Creating Canada's Culture of Innovation: From Cradle to Career

The Hon. John Manley Minister of Industry, Government of Canada CREATING CANADA'S CULTURE OF INNOVATION: FROM CRADLE TO CAREER Chairman: John A. Campion Past President, The Empire Club of Canada

Head Table Guests

Julie K. Hannaford, Partner, Borden & Elliot and a Past President, The Empire Club of Canada; Orest Zakydalsky, OAC Student, Humberside Collegiate Institute; The Rev. Dr. Andrew Stirling, Senior Minister, Timothy Eaton Memorial United Church; Stephen LeDrew, Partner, Morris Rose Ledgett; M. Elyse Allan, President and CEO, The Toronto Board of Trade; Charles S. Coffey, Executive VicePresident, Government and Community Affairs, The Royal Bank of Canada; Elaine Minacs, President and CEO, Minacs Worldwide Inc.; Ted Rogers, President and CEO, Rogers Communications Inc.; The Hon. Al Palladini, Minister of Economic and Trade, Province of Ontario; Ann Curran, President, Curran Corporate Advisers Inc. and Second Vice-President, The Empire Club of Canada; Kathy Lowinger, Publisher, Tundra Books, McCLelland & Stewart Young Readers; Michael MacMillan, Chairman and CEO, Alliance Atlantis Communications Inc.; Gordon Cressy, Vice-President, University Advancement, Ryerson Polytechnic University; John Warren, Toronto Managing Partner, Borden Ladner Gervais LLP; and George

Marsland, Executive Director, Magna Scholarship Fund and The Fair Enterprise Institute, Magna International Inc.

Introduction by John A. Campion

John Manley

Thank you, John, for that kind introduction and thank you all for the opportunity to address this distinguished club again this year.

The speech I gave last year on the productivity challenges that Canada faces caused a bit of a row. And that was purely intentional. I wanted it to serve as a wake-up call to Canadians. Our standard of living was being threatened and I wanted as many people as possible to know it.

Two years ago, I talked to you about our Connecting Canadians agenda. For those of you who may have forgotten that take a look at this.

Video of CONNECTING CANADIANS ad shown.

This ad has been running on television, in movie theatres, just about anywhere you care to look, or listen, but I don't think it's playing on Hockey Night in Canada.

In the time I have with you today, I want to address three issues:

As citizens and taxpayers, you understand that your quality of life is directly related to how hard you work and how much money you make. At the national level, our standard of living is closely tied to our success in fostering knowledge creation, adaptability and innovation.

Over the past year, Canadians have been telling the government what they expected and hoped for in the budget. And we have been listening. And the four themes in this year's budget speak directly to the concerns Canadians have about health care, children, innovation and tax reduction. And I'm going to bring you back to these during the course of my remarks.

Canadians enjoy the fruits of a strong and growing economy. But we can't simply assume that this prosperity will continue forever. The world economy is changing radically and with a speed we can barely comprehend.

The pace of change may be dizzying, but it's not out of control. Where these changes lead us-and what we're going to do when we get there-are subjects that Prime Minister Chretien has been tackling head on. We are determined that Canada will win in the new economy.

This new economy is worldwide, all-encompassing and not without its hazards. It is a fundamental global change from the industrial age to the information age. It's really a revolution that means the death of time and distance.

Here's the equation for a prosperous future: knowledge plus innovation equals increased productivity. We are still facing a productivity challenge in Canada, and' we will likely face it for some time to come. But the good news is that our government's innovation agenda will help make the challenge manageable.

Innovation isn't just about making good products better. It's also about creating new ideas and applying them to new products and services. The need to innovate is not a new discovery. This is no ad hoc solution to a problem that came up last week. The Government of Canada has been promoting and encouraging innovation for the last six years under the Prime Minister's leadership.

This week's budget deepens our commitment to prepare Canadians for the 21st century. For example, we have increased spending on higher education. The budget funded 2,000 21st-century Chairs for Research Excellence with $900 million.

We increased funding for the Canada Foundation for Innovation by a further $900 million, in addition to the $1 billion it had already received. The CFI invests in infrastructure projects at Canadian universities, colleges, hospitals, and other non-profit organisations. This enables Canada's finest minds to carry out world-class scientific research and technology development.

First-class health care is an essential element of our quality of life. We want to ensure that our system continues to deliver professional, caring service to all Canadians. We have the same expectation for post-secondary education.

Next year alone, transfer payments to the provinces for these two areas will reach an all-time high of almost $31 billion. This is important. But our commitment to our children doesn't begin at university.

We want the best possible opportunities for our children who are, literally, the future of this country. From extending maternity and parental leave to increasing the tax exemption on scholarships and bursaries, the government is committed to doing more for our children-from cradle to career. And we want that career to be in Canada.

To that end, Monday's budget addressed corporate taxes. We are lowering the top rate for higher-taxed industries from 28 per cent to 21 per cent, putting all sectors on a competitive footing with the United States. Make no mistake about it; Paul Martin has shown real courage in committing us to these corporate tax reductions.

Because cuts in corporate taxes are going to attract criticism from the usual anti-business suspects, I know that people will find it easy to say: "Make the corporations pay." In the traditional economy, corporate taxes weren't much of an issue. You had to be where the trees were if your business was cutting down trees. And you paid the corporate taxes that applied in the country where your trees fell. But in the new economy, the corporations don't necessarily have to pay because they don't have to stay. They can just leave. And I'll tell you shortly about some that did. And when companies do leave, they take jobs and opportunities-and our children-with them.

We also had to address the issue of stock options. Many high-tech industry leaders brought their grievances to me about this. Our government responded. By allowing employees to pay tax only when they sell their stockand not when they exercise their options-we've added another incentive for high-tech workers to stay in Canada. Monday's budget reflects similar tax treatment in the U.S.

I've talked about corporate taxes and about stock options. Now let's talk about individual Canadians. Over the next five years, personal income tax will fall by an average of 15 per cent annually; 22 per cent when you take into account tax cuts in previous budgets. And by restoring indexing, we have ensured that your tax cuts will not be lost to bracket creep. This budget promises a cumulative reduction in taxes of $58 billion over the next five years.

I want you to understand what I've been saying in newspaper interviews, because I think there may be some confusion. These are the most significant reductions in tax in Canadian history. They're welcome, justified, and substantial. But Mr. Martin has said they are a floor, not a ceiling. If our finances permit, we both would hope that these cuts could be deepened and accelerated.

All of the measures I've just been talking about are targeted, strategic and affordable. But they are also elements of a larger strategy: one that will help us conquer the innovation challenge.

These measures contribute to the new thinking that will help Canada become a magnet for brains in the next decade. If a university graduate moves south, it's for the sandy beaches and the warm winters and not because of lack of opportunity here.

I am talking about encouraging risk and rewarding success. I am talking about creating a culture of innovation in Canada. Why? Because Canada is facing one of the greatest challenges ever to its standard of living. That challenge is globalisation.

In his recent book, "The Lexus and the Olive Tree," Thomas Friedman describes globalisation as the spread of free-market capitalism to virtually every country in the world.

Globalisation means deregulation. It means privatisation. It is built on technologies that make computers smaller and faster. It is digital. It is on-line. It is now.

Friedman says that if globalisation were a sport, it would be the 100-metre dash over and over and over. No matter how many times you win, you have to race again the next day.

There is no guarantee that, in this environment, Canada will simply maintain its privileged economic position. Not without becoming more skilled, more productive, more entrepreneurial and more innovative than any other country.

Let me talk for a minute about productivity. Ask Canadians to define increased productivity and they may well say it means doing more work for the same or less money-not a pleasant picture for any of us. Instead, I prefer to define productivity as "working smarter"investing in leading-edge technology and training to improve the output of our companies and their employees. It is a fact that in the global, knowledge-based economy, the advantage goes to the countries that are innovative and have high levels of productivity. The advantage also goes to nations that quickly adopt the latest technology, invest in skills development for their citizens and seek out new global opportunities. These challenges facing Canada will determine the future direction of our economy.

Canada has a long history of creating new ideas and building its knowledge base. And we have a long history of being modest about it. More than 40 years ago, Canadians were at the forefront of high technology in aeronautics. It was called the Avro Arrow. When the Diefenbaker government cancelled the Arrow, many of the Canadian brains behind it went south. A few years later they helped put Americans on the moon.

Some of our more traditional industries are also succeeding through increased productivity. They are investing in tools and training. For example, the Canadian chemical industry and the Canadian auto industry have outperformed their U.S. counterparts for the last decade. This is what can happen when companies make large investments in new plants and machinery and give their researchers access to state-of-the-art technologies.

We have proven our ability to create, but we are often slow to apply our creations. This slowness is one of the reasons that Canada's growth rate in productivity lags behind other countries.

In 1999, the Conference Board of Canada published its first annual innovation report. It studied how the context of an organisation influences the effectiveness with which innovation can occur. Benchmarked against our main competitors, Canada is near the bottom of the pile because of the inability of firms to organise around innovative business strategies.

Not everyone, though. Some firms are tremendously innovative. The problem they have, and the problem Canada has, is that finding financing is a difficult and frustrating process. This means that we are losing innovative businesses that started here and should be staying here. That puts our future at risk.

Here are some examples.

Signal9 Solutions, a small network security firm near Ottawa will close its doors for good and move to Silicon Valley in a few weeks. It will join its parent McAfee.com, a maker of anti virus software, which acquired Signal9 for $18 million. Philip Attfield, President of Signal9 Solutions, said that the reasons for the move were lack of early-stage capital and onerous taxation.

And then there's Homegrocer.com, which was up and running in Vancouver, but moved to Seattle to get easier access to venture capital. It raised more than $160 million in pre-lPO funding in the United States.

And finally, there's the business that I met with that brought together four entrepreneurs. I promised I would not give out their names. They acquired the intellectual property on very promising technology. They began to shop around for financing to build a company.

They were looking for $10 million. They knocked on the doors of every financial house on Bay Street, but no one would give them a nickel. So they tried their luck in the States. Rather than provide them with $10 million Canadian, Silicon Valley offered them $45 million U.S.!

There was a catch, however. The company had to establish its head office in the United States. After their experience with Canadian technology financing, this was not a hard decision for them to make.

Under these circumstances, I sometimes think that if Canadians had invented the wheel, we would have dragged it to the U.S. to market it there.

Should our kids have to leave Canada to succeed? No way! We need them.

I want Canada's creative, imaginative and determined young people to succeed here. Not somewhere else. And I am sure that you understand me perfectly when I tell you that I would much rather talk to my kids over the dining room table than over the long-distance telephone.

We have announced changes to the taxation system to make it attractive for companies to innovate. We will continue to encourage partnerships and promote commercialisation here. We remain focussed on excellence.

We are investing in research to generate new ideas. And we are connecting Canadians to this knowledge. At the end of March last year, our Connecting Canadians strategy reached an important milestone by connecting all of Canada's schools and libraries to the Internet. This short video will show you how technology opens up a world of opportunity-whether on Pictou Island, Nova Scotia, or in the heart of Toronto.

Video of PICTOU ISLAND shown.

It will take us wherever we want." We must take that young girl's vision and apply it. We must make Canada's innovation systems the envy of the world. We must set the technology trends, not merely follow them.

To do this, we must ensure that our world-class researchers have Canadian opportunities to succeedboth professionally and financially. And this leading-edge research must be turned into cutting-edge products and services.

We must lead the world in technology sectors and we must create and retain world-class technology entrepreneurs-people with the know-how and the drive to market our research discoveries.

We must rebrand Canada as technologically advanced, entrepreneurial, creative and innovative.

But the federal government is only part of the story. With the sound fiscal, regulatory and policy framework that government must deliver, we need a domestic Team Canada-businesses, banks, venture capitalists, investors, entrepreneurs, inventors-Canadians. People like you to make this agenda for innovation work.

We can advise. We can encourage. We can help. But Canadians have to have faith in their own entrepreneurs. This means that you have to be willing to invest in Canada and put your money where your hearts are. You have to innovate. You have to create.

Canadians must surely be the most fortunate people on Earth. We live in a spacious, beautiful and richly endowed land. We have built a nation known for its peacefulness and prosperity.

Together, we can ensure that the Canada of tomorrow is as full of promise as the one that you and I inherited. Thank you.

The appreciation of the meeting was expressed by Ann Curran, President, Curran Corporate Advisers Inc. and Second VicePresident, The Empire Club of Canada.