Canada’s Entrepreneurship Dilemma: Decades Of Anemic Research Investment


UPDATE: May 21, 2015.  As if to drive home the Canadian economic crisis, Goldman Sachs has just released an oil price forecast suggesting that North Sea Brent crude will still be $55 in 2020, five years from now.  As Alberta Western Canadian Select (WCS) bitumen is valued lower on commodity markets this is extremely bad news for Canada. Further, the well-known Canadian economic forecasting firm, Enform is predicting that job losses across all of western Canada, not only Alberta, could reach 180,000. 

This issue has driven me absolutely nuts since I first arrived in Canada from Silicon Valley.  It did not take me long to figure out that things did not work they way they did in California, and that there wasn’t much of a true entrepreneurial economy here.  Since then, I have also been appointed to the Canada Foundation for Innovation grant process, providing me with insight into how R&D funding works in Canada. I have seen many issues in Canada that have impaired the nation’s ability to develop an entrepreneurial culture,  among them is the inherent Canadian conservatism and short term horizon of investors unfamiliar with technology venture investment.  But none has been worse than Canada’s decades-long neglect of adequate funding for research and development nationwide.  A review of the OECD data on Canada’s investment in R&D compared to other industrialized nations paints a sorry picture.  This has led directly to a poor showing in industrial innovation and productivity. This is further compounded by the current government’s myopic focus on natural resource extraction, Canada’s so-called “natural resource curse.” The result now is an economic train wreck for Canada.  The fossil fuel based economy has collapsed and is not forecast to recover anytime in the near future.  During the boom time for fossil fuel extraction, there has been essentially no rational strategy to increase spending on R&D and innovation, and hence no increase in economic diversification.  Now the problem is nearly intractable, and may take decades to reverse.
asleep at the switch
 ASLEEP AT THE WHEEL, by Bruce Smardon, McGill-Queens University Press
ASLEEP AT THE WHEEL explains that since 1960, Canadian industry has lagged behind other advanced capitalist economies in its level of commitment to research and development. Asleep at the Switch explains the reasons for this underperformance, despite a series of federal measures to spur technological innovation in Canada. It is worth noting that Arvind Gupta, President of The University of British Columbia, and former head of MITACS, the organization at UBC tasked to promote R&D, has also been an outspoken proponent for increased R&D, at one point editorializing in the Vancouver Sun, that Canada needed an innovation czar, to promote innovation in the same manner as the 2010 Seize the Podium program to enhance gold medal performance for Canada.
Also, as a member of the 2012 Canada Foundation for Innovation Multidisciplinary Assessment process, and the University of British Columbia 2015 CFI grant preparation process, I can say without reservation that the Canada suffers from inadequate R&D funding and its consequences.

ANALYSIS From CBC News

Canada’s research dilemma is that companies don’t do it here

Ten-year study says repairs needed for rebound will be costly and difficult

REBLOGGED: By Don Pittis, CBC News Posted: May 15, 2015 5:00 AM ET Last Updated: May 15, 2015 6:31 AM ET

 Northern Electric was a domestic Canadian technology success story that became the telecom equipment giant Nortel Networks. But when Nortel failed, the lack of an R&D hub meant there were no startups to replace it.

Northern Electric was a domestic Canadian technology success story that became the telecom equipment giant Nortel Networks. But when Nortel failed, the lack of an R&D hub meant there were no startups to replace it. (The Canadian Press)

As Stephen Harper handed out more tax breaks for Canadian manufacturers in Windsor, Ont., yesterday, you might ask, “With that kind of support, why is Canada’s industrial economy in such bad shape?” Political economist Bruce Smardon thinks he has the answer.

Smardon says companies operating in Canada just aren’t spending enough on domestic research and development, and the Harper government is only the latest in a long line of governments, stretching back to that of John A. Macdonald, that have contributed to the problem.

As China’s resource-hungry economy goes off the boil, taking Canada’s resource producers with it, everyone including Bank of Canada governor Stephen Poloz, has been waiting for a rebound in Canada’s industrial economy.

But there are growing fears such a Canadian rebound is not on the cards. As the Globe and Mail’s Scott Barlow reported last week (paywall), despite having the top university for generating new tech startups, Canada has repeatedly failed to become a hub for industrial innovation.

Best in North America

Interviewed by the New York Times, the president of the startup generator Y Combinator, Sam Altman, called the University of Waterloo the school that stood out in North America for creating new ideas that turned into companies.

But as Barlow reported, there is statistical evidence that Waterloo’s success has not translated into R&D success, as Canadian industrial innovation continues to decline.

After 10 years of research, Smardon thinks his recent book, Asleep at the Switch — short-listed this year for one of Canada’s most prestigious academic book awards — provides the answer.

Political science professor Bruce Smardon’s book, Asleep at the Switch, examining Canada’s R&D failure, has been short-listed for one of Canada’s most prestigious academic prizes. (McGill-Queen’s University Press)

And, believe it or not, Smardon traces the chain of events back to Canada’s first prime minister and his tariff policy of 1879. Paradoxically, those rules were put in place to protect Canadian manufacturers from cheap U.S. goods, that were in turn protected by U.S. tariff walls.

Central Canadian boom

For the industries of central Canada, the tariff barriers worked. In the years before the First World War, says Smardon, Canada was second only to the United States in creating an economy of mass production and mass consumption, where workers could afford to buy the products they produced.

However, prevented by tariffs from exporting U.S. goods to Canada, American companies did the next best thing. They started, or bought, branch plants north of the border, wholly- or partly-owned subsidiaries that used U.S. technology in Canadian factories.

Smardon says that started a trend that continues today. The majority of R&D was being done in the home country of the industrial parent, not in the Canadian subsidiaries. And in the Mulroney and Chrétien era of free trade, he says, relatively high-tech branch plants, such as Inglis and Westinghouse, started to close as products were supplied more efficiently by the U.S. parent factories.

There were Canadian R&D stars such as Nortel and Blackberry, says Smardon. But they were exceptions. And when those stars began to set, the lack of a traditional R&D hub in Canada meant there were few young research-based companies ready to come up and replace them.

Tax credit paradox

The paradox, he says, is that Canadian taxpayers have spent a fortune on R&D tax credits. The 2011 Jenkins report showed that as a percentage of GDP, Canadian R&D tax incentives were higher than anyplace else. But as Barlow showed, Canadian R&D still lags behind.

The reason, Smardon concludes, is that while taxpayers fork out for R&D, industrial R&D doesn’t happen here but in traditional R&D hubs abroad. He says that free trade agreements and a longstanding view by Canadian governments that business knows best mean it’s very difficult to put conditions on how that money is spent.

“If we are concerned with developing a manufacturing base in the more advanced research intensive sectors, we’re going to have to have incentive programs at the very minimum, that are clear in insuring that any incentives are used to develop products and processes in Canada,” says Smardon. “They’ve got to think through how that can be done.”

But Smardon is not optimistic. He says that free trade and the free market philosophy has become so entrenched in Canadian thinking that it’s impossible to change.

Market rules

He says that is why the Harper government became so enamoured with the business of pumping and exporting unprocessed oil and gas while the Canadian industrial economy crumbled. It was exactly what the global free market wanted.

It may indeed be that global market forces decide Canada is an icy wasteland that is best at producing raw materials. It may decide that the best way to use our brilliant young people is to send them to California to develop their business ideas there.

But if we want more than that, perhaps handing out ineffective tax incentives is not going to be enough.

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