The dearth of venture capital is at the heart of Canada's innovation woes.
A new C.D. Howe study makes two important findings: venture capital is better at spurring innovation than direct investment in research-and-development, and Canada does too little of it.
Venture capital investment peaked at more than $5-billion in 2000 and has been falling steadily since, according the study by Tariq Fancy, released Wednesday.
Venture capital investments now make up less than 0.10 per cent of gross domestic product in Canada, compared to 0.20 per cent in the U.S.
The report comes as Ottawa is looking at how to spend $400-million it committed to venture capital in last year's budget .
"Canadian policymakers are correct to focus on venture capital as a critical component in promoting innovation, but they should focus less on the overall size of the VC market in Canada and more on promoting the right kinds of VC funding," argued Mr. Fancy, an entrepreneur and former member of the CPP Investnment Board.
"Not all VC is created equal."
The report looked at various types of venture capital in Canada and compared their relative success at promoting new patent filings.
The clear winner was private venture capital, which "promotes innovation considerably better than business R&D on a dollar-for-dollar basis," according to the study.
Less successful are bank-sponsored venture capital and government investment pools, such as the Business Development Bank of Canada. By far the worst performers are pools created by tax incentives, including labour-sponsored investment funds (LSIFs).
"If government money is to be spent, spend it wisely," Mr. Fancy concluded. "Doing nothing at all would be arguably better than subsidizing LSIFs."
Instead, government should promote private and institutional venture capital, or "failing that," put more money into arms-lengths agencies, such as the Business Development Bank of Canada or the Export Development Corporation.