Wealth through Technological Entrepreneurship
AND ENGINEERING IN CANADA
Background Report - September 1997
This report is about technological entrepreneurship, that is, new enterprise formation based on innovative technology in response to clearly identified market needs. The report deals, in a practical and informative way, with a number of issues relating to this activity which is so crucial to the creation of new wealth and new jobs.
The report strives to stimulate interest in emerging technological and commercial opportunities and to encourage professional engineers and other entrepreneurs to innovate. Technological entrepreneurship is needed to make full use of the knowledge of science and technology currently available and to meet market needs, thereby making Canada more productive and more competitive internationally.
For several decades, Canadians have enjoyed economic prosperity, a high standard of living and a quality of life envied by many nations. There is now a growing perception that these benefits are diminishing as competition in markets at home and abroad becomes more severe.
Further, in order to control their deficits, governments have been forced to cut many programs and improve productivity in their administration and delivery of services. In order to stay alive, many businesses have had to increase productivity. In so doing, they had to cut jobs while others had to penetrate new markets. Budgetary constraints are also seriously hampering universities in their teaching and research.
Re-engineering of our institutions and the turnaround in the economy make it essential to excel in industrial and academic activities. As part of this collective effort, professional engineers must assume a greater role in redressing Canada's socio-economic situation and become more actively involved in the process of industrial innovation and technology transfer in all regions of the country. This calls for technological entrepreneurship in the design, development, production and commercialization of innovative new products and processes, and in consulting engineering services as well. The challenge is to increase the frequency and pace of innovation in all sectors.
Technological entrepreneurship holds special significance for engineers, not only because of their education and training, but also their work experience. Professional engineers are well positioned to play a critical role in the innovation process, which is now the key to increased competitiveness in the rapidly evolving global economy.
Canada's gains in international competitiveness and incomes can only be achieved by productivity growth, by:
developing new technology more efficiently and making full use of technology transfers.
being more innovative in management, marketing and finance.
being more innovative in technology, shortening the innovation cycle and, especially, nurturing technological entrepreneurship.
continuously improving labour skills and promoting lifelong learning.
increasing financial government incentives to encourage industry to be more innovative and to develop new technology.
governments becoming leaner, more efficient and eliminating the current deficit.
According to the OECD, Canada is afflicted with a serious innovation gap. In our opinion, this gap is rooted in a number of major deficiencies compared to other major industrialized countries, including:
a lower overall rate of adoption of high technology vs. low technology in the production of goods and services, especially in the area of new information technologies.
a lower level of high-and medium-technology goods and services exports.
an annual deficit of about $20 billion in our international balance of payments for high-and medium-technology manufactured goods.
small-and medium-sized enterprises (SMEs) which are understaffed in terms of professional engineers and technologists compared to their counterparts in other advanced economies.
a proportionately much smaller number of engineers compared to other advanced countries, but proportionately more scientists.
a lower national effort in R&D, viz. 1.5% of GDP vs. 2.5-3.0% in the advanced economies.
a lower share of R&D financed by industry, viz. 0.6% of GDP vs. an average of 1.6% in the advanced economies.
a smaller number of researchers per capita, viz. 4.7 per 1,000 of the labour force vs. an average of 6.3 in the advanced economies.
a smaller number of inventions, viz. 0.3 patents per 10,000 of the population vs. an average of 3.1 in the advanced economies.
fewer entrepreneurship education programs at the university, college and secondary school levels compared to the United States.
a financial community less prone to investing in technological innovation compared to the United States.
a venture capital industry much less deployed than in the United States, particularly for early-stage ventures.
a lack of knowledge of the global environment.
too small a number of global alliances by Canadian industry.
Canada is one of the world's leading trading nations, but it produces less than 3% of the OECD countries' total output of R&D and new knowledge. Its share of technology-intensive world exports is also about 3% vs. 21% for the United States, 19% for Japan, 16% for Germany, and 17% for France and the United Kingdom combined. Likewise, its annual investment in information technology software and hardware is only 3.0% of the OECD total.
A Call to Arms
The above picture may surprise and even shock many people. Canada's competitive position is far from rosy. The first corrective task is to take a hard look at this situation and come up with an action plan. This is what the Academy is trying to achieve. However, government must also take bold action. At the end of Chapter 8 we argue that a $1 billion program is necessary to help small firms to take up, entrepreneurially, the full industrial innovation and technology transfer challenge.
In its report, Connecting with the World - Priorities for Canadian Internationalism in the 21st Century, released in November, 1996, the Task Force headed by Maurice F. Strong emphasized in different words what the Academy is stressing in this report:
«Change in today's world is marked by uncertainty and speed; Canadians are unavoidably part of that change. The globalization of industry, finance, markets, the environment, and information and communication technologies is almost certainly the most transformative global force since the inception of the industrial revolution some two centuries ago. Change will mean dislocations but, if properly planned on a sustained basis, it will also mean very real opportunities for Canadians.»
A Matter of Priorities
To achieve a major shift in goals and attitudes, we must not only rethink our priorities, but we really need to establish a more inventive, innovative and entrepreneurial culture in Canada. Several countries have achieved strong positions in the New Economy, and we can look to them for examples to encourage us. But only Canadians can design and establish the processes that will work best for Canadians. We have been complacent while the rest of the world has closed in on us. Our lifestyle is threatened because we spend more than we truly earn. The shortfall is immediately visible in our country's huge annual deficit in its international balance of payments for high-and medium-technology trade.
Canada has long benefited from its vast wealth in natural resources. This should continue and every attempt must be made to maintain that privileged position. This calls for sustained infusions of vision, talent, skills, experience, capital, and especially investment in, and effective use of, new technologies.
Engineers in the New Economy
In the New Economy, the world is functioning around global networks of capital, technology, management and information, where ready access to technological know-how is at the root of productivity and competitiveness. Knowledge-based industries are now the principal creators of new jobs and new wealth.
In the new context, industrial innovation and technological entrepreneurship are very important factors of progress. In this regard, professional engineers are especially well placed to help Canada overcome its "innovation gap", raise productivity and improve competitiveness in world markets.
As this report shows, engineering is really an entrepreneurial profession. Also, it can make a major contribution to the improvement of the industrial innovation process and to bringing new goods and services to the market faster while increasing Canada's competitiveness in science and technology.
Indeed, professional engineers constitute an important segment of the population: there are more than 160,000 registered professional engineers in Canada, working in all sectors of economic activity: manufacturing (21%), consulting (17%), services (16%), resources (14%), government (13%), academia (12%) and construction (7%). Most of them occupy technical functions, with about 20% involved in business management in one form or another.
Canada's industrial innovation potential is further reflected in the 49,000 young people currently studying engineering in the 33 faculties of engineering in various parts of the country, 9,000 of whom are engaged in graduate studies and research.
Technological Entrepreneurship Education
The point is made in this report that technical entrepreneurs are not necessarily born that way. In fact, most of them become so as a result of going through the "school of hard knocks" when developing inventions and innovations. Technical entrepreneurs are a special breed, exhibiting several inborn qualities, like creativity and leadership, and many learned skills, including problem-solving abilities, technological competence and managerial skills. Because of their training and practical experience in technology, many of them are engineers or technologists.
The report emphasizes the strong need for technical entrepreneurship education, in both the engineering schools and the business schools. To achieve the most momentum and impact, the faculty of engineering and the faculty of management in the larger universities must collaborate and take the initiative to develop a joint entrepreneurship education program at both the undergraduate and the graduate levels. They could also establish an entrepreneurship centre on campus for the benefit of students who may be interested in an entrepreneurial career, including those in pure science.
These initiatives would be a necessary complement to the efforts of universities to increase their contribution to the development of science and technology. Entrepreneurship education would also help improve the quality of training by making students more aware of industry and market needs, and encourage them to develop new skills and expertise.
The Importance of Innovative Firms
The need for innovative firms is paramount. They are the main source of new wealth and job creation. As early as 1939, Schumpeter had recognized the importance of entrepreneurial innovation «...when and where new technologies and scientific developments yield economic opportunities that are seized by enterprising entrepreneurs; small dynamic fast-growing firms emerge and become the primary engine of innovation.» This insightful statement is even more true today.
As industries and markets mature, the surviving firms are larger, differentiation between competing products is less, and competition shifts to price. Then, innovation efforts become in good part directed away from products and towards cost-reducing process technology. Closely geared to market forces, innovation becomes "managed".
Large firms in the telecommunications and aeronautical fields have contributed in a major way to Canada's competitiveness in high-technology world markets because of their innovativeness and their deep involvement in the country's research and development (R&D) effort. In the other sectors, most of the large firms are producers of commodities which require less R&D to be competitive.
In this context, the entrepreneurial nature and high degree of innovative capability of a very large number of small firms constitute a critical factor of technological and socio-economic progress.
Our country is one of small enterprises (i.e. fewer than 100 employees) and medium-sized ones (i.e. 100-499 employees). In addition to 1.3 million self-employed, Canada had 922,182 employer businesses in 1993, but fewer than 4,000 of them had more than 500 employees. SMEs with fewer than 100 employees accounted for 99% of all businesses, contributed 50% of total private sector employment and 42% of total private sector GDP.
Furthermore, successful SMEs account for more than 85% of new job creation. They invest more in R&D, diffuse technology more rapidly and develop more products and services than other firms. They are remarkably entrepreneurial and produce more than half the country's industrial innovations. Unfortunately, SMEs currently account for only 10% of Canada's total exports.
Although the number of exporting SMEs has grown from 33,000 in 1986 to 73,000 in 1992, in good part due to the fast-growing services field, much remains to be done to facilitate the successful entry of Canadian innovative SMEs into world markets.
A recent study by Statistics Canada shows very clearly that exporting SMEs invest much more in R&D and are more creative and innovative than SMEs restricted to domestic sales.
Factors critical to the business success of a small firm are its R&D and innovation capability, its resulting ability to access markets and its technological ability. Government assistance, marketing ability, access to and cost of capital, management skills and employee skills are also important, but less so than its innovative capabilities.
The Financing of Innovation
Another critical issue addressed in this report is the financing of innovation. The difficulties that most technical entrepreneurs face in accessing seed and start-up capital have been a major impediment to Canada becoming a significant world player in high-technology trade. For most of them the financing of innovation is an arduous, complex, lengthy, overly demanding and costly process.
These difficulties are rooted in the particular culture and posture of the financial sector, the structure of the Canadian economy, the tax system and other government policies, the fact that too few wealthy individuals are willing to be money "angels" to emerging entrepreneurs, and the inherent difficulties financiers have in appraising intangible assets, like intellectual property.
These problems are exacerbated by the fact that the success or failure of a new technological venture is often related to how, when and under what terms technical entrepreneurs obtain their first financing.
The good news is the remarkable increase in the availability of venture capital in Canada in recent years. In 1996, more than $1 billion were invested in some 525 companies, about one-third in computer-related or biotechnology firms. This does not include the money provided by money angels who play a critical role in start-up financing.
Factors of Success and Failure of New Technological Ventures
Experience with new technological ventures shows that success is generally associated with the following factors:
- a skillful, competent, visionary and innovative technical entrepreneur who is a real leader
- an experienced and cohesive management team
- an adequate financial infrastructure and access to start-up capital
- an important opportunity in a large or growing market
- a clearly superior new product or process appreciated as such by the customer
- a solid new technology and an internal or readily accessible core competency to exploit it
- an astute marketing and technological strategy
- a conducive environment, primarily government policies and a tax climate encouraging industrial innovation and technological venturing
The most frequent causes of failure are:
- insufficient start-up capital
- the attitudes of the founder
- an inefficient management team
- lack of focus and insufficient effort on marketing, technical and operating factors and deficient interrelationships amongst them
- deficient technology
An important facet of technological venturing is the creation of new enterprises through spin-offs. This phenomenon occurs when an organization, either a producer or a consumer of technological innovations, serves - willingly or unconsciously - as an incubator of entrepreneurs-to-be. People leave the organization because they are frustrated with the manner in which they feel constrained, be it a lack of vision on the part of management, a mismatch in objectives or policies or a lack of interest in pursuing different technological and business avenues.
The engineers who create spin-offs are generally highly qualified technically but often inadequately prepared in the key areas of experimental development, personnel management, marketing and finance. Invention or design can be solitary but innovation never is. These technical people stand to benefit greatly from associating themselves with a cohesive management team having the complementary expertise. Successful spin-off teams are generally experienced, technically and managerially, knowledgeable about their markets, and respected by their required network of potential customers, suppliers and financiers.
University spin-outs are new business ventures arising from scientific or technological advances made in a university, for example in biotechnology or computer software. These ventures share many of the characteristics, and shortcomings, of industrial spin-offs.
For both spin-offs and spin-outs, models of successful entrepreneurs which are valued by their communities are powerful motivators for would-be entrepreneurs.
Also, these new enterprises form and flourish in regions where fairly large technology-intensive companies exist in sufficient number to generate attractive market opportunities, yet leaving technological gaps which can be filled by new firms. Like other companies, spin-offs and spin-outs rely on a supportive infrastructure.
Another important facet of technological entrepreneurship is the world of new business possibilities offered by the new information and communications technologies (NICT) and by the Internet in particular. Indeed, the remarkable convergence of computer technology, telecommunications and microelectronics is leading to entirely new ways of doing things, from virtual reality and new design methods, through global networking, to paperless transactions and electronic commerce.
Netpreneurship offers attractive possibilities to entrepreneurially-minded engineers and computer scientists and technologists. Not only can they benefit by making full use of the Internet to do business, but they can also develop the hardware and software for the present Information Age and its global ramifications and transactions.
The challenge now is to refocus our creative talents and energy on developing high value-added products and services and make full use of the country's considerable human resources in engineering and related fields.
Canadian Innovation System
Canada is endowed with a good innovation environment and a well developed R&D and education infrastructure. However, compared to other G-7 countries, it takes too long for new technology to diffuse through the system. Also, Canadian industry is far from investing in R&D to the same extent as its counterparts in other advanced countries, which is hampering our national ability to innovate. Furthermore, too many federal government research laboratories have not worked closely enough with industry to provide the critical mass needed.
All this serves to show that in order to maintain its high rank amongst industrialized countries, Canada must develop a greater ability to innovate and compete more effectively in world markets for value-added goods and services. Clearly, this calls for much more technological entrepreneurship. This will necessarily include a greater use of new information and communications technologies and "netpreneurship".
The Academy believes that Canadian professional engineers must recognize and accept the challenges of change and provide leadership to achieve success in the New Economy. There is a great deal in Canada that is exceptionally good, including excellent science and technology, a growing entrepreneurial attitude and a «positive conspiracy» which is starting to produce results. The engineering profession through its many stakeholders and the Academy in particular must help in filling our country's «innovation gap».
Wealth through Technological Entrepreneurship