se and instead becomes the enhancement of competitiveperformance and the promotion of structural change” (1995, p. 6). 3 The broader perspectiveafforded by evolutionary theory, with its focus on both the public and private dimensions ofthe innovation system, is a more promising approaching (Nelson 1995). 4Using this distinction between the market failure approach and that offered by evolutionaryeconomics, we can distinguish between the type of analysis and the implications that followfrom each. The old approach, based on the theory of market failure, tends to focus on theimportant role of information in economic activity. Drawing on the work of Kenneth Arrow,it underlines the informational properties of scientific knowledge, suggesting that thisknowledge is non–rival and non–excludable (1962). Non–rival means that others can use theknowledge without detracting from the knowledge of the producers and non–excludable meansthat other firms cannot be stopped from using the information. In this sense, the main productarising from government–funded scientific research is seen to be economically usefulinformation, freely available to all firms in a non–exclusionary fashion. By increasinggovernment funding for basic research, it is deemed possible to expand the pool ofeconomically useful information available for industrial firms to draw upon. This informationis seen to be durable, freely available, and costless to use. Government funding overcomes thereluctance of firms to fund their own research (to a socially optimal extent) due to itsnon–appropriability; new packets of economically–useful information are created; and thedistribution of this information enhanced through the tradition of public disclosure in science.Relatively few economists would support the purely informational approach today in anunamended fashion. Yet, in much of the economic writing on the relationship between3 For an evolutionary perspective on science and technology policy, cf. Nelson 1993, Lundvall 1992, and Edquist 1997.4 The market failure argument is misleading because it presumes the presence of a market relation where often none exists. As Karl Polbecome institutionalized in societies over time. They do not just come into existence through the agency of some external force; rather,both public and private actions (1957).7

The Socio-Economic Importance of Scientific Research to Canada Page 8© David A. Wolfe and Ammon Salterpublicly–funded research and economic growth, there remains a presumption of theinformational properties of basic research. For example, Adams developed a series of industrymeasures of the stock of knowledge by looking at articles in public journals and theemployment of scientists. He found a twenty to thirty year gap in the uptake of scientificpapers (the knowledge stock) to productivity growth, as the number of papers produced byresearchers fell over time. He suggested that the decline in the productivity of scientists andthe subsequent fall in the stock of knowledge (measured by total papers) was related to theSecond World War and speculated that 15 per cent of the economic slowdown in the 1970scould be explained by this earlier decline in the knowledge stock (Adams 1990, p. 699).The evolutionary approach to the economics of publicly–funded research suggests that theinformational view of knowledge substantially undervalues the extent to which knowledge isembodied in specific researchers and the institutional networks within which they conduct theirresearch. It compounds this error by misreading the nature of the innovation process. AsRosenberg states, the information–based view tends to regard scientific knowledge as being“on the shelf, costlessly available to all comers” (1990, p. 165). But this view fails toappreciate the extent to which scientific or technical knowledge requires a substantial capabilityon the part of the user. To paraphrase the OECD, knowledge and information abound, it is thecapacity to use them in meaningful ways that is in scarce supply (1996, 231). Often thiscapacity is expensive or difficult to acquire and maintain (Pavitt 1991, p. 112; Cohen andLevinthal 1989). In an influential survey, Cohen and Levinthal suggest that one cancharacterize the R&D of firms as having two faces: R&D both allows the firms to create newpools of knowledge and it enhances their ability to assimilate and exploit existing knowledge. 5They refer to this second dimension as the firm's absorptive capacity.In many respects, the informational view of scientific research closely parallels the linearmodel of innovation which predominated in studies of technological innovation during thepostwar period. The linear model has its roots in debates in the UK in the 1930s over theappropriate role of science policy. One side stressed the need for autonomy andself–governance on the part of the scientific community in the conduct of scientific research;while the other argued the need for a more targeted and publicly–directed approach toscientific research. The former view was adopted in Vannevar Bush’s famous report toPresident Truman, Science: The Endless Frontier (1945), that established the guidingprinciples for much of postwar US science policy. The linear model conceived of innovation5 In their paper, Cohen and Levinthal refer to information rather than knowledge. We have replaced information with knowledge here to8

The Socio-Economic Importance of Scientific Research to Canada Page 9© David A. Wolfe and Ammon Salteras a process of discovery that proceeds in a clear fashion from scientific discovery totechnological change in terms of new product and process development, production, marketingand ultimately, the sale of those products and processes. According to Harvey Brooks,This simplistic model, though increasingly challenged by scholarly research, has had animportant and persistent influence on the organization and management of innovation inthe United States until recently. It still provides a plausible description for many of theradical paradigm–shifting technological innovations during the cold war period, notonly in defense but also in a number of other commercial areas. The most classic caseis the development of nuclear weapons and nuclear power . . . , but other examplesinclude the transistor, the laser, genetic engineering, and many biomedical technologies(1996, 21; cf. also US Office of Technology Assessment 1995, pp. 32–35).As appealing as this model was in its simplicity, and despite the examples cited above thatseemed to provide confirmation for it, it does not bear up well under closer scrutiny.Nathan Rosenberg points out that the image of science leading in a unidirectional chain ofcausation toward new products and processes is simply inaccurate in historical terms (1976).Much of the activity of science owes its course to prior developments in technology or theproductive sphere. For example, the Wright Brothers developed the first airplane without anunderstanding of aerodynamic theory and Chester Carlson developed the first xerographiccopier without a thorough understanding of photoconductive materials. In these cases,however, the line of development leads in the opposite direction to that posited by the linearmodel: these inventions triggered considerable scientific research into aerodynamic theory andmaterials science (US Office of Technology Assessment 1995, p. 21). The technologies thatare developed in the form of new products and processes are not simply an ‘applied’ science.Engineering technology is its own form of knowledge and a critically important one at that (cf.Vincenti 1990). The relationship between publicly–funded research and economic performancemay flow in the opposite direction to that suggested by the linear model and the informationalapproach of neoclassical economics. Rather than flowing from science to technology toproducts and processes, it often goes from production problems to technology to science, in thereverse order of causation posited by the linear model (Martin et al. 1996).Figure 1 about hereThe alternative approach based on evolutionary economics has generated two new strands ofresearch. The first strand suggests that despite the poverty of the old approach,publicly–funded research can still usefully be seen to represent information. Information isseen as codified knowledge, i.e. knowledge which is written down or made explicit. This9

The Socio-Economic Importance of Scientific Research to Canada Page 10© David A. Wolfe and Ammon Salterapproach stresses the informational properties of science discussed above, while at the sametime recognizing the criticisms enumerated by Rosenberg and others. For example, Dasguptaand David see the informational properties of science as a powerful analytical tool for studyingthe payoffs to publicly-funded basic research. Through information theory, Dasgupta andDavid suggest it is possible to develop a new economics of science, focusing on themechanisms engendered by information's public good properties. This new economics ofscience focuses on changes in the properties of knowledge brought about by new developmentsin information and communication technologies, such as the Internet. It suggests that thesenew technologies allow for an expansion of the informational or codified component ofscientific knowledge. It calls on policy makers to focus on expanding the distributive power ofthe innovation system through new information resources, such as electronic libraries(Dasgupta and David 1994, David and Foray 1995).The second strand in the new approach focuses on the properties of knowledge not easilycaptured by the information view described above. Influential here is the work of Pavitt andRosenberg, who stress that scientific and technological knowledge often remains tacit, i.e.people may know more than they can say (Rosenberg 1990, Pavitt 1991). 6 Moreover, thedevelopment of such tacit knowledge requires an extensive personal learning process. It isbased on skills accumulated through experience and expertise and often through years of effort.This perspective places great emphasis on the learning properties of individuals andorganizations. Apprehending the learning capabilities generated by public investments in basicresearch makes it possible to appreciate the economic benefits of such investments, Pavittsuggests (1991, p. 117). Of crucial importance in this approach are the role of skills, thenetworks of researchers, and the development of new capabilities on the part of actors andinstitutions in the innovation system. The approach we follow in this report owes much moreto the second strand of research than the first. The information–theoretic approach, developedby Dasgupta and David (1994), is still quite new and has yet to be validated by empiricalresearch, whereas the Rosenberg/Pavitt approach is grounded in a solid body of research inscience policy studies. At present, it offers a more productive line of inquiry into the issuesunder discussion.6 The concept of tacit knowledge originates in the work of the philosopher of science, Michael Polanyi, whodistinguishes between the two dimensions of knowledge - tacit and explicit (1966). For a stimulating application ofthis concept in the recent literature on innovation, cf. Nonaka and Takeuchi (1995).10

The Socio-Economic Importance of Scientific Research to Canada Page 11© David A. Wolfe and Ammon SalterMETHODOLOGICAL APPROACHES:There are three major methodological approaches that have been used to study the benefits ofpublicly–funded scientific research: 1) econometric studies; 2) surveys, and 3) case studies.Econometric studies focus on large scale patterns. They have proven to be an effective tool forproviding an aggregate picture of statistical regularities among countries and regions. Allmeasures of the social rate of return to research and development (R&D) have relied oneconometric techniques, for example. These econometric approaches, however, can also bemisleading. They often work with simplistic and unrealistic assumptions about the nature ofinnovation, such as using R&D spending as a proxy for innovation. It is also very difficult totrace the benefits of the publicly–funded bit of information or technology through the processof innovation and commercialization. “Since such transfers are not priced or sold and arerarely adequately recorded by other means, the extent of their application remains unknown. . .. It is therefore very difficult to establish what contribution (government funded R&D) makesto the development of a technology (or product) merely by measuring the total funds spent atthe basic research stage and then looking at subsequent outcomes.” (Martin et al. 1996, p. 7)The use of surveys has opened up a productive line of new research in this area. They offer apicture of the extent to which government–funded research constitutes a source of newinnovative ideas for firms. Surveys have been used to examine how different industries drawupon the supply of publicly–funded scientific research and they have helped researchersunderstand the way in which different industries draw upon the research results of differentscientific fields. In this report, we make reference to surveys conducted in the US, theEuropean Union and Canada (Klevorick et al. 1995, Arundel et al. 1995, Baldwin and Da Pont1996). Surveys suffer several handicaps, as well. Survey respondents, usually industrial andresearch managers, have an innate bias towards the internal activities of their own firms.Respondents often have a more limited knowledge of their sectors, technologies, and even firmhistory. Moreover, survey questions often force respondents to rate different areas of a firm'sactivities against each other, though, in reality, they may be interrelated.Case studies and interviews afford the best tool to directly engage actors in the innovationprocess and to gain a better understanding of the historical roots of a particular technology orgovernment program (Freeman 1984). Case studies generally provide strong support for theresults reached by the econometric studies and survey techniques. For example, the TRACESstudy by the National Science Foundation showed the substantial influence ofgovernment–funded technologies in key sectors of the US economy (Illinois Institute ofTechnology Research 1968). The use of case studies is limited, however, by the factors ofcost, time, and vision. They are expensive to administer; often demand quite extensive11

The Socio-Economic Importance of Scientific Research to Canada Page 12© David A. Wolfe and Ammon Salterinvestments of time for analysis and data collection; and by focusing on a particulartechnology, sector, or group of firms, they depict a narrow picture of reality.THE RELATIONSHIP BETWEEN GOVERNMENT–FUNDED RESEARCH AND ECONOMIC GRO WTHEconometricians have made several attempts to calculate the portion of economic growth thatcan be accounted for by technological innovation, in general, and government–funded scientificresearch, in particular. We first review the attempts to account for the role of technology ingrowth and then focus more directly on the results for government–funded research. Theeconometric attempts to account for the role of technology adopt the technique of ‘growthaccounting’, which focuses on the contributions of various factors of production, such aslabour and capital, to economic development. In these models, growth takes place through thesubstitution of different factors of production for each other. Most growth models focus on thesubstitution of labour by capital, suggesting productivity growth occurs through the steadyreplacement of labour by fixed capital investments.Early growth models said almost nothing about technological change, however. Solow andother pioneers of growth accounting techniques treated technology largely as a residual, or thatportion of growth which could not be explained after labour and capital inputs were tabulated.The residual was labeled ‘technical change’ (Solow 1957, Abramovitz 1986). Technicalchange was deemed to be part of the general productivity increase and played no independentrole in explaining growth. As a consequence, these early models said little if anything, abouttechnology or the economic benefits of publicly–funded research (Martin et al. 1996).Newer models in growth theory have tried to account for technology more directly. PaulRomer's contribution to the field has spawned a new generation of research (1990). Thesemodels remain somewhat simplistic in their treatment of technology, however (Verspagen1993). They suggest that by introducing a variable for ‘technical progress’ into the models, itis possible to directly account for the proportion of growth created by technologicaldevelopment. The models vary in their conclusions, but all suggest a key role is played bytechnology in generating and sustaining economic development (Grossman and Helpman 1991,Aghion and Howitt, 1995, Romer 1994, Lucas 1994). However, they usually rely onsimplifying assumptions about the properties of information or technology, such as itsdurability, and use misleading statistics to measure innovation, such as taking R&D spendingas a cause of innovation. As yet, the models have not been able to develop a reliable indicatorof the benefits derived from publicly–funded basic research. They are more effective in12

The Socio-Economic Importance of Scientific Research to Canada Page 13© David A. Wolfe and Ammon Saltershowing that technology (however measured or treated) does play a substantial role in thegrowth of private sector firms (Verspagen 1993).Zvi Griliches has stressed that the relationship between technological change and economicgrowth remains problematic for economic research. It is difficult to find a set of usefulindicators of technological and economic performance. Moreover, these indicators are hard tocombine with the econometric problem of drawing inferences from non-experimental data(1995, p. 52). It has also been difficult for economists to develop a realistic model to explainthe links that do exist. As Richard Nelson points out, the models do not describe the linkbetween publicly–funded basic research and economic performance in a direct way; theysimply look at inputs (such as patents) and then outputs (firm sales) without probing theprocess (Nelson 1982).Measuring the Social Rate of Return to Investments in Basic Research:Most studies of the social and private rate of return to publicly–funded research stress thepositive rates of return. What, however, is a private and what is a social rate of return onbasic research? Private rates of return refer to the return on investments in research that flowfrom the success of the individual research project. Social rates of return to research, incontrast, have “benefits which accrue to the whole society” (Smith 1991, p. 4). The differencebetween the two stems from the simple fact that frequently the results of a specific researchproject, or even a firm–based innovation, do not accrue entirely to one firm. The scientificbenefit of a piece of basic research may be appropriated by more than one firm, or imitatorsmay flood into the market and replicate the new product or technology developed by a specificfirm, without having to shoulder the substantial cost of the original research. However, bylowering the costs incurred in developing new technologies or products through investing inthe inputs, ie. the basic research, publicly–funded projects generate a broader social benefit.Because of this difference, estimates of the private rate of return to research and developmenttend to be much lower than those for the social rate of return (Mansfield 1996, pp. 118–119).This difference underscores the necessity of estimating the social rates of return forinvestments in scientific research, despite the methodological problems involved.Estimates of social and private rates of return to privately–funded R&D vary between 20 and50 per cent (Griliches 1995, p. 56). These estimates are summarized in Table 1. In a surveyarticle, Hall suggested the gross rate of return on privately–funded R&D in the United States is33 per cent. If the computing sector is removed then the rate of return falls to 12 per cent.Hall suggests that the private return to R&D spending is not as profitable as it once was and13

The Socio-Economic Importance of Scientific Research to Canada Page 14© David A. Wolfe and Ammon Salterthat there may be a secular decline in the effect of science on productivity (Hall 1994). Theuse of firm-level R&D spending statistics is a limited approach to understanding the economicbenefits of investments in innovation. The vast majority of manufacturing firms in Canada dono formal R&D (Baldwin and Da Pont 1996). R&D spending is only a small portion of asociety's investment in activities that generate innovation. Many process innovations are theresult of ‘grubby and pedestrian’ incremental processes at work within the firm. Theseinnovations are rarely captured by figures for R&D spending at the firm-level (Rosenberg1985, p. 12). Moreover, Dennison has suggested that R&D accounts for only 20 per cent ofall technical progress (Dennison 1985). Studies such as Hall's, that rely on R&D spending atthe firm level, have to be analyzed in light of these empirical limitations.Table 1. Estimates of Private and Social Rates of Returns to R&D SpendingStudies Private Rate of Return Social Rates of ReturnMinnasian (1962) 25Nadiri (1993) 20 - 30 50Mansfield (1977) 25 56Terleckyj (1974) 27 48-78Sveikauskas (1981) 10-23 50Goto-Suzuki (1989) 26 80Mohnen-Lepine (1988) 56 28Bernstein-Nadiri (1988) 9-27 10-160Scherer (1982, 1984) 29-43 64-147Bernstein-Nadiri (1991) 14-28 20-110Source: Griliches 1995, p. 72Until recently, few attempts had been made to measure the rates of return to publicly–fundedresearch and development. Most studies have focused on government–sponsored R&Dprojects and not basic research. The various attempts made to determine a rate of return onpublicly–funded research have been largely unsuccessful (US Office of Technology Assessment1986, p. 14). The limited evidence gathered to date indicates that publicly–funded basicresearch has a positive payoff, although this pay–off is low in comparison to private rates ofreturn. Table 2 summarizes the results of some of these studies. 77 Many authors of the studies listed in Table 2 caution readers about the va lue of the num erical results offered intheir own studies. For example, Link states "readers should refrain from a strict interpretation of the numericalfindings presented here” (Link 1982).14

The Socio-Economic Importance of Scientific Research to Canada Page 15© David A. Wolfe and Ammon SalterThe studies cited in Table 2 focus on relatively ‘successful’ examples of government programs.They infer that “no alternative method could have generated the economic returns associatedwith the products and processes attributed to the basic research in question. . . . mosteconomists would find this assumption to be an uncomfortable one, inasmuch as there are fewnew products and processes completely lacking substitutes” (David et al. 1992, p. 77). Thecosts and benefits of government–funded projects need to be compared with the costs andbenefits of alternative solutions, according to Paul David and his collaborators. Tracing thebenefits of a particular project involves a retrospective look back at a technology and does nottake into account expenditures and investments made in complementary assets needed to bringthe technology to market (Teece 1986). One consequence of this tunnel vision is that theresulting measures of return on investment may significantly underestimate the costs oftechnological development.Using industry–level productivity growth rates as an indicator of the social rates of return togovernment–funded basic research is also problematic. Studies using this method demonstratea statistically significant impact for government–funded basic research on productivity growthat the sectoral level. However, most of these studies have relied on a high degree ofaggregation, rarely controlling for inter–industry differences. “Moreover, they do not revealhow the economic returns of basic research (and development) are [actually] realized” (Davidet al. 1992, p. 79).Table 2. Estimates of Rates of Return to Publicly Funded R&DStudies Subject Rates of Return to Public R&D(%)Griliches (1958) Hybrid Corn 20-40Peterson (1967) Poultry 21-25Schmitz-Seckler (1970) Tomato harvester 37-46Griliches (1968) Agricultural Research 35-40Evenson (1968) Agricultural Research 28-47Davis (1979) Agricultural Research 37Evenson (1979) Agricultural Research 45Davis and Peterson (1981) Agricultural Research 37Huffman and Evenson (1993) Agricultural Research 43-67Source: Griliches 1995 and US Office of Technology Assessment 198615

The Socio-Economic Importance of Scientific Research to Canada Page 16© David A. Wolfe and Ammon SalterOther econometric studies in this area have reached some intriguing additional conclusions.Link and Rees suggest that small firms take advantage of university research more effectivelythan large firms (1990). Hall has also shown that the major impact of publicly–funded basicresearch may be to increase a firm's own R&D spending (1994).Despite the problems encountered with this line of research, Mansfield has made the mostsubstantial contribution to these attempt to measure the benefits of basic research. His studiesfocus on recent academic research, i.e. research occurring within fifteen years of thecommercialization of whatever innovation is being considered (Mansfield 1991, p. 1). Using asample of 75 major American firms in seven manufacturing industries (information processing,electrical equipment, chemicals, instruments, pharmaceuticals, and metals and oils), heobtained estimates from R&D managers about what proportion of the firm's products andprocesses over a ten year period could not have occurred without the results of the academicresearch. The survey results suggest that about 11 per cent of these firms’ new products and 9per cent of their new processes could not have been developed without substantial delay in theabsence of the academic research. These percentages of products and processes accounted for3 per cent and 1 per cent of sales respectively for the firms concerned. Mansfield alsomeasured those firms’ products and processes which were developed with ‘substantial aid’from recent research (last fifteen years). He suggests that 2.1 per cent of sales for newproducts and 1.6 per cent of new processes would have been lost in the absence of theacademic research.Mansfield concludes that the economic benefits of academic research are spread over sevenyears. By the eighth year, such research would have been realized by the firms themselves.These benefits accrue only to American firms and they provide benefits to only the innovatingfirm. Using these figures, Mansfield estimates the benefit from academic research to be 28 percent. The figure represents “the present value of the stream of benefits associated with theresearch equal to costs. (In other words, it is the annual profit rate on society's investment inacademic research)” (Mansfield 1991, p. 10; cf. also 1996).Mansfield admits to the limitations of his approach: the time lag is short (fifteen years); nobenefits accrue to firms outside the US; there are no indirect benefits of research, such asskilled researchers; the estimates rely on the opinions of large firm managers; and they do not16

The Socio-Economic Importance of Scientific Research to Canada Page 17© David A. Wolfe and Ammon Salterconsider the full costs of commercialization (US Congressional Budget Office 1994, p. 15). 8The most important failing of his approach is that it offers only a social rate of return, not amarginal rate. It can not inform policy makers about the marginal benefits of adding fundingto research or development. “In this sense, these studies (including Mansfield's) offer littleguidance for policy makers, other than by stressing the importance of investments in basicresearch in general” (US Office of Technology Assessment 1986, p. 4). “Like many costbenefitcalculations, it is more useful as an ex post rationale for historical public researchinvestments, rather than as a criterion for future investments” (David et al. 1992, p. 79).The figures generated by Mansfield’s studies are also hard to compare with other financialfigures on rates of return. If the benefits of investment in R&D are so high, then, why dogovernments and firms not invest more in research? The lack (from a social point of view) ofinvestment might be related to the risk of R&D. More likely, however, these estimates can notbe realistically compared with the estimates for other rates of return, such as that on capitalequipment. They do not provide a meaningful yardstick to measure such benefits, but merelysuggest that there are some considerable benefits arising out of past investments by governmentin publicly–funded basic research.A new approach to evaluating the benefits of publicly–funded scientific research is found in thework of Narin et al. They measured the academic citations in US patents to conclude that overthe past six years there has been a tripling in the knowledge flow from US science to USindustry. Their study is based on an analysis of the front pages of over 400,000 US patentsissued between 1987 and 1994. Narin et al. traced the 430,000 non–patent citations containedin these patents. Of these 430,000 non-patent citations, 175,000 were references to paperspublished in the 4000 journals covered by the Science Citation Index (SCI). They undertook alibrary search of 42,000 matched papers with at least one US author. They located thesepapers and were able to determine the sources of US and foreign research supportacknowledged in the papers.Using this methodology, they demonstrated a secular increase across countries (UK, France,German, and Japan) in citations of science in patent records. Patents also tend to cite theirown country's papers two or three times more often than expected, when adjusted for the size8 In a review of Mansfield's work the Congressional Budget Office suggested that such an approach is misleading for policy-makers. Mmakers as they allocate research funding or even determine the amount of funding devoted to R&D (CBO 1994). However, this criticisfrom citing Mansfield's work as a justification for an increase in basic research funding.17

The Socio-Economic Importance of Scientific Research to Canada Page 18© David A. Wolfe and Ammon Salterof a country's scientific publications. Of the institutions cited in the patent records, AT&TLabs and IBM were among the most frequently cited. Large US funding agencies were alsohighly listed as sources of funding for the citations included in the patents. Narain et al.suggest that this indicates a strong reliance by US industry on the scientific results of researchfunded by the public sector.This study suffers from a serious limitation in its research methodology. Patent citations aremade by both the firms submitting the patent application and the patent review officer at theUS patent office. The researchers made no attempt to differentiate between these two sourcesof citations. It may be that the increase of citations in US patents simply reflects a policy atthe Patent Office to promote academic citations. It could also reflect the availability of newCD–Rom's at the Patent Office listing academic papers by subject which has led to the massiveincrease in academic citations. The tremendous increase — three fold over six years —indicates that there may be more going on here than Narin et al. acknowledge in their study. Itis questionable whether there could have been such a shift in the relationship between USindustry and science over such a short period of six years (Narin et al. 1997).Spillovers and Localization:One of the most prominent lines of recent research into the benefits of publicly–fundedresearch has been that investigating the spillovers from government funding to other types ofactivities, such as industrial R&D. The existence of these spillovers augments the productivityof one firm or industry by expanding the general pool of knowledge available to it. There aretwo main forms of spillovers identified in the literature: 1) geographical spillovers and 2)spillovers across sectors and industries (Griliches 1995).Geographical spillovers imply benefits for firms located near research centres, other firms, anduniversities. Evidence from bibliometric studies indicate a strong tendency for basic researchto be localized. Katz has shown that research collaboration within a country is stronglyinfluenced by geographical proximity. As distance increases, Katz found that collaborationdecreased. This indicates that research collaboration often demands face–to–face interaction(Katz 1994). Hicks et al. also found that research across countries is localized (Hicks et al.1995). At a regional level in Canada, Godin and Ippersiel found that papers published inMontreal tend to be cited by other papers published in the city as opposed to papers publishedin other parts of Quebec (1995).18

The Socio-Economic Importance of Scientific Research to Canada Page 19© David A. Wolfe and Ammon SalterIn a seminal work, Jaffe attempted to measure geographical spillovers in the US. He employeda three equation model (one for patenting, one for industrial R&D, and one for universityresearch), based on 29 states from 1972-1977, 1979 and 1981. Using patents as a proxy forinnovative output, he related the incidence of patents assigned to various corporations indifferent US states over time with industrial R&D and university research. 9 His resultsdemonstrate that there are spillovers from university research and industrial patenting. Thereis also an association between industrial R&D and university research at the state level. Itappears university research encourages industrial R&D, but not vice-versa (Jaffe 1989). In asimilar study, Acs et al. found that the spillovers between university research and innovation isgreater than Jaffe has described (Acs et al. 1991, p. 366). 10 Feldmann and Florida developed afour variable model (distribution of university research, industrial R&D expenditures,distribution of manufacturing, and distribution of producer services) to test for geographicalcoincidence. Using the same data as Acs, the model showed that geography does matter in theprocess of innovation, as the variables are highly correlated to one another. 11This of strand research is also confirmed in the work of Edwin Mansfield, referred to above.Using a survey of 70 major US companies, Mansfield and Lee found that. . . distance also helps to determine which firms reap the economic benefits from aninnovation based on academic research. While economists and others sometimes assumethat new knowledge is a public good that quickly and cheaply becomes available to all,this is far from true. According to executives from our sample, firms located in thenation and area where academic research occurs are significantly more likely than distantfirms to have an opportunity to be among the first to apply the findings of this research(Mansfield and Yee 1996, p. 1057)Firms located close to major centres of academic research are deemed to have a ‘majoradvantage’ over those located at a distance from the academic source of research (1996, p.9 Jaffe employs a ‘knowledge production function’ model, which shares some of the limitations discussed above. Academic research andindustries: i) drugs and medical technology; ii) chemical technology; iii) electronics, optics, and nuclear technology; iv) mechanical arts10 The Acs et al. study is based on a database of innovation counts prepared by the US Small Business Administration in 1982. The datinnovations for one year (1982) by city and state. Such databases are inherently subjective because they rely on innovations cited in teca limited number of product innovations for one year. The date of the database collection also raises questions about the accuracy of thover the past 15 years.11 "In the modern economy, locational advantage in the capacity to innovate is ever more dependent on the agglomerations of specializeresources that make up the underlying technological infrastructure (of a place)" (Feldmann and Florida 1994, p. 12).19

The Socio-Economic Importance of Scientific Research to Canada Page 20© David A. Wolfe and Ammon Salter1057). The major limitation of this study is that it is based on a narrow sample of firms andonly asks these firms to list the five most important academics for their firm's activities. 12Recent work in economic geography also stresses the continuing importance of geographicalagglomerations and locational spillovers. Saxenian's study of Silicon Valley and Route 128suggests that local institutions (including the research infrastructure) profoundly shape aregion's capacity to innovate. Such institutions are the product of a historical process of firmand institutional evolution (Saxenian 1994). Storper also suggests that the development ofgeographical agglomeration is a result of the personal nature of technological knowledge.Since much of technology is embodied in people and this knowledge is largely tacit, it dependsupon face–to–face interaction. Given uncertainty about the future course of a technology ormarket, firms and individuals tend to cluster together in agglomerations. Firms andindividuals interact with each other in these agglomerations and the form of these interactionsis often untraded. These untraded interdependencies help promote a social atmosphere whichallows individuals to share knowledge and ideas. The resulting interdependencies areplace–specific and context–dependent. They result from a continuous set of interactions amongfirms and individuals as they go about developing technology and solving common problems(Dosi 1988; Storper 1995).The value of geographic spillovers and untraded interdependencies also varies over time. Dosiand Lundvall, in particular, recognize that under certain conditions the territorial dimensionsof these spillovers may take on added significance. This is especially true in situations wherethe pattern of technological development, or technological trajectories (Dosi 1984), are highlyindeterminate — in other words, where a wide range of potential paths of developmentincreases the tacit dimension of the innovation process, thus raising the value of directinteraction in interpreting and applying new types of information. According to Lundvall, thisspatial or territorial dimension of learning is critical in a period of rapid economic andtechnological change associated with a shift in techno-economic paradigm.When the technology changes rapidly and radically — when a new technologicalparadigm develops — the need for proximity in terms of geography and culturebecomes even more important. A new technological paradigm will imply thatestablished norms and standards become obsolete and that old codes of informationcannot transmit the characteristics of innovative activities. In the absence of generally12 For 66 firms, they received 321 names. Using a simple model of distance, Mansfield and Yee found that distance matters. For univeto-good facilities citations were quite low unless they are within 100 miles of the firm. The chance that firms will support R &D at a re mand Yee 1996, p. 1055).20

The Socio-Economic Importance of Scientific Research to Canada Page 21© David A. Wolfe and Ammon Salteraccepted standards and codes able to transmit information, face–to–face contact and acommon cultural background might become of decisive importance for the informationexchange (Lundvall 1988, p. 355).These untraded interdependencies become the collective property of the region and help theregional actors expand their range of activities by drawing one another through their variousand blended set of institutions, conventions, habits, and common infrastructure. The evidencediscussed here suggests that nations and regions need to maintain their own capability inresearch and development. Face–to–face interaction and personal links are essential for theresearch process. “In order to transfer existing forms of knowledge, research performers andusers often need close, personal interaction, given the importance of know-how (i.e. tacitknowledge that cannot be codified). This need to ‘be there’ forces firms and individuals tocongregate in particular localities in order to share and transfer knowledge quickly andeffectively” (Martin et al. 1996, p. 13). 13 Policies designed to support geographicalagglomeration would help facilitate this level of interaction. 14Spillovers are also common among types of research–related activities. “[I]t is assumed thatthe level of productivity achieved by one firm or industry depends not only on its own researchefforts but also on the general pool of knowledge accessible to it” (Griliches 1995, p. 63).Using US patent data, Scherer was able to construct development measures of the direction ofspillovers by classifying a large sample of patents by the industry where the innovationoccurred and by the industry where it was expected to have an impact (1982, 1984). Otherspillover models have used the Canadian patent office date which provides an SIC codedestination for the patent. New work in Europe by Los and Verspagen has expanded thetreatment of spillovers. They looked at the location of patent and paper citations in US patentrecords to determine the degree of spillover of domestic sources of science and technology.They found that spillovers do exist, but they vary among sectors and countries (Los andVerspagen 1996). 1513 An important analysis of the advantage of "being there" has been made by Meric Gertler at the University of Toronto. Looking at crotools, Gertler found that substantial differences in a nation's social and economic institutions act as a barrier for successful technology teconomic systems are embedded in bits of technology. Gertler's work highlights the difficulties Canadian firms have relying on distant stechnology (Gertler 19 95 and 1 996).14 For a fuller discussion of these issues, cf. the treatment in Wolfe, 1997.15 Los and Verspagen’s approach focusing on patent citation records faces the same methodological problems asthat of Narin et al.21

The Socio-Economic Importance of Scientific Research to Canada Page 22© David A. Wolfe and Ammon SalterWork in the new growth theory also highlights the importance of spillovers. New growththeory has focused on the spillover effects of technological development. Growth theoriststend to see spillovers as the main mechanism underlying growth patterns (Romer 1994,Grossman and Helpman 1994). 16 These models suggest that the elaboration of spilloversthrough government institutions may be helpful from a policy perspective (Romer 1990).These models do, however, largely rely on the theoretical elaboration of production functionconcepts and they make limited use of empirical data. Most of these models also focus onindustrial R&D, rather than publicly-funded basic research. These models show thatknowledge and technologies spill over across sectors and fields. It is, however, difficult todevelop useful measures of the extent of these spillovers. Often the links betweengovernment–funded basic research and production are varied and indirect. Simple measures,such as sales or cross patent citations, only capture this spillover to a very limited degree.IDENTIFYING THE BENEFITS OF PUBLICLY–FUNDED RESEARCHDespite the methodological problems in estimating the economic returns to public investmentin basic research and the limitations of the studies discussed above, it is possible to identify thekey contributions that publicly–funded research makes to economic growth (Martin et al.1996). Six main benefits have been identified:1) increasing the stock of useful knowledge;2) training skilled graduates;3) creating new scientific instrumentation;4) forming networks and social interaction;5) increasing the capacity for scientific and technological problem-solving;6) creating new firms.These different benefits are interrelated and overlapping. In the next section, we draw uponrecent research in science policy studies to analyze the benefits that flow from governmentfunding of basic research in each area.Increasing the stock of new knowledge:The traditional justification for the public funding of basic research is that it expands theamount of information available for firms to draw upon in their technological activities.However, this view largely underestimates the substantial effort and costs needed by users totake advantage of this information. The difficulty with the pure information theory of basic16 The case for spillovers is strong but needs to be tempered by an understand of the importance of firm level dynamics. As Rosenbergdevelopment takes place within the firm. External relations among firms, such as spillovers, help to constitute these internal firms dyna22

The Socio-Economic Importance of Scientific Research to Canada Page 23© David A. Wolfe and Ammon Salterresearch is that the commercial value or application of scientific findings is not alwaysimmediately evident. In one of the final reports issued before its untimely demise, the USOffice of Technology Assessment noted numerous examples of key scientific discoverieswhose commercial application could not fully be conceived of at the time of their discovery —the widespread adoption of lasers took decades to advance from their initial discovery in thelaboratory to their practical application in communication systems, medical devices andconsumer electronics. The difficulty with exploiting this type of research lies in determiningcommercially viable applications of the new discovery and developing the necessaryengineering (1995, p. 43).Despite the inherent difficulties in tracing the path from scientific discovery to practicalapplication, firms rely heavily on publicly–funded scientific research as a source of new ideasor technological knowledge, a point reinforced by the results of the recent study by Narin et al.Klevorick et al. suggest that one can think of government funding for basic research asexpanding the technological opportunities available to society. They use the analogy of firmsdrawing balls from an urn in the process of technological development. Government fundingfor scientific research adds more balls to the urn and therefore increases the chances for firmsto draw out a winner (Klevorick et al. 1995).A great deal of confusion exists in the literature over what it is that firms draw from publicsources — information or knowledge. In many innovation surveys, these terms are usedinterchangeably and, for many firms, the distinction between information and knowledge is anacademic one. However, the difference between information and knowledge is important forunderstanding the role played by publicly–funded basic research. The traditional justificationfor government–funded basic research relied on the public good qualities of information.However, the evidence deduced from the science policy studies indicates that what firms drawupon is not information per se, but knowledge. Understanding information almost alwaysrequires knowledge. Individuals and organizations require a complex set of skills and mustexpend considerable resources both to absorb and understand information. Without theseinvestments, firms would be unable to make use of the information available to them. In thisrespect, information only becomes codified knowledge (and therefore valuable and useful)when users have the skills and capabilities to make sense of it. Information is meaninglesswithout the personal background and experience of those who use it (Nightingale 1997).Faulkner and Senker find that even codified knowledge is capable of providing only a limitedamount of information and that the application of this knowledge requires more personal23

The Socio-Economic Importance of Scientific Research to Canada Page 24© David A. Wolfe and Ammon Salterinteraction (Faulkner and Senker 1995). In recent work, Hicks and Katz have shown thatfirms have an increasing tendency to publish (1997). The fact that companies publishundermines the informational view of economic benefits which suggests that firms areunwilling to codify these aspects of their knowledge base for reasons of appropriability. Hicksand Katz suggest that firms do indeed publish and they use their published papers to signal thepresence of tacit knowledge in the firm (Hicks 1995). Our own investigations intocollaborative research in Ontario supports this finding. Large research–intensive firmsincreasingly view co–publication with academic researchers as an important way of signalingtheir firm’s research capabilities to prospective strategic partners in their industry.The Pace Study shows that publications remain the most commonly cited source for learningabout public research (Arundel et al. 1995 ). 17 It is necessary to put these results in context.Table 3. Importance of Different Sources for Learning about Public ResearchSource or Method % Rating as Important High Scoring Industries (scores in percentages)Publications 58 Pharmaceuticals (90), Basic Metals (64), GCC (62),Utilities (61)Informal Contacts 52 Pharmaceuticals (88), GCC (68), Utilities (67),Aerospace (60)Hiring 44 Pharmaceuticals (85), Computers (56), Aerospace(52), Chemical (48)Conferences 44 Pharmaceuticals (85), Utilities (56), Computers (56),Telecom (48)Joint Research 40 Aerospace (70), Basic Metals (68), Utilities (67),Pharmaceuticals (51)Contract Research 36 Utilities (72), Pharmaceuticals (51), Basic Metals(48), Plastics (46)TemporaryExchanges14 Pharmaceuticals (27), Computers (22), Electrical(20), Basic Metals (20)Note: Respondents were asked to rate the importance of each source or method on a 7 point scale. Thefigures indicate the percentage of respondents rating each source/method at 5 or higher on that scale.The study broke the reponses down to 16 sectors.Source: Arundel et al. 199517 The Pace Report, conducted in 1994, involved a mailed questionnaire of large firms in the European Union.The results, based on 640 responses from 16 sectors received a response rate of 56 per cent. The sectors includedwere: food, petroleum, chemicals, rubber and plastics, glass, ceramics and cement, basic metals, fabricatedmetals, aerospace, non-electrical machinery, computers, electrical equipment, instrum ents, automobiles, utilities,telecommunications equipment, and pharmaceuticals.24

The Socio-Economic Importance of Scientific Research to Canada Page 25© David A. Wolfe and Ammon SalterThe evidence generated by research into the ways firms use publicly available knowledgeindicates that government funding provides an importance source for expanding thetechnological opportunities open to firms. This result needs to be weighed against thesubstantial costs that firms must still expend to acquire and use this information. Publicationsrarely contain economically useful information, more often they signal the presence ofexpertise or tacit knowledge, as Hicks has suggested (1995). In this respect, governmentfunding contributes to the ability of firms to draw upon available sources of knowledge byextending their ability to contact the body of tacit knowledge signaled by the publication ofacademic papers. Public traditions of disclosure in science remain an important institutionalcondition for the public funding of science. They ensure that the opportunities for firms toaccess the knowledge and skill base in the scientific community are maintained (Dasgupta andDavid 1994).The argument presented here differs significantly from the old information–based view of thebenefits of publicly-funded research. Firms use publications to network, develop contacts, andsignal expertise. Codified knowledge is a handmaiden of tacit knowledge (Hicks 1995).Moreover, access to, and use of, this codified knowledge requires a great deal of investmentby the users. It is costly, time–consuming and difficult, yet frequently holds the key to thedevelopment of important new innovations by the firm.Skilled Graduates:Many studies of the economic benefits of publicly–funded research highlight the role of skilledgraduates as the primary benefit that flows to firms from the government’s investment inscientific research. New graduates, who have had the opportunity to participate in the conductof basic research, enter industry equipped with training, knowledge, networks and expertise.They bring to the firm a knowledge of recent scientific research, as well as an ability to solvecomplex problems, perform research, and develop ideas. The skills developed through theireducational experience with advanced instrumentation, techniques and scientific methods areextremely valuable. Students also bring with them to industry a set of qualifications, helpingset standards for knowledge in an industry.Senker suggests that graduates bring to industry an ‘attitude of the mind’ and a ‘tacit ability’ toacquire and use knowledge in a new and powerful way (1995). Nelson also notes thatacademics may teach what new industrial actors need to know, without actually doing relevantresearch for industry. Basic techniques in scientific research are often essential for a youngscientist or technologist to learn to participate in the industrial activities within the firm (1987).25

The Socio-Economic Importance of Scientific Research to Canada Page 26© David A. Wolfe and Ammon SalterGibbons and Johnston’s research in the 1970s demonstrated that students provide a form ofbenefit that flows from research funding (1974). Studies by Martin and Irvine in the 1980salso showed that students trained in basic research fields, such as radio astronomy, move intoindustry over time and make substantial contributions (1982). Our own research on the recentexperience with Ontario programs to promote international collaborative research indicates thatthe movement of doctoral and post–doctoral students into industry often provides the mosteffective method for transferring research results from the laboratory directly to industry.These benefits are often difficult to anticipate or to measure, yet the evidence collectedindicates that students bring a wide range of skills and techniques to industry. They enablefirms to increase their base of tacit knowledge and expand into new activities.Even in the most applied areas of science and technology, the transfer of students into industryis rarely a smooth process. Often firms still have to make expensive and time–consuminginvestments in the new graduates. In this sense, students come prepared to learn, but need tobe taught industrial practice. 18 Training students can be a costly activity for firms. Rarely canstudents be used immediately by firms to accumulate and expand their technologicalcompetencies. Yet, at the same time, firms also indicate that students fresh from theireducational experience bring to the firm an enthusiasm and critical approach to research anddevelopment that stimulates other members of the research team. Over the entire career of thenew hire, the skills learned in their education are valuable and often serve as a precursor to thedevelopment of more industry–related skills and knowledge that appear over time. 19There is a critical need to maintain the link between student training and government–fundedbasic research. Students provide a key transfer mechanism for the benefits of this funding bythe public sector to be channeled into industry. This provides another justification forconducting basic research and student training in the same institute. There are benefits totraining student in the same research institutes that are engaged in industry–related research(Gibbons et al. 1996). Students involved in industry–related research gain hands–onexperience with firm situations and competencies. Projects designed by, and conducted18 The style of training of scientists and technologists is an important concern of Canadian industry. Numerous reports in the so ftware inqualified software engineers. Even co-op graduates from Waterloo's world class software engineering course need extensive training befirms who hire them. Newbridge has a six-month program to train and reorientate students so that they will be m ore familiar with the co19 For example, Michael Cowpland of M itel used some theoretical concepts developed in his Master’s Thesis at Carleton to develop M iIt was only after some years in industry and more accumulated experience that such an oppo rtunity availed itself to him. This is often thindustry can be used to reassess and evaluate the results of governm ent-funded b asic research.26

The Socio-Economic Importance of Scientific Research to Canada Page 27© David A. Wolfe and Ammon Salterthrough, the Ontario Centres of Excellence have been useful in helping firms and students codefineresearch that deals with industrial concerns. At the same time, it allows the students todevelop expertise and skills which will be valuable over the long period. It is necessary tostrike a balance between the need for an understanding of industrial practice on one side, andthe requirement for student education to be lifelong and portable, on the other.New Instrumentation and Methodologies:The development of new instrumentation and methodologies is one of the key benefits ofgovernment–funded basic research. As yet, few attempts have been made to measure thebenefits of instrumentation and methodologies. 20 Innovation surveys rarely reflect the benefitof instrumentation because of the limited ability of R&D managers to recognize thecontribution made by earlier government–funded research. Yet, historical research has shownthat instrumentation is a key economic output that results from government funding. “Theeventual economic impact of basic research is commonly expressed through the medium ofnew instrumentation technologies and the life histories of these new technologies” (Rosenberg1992, p. 381)Problems in basic research have forced researchers to invest and design new kinds ofequipment. Scientists often create new instrumentation, lab techniques and analytical methodsthat eventually are adopted and used in industrial process controls. Although initiallydeveloped for a specific research problem, these pieces of equipment often become useful inother areas. Numerous examples of this process abound — electron diffraction, the scanningelectron microscope, ion implantation, synchrotron radiation sources, phase–shiftedlithography, and superconducting magnets (US Office of Technology Assessment, 1995, p.38). Another prominent example, the computer, was largely a product of scientificinstrumentation needs. The early pioneers of the computer “were confronted by extremelytedious and time-consuming computational requirements in their research work, typicallyinvolving solutions to large systems of differential questions” (Rosenberg 1992, p. 382).Scientific instruments have become almost indistinguishable from industrial capital goods inmany industries, such as semiconductors. “Indeed much, perhaps most, of the equipment thatone sees today in an up–to–date electronics manufacturing plant had its origin in the universityresearch laboratory” (Rosenberg 1992, p. 384).20 There is almost no systematic evidence on the percentage of research funding accounted for by instrumentation or the diffusion of thiof science.27

The Socio-Economic Importance of Scientific Research to Canada Page 28© David A. Wolfe and Ammon SalterThere are strong feedbacks between instruments developed in the course of research andinstruments developed by firms (Von Hippel 1988). New instrumentation is drawn upon byfirms as scientists take advantage of the new tools to expand their research. Examples aboundhere, such as X-ray crystallography. Often the introduction of new instrumentation can lead tothe development of whole new fields of research, such as geophysics, computational physics,and artificial intelligence. Rosenberg suggests that it would be misleading to assume that suchinstrumentation would have been developed without government funding for basic research.The instrumentation often emerged as a result of researchers being allowed to probefundamental questions.Recent work by Richard Nelson on the licensing of technologies at Columbia Universityindicates that firms tend to license research tools and techniques from the university. 21 Thepattern of licensing from Columbia indicates that much of the ‘technological output’ of theuniversity system lies in instrumentation and techniques, as was previously suggested byRosenberg (Nelson et al. 1997). The Pace Report (Arundel et al. 1995), referred to above,shows that firms rated instrumentation as the second most important output of public research(in comparison with specialized knowledge, instrumentation, general knowledge from basicresearch, and prototypes). Instrumentation was important in pharmaceuticals, glass, ceramicsand cement, electrical and aerospace industries (Arundel et al. 1995).Table 4. Importance to Industry of Different Outputs of Public ResearchForm of Output% Rating asImportantHigh Scoring Industries (scores in percentages)Specialized Knowledge 56 Pharmaceuticals (84), Utilities (64), Food (57),Aerospace (57)Instrumentation 35 Pharmaceuticals (49), GCC (45), Electrical (42),Aerospace (39)General Knowledgefrom Basic Research32 Pharmaceuticals (76), Chemical (38), Computers(38), Instruments (36)Prototypes 19 Food (28), Pharmaceutical (27), Electrical (26),Basic Metals (24)21Nelson's research is based on the invention reports submitted by the university to its technology transfer office.Nelson has analysized these results for one university. Other studies are planned for Stanford, MIT and Harvard.Columbia remains a good example, however, because it is the third largest recipient of private funds among USuniversities (Nelson et al. 1997).28

The Socio-Economic Importance of Scientific Research to Canada Page 29© David A. Wolfe and Ammon SalterNote: Respondents were asked to rate the importance of each source or method on a 7 point scale. Thefigures indicate the percentage of respondents rating each source/method at 5 or higher on that scale.The study broke the reponses down to 16 sectors.Source: Arundel et al. 1995A recent study in Canada highlighted the role of instrumentation in research. Based on a 1990survey of equipment in Canadian universities, Rank and Williams were able to determine theamount spent in 1989 in Canadian universities on instrumentation and to compare these figureswith data from the US and the UK. Rank and Williams showed that Canadian researchers haveless instrumentation per researcher and department than their American cousins and thatCanadian instrumentation was older and less computerized. They suggested that “manyresearchers do not have access to advanced instrumentation necessary to undertake world–classresearch. Furthermore, the 1980s witnessed a serious decline in the condition and state ofrepair of the nation's equipment stock” (Rank and Williams 1997, p. 113). Rank and Williamsargued that a lack of modern equipment in Canadian universities makes it “difficult orimpossible to undertake ground-breaking science” (p. 113). The recent Federal and Provincialinitiatives in this area may prove effective in redressing this instrumentation gap. Yet, the pastcost of poor equipment will hinder the training and development of research skills in thecurrent generation of Canadian students.Networks and Social Interaction:Derek De Solla Price has stressed the important role of government funding in providing apoint of entry into the personal and knowledge–based networks of expertise and practice(1984). Government funding affords individuals and organizations the means to participate inthe world–wide community of research and technological activity. The economic benefits ofsuch networks are very difficult to measure. Evidence collected thus far indicates that firms dofind informal methods of interaction an important means of learning about public research andtechnological activity. Table 3 (above) highlighted how different methods for learning aboutpublic research have been rated by firms in Europe (Arundel et al. 1995).Networks have been the focus of a great deal of empirical research. This research indicatesthat firms and industries link with the publicly–funded science base in many different ways.These links often are informal. Faulkner and Senker, in their book Knowledge Frontiers,studied the nature of public–private sector linkages in three areas — biotechnology,engineering ceramics and parallel computing. Their research indicates that good personalrelationships between firms and public sector scientists are the key to successful collaboration29

The Socio-Economic Importance of Scientific Research to Canada Page 30© David A. Wolfe and Ammon Salterbetween the two sectors. Personal relations build up understanding and trust, leading tolong–term contractual relationships (Faulkner and Senker 1995).Callon has suggested that government funding for basic research can be seen as a means ofcreating new and different networks. Funding provides a new combination of organizationaland individual relations. It opens up new forms of cooperation and interaction. There is atendency in the market to use up the existing sources of variety, creating irreversibility andconvergence and locking society into particular technological options. Government action isrequired to break this cycle, to create new options and to counter these centralizing economicforms limiting the formation of new ideas and relations. Through government funding, it ispossible to create “novel approaches to addressing and resolving technical problems byexpanding the variety of scientific options available to firms” (Martin et al. 1996, p. 30).Government funding expands social interaction and thus enables the creation of new linksbetween social actors. By linking actors, it is possible to expand the pool of technologicalopportunities available to firms (Callon 1994).Lundvall has also stressed the need for government funding to generate new forms of socialinteraction among actors in the innovation system. Lundvall suggests that the interactivenature of the learning process which characterizes innovation needs to be supported byinstitutions to facilitate contact between actors within the system (Lundvall 1992). Bridginginstitutions, such as the Ontario and federal Networks of Centres of Excellence, provideinstitutional mechanisms to embed and support interaction. Increasingly, knowledge andintelligence are organized in social ways, rather than accessed on an individual basis. Thecapacity for networking is seen as essential for tapping into the shared intelligence of both theindividual firm or organization, as well as a collectivity of firms within a givengeographic space. The network model also recognizes the growing relevance of the tacitdimension of knowledge and the extent to which it is often grounded in the informal sharing ofknowledge and ideas among firms and other relevant institutions, such as universities, within aregion or territory. According to Cooke and Morgan, the key elements of a networkedregional economy include a dense network of public and private industrial support institutions,high-grade labour market intelligence and related educational institutions, rapid diffusion oftechnology transfer, a high degree of interfirm networking and receptive firms, well–disposedtowards innovation. The very density of these networks and institutional supports is ofteninterpreted as a sign of the vibrancy of a regional or national economy (1993: 562).30

The Socio-Economic Importance of Scientific Research to Canada Page 31© David A. Wolfe and Ammon SalterTechnological Problem–Solving:Publicly–funded research also contributes to the economy by helping industrial practitionerssolve complex technological problems. As many firms in complex and technologicallydemanding industries draw from a variety of technologies, public support acts as a wide poolof resources for these firms to draw upon (Patel and Pavitt 1994). Vincenti's discussion ofengineering knowledge suggests that advanced engineering knowledge draws from the publicsupport base indirectly, through the provision of trained problem–solvers and the backgroundsupply of knowledge (Vincenti 1990).The Yale Study, which is based on a survey of 650 US industrial R&D directors, provides themost systematic analysis of the benefits of basic research. 22Industries where the generalrelevance of science was judged to be important to current technological activities were threetimes as numerous as those where specific university research was judged to be important.The authors noted the difference between the role of science as a pool of knowledge and therole of university research for firms. Overall academic research in a field is reported as muchless important to recent technological advance than is the general body of science in that field.The discrepancy between the measured relevance of generic science (a pool ofknowledge) and that of university science (new results) is greater for basic than forapplied research because research in applied sciences and engineering disciplines isguided to a large extent by perceptions of practical problems, and new findings oftenfeed directly into their solutions. . . . this by no means implies that new findings infundamental physics, for example, are not relevant to industrial innovation. Rather, weread our findings as indicating that advances in fundamental scientific knowledge havetheir influence on industrial R&D largely through two routes. One . . . is throughinfluencing the general understandings and techniques that industrial scientists andengineers, particularly those whose industrial training is recent, bring to their jobs.The other is through their incorporation in the applied sciences and engineeringdisciplines and their influence on research in those fields” (Klevorick et al. 1995, pp.196–7).22 The Yale Survey was conducted in 1982. It was based on a mailed questionnaire sent to the R&D managers oflarge American firms divided into 130 sectors. The survey received a 54 per cent response rate.31

The Socio-Economic Importance of Scientific Research to Canada Page 32© David A. Wolfe and Ammon SalterTable 5. Relevance of University Research and Knowledge of Science to TechnologyScientific FieldNo. of Industries Rating UniversityResearch as Important and High ScoringIndustriesNo. of Industries rating Knowledge of Scienceas important and high scoring industriesBiology 12 Animal Feed, Drugs, Processed Food 14 Drugs, Pesticides, Meat Products, AnimalFeedChemistry 19 Animal Feed, Meat Products, Drugs 74 Pesticides, Fertilizers, Glass, PlasticsGeology 0 4 Fertilizers, Pottery, Non-Ferrous MetalsMathematics 5 Optical Instruments 30 Optical Instruments, Machine Tools, MotorVehiclesPhysics 4 Optical Instruments, Electron Tubes 44 Semiconductors, Computers, GuidedMissilesAgricultural Science 17 Pesticides, Animal Feed, Fertilizers,Food Prod.16 Pesticides, Animal Feed, Fertilizers, FoodProd.Applied Math/O.R. 16 Meat Prod., Logging/Saw mills 32 Guided Missiles, Aluminum Smelting,Motor VehiclesComputer Science 34 Optical Instruments, Logging/Sawm ills 79 Guided Missiles, Semiconductors, MotorVehiclesMaterials Science 29 Synthetic R ubber, Non-Ferrous Metals 99 Primary Metals, Ball Bearings, AircraftEngines.Medical Science 7 Surgical/Medical Instruments, Drugs,CoffeeMetallurgy 21 Non-ferrous Metals, Fabricated MetalProductsChemical Engineering 19 Canned Foods, F ertilizers, M altBeveragesElectrical Engineering 22 Semiconductors, Scientific Instruments n/aMechanicalEngineering28 Hand Tools, Specialized IndustrialMachinery8 Asbestos, Drugs, Surgical/MedicalInstruments60 Primary Metals, A ircraft Engines, BallBearingsNote: Respondents were asked to rate the importance of each scientific field on a 7 point-scale. Thefigures indicate the number of industries rating the scientific field at 5 or more on the Likert scale.Source: Klevorick et al. 1995.n/an/aThe Pace Report provides further confirmation for the conclusions of the Yale Study. Thelinks between industries and sciences vary by sector and nations. In the Pace Report,respondents were asked to rate different fields of science in terms of their importance to theirfirms' technological base. Applied areas of research received fairly high scores. Chemistryalso scored high, while physics, biology and mathematics did not. Table 6 lists the results ofthe survey by industry and by field of science.32

The Socio-Economic Importance of Scientific Research to Canada Page 33© David A. Wolfe and Ammon SalterTable 6. Importance to Technological Base of Publicly Funded Research in the Past TenYearsScientific Field% of RespondentsRating as ImportantHigh Scoring Industries (Scores in Percentages)Material Sciences 47 Aerospace (77), Basic Metals (76), Electrical (72), GCC(63)Computer Sciences 34 Aerospace (60), Telecom (56), Automotive (47), Computers(47)Mechanical Engineering 34 Automotive (64), Aerospace (64), Utilities (53), Computers(47)Electrical Engineering 33 Computers (78), Aerospace (73), Telecom (70), Electrical(56)Chemistry 29 Pharmaceuticals (78), Petroleum (52), Chemical (46),Computers (33)Chemical Engineering 29 Petroleum (60), Pharmaceuticals (55), Chemical (46),Plastics (42Physics 19 Computers (64), Basic Metals (33), Plastics (25), GCC (25)Biology 18 Pharmaceuticals (71), Food (33), Petroleum (18), Chemical(17)Medical 15 Pharmaceuticals (85), Instruments (29), Computers (27),Food (15)Mathematics 9 Computers (25), Aerospace (20), Automotive (20), GCC(13)Note: Respondents in 16 industries were asked to rate the importance of publically funded research ona 7 point scale. The figures indicate the percentage of respondents rating publicly funded research 5 orhigher on that scale.Source: Arundel et al. 1995These findings indicate that firms draw from the public–funded science and technology base ina heterogeneous fashion. In some sectors, the link is rather tight, with high citations forscientific papers in patents and a great interest in scientific research. In other sectors, such asautomobiles, firms draw from the public base indirectly, mostly through the flow of students.These differences among sectors suggest that a simple calculus of the benefits ofgovernment–funded basic research can be extremely misleading, given the different ways inwhich individual sectors derive their benefits. It is almost impossible to measure howindividual sectors, such as autos, derive economic benefit from the publicly–fundedinfrastructure of scientific research. Only in pharmaceuticals — where the links are tight andoften visible — might some measurement of the benefit be possible. The lesson for sciencepolicy practitioners is the need to promote a diverse and varied base of support for industry.33

The Socio-Economic Importance of Scientific Research to Canada Page 34© David A. Wolfe and Ammon SalterCreation of New Firms:Often the creation of new firms is cited as one of the key benefits of government–fundedresearch. However, the evidence is mixed as to whether new firms have been created on asignificant scale as result of government funding. There are some spectacular examples ofregional agglomerations of new firms clustered around research–intensive universities. Yet areview of several studies found little convincing evidence that significant investment in basicresearch generates a large number of spin–off companies. Research in the US has revealedmixed evidence as to whether funding for basic research in university leads to firm growth. Inthe electronic equipment sector, the correlation between university research and firm birth ispositive and statistically significant, while in other sectors it is statistically insignificant (Baniaet al. 1993). 23New firm growth is not, however, all important. Often the companies createdby spin–offs remain quite small and have a high failure rate, for example, software companies.These companies can provide an important source of Schumpeterian clustering around a newtechnology, but simple head counts of numbers of new firms can be misleading. Firm entryand exit rates vary considerably between sectors and regions. Moreover, many of the firmswhich are spun out of universities have low growth rates (Massey et al. 1992). Studies offirms located in science parks indicate that a connection to a university can be advantageous fornew small firms, but this advantage is often quite limited (Story 1994). Successful andsustained innovation is more the development of an idea. “Academics do not make goodentrepreneurs and the effective exploitation of their technology usually requires that theownership of the technology and the managerial control are taken out of their hands at an earlystage” (Stankiewicz 1994, p. 101).FEDERAL POLICY WITH RESPECT TO R&D INVESTMENTAs we noted at the outset, the question of Canada’s level of spending on research anddevelopment has been the subject of numerous inquiries and policy initiatives over the pastthree decades. The consensus has been that Canada suffers from an underinvestment inresearch and development and numerous attempts have been made to improve this situation.Federal support for investment in basic research has grown from a small base in the early partof the century to become a central part of the country’s overall science and technology policyframework. From the creation of the National Research Council in 1916, it assumedresponsibility for providing financial support for scientific research at Canadian universities.Over the next six decades, until this responsibility was transferred to the Natural Sciences andEngineering Research Council (1978), total expenditures on scholarships and grants grew to23 This study ignored firm deaths.34

The Socio-Economic Importance of Scientific Research to Canada Page 35© David A. Wolfe and Ammon Salterjust under $100 million. At the same time, the federal government separated the grants andfellowships activities in the social sciences and humanities from the Canada Council to formthe Social Sciences and Humanities Research Council. Along with the Medical ResearchCouncil, established in 1969 out of another unit within NRC, these bodies assumedresponsibility for administering federal support for research activities. Federal funding forbasic scientific research continued to grow steadily over the next decade (Kavanagh 1993).The last decade, in particular, has witnessed several attempts by the federal government toboost our level of investment in research and development. In 1987, the federal and provincialgovernments jointly signed the first National Science and Technology Policy, which created theCouncil of Science and Technology Ministers. Its objectives, among others, were to optimizethe existing S&T policies of both orders of government and to identify S&T policies andprogram actions that might be undertaken jointly. In the same year, the federal governmentannounced the launching of its science and technology strategy, 'InnovAction', designed toincrease industrial innovation and technology transfer, as well as develop and promote strategictechnologies. The strategy was assigned an initial five year budget of $1.3 billion allocatedamong several program initiatives, including:! Science and Technology Programs (Strategic Technologies, Sector Competitiveness,Services to Business) — $466 million;! Canadian Space Program — $256 million;! Networks of Centres of Excellence Program (funding for 15 networks) — $240 million;! increases to the federal Granting Councils — $200 million;! Canada Scholarships Program (for undergraduate students) — $80 million.The principle thrusts of the program were subsequently refinanced for a further five years at acost of $1.5 billion. “Most of this new funding is targeted at increasing the base funding levelsof the national granting councils, which had been eroding as a result of inflation and theincreased cost of research infrastructure” (Dufour and de la Mothe 1993, pp. 35-36). Thecontinuing support for this program by the Conservative government and the central placeassigned to both the Networks of Centres of Excellence program and maintaining the basefunding levels for the national granting councils demonstrated a commitment to the importantrole played by basic scientific research in the country’s economic development. This wasmatched by the initiatives of several provinces in launching their own Centres programs and/orproviding increased funding for basic research.The results of the federal election in 1993 seemed to signal a continuation of the policydirection set by the previous government. In the fall of 1994, the Liberal government released35

The Socio-Economic Importance of Scientific Research to Canada Page 36© David A. Wolfe and Ammon Salteranother series of policy documents outlining its broader economic agenda. The frameworkdocument issued by the Department of Finance (cited in the introduction to this paper) stressedthe role that it saw for innovation policy as one of the four pillars of its economic agenda. Acompanion document issued by Industry Canada, Building a More Innovative Economy, placedthe government’s S&T initiatives within the context of its broader economic agenda. Policyinitiatives were to be pursued in four key areas: trade, infrastructure, technology and theclimate of the marketplace. Of the four key areas, the two most central to the concerns of thispaper are infrastructure and technology. In the area of infrastructure spending, the governmentindicated its strong intention to support the information highway. It highlighted itscommitment to regulatory reform in the area of telecommunications policy, its efforts to extendthe CANARIE network with capital spending and its support for the linking of all schools andlibraries in the country to the Internet through the SchoolNET program. With respect totechnology, it outlined some of the key issues to be addressed in the S&T Review, includingthe need for a more systematic approach to the commercialization of R&D, the need to developa strong scientific culture in Canada, the need to establish which scientific and technologicaldevelopments Canada should pursue, the need to ensure that federal labs play an effective rolein the commercialization of technology and the need for measures to promote the rapiddiffusion of technology to industry (Government of Canada, 1994c, p. 61).The federal budget for 1994 reflected some of the broad themes outlined in the policydocuments, but clearly further development awaited the outcome of the S&T Review. Chiefamong the measures announced were the cancellation of the KAON project, a revamping of thespace program, funding for the Canadian Technology Network, additional funds for theNational Research Council, along with a stabilization of funding for the Networks of Centresof Excellence and the Granting Councils. The first budget seemed to provide some degree ofsupport for the directions promised in the Red Book. However, this sense of complacency didnot last long. In the next budget of February, 1995, the government signaled a change indirection away from the themes of the Red Book and towards a priority on deficit reduction.Not awaiting the outcome of the S&T Review, nor many of the other program reviews that hadbeen launched, it leveled a series of major cuts at program spending. The cuts were substantialacross the board and hardly any portfolio was spared, including the S&T one. IndustryCanada was particularly hard hit, with expenditure reductions of more than 42 per centplanned over a two year period, including many of its subsidies to business. The budgets of thethree granting councils were not spared, with NSERC, SSHRC and the MRC all targeted formajor reductions. A recent estimate suggests that over the three years since, when budgets areadjusted for inflation, MRC has suffered a 17.9 per cent reduction, NSERC 11.8 per cent and36

The Socio-Economic Importance of Scientific Research to Canada Page 37© David A. Wolfe and Ammon SalterSSHRC 12.9 per cent (CAUT, 1997, p. 11). The magnitude of these reductions undeniablyrepresented a significant blow to the scientific community in Canada. In light of the numerouslong–term benefits of investing in basic research documented above, we are tempted to invokethe analogy of a government desperately eating its seed corn to cope with its current fiscalstraits!The last remaining hope for the research community was the S&T Review itself. However, aswe noted at the outset, the review was posed a number of questions at its inception withtroubling implications for that community. The review process itself was complex andinvolved. In addition to the numerous consultations held by the Secretariat, there were fourinterdepartmental committees at work, each of which produced an internal report, as well as areport issued by the National Advisory Board on Science and Technology. 24 One of the fourinterdepartmental committees dealt with some of the issues considered in this report. Itsconclusions were clear. The principle recommendation made in the final report of theinterdepartmental task group on the Advancement of Knowledge accentuated the importance ofadequately funding the research base in the post–secondary sector and the research intensivehospitals.The Task Group takes as its basic premise that Canada needs and must maintain astrong capability in fundamental research. . . . The Task Group therefore urges thegovernment to accord a high priority to ways and means of strengthening theuniversity research base in Canada (Government of Canada 1994d, p. 17).The federal S&T Review has been the subject of much discussion and some criticism, bothduring the period of its existence and since the release of its report. Part of the reason for theintense scrutiny to which it was subjected was the high expectations that it engendered in thescience and technology research community. The consultation itself was very inclusive,involving twenty-nine local meetings, five regional meetings and a final national meeting witha total of twenty-five hundred participants. There were few parts of this community notinvolved in the process to some degree. The inclusiveness of the process sustained the beliefthat the 1995 budget was a temporary step backwards and that the government intended achange in policy direction towards the goals articulated in its campaign platform of 1993 (de laMothe 1996, pp. 409-10).24 For a more detailed discussion of the review process itself and an assessment of the results, cf. de la Mothe1996.37

The Socio-Economic Importance of Scientific Research to Canada Page 38© David A. Wolfe and Ammon SalterAfter a long travail of nearly two years, the results of the Review were finally released inMarch, 1996. The strategy established three related goals for building a dynamic andforward–looking Canadian innovation system: 1) Canada should be among the world’s leadersin “applying and commercializing S&T for sustainable job creation and economic growth,” 2)that S&T be applied in such a way as to maximize the quality of life of Canadians, 3) thatCanada retain and enhance its capabilities to advance knowledge in all major areas of scientificand technological endeavour. This last goal reflected the recommendations of the Task Groupon the Advancement of Knowledge (cited above). To be precise, the goal was. . . to create in Canada world centres of excellence in scientific discovery; to build abroad base of scientific enquiry; to foster Canadian participation in all major fields ofscience and technology; and to ensure that new knowledge can be acquired anddisseminated widely, from Canadian sources and from around the world (Governmentof Canada 1996, p.6).Having identified these four goals, however, the strategy then noted the overriding need for thefederal government to establish clear priorities for spending in light of the continuing pressureto reduce its fiscal deficit. As result of the reductions already underway, the report underlinedthe need for public spending to focus on core activities in the S&T policy area and to find moreefficient and effective ways to deliver those activities. The principal means identified forimproving on the efficiency of delivery mechanisms was the increased use of partnershiparrangements between government departments and agencies and other key components of theinnovation system. The strategy went on to identify the federal government’s core S&Tactivities as: 1) funding that research which supports the mandates of federal agencies, 2)providing research support to universities, the Centres of Excellence, and other nongovernmentalresearch institutes, 3) supporting private sector research and development, and4) disseminating knowledge, building information networks and acting as an informationanalyst (p. 10). In the section of the report which laid out the priorities and initiatives forsupporting research in universities and colleges, the review noted that fiscal constraint hadresulted in ‘some’ reductions to the budgets of the research granting councils, however, thegovernment was developing “innovative partnerships with the private sector as a means ofsustaining support for researchers” (p. 11).Despite the positive sounding rhetoric of the strategy document, the action plans associatedwith it fell short of the expectations that had been engendered. In the eyes of onecommentator, at least, “. . . it took too long to deliver and resulted in a feeling that the policyleadership developed by the government was lost. It was not as comprehensive as had beenpromised . . . [and] . . . suffered from the fact that ‘new’ programs, like the Technology38

The Socio-Economic Importance of Scientific Research to Canada Page 39© David A. Wolfe and Ammon SalterPartnerships Canada program, simply appeared to be replacements for old programs, like theDefence Industry Productivity program . . . . (de la Mothe 1996, pp. 415-16). Coming as itdid on the heels of the 1995 budget cuts, the strategy did little to compensate for the sense ofdevastation felt by the research community. This feeling was largely the result of the inwardlooking nature of the strategy and the accompanying action plans. It focused primarily on thegovernment’s in–house research capacity and paid relatively little attention to the pastcontributions and potential role of the university sector and the granting agencies that supportit. As was noted above, it confirmed the continuing reductions in government researchbudgets and stressed the importance of doing more with less. Of the specific partnershipinitiatives that were identified as a means of “sustaining support for researchers”, mostinvolved mechanisms for commercializing the results of research and directing venture capitalfunds into innovative start–up firms.In conjunction with the release of the federal strategy, the major budgetary development in1996 was the announcement of the new Technology Partnerships Canada program to providesupport to private sector partners, such as those in the aerospace industry, in their efforts tocommercialize high technology products and processes. This was the industry hardest hit bythe cancellation of the DIPP in 1995, and although the Technology Partnerships programdiffers in important ways from its predecessor, it went a long way towards satisfying theconcerns of the industry. The final budget of the Liberal government, brought down inFebruary, 1997, contained several significant announcements for the science and technologyportfolio. Chief among these was the establishment of the Canada Foundation for Innovationwith an initial allocation of $800 million over a period of five years. The CFI will providefunds on a matching basis to the provinces or industry and the universities for themodernization of research facilities in the natural sciences, engineering and health sciences atuniversities, colleges, research hospitals and non-profit research institutions. In addition to theCFI, the 1997 budget also made the Networks of Centres of Excellence program permanentand stabilized its annual funding at $47.4 million — but this was largely achieved byreallocating money from the budgets of Industry Canada and the granting councils. Finally,the funding for the popular and successful Industrial Research Assistance Program run by theNational Research Council was also stabilized.While the 1997 budget certainly provided better news for the research community in Canada,the initiatives should not be regarded as a panacea for all of the problems that remain. Thecreation of the Foundation goes some way towards redressing the long standing concern overthe deterioration of our basic research infrastructure, but the Foundation itself cannot39

The Socio-Economic Importance of Scientific Research to Canada Page 40© David A. Wolfe and Ammon Saltercompensate for the budget reductions that the granting councils have suffered in the last fewyears. In addition, there are many technical issues to resolve with respect to the kinds ofinvestments that will be eligible for support, whether soft costs will be included with certainkinds of investments, and how ready the other partners are to match the federal funds madeavailable. The flow of funds is conditional on the provision of matching funds — someprovinces have already indicated their willingness to participate, but initial reaction fromindustry suggests a reluctance to fund research equipment, rather than support individualresearchers, or specific projects. Regardless of how these issues are resolved, improvedresearch infrastructure, without continued support for the training of the next generation ofresearchers, or the conduct of their research activities, will not fulfil the goals articulated in thefederal strategy, nor will it ensure that Canada realizes the kind of benefits from investments inbasic research discussed in this report. As the next section makes clear, the overall level offunding for academic research has fallen significantly below that available earlier in thedecade.THE FUNDING OF SCIENTIFIC RESEARCH IN CANADAGiven the economic and social benefits produced by scientific research that have beenidentified in this report, it is important to examine the trend in funding levels for research overthe past decade. Although the provincial governments are responsible for the post–secondaryeducational system, the federal government provides a major source of the funds for theconduct of research and development. The annual survey of scientific activities by the federalgovernment makes an important distinction between spending on science and technology andthat on research and development. The broader category of S&T includes both research anddevelopment and related scientific activities. The survey defines R&D as “creative workundertaken on a systematic basis to increase the stock of scientific and technical knowledge andto use this knowledge in new applications”. Related scientific activities is a broad categorythat subsumes a number of different things, such as scientific data collection. Although thelevel of federal spending on S&T, peaked at almost $6 billion in 1993-94 at the outset of theS&T review, the level of spending on R&D is considerably lower. Given the focus of thisreport on scientific research, the data presented in the following tables use the more focusedcategory of R&D, rather than the broader one. The data in Table 7 provide a detailedbreakdown of actual levels of federal spending on all research and development relatedactivities over the past ten years.40

The Socio-Economic Importance of Scientific Research to Canada Page 41© David A. Wolfe and Ammon SalterTable 7. Federal Expenditures on R&D by Major Department or Agency, 1988-89 to1997-98 (in millions of dollars)Department or Agency1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 p 1997-98 eAgriculture 300 307 332 334 319 328 323 327 346 308Atomic Energy of Canada 118 128 149 155 159 155 163 163 163 132CIDA 71 77 82 70 69 61 62 51 54 50Canadian Space Agency 128 122 332 360 379 314 292 265 175Energy, Mines and Resources 274 264 258 275 268 271Forestry Canada 68 70 76 82 92 106Natural Resources Canada 381 403 381 321Environment 73 81 91 97 119 135 174 164 131 119Fisheries and Oceans 117 126 138 135 111 114 114 112 119 100Health Canada 42 45 47 46 49 53 57 63 70 54ISTC 236 214 213 228 242Communications 59 57 54 46 44Industry Canada 317 322 268 305 297IDRC 82 89 80 88 82 89 78 73 71 71MRC 182 195 233 238 247 249 257 244 234 229National Defence 278 276 276 234 253 234 231 208 181 175NRC 463 421 451 419 458 441 449 419 446 440NSERC 323 347 420 432 445 439 440 425 405 390SSHRC 51 56 63 68 69 68 69 70 64 64Ford (Q) 24 28 30 35 24 26 31Western Economic Diversification 6 25 37 25 22 24 13 14 15 8Other 163 180 151 127 120 153 153 132 128 105Total 2,906 3,086 3,273 3,455 3,556 3,646 3,635 3,452 3,404 3,069Note: p = preliminary figures; e = estimatesSource: Statistics Canada, Table 6, Federal Government Expenditures on Scientific Activities,1997-98, Service Bulletin Science Statistics, Vol. 21, No. 4, Ottawa, May, 1997.These data reflect the impact of the increased commitment to research and development in thelate 1980s with the introduction of the Innovaction program. Spending rose from $2.9 billionin 1988-89 to a peak of $3.6 billion in 1993-94, the year before the S&T Review began.Somewhat ironically, this level of federal spending represented the all–time high, rather thanthe norm. In the period since the introduction of the restraint budget in 1995, federalspending on R&D has fallen back to $3.0 billion, virtually the same level as a decade earlier incurrent dollars, and significantly less in real dollars, when allowance is made for the impact ofinflation. The data presented below in Table 8 reflect the changing level of federal spendingon R&D over the same period in both current and constant (real) dollars, as well as changes inthe share of R&D spending as a proportion of total government spending. It should be noted41

The Socio-Economic Importance of Scientific Research to Canada Page 42© David A. Wolfe and Ammon Salterthat the figures in the column for budgetary main estimates includes the spending on publicdebt interest costs, which rose dramatically in the early 1990s, as a result of the impact of therecession and higher interest rates.Table 8. Federal Expenditures on R&D in Current and Constant 1986 Dollars, 1987 to1997 (in millions of dollars)Year Budgetary R&D R&D as a % change GDP Budgetary R&D % changeMain % of the year-to- Implicit Main year-to-Estimates Main Est. year Price Index Estimates yearcurrent dollars constant dollars1987 125,535 2685.00 2.14 104.7 119,900 2564.501988 133,000 2906.00 2.19 8.24 109.6 121,350 2651.60 3.421989 142,900 3086.90 2.16 6.19 114.9 124,369 2685.60 1.291990 147,593 3273.40 2.22 6.07 118.5 124,551 2762.40 2.851991 157,528 3455.50 2.19 5.56 121.9 129,227 2834.70 2.621992 160,517 3556.50 2.22 2.92 123.4 130,079 2882.10 1.671993 161,089 3646.20 2.26 2.52 124.7 129,181 2924.00 1.451994 160,738 3635.30 2.26 (0.30) 125.6 127,976 2894.30 (1.02)1995 164,191 3452.00 2.10 (5.04) 127.5 128,777 2707.50 (6.45)1996 p 156,985 3403.80 2.17 (1.40) 129.1 121,600 2636.60 (2.62)1997 e 149,194 3069.00 2.06 (9.84)Notes: p = preliminary figures; e estimatesSource: Statistics Canada, Table 1, Federal Government Expenditures on Scientific Activities,1997-98, Service Bulletin: Science Statistics, 21:4, Ottawa, May, 1997.The data in this table indicate that from the late 1980s to 1994, federal spending on R&D rosein both current and constant dollars, and — more significantly — as a share of totalgovernment spending. This rise in the proportion of total federal spending devoted to R&Doccurred despite the increasing share that was also absorbed by public debt interest costs in theearly 1990s. After reaching its peak in 1994, it has fallen steadily in the past three years. Ifthe estimates for the current year prove to be accurate, spending on R&D will fall to a smallershare of total federal spending than it received a decade ago./These estimates of federal R&D spending include a range of activities that go well beyond thefocus of this report — basic scientific research. Given that there is no comprehensive set ofdata collected for spending on basic research, the closest proxy we can find is spending onR&D in the higher education sector. Federal spending on research in this sector represents42

The Socio-Economic Importance of Scientific Research to Canada Page 43© David A. Wolfe and Ammon Salterabout one fifth of total federal spending on R&D. The data in Table 9 indicate how the trendin this category has fared in recent years.Table 9. Federal Government Payments to the Higher Education Sector for R&D, byDepartment or Agency, 1987-88 to 1996-97 (in millions of dollars)Department 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 p 1996-97 eor agencyAGR............. 4 7 5 5 4 3 3 5 4 2CIDA............ 25 27 24 25 26 24 22 21 21 21ENV............. 2 2 1 2 2 5 9 15 13 11HC............... 8 11 10 11 11 11 9 15 16 16MRC............ 158 170 183 219 222 231 233 239 227 218.NDEF........... 8 9 9 11 8 7 6 6 10 8NRES........... 5 6 7 7 7 7 8 7 6 4.NRC............. 28 30 32 37 33 37 32 35 34 19NSERC......... 281 299 317 377 389 401 394 393 380 360.SSHRC.......... 40 46 50 57 60 61 61 61 60 57Other............ 15 17 26 18 18 33 39 34 28 31Total ............ 574 624 664 769 780 820 814 831 798 748Notes: p = preliminary figures; e estimatesSource: Statistics Canada, Table 24, Federal Government Expenditures and Personnel onActivities in the Natural and Social Sciences, 1987-88 to 1996-97, ST 97-04 (March 1997).The data in Table 9 indicate that the pattern of federal spending on research activities in thehigher education sector has tracked the broader pattern of spending in the portfolio as a whole.Spending rose significantly in the late 1980s and early 1990s following the commitment by thegovernment to improve the research base, especially for the three granting councils. Notsurprisingly, it reached its peak in 1994-95, just before the introduction of the government’srestraint program. While spending levels held fairly steady during the first two years of thegovernment’s mandate, they have fallen precipitously since — by more than $80 million incurrent dollars (and even more if allowance is made for the effects of inflation). Thisrepresents a fairly major reversal of the policy directions enunciated in the early years of theLiberal government’s mandate and contradicts fairly strongly the message sent out during theS&T Review — both those contained in the interdepartmental working documents and in thefinal report. The fall in the level of federal spending in this area represents a significant blow43

The Socio-Economic Importance of Scientific Research to Canada Page 44© David A. Wolfe and Ammon Salterto the funding of research in the higher education sector. This was clearly acknowledged byJohn Manley on his swearing in as Industry Minister for the Liberal government’s secondmandate. He indicated that one of his two immediate priorities in his second term in theportfolio would be to fight for a larger share of the budget for the research granting councils(Eggertson 1997, p. B4). This represents one of the strongest affirmations from the currentgovernment of the validity of the arguments presented above.While the federal government is a principal funder of research in the higher education sector, itis by no means the only funder. Additional funds are also provided by provincialgovernments, the higher education sector itself, business enterprise, private non–profitorganizations and foreign funders. The data in Table 10 present the other sources of fundingfor basic research and the relative proportions of their contribution. Some caution must betaken in interpreting the data in this table, particularly with respect to the estimates for thehigher education sector. These calculations are based on estimates of the post-secondaryinstitutions’ total budgets devoted to research, using estimates of time use, some of which aredrawn from other countries. 25 The data in this table are not directly comparable to those in theprevious ones, because they are derived from surveys of the institutions themselves, whereasthe data in the previous table are derived from the annual survey of federal S&T activities.Table 10. Estimates of R&D Expenditures in the Higher Education Sector by Source ofFunds, 1987-88 to 1994-95 (in millions of dollars)Year Federal Provincial Business Higher Private Foreign TotalGovernment Government Enterprise Education non-profit1987-88 560.3 217.8 93.8 823.7 141.5 11.6 1,848.71988-89 624.9 261.2 115.1 810.9 172.8 13.2 1,998.21989-90 669.4 285.5 139.7 941.1 165.2 11.8 2,212.81990-91 815.0 309.7 155.3 964.1 196.9 12.6 2,453.51991-92 829.4 309.3 241.6 1,039.0 225.7 14.6 2,659.51992-93 865.2 322.7 304.9 1,034.6 202.5 20.4 2,750.31993-94 872.2 339.0 306.9 1,032.5 249.5 19.7 2,819.71994-95 883.0 338.9 296.7 1,057.9 263.5 17.7 2,857.725 The estimates for these data are currently undergoing revision as part of Statistics Canada’s Science andTechnology Rede sign Project.44

The Socio-Economic Importance of Scientific Research to Canada Page 45© David A. Wolfe and Ammon SalterSource: Statistics Canada, Table 2, Estimation of Research and Development Expenditures inthe Higher Education Sector, 1994-1995, Service Bulletin Science Statistics, ST 96-07October, 1996.However, these data can be compared directly with those for other OECD countries. Thecomparison does not place Canada in a favourable light. As can be seen from Table 11,Canada ranks well down the list of OECD countries in terms of per capita spending forresearch and development in the higher education sector and well behind the technologicalleaders, Japan, the United States and Germany.Table 11. R&D Expenditures in the Higher Education for the OECD CountriesCountry Herd Population HERD Per Capita Year(Million current PPP $) (millions)Australia 1,362 17.838 76.35 1994Austria 799 7.992 99.98 1993Belgium 898 10.084 89.05 1993Canada 2,289 29.606 77.32 1995Denmark 408 5.189 78.63 1993Finland 388 5.108 75.96 1995France 4,383 58.141 75.39 1995Germany 7,257 81.662 88.87 1995Greece 222 10.379 21.39 1993Iceland 21 .267 78.65 1995Ireland 166 3.580 46.37 1995Italy 2,866 57.283 50.03 1996Japan 16,967 125.250 135.47 1995Netherlands 1,692 15.383 109.99 1994New Zealand 154 3.480 44.25 1993Norway 438 4.360 100.46 1995Portugal 254 9.921 25.60 1995Spain 1,411 39.210 35.99 1995Sweden 1,181 8.719 135.45 1993Switzerland 1,108 7.037 157.45 1994United Kingdom 4,022 58.613 68.62 1995United States 27,300 263.057 103.78 1995Source: OECD, STIU Database, May 1997.One might argue that the decline in the absolute level of funding for basic research and therelative standing of Canada in relation to other countries reflects on the quantity and quality of45

The Socio-Economic Importance of Scientific Research to Canada Page 46© David A. Wolfe and Ammon Salterthe research produced in this case. But exactly the opposite is true! Using bibliometricmeasures of the number of scientific papers produced in different countries and the number oftimes that the papers of one country are cited by researchers in other countries provides arough gauge for judging the quality of the scientific output in individual countries. Thesemeasures should be treated with some caution as bibliometrics remains an imperfect science atbest, and these results can only be taken as a rough indication of the quality of the scientificoutput. With this qualification in mind, Peter Macklem, the head of one of the federal Centresof Networks of Excellence suggests that four metrics can be used to evaluate the quality of ourscientific output in relation to that of other countries: the productivity of Canadian research canbe measured by the number of scientific publications per capita; the scientific impact of thatresearch can be judged by the average number of times a publication is cited by other scientistsmultiplied by the number of publications per capita; the scientific efficiency of our researcheffort can be judged in terms of the number of publications per dollar spent on research; andfinally, effectiveness is the number of citations per dollar spent on R&D. According to hisestimates, Canada ranks first in research productivity, efficiency and effectiveness among theG-7 countries and is second only to the US in impact (1995). These estimates are confirmed ina recent publication of Science magazine in the UK (May 1997). It appears that Canada isreceiving more than fair value for our investment in basic scientific research!CONCLUSION: TOWARDS A NEW APPROACHThe evidence presented in this report confirms the idea that talk of a knowledge–basedeconomy is more than just a convenient turn of phrase. Government–funded basic research isa critical source of investment for developing a society's learning capabilities. Governmentfunding expands the technological opportunities available for firms to draw upon as they goabout developing new products and processes. It supports the training of students, who uponentering industry, transfer their skills and knowledge about science and technology into theprivate sector. Given the localized nature of the innovation process, government support forbasic research fosters the creation of dynamic agglomerations of firms around centres of highereducation and it sustains the growth of untraded interdependencies among these parts of theinnovation system.The empirical evidence as to the directly measurably benefits of this investment has provendifficult for economists and students of science and technology to construct. Econometricapproaches often fail to account for the heterogeneity of the innovation process. Recentsurveys have highlighted the variety of actors and relations in the innovation system, but donot offer detailed analysis of particular technologies. Case studies point to the complexity of46

The Socio-Economic Importance of Scientific Research to Canada Page 47© David A. Wolfe and Ammon Salterthe relationship, highlighting the interpersonal and tacit character of much of the process ofknowledge creation and diffusion. However, taken collectively, the body of evidence reviewedin this report provides a strong indication of the social and economic benefits that accrue to acountry’s innovation system from public funding for basic research.The importance of this conclusion is increasingly recognized among a number of our majorcompetitors. One of the final reports issued by the US Office of Technology Assessmentbefore its untimely demise sounded the warning that a shift in private funding away from basicresearch and towards more short–term, commercially–oriented research posed a threat to thefuture research base of the US economy. This shift is reflected in the downsizing of many ofthe large corporate research laboratories in the US and their refocusing towards more productdevelopment–oriented divisions. The OTA warned that, in light of the pressure to reducefederal budget deficits, funding for basic research at universities and federal laboratories coulddrop further, a change which “could potentially reduce the amount of basic research availableto US firms” (1995, p. 16). A recent White Paper on Basic Research published by R&DMagazine in the US echoed this warning. It notes the growing concern among both R&Dmanagers in industry and research administrators in universities that the shift away from basicresearch and a more long–term focus towards more commercially–relevant research with ashorter time horizon is drying up the pool of scientific knowledge that can feed futureinnovations. It quotes from a recent letter sent by 60 Nobel Prize winners to President Clintonand the US Congress advocating the continued funding for university–based research,America’s future prosperity will depend on a continued commitment to producing newideas and knowledge, and the people educated to apply them successfully. They will becentral to our economic opportunity in the face of intense global competition, to ourprotection against renewed threats to our security and environment, and to ensuring thehealth of Americans. Federal funding for university–based research is an investment inour future that should be maintained (Vandendorpe 1997).These concerns were echoed in a recent speech by Peter Nicholson, Executive Vice–Presidentfor Corporate Strategy of BCE, Inc. and formerly a senior policy advisor to the Minister ofFinance. Citing the White Paper on Basic Research and other sources, Mr. Nicholson warnedthat, “The trend away from curiosity–driven research in favour of highly directed investigation. . . must not be taken too far. Otherwise, we will deplete the wellspring of truly fundamentalinnovation on which sustained improvement in the human condition depends” (1997, p. 3).These remarks underline a central point made earlier in this report — continuing investments inbasic scientific research sustain both the number and variety of potential innovations that firmscan draw upon. A failure to sustain that investment undermines their ability to do so.47

The Socio-Economic Importance of Scientific Research to Canada Page 48© David A. Wolfe and Ammon SalterA further illustration of the importance attached to investing in basic research comes fromrecent accounts of the growing competition among US states to recruit top research scientists.In a recent case, Emory University built a $10 million research lab to attract a top researchscientist from UCLA. Overall, the Georgia Research Alliance (a non–profit organization) hasspent more than $160 million in the past four years to recruit twenty two scientists to stateinstitutions (Jaffe 1997). This trend among the US states reflects a significant shift away fromthe traditional form of smoke–stack chasing they have engaged in, towards a moreknowledge–based approach that recognizes the kinds of regional agglomerations andtechnological spillovers discussed in this report. It underlines the extent to which they arebeginning to perceive the fundamental research base of their economies as a source ofcompetitive advantage.The critical issue for Canada is how well we have absorbed these lessons. Over the pastdecade, governments of both major parties have offered rhetorical support for the importanceof investing in basic scientific research, but their fiscal actions have not always mirrored theirwords. In the late 1980s and 1990s, budgetary spending on basic research in the highereducation sector increased; but this growth came to a sudden halt in 1995 and has fallenprecipitously since then. Actions taken in the 1997 budget to create the Canada Foundation forInnovation and to stabilize funding for the Networks of Centres of Excellence offset some ofthis damage, but cannot, on their own, sustain the degree of research activity that is needed.The challenge for the next federal government is not only to restore the funding for scientificresearch to the level achieved before 1995, but to go further, if we want to transform Canadainto a truly knowledge–based economy.48

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