Richard Carleton
CEO - Canadian Securities Exchange

Access to Capital Key to Canadian Economic Competitiveness

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Takeaways

  1. Capital allocations to grow Canadian companies are best made by entrepreneurs and capital markets, not governments. Lowering taxes would help this goal.
  2. Canadian capital markets have performed very well in terms of their ability to allocate capital to growing and emerging sectors and companies.
  3. Companies and industries will be transformed by new technologies’ ability to increase productivity while decreasing labour costs.

Action

Canada’s personal and corporate tax regime needs to be made competitive with that of the US and other jurisdictions in Europe that we are competing with for capital investment. If we want to see more companies get to a larger scale in Canada, employing more Canadians, and building our IP asset base, we will need to work harder at keeping these entrepreneurs here in Canada.


What do you see as the strengths and weaknesses of Canada’s business and entrepreneurship ecosystem?

Canada has a tremendous track record of starting businesses across a whole range of sectors, whether public or private. However, we face challenges in growing those companies on a national and global scale. Canada needs more global champions, whether it is in the mining industry, oil and gas industry, or the technology industry. 

Another one of our main issues is that Canada has been somewhat out of favor as an international investment destination, especially when it comes to the oil and gas, mining, banking, and insurance sectors, which are all heavily regulated. This trend is actually one of the things that worry me about the future of Canada’s economy.

“We need to support our entrepreneurs so that they can create successful companies in Canada, which will in turn employ Canadians and build our asset base of intellectual property, the latter of which is utterly key for international competitiveness in the 21st century.”

With that said, Canada is known internationally for the quality of its capital markets and large companies, as well as our ability to finance early stage companies. We are recognized for having a liquid, accessible, and well-regulated public equity market. People are interested in trading Canadian stocks, especially now that we have become well-known for our leadership in the cannabis industry. We have also been responsible for capitalizing much of the American cannabis industry because those companies have not had access to public capital or many private equity sources.

We need to support our entrepreneurs so that they can create successful companies in Canada, which will in turn employ Canadians and build our asset base of intellectual property, the latter of which is utterly key for international competitiveness in the 21st century.


How do you rate Canadian businesses’ ability to access the capital they need to grow? How can we improve on this point?

I do not think we are well-served by the system currently in place as we are not getting the bang for our buck that we should be getting through the investments that government has made into enterprise. 

There are a number of studies that indicate that at the very early stages of investment, deals in Canada are priced higher than similar deals in the United States. As such, there are more dollars chasing fewer deals in Canada and a lot of those dollars either come from the government in the form of tax breaks or other incentives. On top of that, governments are very poor at selecting winners and losers, so those investments do not necessarily see success. 

“Lowering both the personal and corporate marginal tax rates could have a significant impact on people’s willingness to continue investing in and growing businesses in Canada.”

Entrepreneurs and the market itself should be deciding who gets capital and who grows. Lowering both personal and corporate taxes would go a long way to achieving the goal of growing large Canadian companies as opposed to government grants and the other incentive programs. For example, lowering both the personal and corporate marginal tax rates could have a significant impact on people’s willingness to continue investing in and growing businesses in Canada. If we had a corporate and personal tax system that is competitive with that of the United States, so that entrepreneurs residing and earning in Canada could thrive here, we would see more companies get to a national and global scale.


How are Canada’s capital markets performing in terms of enabling the emergence of new sectors of our future economy?

Canada actually has a well-developed system of both public and private markets supporting growing companies. In fact, for the emerging sectors in the technology sphere, including the life sciences and artificial intelligence, a lot of the early stage funding is actually coming from the private market. Canadian markets punch way above our weight globally in terms of our ability to provide capital to existing and emerging sectors.

“Canadian markets punch way above our weight globally in terms of our ability to provide capital to existing and emerging sectors.”

When the cannabis companies listed on the public markets in the spring of 2014, the Canadian Securities Exchange (CSE) embraced this new industry aggressively. That was certainly appreciated by the entrepreneurs in the space, and we were rewarded with a major franchise in the cannabis industry. Those companies, for many reasons, could not access other forms of investment that are open to typical start-up organizations. They had to turn to the public equity markets to raise the growth capital they needed to get the industry under way. Right now, 172 out of 570 of the CSE’s issuers are in the cannabis industry, and so they are a significant part of the CSE’s stock list options.

There was a concern that the incumbent exchanges in Canada were over-taxing the capital that was being raised by companies coming into public equity markets in Canada. As such, one of the CSE’s goals is to use technology and increased disclosure obligations to reduce friction and provide a pathway for investment that is less risky and costly but more predictable from a time perspective. We have always been about reducing the cost of capital for public companies in Canada.


What are the trends or forces you see having an impact on Canada’s economy over the coming years?

Oil and gas is a significant component of our gross domestic product. Yet, investment managers are divesting from Canadian oil and gas. We need to recognize that 70% of oil in the world is pumped by state-owned enterprises, and only 30% by publicly-listed corporations. I do not think I am going too far out on a limb by saying that many state oil companies are not the best actors in the sector, often suppressing public companies who, generally speaking, are more advanced in their use of technologies to reduce carbon emissions. These public companies are going to be starved of capital as a result of these divestment initiatives. So instead of doing good, the divestment movement is only ensuring that the carbon-based fuels we will need for the next 30 to 50 years are going to come from the worst actors in the industry.

Right now, we have a good environment for people to make long-term investments in infrastructure and technology. This is because there is no price pressure and interest rates will continue being low in the long term. The projected yield curve in Canada and the United States will be flat for a long time, which means there is no material prospect for inflation on the horizon. 

This also has a big impact on employment. Industry sectors that used to employ thousands of people, whether auto manufacturing, steel making, or any of those traditional industries, have seen and will continue seeing employment numbers plummet even as productivity goes in the other direction. We need to work on a plan to find meaningful employment for people who otherwise would have been in these kinds of occupations.


And looking farther down the line, how do you see our industries and companies having to evolve to compete?

Existing industries are going to make significant investments in fintech and artificial intelligence with the goal of increasing service levels, employee productivity, and service offerings. Manufacturing will have interesting ways of applying these technologies, with the capability to produce with relatively less labour but with a lot more technology. Labour cost as an input is going to continue to decline as a component of finished goods.

“Manufacturing will have interesting ways of applying these technologies, with the capability to produce with relatively less labour but with a lot more technology. Labour cost as an input is going to continue to decline as a component of finished goods.”

We are already seeing a massive shift in the way stock trading takes place from an open outcry system with paper tickets to fully electronic systems that are capable of processing millions of orders in the blink of an eye. Ours is an organization of 50 people, and with the applications of new technologies, our organization can produce work at a level that would have been unthinkable a generation ago. A lot of artificial intelligence and machine learning technology is going to be integrated into and employed by existing companies to increase their margins to broaden their service offerings.