Canada's Regional Innovation System: The Science-based Industries 9780773572430

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CANADA'S REGIONAL INNOVATION SYSTEMS

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Canada's Regional Innovation Systems The Science-based Industries JORGE NIOSI with the collaboration of TO MAS G A B R I E L BAS and

MAJLINDA ZHEGU

McGill-Queen's University Press Montreal & Kingston • London • Ithaca

© McGill-Queen's University Press 200 ISBN 0-7735-2823-7 Legal deposit first quarter 2005 Bibliotheque nationale du Quebec Printed in Canada on acid-free paper that is I00% ancient forest free (I00% post-consumer recycled), processed chlorine free. Publication of this book has been assisted by a grant from the Publications Committee of the University of Quebec in Montreal McGill-Queen's University Press acknowledges the support of the Canada Council for the Arts for our publishing program. We also acknowledge the financial support of the Government of Canada through the Book Publishing Industry Development Program (BPIDP) for our publishing activities.

Library and Archives Canada Cataloguing in Publication Niosi, Jorge, I945Canada's regional innovation system / Jorge Niosi; with Tomas Gabriel Bas and Majlinda Zhegu. Includes index. ISBN 0-7735-2.82.3-7

I. Technical innovations - Economic aspects - Canada. 2. Industrial location - Canada. 3. High technology industries Canada. I. Industries de pointe - Canada. I. Bas, Tomas Gabriel II. Zhegu, Majlinda III. Title. TI77-C2N553 2004

338'.o64'o97I

C2004-904448-6

This book was typeset by Dynagram Inc. in I0.5/13 Sabon.

Contents

Tables, Figures and Sidebars vii Preface

xi

I

Introduction: Regional Production Systems and Regional Systems of Innovation 3

2

Methods: Patent Analysis and Related Techniques

3

Biotechnology (with the collaboration of Tomas Gabriel Bas) 29

4

Aircraft systems of Innovation (with the collaboration of Majlinda Zhegu) 6I

5

Regional Systems of Innovation in Telecommunications

6

Semiconductor Innovation in Regions no

7

Regional Computer Software Innovation

8

Conclusion I I4 References Index

I69

I59

I25

2I

87

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Tables, Figures and Sidebars

TA B L E S

3.I Definitions of the sectors 30 3.2 List of biotechnologies 3I 3-3 Core biotechnology firms in Canada by province, 200I 33 3.4 Core biotechnology firms in Canada by area of research, 200I 33 Largest Canadian biotechnology companies by market capi3.5 talization, as of January 2003 34 3.6 Canadian core SBFS by size, as of August 2002, 35 3.7 Canadian core SBFS by province, as of August 2002 35 3.8 Canadian core SBFS' expenditure in biotechnology R&D by province, I997-2001 (c$) 36 3.9 Canadian core SBFS by province, I997-2001 37 3.10 Canadian core SBFS' revenues in biotechnology by province, I997 and 200I (c$) 37 Canadian private investments in core biotechnology firms by 3.I I province, 200I (c$) 38 3.I2 Canadian private investments in core biotechnology firms by city, 200I (c$) 38 3.I3 Canadian venture capital in biotechnology by metropolitan area, 200I 39 3.I4 Year of foundation of patenting firms existing in 2002 40

viii

Tables, Figures and Sidebars

3 - I 5 Year or foundation or all firms existing in 2002 41 3.I6 Regional concentration of U.S. patents of Canadian core bio-

technology firms (I990-2001)

42

3.I7 Location biotechnology licensees, five NRC labs, and five re-

search universities 43 3.I8 Toronto human health megacentre in 200I 54 3.I9 Montreal human health megacentre in 200I 57 4.I TPC investment I996-2002 and jobs created/maintained by 4.2

4.3 4.4 4.5 4.6 4.7 4.8

5.I 5.2 5.3 5.4 5.5 5.6 5.7 6.I 6.2 6.3 6.4 6.5 7.I 7.2 7.3

province/region 66 TPC investment I996-2002 and jobs created/maintained by technology field 66 TPC main loans to aircraft companies, I996-2002 67 Largest Quebec contributions to the aerospace industry, I997-2003 68 Patents in Canadian aircraft I976-2002, main clusters 77 Geographical concentration of patents in main RSIS, I9762002 8I Economic concentration of patents, I976-2002 8I Canada's aerospace RSIS by technology according to the number of patents I976-2002 82 Telecommunications R&D expenditures in Canada, selected years 88 Telecommunications intramural R&D expenditures in Canada by province, selected years 88 ICT sector employment, in thousands, I995-2001 92 ICT sector intramural R&D expenditures, I997-2002, c$ million 93 Regional distribution of patents, I976-2002 94 Major corporate R&D spenders in ICTS, 200I 95 Ottawa's largest telecommunication companies, 2003 I05 The world semiconductor industry, 2002 I I 2 Ottawa's main semiconductor companies, 2003 I I 9 Canada's semiconductor manufacturing companies I2I Toronto semiconductor patents I22 Montreal semiconductor patents I22 Summary statistics for computer systems design and related services, 200I (NAICS 54I5I0) I28 Summary statistics for software publishers, 200I (NAICS 5I I2I0) I28 Summary statistics for data processing services, 200I (NAICS 5I42I0) I29

Tables, Figures and Sidebars

ix

7.4 Top twenty-five independent Canadian software firms in 2002.

according to revenues I30 Top Canadian software R&D spenders in 200I I33 7.5 7.6 Population of selected CM AS and software firms, 200I-02 I34 7.6a Population of selected provinces and software firms, 2002,

7.7 7.8

7.9 7.I0 7.I I 8.I 8.2 8.3 8.4 8.5

I34

Top Toronto CM A largest software publishers based on local employment, 2002 I35 Top Montreal CM A largest software publishers based on local employment, 2002 I37 Top Ottawa software companies in 2002 I39 Top Vancouver software companies in 2002 I40 A comparison of the four largest software-publishing agglomerations, 2002 I4I Summary findings about Canadian RSIS and clusters I46 Elements in the evolution of high-tech clusters I50 Some U.S. municipal development initiatives I55 Some Canadian municipal development initiatives I56 Some Canadian provincial development initiatives I57 FIGURES

3.I Venture capital invested in Canadian biotechnology (c$), 199I-2001 36 4.Ia Aerospace products and parts manufacturing, total employees, main provinces, I999 69 4.Ib Aerospace products and parts manufacturing, total employees, main provinces, I990 69 4.23 Aerospace products and parts manufacturing, value added, main provinces, I999 70 4.2b Aerospace products and parts manufacturing, value added, main provinces, I990 70 4.3 Sales figures 200I by province 7I 4.4 Sales figures by sub-sector, 200I 7I 4.5 The producers' pyramid 73 4.6a Montreal aerospace cluster 74 4.6b The diversification of Montreal's regional innovation system and production cluster 75 Aerospace products and parts R&D personnel, 2000 83 4.7* 4.7b Aerospace products and parts R&D personnel, main provinces, I990 83

x

Tables, Figures and Sidebars

4.8 Evolution of aerospace patents, I976-2003 84 5.a©McGil-Que n'sUniversityPres 20 5Ia Total employment in the telecommunication equipment manufacturing industry, I990 97 Total employment in the telecommunication equipment man5.Ib ufacturing industry, I999 97 5.23 Total value added in the telecommunication equipment manufacturing industry, I990 97 5.2b Total value added in the telecommunication equipment manufacturing industry, I990 98 5.3 Ottawa as a percentage of Canadian telecommunications patents, I976-2002 I0I 5.4 Ottawa, Toronto, and Montreal telecommunication patents, I976-2002 I02 5.5 U.S. telecommunication patents invented in Canada by city, I976-2002 I02 6.Ia Canadian total value added in semiconductor manufacturing, I990, major provinces I I 6 6.Ib Canadian total value added in semiconductor manufacturing, I999, major provinces I I6 6.2a Canadian total employment in semiconductor manufacturing, I990, major provinces I I 7 6.2b Canadian total employment in semiconductor manufacturing, I999, major provinces I I 7 6.33 Canadian semiconductor patents, I976-1989 I20 6.3b Canadian semiconductor patents, I990-2002 I20 SIDEBARS

7.I Obtaining nominal data on software developers I3I 7.2 Definition and description of industries I32 7.3 University Spin-offs I42

Preface

Some years ago, I published a book on Canada's national system of innovation in which I took into consideration the international dimension, but not the regional one (Niosi 2000a). I felt that the marked geographical agglomeration of innovative firms and other institutions devoted to R&D into a small number of metropolitan areas was worth a separate effort. This book is a modest move in this direction. My research spanned four years (I999-2003), and I used patents as the main, but not the only, method to find where invention (the first phase of the innovation continuum) takes place. I also used Statistics Canada figures on R&D, production, and employment to find the locus of innovation. During these years, I had the privilege of collaborating with a group of doctoral students, including Tomas Gabriel Bas and Majlinda Zhegu, and a postdoctoral fellow, Dr Marc Banik, now a professor in the Department of Management and Technology at the Universite du Quebec a Montreal. This research was also facilitated by my participation in the Innovation System Research Network, a pan-Canadian initiative gathering most if not all the major researchers in this area of studies between Halifax and Vancouver. Agnes Jacob improved the quality of my written English. The Social Sciences and Humanities Research Council of Canada, and Canada Research Chairs Program founded the research. I am grateful to all of these people and two organizations. Jorge Niosi

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CANADA S R E G I O N A L INNOVATION

SYSTEMS

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I

Introduction:

Regional Production Systems and Regional Systems of Innovation

Debates about regional agglomeration of production started with Alfred Marshall at the beginning of the twentieth century and continued with Francois Perroux and others in the I9605 on industrial poles. More recently, Krugman (I99I) has coined the term "economic geography." These writings, however, analyse regional production systems, i.e. local agglomeration of productive firms based on the availability of some natural resource, pools of labour force, or major markets (Ragni, I997). The new emerging literature since the I9905 has been about regional innovation systems, the agglomeration of firms and other institutions devoted to the creation of new and improved technology. These firms often use few natural resources, demand mostly skilled labour, and are less dependent on local markets, as their products are usually easy and inexpensive to transport across the world. The difference between the two types of regional systems appears in Amin and Thrift (I995) and Lawson (I999), among other authors. During the twentieth century, innovation studies moved from the isolated firm and the entrepreneur toward larger economic units and complex linkages among different types of organizations. In Schumpeter's work (from the 19105 to the 19405), small and large firms are responsible for innovation without reference to environmental conditions that could affect their innovative performance (Schumpeter, 1934, 1942,). Schmookler (1966) underlined the role of demand and

4

Canada's Regional Systems of Innovation

the market for innovation as key determinants of the innovative behaviour of the firm. Freeman (1974) argued that environmental conditions helped German chemical and electrical firms in the 18505 to start conducting in-house R&D in order to compete with their more advanced British and French counterparts. Von Hippel (1976) emphasized interactions among firms during the process of technological change, while Gille (1978) pointed out that innovation has a systemic character. Mowery and Rosenberg (1979) provided a useful and necessary balance to Schmookler when they highlighted the role of the science and technology base in innovation; the difference between "market pull" (Schmookler) and "science and technology push" (Mowery and Rosenberg) innovations has since been understood. In the early 19808 Nelson (1982, 1984) showed that the state was the most important supplier of funds for science and technology and explained that social and economic benefits that producers could not appropriate justified taxpayer support, through the state, for technological innovation in private firms by different means. Finally, in the late 1980$, the concepts of "national innovation system" and then "sectoral" and "regional" innovation systems appeared. Since then, innovation has been seen as a geographically dependent phenomenon. It occurs almost exclusively in a group of some twenty industrialized countries. The now abundant literature on national systems of innovation, encompassing the late 1980$, 19905, and early 20005, has documented this fact and also shed light on the important institutional differences between these nations in terms of industries where innovation occurs, inducements, and policies (Freeman, 1987, 1997; Lundvall, 1992; Nelson, 1993; Niosi et al., 1993; Niosi, 2oooa, etc.). In the 19905, the regional dimension of innovation has also become evident: within industrial and industrializing countries, innovation takes place in a few metropolitan areas and regions (O'Huallachain, 1999; Sun, 2000). Again, these regions diverge in their specializations, institutions, incentives, and human capital. In other words, from a geographical point of view, nations are far from being internally homogeneous in terms of innovation capabilities. Within nations, regions differ in the quality and quantity of higher education institutions and public laboratories, as well as in their capacity to attract government technology organizations or private sector research laboratories. In the comparison between re-

Introduction

5

gions such as California and Mississippi within the United States, Ile-de-France and Brittany in France, or Basilicata and EmiliaRomagna in Italy, the contrast between highly innovative and less innovative districts is astounding. However abundant, regional innovation literature is most often descriptive, only rarely trying to suggest concepts and hypotheses as well as methods to explain the growth of regional innovative clusters and their evolution, including their stagnation and decline. This chapter goes some way in this direction. THEORETICAL APPROACHES

Regional systems of innovation (RSIS) are complex, dynamic systems. "An economic system is dynamically complex if its deterministic endogenous processes do not lead it asymptotically to a fixed point, a limit cycle, or an explosion" (Day, 1994). In other words, complex systems are composed of interacting elements evolving on the basis of and as a result of their interaction (Rosser Jr, 2003). Regional systems of innovation - most often composed of innovative enterprises, research universities, government laboratories, and venture capital firms operating under appropriate public policy incentives - evolve on the basis of multiple interactions, be they financial, technological, personal, or regulatory. Thus venture capital firms will develop new areas of expertise (i.e. biotechnology) if they interact with universities conducting research on this new technology. Conversely, the presence of venture capital in a region will nurture the creation of university spin-offs using the new technology. Complex systems economics is a fast-growing area of evolutionary economics and management, and this book will draw on this tradition in the analysis of regional innovation systems. Existing Knowledge about Regional Systems Why do some regions in each industrialized or industrializing country hold such a high proportion of the national innovative activities, as measured by the regional concentration of researchers, patents, or R&D expenditures? Various reasons have been given in different brands of heterodox economics. Baumont et al. (2.000) mention (a) microeconomic theory of imperfect competition among firms and regions for scarce resources; (b) new theories of international trade;

6

Canada's Regional Systems of Innovation

(c) new endogenous growth theories; and (d) new urban economics. All these approaches have some elements in common, including increasing returns to scale, imperfect competition, pervasive externalities, and strategic behaviour of agents and particularly strategic interaction among them. In other terms, some regions concentrate a high proportion of skilled labour, public policy incentives, and organizations able to design knowledge-intensive products (such as aircraft, composite materials, information technology goods and services, or pharmaceutical products) and, in such a way, they become the national hubs of these activities. On the basis of the most recent theories of administration science, other complementary approaches have been developed where innovative regions appear as repositories of specific competencies that are difficult to identify and replicate (Lawson, 1999; Niosi and Bas, 2001). Why do innovative firms agglomerate? Reasons vary according to authors: - Opportunities for knowledge externalities and learning (Florida, 1998; Feldman, 1999; Larsen, 1999; Jaffe and Trajtenberg, 2,002) justify agglomeration of knowledge-intensive industries around knowledge-producing institutions such as universities and government laboratories, as well as large private R&D centres. Interaction and networking (Saxenian, 1998) are linked to this kind of explanation. - Pools of talent operate as magnets for new firms, as they provide the ideal mechanism for the acquisition of human capital and associated personal knowledge (Padmore and Gibson, 1998). At the same time, spin-offs from institutions where this talent concentrates create new firms close to existing ones, as top scientists are reluctant to abandon their position in universities while they create new firms in biotechnology (Zucker, Darby, and Armstrong, 1998). Thus, Zucker et al. have discovered that biotechnology firms concentrate geographically around star university scientists. - Particular effects are associated with proximity, such as trust and solidarity (de la Mothe and Paquet, 1998). In iterated games, players tend to "cooperate" instead of "defect," a fact well known in game theory; when players are forced to play repeated games, cheaters are easily discovered and reputation effects

Introduction

7

follow. Within regions proximity usually forces organizations to iterate their relations, thus to cooperate. Open labour markets are also a result of proximity, and it was suggested that there is an advantage in these types of open markets as opposed to hierarchical ones (Saxenian, 1998). - Some regions provide easier and cheaper access to financing (i.e. venture capital), suppliers, clients, consulting services, etc. This is why urban economies, accessible in larger cities, seem more clearly established in the empirical literature than knowledge externalities of smaller and more specialized regional systems (Guillain and Hauriot, 2000). While most of these elements are compatible with an evolutionary approach to regional innovation systems, they do not all agree. Most importantly, these findings come from two different and sometimes conflicting approaches, as Antonelli (1999) has correctly underlined. Some come from the transaction cost approach, which stresses opportunism in economic behaviour, thus putting the emphasis on trust and confidence engendered by proximity (Storper, 1995). Others come from the externalities framework, which insists on increasing returns within regions, due, again, to proximity and bounded rationality, as well as myopic behaviour. The latter is clearly more attuned to the evolutionary perspective. However, both sets of arguments often appear together without a proper understanding of their very different microeconomic assumptions. In an evolutionary framework, however, additional elements need to be underlined. They include initial conditions, chance, and cumulative processes. An Evolutionary Approach to RSIS Any evolutionary approach to economic thinking is based on a few assumptions. These assumptions are first and foremost defined by the rationality of agents, which, following Nobel prizewinner Herbert Simon's seminal contribution, is considered bounded with a corollary of variety of semi-random innovation behaviour and evolutionary change (including variation, selection, and imitation) through which agents and organizations try to adapt to macroeconomic and macropolitical changes in their environment. The evolutionary approach

8

Canada's Regional Systems of Innovation

also includes chance and cumulative processes not necessarily tending to a stable equilibrium, multi-stability (different possible and competing institutional structures), and path dependency and irreversibility. These assumptions are compatible with most of the elements previously identified for innovative regions, including imperfect competition (perfect competition implies perfect knowledge, thus the possibility for any economic agent centred on any region to copy the innovative behaviour of any other one), increasing returns to scale, and externalities. However, an evolutionary analysis goes far beyond a piecemeal approach to regional innovation. In regional innovation systems, initial conditions include different endowments of institutional firm attractors, including knowledgeproducing organizations, policy, and infrastructure environments across regions. Unlike traditional industries, where localization can be easily traced back to natural resources, pools of cheap labour, or major markets, R&D-intensive industries are more nomadic and may, in principle, be located in many different geographical areas. Attractors are required to agglomerate these industries not dependent on traditional localization factors. Attractors are often knowledge-producing organizations that by their size, efficiency, and effectiveness create the major input in innovative regions, that is, commercially useful knowledge. The major organizational attractors of science-based industries are slowly being identified. One thing is sure: the nature of the attractors varies according to industry. Thus: i Major innovative industrial users are the key attractors of advanced materials producing firms. These materials are produced in smaller quantities (compared to traditional materials) and need frequent interaction between users and producers. Advanced materials are a good illustration of market pull innovation, and advanced materials producers tend to locate close to major users (Forrester, 1988). z Major innovative corporate assemblers tend to agglomerate parts and components producers in aerospace, aircraft, and other mass transportation systems. Major clusters are Seattle (Boeing), Toulouse (Airbus), and Montreal (Bombardier), where the world's three largest producers of aircraft are located. The evolution of this relationship through time is fairly complex, as we shall see in chapter 4.

Introduction

9

3 Knowledge-producing semi-public institutions such as universities are major attractors and incubators in biotechnology (Acs, 1996; Kenney, 1986). This has proved true in three of the countries leading the biotechnology revolution: the United States, the United Kingdom, and Canada (Swann et al., 1998; Yarkin, 2000; Niosi and Bas, 2,001). 4 Large R&D-intensive corporations are the key agglomerators and incubators in information and communication technologies (ICTS) (Swann et al., 1998), as dozens of small and medium-sized enterprises (SMES) spin off from these organizations to thrive on externalities generated by them. In a sense, most ICTS' regional systems seem to be cases of agglomeration and incubation of new companies on the basis of ideas and labour pools created by larger firms. Ottawa is an agglomeration of that sort, based on Nortel's incubation activities, as we shall see in chapters 5 and 6. 5 Venture capital is another attractor in all knowledge-intensive industries where SMES are pervasive, such as biotechnology, medical devices, and software. However, venture capital is an attractor as much as a follower, as these specialized financial organisations are able to co-locate themselves with agglomerations of new firms and talent. The anchor tenant hypothesis (Feldman, 2002) summarizes some of the dimensions of the attractor phenomenon. Feldman compares the innovative region with a large commercial centre, where the presence of a large anchor tenant creates agglomeration externalities for many other smaller firms. Aircraft (the large assembler), biotechnology (the large research university), and information technologies (the large R&D-intensive corporation) are all cases of anchor tenants creating large regional demand for specialized producers as well as geographically concentrated labour pools from which SMES may emerge and prosper. Usually, these organizational attractors are supplemented by the appropriate infrastructure such as airports, highways, cable communications etc., but infrastructures by themselves are not enough to explain the rise of a RSI. 6 The policy environment is a more central attractor. It includes local, national, and even supranational public policy inducements. Taggart (1993) has shown how important patent and R&D policy was for attracting pharmaceutical firms to some industrial nations. Similarly, innovative regions have supposedly developed under local, national, or supranational policies. Local initiatives

10

Canada's Regional Systems of Innovation

include the economic development corporations created by municipalities in order to bring new investment to the region. National and subnational policies seem more important; they include tax credits for R&D, direct research subsidies, the creation of government laboratories, and the design of special inducements and/or industrial or innovation funds for specific regions, as well as the support of research universities. Horizontal policies at the national level produce, more often than not, results at the regional level. Even if incentives apply to the entire country, only a few regions are able to take advantage of them. This characteristic of some geographical areas may be called "absorptive capacity" of regions. Audretsch and Feldman (1999) found that in the United States large metropolitan areas concentrated most of the innovative capacity of the country, which suggests that in that country, national policies produce very skewed local effects. In the mid-1990s, the German government organized a BioRegio contest to foster competition among German regions in the emerging biotechnology industry (Dohse, 2,000). The result was that a few German areas received most of the incentives. Supranational inducements include those helping local actors to increase synergies among themselves, such as the 1994 European Union Regional Innovation Strategies (RIS) and Regional Innovation and Technology Transfer Strategies (RITTS). These programs may have the same local effect, even if they are open for competition in the whole union. Thus a few regions in the European Union (and particularly the London-Amsterdam-Paris-Frankfurt-Milan corridor) keep and even increase their advantage over laggard ones, such as southern Italy, Portugal, or Greece. A recent public document classifies these local, national, and supranational policies in six categories (Conseil de la science, 2001): - Those aiming to stimulate self-organization among regional agents in order for those agents to define a framework conducive to the creation of a RSI; - Those designed to stimulate linkages between local agents and extra-regional innovative organizations; - Those designed to favour learning and knowledge exchange both inside the region and between the region and its outer environment; - Programs aimed at improving the acquisition of strategic information by local firms;

Introduction

ii

- Those designed to improve the local technical and industrial infrastructure; - Those aimed at helping specific regions to improve their innovative potential in a particular industry or technology. Local policies are in some cases conducive to the attraction and/ or generation of innovative firms in a laggard region. However, these regions usually have limited financial and managerial resources, which often do not match the funds and talents of national governments. Also, because of their limited resources, they are often unable to counterbalance the effects of industrial fluctuations. The relative decline of Ottawa's telecommunication cluster in the early 2,ooos is a point in case, a decline that occurred in spite of the efforts of the Ottawa Economic Development Corporation to counter it. Local policies have more weight when they complement the resources and incentives of national policies. Therefore, when both Ottawa and Quebec decided that Montreal would be a pole of the aerospace industries, a decision that the market had made decades before them, the resources of several levels of government reinforced the regional innovation system. Chance plays a major, yet understudied, role (Arthur, 1994). Science-based industries are the most footloose of all, and the nature of their particular attractors is still ambiguous. Thus, government policies may inadvertently support the development of a specific industry in a region or, conversely, concentrate on the development of infertile incubators or regions. A detailed study of Canada's regional clusters in biotechnology shows that both federal NRC labs and provincial labs in biotech have played a secondary role in stimulating biotechnology clusters, as most of these labs are situated in remote regions or small metropolitan areas (Niosi and Bas, 2.001). Also, historical events play a major role in unexpected ways. "In Cambridge, IBM was refused permission to establish its European R&D lab in the city in the 19605" (Lawton Smith et al., 1998: 134), thus inadvertently chasing the world's major incubator of electronic firms from the region. Cumulative patterns are also central to an evolutionary model. Krugman (1991) pointed out the first of them: increasing returns. Most present-day industries, particularly in high technology, show strong indications of increasing returns. Early entrants may reinforce

12,

Canada's Regional Systems of Innovation

their dominance in these industries through decreasing unit costs, and learning economies, network externalities, and market development also play a major role in reinforcing their dominance. Microsoft in packaged office software, Intel in microprocessors, Boeing in aircraft, as well as the world pharmaceutical industry are well-known cases of increasing returns leading to regional concentration of activities. Another cumulative phenomenon leading to regional concentration is incubation. Regional agglomeration of activities will not necessarily occur with the early entrants, as in the case of increasing returns. Early innovative entrants often become incubators of new firms. These may be either imitators or specialized suppliers and customers. Incubation thus generates major local cumulative effects. Incubation tends to promote local agglomeration because most if not all the spin-off companies tend to remain in the same region. The concentration of spin-offs in the mother regions reveals bounded rationality: new firms use local knowledge acquired during their incubation. Incubation of spin-off firms is a major method of economic replication and regional agglomeration. This cumulative phenomenon happened in Silicon Valley, with dozens of firms created on the basis of Bell Labs (Molina, 1989), in Cambridge with university biotechnology (Lawton Smith et al., 1998), and in Ottawa on the basis of Nortel central labs. Cumulative patterns, however, may be negative, not simply positive: at a given moment, and due to their own success, regions may exhaust their local advantages. They may become too polluted, too expensive, and/or they may lack space, skilled labour, or other crucial resources. The fundamental model posits that firms agglomerate to make use of some key input (i.e. human capital); however, as this resource becomes scarce, the number of newly founded and attracted firms will decrease (Zucker, Darby, and Peng, 1998). Thus, in the last fifteen years Silicon Valley's high technology industry has spilled over into Texas, Oregon, and Washington states because of lack of energy and water and the rising cost of space in California. Although the celebration of Route 128 and Silicon Valley's virtues continues unabated, the share of their major cities, such as Boston, San Jose, and San Francisco, has declined for the last fifteen years as the home of a percentage of U.S. high-technology industries (Acs, 1996, 2000). Other cumulative processes with regional innovation effects relate to externalities. Among externalities and agglomeration economies that are key in RSIS, knowledge spillovers seem paramount.

Introduction

13

Bounded rational agents will more easily adopt local knowledge: it is easier to transmit and to adapt and it can be transmitted from agent to agent with less distortion than distant knowledge. It has been proved that regions (states, metropolitan areas) with stronger university research are also those with stronger industrial research. However, as Guillain and Hauriot (2,000) have pointed out, research activities may be regionally concentrated (most often in larger cities) because of different processes, including the location preference of skilled workers or vertical relationships between firms operating in the same industries. Also, they recall that proximity is not always a guarantee of information exchange, as Saxenian has remarked time and again when comparing Silicon Valley and Route 12,8. Evolutionary theory shies away from a diffusion model based on a logistic curve, where all firms tend to adopt new technologies equally (Saviotti, 1996; Niosi, 1999). Conversely, some firms seem more inclined to adopt innovations. Similarly some regions because of the importance of their higher education institutions, the availability of venture capital, the presence of large R&D organizations, superior combination of public policy inducements, or other reasons - are more prone to attract new science-based industries. Finally, cumulative processes reinforcing local regional advantages are compatible with irreversibility: regions that have previously invested heavily in some obsolete technology or industry may experience difficulties in imitating growing regions because past investments use existing resources, including human resources. Present-day industries may crowd out future industries. Multi-stability applies to regional systems of innovation. RSIS, like national systems of innovation (NSIS), seem to present different configurations of institutions. Voyer's (1998) comparison of such different RSIS as Milan, Paris, London, Route 128, Silicon Valley, or the Triangle Research Park in North Carolina show very different combinations of university, private, and government innovation at work. Thus, agglomerations of firms within a particular technology or industry may be found in large diversified cities as well as in specialized areas hosting just one or two science-based industries related to local knowledge-producing institutions and serving world markets.

i4

Canada's Regional Systems of Innovation DEFINITIONS: CLUSTERS, POLES, AND REGIONAL INNOVATION SYSTEMS

The cluster concept has become the most popular one in defining these regional agglomerations. Michael Porter (1998, 2,000, 2,001) used the most widely used definition. A cluster is a geographically proximate group of interconnected companies and associated institutions in a particular field, linked by commonalities and complementarities. The geographic scope of a cluster can range from a single city or state to a country or even a group of neighbouring countries. Clusters take varying forms depending on their depth and sophistication, but most include end product or service companies; suppliers of specialised inputs, components, machinery and services; financial institutions, and firms in related industries. Clusters also often include firms in downstream industries (i.e. channels or customers); producers of complementary products; and specialised infrastructure providers. Clusters also involve a number of institutions, governmental or otherwise, that provide specialised training, education, information, research and technical support (such as universities, think tanks, vocational training providers) and standard setting agencies ... Finally, many clusters include trade associations and other collective private-sector bodies that support cluster members. (Porter, 2000: 2,54)

This definition has the advantage of being general enough to accommodate most, if not all, existing regional agglomerations of firms. Its major disadvantage lies on this same characteristic: it is so vague, in its geographical boundaries as well as in its institutional components, as be almost useless. As we shall see in the following chapters, regional agglomerations of high-technology firms vary in their geographical limits as well as in their institutional composition. In other terms, the components and confines of an aircraft region are quite different from those that one finds in a biotechnology cluster. Second, this definition goes some way in defining a productive cluster, but less far in the delimitation of an innovation cluster. Finally, the definition does not take evolution into consideration. A cluster may have some of the above-mentioned components in its initial phase, but others may appear later on, and some may never be present if they are essential to one particular technology. In this book, we use the term "cluster " to designate a regional (city, metropolitan, or provincial) agglomeration of productive - but not neces-

Introduction

15

sarily innovative - companies operating in the same or related industries. This use follows closely the literature where the concepts of "clusters" and "industrial districts" name such traditional places as Italian agglomerations of ceramic manufacturers, shoes, or wool sweaters, while regional innovation systems are more appropriate labels for geographical areas in which technological change is ubiquitous, not simply the repetitive application of time-honoured skills. The debate around regional innovation systems has evolved from the literature on national systems. National systems of innovation have been defined as sets of institutions (innovating firms, universities, and government laboratories) devoted either to the creation of new technology or to the improvement of existing ones (Freeman, 1987; Lundvall, 1992,; Nelson, 1993; Niosi et al., 1993). Interactive learning among these organizations is a key dimension of Nsis (Lundvall, 1992,). Similar elements are to be found in RSIS. However, and contrary to national systems, the administrative contours of regional systems are less than evident. The literature sometimes refers to cities (Acs, 1996; Larsen, 1999; O'Huallachain, 1999), sometimes to provinces, departments, counties, or states (Lawton Smith et al., 1998) or to less defined regions such as Silicon Valley, Route iz8 (Saxenian, 1998; Storper, 1995), or all of the above (Voyer, 1998). Whether regions are metropolitan areas, major sub-national administrative units (such as provinces, states, departments, or counties), or vaguely defined geographical areas (such as Silicon Valley or Route 12,8) as the substratum of RSIS, is not an inconsequential issue, because it has definite political and managerial implications. If RSIS occur most often in cities, provinces, states, or departments, then regional and national governments may have a key influence on their growth and evolution (i.e. create research universities or government laboratories, attract major innovative corporations, promote regional venture capital, or other). It is less clear what the political and managerial implications of RSIS are in vaguely circumscribed areas that include several different administrative authorities. We have defined national systems of innovation on the basis of elements (i.e. innovative firms, research universities, and government laboratories) and the flows (information, financial, personal, and technical) among the units within a given nation-state (Niosi et al., 1993). We may on the same basis build a definition of regional systems, with the caveat that the extension of the "region" is an empirical fact that needs to be considered.

16

Canada's Regional Systems of Innovation

Thus the following definition: Regional systems of innovation are sets of institutions (innovating firms, research universities, research funding agencies, venture capital firms, and government laboratories and other appropriate public bodies) and the flows of knowledge, personnel, research monies, regulation, and embodied technology that occur within a region (metropolitan area, subnational unit, or other).1 As such, regional systems of innovation are seen not as an alternative to national systems, but as another layer of a global system of technological innovation basically composed of not more than twenty industrial countries (Niosi and Bellon, 1994; Howells, 1999). ELEMENTS OF THE AGENDA

The agenda of research on RSIS has many unsolved issues and new questions. Some emerge from the above discussion. How Do Regional Innovation Systems Evolve? For any evolutionary economics and management study, the dynamics of RSIS and related clusters is central. RSIS (and related production clusters that may or may not coexist in the same geographical area) are ever-changing constellations of institutions and organizations. Economic agents change their behaviour in response to the activities of other agents. Venture capital firms relocate themselves to come closer to thriving new agglomerations of innovators. Research universities create offices of technology transfer (OTTS) in order to manage any intellectual property created in their campuses, a development that was evident in the United States and Canada in the 19908. The new OTTs attract venture capital firms and contribute to the incubation of new firms and other start-ups to take advantage of the new technologies. This complex dynamic is a key dimension of the development of local agglomeration of innovators.

i Regional innovation systems were previously defined by Cooke and Morgan in similar terms: "Regions which possess the full panoply of innovation organizations set in an institutional milieu, where systemic linkage and interactive communication among the innovation actors is normal, approach the designation of regional innovation systems" (Cooke and Morgan, 1998: 71).

Introduction

17

Are Firms in Innovative Clusters Better Performers? Innovating firms tend to regionally agglomerate. This behaviour can be explained in different ways. One is that their managers intend to gain some advantages from agglomeration. Thus, one should expect firms in clusters to display better performance than those outside clusters. The evidence for this superior performance is far from conclusive. Few studies have been devoted to this dimension of clustering. Baptista and Swann (1996, 1998) found that firms in innovative clusters grow faster if they are located in regions where the presence of firms in their own industry is strong. The presence of firms in other industries does not add to the performance of the innovative firms, suggesting that some congestion effects may also be at work. Another explanation for regional agglomeration is that some kind of bandwagon effect is taking place, one that Knickerbocker (1973) identified, decades ago, in his landmark study on multinational corporations. Firms move to some regions because industry leaders are there or have moved there. Followers infer, not necessarily with accurate knowledge about specific cost structures, that the region conveys some advantage to the leading firms, and followers intend to benefit from this advantage. Yet another explanation is that most regional agglomeration, particularly in high technology, is solely the result of the presence of strong incubators (such as research universities) or attractors (such as government laboratories) that do not convey any major advantage to the incubated (or attracted) firms. Do Regional Agglomerations in Different Technologies Display Different Geographical Boundaries and Trends? How geographically close are the different components of diverse regional innovation systems of varied technologies? How proximate are biotechnology firms among themselves and with the research universities from which they often emanate ? Also, do some cities, metropolitan areas, or provinces tend to concentrate the national activities in particular technologies? Are aircraft innovation activities agglomerating in some municipalities or provinces and abandoning others? If knowledge externalities are important sources of economies, and agglomeration diseconomies are not

18

Canada's Regional Systems of Innovation

costly, then some Canadian regions should tend to concentrate most if not all activities in one particular industry. Are RSI, in the Long Run, Better Economic Performers than Regions Not Based on Innovation? The economic performance of RSIS as units of analysis also needs to be re-examined, as does the evolution of regional concentration of innovative activities in each advanced or industrializing nation.2 The point here is that the performance of RSIS is variable through time, that positive agglomeration effects may at some moment be counteracted by negative congestion effects, and that competition among RSIS may affect the vitality or even the survival of some of the existing regions. What Are the Key Flows among Regional Agents? Knowledge externalities are paramount among the alleged agglomeration economies. However, too many studies assume that knowledge flows easily among innovating units within regional systems. Few studies have tried to measure these externalities. Also, personnel and financial flows, trust and confidence, and other types of linkages are most often assumed from physical proximity. However, some studies have shown that this is not always the case (as in Alsace in Heraud et al., 1995, where co-location is not followed by collaboration). Also, these flows are variable, not a constant that may be deduced from proximity. How much performance may be attributed to these flows? Which are necessary conditions of cluster and firm growth? Financial flows supposedly benefit regional innovation systems, as venture capital funds tend to support local firms. But again, the share of venture capital funds generated in a region and allocated to new firms in the same region is variable and requires more research. 2 According to some authors (de la Mothe and Paquet, 1998) many of the most famous clusters (the F our Motors of Europe, Silicon Valley in California) grow and outperform less glamorous regions. However, other authors (Acs, 1996; Voyer, 1998) have pointed out that Barcelona or the French Alps region (two of the self-appointed motors of Europe) are much less important, as high-tech agglomerations, than Paris or London. Or that Silicon Valley is rapidly losing importance as a cluster of U.S. high-technology, compared to less celebrated metropolitan areas such as Seattle, Washington or Austin, Texas.

Introduction

19

Similarly, venture capital executives tend to closely monitor the companies in which their firm invests, thus requiring physical proximity and creating a flow of administrative knowledge within the region. However, venture capital tends to become more national in scope and even to internationalize, and we are seeing more cases of Canadian venture capital firms investing in different cities than where they are located, British venture capital firms investing in North America, and American venture capital being invested in Canada and Europe, as well as in less developed countries (Wright et al., 2.002.). Specialization and Diversification Two different points of view compete as to the general trend of industrial districts in terms of their degree of specialization. For a majority of authors (in the tradition of P. Krugman, K. Arrow, P. Romer, and R. Lucas), regions tend to become more specialized through time, as knowledge spillovers occur most within localized areas. An opposite view is that of Jacobs (1969), for whom complementary knowledge spillovers easily cross industrial frontiers; the most innovative regions would not be small specialized regional systems, but large diversified metropolitan areas. Audretsch and Feldman (1999) brought compelling evidence in favour of the latter view. Using the U.S. Small Business Administration Innovation Database, they found that 96% of all innovations had occurred in American metropolitan areas, and 45% of these innovations had occurred in just four of those areas (NY-NJ, San Francisco-San Jose, Los Angeles, and Boston). CONCLUSIONS AND POLICY IMPLICATIONS

Regional systems of innovation can be conceived as the lowest geographical level of analysis in a global system of innovation composed of some twenty nations. According to Voyer (1998), some zoo regional systems exist, most located in larger cities within the more advanced industrial countries. The elements of RSIS are similar to those of national systems: innovating firms, research universities, government laboratories, and other institutions such as technology parks, venture capital firms, technology transfer agencies, and the like.

2.O

Canada's Regional Systems of Innovation

However, the linkages among these units at the regional level are not well documented, including knowledge links and other types of agglomeration economies. The relationships between these different degrees and types of linkages and different levels of innovative performance are barely understood. Our first conclusion is that more empirical studies are necessary to have a better grasp of the performance of innovating regions and of innovating firms within those regions. In particular, issues such as the acknowledged, but seldom proved, superior performance of firms within clusters compared with firms outside clusters, as well as the variable aggregate performance of the clusters themselves, require more thorough analysis. Knowledge externalities within clusters need much further study, as do the supposed positive effects of cooperation and networking, and trust and goodwill among local agents. Also, it is important to find out the appropriate geographical boundaries in the study of regional systems of innovation, whether they are urban agglomerations, more widely provincial, state, or county linkages and agglomeration economies, or less well-defined administrative areas. The recent literatures tend to favour larger metropolitan areas, but more comparative studies need to be made in order to assess whether smaller and/or less well-circumscribed regions perform equally well. The policy implications of such distinctions are major, needless to say, as they may set the limits of public administrators, either local, provincial, national, or supranational, to create "new Silicon Valleys." Should governments stimulate smaller regions or promote larger metropolitan areas when choosing regions for national laboratories, research universities, or industry-university consortia ? However inconclusive the evidence on these agglomeration factors may be still, some consensus is starting to emerge as to the main institutions acting as attractors and incubators in different science-based industries. Public policy may create a favourable environment for these institutions, be they research universities, large private sector laboratories, or other, and may launch virtuous circles of regional growth. The evolutionary approach may be helpful in putting some order in the rising but somewhat chaotic tide of literature on regional innovation systems. Some of its concepts (such as chance factors and cumulative causality, replication, multi-stability, irreversibility, and lock-in) can explain the remarkable concentration of innovative activities in a few small geographical areas of each industrial nation.

2

Methods: Patent Analysis and Related Techniques

This book relies on a variety of methods to identify innovative firms and innovative regions. The two most frequently used are patent analysis and licenses to patents. We have also identified - whenever possible - major R&D laboratories, both private and public (including their personnel and research expenditure), as well as research universities and other major agents in the innovative process, such as venture capital firms and venture capital financing by region. Finally, again whenever possible we also studied spin-offs and new firm foundation as indicators of the dynamic character of regions. Such an array of indicators allows us to draw a portrait of each of the major regions in Canada in all the major science-based industries, where most of Canada's R&D expenditures, patents and innovation take place. PATENTS AS INDICATORS OF INNOVATION

Few papers have been able to analyse the actual distribution of innovation in a regional or national territory. This is because there are few databases of innovation as such; the U.S. Small Firms Innovation Data Base is the only one available (Audretsch and Feldman, 1996). Since the 19905, statistical offices in Canada, the United States, and Western Europe have been conducting surveys of innovation, the results of which are beginning to emerge (see Statistics

2,2,

Canada's Regional Innovation Systems

Canada, iooib). Yet these surveys present aggregate figures and are not published at the level of metropolitan census areas due to confidentiality issues. Other methods are thus required. Also, in the past, these surveys have concentrated on manufacturing firms, while innovation often occurs in service firms such as banks and software companies with R&D capabilities. Most research about the geographical distribution of innovation relies on some kind of proxy, such as patents, R&D laboratories, and identification of high-technology firms. Researchers take for granted, out of necessity, that if companies are granted patents, this is part, and result, of some innovation process occurring inside the firm. Similarly, directories of R&D capabilities (inputs) are taken as proxies of innovation activities. It is clear that invention, which may or not be followed by actual commercialization of the patented novelty, is only part of the innovation process. Previous studies have shown that patents are good, if not perfect, indicators of invention. (Jaffe and Trajtenberg, 2002). This applies not only to industries and technologies where the propensity to patent is high, such as information and communication hardware technologies, biotechnology, and pharmaceuticals, but also to industries where the propensity to patent is rapidly growing, such as software (Olsson and McQueen, 2000). Patents give us a broad, quantitative, and diachronic portrait of invention activities in firms. Even if not all commercially useful novelties are patented, not all patents are exploited in the market, and the exploitation may occur in a place different from the one where the invention took place, no other indicator is better suited to the study of innovation. Propensity to patent varies across the industrial spectrum (Winter, 1989), but it is particularly high in science-based industries such as chemical and pharmaceutical products, information technologies, advanced materials, and aerospace. Besides, the propensity to patent is increasing across the board. In 1981, the U.S. patent and Trademark Office (USPTO, the largest intellectual property office in the world) granted 131,575 patents; in 2001, it granted 288,290 patents. Similarly, Canadian firms obtained 2,300 U.S. patents in 1991 but over 4,000 in 2001, representing a steady increase from 1.9% to 2.3% of all patents granted by the USPTO in the last twenty-five years (Rafiquzzaman and Mahmud, forthcoming). Canadian firms tend to patent more in the U.S. than in Canada. In 2000, Canadian residents were granted 1,117 patents in Canada

Methods

23

against 3,92.5 patents in the United States. The USPTO database gives information about the place where the invention was made, and American patents are considered the most valuable in the world. The study of the U.S. patenting activities of Canadian corporations, universities, and government laboratories may yield key information on the most important inventions produced in Canada and the location of their inventors. Factors pushing companies to patent and obstacles to patenting are many. Olsson and McQueen (2000) have drawn up a list of the factors that companies take into consideration when deciding whether to patent an invention. These include: - The commercial characteristics of company novelties, including their attractiveness and expected lifetime. Companies use patents to deter competitors from copying, even if, in most cases, successful products are usually imitated. Patents create obstacles to copying and counterfeiting. - Financial issues, including (in the case of new companies) the use of patents by venture capitalists as an indicator of the value of the enterprise and its exclusive rights to the protected technology. - Patents reduce the risk of personnel defecting and competing with the original assignee. - Patents provide licensing and cross-licensing opportunities. - Patents may block a competitor even if the company does not intend to exploit the new technology. - Patents are used as economic (and non-economic) compensation to inventive R&D personnel. - Patents boost the image of the company. - Patents are used when secrecy is less effective (i.e. for products more often than for processes, as products are subject to reverse engineering more often than processes). - Patents are used when other means to protect intellectual property (i.e., speed to market, customer loyalty, etc.) are less effective. Patents are used both for economic and public policy analysis and for business planning and forecasting (Ashton et al, 1988, 1989; Magee, 1991). How effective are science, technology, and innovation policies designed to increase competitiveness, nurture technology transfer form university to industry, or allow specific industries and nations to catch up (Kim, 1997; Alcorta and Peres, 1998;

2-4

Canada's Regional Innovation Systems

Mowery et al., zooi; Rafiquzzaman and Mahmud, forthcoming)? How do particular companies fare, compared with competitors, in terms of new technology development? How do regional industrial strengths compare and evolve over time according to the patent record (Piergiovanni and Santarelli, 2.001)? An increasing number of studies have used patents (as well as citations to patents, patent licenses, and inventor mobility) to assess the regional agglomeration of innovators, localized knowledge spillovers, and innovative regions. After the pioneering work of Antonelli (1986) on industrial districts using the Italian patent database, several studies for Europe (Breschi, 1999), China (Sun, 2000), the United States (Porter, 2001) and Canada (Niosi and Bas, 2001) have documented the strong geographical agglomeration of innovators through patent records. The importance of large cities has been made evident in other studies (O'Huallachain, 1999). Other work has shown trends toward increasing specialization of regions within specific technologies (Cottrell, 2002). A high percentage of Canadian patents are in high-technology industries: computers and communication, pharmaceuticals, electronics and electrical products, and chemicals. In 1998-99, these four sectors represented 42,% of Canadian patents granted by the USPTO, up from 26% in 1975-79 (Rafiquzzaman and Mahmud, forthcoming). NEW FIRM FOUNDATION, SPIN-OFFS, AND LICENCES

New firm creation, spin-offs, and licenses are other important indicators of the dynamic character of regions, and are all related to patents (Breschi, 1999; Statistics Canada 2000; AUTM). Firm entry and exit is a key indicator of the dynamic character of a region. The more new, commercially useful knowledge a district produces, the more new firms will be created in the area to exploit that knowledge. This is particularly true in technological areas where small and medium-sized enterprises abound, such as biotechnology and software. Even in older, science-based industries, such as aerospace and chemicals, large innovative firms create opportunities for the entry of small technology-based ones such as specialized advanced materials and dedicated software companies. Firm entry and exit are dependent not only on innovation but also on in-

Methods

2-5

tellectual property (IP) appropriability regimes: high technological opportunity, low appropriability, and low cumulativeness are conducive to high entry and exit (i.e. software). Conversely, high appropriability and high cumulativeness drastically reduce the rate of exit (i.e. biotechnology) (Malerba and Orsenigo, 1999). Spin-offs also indicate the technological dynamism of regions. In biotechnology, start scientists carry their inventions from universities to new firms within the region (Zucker, Darby, and Armstrong, 1998 and Zucker, Darby, and Peng, 1998). Thus, research universities are the main incubators of new science-based firms in biotechnology. Conversely, in information technologies, large R&D laboratories of incumbent corporations usually act as incubators for new technology-based firms, as the case of AT&T labs, and later Intel in California, have well documented (Molina, 1989; Swann et al., 1998). Thus, the creation of new firms tends to build on previous regional competencies and often increases these competencies by attracting skilled personnel and other new companies to the area, thus strengthening the local labour pool. Licenses - and particularly licenses to patented technology - also indicate the technological dynamism of regions. Technology produced in a region will be licensed to local producers if the region possesses the absorptive capacity required to use it. METHODS

This research is about science-based industries (Niosi, 2,ooob). These are industries where R&D represents a major component of cost and knowledge is a major input of products and processes. Research methods include the selection of key Canadian science-based industries, the identification of the population of firms by region, their patent portfolio, and the entry, exit, and licensing activity of firms and other economic agents. Choosing Suitable Science and Technology-based Industries We chose five industries and technologies that represent important activities in Canadian industrial R&D. They are aerospace, biopharmaceuticals, and three information and communications technologies (ICTS), namely telecommunications equipment, semiconductors, and software. It is not a coincidence that these three ICTS

26

Canada's Regional Innovation Systems

are the same we chose ten years ago to conduct a study on Canadian technological alliances (Niosi, 1995). These industries and technologies are basically those in which Canada's corporations have some technological edge over overseas competitors. Telecommunications equipment has for decades been Canada's most performing high-technology industry. It is also the leading Canadian industry in terms of intramural R&D expenditures, with 2.2.% of all business expenditures on R&D (BERD) executed in 2001 (Statistics Canada, 2002a). When semiconductor and other electronic components and software and computer services are added, the total ICT sector represents 35% of Canadian BERD. In the 2002 Research Infosource Inc. list of the 100 largest Canadian R&D corporate spenders in 2001, forty-four were ICT firms. Out of these forty-four corporations, eighteen were telecommunication equipment producers, sixteen were software editors, eight were electronic parts and components designers and manufacturers, one was a telecommunication service provider, and one was a computer equipment manufacturer. Canada is the world's third largest producer of aircraft and a leader in regional and business jets. Aircraft and aircraft parts was the second largest industry in Canada in terms of R&D expenditure in 2001, with 8% of the total BERD (Statistics Canada, 20023). Also, federal government direct financing for R&D was concentrated in the aircraft and aircraft parts industry, with a total subsidy of €$140 million in 1998 (Statistics Canada, 2ooob). However, only three aerospace companies made the list of Canada's largest corporate R&D spenders in 2001 (Research Infosource Inc., 2002). Also, Canada is the world's fourth largest producer of drugs and medicine patents. Pharmaceutical R&D in Canada has augmented dramatically in the last ten years, arriving at c$o.8 billion in 2001. By 2002, Canada was the second country in the world, at par with the United Kingdom, in terms of the number of core bio-pharmaceutical companies. Out of the 100 largest corporate R&D spenders in 2001, twenty-five were engaged in pharmaceutical R&D. And pharmaceutical products were the third largest Canadian industry in terms of BERD, with 7% of total Canadian BERD. In other words, in 2001, the sectors selected represented over 50% of Canadian BERD and 72% of the 100 largest corporate spenders in

Methods

2-7

Canada. The location of their R&D and inventing activity will certainly determine, at least partially, their production activity. Studying the Population of Firms by Region A large array of sources was used to study the total population of firms in each region. These sources include Statistics Canada surveys, for an aggregate view of the population. To find nominal lists of companies, we used Scott's industrial directories for different provinces and regions, Contact Canada's annual Canadian Biotechnology Directories, provincial software industrial associations lists of members, as well as our own surveys. Finding the Patent Portfolio of Firms, Universities and Government Laboratories in the Regions The USPTO database was used to study the patent records of Canadian firms. Since 1976 and until 2000 inclusively, Canadian firms were granted around 30,000 patents in the United States, and at least one third of these concerned the firms selected in our study. Areas such as aerospace or telecommunications equipment presented few problems, as the Canadian patentees and their patents were easily identifiable through the U.S. and International Classification Codes that appear in their patents. Patents not benefiting from classification codes, such as those in biotechnology and software, which must be identified through keywords, were less easy to find. Keywords included "business methods" or "software" for software patents, and "recombinant DNA," "genetic engineering," or "hybridoma" for biotechnology patents. Finding the Population of Firms in the Region The same sources that served to identify the population of firms in the region also gave an idea of their entry and exit. Particularly interesting were the cases of university and governmental spin-off. The Association of University Technology Managers (AUTM) gives some information on spin-offs for the largest Canadian universities, and we also collected nominal information (with company names) on academic spin-offs from the largest universities themselves. The

28

Canada's Regional Innovation Systems

National Research Council (NRC) database on university and government spin-offs, originally developed by Denys Cooper, was helpful in identifying over 1,000 such spin-offs. Statistics Canada publishs some aggregate information on these new firms, which provided context to the nominal information. Requesting the Licensing Activities from Universities and Government Laboratories Major research universities and government laboratories grant licenses to external organizations. Some of these licensees are located in the same region as the licensor (regions are defined as metropolitan census areas, or MCAS), while others are situated in the same province (outside the MCA). Yet other licenses are granted to firms based in provinces other than the one where the licensing organization is located, or even in foreign countries. The identification of licensing patterns can serve as an indicator of regional knowledge spillovers, as well as of the absorptive capacity of the regions. CONCLUSION

Canada does not possess any database on innovation similar to the U.S. Small Business Innovation Database. However, patents analysis is a valuable method for measuring the spatial concentration of innovative activity. Combined with studies of the total population of firms, licenses, spin-offs, and venture capital financing by region, it may yield valuable information on the dynamics of regional innovation systems. The picture is incomplete, however, as we do not know the exact number of R&D spenders or the total expenditures by province and MCA, a set of figures that Statistics Canada is preparing and will be a needed complement to the data presented here. Also, even if this book presents some information about evolution over time, the longer trends are blurred by the non-comparability of some figures across time. Nevertheless, we contend that these results are worth the effort, and that a more complete picture will emerge from the combined efforts of many Canadian scholars, including ourselves, working together in the Innovation System Research Network (ISRN) (Holbrook and Wolfe, 2,000, 2002,).

3

Biotechnology WITH THE C O L L A B O R A T I O N OF TOMAS GABRIEL BAS

Biotechnology is a set of technologies developed in the postwar period, particularly since the 19705. Most prominent are genetic engineering, recombinant DNA, genetic therapies, monoclonal antibodies, bioremediation, and biofiltration. They apply to human health diagnostics and therapies, agriculture, environment, food, mining, and pulp and paper industries (see tables 3.1 and 3.2,). In short, these technologies allow the development of new drugs and diagnostics kits with substantial cost reductions, as well as the genetic modification of plants, animals, and bacteria for higher agricultural yields, new food products, and environmental purposes. Promotion of new biotechnology has been a priority for the Canadian government since the late 1970$ and early 19805. By 2,002., Canada was the second most active country in the world in biotechnology in terms of new firms, venture capital, and patents, after the United States and ahead of the United Kingdom. In 1983 a National Biotechnology Strategy was put forward, and it was revamped in 1998. Due to multiple efforts made by the federal government and by several provincial governments, by 2.001 Canada hosted no less than 391 core biotechnology firms, with revenues close to c$4 billion and spending of €$1.4 billion in R&D. Tables 3.3 and 3.4 summarize the main results of the latest data on Canadian biotechnology. By whatever measure, Quebec and Ontario concentrated the bulk of biotechnology activity in Canada.

30

Canada's Regional Innovation Systems

Table 3.1 Definition of the sectors

Sectors

Components

Human health

Diagnostics Therapeutics Gene therapy

Agriculture and food

Plant biotechnology Animal biotechnology Biofertilizers, Biopesticides, Bioherbicides Bioprocessing Functional food, neutraceuticals Non food applications of agricultural products

Environment

Biofiltration Bioremediation and phyto- or plant remediation Diagnostics

Other

Genomics and molecular modelling Fish health Broodstock genetics Bioextraction Micro-biologically enhanced petroleum/Mineral recovery Industrial bioprocessing Custom synthesis (chemical or biological)

Source: Statistics Canada

Over 60% of the core firms, over 80% of the revenues, and nearly 60% of the R&D expenditures were located in these two provinces. British Columbia was a close third, and Alberta distant fourth. As in all other advanced countries (Swann et al., 1998) this remarkable development has been very skewed in geographic terms. Even if Statistics Canada figures cannot yet be disaggregated at the level of metropolitan census regions, other sources will show that Montreal, Toronto, and Vancouver are Canada's biotechnology metropolises. In terms of areas and specialties, human health is by far Canada's most important sector, representing almost 70% of total biotechnology revenues, 70% of the core biotechnology firms, and over 80% of R&D expenditures. This chapter analyses the regional concentrations of biotechnology firms in Canada, the dynamics of their growth, the regional specializations, and accumulation of local competencies. It starts with the study of regional clusters, continues with the national and

Biotechnology

3i

Table 3.1 List of biotechnologies Selection and modification technologies

Recombinant DNA Antibodies/antigens Peptide synthesis Rational drug design Monoclonal antibodies Gene probe Gene therapy DNA amplification

Environmental biotechnology

Bioaugmentation Bioremediation Bio-reactors Phytoremediation Bio gas cleaning

Culture and use of biological material

Tissue culture Somatic embryo genesis Bio-processing Bio-sensing Bio-bleanching Bio-leaching Microbial inoculant

Source: Statistics Canada

provincial policies that explain the development of the new technology, and arrives at the policy implications of the data, followed by a short conclusion.

CANADA'S B I O T E C H N O L O G Y REGIONAL SYSTEMS By 2,001, according to the latest figures released by Statistics Canada, there were 391 Canadian core biotechnology firms. Some eighty-five specialized biotechnology firms (SBFS) were quoted on the stock exchanges, with a total market capitalization of around c$2,o billion in January 2,003. Table 3.5 summarizes the figures of the twenty largest firms at the beginning of 2003, accounting for 80% of their total market value. Some thirty publicly quoted companies were located in Toronto, twenty-two in Montreal, fifteen in Vancouver, seven in Edmonton, three in Calgary, two in Ottawa, and one in each of several other cities of Ontario, Quebec, and B.C., but none in the Maritime provinces. Among the twenty leaders by market capitalization, five were located in each of the three

32-

Canada's Regional Innovation Systems

Table 3.3 Core biotechnology firms in Canada by province, 2.001 Provinces

Number of core SBFS

Biotechnology Biotechnology revenues R&D (c$m) expenditures (c$m)

Quebec Ontario British Columbia Alberta Saskatchewan Nova Scotia Manitoba New Brunswick Other

135 106 71 25 18 13 12 7 c

1,625 1,417 417 125 21 s 115 s c

Total Canada

391

3,749

443 395 428 121 10 7 35 c

Biotechnology exports (c$m)

c

616 68 28 s 4 c c 0 c

1,441

795

S: Too small to be published c: Confidential Source: Statistics Canada (2.003)

largest Canadian cities, Toronto, Montreal, and Vancouver, and three were in Edmonton. At the other end of the spectrum, 41 % of the companies had ten employees or fewer (tables 3.5 to 3.7). During the 2.001-03 slowdown, Canadian biotechnology continued to grow, due to the (declining but still important) infusion of venture capital (figure 3.1), private placements, and public-sector funds. Thus in 2001, venture capital investment in Canadian biotechnology reached €$491 million against C$666 million in 2000 (CVCA, website statistics). Also, the core SBFS raised c$i,8io million in zooi, mostly through private placements, and another $879 million in the first six months of 2002 (Canadian Biotech News, 2002). The 2001-03 slowdown was, however, a period of decreased market value, reduced capitalization, and consolidation. In 1999, Shire pic of the UK acquired the Canadian leader BioChem Pharma of Montreal for US$4 billion (c$6 billion), and in 2002 Bayer (Germany) acquired Visible Genetics, one of the largest Toronto SBFS, for c$61 million. Also, the total market capitalization of Canadian biotechnology firms decreased 40% in 2002, to c$2o billion in Jan-

Biotechnology

33

Table 3.4 Core biotechnology firms in Canada by area of research, 2001 Area

Number of core SBFS

Biotechnology Biotechnology revenues R&D (c$m) expenditures (c$m)

Biotechnology exports (C$m)

207 68

2,605 252

1,209 55

306 59

Nutraceuticals

49

603

123

s

Environment

33

276

18

29

Aquaculture

12

5

4

s

Bio-informatics

11

2

21

c

Natural resources

11

7

13

c

391

3,749

1,441

795

Human health Agriculture

Total Canada S:

Too small to be published

C:

Confidential

Source: Statistics Canada (2003)

uary zoo3. One of the Canadian leaders, QLT of Vancouver, lost 80% of its market value from mid-1999 to the beginning of 2003. Raising capital on the stock exchange became more difficult, except for some of the largest companies, such as Aeterna in Quebec City and Bio vail in Toronto.1 There was no biotechnology initial public offering (IPO) in Canada between 2.001 and 2003. In the first nine months of 2002, Canadian biotechnology received €$185 million from venture capital firms (Reseau Capital, Nov. 2002). The major provinces remained leaders in absolute terms, whatever the indicator used, but strong growth is now concentrated in Alberta, British Columbia, and Quebec (tables 3.8 to 3.10). In 2001, British Columbia moved ahead of Ontario in R&D expenditures and represented 30% of the Canadian total. Alberta's biotechnology R&D moved even faster, growing by more than 500% between 1997 and 2001. Quebec companies kept the lead based on number of firms, i These two companies acquired foreign biotechnology firms in 2.002.. Aeterna bought Zentaris in Germany, a company with sixty-seven employees, for c$8z million; Biovail bought two biotechnology companies from the Pharma Pass group of California with a subsidiary in France for €$190 million.

34

Canada's Regional Innovation Systems

Table 3.5 Largest Canadian biotechnology companies by market capitalization, as of January 2003 Company

1. Biovail 2. Angiotech Pharma 3. QLT Phototherapeutics 4. Axcan Pharma 5. Cangene 6. ID Biomedical 7. Vasogen 8. Isotechnika 9. Aeterna Laboratories 10. BioMS Medical Corp. 11. Neurochem 12. Theratechnologies 13. Labopharm 14. Prometic Life sciences 15. Inex Pharmaceuticals 16. Dimethaid Research 17. StressGen Biotechnologies 18. Biomira 19. Lorus Therapeutics 20. Cardiome Pharma Total 20 largest

Market capitalization (c$m) 6,332 870 837 765 636 241 204 197 185 175 172 148 137 137 134 118 106 93 79 68

City

Toronto Vancouver Vancouver Montreal Toronto Vancouver Toronto Edmonton Quebec City Edmonton Montreal Montreal Montreal Montreal Vancouver Toronto Victoria Edmonton Toronto Vancouver

Area of research

therapeutics therapeutics therapeutics therapeutics therapeutics therapeutics therapeutics therapeutics therapeutics therapeutics therapeutics therapeutics therapeutics therapeutics therapeutics therapeutics therapeutics therapeutics therapeutics therapeutics

11,700

Sources: Toronto and NASDAQ stock exchanges

biotechnology R&D, expenditures, and total revenues. However, Toronto firms collected over 60% of all the private investment in core biotechnology firms in 2001, an indication of the greater maturity of firms in metropolitan Ontario (tables 3.11 and 3.12). The province of Quebec, and Montreal in particular, was a distant second, with just 20% in several smaller placements. In 2002, Quebec companies collected 3 5 % of the total amount of venture capital invested in Canadian biotechnology (table 3.13). In 2001, however, Ontario firms collected more private investment (two-thirds of the Canadian total) but the figure was strongly affected by major placements in Biovail (c$88i million) and Hemosol (c$ioo million) (tables 3.8 to 3.13).

Biotechnology

35

Table 3.6 Canadian core SBFS by size, as of August 2002 Companies

%

very small (1-10 employees) small (10-50 employees) medium (51-150 employees) large (151-499 employees) top tier (500 + employees)

154 141 48 20 5

41.2 38.0 13.5 5.8 1.4

Total

371

100

Size

Source: Canadian Biotech News: (Canadian Biotech Mews Industry Report 2.002.

Table 3.7 Canadian core SBFS by province, as of August 2002 Province

Total companies

Publicly quoted companies

Quebec Ontario B.C. Alberta Prairies Maritimes

117 113 65 20 22 23

22 37 15 10 3 0

Total

360

87

Source: Canadian Biotech News: Canadian Biotech News Industry Report 2002

The Saskatchewan agricultural cluster seems in disarray, with biotechnology revenues and R&D expenditures declining in absolute terms between 1997 and 2.001, despite both federal and provincial efforts to nurture its development. This finding confirms a previous study conducted with the help of Statistics Canada in 1999: biotechnology firms in agricultural and environmental R&D are not growing, with the expected consequences for these specialized clusters (Niosi, 2.000C, 1003). Growth is concentrated in human health clusters. Thus, the number of firms operating in the four Maritime provinces (specializing in marine biotechnology) has increased, but they suffer from declining revenues; they increased their R&D expenditures in absolute terms, but only to under the Canadian average.

36

Canada's Regional Innovation Systems

Figure 3.1 Venture capital invested in Canadian biotechnology (c$m), 1991-2,001

Source: Canadian Venture Capital Association (www.cvca.ca)

Table 3.8 Canadian core SBFS' expenditure in biotechnology R&D by province, 1997-2,001 (c$m) Province

1997

c$m (%)

1999 c$m (%)

2001 c$m (%)

Change (%) 1997-2001

337(41)

+235

+192

Quebec Ontario B.C. Alberta Saskatchewan Manitoba Maritimes

132 (27) 220 (45)

223 (27)

77(16)

131(16)

20(4) 19(4) 12 (2) 14(2)

81 (10) 28(3) 20(2) 6(1)

443 (31) 395 (27) 428 (30) 121 (8) 10(1) 35(2) 29(2)

Total

494 (100)

827(100)

1,441 (100)

+80 +456 +505

-47 +192 +107

Source: Statistics Canada (1999, 2003)

Venture capital and private placements did not seem to go hand in hand. This mismatch (Toronto collected 62% of private placements but just 10% of venture capital in 2001) may be explained by the maturity of several large SBFS in Toronto. The location mismatch between public laboratories and private investment decisions is more remarkable. Private investors prefer Toronto, Montreal, Vancouver, and Edmonton. Government laboratories are located in Halifax,

Biotechnology

37

Table 3.9 Canadian core SBFS by province, 1997-zooi

Province Quebec Ontario B.C. Alberta Saskatchewan Manitoba Maritimes Total

1999

2001

Change (%) 1997-2001

79 87 52 19 19 6 20

107 111 71 28 16 6 19

135 106 71 25 • 18 12 30

+71 +22 +37 +32 -5 +100 +50

282

558

391

+39

- 1997

Source: Statistics Canada (1999, zoo3)

Table 3.10 Canadian core SBFS' revenues in biotechnology by province, 1997 and 2.001 (c$m)

1997 c$m (%)

2001 c$m (%)

Change (%) 1997-2001

Quebec Ontario B.C. Alberta Saskatchewan Manitoba Maritimes

224 363 47 56 56 33 34

1,625 1,417 417 125 21 115 29

+638 +290 +787 +123 -63 +248 -14

Total

813

3,749

+361

Province

Source: Statistics Canada (1999 and 2003)

Montreal, Ottawa, Winnipeg, and Saskatoon. Except for Montreal, publicly promoted clusters do not fit with private investment decisions. Thus SBFS located in the province of Quebec received over 40% of venture capital in 2001 (valued at c$49i million, see table 3.12) and 2002, but only 22% of private placements (valued at nearly c$i,8oo million) in 2001. Ontario was second in venture capital but first in private placements. In 2001, Halifax, Ottawa, Saskatoon, and Winnipeg (all seats of federally promoted clusters) received a paltry i% of private placements and 3.5% of venture capital invested in biotechnology (tables 3.12 and 3.13).

38

Canada's Regional Innovation Systems

Table 3.11 Canadian private investments in core biotechnology firms by province, 2,001 (c$m)

2001 c$m

(%)

Ontario Quebec B.C. Alberta Saskatchewan Manitoba Maritimes

1,148.2 374.2 130.1 116.0 0 9.0 0

65.0 21.0

Total

1,777.5

100

Province

7.5 7.0 0 0.5 0

Source: Canadian Biotech News: Canadian Biotech News Industry Report 2002

Table 3.12 Canadian private investments in core biotechnology firms by city, zooi (c$m) City and province

Amounts invested c$m

(%)

Toronto, Ont. Montreal, P.Q. Edmonton, Alta. Vancouver, B.C. Victoria, B.C. London, Ont. Quebec, P.Q. Kingston, Ont.

1,100.0 351.0 110.5 102.3 27.8 27.2 23.2 15.5

62.0 20.0

Winnipeg, Man. Ottawa, Ont. Calgary, Alta. Saskatoon, Sask. Maritimes Total

Number of placements

9.0 5.5 5.5 0 0

6.5 6.0 1.5 1.5 1.5 1 0.5 0.5 0.5 0 0

11 19 7 3 1 2 2 1 1 2 1 0 0

1,777.5

100

50

Source: Canadian Biotech News: Canadian Biotech News Industry Report 2002

Montreal is now Canada's largest cluster in terms of the number of firms and the number of firms with patents, but Toronto SBFs have obtained more patents than those located in Montreal (tables 3.14 to 3.16). It is worth remembering that Toronto firms are, on

Biotechnology

39

Table 3.13 Canadian venture capital in biotechnology by metropolitan area, 2.001 Metropolitan area

Venture capital amounts

(c$m)

%

Vancouver, B.C. Montreal, P.Q. Toronto, Ont. Victoria, B.C. Quebec City, P.Q. Kingston, Ont. London, Ont. Belleville, Ont. Fleurimont, P.Q. Winnipeg, Man. St-Hyacinthe, P.Q. Saskatoon, Sask. Ottawa, Ont. Halifax, N.S.

168.99 159.91 45.56 27.80 19.12 15.55 13.1013.10 10.99 8.95 8.45 7.85 2.19 1.45 0.75

34 33 9 6 4 3 3 2 2 2 2 .5 . .5 .5

Total

490.66

100

Number of SBFS financed

15 20 10 1 13 2 2 1 2 5 1 2 2 2

Source: Mary McDonald & Associates

average, older than those in Montreal, which may be a sign of decreasing academic biotechnology vitality from the largest Canadian metropolitan area. Vancouver is now closer to the two largest clusters in terms of the number of patenting firms and total firms, as well as the total U.S. patents granted to its local SBFS. These three main clusters represent well over 50% of Canadian total biotechnology firms, patents, and market capitalization. However, some dispersion appears to be taking place, as Edmonton, Quebec City, and Ottawa seem able to nurture new firms and attract either private investments (Edmonton) or venture capital (Quebec City). This dispersion does not necessarily follow federal cluster initiatives but, again, seems more a bottom-up phenomenon, taking advantage of local academic research and national and provincial horizontal policies. If innovation is measured through patented invention, its first and original phase in biotechnology, the three major census metropolitan areas (Montreal, Vancouver, and Toronto) concentrate the bulk of the innovation activity in Canada, with Quebec City a distant fourth. It is worth recalling that three

Table 3.14 Year of foundation of patenting firms existing in 2002. Montreal

Year

1981 and earlier 1982-86 1987-91 1992-96 1997-2001 ND

Total B R i: IBD: IBS: IMB: FBI:

Toronto Vancouver

Quebec Ottawa Edmonton Saskatoon Calgary City

IMB/1

1

11

1 1

0 0 2

0 0

0 0 1

1 2 4

14 16 45

2 0

0 0

0 0

1 0

0 0

2 1

18 2

6

3

2

1

2

11

106

1

0

IBS/4

2

0 3 14

2 0 4

0 1

2 0 2

PBI/0

12

6 5 4

5 0

4 0

2 0

1 1

1 0

24

22

20

8

7

Biotechnology Research Institute Institute for Biodiagnostics Institute for Biological Sciences Institute for Marine Biosciences Plant Biotechnology Institute

Other Canada locations

0

1

3

1

Maritime provinces

0

0

0

5/BRI

Winnipeg

IBD/0

Table 3.15 Year of foundation of all firms existing in 2,001* Year

Montreal Toronto Vancouver

Other Canada Quebec Ottawa Edmonton Saskatoon Calgary Winnip13.10eg Maritime provinces locations City

10

12

6

1

5

ND

26 29 0

11 11 17 16 0

2 12 19 14 1

3 1 7 7 1

Total

81

67

54

1981 and earlier 1982-86 1987-91 1992-96 1997-2001

BRI/11

* Firms with five employees or more only BRI: IBD: IBS: IMB: PBI:

Biotechnology Research Institute Institute for Biodiagnostics Institute for Biological Sciences Institute for Marine Biosciences Plant Biotechnology Institute

X

3

3

1

0

1 1 1 5 0

3 2 6 7 0

PBI/1

5 4 0 0

1 2 3 2 0

2 1 IBD/0

13

21

13

9

IBS/5

16

63

2 0

4 5 5 2 0

9 9 15 6 2

42 60 103 90 4

5

22

57

362

IMB/6

42,

Canada's Regional Innovation Systems

Table 3.16 Regional concentration of U.S. patents of Canadian core biotechnology firms (1990-2.001) Region

Number of patents

Percentage of patents

Metropolitan areas Toronto Montreal Vancouver Ottawa Quebec City Calgary Edmonton Saskatoon Winnipeg Maritime provinces All other locations

278 145 85 62 57 38 37 7 2 4 96

34 18 10 8 7 5 5 1 n n 12

Total

810

100

NB: Only private firms Source: U.S. Patent Office: U.S. Patent Database, zooz

out of the four largest agglomerations do not host a major public federal or provincial laboratory. We tried to find out how these laboratories promote local innovation, and used licenses as a good benchmark. One indicator of the nature of the process of technology diffusion is the location of the biotechnology licensees of major research laboratories, compared to the local research universities (table 3.17). Between 1989 and 1999, a sample of five major research universities granted fifty three licenses to firms located in the same Canadian cities (Canada hosts thirty research universities). In the meantime, all federal government laboratories granted some twenty-eight licenses to local firms located in the cities that hosted them. Montreal and Winnipeg seem to benefit most from government laboratories: a majority of NRG licenses were granted to local firms. Ottawa, Halifax, and Saskatoon seem to have a smaller absorptive capacity, having received only 8%, 13%, and 33% of the lab licenses. As to universities, the University of Bristish Columbia alone granted more licenses to local firms in Vancouver than all NRG laboratories combined to collocated SBFS. However, NRG laboratories transferred

Table 3.17 Location of biotechnology licensees, five NRC labs, and five research universities Location of licensee

BRI-NRC Montreal

15 1 4 3 0

% 65 4 17 13 0

23

100

N

Same city Other same province Other provinces U.S. Other nations Total licenses

Same city Other same province Other provinces U.S. Other nations NA

Total licenses

McGill Univ. Montreal N % 34 13 4 11 11 4 16 42 1 3 0 0

38

100

FBI- NRC

IMB-ATKC

IBS- NRC

IBD-JV.RC

Saskatoon

Halifax

Ottawa

Winnipeg

N

2 4 9 0 0

% 13 27 60 0 0

15

100

12

N

%

N

6 0 12 0 0

33 0 66 0 0

18

100

Univ. ofSask. Saskatoon N

%

4 1 1 2 1 0

44 11 11 22 11 0

9

100

Dalhousie U. Halifax N % 2 100 0 0 0 0 0 0 0 0 0 0 2

100

1

3 1 7 0

%

N

8 25 8 58 0

4 0 0 0 1

% 80 0 0 0 20

28 8 26 10 1

% 38 11 36 14 1

5

100

73

100

100 UBC

Vancouver N % 29 26 1 1 4 4 34 31 2 2 41 37

111

Tota/ /i'ye NRC labs

100

U of Calgary Calgary N % 5 11 1 1 6 13 28 60 11 5 2 4

47

100

N

Tota/ five universities N % 26 53 7 3 7 15 39 80 4 9 21 43

207

100

44

Canada's Regional Innovation Systems

comparatively more technology to Canadian companies than Canadian research universities. 85% of all the licenses granted by NRC biotechnology institutes had Canadian licensees, against 57% by academic institutions. CANADIAN POLICIES AND THE BIRTH OF BIOTECH REGIONS

Federal Policies

The federal government started promoting biotechnology in the early 19805 through the National Biotechnology Strategy, At the beginning the goal was to focus on natural resources and environmental biotechnology, but fairly rapidly the human capital base in health research and services changed the government's aim toward a more balanced set of goals: human health products became the priority, but the enhancement of the country's natural resource base was to be pursued. For those purposes, five government laboratories were either created or revamped. They were the Institute for Biological Sciences (Ottawa, created in the 1930$), the Plant Biotechnology Institute (Saskatoon, created in 1957), the Biotechnology Research Institute in Montreal (BRI, founded in 1987), the Institute for Marine Biosciences (Halifax, 1990), and the Institute for Bio-Diagnostics (Winnipeg, 1992). In 2001-02, these NRC labs spent some c$83 million in biotechnology research. NRC is the only major public organization that aims, through the location of its R&D labs, to develop biotechnology clusters in Canada. We will examine later how successful this policy has been. Other major government laboratories in biotechnology research include the nineteen national centres of Agriculture and Agri-Food Canada, with a total budget for biotechnology of around C$57 million in 2001-02 for in-house research and c$n million for collaborative research with private companies. Also, with smaller budgets, Environment Canada and Natural Resources Canada public laboratories conduct biotechnology research in their specific domains. In 1986, the federal government launched the Centres of Excellence Program, inspired by a similar initiative taken by the provincial government of Quebec. This federal program funded seven panCanadian industry/university research networks in biotechnology, which are still in existence.

Biotechnology

45

In the meantime, the patent law was revised on several occasions in order to strengthen intellectual property protection for pharmaceutical products and to include specific protection for some of the new biotechnology products. The result was a multiplication of biotechnology patents. Patents are essential in biotechnology. On the one hand, they assure the exclusivity of the idea of the inventor, thus allowing the pursuit of research in such an uncertain, complex, and expensive field. On the other hand, venture capital firms use patents as a major milestone when evaluating funding requests from core biotechnology firms. However, in December 2,002,, the Supreme Court of Canada decided that higher life forms are not patentable in Canada, thus opening a major difference between American and Canadian patent law (Canadian Biotech News, 9 Dec. 2002,, p. 4). As well, in 2000 the Medical Research Council, created in the 19605 to fund medical research, was significantly revamped as Canadian Institutes of Health Research (CIHR). The new agency had a base budget of €$477 million in 2001-02. CIHR established thirteen virtual institutes across Canada in areas such as cancer research, circulatory and respiratory health, infection and immunity, nutrition, metabolism, and diabetes. CIHR received new mandates far beyond the funding of university research. Its targets were to - create 50,000 new jobs over five years; - secure the second position for Canadian biotechnology worldwide; - turn $2 billion life sciences commercial deficit into C$2, billion surplus; - double pharmaceutical R&D from c$8oo million/year to c$i.6 billion/year; - achieve 10% of world biotechnology sales; - stimulate venture capital investment of more than c$3 billion; - achieve industry growth in all regions of Canada; - generate 2,00 new companies (Research Money, 2.6 May 1999, p. 5). In particular, a recent Small Business Innovation Grants program acts as an alternative to venture capital to support development of ideas leading to the creation of new firms. A new funding agency, Genome Canada, established in 19992,000 with a total endowment of c$300 million, has created five centres across Canada (Atlantic Canada, Quebec, Ontario, the Prairies,

46

Canada's Regional Innovation Systems

and British Columbia), attracting additional matching funds from provincial governments and industrial corporations. Another new federal funding agency, the Canadian Foundation for Innovation (CFI), created in 1997 with a total capital of €$3.15 billion, has distributed major support for university infrastructures in biotechnology projects across Canada. Some 50% of each of the awards distributed in the first four competitions (from 1999 to 2,002) went to medical-related research, including genomics and human health biotechnology. During its first year of operation, in 19992000, the CFI became the single largest federal R&D fund, with €$605 million distributed to Canadian universities and colleges. The Industrial Research Assistance Program (IRAP), a fund launched in 1962 and managed by NRC, provides some c$5 million in direct subsidies for R&D to Canadian small and medium-size enterprises, including several SBFS. Technology Partnerships Canada (TPC), a federal initiative launched in 1996, chose biotechnology as one of its priority areas of investment and supported twenty Canadian biotechnology firms with multi-million-dollar loans. From 1997 to March 2002, TPC distributed C$263 million for R&D projects in biotechnology. Federal tax credit regulations were also adapted to the specific needs of these new core biotechnology firms. The federal government created its first tax credit for R&D in 1942, and the present law was first passed in 1977 and has been revamped several times since. Canada allows a 20% Scientific Research and Experimental Development tax credit for all R&D expenditures that can be used to offset federal taxes payable. The unused credits can be carried forward ten years, a disposition that suits many SBFS that do not yet have revenues. As well, a 3 5 % tax credit is applicable to some R&D expenditures for the first c$2 million in privately controlled Canadian corporations (KPMG, 2002). Venture capital was promoted through several means. For one, the Business Development Bank of Canada launched a biotechnology fund. By 2002, it had created offices in Calgary, Halifax, Montreal, Ottawa, Toronto, and Vancouver, and had invested in some forty SBFS across Canada. While federal policies were aimed at creating a level playing field across Canada, the results of this strategy produced results in a few metropolitan areas. This was partially the outcome of the historical accumulation of competencies in particular cities, but also the result of provincial policies designed to thrive on federal policies.

Biotechnology

47

Provincial Nurturing of Biotechnology Each Canadian province has followed a different approach to biotechnology. The most active has been Quebec, followed by Ontario, British Columbia, and Alberta. Quebec mirrored the creation of the federal funding agencies in Ottawa through the foundation of its own provincial funding organization, FCAR, in 1969, as well as a specific organization for health research, the Fonds quebecois de recherche en sante (FRSQ). In 2,000-01, the Quebec Health Research Fund distributed some C$65 million to nineteen research centres and hundreds of researchers and health science students across the province. Similarly, Quebec has developed its own tax credits for R&D. Companies conducting R&D in Quebec may deduct - A basic refundable 2.0% tax credit on salaries paid in Quebec; - A refundable 40% tax credit on the first C$2, million in salaries that an SME pays in Quebec in a given year; and - A 40% refundable tax credit to taxpayers who conduct an eligible contract with a prescribed research centre. ... "The Quebec tax credit could therefore represent 55% of eligible additional expenditures" (KPMG, 2,002, p. 14). Quebec also builds upon existing strengths by giving incentives to companies investing in the Laval Biotechnology Development Centre (Laval is a northern suburb of Montreal and part of its metropolitan area). In 2,002,, the province launched a new program to develop three other biotechnology development centres, located in Levis (a suburb of Quebec City and within its metropolitan area), Sherbrooke (another large metropolitan area in the province), and Ste-Hyacinthe, an agricultural region north of Montreal. Occupants of these centres receive substantial fiscal advantages over and above fiscal credits and pay lower rental fees. The public purse thus contributes to reducing the operating cost of the firms and to increasing synergy among the occupants of the centres. Last but not least, Quebec has stimulated public and private venture capital investment. Its public Caisse de depot et placement, which administers the pension funds of public sector employees, has developed subsidiaries in the area of venture capital, the most prominent of which is CDP Capital, one of the largest in the country. By

48

Canada's Regional Innovation Systems

200 2, CDP Capital had invested in some eighteen Canadian biotechnology firms, mostly but not exclusively located in the province of Quebec. Also, labour-sponsored venture capital funds were favoured by different means to create one of the most active pools of risk capital in Canada. As a result of these and other initiatives, by zooi, the province of Quebec, home of 24% of the Canadian population, hosted 35% of the SBFS in Canada, and these accounted for some 30% of total R&D Canadian biotechnology expenditures (Statistics Canada, 2.0033). In 2,002, Quebec passed new legislation concerning intellectual property generated in universities through publicly funded research projects. From now on, this IP will belong to the universities, a regulation similar to the Bayh-Dole Act, passed in 1980 in the United States. The precise consequences of this regulation are yet to be seen. Ontario is more conservative than Quebec. It has traditionally implemented a smaller array of public policies for innovation than the French-speaking province. However, biotechnology has attracted the public imagination, and a collection of measures has been implemented to insure the development of this new technology. This array includes: - the Ontario Business Research Institute Tax Credit, which offers a 20% tax credit to all private biotechnology firms subcontracting research work to provincial universities and research centres; - the Ontario New Technology Tax Incentive, which allows a 100% deduction of up to c$2o million each year for the acquisition of intellectual property; - the Ontario Research Performance Fund, launched in 2001 with an annual budget of €$30 million to support R&D expenditures; - the Ontario Innovation Tax Credit, which adds a 10% tax rebate to all firms conducting R&D in Ontario; - the Ontario Innovation Trust, launched in 1999 with a total investment of €$750 million to help universities, research hospitals, and public institutes to improve their R&D infrastructure; - the Biotechnology Commercialization Centre Fund, also launched in 1999, with c$2o million to create or reinforce regional biotechnology incubator centres in the cities of London, Ottawa, and Toronto;

Biotechnology

49

- the Ontario Research and Development Challenge Fund, founded in 1997, will spend €$500 million over ten years to promote collaboration between private and public research centres; - the Premier's Research Excellence Awards, launched in 1998 with an initial fund of €$75 million in order to attract and retain the best researchers in all areas of science; - the Ontario Research Performance Fund is a Year 2000 initiative of €$30 million to support the costs of researchers working in the province; - the Ontario Genomics Initiative of Year 2000 received a fund of €$75 million aimed at increasing the provincial competencies in research about the human genome; - the Ontario Cancer Research Network, another Year 2000 initiative with a c$5O million fund, aims at accelerating research on new promising therapies. In terms of intellectual property, in 1990 the University of Toronto, Canada's largest higher education institution, adopted a policy that is opposite to that of Quebec. Since that year, all IP developed at the University of Toronto has belonged to the researchers. It is unclear whether this regulation has slowed the pace of new firm creation in Canada's largest metropolitan area. In the meantime, with 38% of the Canadian population, Ontario hosted in 2.001 27% of Canadian core SBFS, which produced 38% of total Canadian biotechnology revenues and spent 27% of Canadian expenditures on biotechnology R&D (table 3.3). British Columbia has also implemented some policies to nurture the development of biotechnology. The province gives a 10% income tax credit for all eligible R&D costs, and it has partnered with Genome Canada to fund Genome B.C. It has also funded the Centre for Molecular Medicine and Therapeutics (CMMT), a public-private sector collaborative research co-supported by the U.S. giant Merck Corporation. Probably, however, the most important assistance to B.C. biotechnology by the provincial government has been through the funding of several world-class universities: the University of British Columbia (UBC) and Simon Fraser (in Vancouver) and the University of Victoria (UofV, in Victoria). Over 60% of the province's biotechnology companies were spin-offs from one of these universities,

50

Canada's Regional Innovation Systems

with a major cluster in Vancouver. Since the creation of the University-Industry Liaison Office (UILO) of UBC in 1984, and up to March 2002., UBC has spun-off 113 companies, of which fifty are in the life sciences, and basically all the largest SBFS in the province. UILO has collected over €$1.3 billion from private investors in order to support these companies. The total market capitalization of these UBC biotechnology companies exceeded c$6 billion in December 2000. It is important to underline the fact that UBC intellectual property belongs to the institution when it has been developed through public research funds. According to Statistics Canada figures, with 13% of the Canadian population, B.C. hosts 18% of the total number of Canadian core biotechnology firms, and they represent 30% of Canadian total biotechnology R&D expenditures as well as 11% of their total revenues (table 3.3). Alberta is the only province without tax credits for R&D. In 1921, Alberta created one of the first and most affluent provincial research organizations, the Alberta Research Council (ARC). With an annual budget of over c$84 million a year, ARC hosts a major biotechnology laboratory with over forty U.S. patents in agricultural, forest, and human health biotechnology. Alberta imitated Quebec in developing its own funding agencies for scientific research. In 1980 the provincial government created the Alberta Heritage Foundation for Medical Research (AHFMR) with an endowment of cSyoo million to support medical research. AHFMR spends over c$4O million every year in grants and awards. In 2,000, a sister organization was created: the Alberta Heritage Foundation for Science and Engineering Research, with a total endowment of c$i billion supporting natural science (including biotechnology) and engineering across the province. In the meantime, an umbrella organization, the Alberta Science and Research Authority, was created in 1994 to recommend science and technology policies to the provincial government, as well as to assess and monitor the scientific activities taking place in the province. One problem the provincial government has been unable to solve is the weak supply of venture capital for high-technology companies and particularly biotechnology firms in the province. Alberta represents 13% to 15% of Canada's GDP but attracts only 2-3% at best of the country's venture capital, a severe obstacle to the develop-

Biotechnology

51

ment of the new activity (Research Money, 15 September 2000, p. 4; CVCA, 2001 statistics). As a result of these regional policies, Alberta occupies fourth position in Canadian biotechnology, after Quebec, Ontario, and British Columbia. With 10% of the Canadian population in 2001, the province hosted some twenty-five SBFS (6% of the Canadian total), which spent some c$izi millions on R&D (8.4% of the Canadian total). Their revenues stemming from biotechnology products represent only 3.5% of the Canadian total. They are located in Edmonton and Calgary and are mostly spin-offs of the two major universities of the province. Saskatchewan is the only province where agricultural biotechnology predominates over human health biotechnology. Activity is located mostly in Saskatoon, host to the University of Saskatchewan and the Plant Biotechnology Institute (FBI) of the National Research Council. The provincial government has created a €$19 million Agriculture Innovation Fund to support research and development ($10 million), capital infrastructure ($4.6 million), human resources ($4.1 million), and services infrastructure ($0.8 million). The province also funds Ag-West Biotech, a non-profit organization whose mandate is "to initiate, promote and support the growth of the province agriculture biotechnology industry" (www.agwest.sk.ca). The province has also supported Innovation Place, a research park located on the campus of the University of Saskatchewan, focused on ag-biotechnology. The province holds 3.3% of Canada's population and 4.5% of its biotechnology firms, representing 0.5% of Canadian total biotechnology revenues and 0.7% of Canadian biotechnology R&D expenditures. An examination of Canada's biotechnology policies (federal and provincial) suggests that policies have generally not promoted the development of clusters but tended to both support and level the field for all regions. While Canadian federal and provincial governments have nurtured the new technology, the location of biotechnology clusters in Canada is more spontaneous than the result of policy measures. Also, policies have adjusted themselves to the local endowments of resources and human capital: witness the modification of Canadian biotechnology policy aims from the enhancement of natural resources to the development of pharmaceutical products

52.

Canada's Regional Innovation Systems

for human health. Biotechnology policy has followed a bottom-up process, with governments recognizing actual or potential comparative advantages of their regions and acting in order to enhance them. The federal government has taken the lead in almost all initiatives, from tax credits for R&D to the foundation of the Medical Research Council (now CIHR), to the CFI and Genome Canada. Some provinces, notably Quebec, have been fast to follow in matters of public policy. The French-speaking province has even taken the lead in some respects, with the Centres of Excellence Programs that the province launched in 1984-85 and the biotechnology development centres. TORONTO AND M O N T R E A L AS B I O T E C H N O L O G Y REGIONAL INNOVATION SYSTEMS

Montreal and Toronto represent together over 50% of Canadian biotechnology. However, neither of these metropolitan areas look like the classic biotechnology agglomeration, such as San Diego or San Francisco, which have just three types of organizations: research universities, SBFS, and venture capital firms. Both Canadian cities could be best described as human health megacentres (Cooke, 2,002,) with a complex pattern of competition and collaboration among these three elements, plus a variety of research organizations, such as large pharmaceutical laboratories, university research hospitals, and clinical research and other specialized firms. Toronto Biotechnology RSI Toronto represents Canada's largest biotechnology regional innovation system, measured either by the number of patents, employees, or investment. As in Montreal, three-quarters of its SBFS operate in the most promising sector, human health therapeutic products. The origin of many of these biotechnology firms is the Faculty of Medicine of the University of Toronto, as well as its large research hospitals. The city has hosted pharmaceutical research since the i88os and has managed to attract some very large laboratories of multinational corporations, such as those of Astra, Aventis, Eli Lilly, GlaxoSmithKline, and Johnson 8c Johnson, which have been lured by the research and graduates of the local university. Between the two world wars, two researchers of the University of Toronto, doctors

Biotechnology

53

Frederick Banting and John McLeod, 192.3 Nobel Prize winners, joined forces to commercialize the first method of purifying insulin, which they developed in collaboration with Eli Lilly. Also, in 1914, the university was the incubator of Connaught Labs, to produce tetanus and diphtheria serums, and later polio and other vaccines. In 1989, the French Institute Merieux bought the labs and in 1994 Rhone-Poulenc of France bought Merieux. In 1999, Rhone-Poulenc and Hoechst life sciences divisions merged to form Aventis and the Toronto subsidiary became Aventis Pasteur. Table 3.18 summarizes the most important organizations among Toronto RSIS. The Toronto agglomeration hosts two major universities, both of which are active in human health and pharmacological research. The University of Toronto is the largest in Canada and one of the largest in North America. By 1999, the university employed almost 2,500 professors, had over 55,000 students, and had external financing for research of €$454 million. Its Faculty of Medicine is best known for its research in neurobiology, cardiovascular disease, and biotechnology. Founded in 1843,the Faculty employs 765 professors and has an annual budget of over c$2zo million. Ten university hospitals are affiliated with the University of Toronto. They host some forty research centres and spend over €$400 million. These figures put Toronto in fourth place in North America in the field of medical research. Among Toronto's largest hospitals are the Hospital for Sick Children, the Ontario Cancer Institute, the Sunnybrook Health Science Centre, St Michael's Hospital, Women's College Hospital, the Centre for Addiction and Mental Health, and the Baycrest Hospital. Needless to say, only part of this research uses biotechnology in its different applications. The second university in the region is York University, founded in 1959, which is much smaller than the University of Toronto. It has no Faculty of Medicine, but its science research is well known in molecular biology and microbiology. Toronto hosts some twelve venture capital firms investing in biotechnology. The largest is MDS Capital Corporation, Canada's largest provider of venture capital funds for the health sciences, with a total fund of c$8oo million and investments in no less than seventysix companies, including most of the leaders in Canadian biotechnology, such as Hemosol, NFS Pharmaceuticals, and GlycoDesign (Toronto), Nexia Biotechnologies (Montreal), and Inex Pharmaceuticals (Vancouver). MDS Capital Corporation is a private company,

Canada's Regional Innovation Systems

54

Table 3.18 Toronto human health megacentre in 2.001 Organizations Number Representative organizations Human health s B F s * Pharmaceutical corporations

50 56

Clinical research organizations

11

Biotechnology services

40

Research universities

2

Government laboratory

0

Research hospitals

10

Biovail, Hemosol, Vasogen Astra Pharmaceuticals, GlaxoSmithKline, Eli Lilly MDS Pharma Sciences, Patheon, Biovail Contract Research MDS Capital Corporation, Royal Bank Ventures Inc. University of Toronto, York University Hospital for Sick Children, St Michael's Hospital

* Firms with five employees or more only

a spin-off of MDS, a research-oriented life science Toronto corporation. Another major investor in biotechnology is Royal Bank Ventures Inc. (RBVI), a diversified financial institution with a total biotechnology fund of €$45 million and investments in twenty-two SBFS including Toronto's Draxis Health, GlycoDesign, and Hemosol. Among the smaller venture capital firms, Yorkton Securities, another private organization, has collaborated in the launching of Draxis Health and Yorkton Biocatalysts. Some eighty biotechnology firms are located in Toronto, onethird of which are quoted on the stock markets in Canada and/or the United States. The market capitalization of these firms approaches the c$8 billion figure, with one large company, Biovail, heading the list with over c$6 billion in market value (table 3.12,), and dwarfing dozens of small and medium-size firms. The average size of Toronto's publicly quoted firms is 12,2 employees, but the figure is reduced to eighty-one when Biovail is subtracted. Many of Toronto's SBFS are the spin-offs of the University of Toronto (U of T).2 Today Aventis Pasteur (with 900 employees in Toronto) is one of the largest biotechnology organizations in the city and, as mentioned earlier, it originated in 1914 as Connaught Labs, a U of T 2. U of T has only recently started to collect information about its spin-offs.

Biotechnology

55

spin-off. According to official university figures, some thirty biomedical firms in Toronto emanate from U of T professors. Three of the most important publicly quoted SBFS were created from U of T research. These are Helix BioPharma, Spectral Diagnostics, and Visible Genetics. Smaller companies include Biox, Interface Biologies, Urex, and Select Therapeutics. Toronto is host to a large number of contract research organizations (CROS). A few are foreign subsidiaries, such as Parexel International, but others are among the largest Canadian-owned and controlled human-health corporations. These include MDS Pharma Sciences, aaiPharma, and Biovail Contract Research. As in Montreal, the CROS conduct clinical and pre-clinical research for the Canadian subsidiaries of large multinational pharmaceutical corporations in Canada, local SBFS, and the main laboratories of U.S. pharmaceutical companies in New Jersey and New York. Montreal's Biotechnology RSI Montreal is the largest regional innovation system in Canadian biotechnology by the number of firms and by R&D expenditures and the second largest by the number of patents and total investment. Early in 2003, twenty-two of these firms were quoted on Canadian or American stock exchanges. These public firms employ over 2,000 researchers and their market capitalization, by July 2002, was over c$i.5 billion. One Montreal SBF deserves special mention. In 2001, Shire Pharmaceuticals pic of Great Britain acquired the largest Canadian biotechnology firm, BioChem Pharma of Montreal, for US$4 billion (or c$6 billion). With over 1,000 employees, forty-six U.S. patents, and a large stream of revenues stemming from its flagship drug 3TC, marketed outside Canada as Epivir, the world's best-selling drug for HIV treatment, BioChem Pharma towered over Montreal's biotechnology. Shire BioChem also produces vaccines and has several other products in the Montreal research pipeline. It is no longer quoted on the stock exchanges. The vast majority of Montreal's SBFS are, however, Canadianowned and controlled. On average they employ only twelve persons and their median age is only eight years. The group of publicly quoted core biotechnology companies is larger and older: they are ten years old, they employ on average fifty-four people,

56

Canada's Regional Innovation Systems

and their average market capitalization is around C$86 million or US$55 million. At the beginning there was pharmaceutical research. Montreal has hosted human health research for over a century. Both Canadian and foreign-owned pharmaceutical corporations have established some of their R&D laboratories in the city, due to the presence of research universities and large public hospitals. Some of these innovating pharmaceutical corporations with decades of involvement in the cluster deserve particular mention. They include Merck Frosst, the subsidiary of U.S. Merck, with some 300 researchers in Montreal; Aventis Pharma, hosting over 2.00 researchers in the cluster; and Bristol-Myers-Squibb with a total R&D Montreal staff of 150. Other companies, such as Glaxo, Novartis, and Aventis conduct only clinical trials. Astrazeneca has recently created a new R&D lab in Montreal. Universities and their affiliated hospitals and centres were the attractors for pharmaceutical research. Montreal hosts four research universities. Three have at least some research in biotechnology. The largest by far is McGill University, founded in 1819, which has 1,360 professors, including 417 professors in health sciences. The University of Montreal, founded in 1920 and employing 1,300 professors, including 348 in health sciences, follows. These two universities have large faculties of Medicine and Sciences, as well as affiliated research hospitals. Also, some seventeen large hospital research centres are affiliated with McGill and Montreal universities. They host over 3,300 researchers. The University of Quebec and its affiliated National Institute of Scientific Research, founded in 1969, have fifty-seven professors in the field of health sciences but no affiliated hospitals and no Faculty of Medicine. The Biotechnology Research Institute of Montreal, a federal public laboratory under the umbrella of NRC, hosts another 560 researchers (see table 3.19). During the last twenty years, Montreal has nurtured the development of a large venture capital fund in the field of biotechnology. A dozen venture capital companies operate in the region, lending some c$i20 million every year. Some ten local specialized biotechnology firms are thus supported each year. Besides, some Montreal SBFS manage to receive funds from other regions of Canada as well as from overseas companies. Local venture capital firms include government-owned organizations (such as CDP Capital and Busi-

Biotechnology

57

Table 3.19 Montreal human health megacentre in zooz Organizations

Number

Representative organizations

Human health SBFS*

59

Pharmaceutical corporations

28

Clinical research organizations

10

Shire Biochem, Haemacure, Ibex, Theratechnologies Aventis Pharma, Abbott, Wyeth-Ayerst, Merck Frosst, Pfizer Canada, Astrazeneca Maxxam, Phoenix Life Sciences, Quintiles

Medical devices Biotechnology services Research universities

13 41 4

Government laboratories

1

Research hospital centres

16

Bio-Capital, Sofinov Concordia, McGill, Montreal, UQAM Biotechnology Research Institute of Montreal (National Research Council) Montreal neurological Institute, Clinical Research Institute of Montreal

* Firms with five employees or more only

ness Development Bank of Canada), government-backed ones (such as the Fonds de Solidarite de la FTQ), and private firms (Investissements Desjardins, Schroders & Associates). Large multinational corporations now conduct clinical research. Several of these, like Covance, Quintiles, and Parexel, are active in Montreal and were joined by some Canadian-owned firms such as Algorithme Pharma and Phoenix Life Sciences (now a subsidiary of Toronto's MDS). These CROS conduct clinical essays for both the pharmaceutical and biotechnology firms in Montreal, as well as for foreign customers, mainly pharmaceutical corporations based in the United States. They represent the fastest-growing component of the Montreal human health regional innovation system (Niosi et al., 2002). The Montreal regional innovation system in the pharmaceutical/ biotechnology area includes two different and fairly autonomous portions. One is the university/SBF/venture capital network. University researchers develop technologies and often create new SBFS with the help of venture capital. When these companies reach some level

58

Canada's Regional Innovation Systems

of maturity, venture capital firms bring them to the stock market and give them advice to manage intellectual property and develop international alliances. The more mature SBFS require the services of the local CROS. This SBF portion of the regional cluster was developed in the last twenty years and is still growing by the addition and attraction of new firms. They teach and conduct research. The second portion is made up of pharmaceutical multinationals and the CROs, which do little "R," concentrating on "D" or clinical trials. CONCLUSION

Canada's regional systems in biotechnology include strong agglomerations in Montreal, Toronto, and Vancouver, and emerging ones in Edmonton, Quebec City, and Ottawa. The first two strong agglomerations coexist within larger human health megacentres, including research hospitals, large pharmaceutical laboratories, clinical research organizations, venture capital firms, and other specialized suppliers. These regional innovation systems are the result of national and provincial horizontal policies, including councils funding university research, tax credits for R&D, commercialization and intellectual property regulations for patents and the management of university and public laboratory research, as well as direct subsidies for R&D, and public and labour-sponsored venture capital. However, these horizontal policies produced unexpected results. First and most important, they created RSIS, geographically agglomerated SBFS in a few metropolitan centres (the three largest Canadian metropolitan areas). Policies applying to the whole country produced results only in an area of several hundred square kilometres. These centres were those where the best talents in human health research were already at work, and also those where venture capital agglomerated, as well as research universities and hospitals. Second, the only attempt to create biotechnology regional innovation systems (that of NRC) produced results only in Montreal, where other factors nurtured the development of the RSI, including, aside from those already mentioned, a strong interventionist provincial government. In other words, governments seem to ignore the dynamics of biotechnology RSIS that require, in Canada as everywhere else, world-class research universities and venture capital. The relative position of the three largest RSIS has slightly changed, with Montreal catching up with Toronto, and Vancouver

Biotechnology

59

moving closer to the other two. In the span of only four years, from 1998 to 2,002, the number of companies quoted on the stock exchange has multiplied fivefold in Montreal. The province of Quebec now holds first place based on several variables. Quebec City is an emerging regional system of innovation. Even more spectacular has been the rise of research expenditures and investment in Alberta and British Columbia, and the arrival of Edmonton as the next major RSI in biotechnology. It is important to underline that in all these strong and emerging RSIS, human health R&D and products are the specialty of a majority of the firms. Conversely, Saskatoon - an ag-biotech agglomeration - declines by all possible indicators, and the Maritime provinces only keep their modest position as a less advantageous location for the new biotechnology. Some general conclusions seem to appear. First, a bottom-up rather than top-down process creates biotechnology regions. Universities hire (or not) promising scientists and create a favourable environment for them to develop new ideas, products, and genetic discoveries. They do so most often by using public funds, but public funds are not enough to force university administrators to run their organizations according to best practices. Venture capitalists are able to discriminate critical masses of high-quality researchers and locate close to them. In other words, governments that intend to grow the next Silicon Valley in biotechnology would best be sure that biotechnology research in universities is properly funded. This may be the main obstacle to the growth of biotechnology in continental Europe and Japan. The (more adequate) funding of academic research may explain the rise of biotechnology in the United States, Canada, and the United Kingdom. Second, governments undergo a learning process (Niosi, 2,002): they produce policy, than evaluate and fine-tune it. This has been the case in Canada, where the original national policy goal in the early 19805 was the development of a natural resource base through biotechnology, and where later experience showed that human capital for health research was the most important input that the country could provide. Policy priorities changed accordingly, and the number of firms as well as R&D expenditures moved continuously out of natural resources, CMOS, and environment and into pharmaceutical products. Human health RSIS grow and ag-bio agglomerations decline. Third, going back to theory, Montreal shows that in life sciences there are two sets of networks, not just one, through which externalities occur. One is the university-SBFs-venture capital network

60

Canada's Regional Innovation Systems

formed by research universities, mainly in molecular biology and medicine, new core biotechnology firms and their financiers, and scant links to CROS. The other is the big pharmaceutical firms-CRO network, with few contacts to the universities, mainly in pharmacology. The two networks coexist and have a few nodes in common (research universities and a few CROS). This finding tends to corroborate Lissoni and Pagani's (zoo3) suggestion that within a metropolitan area, and even in the same generic industry or technology, there may be more than one network through which externalities flow. Local innovation systems are not therefore homogeneous pools of externalities, but these spillovers flow through fairly exclusive networks that may coexist but do not necessarily overlap. Finally, in such a human-capital intensive activity, with major organizations involved and tenure researchers at the centre, inertia is strong. Regional innovation systems evolve slowly. Nobody can grow a biotechnology RSI in a few years, and the relative position of these human capital agglomerations changes slowly. Only major socioeconomic or political events, such as the bankruptcy of a regional or national government or the break-up of a country, may disrupt these long-term agglomeration processes.

4

Aircraft Systems of Innovation WITH THE C O L L A B O R A T I O N OF MAJLINDA ZHEGU

Montreal is one of the world's largest and most diversified aerospace clusters and innovation systems. This high-technology activity has developed continuously since the 19205, and by the beginning of the twenty-first century Canada had become the third largest producer of civil airliners in the world, after the United States and France. Canadian production clusters and regional innovation systems have been strongly concentrated in Montreal and Toronto. This chapter starts with the analysis of some specific characteristics of aerospace systems of innovation and clusters. It goes on to review industrial policies that nurtured the development of this activity in Canada, as well as the main figures of this production. It continues with the examination of innovation and production in the two main clusters in Canadian aircraft; policy implications and a conclusion follow. SOME PARTICULAR

CHARACTERISTICS OF

AEROSPACE AGGLOMERATIONS

The majority of large regional agglomerations of aerospace companies consist of one or several large prime contractors and/or manufacturers of major sub-assemblies (such as aircraft engines and structures) surrounded by dozens or hundreds of smaller suppliers of parts and components. In most other technologies, local spillovers

62,

Canada's Regional Innovation Systems

have been elevated to the rank of major determinants of regional agglomerations. Aerospace is somewhat different. In this advanced but well-established technology, the proportion of codified knowledge is very significant, and this type of knowledge flows internationally through the supply-chain management. Several decades ago, most outsourcing and associated knowledge flows generated by the prime contractors occurred within the region. Today, the industry has become internationalized and concentrated in a few companies for each segment, and is located in a few large metropolitan areas from a geographical point of view. Large aircraft manufacturers (tier-i manufacturers) design airplanes in one city - usually where the final assembling takes place - then send the general design over the globe to suppliers of the main sub-assemblies (tier-2 producers). Thus, Airbus aircraft assembled in Toulouse (France) or Hamburg (Germany) is powered by either General Electric (GE) or Rolls-Royce (RR) turbines manufactured in the United States or the United Kingdom; Bombardier regional aircraft manufactured in Montreal is fitted with GE engines imported from the United States and is often made of substructures produced in Japan. The same international supply chain takes place for each of the major modules of the aircraft. Local knowledge flows occur between tier 2, and tier 3, the latter being domestic producers of metal parts or electronic components. International supply chain management includes such dimensions as technical specifications, concurrent engineering, strategic engineering alliances, quality control, product co-development, certification of suppliers, delivery time, risk-sharing, cost-sharing, production volumes, and prices (Bozdogan et aL, 1998; Gostic, 1998). International technological collaboration between tier-i and tier-2. manufacturers is pervasive in the detailed design and development of sub-assemblies corresponding to a particular general design. Thus, if fifty years ago regional aircraft clusters and innovation systems were characterized by intense regional knowledge flows, today local knowledge externalities are more related to larger corporations teaching quality control, just-in-time systems, and certification to smaller companies, while the important flows are basically international and are made of explicit knowledge.1 i In 2003, Boeing, one of the remaining companies giving preference to local (and even internalized) rather than international procurement, announced that to reduce costs, the company may move part of its manufacturing facilities to other locations, and that subcontractors scattered around the world would manufacture most of its sub-assemblies ("Going, Boeing," The Economist, 19 April zoo3, 2.6-7).

Aircraft

63

O R I G I N S AND GROWTH OF CANADIAN CLUSTERS

In the period following World War I, Canada had no specific policy for the production of aircraft, a new industry that was being developed in Western Europe and the United States. The only policy was one of open markets for foreign direct investments. Thus, the Canadian aerospace industry started almost invariably by the launching of domestic overhauling and assembling facilities of American or British manufacturers in Montreal or Toronto, and the associated transfers of technology. In 1913, Canadian Vickers, a subsidiary of the British Vickers pic, assembled the first Canadian aircraft in Montreal. Five years later, the de Havilland Co., a subsidiary of the British corporation of the same name, assembled its first plane in Toronto. In both cases, the planes were produced in Britain and just mounted in Canada. The head offices of the British manufacturing firms decided by themselves, on the basis of commercial prospects, the first transfers of aircraft technology toward Canada. As early as 192.4, Canadian Vickers developed in-house design capabilities and later, in 1927, passed under domestic ownership and control. Until World War II, public procurement was the main support the governments gave to the local producers of aircraft. This procurement was granted on a case-bycase basis, without any general and permanent policy framework. Before 1940, most planes produced in Canada were sold to the Royal Canadian Air Force, several federal agencies, provincial governments, and in a few cases to private firms or clients in Canada or abroad. During the war both major plants (in Montreal and Toronto) produced military aircraft under American designs and licenses, and the Allies, including the Canadian government, bought most of their production. WWII was a period of rapid growth in terms of employment, output, and technology transfer, mostly from the United Kingdom and the United States. Besides providing a market to the manufacturers, the federal government was part of the technology and procurement agreements between foreign (mainly American and British) corporations and overseas authorities. Finally, Ottawa also built a huge plant at Cartierville, north of Montreal, and leased it to Canadian Vickers for the production of military airplanes (Pickler and Milberry, 1995; Hotson, 1999). After the war, the plant was sold to the newly formed Canadair, a Canadian-owned company founded as a spin-off of Canadian Vickers. In 1944, Canadair took control of the aircraft assets of the British subsidiary.

64

Canada's Regional Innovation Systems

Canadair and de Havilland operated as magnets for other companies and also spun-off several specialized suppliers. In this sense they represent cases of both the traditional Perroux pole explanation of geographical agglomeration and the new "anchor tenant" hypothesis. Both large prime contractors created a labour pool, a knowledge pool, and a market for sub-assemblies and parts on the basis of which the regional systems of innovation would emerge. At the end of WWII, Canadair in Montreal and de Havilland (DHC) in Toronto followed different development paths. Canadair continued producing military aircraft under American ownership (since 1946) and technology licenses, until its nationalization by the federal government in 1976. Conversely, still under British control, DHC produced locally designed civil aircraft until it came under federal government control in 1974. The technological paths of both major producers also diverged. Between 1946 and 1976, Canadair basically produced military jets, while DHC kept on producing mostly civil turboprops, as it does to this day. In the late 19805 and early 19905 both Canadair and DHC were sold to Bombardier, the Montreal-based transportation conglomerate. The Rise of Public Policy Since the late 19505, public support has come from different authorities and incentives within stable policy frameworks (Green, 1970). The most important was the Defence Industry Productivity Program (DIPP), which started in 1959 and continued till 1995. DIPP subsidies increased from c$z million a year to some c$43 million in 1989 for the development of the fifty-seat Canadian regional jet (CRJ) by Bombardier. National Research Council (NRC) aerospace laboratories in Ottawa provided auxiliary knowledge. Its wind tunnels (the first of which was built in 192.9) tested several prototypes of Canadiandesigned aircraft. In 1951, this equipment was moved into the newly created NRC National Aeronautical Establishment, renamed in 1990 the Institute for Aerospace Research. NRC also worked on materials for fuselages and structures as well as different parts and components. In spite of the fact that NRC facilities were located in Ottawa, collaboration was fairly fluid between the private firms in Montreal and Toronto and the public laboratories. Yet more important was the public-sector support of development work of different aircraft prototypes. Direct subsidies to R&D

Aircraft

65

appeared in the 19605 and most often went to both Canadair and DHC and, later on, to Pratt & Whitney Canada. Also, loan/lease export assistance helped Canadian producers to sell aircraft throughout the world. Between 1996 and 2003, Canada's Export Development Corporation (EDC) financed some c$8 billion, or 40% of Bombardier's overseas aircraft sales. Government procurement, R&D assistance and subsidies (through the Defence Research Board, the Defence Industry Productivity Program from 1959 to 1995, then the Technology Partnerships Program since 1996), loan/lease export support, industrial benefits policies related to government procurement: all these policies were designed to nurture domestic aircraft manufacturing. They were all dwarfed by the direct intervention of the Canadian government by means of nationalization of the two largest producers in 1974 (DHC) and 1976 (Canadair). A massive influx of public funds followed (€$700 million to DHC and C$2..4 billion to Canadair) the government takeover, aimed at the development of the Dash 8 turboprop and the Challenger business jet respectively. Public support did not extend exclusively to large airframe producers. It included support to manufacturers of avionics and onboard communication systems, aircraft engines, structures, and subsystems. Large companies, both Canadian and foreign-owned and controlled, benefitted from these interventions. The point here is that these incentives had no explicit regional aim as such, but, Montreal and Toronto having spontaneously emerged as the Canadian regional poles of aircraft production, the incentives nurtured the development of both industrial clusters and regional innovation systems. Tables 4.1 and 4.2 present the regional breakdown of the largest of these programs, Technology Partnerships Canada (TPC). From 1995 to 2002, TPC allocated loans amounting to over c$i billion to Canadian aerospace firms. Basically, Ontario and Quebec received over 80% of the funds, and aerospace received 56% of the total amounts invested by the federal agency. Table 4.3 presents some information about two-thirds of the total refundable loans granted to aerospace. Over 50% of the total $i billion that TPC gave to aerospace was spent in Montreal and some 15 % in Toronto. Quebec created its own incentives, including the Quebec Investment Fund for the Aerospace Industry and selected funding by the Quebec General Investment Corporation (SGF). Compared to the federal government, Quebec contributions are much smaller. The largest went to the creation of a university/industry aerospace

66

Canada's Regional Innovation Systems

Table 4.1 TPC investment 1996-2002 and jobs created/maintained by province/region Province Maritimes Quebec Ontario Prairies

B.C. Total

Investment (c$m)

45 800 890 69 241 2,046

Jobs

741 11,999 19,438

1,499 4,944 38,623

Source: Technology Partnerships Canada Note: Some TPC investments are being conducted in various locations and accordingly, the investments are allocated in more than one province.

Table 4.2 TPC investment 1996—2,002. and jobs created/maintained by technology field Technology

Investments

Investment (c$m)

aerospace and defence

61 315 105

296 592 1,158

Total

481

2,046

environmental technologies enabling technologies

Note: Includes IRAP-TPC: National Research Council's Industrial Research Assistance Program (IRAP) in partnership with Technology Partnerships Canada.

research centre in Montreal (CRIAQ), and to the development of training programs (CAMAQ) (table 4.4). But Quebec also contributes to aerospace innovation through its tax credit for R&D system, its support of higher education training in several Montreal universities, and a generally hospitable climate for aerospace investment in the province. Also, since 1996, Quebec has guaranteed almost $i billion to buyers of Bombardier aircraft. This represents 5 % of Bombardier's overseas airplane sales, and has to be compared with the c$8 billion loan guarantees advanced by the federal government through EDC. The Ontario government became involved in the direct support of the aircraft industry in 1992, when it took a minority position in DHC. Since that time, it has introduced a program of refundable loans aimed mostly at R&D and industrial expansion.

Aircraft

67

Table 4.3 TPC main loans to aircraft companies, 1996-2002. Company

Year of loan

Region

Amount (c$m)

Allied Signal Sextant Avionique Thales Avionics Derlan Aerospace Orenda Bristol Aerospace Orenda Comtek

1999 1997 1996 1996 2002 1997 2002 2002 1997 1998 2002 2000 1997 1998 2000 2002

154.0 147.0 87.0 57.0 39.0 32.0 24.9 16.2 12.7 9.9 9.9 9.5 8.4 7.8 7.2 7.0

Allied Signal Avcorp

1998 1997

BAE Systems Allied Signal Fleet Industries CaseBank Haley Industries Indal Technologies

2000 1999 1997 2001 2001 2001

Montreal Montreal Montreal Toronto Montreal Montreal Toronto Montreal Toronto Montreal Montreal Toronto Truro, N.S. Winnipeg Toronto Burlington Ont. Toronto Montreal/ Vancouver Ottawa Montreal Fort Ontario Toronto Ottawa Toronto

CAL

1997

Ottawa

BF Goodrich Messier-Dowty Heroux-Devtek

2000 2000 2000

Toronto Toronto Montreal

p&w Canada p&w Canada Bombardier Bombardier CAE CAE

Messier-Dowty CMC

Total Montreal Toronto Ottawa Source: Technology Partnerships Canada

Goal of loan aircraft engines aircraft engines regional Jet aircraft R&D flight simulator flight simulator landing gear flight simulator aircraft controls avionics avionics helicopter R&D aircraft engines aircraft structures aircraft engines composite structures

6.6 aircraft controls 4.4 aircraft structures 5.8 3.3 3.25 3.2 3.0 2.9 1.8

1.56 1.25 1.21 665.97 501.7 126.8 8.8

antenna aircraft controls aircraft wings aircraft software light alloys wireless aircraft handling system aircraft position system landing gear landing gear landing gear

68

Canada's Regional Innovation Systems

Table 4.4 Largest Quebec contributions to the aerospace industry, 1997-1003 Company

CAMAQ

Amphitec CRIAQ

Five SMES CAE

Avcorp GE Corp.

'Year of loan

Region

Amount (C$m)

2002 2002 2003

Montreal Montreal Montreal

6.8 5.5 5.3

2001 1997 1997 2001

Montreal Montreal Montreal Bromont

3.4 2.7 2.5 0.8

Goal of loan aerospace training detection systems industry/university research Centre aircraft parts training Centre aircraft structures turbine parts

27

Total largest Source: Technology Partnerships Canada

Canadian Production and Sales in Aerospace The Canadian aerospace industry is distributed across all regions. In 1999, the latest figures available showed a total of 46, ooo employees in aerospace manufacturing across Canada. Out of this total, 56% were located in the province of Quebec, z8% in Ontario, 9% in Manitoba, and 3% in British Columbia (figure 4.1). The distribution of manufacturing value added (total of €$6.3 billion in 1999 for Canada) was similar, but somewhat more concentrated, with Quebec representing 68% and Ontario 2,0% (figure 4.2). Thus Quebec and Ontario are the two major producing provinces; within these provinces, Montreal and Toronto, respectively, are the main production clusters and - as we shall see in the next section - regional innovation systems. The other metropolitan areas for Canadian aerospace are Winnipeg, Ottawa, Halifax, Calgary, and Vancouver. Sales figures mirror those of production and employment (figure 4.3). However, in the last two decades there has been a clear trend toward a geographical concentration of production in the province of Quebec, as witnessed by figures in figures 4.1 a to 4.4. Between 1990 and 1999, Ontario lost one-third of its aerospace employment, while Quebec increased by 25%, British Columbia stagnated, and Manitoba increased by over 30% but starting with lower figures. In 2001, Quebec represented 60% of sales and Ontario another 31%, with only 10% left for the rest of Canada.

Aircraft 6

69

Figure 4.ia Aerospace products and parts manufacturing, total employees, main provinces, 1999

Figure 4.ib Aerospace products and parts manufacturing, total employees, main provinces, 1990

Source: Statistics Canada (zooz): Manufacturing Industries of Canada, Ottawa, Cat. 3i-xo3XPB.

Finally, the sub-sectors are very different in terms of sales. The assembling of aircraft and .structures represents 66% of sales, engines another 12%, and avionics (a highly technology-intensive activity) only 4% of sales (figure 4.4). MONTREAL AND TORONTO R E G I O N A L INNOVATION SYSTEMS

The two largest aircraft metropolitan centres developed simultaneously from the 19208 under the thrust of the large airframe

yo

Canada's Regional Innovation Systems

Figure 4.2.3 Aerospace products and parts manufacturing, value added, main provinces, 1999

Figure 4.2.B Aerospace products and parts manufacturing, value added, main provinces, 1990

Source: Statistics Canada (2002): Manufacturing Industries of Canada, Ottawa, Cat. 3I-2O3XPB.

manufacturers, mostly foreign-owned and controlled. Then other producers of avionics, landing gear, structures, and other subassemblies and parts joined the regional agglomeration, and several local manufacturers (i.e. metal transformation, primary metals, plastic products, etc.) incorporated new lines of production to respond to the demand of the original equipment manufacturers. R&D and innovation followed suit.

Aircraft

7i

Figure 4.3 Sales figures 2.001 by province

Figure 4.4 Sales figures by sub-sectoi

Source: Aerospace Industries Association of Canada

Montreal Montreal hosts one of the most diversified aerospace innovation systems in the world. Most of the producers pyramid can be found in the city (figure 4.5). Its dynamic character comes from the families of

72,

Canada's Regional Innovation Systems

successful products that its major prime contractors (Bell Helicopter, Bombardier, CAE, and PWC in particular) have launched in world markets. Figures 4.6a and 4.6b summarize the progressive diversification of the Montreal production cluster and regional innovation system. In 1986, Bombardier Corporation of Montreal bought Canadair and decided to enter the regional aircraft market with a modified version of the CL6oo. The development of the regional jet was decided in 1987 and the first prototype flew in 1991; it was the RJIOO, accommodating fifty passengers, and it was launched for production in 1993. This was the first regional jet to appear in the world market. Several subsequent versions enlarged the regional jet up to ninety seats. In the meantime, in 1992,, Bombardier had bought the de Havilland plant in Toronto and continued the development of the Dash family with the DHC-8, a turboprop regional airliner, well adapted to short distances, but using a propeller technology that is now almost abandoned in aircraft production. With the acquisition of Short Brothers by Bombardier in the United Kingdom (and its conversion to the production of parts for the Montreal assembly plant), the bankruptcy of Fokker in the Netherlands and the abandonment of SAAB regional aircraft in Sweden, the turboprops were rapidly disappearing from the skies; a technological trajectory was coming to an end. The regional aircraft market is now dominated by turbofan technology that Bombardier, the first among other companies, has put forward. The world market for aircraft had changed radically when, in the late 19805, the large airlines moved from point-to-point to hub-and-spoke networks requiring large aircraft for servicing major airports and regional aircraft for the feeding lines around the hub. The era of regional jets had thus arrived and Montreal thrived on the success of the new product it had pioneered. In a decade, Bombardier Aerospace, with 15,000 employees in this region alone and 2,8,000 around the globe, became the world's third largest producer of aircraft, and Montreal became a growing aerospace cluster centred on aircraft. General Electric engines manufactured in the United States power most Canadian regional jets (CRJS), which use imported avionics and other major components. In the meantime, Bombardier transferred to Montreal its general design capabilities for new aircraft from all its different sites. Today all its families of business and regional jets are designed in Montreal.

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73

Figure 4.5 The producers' pyramid

Airfram assemble and sale

On-Board Avionic

Systems

Electrion and eldctical Coponbents and Parts

propulsion Systems

Airframe Structures Subassmblies

and Subsu

Engines and Components Components

Engine Assecirt

Fuelages and structre Structure

Interrior cabin and conpones Envirioaments control sutems Fuel systmes

Electrino systems and subsystems

Starting systms and Electrical Power Sources

Landing Grear systems Hydraulic systmes

In the 19205., Pratt & Whitney Canada (p&wc), a subsidiary of U.S.-based United Technologies, started overhauling and repairing aircraft engines designed and built in the United States. After World War II, it started producing such turbines in Montreal and incorporated local design capabilities for small aircraft turbines (de Bresson, Niosi, and Dalpe, 1991). Today, PWC has 7,000 employees in Montreal and its family of products has expanded. Its engines are designed in Montreal and Toronto and manufactured in Montreal. They are found in some Bell Helicopter Canada models manufactured in Montreal. Some of their engines are also powering two of Bombardier's models produced in several plants, including those in Toronto (DHC-8) and Montreal (waterbombers CL -2.15 and c 1^-415). The third major innovative company in Montreal is CAE, the world largest producer of flight simulators. A Canadian corporation, CAE was founded in 1947 and started producing flight simulators in the 19508. Today, it employs over 6,000 people including over 4,000 in the Montreal suburb of St-Laurent. CAE produces both in-flight and on-ground simulators for all major airliners and airline companies and is a leader in both civil and military versions.

74

Canada's Regional Innovation Systems

Figure 4.6a Montreal aerospace cluster

In 1984-85, with the help of the Canadian government, Bell Helicopter Textron, the main American producer of helicopters, transferred to Montreal its production capabilities for the manufacturing (but not the design) of most of its civilian helicopters. In the following seventeen years, the new Mirabel facility of Bell Helicopter Canada produced over 2,000 copies of seven successful different models that were exported throughout the world. Some of these models use p&wc turbines designed and manufactured in Montreal. Others use

Figure 4.6b The diversification of Montreal's regional innovation system and production cluster 1920s Aircraft Airframess (Canadian Vickers)

1930s

1940s

1950s

1960s

1970s

1980s

1990s

Aero Structures (Heroux) Avionics Aviation Electric Ltd. (now Honeywell) Landing Gear (Heroux)

Landing Gear (Messier-Dowty) Aircraft Turbines (p&wc)/ Flight Simulators (CAE)/ On board Communication Equipment

(CMC)

Source: Statistics Canada (ij>9z and zooz): Industrial R&D Intentions, Ottawa, Cat. 88-2,01

Commercial Helicopters (Bell HC)

76

Canada's Regional Innovation Systems

U.S.-made Allison engines. All models make use of U.S.-designed and manufactured shafts and other major parts. Other innovative companies are also prominent in the Montreal aerospace cluster. CMC Electronics (975 employees), part of the former Canadian Marconi Corporation founded in 1902,, now under Canadian ownership and control, is Canada's main on-board telecommunications equipment producer. Spar Aerospace., a satellite producer (now EMS Technologies) repairs and overhauls aircraft avionics components and on-board communication systems but has no patents in this technology. Heroux-Devtek, founded in 1942., with 650 employees in Montreal, is a producer of landing gear used in Bombardier jets, as well as in other aircraft. The French company Messier-Dowty (also a producer of landing gear, producing in Montreal for European customers since 1991) is not involved in R&D but manufactures on the basis of imported designs. Other companies produce airliner equipment but do not innovate, at least not on a regular basis. They are more part of the productive cluster than the regional innovation system. Honeywell Canada (an American subsidiary) is a major avionics manufacturer, with global mandates for several products, but its R&D activity is project-based and not permanent. Two other French companies, Thales Avionique and Sextant Avionique (avionics, both moved in 2.002, to Montreal), also deserve to be mentioned; neither is involved in R&D. In all, over 250 manufacturing companies at different levels constitute the Montreal aerospace cluster. In the last decade, Montreal has become the major aerospace agglomeration in Canada and one of the most active in the world. Innovation is concentrated mostly in large frames, engines, and avionics firms, as shown in table 4.5. In terms of patents, one firm (PWC) dwarfs all the others, as it represents more than 50% of the patents in the region, with total R&D personnel of 900 in early 2.003. Bombardier Aerospace represents the largest concentration of research capabilities in the area, with 1,200 employees in R&D and engineering. The propensity to patent is lower in aircraft design and assembling; thus Bombardier with twice the total number of employees and 30% more research personnel has fewer patents than PWC (table 4.5). Universities and public laboratories were not a major factor in the origins of the agglomeration. While McGill University had some relationships with the industry historically, it was only in 1986 that Bom-

Aircraft

77

Table 4.5 Patents in Canadian aircraft i976-2.ooz, main clusters Toronto Company Company Company Company

Montreal

RC4

64 (P&WC) 79 (P&WC) 26 (HAC) 10(CAE) 8 (CMC) 23 (LSC) 7(BA) 11 (RC) 124 (67%) 104 (80%)

Total

186

#1 #2 #3 #4

BA:

Bombardier Aerospace

BC-W:

Boeing Canada (Winnipeg)

CAE:

CAE Inc.

CMC:

CMC Industries

130

All other locations

Canada

9 (BC-W) 9 (CMC-O) 9 (HAC-V) 7 (RC-P) 35 (35%)

143 (P&WC) 32 (HAC) 23 (LSC) 18 (RC) 216 (54%)

100

399

CMC-O: CMC Industries (Ottawa) HAC:

Honeywell Aerospace Canada

HAC-V: Honeywell Aerospace Canada (Vancouver) LSC:

Litton Systems Canada

P&WC: Pratt & Whitney Canada RC:

Raytheon Canada

RC-P:

Raytheon Canada (Penetanguishene, Ont.)

hardier founded the first Chair in aeronautical engineering in Montreal; that gave the Ecole Polytechnique at University of Montreal the first major research group in the area. In zooi, Concordia University hosted the newly created Concordia Institute for Aerospace Design and Innovation (CIADI). CIADI was an initiative of seven major aerospace firms of Montreal (Bell Helicopter Canada, Bombardier, CAE, CMC, EMS Technologies, PW&C, and HerouxDevtek). Growing companies wish to increase the flow of graduates from local universities and increase academic research. In 2003 CRIAQ (Consortium de recherche et d'innovation en aerospatiale au Quebec) was created, with seven industry members (Bell, Bombardier, CAE, CMC, P&WC, Techspace, and Thales) and seven university members (the four Montreal universities plus Universite Laval, Sherbrooke, and Quebec at Chicoutimi), as well as NRC, the Canadian Space Agency, and a few other institutions. The goal of CRIAQ is collaborative research, training, and networking. Contrary to biotechnology, where the university incubated industry, in aerospace the opposite is true: industry stimulated university to supply ideas and graduates for an already existing demand.

78

Canada's Regional Innovation Systems

Public research institutes contributed somewhat, but not significantly, to the dynamic development of the cluster. In some twelve interviews with the major corporations in the region, none mentioned their collaboration with public laboratories as a major growth or location factor. The fact that NRC institutes for aerospace research are located in Ottawa, far from Montreal, may be a partial explanation. The financial autonomy of the institutes may also contribute to their relative isolation vis-a-vis the industry. In October 2,000, however, the Canadian government announced the creation of a new NRC facility on aerospace manufacturing research, this time to be located on the campus of the University of Montreal. The Aerospace Manufacturing Technology Centre is now being built on the campus of the largest Montreal university. Montreal's cluster and RSI is mostly located in the metropolitan area of the same and barely overflows a few kilometres to the northern suburb of Mirabel. Toronto: An Old and Specialized RSI Toronto represents one-quarter of Canada's aerospace employment. One company, de Havilland Canada (DHC), now part of the Bombardier Aerospace group, dominates Toronto's regional innovation system in aircraft. DHC remains one of the two producers of turboprop regional aircraft in the world, together with the Franco-Italian group ATR, based in Toulouse, France. With over 5,000 personnel in 2002,, DHC is the largest employer in the Toronto aerospace cluster. Its future, however, is uncertain, as turboprops disappear from the skies and the demand for all types of civilian aircraft has declined continuously since 2,000. Magellan Aerospace is another major company in the Toronto agglomeration. With 1,450 employees, it is the second largest employer in Toronto's aerospace cluster, and a tier-2, Canadian-owned and controlled corporation. Its regional subsidiaries include Orenda, a manufacturer of turbine and cells parts, Haley Industries, a supplier of precision aluminium and magnesium alloys castings, and Fleet Industries, a producer of aircraft structures and sub-assemblies. Magellan operates other aerospace manufacturing plants in Canada and the United States. The third largest manufacturer in Toronto is Honeywell Canada, with 1,300 employees mostly in avionics and communications equipment. Even if this is mostly a production site, Honeywell has kept

Aircraft

79

some R&D capabilities, as witnessed by its patented novelties invented in Toronto. Honeywell's Toronto avionics production, like that of Montreal, is not aimed at serving local aircraft demand. The fourth major company is Boeing Canada, a tier-2, subsidiary. The original plant belonged to Douglas Corporation and it was bought from DHC in 1953. When MacDonnell Douglas became part of Boeing Corporation, the Toronto plant continued its production of aircraft sub-assemblies under the control of, and for assembling by, its new parent. By 2,002,, Boeing had some 800 employees in Toronto. In terms of patents, PWC dominates the regional innovation system. If judged by the number and the variety of technological domains of the patents issued in the United States, PWC has been continuously expanding its Toronto R&D facility for the last twentyfive years. Between 1967 and 2003, the company's R&D department in Toronto was granted sixty-four patents. This figure is now similar to the one for its Montreal R&D centre (seventy-nine patents). In the meantime, Toronto is Canada's avionics centre. Honeywell Aerospace Canada, Litton Systems Canada, and Raytheon Canada all produce avionics in Toronto, relegating Bombardier Aerospace (BA) to a more modest position in terms of patents. In terms of engineering personnel, however, BA hosts 500 researchers against 650 in PWC. The avionics research facilities are much smaller, with fewer than 100 employees each. The University of Toronto provided many of the best engineers working for DHC and the other main original equipment manufacturers (OEMS) through the years. The university's Institute for Aerospace Studies is a fifty-year-old institution devoted to research and teaching in areas such as flight simulation and dynamics, materials and structures, propulsion, and combustion. It also runs programs and options at both undergraduate and graduate levels. Ryerson University in Toronto also offers an undergraduate program in aerospace engineering. Finally, York University offers an Honours Program in Space and Communication Sciences in its Faculty of Pure and Applied Science. All these programs have contributed to replenishing Toronto's pool of skilled manpower in aerospace. Even if federal aerospace labs are in Ottawa, some collaboration has existed between DHC and NRC laboratories. DCH-8 reduced versions were tested at Ottawa's wind tunnel. Several parts of different aircraft were designed at NRC. The Aerospace Materials Institute has also contributed to different models of the DHC family (Hotson,

8o

Canada's Regional Innovation Systems

1998). On the whole, however, DHC has not relied on, and produced few spillovers to, NRC government laboratories. In spite of its relatively smaller R&D personnel and expenditures Toronto research centres have obtained more patents than the ones in Montreal, due mostly to the increased weight of PWC and avionics producers in Toronto (tables 4.6 to 4.8). Innovation across Canada Even if there is a marked general trend of geographical concentration of both production and R&D expenditures in the province of Quebec, and Montreal in particular, Toronto patents in aircraft have been growing faster than those in Montreal. This trend is partially due to the rapid increase in patents obtained in Toronto by one company in particular, Pratt & Whitney Canada, but it is also due to the increase in patents granted to other avionics and controls companies located in the Toronto region. A more detailed patent analysis suggests that while Montreal is a magnet for most R&D activities, some of the research activities, particularly those related to the electronics industry and propulsion systems, where most patents are produced, may be heading toward Toronto rather than Montreal. Toronto thus has gained ground, in terms of patents, compared to the other agglomerations. Montreal has kept its second position, and the rest of Canada has lost some importance. Incidentally, avionics represents 34% of the patents but only 4% of the sales in aircraft. Patent figures may overstate the importance of Toronto as a regional innovation system. In terms of patents, smaller metropolitan areas plus a few others represent some 10% of Canadian aerospace innovation. In Ontario, Ottawa hosts Lockheed Martin Canada, Raytheon Canada, Thales Canada, and a few others companies, but most importantly, it is the site of NRC major aeronautical institutes and the Department of National Defence (DND) laboratories. Midland (Ontario) is the main location for Raytheon Canada aerospace R&D. In Manitoba, Winnipeg is host to three major innovative companies, Boeing Canada and Bristol Aerospace working in aircraft composites materials and structures and missiles respectively, and Standard Aero, active in engine repair and overhaul. Halifax hosts a major DND laboratory in Dartmouth, but no patented invention comes from its private sector. Vancouver hosts several aerospace companies but only one,

Aircraft

81

Table 4.6 Geographical concentration of patents in main RSIS, 1976-2002. Number of patents

%

Toronto Montreal Winnipeg Ottawa All other

186 130 14 22 47

47 33 4 6 10

Total

399

100

Table 4.7 Economic concentration of patents, 1976-2002 Companies and public labs area

Number of patents

%

Cum. %

Pratt &Whitney Canada Honeywell Aerospace Can. Litton Systems Canada CMC Industries Boeing Canada Raytheon Canada Bombardier Indal Technologies Government labs Subtotal main patent holders

143 32 23 17 15 11 10 10 18 279

36 8 6 4 4 3 3 3 4 71

36 44 50 54 58 61 64 67 71 71

Total Canadian patents

399

100

100

Source: US Patent and Trademark Office Database

Macdonald Dettwiler Associates (MDA), has patents in this industry. Finally, some patented invention comes from DND laboratories in Suffold (Alberta) and Valcartier (Quebec). Therefore, our attention should focus on Montreal and Toronto as the only aircraft RSIS in Canada. Aerospace R&D figures tend to mirror production more than patents. Thus, personnel (61,230 people in year 2000 in Canada) is almost exclusively concentrated in the two major provinces, with Quebec accounting for 60% and Ontario for 38% (figures 4-ya,

82,

Canada's Regional Innovation Systems

Table 4.8 Canada's aerospace RSIS by technology according to the number of patents 1976-2002 Toronto Aircraft products and parts, including engines Avionics Other (mechanical and general purpose parts) Public sector Total

Montreal

All other locations

Total

88

90

17

195

76 18

31 9

40 9

147 36

4

0

17

21

186

130

83

399

4.7!?, and 4.8). Aerospace products and parts R&D expenditures are almost identical, with Quebec representing 63%, Ontario 36%, and the rest of Canada only i %. POLICY IMPLICATIONS

Aerospace clusters and regional innovation systems are long-term phenomena based on large plants and pools of skilled workers. There is no clear recipe to create or lure these kinds of agglomerations. However, it is also clear that public policy contributes to their evolution and growth. Aerospace companies require R&D support, and often R&D loans, export credits, and direct subsidies for the building of plants. More often than not, aerospace policies are the responsibility of national governments due to the large risks and investments involved. In this industry, national authorities act like high-level venture capitalists: they invest public funds and expect social and economic returns in the form of highly paid jobs, exports, and technological externalities on other industries, such as telecommunication equipment, software, semiconductors, and metal manufacturing. Also, defence policies (or the lack of them) have a major impact on the industry. Advanced industrial countries such as Germany and Japan have for many years tried unsuccessfully to develop an aircraft industry and failed due to their under-investment in defence technology. Conversely, countries such as France and the United States, nurturing strong mili-

Aircraft

83

Figure 4.73 Aerospace products and parts R&D personnel, zooo 2%

Figure 4-yb Aerospace products and parts R&D personnel, main provinces, 1990

Source: Statistics Canada (1994, zooib)

tary industries, have for decades dominated the world civilian aircraft industry. While Europe displays a more geographically dispersed industry due to local employment conditions and historically based competitive advantages, some countries, such as France, have made an effort to localize in one area, namely Toulouse, their R&D capabilities. Thus, in the 19905 the French

84

Canada's Regional Innovation Systems

Figure 4.8 Evolution of aerospace patents, 1976-2.003

government transferred its public aerospace laboratories from the Ile-de-France region to Toulouse in order to nurture Europe's largest RSI (Longhi, 2.ooz). In the same way, the Canadian government may increase the weight of its national aerospace institutes by transferring them to Montreal, where Canadian aircraft production and innovation takes place. Conversely, it is clear that municipal authorities have a reduced influence on the local agglomerations of the industry, which are mostly spontaneous market phenomena. In some cases, municipalities have provided land in order to facilitate the installation of large plants on their territory. Subnational governments (i.e. state or provincial) also have limited influence on the creation and growth of such production clusters and innovation systems. At best, other than providing land, and due to the pervasive importance of highly skilled labour in the industry, they may increase the supply of educated workers, such as aerospace and telecommunication engineers, computer scientists, and semiconductor designers, as well as welders, mechanics, and assembly-line specialists. Subsidies to university research, targeted grants, and fellowships may also help to produce graduates, thus nurturing the development of the industry in a specific location.

Aircraft

85

CONCLUSION

Aerospace clusters are the most obvious case of both Perroux poles (at their origins) and "anchor tenant" (present-day) agglomerations. Large prime contractors or final assemblers attract national and international suppliers of sub-assemblies such as engines, landing gear, and avionics. They also provide a market for local producers of metal parts, software programs, and electronic components that are assembled into engines, thus inducing the latter into some related diversification in order to serve the needs of the large final or semi-final manufacturers. They represent not only "attractors" but also a new demand that changes the composition of the local production through the diversification of existing manufacturers and service providers. However, a major evolution has taken place in aerospace regional systems in the postwar period. The industry has now consolidated into a few international companies for each major segment (aircraft manufacturing, engines, landing gear, avionics, and on-board telecommunication equipment). Local outsourcing has been replaced by international supply of sub-assemblies. Today, large prime contractors request bids from all the major companies in different countries in order to insure some competition, as well as to capture international markets for their final products. Thus, international knowledge spillovers have superseded local ones. The former occur between final assemblers and producers of major sub-assemblies. The local externalities take place most often between small and medium-sized producers of parts and components and the local manufacturers of major modules. Finally, due to the explicit and well-codified nature of the manufacturing and design knowledge involved, major products and modules can be designed in one region and produced in another. Thus, BHC helicopters can be designed in Fort Worth and manufactured in Montreal, and major components of regional and business jets can be designed in Montreal and produced elsewhere in the world. The aerospace industry has become global, with localized production and innovation occurring in a few major cities. The examination of aerospace clusters provides another interesting test for local knowledge externalities theories. Far from being mostly "local," major knowledge spillovers flow out of the region

86

Canada's Regional Innovation Systems

through the value chain, toward overseas suppliers. In other words, final assemblers and major producers of sub-assemblies, located in the two larger census metropolitan areas of Canada, are teaching foreign manufacturers how to produce parts and pieces of aircraft. Only minor spillovers are local: they related local OEMS (tier i and 2.) to local tier-3 suppliers of parts and components, usually small and medium-sized enterprises, that learn about quality control, justin-time, and certification mostly through neighbouring producers of sub-assemblies. Locally produced knowledge thus becomes diffused world-wide through international outsourcing and foreign direct investment. In this type of cluster, inertia is due to the basic immobility of both large capital investments and the human capital pool.

5

Regional Systems of Innovation in Telecommunications

During the last quarter century, Canada has become a major player in the global telecommunications equipment industry. Canada has produced the first entirely digital communications system, launched by Northern Telecom (today Nortel Networks) in the 19705, as well as a long list of major innovations in wired and wireless communications equipment. Also, telecommunications equipment has been the first area of industrial research in Canada for the last twentyfive years (table 5.1). Ontario is and always has been the key province for telecommunications research, hosting Canada's two major centres in Ottawa and Toronto (table 5.2,). This chapter examines some of the major characteristics of telecommunication equipment clusters and innovation regions, then analyses Canadian telecommunications production and regional innovation systems. It also examines both the Ottawa RSI and policy implications. TELECOMMUNICATIONS EQUIPMENT C L U S T E R S AND

RSIS

The telecommunications equipment manufacturing industry is characterized by a few large and established corporations such as Cisco and Lucent in the United States, Nortel Networks in Canada, Ericsson in Sweden, Nokia in Finland, Siemens in Germany, and

88

Canada's Regional Innovation Systems

Table 5.1 Telecommunications R&D expenditures in Canada, selected years Year

Telecommunication Rank in equipment R&D Canada's (Current c$m) industry

1981 1986 1991 1998

#1 #1 #1 #1 #1

517 621 749 2,227 3,257

2000

Total BERD (c$m)

Total GERD (c$m)

Telecommunication R&D as a percentage of BERD

GERD

2,124

4,415

24

12

4,022 5,438 9,676 11,499

7,546 10,770 16,133 19,129

15 14 23 28

7 14 17

8

Source: Statistics Canada: Industrial R&D intentions, Cat. 88-2.02. (Annual)

Table 5.2, Telecommunications intramural R&D expenditures in Canada by province, selected years Year

Ontario

Quebec

c$m

%

1981 1991 1993 1995

281 624 773 1,233

2000

2,820

54 83 88 89 87

c$m

Total Canada

ROC

%

C$m

%

68

13

168

32

NA

NA

NA

NA

58 99 228

7

43 47 210

5 3 6

7 .7

517 749 874 1,379 3,257

Source: Statistics Canada: Industrial R&D intentions, Cat. 88-202 (Annual)

Alcatel in France. The stability of the rankings within the industry is due to the high and rising cost of developing and marketing increasingly complex pieces of equipment, such as large public switching systems. R&D usually represents over 10% of sales in these firms. These are vertically integrated producers with captive semiconductor design and manufacturing plants. Around these huge corporations is a fringe of no less than one hundred niche firms producing more specialized hardware, such as optical switches, point-to-point transmission apparatus, local and wide area networks, on-board equipment for aircraft and ships, and modules. These specialized niche manufacturers are also highly R&D intensive and they all spend between 5 to 20% of their sales in R&D. Finally, these hardware companies also produce telecommunications software in order to exploit their equipment; besides, they

Telecommunications

89

partially rely on hundreds of independent specialized software firms providing new communications applications. Telecommunication clusters and regional innovation systems are composed of all these different types of firms. All information technology industries - and telecommunications is no exception - share some characteristics, with major implications for clustering and regional agglomeration. They all spend a substantial part of their sales in R&D. Also, their products are complex and composite: these products consist of semiconductors and memory chips, assembled in integrated circuits; all of them use large numbers of rapidly changing software programs; and they are composed of a multitude of different types of equipment that is constantly being updated and revolutionized through continuous innovation. Large diversified corporations in information and communication technologies (ICTS) usually host major R&D facilities that represent incubators of many spin-offs in software, semiconductors, and integrated circuit designers, specialized module and equipment manufacturers such as private branch exchanges, local area networks (in the telecommunications equipment industry), as well as memory modules or specific types of computer peripherals (in the computer industry). These incubated firms may become viable in the short term, as they start with a major intellectual human capital already trained in the large incubator, and they are - more often than not - knowledge-intensive more than capital-intensive companies. Thus, in contrast to aerospace, where the large prime contractor attracts most companies to the area, in the ICTS the anchor tenant most often incubates the new firms entering the regional agglomeration. The anchor tenant in telecommunications generates the regional innovation system in several ways. First and foremost, it creates knowledge externalities that flow easily within the region through the movement of researches and managers. Second, it also contributes to the creation of a major specialized labour pool within the agglomeration by hiring thousands of skilled workers. And finally, it tends to make viable the settling in the region of support service activities such as specialized intellectual property law offices, dedicated venture capital firms, etc. that will serve the whole set of innovating companies in the agglomeration. Regional innovation systems in ICTS thus tend to be formed by and around one or a few large diversified research-intensive corporations

90

Canada's Regional Innovation Systems

(the anchor tenants) surrounded by a number of smaller corporations, many of which have been spun-off from the former. As such, ICTS' regional innovation systems tend to specialize in converging and complementary technologies such as computer software and/or hardware, telecommunications hardware and/or software, radio and TV hardware, or defence communications. Also, telecommunications clusters and innovation systems tend to be affected by the "development pairs" that have characterized the industry for over a century (Berggren and Laestadius, 2003). This is the dual monopoly relation existing between telecommunications utilities and their captive or preferred suppliers of equipment. Thus, in the United States, AT&T and Western Electric, in Sweden Swedish Telecom and Ericsson, and in Canada Bell Canada and Northern Electric are such development pairs, often collocating their R&D activities in order to maximize synergies. In Canada, some of this innovation co-location existed with Bell Canada headquartered with Northern Electric in Montreal, and later centralizing its R&D activities in the Bell Northern Research Centre in Ottawa. CANADA'S PRODUCTION IN COMMUNICATIONS EQUIPMENT Canada's original telecommunications production industry was reduced and basically foreign-controlled. The core of the system was Northern Electric, the Canadian subsidiary of Western Electric (today's Lucent), the manufacturing arm of AT&T. In 1882, Northern Electric was founded in Montreal. In 1914, Bell Canada (itself in the beginning a subsidiary of AT&T) purchased a minority share of Northern Electric, whose equipment was manufactured on the basis of designs and technologies licensed from Western Electric in the United States. In 1956, the U.S. Justice Department issued a final judgment remembered as the Consent Decree, ordering the Bell System to license its technology to all new entrants; at the same time, the judges enjoined AT&T and its subsidiaries to terminate all ownership, patenting, and licensing relationship with Northern Electric, forcing the latter to become technologically independent. In 1957, Northern Electric created its own R&D facility in Belleville (near Ottawa), followed in 1960 by the launching of its central Ottawa R&D Laboratories. Manufacturing production remained concentrated in Montreal and Toronto, where other companies such as

Telecommunications

91

Canadian Marconi, Harris Canada, Motorola Canada, Spar Aerospace, and (later) MPB Technologies and SR Telecom were producing telecommunication equipment. Innovation, though, moved to Ottawa. Only a few telecommunications equipment companies developed outside the Montreal-Ottawa-Toronto corridor. In 1978, Novatel started manufacturing its equipment in Calgary. After several changes in ownership and control, and the addition of new companies, Calgary became a significant player in the GPS-wireless segment (Langford and Wood, 2003). In terms of patents, though, Calgary represents i% of Canada's invention in telecommunications. A few minor specialized producers located in the Maritime provinces, the Prairies, and British Columbia. Thus, Canada's major production clusters and innovation systems have been located in Montreal and Toronto since the beginning of the twentieth century, and Ottawa was added to the list in the 1950$ and soon became the industry's main RSI. The telecommunications equipment industry is somehow the flagship of Canada's ICT industry. It has pulled in the semiconductor and electronic industries, as well as the radio, television, and wireless communications equipment industries. By 2001, ICT manufacturing employed 105,600 workers, and another 413,000 were employed in related services industries (table 4.3). When wholesaling is added, one finds that between 1995 and 2,001 the ICT sector grew from 3 % to 4 % of Canadian total employment. Out of these 597,000 workers, 47% were in the software and computer services (part of which is composed of telecommunications software publishing and related services). Another 20% was made up of telecommunications services and a further 10% of different types of telecommunication equipment and cables. In the 19905, the telecommunications equipment manufacturing industry left its main location, the province of Ontario, and moved to other provinces, mostly Quebec. Thus, Ontario represented 66% of total employment in 1990, but only 54% in 1998 (the last year for which provincial figures are available). Quebec increased from 17% to 24% and the rest of Canada from 17% to 22% of total national employment (figures 5.1 a and 5.2,b). In Ontario, total employment has basically stagnated below 16,000, while it has increased by over 70% in Quebec, from 4,100 to 7,000, and by 65 % in the rest of Canada, from 4,000 to 6,500. In terms of total value added in manufacturing, the geographical shift has been even more dramatic: Ontario's share fell from 63 %

92,

Canada's Regional Innovation Systems

Table 5.3 ICT sector employment, in thousands, 1995-2001 NAICS

Industry

33331

Commercial and service industry machinery Computer & peripheral equipment Telephone apparatus Radio & TV broadcasting & wireless communication equipment Audio & video equipment Semiconductor & other electronic components Navigational, measuring & other control instruments Communication and energy wire &c cable

33411 33421 33422

33431 33441

33451

33592

51322

5133 772

1995 1996

1997 1998

1999

2000

2001

7

8

9

11

12

13

NA

14

13

14

15

13

15

NA

20 6

17 6

18 8

18 8

18 9

18 10

NA

1

1

1

1

1

1

NA

16

17

18

20

24

25

NA

26

25

25

24

23

24

NA

7

6

6

7

12

16

NA

Total ICT mfg

95

93

100

105

112

122

106

Cable & other program distribution Communication services Software & computer services

11

9

9

9

12

14

15

120

112

112

113

114

116

119

118

132

158

180

228

255

280

249

254

278

303

354

385

413

63

67

70

72

75

78

78

Total ICT sector

407

415

448

479

541

584

597

ICT employment as % of Canadian employment

3.0

3.1

3.2

3.4

3.7

3.9

4.0

Total ICT services Total ICT wholesaling

Source: Industry Canada

NA

Telecommunications

93

Table 5.4 ICT sector intramural R&D expenditures, 1997^002, c$ million NAICS

Industry

1997

1998

1999

2000 2001

2002

CAGR

1997-2002 22 24 21 33331 Commercial and 26 26 17 service industry machinery 33411 Computer & 193 178 189 192 154 155 peripheral equipment 33427 Communication 1,869 2,251 2,335 3,339 3,353 2,626 33592 equipment, wire & cable 33431 Audio 8c video 18 17 17 18 20 18 equipment 33441 Semiconductor & 579 771 770 875 369 479 other electronic components 314 408 33451 Navigational, 435 432 268 306 measuring & other control instruments

Total ICT mfg

51121 Software publishers 51322/ Cable & other 5133 program distribution 8c communication services 54151 Computer system design & related services

2,697 3,232 3,446 4,747 4,896 4,068

9.4%

4.6%

7.0%

-2.4% 15.8%

10.2%

8.6%

235

202

223

241

260

264

2.4%

81

88

66

55

57

57

-6.7%

445

515

542

624

690

709

9.8%

18 22 25 28 Other services 9.8% 25 16 848 944 1029 1055 777 833 Total services 6.3% 42 -12.5% 53 39 42 81 66 Wholesaling Total ICT sector 3,555 4,131 4,347 5,731 5,967 5,165 7.8% ICT as % of BERD 40.7 42.7 42.5 50.1 49.8 45.9 Source: Industry Canada NB: CAGR: Composite annual growth rate

Canada's Regional Innovation Systems

94

Table 5.5 Regional distribution of patents, 1976-zooz

Ottawa

Toronto

Montreal

Rest of Canada

Total Canada

Ottawa as %of Canada

1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

16 25 29 26 24 31 37 33 51 48 49 67 58 46 41 33 34 27 39 32 52 40 96 144 174 194 203

5 8 8 7 5 5 8 6 3 6 8 19 9 9 6 13 10 7 13 17 28 44 49 57 75 103 105

5 7 7 8 7 11 13 12 7 15 7 7 13 9 12 16 9 8 17 7 24 26 28 72 . 64 45 39

0 0 0 0 0 0 1 1 0 3 0 1 0 0 0 0 3 0 1 2 2 7 7 3 8 14 11

26 40 44 41 36 47 59 52 61 72 64 94 80 64 59 62 56 42 70 58 106 117 180 276 321 356 358

62 63 66 63 67 66 63 63 84 67 77 71 73 72 69 53 61 64 56 55 49 34 53 52 54 54 57

Total

1,649

633

495

65

2,841

58

58

22

17

3

100

MCR* as % of Canada

*MCR: Metropolitan census region. Source: U.S. Patents and Trademark Office Database

Telecommunications

95

Table 5.6 Major corporate R&D spenders in ICTS, 2.001 Company

Rank as Canadian private spender

Nortel Networks JDS Uniphase Ericsson Canada ATI Technologies IBM Canada Mitel Networks Motorola Canada 724 Solutions BCE Emergis Research in Motion Leitch Technology

1 2 5 6 7 24 30 33 34 46 53

CMC Electronics

59

Exfo SR Telecom Com Dev

65 69 70

Certicom Wescam Ceyba NSI Global

81 92 93 97

Main R&D location

Ottawa Ottawa Montreal Toronto Toronto Ottawa Toronto Toronto Montreal Waterloo Ottawa, Toronto Montreal, Ottawa Quebec City Montreal Cambridge, Ont. Toronto Toronto Ottawa Montreal

Control U.S.-granted Total R&D telecom expenditure patents (c$m) invented in Canada Canada Canada Sweden Canada U.S. Canada U.S. Canada Canada Canada Canada

1,630 31 203 176 160 165 19 2 0 55 3

4992

Canada

17

32

Canada Canada Canada

6 0 64

27 26 26

Canada Canada Canada Canada

27 7 0 0

20 16 16 15

505 270 255 250 95 64 61 58 40 37

Sources: Research Infosource (zooi): Canada's innovation leaders, Ottawa; USPTO

to 39% while Quebec's part increased from 18% to 41% and the rest of Canada remained unchanged at 19%. It is not difficult to conclude that Quebec is attracting high value-added activities while more valuable production is moving toward the rest of Canada.1 i Statistics Canada (1994, 2001) published provincial breakdowns only for Ontario and Quebec and only for a few years, including 1990 and 1998. For reasons of confidentiality, there are no figures for any of the Atlantic provinces, the Prairies, and British Columbia. They are aggregated here under the label "Rest of Canada."

96

Canada's Regional Innovation Systems REGIONAL INNOVATION SYSTEMS

In Canada, telecommunications research represents more than half of the ICT sector intramural R&D expenditures. Also, the number of R&D performers in telecommunications research, which had been fairly stable for decades, grew very fast in the 19905. By 1989, there were some nineteen manufacturers of telecommunications equipment with research activities in Canada; twelve were domestically owned and controlled, five were the subsidiaries of American corporations, and two were foreign-controlled from other countries (Statistics Canada, 1991: 100). Besides, twenty communications utilities were among the R&D performers, seventeen of which were domestically controlled, two of which were American subsidiaries, and one of which was controlled by corporations based in other nations. By year 2000, 105 manufacturers of equipment and twentyfour utilities conducted R&D in the communications industry (Statistics Canada, 2002,: 86, 92). In the 19905, dozens of new small companies were founded and started conducting R&D for special equipment and related software in the burgeoning wireless and personal communications markets. The new entrants reinforced the traditional innovating agglomerations: Ottawa, Toronto, and Montreal. These three regional innovation systems dwarf all others in Canadian telecommunications research and development. They represent, respectively, 58%, 22%, and 17% of all U.S. patents granted to Canadian inventors in telecommunication hardware and software between 1976 and 2002. The rest of Canada represents only 3 % of total patents. In each city, the economic concentration of invention is very high: one or two companies represent the majority of the patents. In Ottawa, Nortel is the assignee of 80% of the telecommunications patents granted to the region's companies between 1976 and 2002. Mitel is responsible for another 10%. Fifteen other companies share the remaining 10%. In Montreal, Nortel holds 50% of the U.S. patents granted from 1976 to 2002, and Ericsson Canada possesses another 41%. Fourteen other companies represent a further 9%. In Toronto, ATI (28%), IBM Canada (25%), and Nortel (16%) are the assignees of the majority of the patents; some nineteen companies in the region (including Com Dev in Cambridge and Research in Motion in Waterloo) share the remaining 31%.

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97

Figure 5.13 Total employment in the telecommunication equipment manufacturing industry, 1990

Figure 5-ib Total employment in the telecommunication equipment manufacturing industry, 1999

Each regional system shows the presence of Nortel from its inception. Even if the company's central labs have always been centralized in Ottawa, Nortel has obtained patents every year in the entire 19762002, period in each of the three census metropolitan regions. In fact, by 1976 Nortel was essentially the major patenting company in each

98

Canada's Regional Innovation Systems

Figure 5-ia Total value added in the telecommunication equipment manufacturing industry, 1990

city. (By 1976, Mitel was also patenting in Ottawa, as were Canadian Marconi in Montreal and IBM and Electrohome in Toronto.) Thus, the three regional systems were able to either incubate new firms or attract incumbents during the last twenty-five years. Thanks to the initial R&D investments made by Nortel in the 19505, Ottawa has incubated such companies as Mitel Networks, Newbridge (today absorbed by French Alcatel) and JDS Uniphase, and attracted General Dynamics and Cisco Systems Canada from the United States. A more complete picture of Canada's major regional innovation system in telecommunications appears below, in a separate section. Montreal started innovating in telecommunications with Canadian Marconi, today CMC (attracted in the early 19005 from the United Kingdom), and Nortel (which has conducted R&D in the MCA since the 19605), and in 1986 attracted the Swedish leader of wireless telephony that created Ericsson Research Canada. Ericsson's R&D centre is its main research facility outside Sweden, and today represents Montreal's largest telecommunications laboratory. With i,600 employees in 2002 (75% of which are technical personnel) and total R&D expenditures of €$270 million in 2001, Ericsson represents the third largest Canadian corporate spender in telecommunications, and the fifth largest in Canada, all indus-

Telecommunications

99

Figure 5-zb Total value added in the telecommunication equipment manufacturing industry, 1999

Source: Statistics Canada (1994, zooib)

tries combined. Ericsson was attracted to Montreal by its labour pool, the number and quality of its universities, the quality of life, and the policy environment conducive to R&D. The lab has several mandates, most of which are related to global networks and services." In 1967, Toronto attracted IBM's Software Laboratory, Canada's seventh largest corporate R&D spender and itself a major incubator of new companies. IBM Toronto Software Lab hosts over z,ooo employees; in terms of employment it is the third largest R&D facility in Canada. It has a mandate for the development of five different technologies (database, electronic commerce, "websphere" business components, and user technologies). ATI Technologies, a Canadian corporation founded in 1985 to produce communications, graphics, and multimedia software, is a public corporation with 1,900 employees in the world, 250 of whom are located in Toronto, the locus of its central R&D laboratory. Both IBM and ATI produce at the same time computer and telecommunications software. IBM is more involved in the first industry, and ATI in the second. We will return to IBM later on in chapter 7. z Personal interview with the company, Novembre zoo3.

ioo

Canada's Regional Innovation Systems

OTTAWA A S C A N A D A ' S M A I N TELECOMMUNICATIONS RSI Except for a few years, judged by the number of patents obtained in the United States by Canadian inventors, Ottawa has concentrated over 50% of Canada's invention capabilities (figure 5.3). Also, since the mid-1990s it has increased its dominance vis-a-vis the two other large centres, Toronto and Montreal (figure 5.4). Historically, Ottawa's regional innovation system has produced some 58% of the total Canadian telecommunications patents, against 2.2% in Toronto and 17% in Montreal. All other regions combined (mainly Calgary and Vancouver) represented only 3 % of the patents in the twenty-seven-year period (fgure 5.5). In the late 19505 and early 19605, with the creation of Northern Electric (today's Nortel Networks) central laboratory in Ottawa, the region started its rise as Canada's centre for telecommunications research. At that time Ottawa had already developed some expertise in defence information technologies (including the radar, the sonar, avionics, and communications), due to the Second World War effort (Amesse and Cohendet, 2,001). Also, the main government laboratories (the NRC and DND group of research institutes) were located in Ottawa, providing a labour pool as well as technical facilities. Northern Electric was not the only technology-based company attracted to Ottawa by the defence market and governmental research. Among these other companies were Electronic Materials International, Northern Radio, and SPAR. In addition, no less than seventy-four companies in the region were spun-off from government laboratories, including Computing Devices, Gandalf, Mechron, and Semco. Finally, demand from the public sector was also taken into consideration: the federal government is Canada's major client of information and communication technologies. The enterprises located in Ottawa thus have an information advantage, not only with regard to new technologies being developed in government laboratories and available to the private sector but also in the possibility of using and interacting with these laboratories and the many public-sector demands and tenders concerning information technologies. Also, Ottawa was a much less expensive location than Toronto, and more central than any other in the Prairies or the Maritimes. Besides, Ottawa represented an English-speaking envi-

Telecommunications

IOI

Figure 5.3 Ottawa as a percentage of Canadian telecommunications patents, 1976-2.002.

ronment, essential for a company planning to recruit thousands of computer scientists and electrical and electronic engineers across the globe. Since 1970, the rise of the Parti Quebecois in Quebec has accelerated the trend of the R&D function toward Ottawa, and was key in the moving of Northern Telecom's head office from Montreal to Toronto in the spring of 1977. In Ottawa, the growth of Northern Electric laboratories was nothing short of spectacular. Employing fifty employees at its inception, the company grew rapidly and merged with Bell Canada research in Ottawa to form BNR Labs in 1971. At that time, the company was developing an electronic switching system that was finally launched in 1972.. It was the SG-I - or PULSE - the world's first digital private branch exchange. A series of all-digital switches followed in the 19705. The break-up of AT&T in 1984 opened the U.S. market for this series of radically new products. Explosive growth followed at Nortel in the 19805. Around year 2.001, at its height, Nortel had 16,000 employees in Ottawa; enrolment declined to 6,000 in 2003. At its peak, Nortel hosted some 12,000 employees in R&D, mostly located on the Carling Campus. They were distributed in several labs, responsible for software and hardware, semiconductors and integrated circuits. In addition to Carling, Nortel has other R&D labs in Ottawa. Skyline designs and develops fibre-optics and radio transmission as well as wireless products. The Kanata complex houses the Physical Design Integration Group focused on systems packaging, product integrity,

IO2,

Canada's Regional Innovation Systems

Figure 5.4 Ottawa, Toronto, and Montreal telecommunication patents, 1976-2002.

Source: U.S. Patent and Trademark Office

Figure 5.5 U.S. telecommunications patents invented in Canada by city, 1976-2002

Source: U.S. Patent and Trademark Office

and related areas. In addition to its R&D, Nortel developed manufacturing plants in the Ottawa region. The most important is a semiconductor plant, which designs and manufactures custom chips and application-specific integrated circuits and was recently sold to

Telecommunications

103

ST Microelectronics, the world's fourth largest producer of semiconductors, based in Italy. Another plant is Nortel Microwave Modules, producing modules for wired and wireless transmission. In the 1970-2000 period, Nortel spun-off most of the major companies in the region and over 200 technology firms in all. Mitel was one of the most successful of Nortel's spin-offs. The company started in 1971, when two employees of Microsystems International (a Nortel subsidiary in Kanata), Michael Cowpland and Terry Matthews, started working on a tone receiver. Mitel was founded in 1972 and in 1976 it acquired a bankrupt semiconductor plant in Bromont (Quebec), thus integrating microelectronics technology with the telecommunications products already being developed by the company. Mitel thrived on the revolutionary adoption of digital technology in telephony launched by Nortel at that time and followed the leader by launching several very successful switching systems. By 1981, when the company was quoted on the NYSE, it already had 6,400 employees around the world and was a rising company in the telecommunications industry. In 1984, Mitel launched the sx-2ooo, its main product and the largest PABX (private branch exchange) to date, and established a plant in the United Kingdom. In 1986, British Telecom acquired Mitel, but in 1992 the Ottawa company was back under the control of Canadian investors. During most of its existence, Mitel maintained semiconductor design and telecommunications hardware and software R&D in Ottawa and process research in its semiconductor plant in Bromont. In 1997, Mitel acquired a semiconductor plant in Sweden. In 2001, Mitel sold its telecommunications assets to Matthews and focused on semiconductor design and production, changing its name to Zarlink Semiconductors. In 1986, Matthews had founded Newbridge Networks with part of the product of the sale of Mitel to British Telecom. The new Ottawa company developed a highly successful family of Wide Area Networks (WANS) and ATM technology. In May 2002, at the peak of the telecommunications boom, Matthews sold the company (with over 6,000 employees worldwide) to Alcatel of France for c$7 billion. A year later he bought Mitel telecommunication assets in Ottawa to form March Networks. In the 19705, Nortel was one of the first companies to develop opto-electronics, and it built R & D laboratories and manufacturing facilities in Ottawa. As in the case of the all-digital switching systems,

104

Canada's Regional Innovation Systems

spin-offs followed within the area. In 1981, three former Nortel employees founded JDS Uniphase under the name JDS Optics. The company produces advanced fibre-optics products for the telecommunications and cable television industries. In 1998, JDS acquired Philips Optoelectronics, and in 1999 it merged with Uniphase of San Jose California to form the present-day company. In 2000 JDS took over some eleven companies at a total cost of C$6 billion. In 2.001, JDS bought the IBM Optical Transreceiver Business Unit and Scion Photonics. On the basis of opto-electronics knowledge developed within Nortel, this company managed to become one of the world's largest optical telecommunications equipment firms. As of 1999, Ottawa was a specialized regional innovation system, with telecommunication as its main activity. Out of $2.84 billion in business R&D spent in the region, five telecommunications companies executed some 90%. They were Nortel, Newbridge, Mitel, JDS Uniphase, and Calian. Computer software companies followed with 6%. The specialization of the regional system caused the downturn in telecommunications to affect Ottawa more than any other RSI in Canada. By 2002, the telecommunication bubble had burst and most of the above-mentioned companies were struggling. Nortel cut its Ottawa workforce from 16,000 in 2001 to 6,000 in 2003. Mitel telecommunications assets were entirely written off. JDS Uniphase reduced its personnel from 29,000 to 7,000, out of which some 1,300 were left in the Ottawa region. In 2003, the company was relocating its manufacturing operations to China in order to reduce costs. Table 5.7 summarizes the present state of the core companies in the Ottawa telecommunications regional innovation system. The job reductions and the divestiture of entire divisions in the largest companies in the 2000-03 period created many spin-offs. Peter Allen, a former Nortel vice-president business development for opto-electronics, created Innovance Networks in 2000 and became its CEO. In a few months, the new company collected close to C$ii5 million in venture capital and recruited top executives and researchers from JDS Uniphase, Lucent, and Nortel and established a subsidiary in New Jersey in order to gather externalities and personnel from the former Bell Labs. In 2000, with the acquisition of Newbridge by French Alcatel, several executives from Newbridge launched Meriton Networks, a start-up producing networking transform platforms with a new optical switch, building on former company knowledge and expertise.

Telecommunications

105

Table 5.7 Ottawa's largest telecommunications companies, 2.003 Company

Number of local Year established employees locally

Nortel

6,000

1960

Alcatel Canada Bell Canada

3,215 3,000

2000 1880

JDS Uniphase Mitel Cisco Systems

1,300 1,200 400

1981 1972 1996

Telus

400

1999

Telesat Canada

350

1969

Entrouage

275

1996

Catena Network

270

1998

Innovance Networks Ceyba

215

2000

CMC

200 200

2000 1902

EMS Technologies

200

1974

oz Optics Prestec Electronics

200 185

1985 1980

CML

March Networks Tropic Networks Meriton Networks

170 160 115 95

1979 2000 2000 2000

Total top 20 firms

18,150

Source: Ottawa Business Journal

Main product description network equipment and semiconductor R&D and manufacturing network equipment advanced communication service fibre-optic network modules IP telephony solutions hardware & software internet solutions voice, data, IP network and wireless solutions operates a fleet of satellites for communication services professional installation systems design and delivery of voice 8c data access products photonic network solutions optical internet systems communication products for aviation, GPS & marine users mobile satellite communications fibre-optic manufacturer turnkey products, cable and fibre manufacturer digital switching systems broadband IP applications metro networking solutions metro optical components

io6

Canada's Regional Innovation Systems

The same year, a group of executives from Newbridge and Nortel formed Tropic Networks, another firm backed by venture capital with new optical metro switching equipment. Expatriates of large companies, including Nortel Networks, Cisco Systems, Newbridge Networks, Alcatel, Pirelli, Tellabs, and Abatis Systems founded Ceyba with the help of venture capital. The company is to manufacture regional and ultra-long networks in competition with Nortel. It is justifiable to suggest that incubation from large firms is the main mechanism from which telecommunications (and probably all ICT clusters and innovation systems) develop. Incubation takes place most probably under two very different circumstances. In the first, spin-off companies develop to take advantage of revolutionary new technologies created by major corporations; this is the case of Mitel (digital switches), Newbridge (local and wide area networks), and JDS Optics (opto-electronics). In the second situation, a downturn devaluates the technological assets of the incumbents and blocks career opportunities in them; in this case, executives and researchers are "forced" to walk out and acquire new technologies at discount prices. This is the case of the array of new firms in optical switching equipment created in Ottawa in 2000-03 on the basis of the partial dismembering of JDS Uniphase, Mitel, Newbridge, and Nortel. Nortel is the incubator of most of the major companies in the agglomeration, having spun-off a total of over 2,00. The role of the two local universities and the dozens of government laboratories is more modest. The universities have incubated a dozen technology firms, and government laboratories some seventy-five others. Few of these companies based on academic or public-sector research have experienced major growth, most probably lacking the financial, marketing, and operations competencies and routines required to expand. POLICY IMPLICATIONS

The telecommunications industry in Canada is another case of the "development pairs" that was already observed in the United States and in the Nordic countries: dynamic telecommunications utilities, whether private or public, create a unique "user-producer" pair with their captive or preferred equipment manufacturers. In Canada, as in the United States, the development pair was entirely pri-

Telecommunications

107

vate, but the government has nevertheless played a major role through its R&D subsidies, public procurement, and industrial strategy in which telecommunications have for many decades played a major role. Canada's clusters in telecommunications developed spontaneously as a result of several factors. Toronto and Montreal grew out of the development of a pool of skilled labour, trained in the local universities, and/or attracted by major companies such as IBM and Nortel in Toronto and Marconi and Nortel in Montreal. Later, the pool attracted some major players from abroad (Cisco in Ottawa, Ericsson in Montreal, Motorola in Toronto). In Ottawa, government laboratories that attracted Nortel, which nurtured the further development of local companies such as JDS Uniphase, Mitel, Newbridge, and Plaintree, created the labour pool. The process is not only spontaneous; it is also cumulative and self-reinforced: more companies draw more talent, the growth of which, in turn, operates as a magnet for the attraction or development of new firms. The Canadian government has certainly played a role in the development of a telecommunications regional innovation system in Ottawa, through the location of its main laboratories, public procurement, and technology policy. Unaware, the Quebec government has also probably played a negative role, chasing some companies most notably Nortel - through its linguistic policies and long-term constitutional goals. It is doubtful that provincial and municipal authorities have played any major role in the development of Canada's telecommunications clusters and regional innovation systems anywhere else. The many efforts by the Alberta government to nurture the growth of a telecommunications cluster in the province were only moderately successful, and those by other provinces were particularly fruitless. CONCLUSION

Telecommunications clusters and innovation systems are long-term agglomerations that have developed spontaneously over the decades. As in the case of aerospace, public policy has played a key role in the development of the industry, but not necessarily a central one in the formation of regional agglomerations. As in other sectors, governments do not precisely understand the dynamics of

io8

Canada's Regional Innovation Systems

these regional systems, nor the opportunity costs and returns on investments made in new technologies. Besides, only national governments have the resources needed to nurture the development of these local agglomerations, and these authorities experience demands from many different regions, the political priorities of which may not correspond with the growth requirements of these clusters. In telecommunications, regional production systems and regional innovation systems do not always overlap. Ottawa's importance as main innovation system does not concur with its smaller role as a production hub. In other words, telecommunications hardware and software may be developed in one location and produced in others. The increasing role of Montreal as Canada's main production site is not matched by its more modest role as a regional innovation system. Large companies base the dynamics of telecommunication clusters and RSIS on the creation of large pools of skilled professionals. The main growth pattern is the incubation of new firms in the region within these large incumbents. In our case, incubation has taken the form of the branching out of new technologies from the large group of those being developed in the laboratories of the mother company. Incubation in ICTS differs from aerospace, where the large prime contractor spins-off activities (interior finishing) or the manufacturing of sub-assemblies (landing gear, structures) that they do not place among their core competencies, or that they can buy less expensively from independent producers. The spin-offs have a major advantage as they thrive on the technological and business experience of the incumbent and recruit employees in the labour market (and sometimes out of the major company itself) created by the incumbent. Anchor firms in telecommunication clusters and regional innovation systems do not play the same role with regard to new technology firms. Spin-offs do not have the same type of relationship with universities and government laboratories either. In biotechnology, the academic institutions played the key role as incubators providing the technology, helped by venture capitalists, which provides the required business routines and makes the difference between a research project and an enterprise. Conversely, in the telecommunications industry, the incubating firms provide both the technology and the management routines, most often in the form of researchers and managers migrating from the incumbent to the newly formed company.

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109

Local knowledge externalities naturally flow from established, incubating companies to new spin-offs. Managers and engineers leaving the incubators bring their expertise to their newly created firms. In that sense, telecommunication regional innovation systems come closer to the Audretsch-Feldman or the Jaffe-TrajtenbergHenderson theory on local network externalities: most occur within the regional innovation systems, and local incubation of firms seems a proper and defendable mechanism of knowledge transfer. Finally, the RSI display high levels of inertia because of the large labour pool, even when the particular organizations that employ this labour are constantly changing.

6

Semiconductor Innovation in Regions

THE SEMICONDUCTOR INDUSTRY

The microchip industry was born in the United States in the late 19405. The AT&T Bell Laboratories in New Jersey were its cradle (Langlois et al., 1988; Queisser, 1988). The new technology spread through the Western industrial world, particularly to Canada, Germany, the Netherlands, and Sweden. In North America, it became the basis of the computer and the telecommunications equipment industries. In the Asia Pacific region, particularly in Japan, China, and Korea, microchips became the cornerstone of consumer electronics industries (Chandler, 2,001). Today, this industry is a complex and differentiated one, classified under the general umbrella of electronic components. It includes two major types of components: discrete devices and integrated circuits. The first group includes microprocessors, micro-controllers, and digital signal processors. The second group includes memory chips, such as Dynamic Random Access Memories (DRAMS), Static Random Access Memories (SRAMS), Readonly Memories (ROMS), and flash memory chips, but also, Application Specific Integrated Circuits (ASICS) and Analog Devices (ADS). Microchips can be designed by one company and manufactured by another within wafer plants called "fabs." At a second stage of manufacturing, chips of different kinds need to be "pack-

Semiconductors

111

aged" (connected with other, associated circuits on hosts, such as printed circuit boards). Thus the industry includes not only producers of different types of chips but also specialized designers and manufacturers. The demand for chips comes from several industries. The computer industry is the most important, representing over 5 5 % of the world market; it is followed by the telecommunications equipment industry with 20%, consumer electronics with 10%, and the automobile, industrial and military industries accounting for the balance (Canadian Microelectronics Corporation, 2000). In 2,002, the world semiconductor industry represented a total production valued at US$142 billion, of which 22% originated in North America, another 22% in Japan, 19% in Europe, and the remaining 3 7 % in the Asia Pacific region. The main products of this industry were integrated circuits, representing 85% of world semiconductor production in value terms. Table 6.1 summarizes the key figures of the world industry. Such companies as IBM and Western Electric (today's Lucent) in the United States, Northern Telecom (today's Nortel Networks) in Canada, and Ericsson in Sweden were among the first to incorporate semiconductors in third-generation computers between 1963 and 1972, then in telecommunications equipment in the early 19705. The Bell Labs spawned dozens of electronic component companies across the United States. In 1955, William Shockley, one of the inventors of the semiconductor at Bell Labs, moved a large part of the industry to California when he decided to locate a new company in Palo Alto. Shockley Semiconductors also became a major incubator of electronic components firms in the California, following a pattern similar to the one we saw in the telecommunications equipment industry: agglomeration by incubation.1 Semiconductors are now ubiquitous and are used in computers, telecommunications equipment, robots, numerically controlled machines, watches, transportation equipment, consumer electronics, and a vast array of other industrial products. They allow the treatment and storage of information in all these different types of equipment. It is said that the average human being interacts with i The same idea appears in the words of one of the founders of Intel, Gordon E. Moore: "Successful start-ups almost always begin with an idea that has ripened in the research organization of a large company. Lose the large companies or research organizations of large companies and start-ups disappear" (Moore, 1996: 171).

ii2

Canada's Regional Innovation Systems

Table 6.1 The world semiconductor industry, 2002. US$bn

%

Americas Europe Japan Asia Pacific

31.7 27.4 30.9 52.2

22 19 22 37

Total world

142.2

100

Discrete semiconductors Optoelectronics Sensors Integrated circuits Bipolar Analog Micro Logic Memory

12.5 6.8 1.0 121.9 0.2 24.4 38.2 31.8 27.3

9 5 1 85

Total products

142.2

100

Source: World Semiconductor Trade Statistics, 7003

microchips, through telephone, computer, and other electronic equipment, approximately 300 times a day (Canadian Microelectronics Corporation, 2.000). The life cycle of the typical electronic component in computers, consumer electronics, and telecommunications equipment has diminished through the decades, and its range is now measured between eighteen and thirty-six months. Such a short lifetime requires permanent innovation from both design houses and manufacturers. This fact explains why the semiconductor industry is a very research-intensive activity. Also, the semiconductor industry is one that makes extensive use of patents, and the number of patented inventions has increased dramatically in the United States since the mid-1980s (Hall and Ziedonis, 2001). The upsurge in patenting is explained not so much to protect invention - in an industry where the life cycles of the products are very short - but mostly to avoid the risk of litigation from competitors, and also to improve bargaining positions with

Semiconductors

113

them, and eventually trade technology from a secure standpoint. The patenting upsurge is evident in both fabless chip designers and wafer manufacturers and is an international phenomenon affecting European as well as Japanese and North American companies. We expect these patents to be a very good indicator of the location of inventive activity. Another characteristic of the industry, and one that has important implications for its location, is the increasing network of partnerships and collaboration that links many of the industrial competitors with universities and government laboratories. Thus, in 1977 the largest semiconductor companies in California formed the Semiconductor Industry Association (siA) to work on common issues. Companies in other states soon joined. In 1982, SIA formed the Semiconductor Research Corporation (SRC) with some sixtyfive American and Canadian corporations to reinforce the competitive capabilities of North American industry vis-a-vis the new competitors from South East Asia (Rea et al., 1997). Today, SRC, headquartered in the Research Triangle Park (North Carolina), involves almost 100 universities, most of them American, but a few located in foreign countries, including the University of Toronto. In 1987, SIA and SRC nurtured the creation of SEMATECH, with federal government support, in order to help the U.S. semiconductor industry regain world leadership. Austin, Texas was selected as the home of SEMATECH, reinforcing the emerging regional innovation system in that state. By 1999, SEMATECH evolved into International SEMATECH and admitted its first foreign members. The Fabless Semiconductor Association (FSA) was created in 1994, with hundreds of corporate members, based mostly in the United States but also in Canada, Europe, Japan, and Korea. Mosaid and Tundra, two Ottawa-based semiconductor fabless designers, are members of FSA. CANADIAN

SEMICONDUCTOR

AND

DESIGN

PRODUCTION

The design and production of semiconductors migrated to Canada in the late 19605, since this country was already known for its strength in telecommunications products. The crib of Canada's semiconductor production was an Ottawa company named Microsystems International Ltd (MIL). MIL attracted hundreds of highly

ii4

Canada's Regional Innovation Systems

skilled specialists to Canada. MIL, together with Nortel, was at th origin of the Ottawa labour pool in microelectronics. In the early 19703, Nortel bought MIL to increase its competencies in the design and manufacturing of microchips, and proceeded to create its foundry in Ottawa. Many small and medium-sized chip designers were spawned in the national capital region by former MIL employees. Among of the most conspicuous of them are today's MO SAID and Zarlink Semiconductors, founded in 1971 as Mitel. In 2001, STMicroelectronics (ST), a European-based producer of electronic components, bought Nortel's plant in Ottawa, a plant temporarily closed in 2003 due to a slump in the telecommunications industry. ST and Zarlink both own medium-sized wafer plants in Canada for the manufacture of semiconductors. A smaller plant is owned by Gennum Corporation in Ontario. In Ontario and Quebec, companies such as Celestica and C-Mac produce integrated circuits under contract for other companies. Close to a hundred companies (most of them in Ottawa, Toronto, and Montreal) also have design capabilities for specific types of chips. Canada has no large, high-volume manufacturing plant producing general-purpose microchips, but for the last five years the federal government has tried to attract a foreign corporation interested in building such a facility in Canada. Integrated circuits are the most important part of the electronic components industry, with nearly 60% of the total Canadian production, with telecommunications equipment as its major market. In the meantime, over 80% of chips consumed in Canada are imported. In 2000, the design and manufacturing of electronic components (NAICS code 33441) employed some 25,000 people in Canada. This activity is, and has always been, concentrated in Ontario, with two major agglomerations in Ottawa and Toronto. Ottawa is host to Nortel's design centre and the manufacturing plant now owned by STMicroelectronics, but also to an array of semiconductor designers such as MO SAID, Tundra, and Zarlink Semiconductors. Some of them, most notably MO SAID, design chips for the largest Japanese and Korean manufacturers. Other Canadian design firms include Genesis Microchips in Toronto, PMC Sierra in Vancouver, and Lendar Design in Montreal. Quebec hosts two large manufacturing plants. They are both located in Bromont, seventy-five kilometres east of Montreal. The largest belongs to IBM Canada and was founded in 1972. It has 3,000 employees, and it is active in inte-

Semiconductors

115

grated circuit packaging and test services for the personal computer industry. This is the largest IBM chip assembly plant in the world. The second plant belongs to DALSA Corporation, a Waterloo (Ontario) company founded in 1984, which, in 2,002, bought the Bromont wafer plant from Zarlink Semiconductors, a plant with 250 employees working in the production of telecommunications chips. Figures 6.1 a and 6.ib as well as 6.2,a and 6.2,b show that Ontario is the centre for Canadian manufacturing, followed by Quebec and the rest of Canada. Through the 19905, Quebec shares have stagnated and the rest of Canada has slightly increased its involvement in this industry. More precisely, Ontario has increased its share of Canada's value added, while the share of Quebec's share has decreased. In terms of employment, Quebec's share has remained constant. The rest of Canada has increased its part of both value added and employment, but without threatening the position of the two main provinces. CANADIAN CLUSTER AND INNOVATION

SYSTEMS

The Canadian microelectronics industry is composed of some 2,2,5 companies. Only thirty-two of them have requested, and been granted, patents from the U.S. Patent and Trademark Office. The overall patent propensity of this industry in Canada is thus around 14%. The USPTO has granted some 1,061 semiconductor patents to Canadian inventors between 1976 and 2,002. One company, Nortel, is the inventor of over 50% of the total patents in the industry. The other big patent holders are MOSAID in Ottawa, PMC Sierra in Vancouver, DALSA in Waterloo and Bromont, and IBM Canada in Toronto and Bromont. Ottawa has been the centre of Canada's semiconductor industry from its beginning, mostly due to the strong presence of Nortel, but also to Nortel's many semiconductor spin-offs, including Mitel (today Zerlink Semiconductors) as well as MOSAID, Semiconductor Insights, and Tundra Semiconductors. Table 6.2 gives an overview of Ottawa's main semiconductor firms. Ottawa is also host to several government research centres, such as the Communication Research Centre, with over fifty years in the region, including, among others, a program of research on design and testing of integrated circuits and over sixty patents including many in microelectronics. Close to Ottawa, in Kingston, Ontario, the Canadian Microelectronics

n6

Canada's Regional Innovation Systems

Figure 6. ia Canadian total value added in semiconductor manufacturing, 1990, major provinces

Source: Statistics Canada

Figure 6.ID Canadian total value added in semiconductor manufacturing, 1999, major provinces

Source: Statistics Canada

Corporation is an industry-university organization with forty-four postsecondary education institutions, twenty-five companies, and seven other institutional and individual members. Founded in 1984, its goal is the teaching, design, manufacture, and testing of microchips. Its budget is in the €$15 million range, of which the federal government pays two-thirds through the National Science and Engi-

Semiconductors

117

Figure 6.2.a Canadian total employment in semiconductor manufacturing, 1990, major provinces

Figure 6.zb Canadian total employment in semiconductor manufacturing 1999, major provinces

Source: Statistics Canada

neering Research Council (NSERC), and its industrial members the remaining one-third. However, over the course of time, Ottawa has lost its overwhelming pre-eminence, and other regional innovation systems are slowly emerging (Figures 6.33 and 6.^b). In Ontario, Toronto hosts three major patentees in semiconductors: Gennum, Mark IV, and Nortel, as well as eight others. Gennum, in Burlington, is a producer of integrated circuits for hearing instruments and video products. Founded in 1973, it has 500 employees and its customers include companies such as Panasonic,

n8

Canada's Regional Innovation Systems

Samsung, Sony, and Toshiba. A Canadian company, Gennum has subsidiaries in Japan and the United Kingdom, but all its patents are the result of its domestic R&D, which amounts to 25% of sale Mark IV Industries is the Canadian subsidiary of a company of the same name with headquarters in Sweden. The Toronto subsidiary develops integrated circuits for the automotive market, namely transponders and readers for electronic toll collectors. Finally, Nortel has designed some of its integrated circuits in Toronto, where it hosts a more reduced R&D centre. Other important companies in Toronto semiconductor design are Genesis Microchip, a leader in video image microprocessors, and Northern Technologies, a company producing connectors for the data communications industry. The University of Toronto is the host of MICRONET, one of Canada's twenty-two Centres of Excellence. It aims at improving the country's capabilities in microelectronics and information technologies, and has an annual budget of €$4.1 million. In Waterloo, we have a smaller cluster: 140 kilometres from Toronto, three other companies are innovating. The most important of them is DALSA. Founded in 1984 as a spin-off from the University of Waterloo, this Canadian company has developed semiconductors for cameras, scanners, and sensors (tables 6.3 to 6.5). In Quebec, Bromont (eighty kilometres east of Montreal) hosts two of the three manufacturing plants in Canada, those of IBM Canada and DALSA. The semiconductors manufactured in Bromont are designed elsewhere: for IBM usually in the United States (sometimes in cooperation with the Toronto IBM R&D lab), for Zarlink in Ottawa. However, the two Bromont plants have received thirty and thirty-six U.S. patents for manufacturing processes and related materials invented in that city. IBM products are designed for the personal computer market, while DALSA produces chips for the telecommunications equipment industry. In Montreal, Nortel researchers located in St Laurent Technoparc have twenty-four patents for circuits and semiconductor designs for telecommunications, in the areas of optical and wireless technology. Eight other companies (including Lendar, Matrox, Metafix, Primetech, Transfotec, and Weco) have received patents. In all, companies located in Montreal have received fifty semiconductor patents since 1976 (half of which have been granted to Nortel) and those in Bromont another sixty-six. In Vancouver, PMC Sierra, founded in 1992, dominates the scene, with sixty-three patents (out of sixty-seven semiconductor patents in the region) mostly for communication semiconductors. PMC

119

Semiconductors Table 6.2. Ottawa's main semiconductor companies, 2.003 Name

Employees Semiconductor patents

Revenues c$m

Nortel Semiconductors Zarlink Semiconductors Tundra Semiconductors

900

526

NA

300

90

222

180

0

29

MOSAID

168 140

84 0

NA

Semiconductor Insights sice Semiconductor

115

3

NA

90

1

NA

SpaceBridge Semiconductor IDT Canada Connexant Systems

80

0

NA

75 65

0 1

602

705

NA

Cadence Design

Total main firms

2113

52

NA

Products telecommunication products telecommunication products system interconnectors network chips chips for automation, computer and communication technical and legal consulting Internet & broadband broadband communications communication personal networks market

Source: Ottawa Business Journal, USPTO

Sierra has been designing and patenting semiconductors since 1994. With 600 employees in 2.003, the company develops asynchronous transfer mode (ATM) chips for network communications. In 1996, PMC Sierra became a wholly owned subsidiary of Sierra Semiconductor of Silicon Valley. Its clients include Alcatel, Cisco Systems, Ericsson, Fujitsu, Hewlett-Packard, Huawei, Lucent, NEC, Nokia Nortel, Siemens, Sony, and ZTE Corporation. By itself, this company has been able to increase Vancouver's share of the semiconductor industry: that city's patents have passed from i% of Canada's total between 1976 and 1989 to 8% in 1990-2,002,. In sum, Canada's competitive advantage has been in the design of semiconductors for foreign manufacturers, more than in manufacturing or in process technology. Design is a skill-intensive activity but not one that requires important numbers of workers. Its potential as the locomotive of large clusters is thus limited. Canada hosts

Canada's Regional Innovation Systems Figure 6.33 Canadian semiconductor patents, 1976-1989

Source: Statistics Canada

Figure 6.^b Canadian semiconductor patents, 1990-2002

Source: Statistics Canada

a design and manufacturing cluster in Ottawa with dozens of firms, a government laboratory, and, close by, an industry-university training facility in Kingston. Toronto, Vancouver, and Montreal may at best be classified as emerging design clusters, and Quebec's Eastern Townships (with Bromont at the centre) as an emerging manufacturing one. The trend in Canada is toward increasing geographical dispersion of innovative activity in the semiconductor industry. Ottawa loses share against other domestic agglomera-

Semiconductors

IZI

Table 6.3 Canada's semiconductor manufacturing companies Name

IBM Canada Bromont

Employees

Location

Semiconductor patents 1976-2002

3,000

Bromont, Quebec Bromont, Quebec Burlington, Ontario

30

computer chips

36

communication devices hearing aid chips

DALSA

250

Bromont Gennum

250

Total

3,500

30

Products

96

tions. A similar trend has been observed in the United States, where Silicon Valley, once the almost exclusive location of the semiconductor industry, is losing its share. Silicon Forest in Oregon, as well as Austin (Texas), is attracting new investments in design and manufacturing (Moris, 1996). In the meantime the share of North America in the world industry declines to the benefit of China, Japan, and Korea as manufacturing moves abroad, and the world industry moves to single digit growth levels (Isaac, 2003). The window of opportunity for the development of new industrial clusters and RSIS in Canada's semiconductors seems to be closing. POLICY IMPLICATIONS

Canada has favoured telecommunications technologies in order to nurture national unity through a network of high-quality communications services. Semiconductor research was basically pulled by telecommunications equipment innovative activities in Ottawa as Nortel, and later Mitel, designed its digital switches in the early 19703 and required captive wafer plants. The development of Ottawa's RSI was concomitant with the growth of the telecommunications cluster, of which it was an integral part. The development of the other emerging RSIS was linked to the adoption of microchip technology in a vast array of other industries, and the expansion of associated design capabilities within a specialized set of companies. Barriers to entry being lower in design, Canadian spin-offs entered this segment of the industry. Another cluster was based on foreign direct investment, which was at the

122

Canada's Regional Innovation Systems

Table 6.4 Toronto semiconductor patents Name

Nortel Mark IV Genesis Microchips IBM Canada Northern Technologies Six other patenting firms

Location employees

Semiconductor patents 1976-2002

Products

400 120

38 30 13

3,000

12

telecommunication chips automotive industry chips display chips for consumer and PCs PC microchips

NA

10

connectors

12

several

NA

115

Total Table 6.5 Montreal semiconductor patents Name

Nortel Metafix

Local employees in 2002

Semiconductor patents 1976-2002

1,700

24 8

NA

Six other patenting firms

18

Total

50

Products

telecommunication chips chips for photo imaging industry several

origins of two out of the three manufacturing plants in the country, both located in Bromont. Thus, Canada's established regional innovation systems in Ottawa and emerging RSI clusters elsewhere are not the result of any policy decisions, but more the spontaneous outcome of private sector efforts aimed at catching up with foreign competitors and using local pools of talent, and of overseas companies locating in what they perceived as favourable sites for the launching of manufacturing facilities. The federal government has tried, in vain, to attract a large manufacturing plant to Canada, with seven locations competing for it: Burlington, Calgary, Edmonton, Montreal, Ottawa, Van-

Semiconductors

1x3

couver, and Winnipeg, none of which has yet been successful in its bid. Due to the importance of the industry in terms of R&D and employment in other advanced nations, as well as its spillover effects on related activities, the efforts made by the different levels of government can be safely qualified as modest. CONCLUSION

West (2.002.} has argued that there have been distinctive national modes of organization in technological development within the semiconductor industry, with national specialties arising from different domestic markets and governmental priorities. The semiconductor industry in Canada shows two major characteristics. One is a national specialization in telecommunications components, which developed under the influence of government missions and the demands of the telecommunications equipment industry. The geographical location of the semiconductor industry reflects the latter factor. Thus, it is true not only that Ottawa is and has always been the main locus of the semiconductor industry, but that its strengths and weaknesses reflect those of the Canadian telecommunications equipment industry. Also, Canada has always been weak in computer technology in spite of some early achievements in the 19405 and 19505 (Vardalas, 2001). Thus, a strong market for electronic components was almost always absent in this country. Only the telecommunications equipment industry was able to develop some expertise in design and manufacturing in the area. The second characteristic of Canadian industry is a marked specialization in semiconductor design. Canada is the only major industrial nation without a major wafer plant. Not surprisingly, Nortel and its telecommunications technology was the driver in the development of the Ottawa RSI in semiconductor technology. The same company has incubated dozens of electronic component firms in the metropolitan area of the national capital, as well as a few other firms in different regions of Canada, including Ontario and Quebec. In the Canadian semiconductor industry, aside from telecommunications, technological competencies are reduced. The other source of technological capabilities in the Canadian semiconductor industry was mostly foreign direct investment in manufacturing and design, mainly by American corporations looking for pools of talent and other location advantages. This is the case for companies such as PMC Sierra and its major design

124

Canada's Regional Innovation Systems

centre in Vancouver, IBM Canada's design facilities in Toronto, and its chip packaging plant in Bromont. Due to the present lack of dynamic development of the telecommunications industry, it would be surprising to see the development of new regional innovation systems in Canadian semiconductors. At best, the existing centre in Ottawa will consolidate, while gradually losing more of its relative and absolute dominance in favour of the three larger metropolitan areas. One external factor may alter this fairly stable situation, namely the decision of a foreign manufacturer to install one large highvolume chip manufacturing plant in a Canadian city, thus launching a new round of labour pool creation, relocation, and new firm incubation. In 2.003, sucn a dynamic is nowhere evident due to the parallel slump in markets for both computers and telecommunications equipment, and the general movement of wafer manufacturing to South East Asia. However, in case it occurred, governments would be well advised to carefully weigh the advantages and disadvantages of each candidate region, considering the major externalities such a dynamic investment is likely to generate, with its attractor and spinoff effects. Our research has shown that in the semiconductor industry, design activity, a white-collar office activity, is located in large metropolitan census areas, such as Ottawa, Toronto, Montreal, and Vancouver. Conversely, manufacturing and associated process innovation activity is situated in smaller agglomerations, such as Bromont and Burlington. This pattern seems to be specifically Canadian.1 Once again, as in the case of the telecommunication industry, the semiconductor design activities of one large corporation have spawned several spin-offs in the Ottawa region, where local knowledge externalities took place via the incubation of new firms. Conversely, semiconductor manufacturing (in the cases of Bromont and Burlington) did not produce such agglomeration effects. We may argue that agglomeration effects occur more easily where knowledge is the main input of production, such as in semiconductor design. Manufacturing requires not only knowledge but also capital. Barriers to entry in this second case are much more substantial, and geographical agglomeration of innovative firms does not take place easily. 2, In more populated nations design, manufacturing, and testing are co-located. Thus, in Silicon Valley, one finds the world's largest concentration of all types of firms, as well as integrated semiconductor corporations such as AMD, Altera, Atmel, Intel, LSI Logic, National Semiconductors, and Xilinx, to name a few. Among the new RSIS, in 2003 Shanghai already hosted sixty design houses and thirty manufacturing and testing plants.

7

Regional Computer Software Innovation

In the twenty years between 1980 and 2000, Canada has witnessed the development of thousands of software producing firms located in many regions across the country, but most conspicuously in the three largest metropolitan areas, and in Ottawa. At first sight, patents do not seem to be the most appropriate indicator of this R&Dintensive activity. However, we found that more Canadian software firms are asking for and obtaining U.S. patents to protect their novelties and that the propensity to patent increases across the board. This chapter starts with a characterization of the international software industry, then turns to the Canadian software sector, its innovative regions, and the policy implications of such clusters and innovative regions. THE WORLD COMPUTER SOFTWARE INDUSTRY

The computer software industry derived from the computer hardware industry that started in the United States in the 19505. Today, computer software is an entrepreneurial activity with low barriers to entry, very high rates of entry and exit, and thousands of firms competing in almost each niche in the market of every industrial nation. Its history shows several well-defined stages (Hoch et al., 1999). The first phase started in the 19505 with the rise of the independent professional software services firms, offering tailor-made

iz6

Canada's Regional Innovation Systems

programs for mainframes to an elite market of government and industrial customers. By 1967, z,8oo professional software service firms existed in the United States. The second era, launched in the mid-1960s, was characterized by the development of packaged software products for institutional markets. The third phase, from the 19705 on, was that of customized enterprise solutions; it started in 1969 with SAP of Germany, the first firm offering this type of product. The development of the IBM PC in 1981 launched a fourth era, in which the computer packaged software market developed, and several large firms appeared mostly in the United States. The fifth software era started in 1994 with the Internet and Netscape browser with a new cohort of firms launching Internet, intranet, and e-commerce products. The world market for packaged software in 2.002, was estimated at US$2,oo billion (against $77 billion in 1994). Also, in 1993 North American producers supplied over 75% of the world's packaged software, and it was estimated that they represented close to 50% in 2000. Similarly, the U.S. and Canada represented half of the global packaged software market. The present software industry shows segments belonging to these different periods. However, packaged software for the PC segment represents the major portion of the industry. In today's software industry many platforms compete, and independent software producers (of which Microsoft, Oracle, Adobe, and Computer Associates are some of the largest) and large computer hardware and software corporations (such as IBM, Apple, Compaq, and Sun Microsystems) coexist. Software publishing is the cornerstone of computer software in terms of research and innovation (as opposed to computer services and data processing). In 2000, in the United States, software publishing represented the third largest industry in terms of R&D investment (after pharmaceuticals and surface transportation equipment) with a total expenditure of some US$i6 billion. Innovation, R&D, and patenting are most often related, as large R&D laboratories in computer software publishers represent a high percentage of this investment. Software patenting is an increasingly common practice and one that has launched many debates. Yet, in the North American computer software industry, only two types of firms patent their inventions: the computer hardware firms (such as IBM, Apple, Compaq,

Computer Software

12.7

Dell and, Hewlett Packard) and the largest computer software editors (such as Microsoft, Oracle, Computer Associates, and PeopleSoft). Few small or medium-sized software firms request patents. A study on the propensity to patent in the North American computer software industry showed that, among some 1,800 publicly quoted computer software companies, some 2.2.0 had requested and obtained patents from the USPTO, and that the presence of computer manufacturing and the large size of the firm explained close to 80% of the propensity to patent (Chabchoub and Niosi, 2003). This finding has an important corollary for our research, as the propensity to patent is low in the Canadian software industry, where SMES represent the vast majority of competitors. THE CANADIAN SOFTWARE

INDUSTRY

In many respects, the Canadian software industry mirrors that of all other industrialized nations: thousands of companies, mostly small and medium-sized firms compete in the markets for many different applications. Canadian firms have thrived in niche markets such as business intelligence and performance planning, customer management, enterprise connectivity, and risk management software. In 2001, the Canadian industry was composed of some 47,000 enterprises. Statistics Canada distinguished three main segments within the computer software and service industry. The first and largest sector was composed of computer systems designers and related service providers. Over half were located in Ontario and some 20% in Quebec. British Columbia and Alberta hosted 11% and 12% respectively of this type of firm (table 7.1). Ontario companies were the largest in terms of revenue and employment, followed by those located in Quebec. The software publishers formed the second segment with total revenues of $5.9 billion. Again, Ontario and Quebec were hosts to 38% and 28% of this subset of firms respectively, followed by Alberta (13%) and B.C. (16%) (see table 7.2). Packaged software rep resented the bulk of this R&D-intensive sector. Ontario firms employed 45% of the payroll and obtained 55% of the revenues. Quebec-based firms were much smaller. Though they represented 28% of the firms, they employed 27% of total Canadian personnel and received 21 % of the revenues of this segment.

i±8

Canada's Regional Innovation Systems

Table 7.1 Summary statistics for computer systems design and related services, 2.001 (NAICS 541510) Province Ontario Quebec British Columbia Alberta Maritimes Other Prairies and Yukon Canada (%) Canada (N)

Number of firms (%)

52 20 11 12 2.5 2.6 100 43,440

Paid employees Revenues (c$m)

53 23 8 10 3 3 100 128,005

55 21 8 11 3 2 100 17,964

Source: Statistics Canada (zoc>3b)

Table 7.2. Summary statistics for software publishers, 2.001 (NAICS 511210) Province Ontario Quebec British Columbia Alberta Maritimes Other Prairies and Yukon Canada (%) Canada (N)

Number of firms (%)

38 28 16 13 3 2 100 2,306

Paid employees Revenues (c$m)

45 27 16 9 1 1 100 41,310

55 21 14 9 1 1 100 5,869

Source: Statistics Canada (zoo3b)

The data processing service providers were in the third segment, with 1,345 firms and basically the same ranking in terms of provincial distribution (table 7.3). In this segment, the average size of the Ontario firm was the largest: it represented 70% of Canadian employment and 71 % of total* revenues. In the three segments, economic activity was essentially located in the same four provinces. In 2,002, less than i% of all these firms (some 400 companies) were quoted on Canadian or foreign stock exchanges. They were usually the largest companies in terms of sales, employment, or R&D expenditures. Table 7.4 shows the twenty-five largest indepen-

, Computer Software

12,9

Table 7.3 Summary statistics for data processing services, 2.001 (NAICS 514210) Province Ontario Quebec British Columbia Alberta Maritimes Other Prairies and Yukon Canada (%) Canada (N)

Number of firms (%)

Paid employees

Revenues (c$m)

47 20 13 14

70 14 5 7

71 15 5 6

X

X

X

4 100 1,345

3 100

3 100

15,629

2,276

x: Confidential Source: Statistics Canada (zoo^b): Annual Survey of Software and Computer Services, Ottawa

dent software companies in Canada in terms of revenues, the majority of which were publicly quoted. Table 7.4 also shows that Canada has no equivalent to the large American or European computer software firms such as Microsoft (50,000 employees), Oracle (40,000 employees), SAP (29,000 employees), or Computer Associates (16,000 employees). With 2,900 employees and revenues of €$770 million in 2002, Cognos is the Canadian leader, followed by GEAC (2,500 employees) and Hummingbird (1,000 employees). Many of the largest Canadian software publishers grow within niches of packaged business software for such applications as accounting, communications, logistics, market intelligence, and productivity. INNOVATION AND CLUSTERS IN CANADIAN SOFTWARE PUBLISHING

The propensity to conduct R&D in the Canadian software industry was fairly high. It was estimated to be around 70% in an independent study conducted in 1997 on 2,160 software firms across Canada (Niosi and Cheron, 1998). In a previous study, with data for 1995 and a sample of 6,850 companies, Statistics Canada estimated that more than 50% of Canadian computer services companies performed R&D in Canada and that 31% of them requested the federal Scientific Research and Experimental Development (SR&ED) tax credit. However, due to the small size of many companies, average R&D expenditures for 1995 were c$849,ooo. That year, total R&D

130

Canada's Regional Innovation Systems

Table 7.4 Top twenty-five independent Canadian software firms in 2002 according to revenues Company

Cognos Geac Computer Hummingbird Ltd Open Text Corp Corel Corp Descartes Systems Algorithmics Pivotal Constellation Surefire Financial Models Platform Computing MDSI Mobile Data Data Mirror Cryptologic Triversity Cedara Software MRS

Longview Solutions Avotus Systems Xcellence Castek 2.0-2.0 Technologies Fincentric Tecsys

Total revenue (c$m)

771 719 283 239 199 125 121 109 95 81 76 70 61 56 54 50 45 44 42 40 39 38 36 33 32

Location of head office Ottawa Toronto Toronto Waterloo Ottawa Waterloo Toronto Vancouver Toronto Montreal Toronto Toronto Vancouver Toronto Toronto Toronto Toronto Waterloo Toronto Toronto Toronto Toronto Montreal Vancouver Montreal

Ownership

public public public public public public private public private public public private public public public private public private private public public private private private public

Employees

2,900 2,500 1,000 490 579 125 300 260 160 80 360 232 260 206 100 170 259 190 130 160 50 216 150 160 NA

Source: Branham 300

expenditures for this industry represented €$231 million or 3% of Canadian industrial R&D (Industry Canada, 1998). Most of the R&D expenditure is accounted for by a handful of firms. Identifying the companies was no easy task of the researcher (sidebar 7.1). The only reliable aggregate figures we have come from the R&D Intentions survey conducted by Statistics Canada. In 2,002,, computer systems design and related services (NAICS 541510) became the fifth most important Canadian industry in terms of total intramural ex-

Computer Software

131

Sidebar 7.1 Obtaining nominal data on software developers Statistics Canada's aggregated figures provided the general portrait but were useless for R&D. Scott's Directories 2002, for software publishers (NAICS 511210) provided a long list of companies located in all regions of Canada, a source that specifies their local employment. Close to 1,000 firms were thus identified. Branham 300 allowed me to find the largest Canadian independent software developers by revenues. The United States Patent and Trademark Office provided information on patents invented in Canada, by location of the inventor. Individual websites of companies were consulted. The Sedar and TSE websites of Canadian publicly traded firms were consulted. In Ottawa, the Ottawa Business Journal special issue "Book of Lists 2003" (with data for 17 January 2003) was also consulted. Provincial industrial associations provided lists of members. For many tables, firms with over 100 employees in a particular location were selected mainly from Scott Directories.

penditures for R&D, with a total of c$7O9 million. Some 1,018 companies perform R&D in this activity sector, with total personnel of 9,718 R&D employees. Besides, there are some 220 other R&D performers in software publishing (NAICS 511210), and twenty other companies conduct R&D in the data processing service industry (NAICS 514210). In the first and largest segment (the only one for which we have detailed figures on R&D) Ontario and Quebec dominate the Canadian landscape with 59% and 31% of all expenditures, leaving 10% for the rest of Canada. Almost all performers were Canadian-owned and controlled except for twelve U.S.-owned and controlled software firms, and three other subsidiaries of corporations based in other countries (Statistics Canada, 2OO2a). Software production is a highly skilled activity usually concentrated in large metropolitan areas where the labour pool allows firms to grow and the customer base justifies the launching of new products. In Canada, a few metropolitan areas centralize most of the activity. These are Toronto, Montreal, Vancouver, and Ottawa/Hull. Among the 100 largest software publishers studied by Branham in

132.

Canada's Regional Innovation Systems

Sidebar 7.2 Definitions and description of industries NAICS 541510 includes computer information technology consultants, computer systems design and integration, and development of custom software. NAICS 511210 includes software publishing (or software products). NAICS 514210 includes data processing services. Software products: software produced for multiple sale, license, or lease. The development of software for a single client that re-markets the software should be included. (The latter is an R&D service, but if the client develops a product for wide distribution, it qualifies as a software product.) Two major types of software products exist: (i) systems software products and user tools, and (2) application software products. Systems and technical consulting includes provision of advice on technical matters related to computer systems; conducting feasibility studies on implementation of a system; providing specifications for a database design; providing technical expertise for hardware and software integration. Custom software development includes systems analysis, systems design, programming, implementation, testing, documentation services, and training to meet a customer's unique specifications; modifications to the source code of existing software products for the use of a single client are included. Data entry: capture of customer-supplied data on tape, diskette, or other medium or directly into a data processing system. Source: Statistics Canada (1998): The Software Development and Computer Services Industry: An Overview of Developments in the 151905, Ottawa, Cat. 63oi6-XPB

xooz, these agglomerations hosted respectively thirty-eight, fifteen, thirteen, and twelve firms for a total of seventy-eight companies. They were followed by Calgary (seven) Edmonton and Waterloo (four firms in each CMA), and Victoria (B.C.) with two firms, as well as Blainville (Quebec), Burlington (Ontario), Dartmouth (Nova Scotia), Guelph (Ontario), and Saskatoon with one firm each. Often, the companies in the latter locations were among the smaller firms. However, the average age of the firms in the smaller regional agglomerations was not significantly different from those in the larger CM As. We conclude that there is no delocalization trend in Canada toward smaller cities: larger metropolitan census areas are, in this country, the right geographical agglomeration for software producers. In the meantime, not all census metropolitan areas are born equal. Ottawa, Waterloo, and Toronto host more firms per popula-

133

Computer Software Table 7.5 Top Canadian software R&D spenders in zooi Company

IBM Canada GEAC Computer Cognos Hummingbird Corel Open Text Delano Technology Psion Teklogic Descartes Systems Accelio MGI Software Cognicase Pivotal Financial Models Spectra Securities

Main area

e-business business management business management business intelligence office suit collaborative commerce logistics management mobile data and network logistics management strategic management digital imaging and video business management customer management investment management financial service software

Total 15 largest

Total R&D expenditures (c$m)T

250 119 104 62 39 38 27 26 25 20 20 19 19 16 15

Main location of R&D

Toronto Toronto Ottawa Toronto Ottawa Waterloo Toronto ND

Waterloo Ottawa Toronto Montreal Vancouver Toronto Toronto

936

i These expenditures may not have conducted in Canada, and are not necessarily intramural. Source: Research Infosource zooi

tion than Calgary, Vancouver, or Montreal (tables 7.5, 7.6, 7.6a). In the meantime, some of the larger CM AS, such as Quebec City, Winnipeg, or Hamilton, do not have a single, medium, to large-sized software developer. Similarly, the provinces of Alberta and Quebec have fewer firms by total population than Ontario and British Columbia. The Maritimes and Quebec are disadvantaged compared to the larger English-speaking provinces. Toronto Toronto is the undisputed centre of Canada's growing software industry. It hosts IBM Software Laboratory, with over 2,000 employees. IBM Toronto Software Laboratory was founded in 1967 with 55 employees and received a global product mandate to develop computer software for different applications. By 2003, Toronto Lab was no longer the only IBM software-producing global research

*34

Canada's Regional Innovation Systems

Table 7.6 Population of selected CMAS and software firms, 2.001-02, CMA

Toronto Montreal Vancouver Ottawa-Hull Calgary Edmonton Quebec Winnipeg Hamilton London Waterloo Halifax Victoria Saskatoon Sherbrooke Burlington Trois-Rivieres Guelph

Province

Population 2001

Firms 2002

Population per firm

Ont. P.Q. B.C. Ont. Alta. Alta. P.Q. Man. Ont. Ont. Ont. N.S. B.C. Sask. P.Q. Ont. P.Q. Ont.

4,682,897 3,426,350 1,986,965 1,063,664 951,395 937,845 682,757 671,254 672,100 422,000 438,515 359,111 311,902 225,927 153,811 150,836 137,507 117,344

38 15 13 12 7 1 0 0 0 0 4 1 1 1 0

123,234 228,423 152,843 88,639 135,914 937,845

1

0

1

NA NA NA NA

109,628 359,111 311,902 225,927 NA

150,836 NA

117,344

Sources: Statistics Canada and Branham 300

Table 7.63 Population of selected provinces software firms, zooz

Ontario B.C. Alberta Quebec

Population 2002

Firms

Population per firm

12,068,000 4,114,000 3,113,600 7,455,000

55

219,418 295,929 389,200 465,938

14 8 16

Sources: Statistics Canada and Branham 300

unit. IBM now has over 23,000 software employees worldwide and owns over 6,000 software patents invented in different software R&D units across the world. The IBM Toronto Lab was involved in some 328 inventions patented between i January 1976 and the end of 2002. Toronto programmers invented some 236 of these patents;

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Table 7.7 Top Toronto CMA largest software publishers based on local employment, zooz Company name

IBM Canada CGI Group Software Innovation Cedara Software SNN Surgical Navigation Syndesis Financial Models Alias/Wavefront Hummingbird Microsoft Canada 12 Solcorp E* Trade Canada InSystems Technologies DataMirror Castek Longview Solutions Cybermation SiebeJ Systems Centrinity Angus Systems MGI Software SLMsoft J D Edwards Indas Bulldog Group Spectra Securities GEAC Canada Netron Totals

Employees Established U.S. patents invented in Toronto

Notes

2,000 500

1967 1985

236 0

450 400 400

1984 1987 1982

0 0 0

350 305 300 300 300 250 250 200 190 187 180 180 150 142 140 130 130 130 129 125 120 105 100 100

1986 1976 1983 1989 1985 1988 1979 1992 1990 1993 1990

0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

U.S. subsidiary Montreal-based Canadian public Norwegian subsidiary Canadian private subsidiary of Cedara Software Canadian private Canadian public U.S. subsidiary Canadian public U.S. subsidiary U.S. subsidiary Canadian private Canadian private Canadian private Canadian public Canadian private Canadian private Canadian private U.S. subsidiary Canadian private Canadian private Canadian public Canadian private U.S. subsidiary Canadian private Canadian private Canadian public Canadian public Canadian private

8,143

NA

1982 1990 NA

1972 1991 1986 1977 1972 1990 1990 1971 1972 NA

237

Averages

281

1984

NA

Medians

187

1985

NA

Sources: Scott's Directories, zooz; USPTO

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Canada's Regional Innovation Systems

Toronto and American IBM employees in different labs appear as co-inventors of another ninety-two patents, in which American employees predominate. Besides IBM, Toronto hosts twenty-nine computer software firms with at least 100 employees, more than any other Canadian agglomeration (table 7.7). Also, among the thirty-seven software companies with U.S. patents invented in Canada, fifteen were located in Toronto, and one of them, IBM Canada, holds a majority. There was a total of 411 such software patents invented in Canada.) Also, Toronto hosts medium to large-sized subsidiaries of foreign corporations developing software in Canada, such as those of ii,, Microsoft, Siebels, and Silicon Graphics. Only one of the largest Canadian software editors located in that metropolitan census area, Financial Models, is a University of Toronto spin-off. Montreal Montreal is the second largest agglomeration of Canadian computer software-producing companies, but far behind Toronto. One hundred and nine mainly software firms, including some of Canada's largest ones, appear in Scott's database. Table 7.8 summarizes the main data for those with 100 employees and more in the CM A. A few of these companies are university spin-offs. Among the largest are Ad Opt and GIRO from the University of Montreal and Hummingbird from McGill University. Softimage from UQAM is a different case, as the firm was created by one graduate from this university having conducted his research within the academic institution but being the personal owner of that knowledge. Using the current definition, Softimage is not a university spin-off but its origins can be traced back to academic research. ALIS Technologies is another successful Montreal firm using technology originally developed in a local university (in this case the University of Montreal) but not owned by the institution. Besides the four research universities, Montreal also hosts the Computer Research Institute of Montreal (GRIM), an industry-university-government non-profit research centre founded in 1985 and located downtown. With over 100 professionals, GRIM conducts contract R&D, organizes conferences and courses on advanced topics, and serves as a networking agency for the Montreal software community.

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Table 7.8 Top Montreal software publishers based on local employment, zoo2. Company name

Employees

Established

U.S. patents invented in Montreal

Notes

STS Systems

800

1972

0

Medi Solution Eicon Network

400 350 300 300

1995 1984 1985 1982

0 0 0 7

MediaGrif 2.0-zo Technologies Softimage

281 260 25.0

1996 1987 1985

0 0 4

Systems Proxima Logibro Speedware Giro Ad Opt engenuity Software1 Conceptis Technologies Guillemot International Alis Technologies Baan Supply Chain Solutions

170 160 150 140 139 138 120

1986 1985 1976 1979 1987 1985 1996

0 0 0 0 0 1 0

subsidiary of UK group Canadian private Canadian private Canadian private subsidiary of Autodesk, U.S. Canadian public Canadian private subsidiary of Avid Technologies, U.S. Canadian private Canadian private Canadian public Canadian private Canadian public Canadian public Canadian private

100

NA

0

Canadian private

100 100

1981 1985

2 0

Canadian private Canadian private

GRICS

Autodesk Canada

Totals

4,258

Averages

237

Medians

160

NA

14

1983 1985

NA

i Previously called Virtual Prototypes. Name changed in 2,001 Sources: Scott's Directories, 2002; USPTO

NA

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Canada's Regional Innovation Systems

Ottawa Ottawa is Canada's third largest regional innovation system in computer software (table 7.9). The national capital metropolitan census area is host to no less than a dozen software publishers with at least 100 employees in the region, including Cognos and Corel, two of the leading Canadian independent firms. Some American corporations also have software-producing subsidiaries in the city, such as Adobe (having acquired Accelio/Jetform in 2002.) and IBM Canada, reinforcing its local presence after the acquisition of Rational Software Canada in 2003. There are hundreds of software companies in the city as well as several government agencies with software expertise, such as the Communication Research Centre and NEC'S Information Technology Research Institute's Software Engineering Group. None of the largest firms were incubated in either of the two universities, but the largest were developed from corporate incubators (Cognos from Noranda Enterprises) and corporate technologies (Corel from Newbridge). As we have seen in the telecommunications chapter, the large private research centres in Ottawa, starting with that of Nortel, were at the same time major magnets and incubators for other firms. Vancouver Vancouver has emerged as the fourth most important agglomeration, with twelve medium to large software editors with over 100 employees and more (table 7.10). Macdonald Dettwiler and Associates (now the Vancouver subsidiary of an American corporation) is the most conspicuous of academic spin-off in software. The University of British Columbia and Simon Eraser University have been very active in the incubation of new software firms, but few of these spin-offs have acquired national, let alone international, stature. In sum, the four cities show similarities, and differences, some of which appear in table 7.11. Toronto is host to some twenty-nine firms with over 100 local employees. These software companies are almost twenty years old and have fewer than 300 employees on average. Montreal's largest firms are somewhat smaller but have the same age. Ottawa's firms are the largest in terms of average employment.

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Computer Software Table 7.9 Top Ottawa software companies in 2002 Company

Local employees

Established

U.S. patents 1976-2002 invented in Ottawa

1,214 700 540 400 284

1969 1986 1999 1982

1 0 2 0 0

Hummingbird

250 210 125

2000 1980 1998

0 2 0

Webplan Hemera Technologies NORTAK Software Prologic Systems

120 100 100 100

1984 1997 1975 1975

0 0 0 0

NA

5

Cognos IBM Canada Corel Xwave Adobe Systems Avalon Works QNX

Total largest

4,143

NA

Averages

345

1988

NA

Medians

'230

1984

NA

Notes

Canadian public U.S. Subsidiary Canadian public Canadian private subsidiary of Adobe, U.S. Canadian private Canadian private subsidiary of Hummingbird, Toronto Canadian private Canadian private Canadian private Canadian private

Sources: Scott's Directories (2002) and Ottawa Business Journal (2003); USPTO

POLICY

IMPLICATIONS

Some of the policy implications are straightforward. Only the larger CM AS in Canada attract or develop medium to large software editing firms. Market and spontaneous phenomena thus come to mind more than public policy. Also, some Ontario CM As - namely Ottawa, Toronto, and Waterloo - seem to attract or nurture medium-to-large firms. Montreal is at some disadvantage, and other Quebec cities (with a higher percentage of French-speaking population) are yet more underprivileged in terms of anchor firms. The Maritimes and the Prairies, except Calgary in Alberta, are particularly deprived in terms of the bigger and more visible firms.

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Table 7.10 Top Vancouver software companies in 2.002, Company name

Pivotal MDSI Mobile Data Intuit Fincentric Chancery Software Radical Epic Data A.L.I, technologies ACL Services Multiactive Software OCE Display Graphics Intrinsyc Software Total largest

Established

U.S. patents 1976-2002 invented in Vancouver

525

1996

450 340 273 200 200 185 180 150 140 130 120

1993 1994 1986 1983 1991 1975 1986 1983 1995 1992

0 0 0 0 0 0 1 0 0 0 0 2

NA

3

Local employees

2,893

NA

Notes

Canadian public Canadian public U.S. subsidiary Canadian private Canadian private Canadian private Canadian public Canadian public Canadian private Canadian public Dutch subsidiary Canadian public

Sources: Scott's Directories, zooi; USPTO

Larger agglomerations, and particularly those in Ontario and B.C., seem more naturally adapted to the creation and growth of innovative software firms. Also, universities do not seem to play such a pivotal role in the foundation of new software firms as they do in biotechnology. They also do not play a critical role in every region of Canada in the training of the workforce. English-speaking Canada, and particularly Toronto, Vancouver, and Ottawa, has been able to attract foreign skilled workers in order to nurture the growth of the industry. In Quebec, though, immigration is much lower and the role of universities in training should be more critical than in B.C. and Ontario. In spite of its very generous tax credit for R&D and other provincial policies aimed at stimulating the industry, Quebec lags somewhat in software development when compared to the more wealthy provinces. The French-speaking province seems able to launch new firms, but less able to nurture them to large size. If the labour force is one of the most significant factors, English Canada needs to train and attract skilled workers for the software industry, but Quebec needs to insist on the training of its (mostly French-speaking) local population.

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Table 7.11 A comparison of the four largest software-publishing agglomerations, zooz CMA

Number affirms over lOOempl.

Total empl.

Total patents

in CMA Toronto Montreal Ottawa Vancouver

29

8,143

19 12 12

4,368

4,143 2,893

237 14 5 3

Size of firms

Age

Average Median

Average Median

281 237 345 241

187 160 230 200

19 20 15 15

18 18 19 15

Sources: Scott's Directories; USPTO

CONCLUSION

The Canadian computer software industry is made up of several tens of thousands of firms, the most R&D intensive being software publishing. With 38% of Canada's population in 2001, Ontario had 5 2. % of the computer systems design and related service firms, as well as 38% of the software publishers and 47% of the data processing services in Canada. More important yet, it hosted respectively 53%, 45%, and 70% of the paid employees in the three major segments. And 55% of the 100 larger software developers in Canada were located in one Ontario CMA, namely Toronto. Thus, Ontario software firms were thus not only over-represented in numbers but also were larger and collected more revenues than those in other parts of Canada. In Ontario, Toronto, Ottawa, and Waterloo were the preferred loci of the most visible Canadianowned software developers, as well as foreign-controlled subsidiaries in this industry. The province of Quebec, with 24% of Canada's population, was a distant second with 20% of the computer systems designers, 28% of the software developers, and 20% of the data processing service firms. Quebec's firms were smaller, measured either in terms of employees or in terms of revenues, than their Ontario competitors. Montreal was the only Quebec CMA where the key software innovators were to be found, yet it seemed more difficult to grow a firm in Montreal, as the ratio of larger firms to population indicates. British Columbia, where 13% of Canada's population lived in 2001, hosted respectively 11%, 16%, and 13% of the firms in the three major segments of the software industry. Its shares of Canadian

142.

Canada's Regional Innovation Systems

Sidebar 7.3 University Spin-offs These are companies that license technology developed in a university and legally owned by the academic institution. In Canada, a database of some 1,000 university spin-offs yielded a list of some 140 computersoftware companies (out of 47,000 such companies in the country, or 0.3%). A few universities seemed the most active in this area: Simon Fraser University in Vancouver (with thirty-four software spin-offs), the University of British Columbia and the University of Toronto (with twenty-one software spin-offs each), the University of Victoria (nine), Waterloo (eight), and McGill University (six) represented over 70% of these academic spin-offs in software. Fifteen other academic institutions across Canada had at least one software spin-off. However, out of these 140 companies, just four had attained the top tier and were quoted on the stock markets. The jury seems to have thus delivered its verdict: universities do not create many software spin-offs, and few of them are successful. However, it may happen that technology produced in the university but not owned by the institution may find its way toward the market through graduate students and/or faculty. If this is the case, then universities may be incubating more companies than our estimate shows. However, the small relative size of university departments in computer science (usually up to fifty professors) compared to the R&D laboratories of medium-sized and large firms (up to several thousands of professional researchers in the case of companies such as IBM Canada or Nortel) puts the role of universities in a more modest perspective. Also, industry researchers spend 100% of their time developing commercial software, while university professors and students spend up to 50% of their time in research and often explore new territories of unknown commercial potential.

employment were more modest: 8%, 16%, and 5% respectively. Also, only Vancouver hosted a considerable number of medium to large software developers. Alberta (10% of Canada's population) was home to 12,%, 13%, and 14% of Canadian firms in the three major segments, but then again their size, judged by the total number of employees or by revenues, was much more modest. In terms of employees, the three segments represented 10%, 9%, and 7% respectively. Only Calgary had a sizeable group of medium to large software developers. The rest of Canada, while hosting 15% of its population, represented only 5 % of the firms and an even smaller percentage of its employees and revenues.

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Canada's regional innovation systems in software are thus situated in its five major census metropolitan areas, and up to a certain point their location is not due to the municipal and provincial policies designed to nurture them. Research universities mattered, but more as a source of training and labour pool creation in some regions (particularly in French-speaking Quebec) while the more affluent English-speaking CMAS could partially rely on the import of skilled workers via the normal process of immigration. Few of the largest software companies in Canada were spun-off from universities, as least using the present definition of spin-offs. Most probably they were spun-off from the R&D laboratories of large ICT corporations, such as IBM Canada in Toronto, Nortel in Ottawa, and Canadian Marconi or Ericsson in Montreal. However, to precisely identify the origins of the software regional innovation systems, in Canada as elsewhere, a specific research project would be required. The present definition of spin-offs does not cover situations where employees of established companies, or graduate students from universities, leave their organizations to start afresh new companies bringing with them ideas from their past employers or their alma maters. If and when such projects are completed, we would be able to better understand the nature and extension of local knowledge spillovers in software regional innovation systems. Canada's software clusters and RSI show strong inertia. Their relative position within Canada changes but the three largest continue to remain at the top, although Ottawa is getting closer to the top group. Software innovation, at least in Canada, remains in the largest metropolitan areas.

8

Conclusion

In the early 2,ooos, the abundant bibliography on clusters, regional innovation systems, learning regions, and the like has been subject to criticism. Martin and Sunley (2003), for instance, argue that there are too many definitions of clusters, almost all are vague, the geographic boundaries of clusters are not clear, the institutions that are an essential part of them vary from one author to the other, and, while factors explaining agglomerations are many, none seem well documented. Thus, the public policy lessons that authors draw from their cluster studies may not be well founded. Breschi and Lissoni (2.001) have also gone in the same direction: knowledge externalities, the most frequent explanatory factor for clustering in the last decade, are nowhere very evident. In sum, there is a notorious geographical agglomeration of firms - particularly the innovative ones - but scanty conceptual or empirical clarity about the reason for their particular location. These criticisms seem well founded. We may add that some portion of this literature is of reduced scientific value, particularly when it extols the virtues of such trendy agglomerations as Silicon Valley, the Northern Italian industrial cities, or the supposed Four Motors of Europe. Insufficient effort has been made to submit definitions, geographical contours, and explanatory theories about knowledge flows to rigorous empirical testing.1 i Works by Zoltan Acs, David Audretsch, Stefano Breschi, Maryann Feldman, Adam Jaffe, Manuel Trajtenberg, and Lynne Zucker et al. are among the most solid contributions to these debates.

Conclusion

145

EMPIRICAL CONCLUSIONS

Let us first recapitulate and discuss the empirical findings stemming from our study. Innovation in Large Cities All major Canadian high-technology RSIS, or at least their essential components, are located in the largest census metropolitan areas (Toronto, Montreal, Vancouver, and Ottawa) (see table 8.1). Two major explanations may be advanced for that pattern: Canada's RSIS are not large enough to spill over several CM AS in such blurred agglomerations as the M-4 corridor in Britain or Silicon Valley in the United States. Perhaps in several decades, Canada will witness the emergence of borderless corridors of high technology, such as Montreal-Ottawa, or even Montreal-Ottawa-Toronto, equivalent to the San Francisco-San Jose RSI called Silicon Valley, but this development is not yet in sight. Also, the price of land and building in Canada in today's CM AS is reasonable, and firms are not often forced to relocate to remote cities or to the outward periphery of existing metropolises. Similarly, in Europe as well as in the United States, the vast majority of R&D is conducted in large cities, and the overwhelming majority of patents is obtained by inventing units located in such agglomerations (see European Commission, 2,001, for the European Union, and Audretsch and Feldman, 1999, for the United States). In this respect, Canada is not different from other parts of the developed world. Agglomeration externalities produced in larger cities seem to be more important than those produced by specialization in smaller places. And CMAS are an appropriate geographical level for Canada, but probably not for other countries with bigger economies and larger geographical agglomerations of innovative firms. New Innovative Metropolises are Growing We found some evidence of local specialization (i.e. Ottawa in telecommunications, Saskatoon in ag-bio), but little evidence of geographic concentration in one Canadian city or CMA either of entire industries or their innovative activity, such as Krugman (1991) would predict. Conversely, almost across the board a few new innovative regions, such as Vancouver for most new industries, are emerging and producing an increasing share of Canadian patents.

Canada's Regional Innovation Systems

146

Table 8.1 Summary findings about Canadian RSIS and clusters Main production cluster

Emerging

RSI

Toronto Toronto Ottawa

Montreal Montreal Toronto

Montreal Toronto Montreal

None Vancouver Vancouver

Ottawa Toronto

Toronto Montreal

Bromont Toronto

Vancouver Ottawa Vancouver

Main RSI

Aircraft Biotechnology Telecommunications equipment Semiconductors Software

Second major

RSIS

Diversified, not specialized, larger metropolitan areas are on the rise. Two explanations may be advanced for this pattern. For one, it may happen that provincial policies in Canada are so strong that they represent discontinuities to the flow of factors and goods similar to national borders, thus setting an obstacle to the emergence of hyper-specialized cities. We tend to believe that this is not the case, as we will discuss in more detail in the policy section of this chapter. Another explanation would suggest that the disadvantages of specialization are all too evident to most economic agents, as can be observed in the strong shocks suffered by Ottawa in telecommunications and Saskatoon in agricultural biotechnology, both since the early zooos. More diversified metropolises such as Montreal, Toronto, and Vancouver may be able to better meet the challenge of cyclical or structural decline, as workers and capital can more easily move from the affected industry to other, related ones in the same CMA. Thus, agents would avoid locating themselves in too specialized geographical agglomerations. Clusters and Regional Innovation Systems are Different Innovation and production do not necessarily run parallel or converge within the same industry or technology. Thus in the 19905, Canadian aerospace production was moving to Montreal, but innovation was heading toward Toronto; telecommunication equipment production is larger in Montreal than in Ottawa and Toronto, but the two latter cities concentrate more innovation than Montreal, as

Conclusion

147

patents clearly show. Thus it is useful to employ one concept for industrial regions (such as clusters, the one that has gained popularity in the 19903 and is used mostly for production agglomerations) and another for innovative regions, such as regional innovation systems. These concepts are preferable to those of industrial poles, based on the Francois Perroux tradition, or of industrial district, based on Marshallian literatures. The last two concepts assume particular industrial structures. In the first case (Perroux poles), a large corporation providing demand for a number of specialized suppliers, or producing some key input for specialized downstream producers that agglomerate around it, forms the pole. In the second case (Marshall industrial districts), the cluster is composed of large numbers of SMES supplying local demand. The Mix of Institutions Varies from One Industry to Another In all industries and technologies, private firms have the commanding role. However, supporting institutions vary from one sector to the next. Thus, the role of local universities varies from one industry to the other. They are key incubators in biotechnology, as Montreal, Toronto, and Vancouver have shown. The importance of universities is variable in software: it is secondary in cities that can constitute a major pool by immigration, such as Ottawa, and crucial in others that are less able to attract skilled workers from abroad, such as Montreal, which requires the training of a less mobile local labour force. Finally, universities are of minor importance in aerospace. Both Canadian aircraft agglomerations (Montreal and Toronto) could thrive for over half a century by importing their more skilled workers from abroad with some support from local universities. The same pattern can be found with venture capital: it is a crucial ingredient of RSIs in biotechnology and in a few information and communication technologies (such as software and semiconductor design) but less so in semiconductor production or aerospace where large corporations predominate. THEORETICAL AND METHODOLOGICAL CONCLUSIONS

We may also draw some methodological and theoretical lessons from our Canadian study.

148

Canada's Regional Innovation Systems

Methods Patents have been used time and again to provide an idea of the geographical distribution of R&D results. Indeed, they represent a good indicator of invention for many industries. Our research has shown, however, that they are less crucial to understanding the aerospace and software industries, at least in Canada. Nelson (1989) has demonstrated that patenting varies in intensity from one industry to another, and also differs from product to process invention, the latter being less often patented. Due to their smaller size and their specialization that excludes computer manufacturing, Canadian software firms patent few inventions. Had we used only this indicator, we could have seriously underestimated the importance of technological innovation in Canadian software. And because the propensity to conduct R&D is found at least 50% in software firms, identifying the location of firms - and particularly medium and large ones - is a good method of locating innovative regions. However, even locating these firms is a daunting task in this activity: the software industry is particularly challenging because of rapid changes in the size, names, and performance of companies, a majority of which are most often privately owned. Similarly, due to their specific strategy based on imported technology and process R&D, Canadian aerospace firms have also requested and obtained fewer patents than their larger competitors such as Airbus or Boeing. It is more useful to include other indicators of clustering than just patents, such as the number of firms in different locations, particularly the larger corporations, the revenues generated with local products, and the geographical distribution of employment. Key Hypothesis Up to a certain point, different definitions and theories have been historically developed on the basis of specific industries, in particular countries, and at different phases of the region's evolution. In the late nineteenth and early twentieth centuries, the observation of traditional small and medium-sized firms in England provided the empirical basis for Marshall's concept of industrial districts. It is not by chance that this approach has become popular in Italy, where labour-intensive industries are still the backbone of manufacturing competitiveness. In the 19505 and 19605, European heavy mechani-

Conclusion

149

cal industries and petrochemicals inspired Perroux to develop his theories of industrial poles, with large engine firms creating upstream and downstream agglomeration effects (Perroux, 1962,: 175). In the 19905, the new high-tech industries have nurtured, both in Europe and North America, the innovation systems approaches, emphasizing supporting research institutions, none of which is key in agglomeration theories of Marshall or Perroux. Thus, the present confusion in concepts may at least partially be explained by the fact that they originate in studies conducted by several authors looking at specific geographical industrial agglomerations in particular nations. Concepts were later detached from their original context, elevated to general hypothesis, and applied everywhere without the subsequent users understanding the specific circumstances under which the concepts and theories were created. However, the theories and their generalizations should be questioned. The combination of key institutions and organizations varies from one industry to another. Universities are the main incubators in biotechnology, but large R&D industrial units fulfil the same role in ICT clusters and regional innovation systems. In aircraft, venture capital and universities play a smaller role, but government financial support is a key ingredient of agglomeration and growth. Government laboratories contribute to different types of RSIs but they are not a key factor of agglomeration in any industry. RSI are complex evolving systems and their evolution differs from one industry to another. Our empirical analysis has shown that this is the case (table 8.2). At their origins, different types of clusters and RSIS are already fairly different species. Anchor firms and other institutions play a crucial role in all of them. However, the nature of the anchor varies from one industry to the next. In aerospace, the anchor is typically a large prime contractor, whose demand attracts actual or potential suppliers. In ICTS, the anchors are large private R&D labs spinning-off new firms in the local area. A research university is most often the incubator in biotechnology. Also, historical accident plays a major role in the original location of aircraft regions, while most biotechnology firms are located close to their alma mater, typically a high-level academic institution. The main agglomeration process in aircraft is the attraction of suppliers by the OEM, while in both biotechnology and ICTS the incubation of new firms by the anchor (and later by the largest incubated firms) is the major process that increases the number of firms in the region.

150

Canada's Regional Innovation Systems

Table 8.x Elements in the evolution of high-tech clusters Aircraft

Biotechnology

research university anchor firm (with large R&D unit)

Origins

anchor firm (large tier-1 OEM)

Initial location of cluster

historical accident close to academic research

Original markets

global

Agglomeration key factor

demand from OEM

Evolution of labour anchor creates a labour pool by pool import of skilled professional and training of local workers Evolution of other anchor attracts other suppliers to local institutions the labour pool

/crs

historical accident, research university, or pubic labs often local and global national incubation of SMES incubation of SMES by academic by industrial researchers researchers anchor creates a creation of a labour pool by labour pool by local research uni- import of skilled professional and versities training of local workers attraction of attraction of extra-regional extra-regional venture capital and venture capital and redirection to redirection to ICTS of venture capital biotechnology of venture capital all levels of govern- all levels of government increase and ment increase and fine-tune financial fine-tune financial support support more successful more successful SBFS are able to SBFS are able to attract out-of- attract out-of-region region talent and talent and venture capital venture capital high medium global global

Evolution of national governgovernment support ments increase and fine-tune financial support Late evolution input-output local matrix becomes of RSI void as firms vie for world markets and suppliers low Turnover of firms global Late market evolution high, due to Inertia of cluster high, due to role large facilities and of academic labour pool institutions and labour pool

medium, due to autonomy of spin-offs and mobility of labour

Conclusion

151

In all industries, the anchor creates the local labour pool that attracts further firms. But the mechanisms of creation of such a pool vary from one industry to the other. Aerospace and ICT anchor corporations attract large numbers of specialized professionals to the area, and they contribute to the training of local workers in conjunction with government programs (and sometimes without them). Conversely, universities create labour pools in biotechnology through their own training activities, and private firms contribute to the pool by attracting a few high-level scientists and managers. The products of both aircraft and biotechnology are usually global from the start, as firms try to recuperate returns from their high initial investments in R&D through the largest sales possible during the period where patents and/or novelty isolates them from competition. Contrary to Michael Porter's classical cluster concept based on his famous diamond, local demand is thus negligible as a factor of agglomeration in these industries and technologies. Conversely, the development of the most common (niche) software products is much less costly, and companies usually launch and refine them in the local and national markets. Local and national institutions and organizations evolve through the life of the cluster or the RSI. Venture capital firms learn how to deal with ICT firms first, then with biotechnology start-ups. Also, venture capital initially invests in local firms, then learns about other firms in more distant RSIS and starts participating in inter-regional financing pools and syndicates (Niosi and Dalpe, 2,003). Similarly, universities learn about the value of the intellectual property created in their laboratories and create IP offices to manage it (Niosi and Banik, 2002). The presence of venture capital firms accelerates the interest of local universities in IP management, as venture capitalists make financial offers to local academics of high standing to motivate them to launch academic spin-offs. Similarly, provincial (or state) governments, as well as national ones, learn about the real effects of their policies and refine them in order to increase the effectiveness and efficiency of public contribution to the growth of the cluster. Later on, new processes are put in place. In aircraft clusters, the local input-output matrix becomes partially an empty space as prime contractors turn to international tenders and partners, and local suppliers become more acquainted with global manufacturing. Companies remain collocated, but this type of agglomeration is now due to

152.

Canada's Regional Innovation Systems

inertia of large manufacturing plants and vast labour pools. In biotechnology RSIS, new mechanisms are needed to refurbish the local pool of highly talented scientists and managers as the original ones are committed to their firms (and sometimes to extra-regional firms). Thus, clusters and regional innovation systems are fairly difficult to move, because of the combined inertia of labour pools (in all different industries), plants (in aircraft), and academic research (in biotechnology). Software clusters and RSIS and their component firms seem somewhat more volatile, as the flight of several software firms from Montreal to Ottawa and Toronto has witnessed. Evolutionary Themes Revisited Multistability Within the same industries and technologies, different configurations of institutions and organizations emerge, and all of them are stable in the long run. No optimal way of organizing clusters and RSIS seems to exist. Thus, Montreal and Toronto, Canada's major RSIS in biotechnology, have grown within century-old human health megacentres, involving large R&D labs of pharmaceutical corporations, numerous clinical research organizations, large university hospitals, and many venture capital organizations as well as the core SBFS. Conversely, in the other emerging biotechnology regions, notably Vancouver and Edmonton, SBFS grow out of university research without the help of most of the other supporting institutions, except for local some venture capital in Vancouver. Similarly, Toronto and Montreal are very different as aircraft clusters, yet they are stable in the long term. Montreal has grown into a very diversified aerospace region, with aircraft and helicopter manufacturing, turbine production and overhaul, landing gear and structures fabrication, and some avionics, while Toronto is a centre for the manufacturing of aircraft and is more specialized than Montreal in avionics, an activity linked to its rank as first Canadian region in information and communication technologies (Beckstead et al., 2003). Path dependence The above-mentioned evolutionary patterns are path dependent. In another paper, I showed that rapid growth in biotechnology firms is linked to a specific virtuous sequence starting with the choice of human health R&D followed by patents, the support of venture capital, renewed R&D, and international alliances with the aim of launching innovative products in the world market

Conclusion

153

(Niosi, 2003). At the level of the biotechnology RSIS, and whatever the particular configuration, growth starts with high-level university research in human health (most often conducted by star scientists) and the launching of companies owning proprietary patented information; such a type of new technology firms - when appearing in sufficient numbers - attracts venture capital to the region. A few scattered firms in a specific region will not attract venture capital; this is why some of the smaller Canadian RSIS show a weak record of growth. In some of the science-based industries, larger CM AS also have an edge in their competition with less significant urban centres. Incubation as a growth process Incubation seems a major process in the reproduction and growth of clusters and RSIS. Yet we have seen that at least in two industries where incubation plays a key role (biotechnology and ICTS) the basic incubators are not the same (they are respectively universities and large corporations) and the process of incubation does not have the same contours, with university spin-offs usually much less successful than corporate ones. The development of corporate spin-offs in aerospace is much less understood, yet there are traces of this process taking place in the origins of the industry, when foreign multinational corporations spun-off their tier-i Canadian subsidiaries. Also, in a second wave, the latter spun-off several non-core activities, to create some of the largest tier-2 and 3 Canadian companies of today. POLICY IMPLICATIONS

Public policy concerning clusters and regional innovation systems has evolved in several stages and with different patterns in various advanced nations. As Feldman and Francis (2,001) have suggested, however, we have as limited an understanding of how new clusters emerge and grow, and of their impact on the local economy, as governments do. This discussion of public policy insists on the limited knowledge of the dynamics of RSIS and clusters that governments have shown at different times and in different places. Between the 19505 and the 19805, Western European national governments developed regional industrial policies, mostly in order to foster the development of backward geographical areas. Italy was one of the most active countries in this area, with the goal of fostering the development of its southern regions (Allen, 1972).

154

Canada's Regional Innovation Systems

During the 19805 and 19905, these national policies were progressively phased out, and European Union (EU) policies as well as local initiatives emerged in the context of a widespread process of transfer of responsibilities from national to subnational and supranational government levels. By 1996, the European Commission recognized that almost 50% of all research and technological activity in the EU occurred in twelve regional systems of innovation, all highly urbanized ones, including Amsterdam-Rotterdam, Frankfurt, Ile-de-France, London, Milan, and Turin. A First Cohesion Report in 1996 and then a second in 2,001 (European Commission, 1996, 2.001) showed that disparities between countries had receded, but those between regions had not. The EU transfer of resources from rich to poor regions, aimed at reducing such disparities, was nevertheless renewed. However, the second report made clear that the enlargement of the union to the Eastern European countries would vastly increase the number of regions requesting help from Brussels. Also, the report found that the increasing mobility of capital and people from one region to the other created by the EU had tended to concentrate economic activity in the very same central regions that formed the "Archipelago Europe" of rich metropolitan areas. Similarly, research, technology, and development (RTD) expenditure gaps among regions had not receded: in year 2000, most RTD took place in the very large cities that used to rank in the top ten some years earlier. In the United States, state and local initiatives multiplied in the 19805 and 19905 with the goal of creating new clusters, particularly in backward states. Among the oldest of them, the Southern Growth Policy Board, a public policy thinktank based in Research Triangle Park, North Carolina, with thirteen American states and Puerto Rico, publishes benchmark studies on R&D and education and has put forward a common plan with targets to attract and develop high-tech industries in these states.1 The plan includes three major goals that can be summarized as "increase education," "increase innovation and entrepreneurship activities," and "create and sustain quality of life to attract new firms and employees" (Southern Growth Policy Board, 2002,). Local initiatives at the municipal level also multiplied in cities from Boston to San Diego, through 2. The states are Alabama, Arkansas, Georgia, Kentucky, Louisiana, Mississippi, Missouri, North Carolina, Oklahoma, South Carolina, Tennessee, Virginia, and West Virginia.

Conclusion

155

Table 8.3 Some U.S. municipal development initiatives City Boston

Phoenix Phoenix Milwaukee San Diego

Organization

Nature of the organization

Boston Redevelopment Authority Economic Development Department Economic Development Group Community and Economic Development Department Economic Development Corporation Economic Development Corporation

municipal

information and assistance to location

non-profit

information

municipal

information and assistance to location information and assistance assist firms in locating or expanding in area

non-profit non-profit

Missions

municipal agencies and government-backed non-profit corporations (table 8.3). However, the top research-intensive states have remained the same, and the largest metropolitan areas still concentrate most innovation (Audretsch and Feldman, 1999). In Canada, regional policies started in the 19605 with the general goal of improving the economic situation of the Maritime provinces and some depressed areas in Manitoba and Quebec. Measures initially included tax incentives, then the Agriculture Rehabilitation and Development Act (ARDA) was added, followed in 1968 by the creation of the Department of Regional Economic Development (DREE). In 1982, a new Ministry of State for Regional and Economic Development (MSRED) was created to replace the disbanded DREE. Later in the 19805, MSRED was disbanded in its turn under the Conservative government of Brian Mulroney. In the meantime, the provinces and the largest municipalities (or private sector organizations within them) set up development departments and councils in order to promote the region by creating information booths and networking offices with a small number of employees each. The government of Quebec was one of the few to fund regional economic development within the province (tables 8.4 and 8.5). In spite of these national initiatives, the Maritimes and the Prairies remain the underprivileged regions of Canada in terms of innovation, with the exception of Alberta, which is rich in oil and gas.

i56

Canada's Regional Innovation Systems

Table 8.4 Some Canadian municipal development initiatives City

Organization

Nature of the organization

Missions information networking policy advice information networking information tax incentives information networking assistance information networking assistance information networking

Montreal

Montreal International

non-profit

Ottawa

Ottawa Centre for Research and Innovation (OCRI) Regina Economic Development Authority Regional Economic Development Authority

non-profit

Regina Saskatoon

municipal non-profit

Toronto

Economic Development Office municipal

Vancouver

Economic Development Commission

municipal

Public policies did not seem to make a major impact on the distribution of regional technological development. From the above discussion, we draw the following public policy conclusions for local as well as national and subnational (i.e. state, provinces) governments. Understand the dynamics of RSIS Governments trying to nurture the next Silicon Valley need to take the dynamics of RSIS seriously in order to respect the main milestones of their evolution. Creating government laboratories (with their complex licensing arrangements and less-than-flexible internal labour markets) to nurture biotechnology may not be the right approach, but funding worldclass university research may be the first right step. Negotiating a greenfield investment of anchor firms with substantial innovation capabilities could be the best way to start an ICT cluster or regional innovation system. Promote human capital attraction and development Human capital is the most common denominator of RSIS and the most often cited factor behind their growth (see Simon and Nardinelli, 1996, 2002). Historically, in Canada human capital has been massively

Conclusion

157

Table 8.5 Some Canadian provincial development initiatives City Ontario Quebec

Nova Scotia

Organization Urban Economic Development Branch of MEOI Within Ministry of Economic and Regional Development Regional Development Authorities within N.S. Economic Development

Nature of the organization Provincial Provincial

Provincial

Missions information tax incentives information networking funding information networking policy advice assistance

imported through selective immigration, and more recently (in the 19705 and 19805) it was domestically produced through the rise of university education. However, some regions have been - and still are - more successful than others in importing skilled labour. Any policy that promotes the attraction and local production of highly skilled human capital is bound to increase the chances that a city or larger metropolis attracts and/or nurtures new firms. For decades, Toronto has been the recipient of the largest numbers of skilled immigrants in Canada; it is not by chance that it heads Canadian cities in terms of population and innovation growth. Thus in 2001, according to the very reliable census figures, 46% of immigrants to Canada settled in Toronto, against 15 % in Vancouver and 13 % in Montreal (Statistics Canada, 2OO3C). The three largest metropolitan areas were, however, home to only 2.6% of the Canadian-born population aged fifteen years or more. And several major research projects on the United Kingdom and the United States have shown that immigration, and particularly highly skilled immigration, is a major determinant of the growth of cities in the long run (Glaeser and Shapiro, 2001; Simon and Nardinelli, 1996, 2002). Benchmarking the local agglomeration against others in similar technologies or industries is a basic and commonly used means of finding the missing elements (as well as the superfluous ones) in any regional system. Unfortunately, benchmarking has most often confined itself to identifying R&D expenditures in the state, city, or metropolitan area, determining the number of firms hosted by the

158

Canada's Regional Innovation Systems

region, or counting the number of students or graduates in specific disciplines, such as those in science or engineering. Understanding flows and networks is more important. Understanding networks The links between the different agents vary from one industry or technology to another and also vary through time. For instance, understanding the efficiency and effectiveness of local universities in the creation of new biotechnology or software firms is extremely important in order to provide remedies, if necessary, to some low levels of incubation. Similarly, input-output tables describing the nature and evolution of the links between tier-1, tier-2, and tier-3 manufacturers in an aircraft cluster, or the service flows between contract research organizations, university laboratories, pharmaceutical corporations, and biotechnology firms may be key to understanding the dynamics of a particular regional innovation system in biotechnology. Similarly, the flow of graduates into the local economy needs to be understood. Thus, benchmarking must go beyond the simple arithmetic of R&D expenditures, or the figures of college and university degrees, and more deeply into the study of the degree to which local institutions provide research inputs to one another or train the needed skilled local workforce. Regional innovation systems are complex entities which, although constantly evolving, show high levels of inertia and stability. Multi-stability is overwhelming: the same industry shows different structural patterns in different agglomerations. Finally, new regions emerge over the years while others stagnate or decline. Dynamic analysis is thus essential to understanding their contours and forecasting their future patterns.

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Index

Acs, Z., 9, 12, 15, i8n Advanced materials, 8,

Baumont, C., P.P. Combes, P.-H. Derycke, 22, Z4 H. Jayet, 5 Aerospace, 8, zz, 24, 25, Beckstead, D.M. Brown, 2.6, 27, 61-86, 89, 107G. Gellatly, and C.Seaborn, 152 08,146-9, 151 Aircraft, 8, 9, 12, 14, 26, Berggren, C. and S. Laestadius, 90 61-86, 146, 149, 1502,158 Biotechnology, 5, 6, 9, II-IZ, 14, 17, 22, 25, Alcorta, L. and W. Peres, Z3 27, 29-60, 108, 146, Allen, K., 153 149, i5O-z, 156, 158 Amin, A. and N. Thrift, 3 Bozdogan, K. et al, 62 Breschi, S., Z4 Anchor tenants, anchor firms, 9, 64, 85,89-90, Breschi, S. and F. Lissoni, 144 108, 139, 149, 150-1, 156 Calgary, 31, 38-42,46, Antonelli, C., 7, 24 Arthur, W.B., n 51, 68, 91, 100, 122, Ashton, W.B. and R.K. 13^ 133-4, 139, i4 2 Sen, 23 California, 5,12, 25, 33n, Audretsch, D. and M. 104, in, 113 Feldman, 10, 19, 21, Cambridge (UK), n, 12 Canadian Biotech News, 145, 155 31,45 Canadian Microelectronics Baptista, R. and G.M.P. Swann, 17 Corporation, in, 112

Chabchoub, N. and J. Niosi, 127 Chandler, A., no Clusters, definition, 14 Complex systems, 5, 149 Conseil de la science, 10 Cooke, P., 52 Cooke, P. and K. Morgan, i6n Cottrell, T. Z4 Cumulative processes, 8, 11-13, i 0 » I O 7

Day, R.H., 5 de Bresson, Niosi and Dalpe, 73 de la Mothe, J. and G. Paquet, 6, i8n Dohse, D., 10 Edmonton, 31, 32, 36, 38-42, 51, 58, 122, 1 3 2 , 1 3 4 , 152

European Commission, *45> 154 Externalities (or spillovers), 6, 7, 12, 18, 20,

170 62, 82, 85-6, i 109, 124,143,144

Feldman, M., 6, 9 Feldman, M. and J. Francis, 153 Florida, R., 6 Forrester, T., 8 France, 5, 33n, 82-3, 88 Freeman, C., 4, 15 Germany, 10, 33n, 87, no, 126 Gille, B., 4 Glaeser, E. and J. Shapiro, 157 Gostic, W.J., 62 Government laboratories, 4, 5, 6, 10, u, 15, 16, 19, 20, 21, 23, 28, 36,42-4, 50, 56, 64, 76, 79-81, 106, 108, 136, 149, 156 Green, J.J., 64 Guillain, R. and J.-M. Hauriot, 7, 13 Halifax, 36, 37, 39,42-3, 46, 68, 80, 134 Hall, B. and R.H. Ziedonis, iiz Heraud, J.A., R. Hahn, A. Gaiser, and E. Muller, 18 ' Hoch, D., C.R. Roedling, G. Purkert, and S.K. Lindner, 125 Holbrook, J.A., and D. Wolfe, 28 Hotson, P., 63 Howells, J., 16 iCTs, 9, 22, 25, 26, 87109, 110-24, I2 5~43> 149, 150, 152, 153, 156 !le-de-France-Paris, 5,13, i8n, 84, 154

Index Incubators-incubationincubating, 9, ii, 12, 16, 17, 25,48, 53, 89, 108-9, I ] C I 5 I2 -3> I 38, 142, 149, 150, 153, 158 Industrial districts, 15, 24, 147, 148 Industry Canada, 130 Inertia (location), 60, 86, 109, 143, 150, 152 Isaac, R., 121 Jacobs,]., 19 Jaffe, A.B. and M. Trajtenberg, 6, 22 Kenney, M., 9 Kim, L., 23 Knickerbocker, C., 17 K P M G , 46, 47

Krugman, P., 3, n, 145 Langford, C. and J. Wood, 91 Langlois, R., T.A. Pugel, C.S. Haklisch, R.R. Nelson, W.G. Egelhof, no Larsen, K., 6, 15 Lawson, C., 3, 6 Lawton Smith, H.D., D. Keeble, C. Lawson, B. Moore and F. Wilkinson, n, 12, 15 Lissoni, F. and M. Pagani, 60 Longhi, C., 84 Lundvall, B.-A., 4, 15 Magee, M.E., 23 Malerba, F. and L. Orsenigo, 25 Martin, R. and P. Sunley, 144 Metropolitan areas, 4,13, 15,20,28, 30,38-9,

46,49, 123, 131, 132, 136, 138, 139, 143, 145, 146, 154, 155, i5 6 > J 57 Molina, A.H., 12, 25 Montreal, 8, n, 30-3, 37, 38-43,46-7, 52, 558, 61-86, 90, 94-8, 101, 107-8, 113-24, 130-4, 136-7, 141, 143, 145, 146, 147, 152, 156, 157 Moore, G.E., inn Moris, F., 121 Mowery, D. and N. Rosenberg, 4 Mowery, D., R.R., Nelson, B. Sampat, and A. Zidonis, 24 Multi-stability, 8, 13, 20, 88-9, 119, 121, 136, 152 Nelson, R.R., 4, 15, 148 Networks, 59-60, 113, 156, 158 Niosi, J., 4, 6, 13, 25, 26, 35. 153 Niosi, J. and B. Bellon, 16 Niosi, J. and E. Cheron, 129 Niosi, J. and M. Banik, 151 Niosi, J. and R. Dalpe, I5 1 Niosi, J. and T.G. Bas, 9, 11,24 Niosi, J., L.M. Cloutier, A. Lejeune, 57 Niosi, J., P.P. Saviotti, B. Bellon and M. Crow, 15 O'Huallachain, B., 4, 15, 24 Olsson, H. and D.H. McQueen, 22, 23

171

Index Ottawa, 9, n, 12, 31, 37, 38-42,, 46, 58, 64, 68, 79-80, 87, 90-1, 94-7, 100-8, 113-24, 130-4, 138, 140-1, 143, 145, 146, 156 Padmore, T. and H. Gibson, 6 Path dependence, 8, 152 Perroux, E, 3, 149 Perroux poles, 3, 85, 147, 149 Pickler, R. and L. Milberry, 63 Piergiovanni, R. and E. Santarelli, 24 Porter, M., 14, 24 Private sector R&D, 4, 6, 20, 21, 52, 56,90,95106, 11in, 122, 1293i, 133, 137-8, 143, 147, 149, 151, 155 Public policy, 9-11, 4452,82-4, 106-7, 113. 121-3, 126, 137, 139- 4i, I42.-3, *5°, *53-8 Quebec City, n, 38-42, 47, 58,95, !33 Queisser, H., no Raffiquzzaman, M. and A. Mahmud, 22, 24 Ragni, L., 3 Rea, D.G., H. Brooks, R.M. Burger and R. LaScala, 113 Regional production systems, 3,14-15 Regional systems of innovation (RSIS): definition, 16 Research Infosource Inc., 26 Research Money, 45, 51 Reseau Capital, 33 Rosser Jr, B., 5

Route 128, 12, 13, 15 Saskatoon, 37, 38-43, 51, 59, 132, 134, 145, 146, 156 Saviotti, P.P., 13 Saxenian, A., 6, 7, 15 Schmookler, J., 3 Schumpeter, J., 3 Seattle, 8, i8n Semiconductors, 25, 82, 87-109, 110-24, 146 Silicon Valley, 12, 13, 15, i8n, 20, in, 121, J 44-5, J 56 Simon, C J. and C. Nardinelli, 156, 157 Software, 9, 22, 24, 25, 26, 27, 82, 88-91, 12543, 146, 148, 152, 158 Southern Growth Policy Board, 154 Spin-offs, 5-6, 9, 12, 21, 24, 25, 27-8, 49, 100, 103-4, IO7, 114, 121,

136, 142, 143, 149, I50-I, 153

Statistics Canada, 21-2, 24, 26, 48, 95n, 96, 131, i57 Storper, M., 7, 15 Sun, Y., 4, 24 Swann, G.M.P., M. Prevezer, and S. Stout, 9, 2-5, 30 Taggart, J., 9 Telecommunications equipment, 25, 26, 27, 82, 87-109, 123, 146 Toronto, 30, 31, 32, 36, 38-42,46,49, 52-5, 58, 61-86, 87, 94-100, 107, 113-24, 130-6, 139, 140-2, 143, 145, 146, 152, 156, 157 Toulouse, 8, 62, 83-4

Triangle Research Park, 13,154 United Kingdom, 9, 29, 59,62, 157 United States, 5, 9, 10, 16, 29, 48, 59, 62-3, 73, 82,90, 110-12, 118, 121, 125, 145, 154-5, *57 Universities, 5, 6, 9, 10, 13-16,19,20,23,27-8, 42--3,49, 53,56-7,5960,66,76-7,79, 116, 118,136, 138,143,147, 149, 150-2, 158 Vancouver, 30, 31-2, 36, 38-42,46,49-50, 58, 68, 80, 118-19, I2°, 122-4,I3°-1, !38, 140-2, 145, 146, 152, 156, 157 Vardalas, J.N., 123 Venture capital, 5, 7, 9, 13, 16, 18-19, 2,3,323, 36-7,46-8, 53-4, 57-8, 82, 89, 106,108, 147,149,150-3 Von Hippel, E., 4 Voyer, R., 13, 15, i8n, 19 Waterloo, 115, 118, 130, 132-4, 139, 141 West,]., 123 Winnipeg, 37, 38-43,68, 80, 122, 133, 134 Winter, S., 22 Wright, M.A. Lockett and S. Pruthi, 19 Yarkin, C., 9 Zucker, L., M. Darby and J. Armstrong, 6, 25 Zucker, L., M. Darby and Y. Peng, 12, 25