PROMOTING INNOVATION & COMMERCIALIZATION IN RURAL BC FINAL REPORT MARCH 2003 Ference Weicker & Company Management Consultants Ference Weicker & Company EXECUTIVE SUMMARY INTRODUCTION & OVERVIEW It is widely recognized within the Government of Canada and the Government of BC that innovation has become the major driving force in economic growth and social development. The Government of Canada explicitly recognizes the importance of innovation in its new Innovation Strategy, which notes that knowledge is now the main source of competitive advantage. Further, the Government B with input from public sector partners, community economic development organizations, regional science councils and industry B has acknowledged the importance of innovation in rural BC, its links to science & technology development/application and the essential role it plays in the economic health and success of the province. In order to succeed, all parties recognize a need to know the current status of science & technology applications province-wide, what strengths and weaknesses exist in the regions and where future support should be directed to most effectively enhance innovative applications in rural BC. The results of this partnered input manifest themselves in this study B APromoting Innovation & Commercialization in Rural BC@ (PIC). It provides the empirical evidence, input and ground-level guidance regarding what actions and resources are required in rural BC to enhance a culture of science & technology application in all regions. Through this study B and the resulting actions to be taken B a more diversified, sustainable community economic infrastructure will grow. Rural British Columbia has unique strengths, skill sets, resources and geography that can be directed towards economic advantage in the global marketplace. This study functions both as a Asnapshot@ of rural BC=s current state and as a Aroadmap@ towards improved regional science & technology resources, applications and competitiveness. As outlined in the following pages B and detailed in the attached report B eight strategic recommendations have been identified as priorities to improve innovation and science & technology commercialization in rural BC. Strategic Recommendations: 1. 2. 3. 4. 5. 6. 7. Strengthen the capabilities of communities and regions in planning, developing, and implementing strategies and actions to improve innovation performance, including enhanced support for rural agencies such as regional innovation councils, Community Futures Development Corporations, technology centers and related resources; Enhance the research infrastructure serving the regions, through institutions such as the University of Northern BC and the University Colleges in rural BC; Develop and retain a highly skilled work force to support innovation, with significant efforts aimed towards the North and First Nations communities; Increase access to financing, particularly at the early stages of business development by the creative application of venture capital and debt financing options such as the provincial government=s Equity Capital Program and Western Diversifications=s loan loss reserve initiative; Assist in the development of and access to markets for regional innovation companies through the development of needed skills sets (i.e. eBusiness and exporting) and linkage to relevant contacts and resources; Foster an innovation culture through awareness, awards programs such as AScientists in Schools@ and recruitment strategies involving the key stakeholders (i.e. industry, labour, education/research institutions and government); Improve the business environment for innovation through sharing Abest practices@ related to management, high tech business start-up support and entrepreneurial training; and Promoting Innovation and Commercialization in Rural BC Page i Ference Weicker & Company 8. Promote the development of new rural clusters where promise is shown and act as a catalyst to the enhancement of existing clusters such as wood products, energy and information technology in all regions. With the input provided to this initiative by all parties B public sector, private sector, academia and rural industry B a Plan of Action can be developed towards a more innovative, competitive rural BC where science & technology commercialization and application plays a key role in every region. THE IMPORTANCE OF PROMOTING REGIONAL INNOVATION The Government of Canada=s Innovation Strategy provides leadership and will help to chart the future directions of the innovation support system, which consists of research institutes and organizations, sources of funding for R&D, technology transfer organizations and facilitators, education and training organizations, sources of business capital, and other sources of assistance. To date, the members of the innovation support system in Canada have tended to focus their efforts and programs on the major population centres. However, the Innovation Strategy stresses that AInnovation should not be viewed as exclusively based in large urban centres@. In fact, encouraging innovation in the regional areas can be a critical driver of economic growth across Canada. The potential benefits of improving rural innovation performance are particularly significant in British Columbia, given that: # The regions located outside of Greater Vancouver and Victoria are the primary economic engine of the Province of British Columbia. Home to about 41% of the province=s population, the regions account for over 50% of manufacturing shipments and produce a much higher per capita income from exports than do the urban areas. # There are tremendous opportunities in the regions to expand economic activity in a wide range of existing and emerging economic clusters. The extent to which we are able to realize these opportunities will, in large part, be determined by our ability to improve productivity, add value and differentiate our products and services through innovation. PURPOSE AND METHOD OF STUDY Prior to this study, there was relatively little information available about the characteristics of regional innovation in British Columbia. The objectives of this study, therefore, were to review innovation activity occurring in the regions, assess the infrastructure and systems that have been established to support regional innovation, and identify potential actions that could be taken to improve innovation performance. Given these objectives, it was important to obtain input from a broad cross-section of representatives from government, industry, academia and other stakeholders in the regional innovation support system. Towards this end, an extensive research and consultation program was implemented which included: # A detailed literature review and Internet search that enabled the field research to build on the existing work that has been undertaken. # Detailed interviews with 263 regional businesses that have been identified as utilizing or in need of technological information for the purposes of technology transfer, technology application, product development or product commercialization. Promoting Innovation and Commercialization in Rural BC Page ii Ference Weicker & Company # Detailed interviews with 50 representatives of organizations that comprise the science and technology (S&T) infrastructure in rural BC. # Detailed interviews with 50 representatives involved in community economic development (CED) in rural BC not normally considered S&T agencies such as Community Futures Development Corporations, economic development offices, Chambers of Commerce, First Nation's organizations, and the Business Development Bank. # Focus groups in 10 regional centres with 86 individuals including industry representatives, local representatives of the S&T support system, representatives who may play a role in implementing strategies to address key issues, and others who offered outside objective opinions. The study also benefited from the direction of an active Advisory Committee that included representatives from Federal, Provincial and Local Governments, academia, research institutions, and industry. THE IMPORTANCE OF PROMOTING CLUSTER DEVELOPMENT IN RURAL BC The underlying objective for improving innovation performance is to facilitate the further development of industrial clusters involving the regions. The ability to innovate and to commercialize new products, services, and processes across many sectors has been important and will become even more critical to the future economic prosperity of the regions. As an illustration, the agriculture industry in rural BC has been able to remain competitive, while the real price of agricultural products has dropped, only because of the development and implementation of new technologies. As one report noted, "Agriculture today is as much on the cutting edge of technology as engineering or computer science." Improving innovation performance will benefit a range of existing and emerging clusters which are resident in rural BC. Examples of clusters, which are already significant contributors to the economy of regional British Columbia, that will benefit from a strengthened innovation support system include: # # # # # The wood products cluster, which is concentrated in central and northern BC; The food and beverage cluster, including the wine industry, which is concentrated in the Okanagan; The energy and mining cluster, which is based largely in the northeast; The transportation and logistics cluster, which is concentrated in the central interior; and The information technology cluster which has a strong presence in the southern interior and on Vancouver Island. With these existing clusters in mind, proper support can act as a catalyst to immediate, positive economic benefits. There are also a variety of emerging clusters in the regions of BC, which represent significant opportunities for further growth and development. Examples of emerging clusters include: # # # # # # Value-added wood manufacturing in the Fraser Valley and central and northern BC; Agriculture biotechnology/life sciences in the Okanagan; The aquaculture cluster located along the coast and on Vancouver Island; Alternative sources of energy, driven in part by the impacts of the Kyoto Accord; Off-shore oil and gas exploration, which is dependent on the moratorium being lifted; Film and video production in a number of regions, including Vancouver Island and northern BC; Promoting Innovation and Commercialization in Rural BC Page iii Ference Weicker & Company # # # Advanced manufacturing and advanced materials in the southern Interior; Oceans technology including remote sensing and GIS on Vancouver Island and the north coast as well as environmental management; and The new media component of the IT cluster. With these emerging sectors in mind, directed support can lead to long term benefits through the development of viable clusters province-wide. AN OVERVIEW OF THE REGIONAL INNOVATION SYSTEM The major findings of our review of the regional innovation system are as follows: 1. The basic foundation of a rural innovation system has been established in BC. Key elements of the regional innovation support system include research institutes and organizations, sources of funding for R&D, technology transfer organizations and facilitators, education and training organizations, sources of business capital, and other sources of business assistance as outlined below. OVERVIEW OF THE INNOVATION SYSTEM IN REGIONAL BRITISH COLUMBIA Component Summary Research Institutes and Organizations There are 15 S&T related research facilities located in the regions, the largest of which are the Pacific Biological Research Station and the Summerland Research Station. Sources of Funding for R&D IRAP is the only significant source of funding that has a permanent physical presence in the regions. Other leading sources of funding include NSERC, CFI, Revenue Canada SRED, Provincial SRED and ASI. About 2% of BC NSERC and CFI funding has been awarded to the regions as compared to about 18% of IRAP funding and 19% of ASI funding. Approximately 1,400 companies in BC claim SRED annually, of which 10% to 15% are believed to be based in the regions. Technology Transfer Organizations and Facilitators These organizations, which can assist in the development, transfer, adoption and/or application of new technologies, include 7 regional technology councils, 4 technology access centres, a university industry liaison office, and the network of Industrial Technology Advisors which includes 8 who are based in the regions. The seven councils and four technology access centres have come together to form the BC Regional Science & Technology Network (BCRSTN) Education and Training In rural BC, there are 4 university-colleges, 6 colleges, 1 institute, and 1 university. In 2000/01, the University of Northern BC awarded 254 degrees related to science and technology (about 5% of the provincial total). In addition, there are over 4,500 full-time equivalent students enrolled in science and technology related programs at the regional colleges and university-colleges (about 35% of the provincial total). Sources of Business Capital The 34 CFDCs made loans into rural BC totalling almost $140 million over the past five years. Other leading sources of funding have included BDC (which has 9 regional offices), WD Loan Investment Fund Programs, Promoting Innovation and Commercialization in Rural BC Page iv Ference Weicker & Company Component Summary chartered banks and credit unions. Other Support for Commercialization 2. Examples of organizations which provide information, advice, and other forms of support to assist in the commercialization of new products, processes and technologies include the 34 CFDCs, 38 economic development commissions, the Canada-BC Business Services Society (which has established 75 Community Partnerships), business incubators in a variety of communities, and the members of WestLink. Innovation is occurring in the regions but at levels lower than in the major urban centres. Regional industry is actively involved in developing products, technologies and/or production processes. Of the companies surveyed, 63% developed new or significantly new products, processes or technologies and 55% reported R&D expenditures over the past three years. Most of the companies indicated that those innovations have been extremely important to the success of their business. However, the survey results also indicate that most innovation activity in the regions is not based on major scientific breakthroughs but rather is focussed on small, incremental improvements to existing products, processes and technologies or the adoption of technologies and processes developed elsewhere. 3. There are challenges to building on the initial foundation to establish an innovation system that will enable the existing and emerging regional clusters to realize their potential for development. The report identifies a wide range of gaps and areas where the regional innovation system needs to be strengthened. The most visible gaps and opportunities for improvement include: # Too little research is being conducted by institutions based in the regions and not enough of that research reflects regional priorities. There is a strong correlation between innovation performance and the research infrastructure. Only 15 of the 103 S&T related research facilities in BC are located in the regions and most have very limited research budgets. Only about 2% of BC NSERC and CFI funding has been awarded to the regions. # The regions are not producing enough graduates from S&T diploma programs. Although enrollment in regionally-based S&T related degree programs is increasing, 95% of the university S&T graduates and 65% of the college S&T students are still educated in the Lower Mainland and Victoria. Where students are educated has a profound impact on where they eventually choose to work. For example, a recent survey found that 73% of UNBC graduates from 1996 stayed in northern BC and another 5% were living in the southern interior. In contrast, a 2001 University Presidents= Council of British Columbia survey of recent graduates from all BC universities found that, of the 88% of grads who remained in BC, only 5% were living in northern BC and 7% were living in the southern interior as compared to 61% and 15% who were living in the Lower Mainland or on Vancouver Island respectively. # Gaps remain in the telecommunications infrastructure. The Internet has the potential to greatly increase the accessibility of regional businesses to programs, services, and expertise. However, access to high-speed Internet services varies significantly across the province. Promoting Innovation and Commercialization in Rural BC Page v Ference Weicker & 4. Company # Stronger linkages need to be developed between the various components of the innovation support system at both the community and regional level. A variety of actions will be required to strengthen community capacity and improve the level of coordination am amongst various elements of the system. # Access to patient capital is much more limited in the regions. For example, only 3 of the 263 companies surveyed reported receiving a new venture capital investment in the past three years. The primary sources of equity capital have been investments by shareholders/owners and by other private investors (including love money). A major constraint is that many of the companies are simply not sufficiently investor ready to attract investment capital. In taking steps to strengthen the innovation support system, it is important to recognize that characteristics of regional businesses provide additional challenges to those typically faced by businesses in the major urban areas. Regional business tend to be: # Smaller in size. Competing demands for staff time is a major constraint to innovation. # Geographically dispersed, which increases the difficulty of physically accessing resources both within and external to the region. Geographic proximity is an important factor relating to the speed of adoption of new technologies in that the farther a region is away from the source, the longer the transfer period. # Less aware of the resources that are available; # Less developed in terms of their technical capabilities and less experienced in the development of new products, processes and technologies. In particular, companies in traditional industries, which typify the regional economies, are less likely to have established cultures, climates and systems that support innovation; and # More limited in terms of their access to, and use of, the Internet. These additional challenges impact on the ability of regional companies to develop strategic relationships with universities, colleges, research institutions, and programs (particularly those based outside the region) and to access technical expertise, resources and equipment. One implication of this is that 85% of the R&D undertaken by regional companies is conducted in-house. Only 17% of companies currently identify universities or colleges as an important source of information in the development of their products, technologies or processes and only 3% report entering into R&D contracts with a university or college. The limited opportunities for interaction between members of the R&D infrastructure and regional businesses is also a contributing factor as to why the focus of institutional research may not be consistent with regional needs and priorities. Research undertaken internationally is often more relevant to local businesses than research undertaken within the province. Promoting Innovation and Commercialization in Rural BC Page vi Ference Weicker & Company STRATEGIC DIRECTIONS AND RECOMMENDATIONS The study found strong support for placing a high priority on improving regional innovation performance as a means to promote further development of these clusters. As an illustration, 94% of the CED and S&T representatives surveyed indicated that there are significant opportunities to use science, technology and innovation to promote regional economic development in BC. It is widely recognized that improving regional innovation performance is the key to reinvigorating traditional economic clusters and supporting further development of emerging economic clusters. Improved innovation performance will enable regional communities to transform from resource-based economies to more knowledge-based economies, which will benefit the entire province. For this to occur, the Government of Canada, the Government of BC, and other members of the innovation support system will need to focus greater attention on enhancing innovation performance in the regions. Given that a variety of factors are working to constrain innovation activities in the regions, a range of actions will be required to address these constraints and numerous organizations will need to be involved in their implementation. The report details eight major strategic recommendations for improving the environment for innovation. In each strategic recommendation, a series of specific target outcomes and actions have been defined to provide a basis for prioritizing future activities and monitoring the progress made in improving innovation performance in rural BC. The eight strategic recommendations and specific actions are listed below. Promoting Innovation and Commercialization in Rural BC Page vii