TheFutureEconomy.ca: How globally competitive is Canada today in the global economy considering its historically resource-based economy?
Paul Lee: If you believe the reports, Canada fits in the mid-tier of competitiveness rankings. However, my view is that Canada is actually quite competitive, for a number of reasons. Number one, the most important factor for business is predictability and if you look at the world today, Canada is an island of stability. Whether liberal or conservative, we have very stable governments, with the philosophical differences among them fairly narrow. It mirrors the views of our overall population, which are also pretty “middle of the road” in terms of their political and economic views. We care about the things that matter: we care about having a job, we care about a strong economy, we care about our environment, we care about predictability and fairness in the regulatory environment, and we care about equality. Having that foundation for our culture is what allows us to have great stability.
On the other hand, we are somewhat constrained by the fact that we have a small market of only about 36 million people. That is smaller than a big city in some countries. In terms of total technology investment dollars in Canada, we’re probably smaller than what is invested out of one office building on Sand Hill Road, in Silicon Valley. But Canada does have enormous global influence and strong trade relationships, despite all the talk about renegotiating the North American Free Trade Agreement (NAFTA). No matter what happens to NAFTA, access to the US market is still going to be relatively open for Canada. We also have the new Comprehensive Economic and Trade Agreement (CETA) with Europe, which is just being finalized. So, Europe will continue to be relatively open for us and so will Asia. The free flow of people and talent is a key component of our competitiveness and Canada continues to be one of the countries whose travelers do not need a visa to get to most countries. As Canadians, we are generally viewed as nice, honourable and trustworthy.
“We need to let the weak fail in order to more aggressively support those who are strong. We need companies that can dominate globally because there is a real competitive advantage in scale, especially in the technology sector.”
I think people generally view Canada as open and fair. We are also generally comfortable overall. As such we may not be as aggressive as the Americans, the Europeans or the Asians, but that does not mean that we do not have a competitive environment. We have a very open and competitive environment. But we are a nation with enormous wealth; we can choose how much of our natural resources we allow to be developed. We impose the environmental standards that protect our environment because we can afford to do so. For example, we have enormous oil and gas reserves off the coast of BC. We choose not to exploit it because we value the current environment more than the value of that extraction along with the incumbent environmental risks of that extraction. We have that choice because we can afford to make that trade-off. But in the areas of business where we do decide to engage, the business environment is generally as open and competitive as anywhere else in the world. We have very few monopolies and strong laws to ensure market competitiveness in our economy. We may not be as aggressive, but that is not the same as competitive. We far exceed our share of the world’s global GDP relative to our population and we have a large number of global Canadian companies.
What is government’s role in increasing Canada’s global competitiveness?
In terms of what the government needs to do, my argument would be to just not screw it up – do not try to do something that makes Canada less of a great place to live and work. Governments have, in the past, gone overboard on policies that shifted us away from that delicate balance of strong social policies with a strong competitive market economy. We’ve learned, over the years, that if we want to maximize our tax revenues, then we need to set our tax rates competitively with our largest trading partner and competitor. If our tax rates are a couple of points lower than those in the U.S., we miraculously tend to generate more tax dollars. If they are a little higher, we tend to see businesses and jobs flowing south, thereby impacting the total tax revenues we actually generate. We have a strong social net that is important to us as Canadians. In order to be able to afford to maintain and enhance it, our government needs to ensure its fiscal and monetary policies are sustainable. We are in a good position right now and we need to stay there.
I think both the federal and provincial governments understand that resource extraction is critical to the Canadian economy as that is what allows us to have our lifestyle, our education system and our healthcare system. On the other hand, climate change is real and we need to protect our environment for our future generations, so it’s about finding that middle ground between what we can afford in our spending versus how much risk we take with our environment. As I indicated earlier, I think the revenue side for government is relatively constrained, in terms of our policy options, given our size relative to our neighbours to the south.
In order to grow our economy, and to decrease our dependence on our natural resources, we need to strengthen our technology sectors. When it comes to the innovation economy, it is about people, markets and capital. I am encouraged that the understanding is quite strong at both the federal and provincial government levels, which has not always been the case in the past. As long as governments keep focused on improving the overall competitiveness of our technology sector, without picking winners and losers, we will be fine.
“We need to make Canada a place where the most talented people in the world want to come, and we must make it easier for them to come here.”
Lastly, it is important for government to distinguish between social policies and economic policies. In social policy, the role of governments is generally to support those who are disadvantaged or are in need. In economic policy, the role of government is to allow the market, in a Darwinian process, to weed out the weak in favour of the strong. Only then can the companies be globally competitive and sustainable. It also means economic policies that make our Canadian companies more competitive than their competitors in other jurisdictions while operating within the open trade rules upon which our economy relies. Again, we need to let the weak fail in order to more aggressively support those who are strong. We need companies that can dominate globally because there is a real competitive advantage in scale, especially in the technology sector.
How can governments support Canadian innovation without picking winners and losers?
The three critical factors for Canadian technology companies today are people, markets and capital. The government can affect each of those variables across the industry without picking which companies or sectors are going to be supported.
We want an environment that enables our people to innovate. In that regard, we need to focus on education and immigration. We need to make Canada the place where the most talented people in the world want to come, and we must make it easier for them to come here. Forestry is about wood. Technology is about people, and in technology we need to get the best people to have a chance to win. Our schools need to be globally competitive in training the best people as well as offer more spots to those who qualify. It is shifting. I look at the University of British Columbia and the University of Toronto and they are doing a great job – they are globally competitive schools. To win on technology, we need to win on people, as that is the number one factor in technology.
The second ingredient here is markets. Yes, the Canadian market is relatively small. But technology markets are generally open globally. Where the U.S. really excels in supporting its young early stage technology companies is in procurement. They leverage their military and intelligence spending, in a symbiotic way I might add, to really support their early technology companies. A lot of people do not understand that, but it is a huge driver in giving many start-ups their first significant orders and a signal for market acceptance. In the past, our federal and provincial governments were not open to buying from our technology companies until they had become globally successful elsewhere. There are signs that may now finally be changing.
“As long as governments keep focused on improving the overall competitiveness of our technology sector, without picking winners and losers, we will be fine.”
The third ingredient is capital. No significant venture capital market has developed in any jurisdiction globally, not even in Silicon Valley, without government support in seeding its development. That does not mean the government is picking companies. Instead, it is about seeding an environment that attracts knowledgeable and connected investors to pick the companies and help them become globally competitive. And, over time, as private investors accustom to the venture capital asset class, then governments can scale back their support in the capital area. The U.S. did that with in the 1980’s. Another thing the U.S. did was change the pension fund and endowment rules to allow them to invest in venture capital and private equity; to encourage private companies as part of their overall asset mix. Our pension and endowments funds, as well as the corporate sector, have been really slow to invest in the technology space. We are starting to see governments trying to seed the environment and encourage more private company investment, which I think is great.
One thing I do worry about is governments picking a sector for political expediency. For example, does Canada really have any natural advantage in clean-tech? Probably not. But it is important politically. I do believe that climate change is real and something we need to address, but is it something where Canada has competitive advantage – I am not sure we do. So, if the government wants to support the clean-tech industry, I would rather it do so in a way that does not lower the overall returns of the venture capital industry and thereby undermine the work the government is doing in seeding the venture capital industry. One example where it could end up doing both well is at the federal level with the use of Sustainable Development Technology Canada for climate change support and the Venture Capital Catalyst Initiative for venture capital seeding. The two programs are designed so that one does not work at cross purposes with the other. On the other hand, if the dollars to help on developing technologies to address climate change were to go through VCCI in the form of investment while accepting lower returns, then that would be an example of it working at cross purposes with trying to seed the venture capital industry.
Which are some of the sectors you believe Canada can lead in the future?
There are two areas where we seem to have good global leadership, quantum computing and machine learning. We have the world’s only commercially available quantum computer company here in Canada, as well as some of the top research centers in the world. Quantum computing is a whole new computing paradigm. Today’s computers are all based on a binary switch being on or off. We have scaled that to billions and billions of smaller and smaller switches to solve increasingly complex equations. But we are nearing the end of Moore’s Law and there are problems that simply do not seem solvable by today’s classical computers. In business, nearly all those problems are optimization problems. Some examples are the travelling salesman problem for logistics optimization, Monte Carlo Simulations for financial risk analysis, gene sequencing for new drugs, and chemical property analysis for complex new material concoctions. Quantum computing harnesses the power of quantum mechanics to predict the most optimal answer when dealing with a large number of variables all at the same time. We are nearing the point where quantum computers will soon be able to outperform their classical counterparts in some very important areas and that could bring a range of new discoveries.
The second area we seem to have some early leadership is in machine learning and artificial intelligence. It is about training computers to analyze vast amounts of data to learn to make predictions or decisions faster than waiting for human decision making or input, thus enabling things like natural language speech recognition, self-driving cars, simultaneous language translation, and behavioural security protocols. Canada is blessed with some of the world’s top research scientists at its academic institutions, including Geoffrey Hinton at the University of Toronto, Yoshua Bengio at the University of Montreal, and Rich Sutton at the University of Alberta. In this area, we are seeing both academic and government support in helping to seed the ecosystem and expand on that lead. The Creative Destruction lab at the University of Toronto has been running a program for machine learning startups over the last two years and will be starting a second program for quantum machine learning soon. Ontario, Quebec and Alberta have all seeded institutions focused on machine learning in their respective provinces along with the support of the federal government support.
“Quantum computing and machine learning are clearly two areas with a lot of potential for Canada.”
So I think quantum computing and machine learning are clearly two big technology trends that have a lot of potential for Canada to lead globally. We are clearly early leaders in both and they are both huge new technology developments that will surely change the world in which we live. Both have the potential to be as impactful, if not more so, than the internet.
If I had to pick a third, I would say life sciences because it caters to a global market, much like the other sectors I mentioned. We group-buy our drugs through the provinces in Canada – each of the buyers are already global players so that’s a plus. Also, because of the way our healthcare systems work, we have collected a tremendous amount of data through our health authorities over the years. So I think we have a competitive advantage versus other jurisdictions because as life sciences evolve, our ability to use machine learning and quantum computers to create new molecules and new drugs, gives us a competitive advantage.
You have been actively involved in developing many companies, and now you are investing in and selling innovative global businesses. What is your advice for entrepreneurs who want to succeed and go global?
One of the issues in Canada is that we are a little too provincial. In the technology space, if you are not a global leader it is going to be very difficult. If you take the niches within the technology sector, in any one of them, the number one player generally seems to get the bulk of the market and the profits. The number two and three might be profitable but they might also not be. After that, it gets really, really bad. So being a player in your own home market is not good enough. In the technology space, there is a huge advantage to scale and being able to set the market rules. So, my advice is to first understand your global competition. Pick your niche and make sure you can be the global leader in providing that solution. To do that well, you need to travel to your markets and really understand what they need. You also need to understand your competition and where they are headed. You also need to leverage any partners you can get. Technology is changing so rapidly that the winner is not who has the best solution today, but who can run the fastest. For some reason, many of our technology leaders do not travel as much as they should, given the relatively small size of the Canadian market. So, the first advice I would give them is to network and travel – get to know potential customers and competitors.
The second thing is to really understand the core value proposition that gives you competitive advantage. That makes the art of the elevator pitch – something a lot of young entrepreneurs don’t do well – so important. Why do people need an elevator pitch? There are always 50 things you must do to compete or just be in the game. But if you can’t pick the one thing that is critically important that you are going to do better than anybody else, then you are not going to win. The art of the elevator pitch is to show you know how and why you can win.
The third thing I would say to entrepreneurs, is not to worry as much about dilution. Get funded, get over funded, take as much money as you can, and worry about ownership further down the road. In Canada, what tends to happen is that companies prefer to raise less funding at any one time, thinking they will just go raise more when needed during the next round. But every time you go raise money it takes at least six months, and the company has lost three months of momentum. In fact, one of the key determinants of success is being able to raise more capital than your competitors so you can scale faster if you need to. Big companies do not want to buy from little companies because they worry they might go bankrupt. Top employees don’t want to join little companies for the same reason. So, having a strong balance sheet can help with sales, talent recruitment, investor interest and maintaining momentum in the company’s growth.
What is your vision for the future of Canada’s economy in 20 to 30 years from now?
I do not think it needs to look very different than today, and that’s the beauty of Canada. If I look at the global economy, we still are going to be a significant supplier of the world’s resource commodities and that will continue to be a significant part of our economy.
On the other hand, I think Canada will be a more influential player. We are moving from a world with a single dominant leader in the United States to a world with multiple leaders, including Europe and China amongst others. In that environment, there will be more need for mediation among the global powers that be, and a neutral place for that dialogue to happen. Canada is a great middle ground for discussion between the US and Europe for instance. Canada can also be a great place for discussion between the US and Asia. If we were to cultivate Vancouver and Montreal as centres of dialogue, we can greatly increase our global voice and influence in global affairs.
The other thing we need, and Canada is acting on it, is great education; and not just in the STEM fields. Our business schools typically focus on training students to go work for big companies and I think they are scrambling to adjust and start training students to be more entrepreneurial. Technology and the environment are changing so rapidly that we need people who can take in the big picture and look for opportunities, and those are entrepreneurs.
Global companies are looking for business students, MBAs that can be intrapreneurs running various divisions within a global company figuring out how to adapt to and disrupt existing markets. If you look at both UBC and the University of Toronto as examples, they are really on it and they are kind of leading this field. I cannot praise Ajay Agrawal enough for his work with the Creative Destruction Lab at the University of Toronto and UBC. They have helped create some great companies and, as a result, investors from Silicon Valley are pushing to attend their sessions. The Creative Destruction Lab combined programs have the potential to one day challenge Y Combinator as the leading global start up program. And it is programs like this that will attract future entrepreneurs to our top universities, much as Stanford attracts the world’s top entrepreneurial students today. I also want to call out the University of Waterloo, and all the great things they are doing across the board in building the Stanford University of Canada.
So overall, I am quite optimistic on Canada’s future. We have governments that understand the importance of education and innovation to our future economy, understand the importance of open trade relationships with the world at large, and universities starting to take a leadership role. I see an immigration policy that says to the world’s best and brightest, “Come, we are opening our doors to make it easy for you.” I am seeing governments investing into innovation and entrepreneurship and actually leading the corporate sector to participate. We have always had the talent and means. Now we are also aligned on its importance. So yes, I am very optimistic about Canada.