Canada's 'innovation economy' has been over-hyped and needs a reality check - Canadanewsmedia
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Canada's 'innovation economy' has been over-hyped and needs a reality check

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Neil Desai and Graeme Moffat are executives with Canadian technology scale-ups and Fellows at the Munk School of Global Affairs and Public Policy at the University of Toronto.

There has been a steady drumbeat of headlines praising Canada’s innovation economy of late, including our academic contributions in the area of artificial intelligence, federal “superclusters” that will foster collaboration between large multinationals, local startups and postsecondary institutions, and strategies to increase access to venture capital.

If you look past the feel-good headlines, the analysis of Canada’s innovation activities is misguided at its best. It lacks the precise goal orientation necessary to deliver meaningful and sustainable economic growth relative to the significant public expenditures aimed at transforming our economy. At its worst, the current discourse entrenches a stranglehold on Canada’s innovation inputs by universities, regional innovation centres and foreign tech giants.

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A case in point is a recent Globe and Mail article titled, “Cutting out the middle-man not always best for startups.” It suggests that Canadian startups should partner with other companies and act as a “middle man” rather than trying to reinvent the wheel. The piece cites Jay Shah, the head of the University of Waterloo tech accelerator Velocity, who infers that taking on incumbents is difficult and likely to make a startup some enemies.

The reality in the knowledge-driven global economy is that the ownership of intellectual property (IP) is paramount and a precondition to commercialization. Those who generate, own and commercialize valuable ideas have the greatest ability to create wealth. The rest – those companies and countries without deep IP stocks – will fight over table scraps.

The business strategies that allowed U.S. tech companies such as Facebook, and Chinese champions such as Huawei, to become global giants resemble colonial economics: concerted efforts to own every valuable idea and extract rents on nearly insurmountable advantages. These include monopolies on information, talent, data flows and the sidelining of smaller competitors.

This new reality should not surprise Mr. Shah. His own early-stage company, BufferBox, which aimed to create efficiencies in parcel delivery, was acquired by Google along with a number of others taking on the same challenge. His company’s technology was eventually mothballed. Google likely didn’t think twice about the cost of acquiring the Canadian-created technology. Their goal wasn’t to grow Canadian jobs and prosperity, but to pre-empt competitors.

Acquisitions of early-stage Canadian tech companies are often heralded as great successes but these are false positives for our national economy. While some founders and their investors may pocket a few million dollars, this is the wrong metric by which to evaluate the benefits of publicly supported innovation. Canadian taxpayers spend billions annually on university research and development projects, the federal Industrial Research Assistance Program, Scientific Research and Experimental Development tax credits, and Canada’s technology hubs and accelerators (to name just a few of many programs).

Early acquisition and the expatriation of IP will too often result in the widespread economic benefits of Canadian public investment in innovation – job creation and tax revenue that commercialization creates – occurring elsewhere.

Under these circumstances, it is deeply troubling that those who speak loudest on behalf of our innovation ecosystem not only encourage the acquisition of early-stage Canadian companies and innovations before they grow to scale, but actively enable it.

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For example, tens of millions of taxpayers’ dollars have flowed to state-backed Chinese technology giant Huawei from various public institutions all while that company engaged in a concerted effort to acquire and expatriate Canadian-generated IP, as revealed by a recent Globe and Mail investigation. At the same time, the head of MaRS, a Toronto technology hub that houses the Canadian offices of several foreign tech giants, proclaimed that “Toronto’s tech ecosystem needs to continue attracting global firms such as Samsung and Uber” as if it’s a certainty that Canadian prosperity will follow from their presence.

The growing presence of foreign multinationals has devastating effects on scaling Canadian tech companies. Our companies already face higher hurdles in accessing capital. Now they are facing an increasing talent crunch. Ultimately, the increased presence of foreign giants in our own backyard restricts their ability to grow to a scale that sustains meaningful technical and non-technical job and wage growth for Canadians. Under this reality, early acquisition seems to be the preferred business strategy for Canadian tech entrepreneurs. This will have long-term consequences to our national prosperity and maintaining our standard of living.

Our leaders in this realm need to provide a focused mission orientation for our innovation inputs: Canada needs globally competitive, IP-intensive companies that are structured to succeed in the long-term by commercializing their innovations in a way that benefits Canadians in the form of high-paying jobs and economic growth that sustain the future tax base required to maintain our standard of living.

Every day we spend on the current trajectory is another day spent risking Canada’s future prosperity. There will be no reprieve if we miss the podium in this regard. No sector of the economy is safe from disruption. Few business models are safe from domination by global giants. If Canadians aren’t the winners in any industries at scale, our collective standard of living will erode. The billions of dollars we spend every year in the name of innovation will win us nothing more than a participation ribbon.

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American CEOs don't see US economic slowdown yet, says head of executive group

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Global CEOs are seeing a bit of a slowdown outside the United States, but that’s not what U.S. chief executives are saying about the nation’s economy, according to Steve Odland, president and CEO of The Conference Board.

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The organization, a global, independent business membership and research association, conducts a number of CEO and confidence studies.

“The U.S. numbers look very strong. All of the Conference Board indicators from the consumer confidence index to the leading economic indicators to the expectations index all say that the next six months expect to be very good,” said Odland, a CNBC contributor who once served as CEO of both Office Depot and AutoZone.

He told CNBC’s “Power Lunch” on Friday the group’s forecast for 2018 gross domestic product is about 3.1 percent, while 2019’s is 3.2 percent.

Its leading economic index for September increased 0.5 percent and its consumer confidence index moved up 2.6 points in October. However, its measure of CEO confidence declined in the third quarter, thanks to concerns about rising interest rates.

Odland’s remarks follow CNBC’s Jim Cramer’s comments that CEOs are telling him how quickly things have cooled in the economy.

“So many of them are baffled that we could find ourselves in this late-cycle dilemma that wasn’t supposed to occur so soon,” the “Mad Money” host said on Thursday.

Odland didn’t say that Cramer was wrong. Instead, he pointed out that there are some sectors that may be experiencing a slowdown.

“Ten years into a recovery, you would expect to see some of the leading sectors, some of the leading companies on that cycle to begin to slow down. And you would expect to see different geographic issues,” he said. “It’s a mixed bag.”

Bill George, former Medtronic chairman and a CNBC contributor, agrees. For example, the retail sector has never been better, and health-care execs are bullish, he said. However, for the auto sector it is near the end of the business cycle, he added.

“We are at the end of a very long cycle,” he told “Power Lunch.” “It could continue for several years, but everyone’s concerned about risk.”

He said the biggest risk is global trade, specifically with China.

— CNBC’s Elizabeth Gurdus contributed to this report.

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Economy

Canada falling behind in the knowledge economy due to 'outdated thinking': Balsillie

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Canadian governments need to radically rethink their approach to the knowledge economy if the country is to be anything more than a branch plant for global technology giants, former BlackBerry Ltd. co-CEO Jim Balsillie told a breakfast gathering in Toronto Friday.

“I think they confuse a cheap jobs strategy … (and) foreign branch plant pennies with innovation billions,” Balsillie said. “I think it’s just outdated thinking, people without the expertise making decisions.”

Balsillie made the comments in conversation with Financial Post columnist Kevin Carmichael as part of the launch of the Post’s Innovation Nation project.

Balsillie has argued that the “intangible” economy of data, software and intellectual property is fundamentally different from the classical industrial economy built on the trade of goods and services, and that because Canadian policymakers fail to understand that difference, they keep being taken for rubes.

On Friday, Balsillie was particularly critical of the federal government’s policy when it comes to “branch plant” investments in Canada in the technology sector.

He said that in the traditional economy of goods and services, foreign direct investment (FDI) is a good thing, because there’s a multiplier effect — $100 million for a new manufacturing plant or an oil upgrader might create $300 million in spinoff economic activity.

But if you’re just hiring programmers to write software, the picture is different, he said. It’s a much smaller number of jobs with fewer economic benefits, and, more importantly, the value created through intellectual property flows out of the country.

“Our FDI approaches have been the same for the intangibles, where, when you bring these companies in, they put a half a dozen people in a lab, they poach the best talent and they poach the IP, and then you lose all the wealth effects,” Balsillie said.

“Don’t get me wrong. I believe in open economies. They’re going to come here anyway; I just don’t know why we give them the best talent, give them our IP, give them tax credits for the research, give them the red carpet for government relations, don’t allow them to pay taxes, and then have all the wealth flow out of the country.”

When Carmichael asked about the recent push for tax cuts in Canada to match those enacted by U.S. President Donald Trump, Balsillie suggested that the bigger story is how the U.S. is entrenching its advantage on digital trade.

“We had lower taxes than the U.S. for 15 years, and our productivity went down, tick, tick, tick, for 15 years,” he said. “Now, what the U.S. has said is that you’ve got a one-time holiday to repatriate all your cash, but from now on all your IP gets taxed in the U.S. so they’re accruing the economic benefits and state power that comes with building those intangible assets.”

I think they confuse a cheap jobs strategy … (and) foreign branch plant pennies with innovation billions

Jim Balsillie

While Balsillie said that for years Ottawa didn’t listen as he sounded the alarm on intellectual property issues, he said he is now getting feedback from politicians that suggests the message is starting to get through.

During Friday’s conversation, Balsillie also stressed that, if small countries such as Canada make a point of prioritizing the intangible economy, there are huge opportunities. He pointed to Israel, Finland and Singapore as examples of how smart policies and specialization can reap big rewards.

“I could literally see enormously powerful positions for Canada if we choose the right places. I mean, there are some obvious ones: value added in the food business, and precision data and IP in agriculture; certainly in energy extraction and mining, which are data and technology businesses,” he said.

“We actually have enormous opportunities to build the resilience and opportunity,” he said. ”And how can you threaten a country with a picture of a Chevy and 25 per cent tariffs when you’ve built these kinds of very powerful innovation infrastructures that you can’t stop with a tariff because they move with the click of a mouse?”

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Indonesia moves to shore up economy

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Indonesia announced yesterday a new economic stimulus package to support the rupiah and spur growth in the lead-up to the presidential election in April, which has seen the country’s ailing economy emerging as a critical issue for President Joko Widodo’s administration two months into campaigning.

The stimulus package includes tax cuts from next year for exporters in the mining, plantation, forestry and fishery sectors which keep their export revenues in the domestic banking system.

Finance Minister Sri Mulyani Indrawati, one of several ministers fronting a press conference at the presidential palace yesterday, said that a reduction of income tax will apply to the interest of time deposits both in local and foreign currencies deriving from export revenues.

However, exporters which do not keep their export earnings domestically may be barred from moving their goods overseas.

“Regarding the export revenues, we will impose an administrative sanction by way of banning exports,” Ms Sri Mulyani added.

Experts say it is a move to stem capital outflows, which have seen the embattled rupiah plunge to its lowest levels since the 1998 Asian financial crisis.

Mr Joko had in July met executives from about 40 exporters in Indonesia to also make the case for earnings currently kept offshore to be brought home.

Mr Satria Sambijantoro, an economist at Bahana Securities, said that by keeping export revenues in the country, the foreign exchange reserves can grow, which will help mitigate capital outflows from Indonesia in the future.

“In the end, foreign exchange liquidity in domestic banks will remain ample at times of external shocks,” he told The Straits Times.

To attract foreign investments, the stimulus package will allow for a relaxation of the country’s Negative Investment List for some priority sectors, such as textile printing and weaving, said Industry Minister Airlangga Hartarto.

The list specifies sectors which are either entirely closed or conditionally open to foreign investment, including oil and gas, trading, pharmaceuticals and transportation.

Finance Minister Sri Mulyani Indrawati, one of several ministers fronting a press conference at the presidential palace yesterday, said a reduction of income tax will apply to the interest of time deposits both in local and foreign currencies deriving from export revenues.

With the change, foreign ownership in 54 business sectors, including the steel, chemical and petrochemical industries, can now be 100 per cent, up from the present 30 per cent to 67 per cent.

Coordinating Economic Minister Darmin Nasution said: “We cannot address the current account (deficit) issue only. We must formulate policies to give investors confidence and allow capital inflows.”

The rupiah has been on an upward trend since early this month.

It traded at 14,611 per US dollar on the foreign exchange spot market at yesterday’s closing session versus 14,665 a day earlier, according to data compiled by Bloomberg.

But analysts warn that risks remain, particularly with imports traditionally spiking during the year-end holidays, which might contribute to a higher current account deficit and a weaker rupiah.

Mr Mohammad Faisal, executive director of the Centre of Reform on Economics Indonesia, said that with the US intensifying efforts to boost its economy, including adopting a hawkish monetary stance, capital has been sucked out of emerging economies like Indonesia.

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