Canadian Innovation: How to get back in the game

Canada is behind its global peers when it comes to fostering innovation. Investments in the 2017 budget are a start but initiatives from Finland to Israel could serve as models, too.

By: /
April 13, 2017
An employee works on some hardware ideas in the Makers Lab of Google's new Canadian engineering headquarters in Kitchener-Waterloo, Ontario January 14, 2016. REUTERS/Peter Power

Lakshmi Raj had almost everything she needed to grow her company. She had the idea (a cloud-based time-tracking software for businesses), the money ($22 million raised since launching in 1995), and the tech talent (155 software engineers). But she was missing one very important component: a robust marketing team. Raj’s company, Replicon, is based in Calgary — an oil and gas city with little talent in software marketing — and without increased sales, it couldn’t get bigger.

So, in 2010, Raj moved to California’s Silicon Valley and opened an office there to build the marketing team she needed. “We really wanted to make this company work and in order to do that, I have to live in California for the time being to grow our market,” says Raj.

It’s been a good decision so far. Replicon has been enjoying a 35 percent year-over-year growth and raked in sales of $50 million last year. Still, Canada is where Raj calls home. She hopes in less than three years she’ll be able to move back to Calgary, where her journey began. 

Raj’s story highlights a common struggle among innovative companies in Canada: access to talent. Last month, Navdeep Bains, the Canadian minister of innovation, science, and economic development, announced that the federal government would allow participating employers to fast-track work permits for highly skilled foreign workers. As opposed to the current application process that takes up to one year, the new process is expected to take only 10 business days. The “Global Talent Stream,” as it’s called, will be part of the Temporary Foreign Worker Program and will be launched on June 12. It has been heralded by technology companies as one of the ways to speed up innovation, create more jobs, and allow Canada to stake a claim on the global innovation map.

The announcement — followed by more in Canada’s federal budget released March 22 — is part of the government’s innovation agenda. But what is innovation exactly? To some, it’s synonymous with promoting the growth of startups; to others, it means fostering the development of ideas that could lead to the next big thing. In both cases, compared to its global peers, there is a growing consensus from the government and the private sector that Canada needs to up the ante and think outside the box when it comes to innovation.

Recent government initiatives, including the fast-tracked work permits, couldn’t have come at a better time. The United States government announced in early March it was temporarily suspending its expedited visa program, which was pivotal to boosting talent in high-tech fields like information technology, mathematics and engineering. Canada’s new visa program won’t be the only edge it has over the U.S., a much more powerful player in the innovation game. In fact, Canada has a number of strong innovation precursors: an ambitious entrepreneurial population, world-class institutions, generous venture capital investments, competitive corporate taxes. With the government of Justin Trudeau branding itself around a strong commitment to innovation, could this be the turning of the tides for Canada? 

Israel startup
A prototype of a combustion engine developed by Israeli start-up Aquarius Engines is seen at their offices in Rosh Ha'ayin, Israel May 16, 2016. REUTERS/Amir Cohen

Missing the global mark

In the latest Global Competitiveness Report, the World Economic Forum ranked Canada 25th for innovation and business sophistication, putting it behind Iceland, Malaysia and the United Arab Emirates. The assessment pointed to two things holding the country back: an insufficient capacity to innovate and an inefficient government bureaucracy

Back-to-back reports by the WEF reveal that Canada has persistently done poorly on innovation. The Conference Board of Canada also published its own report card and showed the same underwhelming results — further evidence that Canada is a serious innovation laggard compared to its global peers. The not-for-profit research organization gave the country an overall “C” grade, behind innovation greats like Sweden, Denmark and Finland.

Despite the fact that Canada’s entrepreneurial activity ranks among the highest in the world, according to the Global Entrepreneurship Monitor, and that it invested some US$1.7 billion into its most promising venture-backed companies last year, Canadian companies are spending an embarrassingly low amount of money on research and development. In fact, Canada is one of the worse performers in this area among its OECD peers. In 2014, its private sector spent CAD$14.4 billion on R&D, or less than one percent of GDP. This is well below the average spent by companies in 35 OECD countries as a percentage of GDP. “When firms are not spending on R&D, there’s a real risk that products will stagnate or decline in progress,” says Daniel Munro, the associate director of public policy at the Conference Board of Canada.

Meanwhile, most of the firms in other OECD countries are spending more. Israel, South Korea and Japan all enjoyed sharp increases in this area. Business expenditures on R&D in South Korea, for instance, accounted for 3.36 percent of GDP in 2014, one of the highest percentages in the world. Large multinationals in Korea such as Samsung and LG manufacture cutting-edge technology for consumer electronics that is coveted all over the world. To keep global sales strong, these tech giants funnel tons of money into R&D.

“Canada’s manufacturing firms are not producing the things that multinational companies want,” says Munro. “We’re viewed as less valuable in global value chains.”

However, Canada does have strong potential to elicit international interest in two of its R&D intensive industries: aerospace and artificial intelligence. In March, Google announced it was heading north to open up an AI lab in Toronto, enticed by the breadth of knowledge on deep learning technology coming out of Canadian universities. The problem will be whether Canada can evade the brain drain and keep its best AI leaders on home soil.

"When firms are not spending on R&D, there’s a real risk that products will stagnate or decline in progress."

As mentioned above, it’s not like Canada’s federal government isn’t trying to make innovation flourish. The widely popular Scientific Research and Experimental Development (SR&ED) tax credit was supposed to incentivize companies to spend more on R&D and possibly give the country its next BlackBerry or Canadarm, but given its poor performance on this front, there has been debate as to whether these tax credits are actually doing anything to boost innovation. Munro argues that it might actually be better if that annual $4 billion was used on specific initiatives that have more potential to scale.

The U.S. has something to this effect called the Small Business Innovation and Research (SBIR) program. Since its inception in 1982, it has significantly stimulated technical innovation and commercialization among small businesses by legislating some federal agencies to set aside 3.2 percent of their external R&D budgets on startups. The Department of Defense and National Institutes of Health are two of the largest users of this program, and all 11 government bodies combined have poured US$2.5 billion a year into innovative ideas that might have otherwise been ignored by traditional investors during the early stages of development and financing. And to boot, more than 40 percent of all SBIR projects have made it to market. 

SBIR has been such a renowned success that it has earned the nickname of “America’s seed fund.” It has also inspired similar programs in Japan, the U.K., the Netherlands, South Korea, Australia, Sweden and Finland. Too many editorial columns to count have made the case for a Canadian version of SBIR, and in March the Liberal party finally heeded the calls by announcing the formation of a $50 million federal procurement program modelled after SBIR, called Innovative Solutions Canada. As part of Budget 2017, the government is also injecting $950 million into highly innovative industries, or “superclusters,” that have the most promise to drive economic growth, plus another $1.4 billion in new financing for clean tech firms, and $125 million towards an artificial intelligence strategy.

If Ottawa is looking for more exemplar initiatives around the world for ideas, it could also mimic Israel’s Binational Industrial Research and Development (BIRD) program, which has had a huge impact in spurring innovation at just a fraction of the cost of the SBIR. Established in 1977, BIRD acts like a matchmaker for Israeli and American companies to form a mutually beneficial partnership. Israeli firms benefit from the U.S.’ access to large markets while U.S. firms benefit from Israel’s technological expertise and star talent. To date, more than US$330 million has been invested in BIRD projects, which have gone on to generate sales of more than US$10 billion. 

That kind of collaboration, if adopted here, could give Canadian companies a much-needed boost in areas where they are weakest, such as the recruitment and retaining of talent. “Even when we have good ideas or products, we have fewer people that could manage and market them,” says Munro. Though Israel may boast an impressive innovative edge, it’s important to point out that the country still struggles with extreme income inequality and relatively high rates of poverty. “Parts of the economy are highly innovative, but the benefits of that haven’t been very inclusive,” says Munro. 

The trade factor

Inclusiveness, as it turns out, is a big part of Trudeau’s innovation agenda. In order to bolster Canada’s weak growth in productivity, the government believes that good innovation means giving every innovator a fair chance at success. However, it appears that its trade policies may be hurting the little guys and dampening innovation in the process. 

“To successfully innovate, you’ve got to be able to trade,” says Dan Ciuriak, a consulting economist and senior fellow at the Centre for International Governance Innovation, where his latest essay is part of a larger series on innovation. “Once you enter into trade, you learn about new markets, adopt newer types of technology, and adjust your products to meet foreign tastes. Trade influences innovation and innovation influences trade,” he says.

Exporting costs are the same whether you’re a big or small firm. Of course, the smaller you are, the harder it is to foot the bill of shipping your products overseas. In 2014, less than 12 percent of Canadian small and medium-sized enterprises (SMEs) exported to foreign markets, which is considerably lower than Canada’s counterparts in Germany (20 percent), the U.S. (33 percent) and China (60 percent). Of the Canadian SMEs that did export, more than half were involved in innovation, supporting Ciuriak’s theory that a correlation between innovation and exporting might exist.

Canada could rev up its exports by mimicking some successful models abroad. In Australia, SMEs are encouraged to export thanks to a reimbursement of up to 50 percent of their export marketing expenses, up to a maximum of AUD$150,000. In Germany, SMEs can tap into superior knowledge through the Fraunhofer Society, an independent organization that connects smaller companies with affordable research they couldn’t otherwise afford. And in Switzerland, extensive support is given to small firms so they can take advantage of intellectual property laws that protect their inventions and creations from getting scooped up by larger competitors. 

Nokia
A Nokia 3310 device is displayed after its presentation ceremony at Mobile World Congress in Barcelona, Spain, February 26, 2017. REUTERS/Paul Hanna

A critical role for the big players

If Canada is serious about driving innovation, it not only has to prop up promising SMEs, but it also has to save its biggest enterprises when they're going through tough times, says Ciuriak. He notes that in the last few years, Canada has stood idly by as leading tech firms collapsed. There was Nortel in 2009 (the Harper government refused to offer a bailout when it filed for bankruptcy protection), then Research in Motion (now known as BlackBerry Ltd) in 2011 (funds were instead lent by private investors). “When the government is faced with a hard case like Nortel, the question is ‘Do you let it go or do you save it?’ The answer is you save it,” says Ciuriak.

Despite the tech renaissance Canada has been experiencing lately, which has given it hopefuls like Shopify and HootSuite, by and large it still has not seen the next generation of champions like Nortel, argues Ciuriak. “If you look at the overall innovation landscape in Canada, it’s nowhere near what it was 15 years ago,” he says.

"When the government is faced with a hard case like Nortel, the question is ‘Do you let it go or do you save it?’"

Why is it so important to keep tech giants alive? As much as taxpayers like to disparage large corporations for their glacial innovation pace and narrow-minded vision (read: the pursuit of profits), they still contribute disproportionately more to the country’s economic performance than smaller companies. They hire more employees, enjoy higher profits, develop incredible talent, and are more successful abroad. “No matter how much you hate them, they’re indispensable,” says Ciuriak.

Take, for example, Finland. The country’s mobile giant Nokia experienced some of its darkest days over the last couple of years with massive layoffs and dwindling shares. Instead of standing by, policymakers immediately sprung into action to deal with the surplus of suddenly unemployed tech workers. They established entrepreneurship and training programs, as well as government grants. They even forced Nokia and Microsoft, which owns Nokia’s handset division, to give grants to laid-off employees who were starting new business ventures.

When it comes to innovation, Trudeau and his inner circle are betting they can take Canada to where it needs to be. Many signs point to a cabinet that finally recognizes that the country’s current policies are not fuelling innovation as much as it would like, and that it is overdue for a major overhaul on not just policies, but a mindset that has made the country complacent to mediocrity. Fortunately, other countries have given Canada some sparkling examples of what it takes to become an innovation powerhouse. 

“Over the long term, if our firms and our country are not innovating, then we’ll have greater difficulty generating jobs and revenues to pay for things like education and health care,” says Munro, with the Conference Board of Canada.

“These are things that contribute to higher standards of living, which is ultimately what we all care about.”