Is Ottawa's 'supercluster' funding initiative a superboondoggle in the making?
The federal government's plan to improve productivity and innovation through the promotion of five regional economic groups is both ambitious and expensive. It may provide the spark the country needs – unless it proves to be a fat subsidy for global technology giants
On the morning of Feb. 15, federal Innovation Minister Navdeep Bains strode to the stage at the Canada Science and Technology Museum in Ottawa with his jacket off, sleeves rolled up. The room was full of CEOs and entrepreneurs, academics and reporters, all waiting to hear who was about to win the federal lottery.
Mr. Bains was there to announce the five groups chosen to share the spoils of one of his government's signature economic initiatives: the $950-million supercluster program.
First, though, he had some explaining to do. "This comes up time and time again: What is a supercluster?" he said.
"I know it's a jargony term," he acknowledged, before offering a quick explanation: "It's a made-in-Canada Silicon Valley that will create tens of thousands of jobs."
Throwing around phrases such as "made-in-Canada Silicon Valley" is bound to raise questions. So is calling any government economic plan "super" – particularly when Ottawa's strategy is simply to create what economists have called " clusters" since Harvard Business School professor Michael Porter coined the term almost 30 years ago to describe "geographic concentrations of interconnected companies and institutions in a particular field" that drive productivity, innovation and the creation of new business.
But the hyped-up name signals the program is the star of the government's plan to meaningfully boost Canada's innovative capacity by orchestrating a high-level reshaping of the economy.
Prime Minister Justin Trudeau has fashioned himself as a progressive champion of the 21st-century ideas economy built on the " resourcefulness" of Canadians. To accomplish that, his government has committed to fund venture capitalists, artificial-intelligence institutes, female entrepreneurs and clean-tech initiatives and has made it easier for startups to hire foreign talent and sell their wares to government. But it has given the supercluster plan more fanfare than most other initiatives.
But beyond the spin, what is a supercluster, anyway?
The Bains plan involves the creation of five groups, each comprising dozens of companies of various sizes and industries – including corporate giants and cutting-edge startups, learning institutions and business associations – and getting them to collaborate in ways they never have. The idea is that by smashing together and funding these eclectic groups – the superclusters consortiums have to match each public dollar with at least one of their own – the government can stimulate commercial development in high-potential areas.
A non-profit agency at the centre of each supercluster will co-ordinate all this activity, funding innovative and collaborative commercial projects proposed by its members. "We wanted to see more collaboration … more ambition. We wanted to see people talking about research and development, how they can improve economic growth, how the jobs can be created," Mr. Bains said in an interview.
He can claim some initial success. The application process drew more than a thousand Canadian firms and dozens of research institutions. They combined to submit 50 proposals last summer, cut to a short list of nine in the fall and to the five finalists announced at the museum event in February. As the list got smaller, the government prodded the also-rans to team up with contenders. "It was such an important catalyst in a relatively new exercise for Canadian industry to find ways to work together," said Bill Tam, a B.C. tech-sector lobbyist who spearheaded one of the bids.
The process made for some odd bedfellows. One of the winners was a Quebec-based initiative to improve supply chains using technology. Its members include convenience-store giant Alimentation Couche-Tard Inc., BCE Inc., shoe retailer Aldo and artificial-intelligence researchers. The B.C.-based Digital Technology supercluster proposal features a hodgepodge of 200 industry players – forestry giants, video-game developers, Telus Corp. and medical-equipment supplier Stemcell Technologies Inc.
An Ontario group aims to combine the capabilities of manufacturers in autos, steel, forest products and food with the big brains in the Toronto-Waterloo tech corridor to "spark a manufacturing renaissance in Canada." The Ocean supercluster in Atlantic Canada and the Protein Industries supercluster in the Prairies each see new markets to be tapped by combining traditional players in fisheries, oil drilling and agriculture with high-tech ideas.
Fronting the winning bids were prominent Canadian business figures such as Linamar Corp. chief executive Linda Hasenfratz, former Saskatchewan Telecommunications Holding Corp. CEO Ron Styles and Quebec power broker Hélène Desmarais. "If we can knit together the strengths across the province, then we've got a huge opportunity to do something pretty powerful," said Ms. Hasenfratz, chair of non-profit group Next Generation Manufacturing Canada (NGM), which led the winning Ontario bid.
But is the supercluster initiative a winning proposition for Canada – or a superboondoggle in the making?
Some of the winning applications are so addled with consultant-speak and audacious promises that they seem far-fetched and designed to please a government with interventionist leanings, more than anything. Ms. Hasenfratz's group told Ottawa in its application that it could create 170,000 jobs, increase Canada's gross domestic product by a cumulative $157-billion, boost research and development spending and even reduce greenhouse gas emissions over the next decade.
The slick, 127-page Digital Technology business plan proclaims the B.C. group will "supercharge Vancouver's vibrant digital technology ecosystem, transforming it into a global hub of digital technology and data-related research, development and commercialization with all the hallmarks of a world-class innovation centre: hyperconnectedness, extraordinary collaboration and inclusion, and a virtuous cycle of innovation, investment activity, and talent attraction that results in accelerated venture creation, scale-ups, and high-paying job creation."
"They'll have to move from fairly high-level statements about what they're going to do to actually implementing it," said Richard Gold, a McGill University law professor who specializes in innovation and intellectual property policy. "In many cases, my guess is that hasn't been fully thought out."
All supercluster groups acknowledge there is much work to be done following the scramble to get their bids in. "We've been working on drawing up our operating policies, our governance policies, our intellectual property policies," said Jayson Myers, a former CEO of Canadian Manufacturers and Exporters and now CEO of NGM. "But there's frankly more work to be done … before we actually start thinking about handing out any money." Until the funding agreement with Ottawa is finalized, "everything is interim."
The neat geographic distribution of winners reminds some of an old-fashioned, politically motivated regional development scheme, although Mr. Bains said they were chosen "on merit" reflecting "the innovation taking place across Canada." Some have criticized the plan as a corporate welfare exercise of government picking winners. Each supercluster has so many participants that even some of those involved acknowledge things could get unwieldy.
But the biggest question concerns intellectual property (IP). The government required each group to propose an IP strategy that would "benefit the economic development of Canada." IP has become a priority for government, a long-overdue nod to a 21st-century reality: The world's most valuable companies are built on software platforms and underpinned by sophisticated patent filing and protection strategies to guard their virtual creations.
However, some worry that global technology giants that have joined the superclusters – Microsoft Corp. is a member of four of them – are poised to reap the largest benefits from any valuable technological breakthroughs, rather than Canada's relatively unsophisticated corporate class.
Foreign tech giants "have fairly sophisticated IP teams," Victoria-based IP consultant Peter Cowan said. "They've contributed money and they want to make sure they have access to IP that will benefit them.… Canadian ventures might not be able to compete."
"When these terms were first announced, I [thought] this … was a big step," Waterloo-based IP lawyer Jim Hinton said. "Now, it isn't clear to me that this framework ensures economic growth for the country."
The idea of building clusters has enamoured policy wonks here for years. A 2011 federal task force decried a lack of public-private research consortiums "needed to have significant impact on the development of globally competitive Canadian companies" and called for "a fundamentally new approach to building such collaborations in areas of strategic importance and opportunity for the economy." A group of economic advisers to Finance Minister Bill Morneau last year called for the creation of "innovation marketplaces" comprising consortiums of like-minded private-sector players and co-funded by government.
There are two reasons for the cluster love. The world's top clusters – such as Silicon Valley, Hollywood, Japan's consumer-electronics hub and the Netherlands' agri-food sector – are economic engines that create wealth, jobs and innovation. And government has played an active hand developing some clusters, notably in Germany, where the publicly funded Fraunhofer Society oversees dozens of research bodies – but also in the United States. British economist Mariana Mazzucato noted in her 2013 book The Entrepreneurial State: Debunking Public vs. Private Sector Myths – a widely read tome in Mr. Bains's office – that Silicon Valley would not have become what it is without support from U.S. government agencies that contributed to the growth of the semiconductor industry and the creation of the internet and which helped future tech giants commercialize their technologies. "Not only has government funded the riskiest research … but it has indeed often been the source of the most radical, path-breaking types of innovation," Ms. Mazzucato wrote.
Ottawa has tried for years to spur the innovative capabilities of its economy – to little effect. Corporate spending on R&D has waned compared with that of other developed countries. Canada lacks tech giants that have driven wealth creation elsewhere. The country is home to leading researchers, but much of the valuable IP developed here – such as the touch screen and search engine – has been commercialized by foreign companies.
With the supercluster initiative, the government called for industry-led consortiums composed of at least 10 private-sector enterprises of varying sizes and one postsecondary institution. Senior government officials told The Globe and Mail last year they were looking for bold proposals to make Canadian economic sectors globally competitive – and create lots of jobs.
That push prompted some ambitious and creative thinking across corporate Canada.
For Murad al-Katib, CEO of AGT Food and Ingredients, a Saskatchewan-based global supplier of lentils, chickpeas and other pulses, it represented a huge opportunity for his firm and the entire prairie economy. With a shift toward plant-protein consumption and rising demand for quality foods from an expanding Asian middle class, Mr. al-Katib, who spearheaded the successful Protein Industries supercluster bid, felt it was time for the Canadian agriculture industry to act strategically.
"Canada will be serving a consumer that is totally different than the consumer we serve today in agriculture," he said. "Today, we are known as a reliable, low-cost supplier of raw commodities. Tomorrow, we want to be known as the supplier of food-safe protein and food products in traceable, sustainable food systems" and value-added products such as snacks or building products made from starches. "We need to up our game."
Mr. Tam said the B.C. bid emerged from discussions about how to bring together the anchors of its diverse economy. As a result, its bid offers an odd mix of ambitions to develop personalized, gene-based cancer remedies; create a "digital twin" of Earth drawn from various data sources to help resource development projects; and launch a "digital learning factory" that sounds like an elaborate computer-assisted design program for designing factory processes and large-scale engineering projects.
A common undercurrent of most winning proposals is a belief that superclusters can jump-start underperforming sectors. The Halifax-based Oceans group, including Clearwater Seafoods Inc. and Emera Inc., says Canada underwhelms when it comes to ocean-based industries, noting that Norway's economic output from the sector is 6.5 times that of Canada's. Matt Hebb, Dalhousie University's assistant vice president of government relations and economic development and a member of the Oceans group, said, "It probably sounds obvious to say companies operating in the ocean…share certain things in common. The reality is companies haven't really collaborated a lot historically…[Through the supercluster process] we've gone from asking, 'Is there some basis here for working together?' to the understanding that there is a strong hypothesis for that."
Meanwhile, the NGM application reads like a cry for help from beleaguered Ontario's manufacturing sector. "Our manufacturing sector is falling behind in terms of innovation, competitiveness and growth," it states. "And our technology companies struggle to attract the talent and investment they need to scale up and grow." Its proposal "aims to reverse this trend" by marrying the capabilities of both.
However, its application also undercuts the potential of the region's teeming tech sector, saying the best opportunities for its young firms are "through their integration in the products, processes and distribution channels of larger multinational supercluster participants" – such as Xerox, which has a seat on its 17-member board, as do three other foreign firms.
That underscores one problem with the process, which was open to participation by foreign firms. Mr. Bains said one desired outcome is to "position our companies to be able to be part of global supply chains and global platforms." But talk about supply chains is anachronistic and relevant to "a 1970s production economy, not a 21st-century innovation economy," warned Jim Balsillie, former co-CEO of Research In Motion, now known as BlackBerry Ltd.
The world's most valuable companies, including Google parent Alphabet, Apple, Facebook and Amazon.com, are global platforms. "Queuing up Canadian tech companies to somehow integrate into supply chains of larger global tech companies for pennies on the dollar, rather than creating new global market niches they can dominate and earn billions from, is a recipe for hollowing out Canada's best innovators," not creating 21st-century giants, Mr. Balsillie said.
That also feeds concerns about who will own or commercialize any IP that emerges from the superclusters, as the wealth of companies in the digital economy is often correlated to the value of their underlying patents. There is legitimate reason for concern: Foreign tech giants that perform research here routinely transfer ownership of resulting patents out of the country. Mr. Bains said: "We've been very clear that each of the different superclusters should have an IP strategy, and it's about making sure that IP remains in Canada and benefits Canadians."
But Canadian IP specialists are troubled. For one, it appears to be more of a guideline than a rule that IP developed by publicly subsidized superclusters stays here. An FAQ posted by Mr. Bains's department states: "If a proposed IP strategy is lenient in regards to [supercluster]-supported intellectual property leaving Canada, the applicant is strongly encouraged to explain how this and any other activities render the IP Strategy to Canada's net benefit."
Superclusters are being left to devise their own IP strategies and admit there is work to be done. Many indicate it will be up to participants on a project-by-project basis to negotiate ownership of any ensuing IP. But IP consultant Mr. Cowan worries that "with so many big players at the table, they'll influence where that goes." He reckons sophisticated giants such as Microsoft – a member of four of the superclusters – will push for "open" ownership of patents. While that may seem beneficial, larger U.S. firms would likely look to patent subsequent inventions built on top of the open IP, as Microsoft has done in the field of AI in Canada. If the patent ownership remains tight and closed, "they might be locked out or boxed into a corner where someone puts in blocking technology you have to work around," Mr. Cowan said. "I don't think the clusters have thought through long-term impacts" of their IP strategies.
Microsoft says it intends to provide superclusters with access to its cloud service and that gaining access to new IP "wasn't part of our conversation when we joined these superclusters," said John Weigelt, national technology officer with Microsoft Canada. "We are there to enable the partners to be able to build out that innovation." When pressed further on Microsoft's interest in supercluster IP, he replied: "I'm a simple engineer and I leave that to our IP lawyers … it's still early days around how that is all going to shake down."
IP lawyer Mr. Hinton of Waterloo worries that Canadian firms aren't sophisticated enough to realize it's not enough to patent breakthrough technology; they must develop a series of patents "to protect … and own the market … including creating patents that your international competitors may infringe, if only for defensive purposes. They need to be world owners of that market. If I say, 'I want to own the market,' and you say, 'Let's share,' that's not the right [decision]. Unfortunately, there are not a lot of Canadian companies that think like this" – but global tech giants do. "It's not easy to do, but you have to do it, otherwise it's a bad investment and you won't achieve what you want."
The answer, he said, may be for superclusters to appoint "a non-invested industry expert … that is obliged to look out for the taxpayers' interests" rather than leaving it to those at the table to divide up the pie, which he worries would favour savvier and experienced IP heavyweights.
"There will be an arm wrestle for sure over the IP that comes out of this," said Mike Monteith, a Toronto tech entrepreneur who led one of the unsuccessful bids to create a medical-technology supercluster. "The less sophisticated small companies may not have appropriate counsel on how you engage in these activities. If there isn't somebody arbitrating that process, you have to wonder: Who wins and who loses? I think it's a complexity in the supercluster [program] that has to get figured out."
It's early days for superclusters and there are still big issues to work out. But Daniel Munro, director of policy projects at the Innovation Policy Lab of the Munk School of Global Affairs, says it's a good start.
"We haven't seen anything like this, and it's positive. I would view this more as a first step in a long-term story."