HAL2

Provides a concise but comprehensive description of how impacts in the economy are derived from government support of technology development by companies.

HAL has developed a reputation for thorough economic and social analysis. The focus of many federal S&T programs, and the rationale for continued federal support, has shifted towards clearly serving the needs of stakeholders and demonstrating benefits. We have used our technology assessment methodology in support of federal and provincial departments and agencies interested in determining these benefits. The methodology has been shown to be a useful tool in providing structure and consistency to our quantitative and qualitative assessments.

Framework Overview

A concise but comprehensive description of how impacts in the economy are derived from technological activity is essential to provide a common understanding of the roles of the different participants. The HAL Technology Assessment Framework shown below provides this description. It has been used to:

• Explain the factors and considerations influencing the translation of technology into economic impacts;
• Guide preparation of the questions for studies to insure that key information is collected; and
• Present results from studies in a common format for analysis.

The HAL Technology Assessment Framework has five main parts. Central to the framework is the Study Company that undertakes contracted activities, technology development activities, and product development, production and marketing activities. The Study Company is influenced and assisted by the government through the procurement of goods and services, the activities of government laboratories, and government programs. The study company, in turn, influences the rest of Canadian industry by forming formal and informal alliances with other companies, and by unintentional diffusion of skills and knowledge to other companies. The Study Company also affects the Canadian users of its goods and services by providing quality and productivity improvements in their activities. In the end, the activities of the study companies, Canadian government, Canadian Industry, and Canadian Users result in impacts on the Canadian economy in the form of infrastructure improvements, wealth creation, and the public good.

Each of the five parts of the HAL Technology Assessment Framework is described in more detail in the following sections. Finally, considerations that influence application of the Framework are discussed in the last section.

The HAL Technology Assessment Framework

Government

Government can influence and assist companies through the procurement of goods and services, the availability of government laboratory services, and provision of various government programs.

Procurement

Government procurement of goods and services is an important driver of industry in many sectors. Because of the strategic importance attributed by many nations to their high technology industries, most countries favour procurement from domestic suppliers and impose barriers to entry by foreign suppliers.

Canada is not as protective of domestic suppliers as many countries when procuring high technology products, but regional industrial benefits have been stressed in many large projects.

Laboratories

Government laboratories can assist industry by performing a variety of activities:

• Research and development are the traditional activities usually associated with a laboratory. However, R&D is not limited to technology development; R&D is also necessary for Product Development and Application Development.
• Education and training are the activities that spread the results of R&D to the audiences which can use them in productive ways.
• Facilities and personnel can be provided in national laboratories for use under contract. Often, individual organizations cannot justify the investment necessary to obtain expensive or scarce expertise and equipment. By providing a central source in a public sector laboratory, these resources can be shared to the mutual benefit of all parties.

Programs

Government can help industry develop and adopt new competitive technologies in a number of ways:

• Money: Government can provide financial support for R&D, for demonstrations, for export-related marketing, for training, etc.
• Strategic direction: Government can play a leadership role by pointing the direction for new strategic technologies.
• Guidance and support: Government can help firms by providing information such as how to start up a new business, what the market and economic conditions are in certain areas, where to seek strategic alliances.
• Standards and regulations: Government can set standards and regulations which help to protect consumers and decrease their risk aversion, reduce the cost of combining technologies or products, and increase marketability.
• Fiscal policy: Governments can provide incentives for innovation by methods such as R&D tax credits.
• Encourage technology diffusion: Government can encourage technology diffusion by removing barriers to inter-firm cooperation.

In the early stages of the development cycle, government assistance often plays a major role. The rationale for this assistance is twofold:

• The private sector typically under-invests in research and development because the benefits which accrue to this kind of activity cannot be adequately captured by the firm (improved understanding cannot be readily marketed or patented). Also, the level of risk and uncertainty about activity costs and likely outcomes is such that one firm often cannot afford to undertake the activity.
• Barriers to the successful market development of a major new product or system may exist when reliability, performance and cost are not well enough known or not yet demonstrated. Government assistance or involvement in demonstration projects can effectively address these barriers to the benefit of all firms in the industry and the market segments involved.

The justification for government assistance or intervention is that the increased (or accelerated) social benefit that accrues because of the government intervention would exceed the social costs.

In the later stages of the development cycle, government assistance often involves more general enterprise development. The reason for government intervention here is generally industrial development, regional development, employment generation, etc. that are consistent with government and social priorities and objectives.

Study Company

Contracted Activities

Contracted activity can be of two types: funded R&D, and deliverables. Funded R&D supports the deliverable portion of the contract, but can also produce spinoffs into other technology development in the company. Deliverable activity is the production of a good or service. Such activity can generate spin-offs into other company products.

Spin-off activity is undertaken without support from the contracting agency (government) but is a result of the contracted activity. Spin-off activity, by definition, occurs only within the organizations directly involved in the contracted activities. All other induced activity is defined to be as a result of diffusion.

Spin-off activity results when the expertise and capabilities attained through the firms' involvement in the contracted activity are found to be useful in other applications. Possession of a skilled and experienced labour force, production facilities, technological and project management expertise, and so on, will make a significant contribution to the competitiveness of the company.

Factors that characterize the relationship between contracted activity and spin-offs include:

• The capability of firms that undertake the contracted activity to pursue spin-offs and innovations at the same time as performing the contracted activity; and
• A long list of product and market development factors (time lags due to certification, registration, patenting, etc., competition from foreign sources, market conditions, business conditions, etc.) even after the initiative has been taken and the technology has been transferred but before the product becomes a profitable venture.

Technology Development

Often as the result of contracted activities, but also because of other imperatives, companies develop and adapt new technologies. In his book on the economics of industrial innovation, Freeman (1974) proposes a classification of the technological strategies of firms:

• The offensive strategy involved high levels of R&D expenditures with the goal of bringing radical new products, processes or modes of organization to the market place and maintaining a leading position.
• The defensive strategy was that of firms with a somewhat lower level of R&D but the commitment to closely adopt the innovations of the industry leaders, eventually with some degree of product differentiation.
• The imitative strategy is that of the firms with a low level of R&D, following behind both the leaders and their close followers, but thriving on the particular country or firm specific advantage, such as labour costs, tariff or non-tariff protection, a good marketing network or geographical position.
• The dependent strategy is that of smaller firms with almost non-existent R&D, usually subordinate, subcontracting activities, such as component manufacturers.
• The traditional strategy involves no R&D, and is feasible in industries in which the technological frontier moves slowly, if at all, such as tobacco or some areas of food and beverage.
• The opportunist strategy is that of smaller firms finding niches left unoccupied by industry leaders and requiring different levels of in-house R&D.

This classification is a useful way to differentiate among study firms.

Product Development

New products result from contracted activities and technology development activities.

Canadian Industry

Alliances

The term alliance is used here to refer to any extended relationship (formal or informal) between the study company and a supplier, customer, or competitor. Subcontractors for contracted activities are considered allied companies. The purpose of the alliance could include technology development, product development, or marketing. Transfers from the case study company to the allied company could include people, technology, concepts, or market access. The degree of impact will depend on:

• The capability and desire of the allied company to investigate and evaluate new technologies;
• The degree of linkage between the study company and the allied company; and
• The number of firms involved.

Diffusion

Other companies, which do not have a relationship with the Study Company, can gain people, technology, or concepts through diffusion.

Diffused technology activity is stimulated by contracted activities, technology development, and product development.

Canadian Users

There are impacts in the Canadian economy resulting from the application of innovative technology by industrial performers. Benefits from the use and application of technologies in Canada, other than for the firms that produce and sell those technologies, are very difficult to estimate. The benefits that accrue are usually in the form of improved product quality or lower cost of production in the field of application. Such improvements improve the competitiveness of Canadian firms and result in economic development benefits. It is recognized, however, that many such new technologies would likely be available from outside of Canada. Therefore the incremental benefit comes mainly from the advanced timeliness of such developments for Canadian firms or from the application of technology in manners particularly suited to Canadian conditions.

Canadian Impacts

Economic returns from technology come from the commercialization and application of the technology rather than from its development. Economic activity resulting from a million dollars worth of development of technology is essentially the same as from a million dollars worth of road building (or any other activity). The development of technology creates greater returns from investment because of its commercialization and application potential. When assessing the potential payoff from technology development, it is these downstream benefits that must be identified and estimated.

Traditionally, impacts have been thought of in terms of direct wealth creation - stimulating the economy through the production and sale of tangible goods in the economy, usually by the private sector. In addition, we know that technology can enhance the social well-being of a country (the public good), and the infrastructure. Research into infrastructure improvement, such as faster communications systems or improved methods and codes, ultimately contribute to productivity, wealth creation and the public good.

Wealth Creation

Wealth creation comes from the production and sale of goods and services. Impacts include:

• Employment effects;
• Trade of goods and services;
• Productivity effects; and
• Exports and import substitution.

Infrastructure

In its broad context, infrastructure comprises:

• Physical structures including buildings, facilities, machines, equipment, experimental apparatus, instruments, communications, libraries, databases, computers, software and the operating systems and procedures specific to each structure;
• Institutional structures and systems including management systems, regulations, standards, codes, laws, dispute resolution mechanisms, etc.;
• Knowledge, information and technology;
• Human resources with experience and expertise; and
• Social and cultural values, codes, habits, rituals, heritage, expectations, etc.

Investment in infrastructure can be manifested in several ways:

• Direct investment to expand facilities or operations in Canada;
• Direct investment to start up a new operation or subsidiary in Canada;
• Investment in R&D, technology transfer or product development with commitments or guarantees as to the application of the results to benefit Canada; and
• Investment in the development of linkages or alliances among industrial partners, or between industrial and government (laboratory) partners, to yield new products and services for the future.

Infrastructure has the following attributes:

• Infrastructure is an asset that is created or built up over time.
• Infrastructure must be maintained regularly but also depreciates (or becomes obsolete) and must be upgraded or replaced over time.
• Infrastructure requires significant resources (and time) to be changed or modified since it is an asset (i.e. has significant built-up value).
• Infrastructure must be utilized to be productive - it does nothing by itself.

Infrastructure exists in both the public and private sectors.

Much infrastructure is location specific and needs to be interconnected or linked to produce benefits. Location of infrastructure is an important instrument of regional development policy.

Public Good

Public good impacts can include:

• Quality of life;
• Public safety;
• Public health;
• National security;
• Environment; and
• National pride.

Considerations

When analyzing the results of a program, the following considerations should be kept in mind.

Incrementality

The impacts and effects to be considered are those which are directly due to the government action under review. These impacts and effects are called incremental, which is defined as the difference between what did happen with the government action (such as procurement), and what would have happened if the action had not been taken. If nothing changes as a result of the action, impacts and effects are the same with and without the action, and incrementality would be zero.

Attribution

A concept related to incrementality is that of attribution. Even if the government action makes incremental differences in impacts, some fraction of the impacts may logically be attributable to other programs, funding sources, organizations or stimulants. Impacts and effects may have benefited from more than one government program or policy. Such incremental activities may give rise to impacts and effects that are not wholly (or fairly) attributable to the government action under consideration. In these cases, if the other programs or activities are to be credited with some of the impacts, these impacts must be attributed to the various contributing programs in some way. To the extent these other sources can be identified, they should share in the allocation of impacts and effects associated with the government action.

Time

Time frame plays an important role in the assessment of impacts. The major benefits attributable to R&D and technology transfer will accrue to society long after completion of particular government activities and over many years into the future.

This causes difficulties for identifying and measuring impacts and attributing them to the originating activity. These difficulties involve:

• The uncertainty as to whether the program-assisted development will actually be implemented commercially to take advantage of the potential benefits;
• The uncertainty as to whether the technology will perform after implementation as expected based on results from prototype or demonstration experience;
• The lack of knowledge on the unintended or unexpected effects of introducing new technologies or changing existing processes; and
• The uncertainty of the level of benefits and costs from any particular implementation of technology.