How the Liberals’ multibillion-dollar tech plan created ‘chaos’ instead of growth

Photo illustration by The Globe and Mail/Source: iStock

Canada has been the worst performing advanced economy in the Organisation for Economic Co-operation and Development since 1976. Governments of all partisan stripes have tried and failed to reverse the trend. If nothing changes, the OECD projects, our economic growth per capita will continue to stagnate for decades to come. This article is the first in an occasional series, called Per Capita, that will examine how and why policy interventions have come up short – and how fresh approaches to economic growth are urgently needed.

Last summer, the federal government invited 40 industry groups to weigh in on its latest big-ticket plan to support Canadian innovation. It was a $1-billion agency announced in the spring budget that would stimulate businesses to spend more on research and development and deliver innovation-led growth.

During five roundtable meetings around the end of August, officials with the Innovation, Science and Economic Development department (ISED) asked participants how they thought the proposed Canadian Innovation and Investment Agency (CIIA) could most effectively help businesses increase R&D spending and overcome challenges to growth.

Each invitee got about three minutes to speak. Many left unimpressed, according to representatives of six attending organizations who spoke to The Globe and Mail afterward.

Several believed ISED had already settled on what the CIIA should look like. To them, the agency didn’t sound any more potentially effective in delivering economic impact than initiatives that had come before.

“There were a lot of questions around exactly that: How is this going to be different?” says attendee Corinne Pohlmann, senior vice-president, national affairs with the Canadian Federation of Independent Business. “That was my question too.”

The consensus among many participants was that, after seven years in power and committing billions to supercluster programs and other initiatives including strategies for sectors such as artificial intelligence (AI), Justin Trudeau’s Liberal government had little to show for its efforts to unleash the economic potential of Canadian ingenuity. The new $1-billion agency wouldn’t change that, they felt.

“I wasn’t overwhelmed at all by what they were saying,” says attendee Michele Lajeunesse, senior vice-president, government relations and policy with the Information Technology Association of Canada, known as Technation. “I’m not sure why we need yet another agency when money is already being spent in ways that could be better spent. How is this going to differ in terms of its effectiveness? Others haven’t been so effective.”

Eye-rolls now greet mentions of the word “innovation” by Ottawa, after years of politicians throwing it around as a buzzword. Benjamin Bergen, president of the Council of Canadian Innovators (CCI), which represents domestic technology companies, says “the government still has a lot of work to do to build the capacity and expertise required to design and implement a national innovation strategy that positions Canada for success in the 21st-century economy.”

Some former federal officials agree. There are so many innovation programs and agencies that “with everything that’s been announced, it’s impossible to come up with a word other than ‘chaos,’” said Robert Asselin, who was budget director for then Liberal finance minister Bill Morneau, and is now senior vice-president of policy with the Business Council of Canada.

“The problem has been mainly a lack of clear objectives” by a government “unclear what kinds of problems they are trying to solve. The government still thinks in terms of programs as opposed to outcomes. It should be outcomes first, then programs and structures to support these outcomes.”

Martin Imbleau, president of the Port of Montreal, presents a scale model of the City of Montreal to Veronique Proulx, president of the Quebec Manufacturers, Prime Minister Justin Trudeau, Sports Minister Pascale St-Onge and Innovation Minister François-Philippe Champagne in Montreal on Nov. 7, 2022.Paul Chiasson/The Canadian Press

Innovation programs, critics say, have been overly politically driven with an attempt to cover too many regions and sectors, and designed by bureaucrats with outdated or underdeveloped notions of how to create economic growth in a knowledge economy.

“Canadian policy makers have spent the past three decades confusing innovation with invention, a science-and-technology strategy with an innovation strategy, intellectual property generation with IP protection, free trade agreements with asset protection agreements, privatization with digitization, and supply chains with value chains,” former BlackBerry co-chief executive Jim Balsillie wrote last year.

Observers say one of the best ways to foster economic growth would be to help homegrown companies develop into giants like Shopify Inc. That was a key message in 2019 from outside advisers, including Shopify CEO Tobi Lutke himself, tasked by the government to provide advice on economic growth.

But Liberal actions on innovation have been diffuse and rarely singularly focused on turning upstarts into economic anchors. “Getting companies to that scale is important because they can innovate, do research and development, export and have more bandwidth to do things to make our economy competitive,” said Michael Denham, former head of the Business Development Bank of Canada (BDC), a Crown corporation. “It’s been slow progress over seven years.”

If the government is falling short on innovation, it’s part of a larger problem: Canada has been a chronic laggard on key economic measures.

Our economic output per capita has been the worst among advanced nations in the Organisation for Economic Co-operation and Development since the 1970s, a trend the OECD forecasts will continue until 2060. Business spending on R&D, productivity growth and labour utilization are in the bottom quarter of advanced nations. According to the World Bank, Canada’s share of global exports has fallen from more than 4 per cent in the early 1990s to 2.38 per cent in 2020.

Canada ranks sixth among G7 nations and 15th overall in the World Intellectual Property Organization’s 2022 global innovation index; we used to make the top 10. And Canada ranks 24th overall in knowledge and technology outputs – a measure of the amount of patents generated here. As intangible assets have increasingly driven wealth creation globally, we remain net importers of other nations’ IP.

These are the weaknesses robust innovation policies should help to address, as they have in other countries such as the Netherlands, Israel and South Korea. But those policies haven’t made much of a dent here.

“Look at countries that have been innovative and successful at growing firms the way we have not been. It’s clear they have a plan, a structure, and that they connect their talent and capital with the actual opportunities,” Daniel Schwanen, vice-president, research with the C.D. Howe Institute said. “We invest in talent, we put capital to work, we give R&D tax credits, maybe too much spray and pray. We are not making that connection as much or as successfully as most of our competitors.”

Even Mr. Morneau says in his new memoir that the government “didn’t do nearly enough to stimulate economic growth” needed to pay for social programs. “Productivity improvement is the most important issue on our agenda, and we are not focused on it.” He singled out “our poor performance when it comes to innovation; we depend too often on others to lead the way.”

ISED Minister François-Philippe Champagne speaks on legislation to modernize the Investment Canada Act on Dec. 7, 2022. Keeping pace with the U.S., the world’s most innovation-driven economy, is one of the challenges Mr. Champagne and his government face.Justin Tang/The Canadian Press

The government realizes there is a problem, but so did then Liberal finance minister Paul Martin nearly three decades ago. Current Finance Minister Chrystia Freeland called the chronic productivity shortfall “a well known problem – and an insidious one” in her budget speech last March.

Meanwhile, the slogan of the man in charge of the government’s innovation agenda, ISED Minister François-Philippe Champagne, is “I want more” when it comes to results from its innovation efforts. “If you ask me, ‘Do we need to be more ambitious?’ Totally,” Mr. Champagne told The Globe. “I don’t want to be Polaroid; I want to be Apple and be in the economy of the future.”

Mr. Champagne and his government face another challenge: In the United States, already the world’s most innovation-driven economy, the government is dumping hundreds of billions of dollars into innovation initiatives in areas such as chips, clean technology and AI, part of an effort to reconfigure supply chains to be less reliant on China.

Officials in Ottawa see that as a game-changer for North America’s industrial structure, which prompted the Canadian government last year to commit $15-billion to clean-technology investments and billions in clean-tech investment tax credits. Mr. Champagne has been travelling the globe wooing electric vehicle battery makers to set up branch plants here.

But if the Canadian government’s big innovation focus is trying to keep up with a free-spending neighbour determined to onshore its economy, could we fall even further behind with an innovation agenda is already underwhelming?

The “I” stands for innovation

Prime Minister Justin Trudeau is shown hydrogen fuel cell technology during a visit to the University of Trois-Rivieres, on Jan. 18. Upon coming to power in 2015, Mr. Trudeau fashioned himself as a champion of the ideas economy built on Canadian resourcefulness.Ryan Remiorz/The Canadian Press

The Trudeau government came to power in October, 2015, as Canada’s technology sector was rebounding from the downfalls of Nortel Networks Corp. and BlackBerry Ltd. The proliferation of smartphones and social media, and AI and data-mining capabilities aided by cloud software delivery, powered the second boom of the digital age.

The techlash and concerns about surveillance capitalism hadn’t started yet. It was still cool to hang out with leaders of Google and Facebook, which Prime Minister Trudeau did conspicuously. In Canada, homegrown up-and-comers such as Shopify (which had gone public that May), and Lightspeed Commerce Inc. were growing fast.

The previous Conservative government made two changes to spur investment in Canadian startups: The Tories changed the tax code to make it easier for startups to raise foreign capital and launched a program for venture capitalists to tap wary domestic investors for funds.

Mr. Trudeau heralded a more ambitious approach. He fashioned himself as a champion of the ideas economy built on Canadian “resourcefulness,” not just natural resources. The government even renamed the Industry department that traditionally supported sectors such as autos and aerospace, with the “I” in ISED standing for innovation.

The government’s first innovation-focused budget, in 2017, committed $950-million for “superclusters,” $125-million for a world-first national AI strategy, $400-million for a sequel to the Conservative venture capital plan and $1.4-billion for clean technology.

Ottawa made it easier for innovative companies to hire foreign talent by speeding up visa processing and mandated departments to spend part of their R&D budgets on novel technologies from domestic startups. The Liberals later introduced Canada’s first IP strategy to encourage domestic innovators to protect their ideas and a plan to help the emerging quantum computing sector.

The government kept tabs on other nations that seemed to do innovation well and based some of its ideas on what worked elsewhere, including Israel, the Netherlands, South Korea, Germany and, of course, the U.S.

Clusters a bust?

But after seven years, many innovation sector players have grown weary and disappointed by the results in Canada. Some programs have been misguided, muddled, delayed or fallen short of expectations, critics say. Many single out the government’s flagship innovation program: superclusters.

The program set out to pick five consortiums, each comprised of dozens of multinationals and startups, learning institutions and business associations. Consortium members had to commit their own money to match federal funds. The five superclusters chosen focused on advanced manufacturing, supply chain innovations, digital technologies, protein industries and ocean-based industries. At the centre of each was a non-profit agency that co-ordinated activity and funded collaborative commercial projects proposed by consortium members.

General Motors Brightdrop unit’s CAMI EV Assembly, Canada’s first full-scale electric vehicle manufacturing plant, in Ingersoll, ON, Dec. 5, 2022. Critics say innovation programs have been overly politically driven with an attempt to cover too many regions and sectors.CARLOS OSORIO/Reuters

But critics felt the superclusters program had vague objectives and inadequate focus on keeping valuable IP created from the collaborations in Canada, as the consortiums included sophisticated, IP-hungry foreign players such as Microsoft Corp. Some executives and analysts questioned whether the groups were just instigating activity participants would have undertaken anyway.

The initiative also looked like a lot of past programs guided by political considerations, which aimed to spread the love and money across existing sectors and regions, rather than invest in areas of strategic future importance. As a flagship program, it wouldn’t be enough to carry the weight of fixing Canada’s chronic innovation problems. “The government didn’t do the necessary policy work to prioritize data, IP and Canadian ownership to ensure maximum benefits for the economy,” Mr. Bergen said.

The Parliamentary Budget Office in 2020 criticized the program for being slow to roll out, unlikely to reach job targets and lacking “quantifiable performance indicators” for measuring impacts on innovation.

“As part of a big picture, superclusters could have been a useful thing to have,” Mr. Asselin said. “But I think it’s going to become a poster child of how by itself it didn’t respond to a serious thought process about what needed to be fixed.”

The government also seemed to lose interest. The superclusters did not merit mention in the Liberals’ 2021 election platform, nor the mandate letter from the PM to Mr. Champagne that December. (After asking for $1.5-billion after the program’s initial money ran out, the superclusters got half that in the 2022 budget)

Instead, the government became smitten by another big idea, campaigning to set up an agency modelled on the venerable U.S. Defense Advanced Research Projects Agency (DARPA), created in 1958, which fuelled creation of breakthrough technologies such as the internet and GPS.

But while moving forward on “CARPA” was in Mr. Champagne’s late 2021 mandate letter, the idea was dead by the spring budget. A senior Finance Department official told reporters at the time the government decided it didn’t need another mechanism for funding inventions – research grant councils and universities do that – but something practical and market-focused. That led to the agency that got such an indifferent response from industry last August.

Buy Canada (not)

Another key government effort, the startup procurement program Innovative Solutions Canada (ISC), has fallen well short of its goals. ISC, based on the U.S. Small Business Innovation Research program that helped create giants Symantec Corp. and Qualcomm Inc., was supposed to address a chronic problem: Canadian governments buy little from domestic startups.

ISC promised to spur 21 federal departments to spend a combined $100-million a year, or 1 per cent of their R&D budgets, on precommercial technologies from homegrown companies. That, in turn, could unlock more program funding to develop proofs of concept and then, potentially, orders from government.

But so far, the departments have spent just over $100-million in total since the program’s announcement in 2017, and just four companies have booked those vaunted government orders. It’s well short of the modest 1-per-cent goal; by comparison, the goal set by SBIR in the U.S. is 3.2 per cent.

An ISED spokesman said in an e-mail ISC is “a young program” and it continues to work with departments and enterprises to identify opportunities.

Critics see government departments sticking to old habits. “The government still doesn’t buy Canadian technology,” said independent Nova Scotia Senator Colin Deacon. “We go to traditional vendors and buy traditional solutions. How do you have an innovative economy without an innovative government? We are not using our country’s tremendous capacity to innovate to solve our biggest public policy problems.”

Ex-BDC chief Mr. Denham agrees. “Having the government as a key customer tells international buyers that you are credible. There is huge upside from this. It frustrates a lot of people that we haven’t been able to activate it fully. We’ve never cracked the code for how to use procurement to accelerate innovation and commercialization. The past seven years are part of that dismal history.”

“We let everyone else take it and run with it”

Ottawa has also lagged on the policy front. In spring 2019, the government promised a digital charter to address growing anxiety among Canadians about how their data is being used and how digital technologies affect their lives. Many of the world’s biggest alleged privacy abusers are foreign giants – companies Ottawa has also cozied up to for a long time. The government introduced a bill to modernize Canada’s private sector privacy laws in 2020, but that died with the 2021 election call. The bill was resuscitated last June, but still hasn’t passed through amendments.

Canada has another chronic problem: Successive governments have funded R&D that subsequently turned into IP owned by foreign companies, with no domestic payback for Ottawa’s investment.

“Canada has a major surplus on the world stage in research,” said the C.D. Howe Institute’s Mr. Schwanen. “We sell research to the rest of the world – massively – that’s done here by Canadians, but for multinationals. When you look at the income that countries derive from intellectual property, we are one of the worst. We export all our research, but we don’t monetize it. “

For example, a 2018 Globe report revealed that Canadian universities, governments and phone companies were helping Chinese telecom giant Huawei Technologies Co. Ltd. develop cutting-edge 5G mobile technologies, even though the company was viewed by Canada’s intelligence allies as a corporate arm of its home country and suspected of aiding its cyberespionage capabilities. The Canadian government still permits universities and professors to work with Huawei to develop IP that is routinely transferred out of the country.

The government’s big-ticket corporate welfare program, the Strategic Innovation Fund, frequently bankrolls global corporations, such as Nokia Corp., Mastercard Inc. and Siemens AG. That’s nothing new; foreign aerospace and auto companies have received handouts from Ottawa for decades to operate here. But it hasn’t helped improve our relative economic standing.

During an interview to discuss the government’s innovation track record and accomplishments, Mr. Champagne talked up his efforts to bring foreign multinationals to Canada and to build branch plants that would feed into global supply chains for electric vehicle batteries. The government has pledged more than $1-billion in taxpayer-funded support for those efforts. “When we put our minds to something we succeed – that’s the Canadian spirit,” he said.

That may create jobs. But the head offices are elsewhere, and IP developed at those Canadian branch plants ends up abroad, generating revenues and income for the parent companies. “We’re playing global supply chain as much as Guadalajara is,” Mr. Balsillie said, referring to Mexico’s efforts to woo auto plants. “It’s just arbitrage” on labour costs.

“If you say ‘this is how you get the beginning of domestic global champions,’ well then, the big auto companies should all be in Mexico now. It’s folly. All you’re doing is spending a lot of money for low-end jobs.”

Government fills a role

Some federal innovation initiatives have borne fruit: The program to fast-track visa applications by skilled foreign workers to work for companies in Canada has brought more than 9,000 people here and is widely considered a success.

Canada’s IP strategy has begun to address a long-standing deficit of sophistication and understanding by Canadian entrepreneurs about the importance of protecting and commercializing inventions. It has committed money to accelerators and incubators to provide startups access to expert IP services, and funded a common pool of patents that companies can use to assert freedom to operate, and defend themselves in heavily-patented markets.

Politicians and government officials regularly talk up IP to show they are aware of its importance, and repeatedly state that protection of homegrown ideas is now baked into innovation programs, which never happened in the past. “To the government’s credit I think at least they now understand the problem, whereas a few years ago they didn’t even know what IP was,” said the business council’s Mr. Asselin. “But it’s still preliminary.”

Factory workers at Les Machineries Pronovost, a snowblower factory, in St-Tite, QC, on Nov. 29, 2022. The need for skilled workers has increased as the company ramps up its production, and they’ve hired several immigrants and are keen to recruit more.NASUNA STUART-ULIN /The New York Times News Service

There is also a long way to go. IP-based products amounted to just 1.87 per cent of Canada’s GDP in 2019, according to a November, 2021, article in Policy Options by Daniel Katz and Natalie Raffoul. Only 1.1 per cent of businesses in Canada filed for patents from 2017 to 2019 (the OECD average was 5.9 per cent in 2016). BlackBerry is the sole Canadian company in a ranking of the world’s 250 largest patent holders, at 117th place, but it is trying to sell most of its patents.

From 2014 to 2017, Canada’s international patent filings dropped by 22 per cent, worst among 152 member states of the Patent Cooperation Treaty, as global filings grew by 14 per cent.

Also, Israel receives a portion of revenue when publicly funded IP is sold to foreign companies, while Canada is just not there yet. Canada’s share of intangible assets in the global economy has declined since 2000 and the country is a large net importer of IP. Too much of homegrown and publicly financed IP is assigned to foreign owners and commercialized outside Canada with little residual returned to Canada, Mr. Deacon says.

Venture capital (VC) programs started by the Conservatives, and continued by the Liberals, have helped turn Canada into a leading non-U.S. destination for risk capital investors. The programs bankroll “funds of funds” with government money. The funds, in turn, raise matching dollars from private investors and some provinces to finance VC firms that ultimately back Canadian startups. And if the funds generate good returns, Ottawa gets its money back.

But after the launch of the third such program, in 2022, it’s not clear how long the government will need to keep supporting Canadian financiers. The original plan was to eventually wean them off completely, since top-performing VC funds shouldn’t need government support. Successive programs have required funds to raise more for every dollar from Ottawa.

Last May, Kim Furlong, CEO of the Canadian Venture Capital and Private Equity Association, told The Globe she was “committed” to not asking for a fourth big fund (which averaged $323-million in each of the three programs). “This is a crutch the industry should not rely on,” she said.

But her members pushed back. In December, Ms. Furlong backtracked, telling Canadian technology news site BetaKit “these programs should stay the course.”

Meanwhile, the government is expanding financial support for startups through Crown corporations. Ottawa is Canada’s biggest domestic startup funder, through BDC, which also administers the government’s VC assistance programs.

BDC’s own separate VC portfolio has also expanded over the past decade, including the recent launch of funds to back women entrepreneurs, “deep technology” startups and tech companies that help established industries become more efficient.

In 2010, BDC had $193-million in venture capital commitments. By 2022, it had reached $914-million. BDC projects those commitments will grow to $1.7-billion by 2027.

Another Crown agency, Export Development Canada, has also been increasing the amount of direct private capital investments into export-minded domestic technology startups.

One reason the agencies have stepped up is because giant domestic institutional investors, notably pension funds, don’t have focused investment strategies for Canadian startups, says Mr. Denham, the former BDC chief. They take a global approach and are more likely to buy big stakes in foreign players than write smaller cheques to domestic companies.

The Caisse de dépôt et placement du Québec, mandated by the province to support its economy, is an exception. But it is largely alone.

Even the Ontario Municipal Employees’ Retirement System, which started a Canadian-focused VC program in the early 2010s, now takes a global approach, de-emphasizing local startups.

Prodding pension funds to help finance the domestic tech sector could compel government to pull back on its own investments, Mr. Denham said. No such move appears to be on Ottawa’s agenda.

Coming Monday: Why the Government’s Artificial Intelligence strategy has been a disappointment