Barton panel pitches large growth funds, procurement to improve innovation ecosystem

Mark Henderson
February 14, 2017

The creation of two large funds aimed at scaling high-growth tech firms is among the recommendations contained in the second wave of reports from the Advisory Council on Economic Growth. The funds would target what the panel describes as bottlenecks in the innovation ecosystem – early- and expansion-stage companies as well as established small- and medium-sized enterprises (SMEs) with high impact potential.

The panel’s February 6 report also recommends that existing innovation programs be reviewed and rationalized and that a so-called innovation marketplace be created to incent commercialization and technology adoption modeled on similar initiatives in the US, UK and elsewhere.

The five interlocking reports were released February 6 as the Liberal government puts the finishing touches on its Innovation Agenda, the fundamental science review and the forthcoming Budget. A previous report with three separate recommendations was submitted and released last fall.

Barton Panel is calling for five “interventions” in the innovation agenda:

i) Catalyze the formation of business-led “innovation marketplaces” in sectors and technologies where Canada has momentum and where market participants need new solutions.

ii) Create additional pools of growth capital to ensure promising companies have sufficient capital to scale up and access to investors who can provide advice and other value-added support.

iii) Modify government procurement policy to incorporate strategic procurement and innovation as a key objective. A shift from a requirements-focused to a value-based procurement system will facilitate the government and other public-sector players becoming important first customers, to test and validate Canadian innovative solutions.

iv) Review and rationalize government innovation programs, then scale up those that have proven impact. Review regulatory barriers and remove or re-tool those that would impede development of priority sectors and innovation marketplaces.

v) Expedite entry for top talent through immigration policy that helps reduce a talent shortfall for high-growth companies, and invigorate the talent pool through a focused innovation talent strategy and the FutureSkills Canada program.

Just hours prior to the official release of the report, council chair Dominic Barton spoke about the latest reports and the challenges Canada faces in becoming a more innovative and globally competitive country.

“We need to figure out how we can concentrate and scale up more of what we do. We’re too small a country to do 35 big things. Even the United States is focused on 10,” Barton told a Universities Canada-sponsored conference in Ottawa. “We’re very inventive and that’s wonderful but we do not have the resources – human and capital – to do everything. We have to make choices. We have to pick (and) business has to be involved in that. But once you’ve got business, universities, researchers and entrepreneurs together  ... you can double down.”

The reports cover innovation and skills training, sector development and positioning Canada as a global trading hub. They arrive as growing protectionism south of the border presents a complex web of challenges and opportunities for a domestic economy seeking to break out of a slow growth trajectory.

“(The reports are) a huge improvement over what has been coming out of Ottawa for the past 15 years or so. The financial provisions in particular could be promising insofar as the goal is to grow companies,” says Dr Richard Hawkins, a political economist with the Univ of Calgary’s Science, Technology and Society Program. “I like the recognition that we have to focus more on sectors rather than horizontal programs, and that we have to develop positional strengths … the issue is really about business and finance, not just tech.”

The two proposed growth funds – the Canadian Matching Fund and a Business Growth Fund – are contained in Unlocking Innovation to Drive Scale and Growth, perhaps the most comprehensive of the five reports. The funds are intended to fill an estimated $600 million to $850 million financing gap. The $300 million to $400 million Matching Fund would target private investments on a 1:2 basis by providing common equity, preferred equity or unsecured debt, depending on the needs of the entrepreneur. It would be governed by an existing public agency such as the Business Development Bank of Canada and paid for by “re-allocating funding from existing programs where possible”.

The Business Growth Fund would be business-led and provide a “fully private-sector solution” that “diversifies funding options for SMEs”. Investment mechanisms could be minority equity or loans to high-growth companies consisting of pre-approved capital from leading Canadian banks and financial institutions.

“The technology sector is starved for capital so creating additional pools of growth capital will be well received,” says Charles Plant, a senior fellow at the Univ of Toronto’s Impact Centre.

Plant says the funds are among three of the report’s five recommendations that he rates highly, the others being strategic procurement policies and rationalizing government programs. Where the report falls down, he contends, is in its recommendations for innovation marketplaces and changes to immigration policy to address the talent shortfall for high-growth companies.

“The idea of innovation marketplaces seems like a traditional government program of matchmaking what looks good on paper but rarely works in reality … This will be a boondoggle for not-for-profits feeding at the government trough and issuing magical metrics on how they have increased network uptake receptor capacity,” says Plant.

“The biggest hole for talent is in marketing and sales of technology and no government program will be likely to achieve success at bringing US-based marketing and sales talent to Canada,” he adds. “We should leave these marketing and sales people where they are and employ them from a distance. That way they’ll be located where our future customers are and better able to take advantage of all those great innovation marketplaces developed south of the border.”

Talent is a contentious issue that has largely defied past policies and programs intended to attract people with the expertise needed by SMEs to scale and enter new markets. Hawkins says Canada must get over its “fetish that we can import solutions to our problems”.

“I am annoyed by the focus on importing talent. The real issue is production and retention of talent,” he says.

Hawkins is also critical of the majority of the reports’ recommendations as he says “almost all of the practices recommended are those already practiced for 30 or more years by our significant competitors”.  What’s more, those competing jurisdictions are experiencing a “worsening of the same problems” — a reality that seems to have escaped panel members, he notes.

“The report cites virtually zero argumentation or evidence to back up any of their recommendations so it is impossible to know what they considered and what they did not in their deliberations,” says Hawkins. “If they were to look at the evidence (of) the effectiveness of government programs generally throughout the OECD, they would find that most of these programs have very spotty records.”

Hawkins asserts that “innovation is not about following best practice. It is about establishing new practices” leading to product sales in export markets in which innovative companies set the price.

A Canadian SBIR

The recommendation for an overhaul of government procurement is drawing better reviews, primarily due to its indebtedness to the highly successful US Small Business Innovation Research (SBIR) program — dedicated to stimulating technical innovation and commercialization by small business. The proposed use of strategic procurement by government has five components:

  • Solution-oriented calls for proposals “to align different actors in the innovation ecosystem, incent collaboration, and expand supply chains”;
  • Expand the Build in Canada Innovation Program (BCIP) to “market and support more businesses applying to participate”;
  • Leverage mandatory set-asides by Public Services and Procurement and other government departments starting at 1% and rising to 5% by 2025;
  • Implement a Canadian SBIR-type program requiring government agencies to earmark 3-5% for funding early-stage R&D by SMEs; and,
  • Maintain the Industrial and Technological Benefits (ITB) policy and align with priority areas for growth and innovation.

“Developing strategic procurement policies within government is something that has been needed for a long time,” says Plant. “Our growing technology exporters are frequently asked by foreign governments why they should buy something when our own government doesn’t.”

Hawkins says the report is on the right track by virtually ignoring the place of R&D tax credits in the innovation ecosystem, an absence he says “is really encouraging as their productivity has been less than zero”. He’s also encouraged by the “creeping in of the export dimension”.

“The real measure of how innovative you are is the value of your export markets which you have created and in which you set the price,” says Hawkins.

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