To meet this challenge, the federal government initially focussed on getting its fiscal house in order. It has largely succeeded. The budget is balanced. Inflation is under control. Unemployment rates are improving. Canada's economic state is as sound as it has been in decades. Yet there is growing evidence that the rising tide is not lifting all boats. Unfettered market forces will not automatically lead to enhanced quality of life and well-being for all. In recognition of this reality, the federal government has made strategic investments to ensure that Canadians can prosper in the knowledge society. These recent investments include the funding provided for the Canadian Health Services Research Foundation, the Networks of Centres of Excellence, the Canada Foundation for Innovation, the Canadian Opportunities Strategy and the federal research granting councils.

Despite these investments, the difficulties the Canadian dollar has experienced over the past few months reveal that Canada is still vulnerable to international economic turbulence. Our reputation as a commodity or resource-based society exacerbates this vulnerability.

Investments in the education of people, in knowledge and innovation are our best strategy in terms of promoting enhanced economic productivity and social well-being of Canadians. Such investments are key to long-term growth and jobs. Yet, our anemic research effort (Figure 1) is the most telling indicator of the country's ambivalent commitment to transform itself into a knowledge-based society. However laudable and necessary the recent investments in research and knowledge infrastructure have been, they remain a partial solution. In particular, they have done little to narrow the gap that separates us from our main competitors, especially the United States.

 Our inability to offer internationally competitive levels of funding is one of the key factors explaining our difficulties in attracting and retaining highly productive researchers. Depleted core funding means that universities are unable to nurture a research environment to sustain excellence in research and scholarship over the long term. Student endebtedness is discouraging many from pursuing graduate studies. Moreover, our human science research capacity is largely untapped. This may well explain why we are not reaping the full benefits of technological change and have not been particularly innovative on the social front. Success in a world in which knowledge and brain power are the main sources of comparative advantage requires that we make social and technological innovation the hallmark of our collective actions. These are the challenges we urge the federal government to confront in preparing the 1999 budget.

Universities play a multi-faceted role. They have a critical and enlightenment function which is key to the health of our democracy. In terms of the innovation process, universities play a key role since they produce much of the knowledge that is subsequently turned into products, processes and policies. Even more importantly, universities produce the highly skilled people who drive innovation, which in turn fuels economic growth and job creation. The government sector has an important role to play by providing some of the research facilities that are not feasible economically for the private and university sectors.

Furthermore, government research is a fundamental source of non-proprietary knowledge in the private and university sectors alike. Government research also underpins the regulatory function of government, as well as its policies and programs designed to promote social and organizational innovation throughout society.

The litmus test of our innovative capacity occurs to a large extent in the numerous firms and organizations that comprise the private sector. This role requires that the private sector have a strong receptor capacity, which comes from being an active partner in research.

Innovation is a collective process resulting from the multiple interactions between different participants. It involves a complex web of activity ranging from research, both basic and applied, through the sharing and transfer of new knowledge and information among the various partners, to the development of new products, services, processes and policies.

Underlying this innovative process is research which involves the gathering and dissemination of information and understanding of our physical and social worlds. Research is the basic pillar of innovation. Unless the root system is nourished, innovative efforts will falter.

Much of the improvements in productivity result from advances in the stock of knowledge and the ability of people to make use of it. New ideas and highly trained people being the principal outcomes of university research, it makes an important contribution to economic growth and social well-being. It has been estimated through this contribution to productivity enhancement, university research accounts for over $15 billion of Canada's GDP and 150, 000 to 200, 000 jobs.

Canada's lack of investments in research is well-known and has been documented extensively (Figure 1). What is less appreciated is the extent to which this affects the university sector. It is often assumed that Canada's investments in university research compare favourably to our main competitors because the university sector performs a greater share of our research effort than in other industrialized countries. The reality is that our researchers do not have access to internationally competitive levels of support in large part due to under-investment on the part of the federal government.

The Canadian government supports university researchers at about half the level provided by its American counterpart.

 

 

In fact, Figure 2 reveals that the provinces and the private sector in Canada invest proportionately more than the comparable sectors in the U.S. But their higher contributions do not begin to make up for the under-investment by the federal government.

Two factors explain this funding gap. First, the American government is simply more generous in its support of university research. Also, it provides full cost funding of the research it sponsors whereas the Canadian government covers only the direct costs of research, leaving the universities to defray the indirect costs out of their operating budgets.

A further indication of the very large funding gap between Canada and the U.S. is the size of the average research grant awarded by each country's principal federal funding agencies. A recent study showed the average research grant awarded by the Medical Research Council of Canada in 1995 was slightly in excess of $73,500, whereas the equivalent National Institutes of Health grant (exclusive of indirect costs) is more than $223,900. A similar ratio of three to one exists in other fields of study. The average research grant from the Natural Sciences and Engineering Research Council of Canada in 1995 was about $35,500, and slightly less than $22,000 at the Social Sciences and Humanities Research Council of Canada. By comparison, the average research grant from the National Science Foundation was $116,700.

Moreover, our position relative to the U.S. will get worse before it gets better, unless something substantial is done soon in Canada. The American Congress is positioned to pass its fiscal year 1999 budget, which will likely include measures to begin doubling of the National Institutes of Health budget, while increasing the budget of the National Science Foundation by more than one-third.

These rates of increase are significantly higher than the increases announced for the Canadian granting councils in the 1998 federal budget, which were below current inflation levels.

The funding shortfalls for research in Canada manifest themselves in many ways.

Perhaps the greatest impact of our under-investment in university research will be on future generations. While the federal government has begun to address the problem of undergraduate debt loads, the Canada Millennium Scholarships Foundation will not help to alleviate the unmanageably high debt levels of graduate students. Universities do not have the means to fund graduate students adequately and thus their only sources of support are federal granting councils and limited provincial programs. The provincial programs are themselves unable to meet the demand. The result is a tremendous disincentive to pursue graduate studies, reducing the future supply of Canadian leading-edge researchers.

NSERC and SSHRC have both recognized the urgency of addressing this issue. They have used a significant proportion of the additional resources they received in 1998 to increase the value and number of graduate fellowships.

Evidence of an under-utilized university research capacity can be seen in the pent-up demand released by the recent Canada Foundation for Innovation and Networks of Centres of Excellence competitions. Universities from across the country submitted requests for more than $1.2 billion in the first competitions of the foundation, whose total grants budget is around $900 million. Similarly, innovative researchers and their partners submitted 72 proposals to the Phase 3 competition of the Networks of Centres of Excellence program, despite that only two or three new networks were being funded. This represents a vast amount of unused capacity, not just within the university sector but within the partner sectors as well.

More evidence can be found in the decreasing number of international linkages of Canadian researchers and the lack of Canadian participation in major international research initiatives. Financial restraint measures have virtually eliminated the international research linkages and Canadian researchers are increasingly perceived as "free-riders", with little more than good-will to offer their foreign counterparts. Since Canada accounts for the creation of only three percent of the world's knowledge production, our researchers must be connected to global networks of knowledge and know-how in order to harness the cutting-edge ideas the world has to offer, to build on them and to put them to work for the benefit of all Canadians.

The results of these funding shortfalls also show themselves in the difficulty Canadian universities and other research organizations are having in attracting and retaining world-class personnel. A very mobile segment of the population, these individuals will seek challenging and rewarding career opportunities first and foremost. Often, this means moving to the U.S., where the research infrastructure is not only leading-edge but also better resourced in terms of technical support personnel and operational assistance.

reduced by some $1 billion. These recent cuts translate into a 23 percent real loss of funding, equivalent to $1,500 on a per student basis. In fact, funding has dropped from an average of $6,600 per student in 1993 to only $5,100 now.

Again, this situation is especially acute when compared with the funding of the higher education system in the U.S. Figure 3 shows that Canadian universities have fared extremely poorly when compared to their American counterparts.

The current financial state of Canadian universities is untenable. They face ever-increasing demands with declining funds. It is no wonder that they experience difficulty attracting and retaining researchers of international calibre who are lured by the greener pastures of the better-funded, better-equipped U.S. universities.

To promote economic growth and the well-being of Canadians, we must look beyond the customary approach to innovation that focuses solely on technology-based innovation.