Neil Desai and Graeme Moffat are executives with Canadian technology scale-ups and Fellows at the Munk School of Global Affairs and Public Policy at the University of Toronto.
There has been a steady drumbeat of headlines praising Canada’s innovation economy of late, including our academic contributions in the area of artificial intelligence, federal “superclusters” that will foster collaboration between large multinationals, local startups and postsecondary institutions, and strategies to increase access to venture capital.
If you look past the feel-good headlines, the analysis of Canada’s innovation activities is misguided at its best. It lacks the precise goal orientation necessary to deliver meaningful and sustainable economic growth relative to the significant public expenditures aimed at transforming our economy. At its worst, the current discourse entrenches a stranglehold on Canada’s innovation inputs by universities, regional innovation centres and foreign tech giants.
A case in point is a recent Globe and Mail article titled, “Cutting out the middle-man not always best for startups." It suggests that Canadian startups should partner with other companies and act as a “middle man” rather than trying to reinvent the wheel. The piece cites Jay Shah, the head of the University of Waterloo tech accelerator Velocity, who infers that taking on incumbents is difficult and likely to make a startup some enemies.
The reality in the knowledge-driven global economy is that the ownership of intellectual property (IP) is paramount and a precondition to commercialization. Those who generate, own and commercialize valuable ideas have the greatest ability to create wealth. The rest – those companies and countries without deep IP stocks – will fight over table scraps.
The business strategies that allowed U.S. tech companies such as Facebook, and Chinese champions such as Huawei, to become global giants resemble colonial economics: concerted efforts to own every valuable idea and extract rents on nearly insurmountable advantages. These include monopolies on information, talent, data flows and the sidelining of smaller competitors.
This new reality should not surprise Mr. Shah. His own early-stage company, BufferBox, which aimed to create efficiencies in parcel delivery, was acquired by Google along with a number of others taking on the same challenge. His company’s technology was eventually mothballed. Google likely didn’t think twice about the cost of acquiring the Canadian-created technology. Their goal wasn’t to grow Canadian jobs and prosperity, but to pre-empt competitors.
Acquisitions of early-stage Canadian tech companies are often heralded as great successes but these are false positives for our national economy. While some founders and their investors may pocket a few million dollars, this is the wrong metric by which to evaluate the benefits of publicly supported innovation. Canadian taxpayers spend billions annually on university research and development projects, the federal Industrial Research Assistance Program, Scientific Research and Experimental Development tax credits, and Canada’s technology hubs and accelerators (to name just a few of many programs).
Early acquisition and the expatriation of IP will too often result in the widespread economic benefits of Canadian public investment in innovation – job creation and tax revenue that commercialization creates – occurring elsewhere.
Under these circumstances, it is deeply troubling that those who speak loudest on behalf of our innovation ecosystem not only encourage the acquisition of early-stage Canadian companies and innovations before they grow to scale, but actively enable it.
For example, tens of millions of taxpayers’ dollars have flowed to state-backed Chinese technology giant Huawei from various public institutions all while that company engaged in a concerted effort to acquire and expatriate Canadian-generated IP, as revealed by a recent Globe and Mail investigation. At the same time, the head of MaRS, a Toronto technology hub that houses the Canadian offices of several foreign tech giants, proclaimed that “Toronto’s tech ecosystem needs to continue attracting global firms such as Samsung and Uber” as if it’s a certainty that Canadian prosperity will follow from their presence.
The growing presence of foreign multinationals has devastating effects on scaling Canadian tech companies. Our companies already face higher hurdles in accessing capital. Now they are facing an increasing talent crunch. Ultimately, the increased presence of foreign giants in our own backyard restricts their ability to grow to a scale that sustains meaningful technical and non-technical job and wage growth for Canadians. Under this reality, early acquisition seems to be the preferred business strategy for Canadian tech entrepreneurs. This will have long-term consequences to our national prosperity and maintaining our standard of living.
Our leaders in this realm need to provide a focused mission orientation for our innovation inputs: Canada needs globally competitive, IP-intensive companies that are structured to succeed in the long-term by commercializing their innovations in a way that benefits Canadians in the form of high-paying jobs and economic growth that sustain the future tax base required to maintain our standard of living.
Every day we spend on the current trajectory is another day spent risking Canada’s future prosperity. There will be no reprieve if we miss the podium in this regard. No sector of the economy is safe from disruption. Few business models are safe from domination by global giants. If Canadians aren’t the winners in any industries at scale, our collective standard of living will erode. The billions of dollars we spend every year in the name of innovation will win us nothing more than a participation ribbon.