Commonly used productivity and innovation indicators show Canada’s innovation economy declining relative to other countries. Despite large public investments, Canada still trails most of the Organisation for Economic Co-operation and Development (OECD) countries on productivity.

The Canadian government has played a significant role in efforts to reverse this decline. For more than five decades, we have seen the proliferation of new programs at the federal and provincial levels aiming to spur productivity and the growth of an innovation economy—yet without significant improvements in country-level data.   

This Impact Brief lays out five opportunities for the federal government to change the nature of its programming to reverse the decline. To arrive at our conclusions, we have reviewed over 25 years of federal government budgets and documents prepared by the key innovation department: Innovation, Science and Economic Development Canada (ISED) and its predecessor, Industry Canada.

Commonly used productivity and innovation indicators show Canada’s innovation economy declining relative to other countries. Despite large public investments, Canada still trails most of the Organisation for Economic Co-operation and Development (OECD) countries on productivity.

The Canadian government has played a significant role in efforts to reverse this decline. For more than five decades, we have seen the proliferation of new programs at the federal and provincial levels aiming to spur productivity and the growth of an innovation economy—yet without significant improvements in country-level data.   

This Impact Brief lays out five opportunities for the federal government to change the nature of its programming to reverse the decline. To arrive at our conclusions, we have reviewed over 25 years of federal government budgets and documents prepared by the key innovation department: Innovation, Science and Economic Development Canada (ISED) and its predecessor, Industry Canada.

Opportunity 1. Focus on Commercialization

Budgetary documents show a continued and strong focus on research and development (R&D). Although innovation is emphasized increasingly, commercialization of research remains neglected. This thinking is analogous to the myth of the better mousetrap, that a better product is all that is needed for commercial success. The first opportunity for the government is to revamp their activities to increase their focus on commercialization and related functions, such as marketing and sales.

Opportunity 2. Establish Strategic Objectives

As the key department in the promotion of innovation for the federal government, ISED’s own strategy plays an instrumental role in advancing Canada’s innovation agenda. Although ISED may have an overarching objective guiding its
operations, none of the documentation that we have reviewed pointed to a clear purpose. A significant opportunity is to develop an overarching objective (or set of objectives) for Canada’s central innovation department and turn this into concrete plans whose success can be measured in relation to those objectives.

Opportunity 3. Focus on Demand Creation

Of the challenges that Canada is facing in developing an innovation economy, demand creation is perhaps the most acute. It is likely that we will never have the sufficient local demand to enable our companies to gain experience selling at home before learning how to export. The lack of demand creation programs is a  glaring weakness in government programming and one with the greatest potential for positive change and improved results.

Opportunity 4. Improve Program Design Through Rigorous Research and Evaluation

Our innovation-related programs face two key design issues. First, much of the background work done to identify problems in the innovation economy and to inform program design is carried out through opinion-based
research that rarely touches on the underlying reasons for the problems at hand. Second, once programs are
in place, policy-making and program development tend to set unrealistic targets requiring success rates in excess of what is practical. Innovation programs require more rigorous research during design and more realistic targets during implementation. 

Opportunity 5. Eliminate Scientific Research and Experimental Development (SR&ED) Tax Credits

The Canada Revenue Agency (CRA) administers the $3-billion SR&ED program, which uses a tax incentive to encourage Canadian businesses of all sizes and in all sectors to conduct R&D in Canada. However, the SR&ED filings and surveys currently conducted by the CRA and other federal agencies (e.g. Statistics Canada) do not allow us to capture net benefits beyond expenditures and simple indicators. In the absence of strong evidence, it is time to seriously evaluate whether Canada actually benefits from the SR&ED program. It is our contention that the time for this program has passed, and that the entire program should be phased out and eventually eliminated.

With such a bold and ambitious move, the federal government could free up to $3 billion a year to focus on demand creation, an area in which Canada has the greatest problem and a large need that is inadequately addressed. It could marry this demand creation to social needs and fund new purchases in areas like health care and clean technology.

In conclusion, if we are to stem the slow erosion of our innovation capabilities, then we must look to opportunities such as those identified above to recast how ISED and other departments (e.g. Finance Canada) provide support to the innovation economy. Without radical changes, we are doomed to continue this slow decline in competitiveness and productivity until
it is too late.

In Canada, access to venture capital (VC) is cited as a persistent barrier to the creation of world-class firms, prompting the development of programs and funds to overcome it. Policy is operating under the assumption that availability of VC funding is as much a problem today as it was years ago. But what is the current state of VC funds in Canada? Is there a gap? If so, why?

To help us answer these questions, we took a closer look at: the availability of VC funding in Canada in international comparison; the sources and availability of funds by VC stage within Canada; the structure of the Canadian VC system; and the sources of VC flowing into Canada’s leading tech companies.

Contrary to popular belief, Canada performs exceptionally well globally, ranking among the top countries in the world for availability of capital in both absolute and relative terms. Internationally, Canada ranks third in absolute VC dollars invested, behind the United States and China and far ahead of more populous countries such as the United Kingdom, France, Germany, and South Korea. Canada also ranks third on a gross domestic product-basis in VC invested per year, lagging only the United States and Israel.

For a long time, it has been thought that investments from international sources have propped up overall VC funds in Canada, particularly at later stages of growth. But the evidence suggests that this may hold true for earliest rounds of investing as well. In fact, there were 22% more Series A investments made by foreign firms than by Canadian VCs in Canada and more than twice as many foreign firms investing in Canada than Canadian firms making investments. This implies sufficiency of capital for Series A rounds and potentially even later rounds.

The data also helped uncover a major issue with Canadian investors who are less likely to put forward competitive and significant sums of money. Among the companies we analyzed, only 18% financed were exclusively supported by VC firms based in Canada, and nearly 30% had no Canadian investors. In addition, businesses with no Canadian investors received 2.7 times as much money as those with Canadian investors only.

When it comes to leading Canadian technology companies, businesses that relied exclusively on US and other foreign funding in their Series A round eventually raised more money than Canadian-financed firms and were positioned better to become Unicorns.

Perhaps one of the main factors shaping our perception of capital in Canada is the lack of results on the scaling front. Canada ranks last among Unicorn-creating Organisation for Economic Co-operation and Development (OECD) countries. Although Canada ranks third in the world for the amount of VC invested annually, we place last in the world at turning this investment into Unicorns. The situation is so bad that even if we were to create four times as many Unicorns, we would still be in last place.

The structure of the Canadian VC system also poses some challenges:

1. We have too many VC firms with too little capital, potentially causing competition for deals and smaller investments, far less than the companies need to grow fully.
2. With smaller investments, these companies have less capital to support losses and important business functions (e.g. marketing and sales) that would help them grow faster.

Our current report has put forward evidence that there is, in fact, sufficient capital for Canadian companies, especially when international flows of monies are considered. Certainly, there is some disconnect between data and the general VC insufficiency narrative commonly heard in Canada. Overall, we believe that significantly more effort should be focused on exploring the underlying causes of the capital (in)sufficiency problem. Only then will we be equipped to design and deliver meaningful solutions that get at the underlying “disease”, rather than the symptoms alone.