Canada must get creative to retain homegrown innovators
Almost every week we learn of yet another Canadian tech company being sold to a foreign—usually American—multinational or private equity group because the domestic firm could not raise the capital at home that is needed for the next stage of growth. This is what is called scaling up. This is not new; indeed, this has been going on for years, yet nothing serious has ever been done to address the issue.
The sale of our entrepreneurial tech companies to foreign investors means not only that all the intellectual property developed by Canadian talent at our universities or elsewhere (often funded in large part by government) ends up owned by non-residents, and that the potential value of this early-stage research and development is not captured in Canada, but rather elsewhere. We create seed corn for others. It also means that young companies that had the potential to become much larger success stories as Canadian champions lose that opportunity and instead help their new foreign owners succeed.
But there are few indications yet that the government—or our private sector financial community—is addressing the fundamental challenge, which is how to steer more capital into Canadian businesses so that they are not forced to sell just at the stage where they are poised for the next stage of growth.
The Council of Canadian Innovators earlier this month released a report, The Scale-up Gap: From Value Creation to Value Retention, on the subject. The report's press release states: “Canada consistently produces world-class innovation and globally competitive companies. Yet many of these firms are acquired by foreign buyers at the exact moment scaling becomes more complex and capital-intensive.”
So, they sell to foreign corporations or foreign private equity because there is no alternative.
The council, with outside consultants, surveyed some 30 Canadian firms that had been sold to foreign investors and found that lack of capital was the primary reason to sell or wind-up the business. While these companies tended to continue some operations in this country, “leadership and strategic decision-making were more likely to shift abroad” to foreign head offices.
Concern over converting in-country discoveries and knowledge into commercial value at home is even a concern of the United States. In his report, Science: A New Golden Age, to U.S. President Donald Trump, author Michael Kratsios calls for policies to “ensure that ground-breaking ideas invented in the United States are rapidly prototyped, tested, manufactured, and scaled domestically.” So, on top of strengthening science, “we also have a duty to ensure that its downstream benefits accrue to the American people first.”
Kratsios, who is director of the White House Office on Science and Technology Policy, contends that while a steady array of American inventions that led to new industries have fueled much of the country’s prosperity over the past 75 years, the U.S. innovation ecosystem has failed to keep up with a changing industrial landscape, one that is now based much more on investment in intangibles, and so is failing to capture the value to of discoveries coming from U.S. universities and government research laboratories. The institutions that created much past wealth are not aligned with the new economy, he contends.
“The institutions we build determine what problems get solved, which approaches get tried, what risks are taken, and whose talent contributes to the discovery,” Kratsios argues. “When these institutions align with the nature of the scientific frontier and with our national needs, science advances; when they are misaligned, abundant resources and brilliant researchers go to waste.”
Much of Kratsios' report is on the need to redesign the U.S. science ecosystem in the digital age. One example is the Genesis Mission unveiled by the White House last November—a US$5-billion project, allied with support from leading U.S. tech companies, to accelerate scientific discovery, strengthen technological competitiveness, and advance energy innovation, based on an AI-supercomputing platform, including an American science cloud, advanced supercomputing power, and extensive public-private partnerships.
There is much in the Kratsios report that is relevant to the Canadian situation, as well. We also need to examine the institutional arrangements for science—how well the science ecosystem is aligned with a new kind of economy, based on AI, intangibles (such as research and development, branding, new ways of doing business, employee training, and software, for example).
As the report bluntly says, in the world of this new economy, “the technologies that matter most are those that form platforms on which future technologies are built.” This means that “dominating the right foundational platforms grants structural power, allowing the leading actor to dictate the rules and standards by which others must play. These advantages compound, with advances in one field, like computation, unlocking breakthroughs in others, like AI and biotechnology, creating feedback loops that reinforce the leader’s edge.”
This formulation that explains much of U.S. technology policy today, including the Trump administration’s heavy-handed protection of U.S. hyperscalers and active engagement with international standards-setting bodies at a time when it is pulling back from other international bodies such as the World Trade Organization.
It also explains why digital sovereignty in some form has to be a Canadian priority, as well.
If we are to have a successful future economy, we need to be much more creative. For example, we need to review whether our existing institutions, including our granting councils, are well designed for advancing Canadian success in science and technology; create a science and technology body that will review, assess, and recommend on science and technology policy; give high priority to creating a financial system that enables high-potential firms to secure the capital they need here at home so that they are not forced to sell to non-residents; look at new institutional arrangements—such as Canada Post as a vehicle for digital sovereignty—to advance and build Canadian capacity; and get serious about using government procurement to support Canadian-owned companies, especially those with new entrepreneurial solutions.
We are spending on our science base, which consists of our universities and colleges and government support for companies. But we are not capturing the value. Spending more on science won’t deliver better results unless we fix the other barriers to growth as well.
David Crane can be reached at crane@interlog.com.
The Hill Times