Richard Florida Writes That Canada Is Losing The Global Innovation Race – Globe and Mail

Canadian Venture Investment Is In Decline

Canada’s investment in R & D Has Been Anemic For Decades Compared to OECD Nations

U.S. Tech Giants Are Exploiting Canada’s Talent Base At The Expense of Canadian Startups

My long-time business partner and I, one of us in Canada and the other in Silicon Valley, last year launched a business targeted at bringing immigrant entrepreneurs to Canada, Vendange Partners. http://www.vendangepartners.com.  We spent months analyzing and investigating the Canadian entrepreneurial ecosystem, particularly Vancouver and Toronto, Canadian immigration policy, and the Canadian venture capital industry. What we found was very concerning. Last December, I wrote a blog post here detailing our findings (read more below) that Canada was nowhere close to being the next Silicon Valley. With regard to venture capital, we found that there was a lack of adequate risk capital, which could be traced to deeply rooted conservative values in the Canadian financial industry. Immigration policy was a mixed bag, with a “startup” visa program that had become a magnet for immigration scams.  Despite these disadvantages, we decided to press ahead, and are making progress.

That said, I was very interested yesterday to read the article in the Globe & Mail by University of Toronto Professor Richard Florida, and Ian Hathaway, Research Director for the Center for  American Entrepreneurship, and Senior Fellow at the Brookings Institute. The article by Florida and Hathaway draws the same conclusions as my research, providing even more precise data to support their disturbing conclusions. It is not hard to find many additional articles on these issues.  Ironically, also yesterday, a LinkedIn connection shared a post by Sciences, Innovation, and Economic Development Canada with a very upbeat, positive assessment of venture capital for startups in Canada. This is the essence of the problem. Since I came to Canada years ago now, I have seen a pollyannaish state of denial about the true situation for entrepreneurship, immigration policy, and the lack of “smart” venture capital for Canadian startups. No amount of counter-evidence has changed this mistaken rosy outlook. Without a recognition of these problems, nothing will change.

 

READ MORE: Canada Woos Tech Startups But Canada Is Not Silicon Valley December 20, 2017, mayo615.com blog post

OPINION

RICHARD FLORIDA AND IAN HATHAWAY

SPECIAL TO THE GLOBE AND MAIL

UPDATED NOVEMBER 2, 2018

Solving Canada’s startup dilemma

Source: Solving Canada’s startup dilemma – The Globe and Mail 

Canada, we increasingly hear, is becoming a global leader in high-tech innovation and entrepreneurship. Report after report has ranked Toronto, Waterloo, and Vancouver among the world’s most up-and-coming tech hubs. Toronto placed fourth in a ranking of North American tech talent this past summer, behind only the San Francisco Bay Area, Seattle, and Washington, and in 2017 its metro area added more tech jobs than those other three city-regions combined.

All of that is true, but the broader trends provide little reason for complacency. Indeed, our detailed analysis of more than 100,000 startup investments around the world paints a more sobering picture. Canada and its leading cities have seen a substantial rise in their venture capital investments. But both the country and its urban centres have lost ground to global competitors, even as the United States’ position in global start-ups has faltered.

Overall, Canada ranks fifth among countries in the number of venture capital deals and sixth in venture capital investment, trailing only the United States, India, China, Britain, and Germany. That said, Canada’s share of the world’s venture capital investment is tiny, just 1.5 percent. And it has actually declined over the past decade and a half.

But start-ups and entrepreneurship are a local phenomenon: They happen in urban areas. The good news is that a dozen or so of Canada’s cities make the list of the world’s 300-plus startup hubs. And the three largest of them – Toronto, Montreal, and Vancouver – rank among the world’s 62 leading global startup hubs.

Toronto, Canada’s top-ranked startup hub, is the only Canadian city to crack the list of the world’s top 25 startup cities. Vancouver and Montreal are in the top 50. Kitchener-Waterloo leads all Canadian cities in venture capital investment per capita, ranking 26th globally on that measure. It and Ottawa also rank among the world’s top 100 startup hubs in terms of capital invested, and Calgary is among the top 150.

The not-so-good news is that Canada and its startup cities are losing ground to startup hubs such as New York and London; Beijing and Shanghai; Bangalore and Mumbai; Berlin, Amsterdam, Stockholm, and Tel Aviv.

More worrying, Canada is failing to take advantage of the United States’ weakening position, which is attributable in part to its tighter immigration policies. While the U.S. continues to generate the largest amount of startup and venture capital activity, its share of the global total has been falling steadily, from more than 95 percent in the mid-1990s to about two-thirds in 2012, and a little more than half today. But the country that has gained the most ground is China, which now attracts nearly a quarter of global venture capital investment.

Exactly why Canada is lagging is unclear. A growing number of Canadian commentators suggest that the influx of large U.S. and Asian tech firms into Canada is sucking up tech talent that would have otherwise gone to local start-ups. But companies like Microsoft and Google are such powerful talent magnets that they are more likely to increase the overall supply. After all, San Francisco, New York, and London are homes to some of the biggest tech companies in the world, and they are also leading startup hubs.

Perhaps the brunt of Donald Trump’s anti-immigration policies has yet to be fully felt. Maybe it is because New York and the San Francisco Bay Area are close enough to lure Canadian entrepreneurs away, or maybe we are just not as entrepreneurial as we like to think.

Whatever the cause, Canada and its leading tech hubs must do more to grow their ecosystems, which already enjoy such clear advantages in talent, especially in the field of artificial intelligence, and their openness to immigration. Given the role that innovation and start-ups play in propelling economic growth and raising living standards, our economic future depends on it.

Richard Florida is University Professor at the University of Toronto’s School of Cities and the Rotman School of Management. Ian Hathaway is Research Director of the Center for American Entrepreneurship and a Senior Fellow at the Brookings Institution. They are authors of the Rise of the Global Startup City, released earlier this month.

READ MORE: Rise of The Global Startup City

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. 

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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 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. (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.