Cultivating a Culture of Innovation to Lead Canada Into the Next Decade

Canada’s ongoing trade dispute with the United States has created significant uncertainty for many businesses and heightened awareness of the serious economic challenges faced by our country. If Canada can adequately address these challenges, we will, in turn, create the conditions for a thriving domestic innovation ecosystem equipped to nurture hard tech fields and software- and AI-driven industries alike. The most significant challenge is the stagnation of productivity growth over the last decade, illustrated by the lack of growth of real GDP per person. While Canada’s new government is acting quickly to improve several regulatory impediments, such as interprovincial trade barriers and onerous processes for large project approval, legislative changes alone won’t be enough to address the structural issues within the Canadian economy, as described below:

• Shrinking Entrepreneurial Pipeline: Small and Medium Enterprises (SMEs) are the largest contributors to the Canadian economy. Unfortunately, the number of new entrepreneurs has fallen dramatically over the last 20 years, according to a study by the Business Development Bank of Canada. 
• Lack of Global Innovation Leaders (GILs): Corporate Canada punches at its weight with 60 companies on the Fortune 2000 list of the world’s largest companies. However, an examination of this list reveals that the majority are in financial services, oil and gas, utilities, mining and Canadian retail. Competing in local, regulated or commodity markets creates less motivation for innovation compared to offering differentiated products or services for the global market.
• Rapid Growth in Government Spending: Governments at all levels across Canada have rapidly expanded spending significantly faster than economic growth, even as service levels have often declined. The negative impacts of government inefficiency are well documented, ranging from slowed economic growth to misallocation of funds to the erosion of public trust.

These three issues have created a negative feedback loop, a downhill spiral of sorts, that will be challenging, but not impossible, to reverse. Government spending is driving inflation and tax policy, which together are significant deterrents to entrepreneurial activity. The regeneration of modern economies is driven by the arrival of new companies aiming to disrupt incumbents that fail to evolve, and GILs are often the breeding grounds for that next generation of entrepreneurs. National competitiveness is jeopardized when that entrepreneurial pipeline dries up. A concerted focus on enabling innovation and entrepreneurship to thrive throughout the country is required for Canada to create an economic flywheel that will restore Canadian global leadership in the decades to come.

Unlocking the Innovation Flywheel

Canada retains a highly regarded international brand, has one of the strongest and most accessible educational systems in the world, and is a land rich in natural resources with a highly skilled workforce.

We possess the tools and attributes that I believe are needed to rediscover and cultivate a culture of innovation that will allow our country to thrive. If we can focus with precision on reviving entrepreneurship, cultivating innovation at the corporate level, and optimizing government efficiency in the right places, we can win. Here’s how we can unlock this innovation flywheel.

Supercharging Entrepreneurship

The solution offered by many of my fellow Canadian venture capital (VC) investors is more government support for the venture capital industry. Historically, these efforts have fallen short of achieving the level of transformational impact required to bolster our entrepreneurial ecosystem. A more surgical playbook that addresses the shrinking entrepreneurial pipeline and the inability to create global innovation leaders is needed. This approach would be aligned with Canada’s current push for greater transferability across provinces, and should include:

• Federal Venture Capital Tax Credits: Canadian investors are historically more comfortable with perceived lower-risk investments, such as real estate, a highly unproductive asset class. Finding ways to encourage investors to reallocate towards productive investments is a key piece of the equation. One tool that has been particularly effective at stimulating private start-up investment is provincial venture capital tax credits, which are often instrumental in the capital formation of companies at the earliest stage. In the current spirit of reducing provincial barriers, it is logical to replace this piecemeal approach with a similar federal program that provides the same incentive for investment across the country.
• Federalized Securities Regulation: Similarly, provincial securities regulators should be replaced by a single Canadian regulator in order to permit more frictionless entrepreneurial finance across the country. A federal regulator would reduce regulatory complexity, negate the costs (and time) required to file in multiple jurisdictions, and limit a litany of other impediments that can come with a fragmented patchwork of regulators.
• Focused Cultivation of GILs: Government-funded venture capital initiatives should be focused on supporting the creation of new GILs. A growth-oriented fund of funds or similar that co-invests with leading growth funds will give leading Canadian start-ups the firepower to compete in markets that are often “winner takes most”. There should also be a mechanism to provide for a secondary opportunity for founders and angel investors interested in taking money off the table to reduce the persistent pressure Canadian start-ups feel to deliver early liquidity. Much of this money is likely to be recycled into new start-ups, giving much-needed energy to the economic flywheel.

Championing Global Innovation Leaders

Today’s version of corporate Canada needs to step up its innovation game. Even though Canadian companies spend a similar percentage of their revenue on R&D compared to their US peers, I’ve seen firsthand through my experience investing and advising hard tech start-ups that R&D spending alone is not the only pathway to results. Just as often, results are driven by product innovation enabled through unique customer insights, and business innovation through partnerships and creative business models, including creating a corporate venture capital (CVC) function. 

Corporate Venture Capital

CVC is a highly effective tool at providing corporations with a unique external window into the future, and can catalyze a culture of creativity and innovation within a firm. US corporations are almost 7x more likely to have a CVC unit vs. their Canadian peers. 

Even traditional industries benefit from this investment in innovation. TELUS has long been a leader in Canadian CVC, which has helped it position itself as a more innovative, higher-growth company compared to its counterparts. In the natural resources industry, companies such as BHP and Chevron have made heavy investments in CVC and external innovation, in turn supporting their position as innovative and growing GILs as compared to their peers. 

In order to catalyze this activity, Canadian corporations should be extended similar federal venture capital tax credits to those recommended above. In order to ensure a steady stream of the world’s best innovation can be championed by Canadian corporate leaders, these should extend to venture capital and venture fund LP investments made outside of Canada.

Financial “Remodelling“

Canada has a world-class financial services industry in both banking and insurance, and numerous companies, such as Manulife and Brookfield, have become GILs. In addition to capitalizing on the latest innovations in fintech through external innovation activities, Canadian financial institutions have the opportunity to leverage existing core competencies in commercial and investment banking in order to become GILs in financing emerging low-carbon industries such as carbon capture and utilization, nature-based carbon removal and industrial efficiency. 

The Canada Infrastructure Bank (CIB) was set up with this in mind, while being synergistic with traditional financing. Unfortunately, this entity suffers from high costs and low productivity due to the highly bespoke nature of each deal. The CIB could take a lesson from the highly successful Canadian Mortgage and Housing Corporation and provide a more formulaic and scalable risk management product that can help our Canadian financial institutions become global leaders at providing the most compelling solutions to getting more novel, yet often highly capital-intensive projects financed.

Government Leadership in Innovation

In order to reverse the government productivity deficit, governments need to lead by example and become innovative leaders in their own right. This should start with an overhaul of the procurement department to deprioritize the billions of dollars that are spent on consultant or consultant-type vendors (ArriveCAN is an infamous example of an app that cost over $50M to develop, while many people claim the same thing could have been produced for under $2M). Instead, they should prioritize scalable technology solutions, ideally powered by Canadian technology companies that use these contracts as a platform to expand globally. By implementing criteria around cost value and technological scalability, and focusing on long-term outcomes, government procurement can become a significant stimulant in the domestic innovation ecosystem. 

Shifting to a Culture of Innovation

In any organization, the culture provides for a shared understanding of how people work and behave. This phenomenon extends to the national level, so if any one group doesn’t embrace the need for this cultural shift, it will be difficult to get the innovation flywheel up to full speed. Solutions need to address all facets of the economy if Canada is to eventually stake our claim as the global innovation leader we’re capable of becoming.