Canada’s structures for incentivizing and creating an innovation-driven economy are so broken, if the country were operating as a business it would be considered a bad investment, say two veterans of the innovation landscape.

Multiple problems include an “alphabet soup” of federal innovation programs – funded with taxpayers’ money – that are subsidizing the talent and IP of foreign multinationals, they said at Alberta Innovates’ Inventures conference in Calgary.

“We actually don’t have the right policies in place and we often don’t have the right structure on how policies should be implemented,” Benjamin Bergen, (photo at right), CEO of the Council of Canadian Innovators, said during a session titled “Unlocking Canada’s Innovation Potential.”

Successful innovation economies in the world see domestic innovators working collaboratively with governments to support entrepreneurs, build markets and create the right conditions for innovation, he said.

But that doesn’t happen in Canada, where prosperity “is atrophying or stagnant,” Bergen said. “There’s a real sense that the economic opportunities in this country are eroding.”

Canada is a high-cost, low-productivity jurisdiction, said Neil Desai (photo at left), board chair at Solace Power and former leadership team member at cyber-forensics firm Magnet Forensics. “Our economy is structured this way, not just our government.”

“The No. 1 issue I see for our country [is that] our economics don’t work,” he said. “Every year things are getting more expensive and every year the costs are going up at the same time. That really scares me.”

Structures in Canada around talent, capital, intellectual property and companies’ freedom to operate looked very different only a decade ago, with entrepreneurs saying that a welcoming and supportive ecosystem put the wind in their sails, Desai said.

But those structures have changed during the last 10 years, he said. “The wind has actually been in the face of the entrepreneurs who are trying to do this at scale from Canada for the benefit of all Canadians.”

For example, Canada’s largest program to support innovation is the Scientific Research and Experimental Development (SR&ED) tax credit program. About 18,000 companies receive a total of about $4 billion per year to support R&D activities.

But about 50 cents of every dollar of SR&ED funding goes to foreign multinationals with branch plants in Canada, Bergen noted. “We are subsidizing large multinationals to the tune of $2 billion a year, just through one program.”

Up until 2023, China-based Huawei was receiving SR&ED funding, until the federal government banned the company from operating in Canada due to concerns about national security and potential espionage, he said.

The SR&ED program also is so complex, about 20 percent of the funding provided goes to consultants to help companies access funding, he added.

Another example is the federal Strategic Innovation Fund (SIF), which has allocated about $8 billion since 2018. But 68 percent of this SIF funding also has gone to foreign multinationals with branch plants in Canada, to subsidize talent and IP generation for the countries where these global firms are based, Bergen said.

When looking at some of the structures of how the federal government funds the innovation space, “a lot of it is just a jobs strategy [aimed at creating jobs] and it’s not actually about creating productivity and prosperity,” he said.

Given Canada’s prosperity crisis and the threat of U.S. tariffs, “each one of those dollars [for innovation] that we’re allocating definitely has to be going to something that is not helping to subsidize Huawei or Google or IBM or Cisco, but actually supporting [Canadian] firms that are going to turn one dollar into $10, rather than having IP and data leak out of the country,” Bergen said.

Homegrown companies ignored for government procurement

Desai said that when he was at Magnet Forensics, the company received public funding from the SR&ED program, the National Research Council’s Industrial Research Assistance Program and other government agencies, while growing a company that made a profit every year.

When Desai was with Magnet Forensics, the company’s software was used by police forces and national security agencies globally in 100 countries, to investigate and prevent child sexual exploitation and human trafficking.

But when Magnet Forensics ran into a technology problem that it couldn’t solve and had to sell the company for $1.8 billion to U.S. private equity firm Thoma Bravo in 2023, that sale didn’t move the needle at all in increasing Canada’s GDP, Desai said.

Moreover, the private equity firm purchaser valued the government public investment in Magnet Forensics at only 80 cents on the dollar, he noted. The company’s recurrent software revenue, however, was valued at $19 on the dollar.

 “If you don’t think procurement is important, let me tell you that it’s very, very important,” Desai said.

Canada has this “weird” innovation ecosystem structural problem – not seen in other countries – where intermediaries such as financiers, universities, and business incubators and accelerators are put at the centre for validating businesses, he said. “Everywhere else the business gets to validate the business.”

“We have a very odd ecosystem where we’ve actually pushed those who know the businesses best and marginalized them to the sidelines,” Desai said.

 Magnet Forensics was able to pursue co-development of its technology with partners in the U.S., the U.K. and Singapore, he noted.

But in Canada, with partners like the RCMP and other organizations, “they just did not have a structural incentive to innovate with a Canadian company,” Desai said. “They’re actually taking a risk [to their careers] if they want to work with us.”

Bergen said when it comes to procurement, Canadian governments at both the federal and provincial levels regularly select foreign firms over domestic companies that can offer the equivalent technology or service.

For example, in March the federal government selected Australian firm BAE Systems for a $6-billion partnership to provide a new over-the-horizon radar system in the Arctic.

 After Ottawa’s announcement, Bergen said he got a call from two Ottawa-based companies that together have received about $60 million in public funding over several years to develop such technology and could have provided it – but neither company was consulted. Instead, the Australian company will own the IP rights for the system that Canada will purchase.

In another example, the Quebec government last year chose Wisconsin-based Epic Systems Corporation to build infrastructure for Quebec’s new digital health record project, expected to cost about $3 billion.

This means that Canadians’ personal health data is potentially being put into the hands of a company that’s subject to U.S. laws, including legal requirements to provide access to data, “that potentially could be shaken down by the [U.S.] government,” Bergen said.

The Ontario government promotes a buy in Canada policy. But the Doug Ford government recently passed a policy that stipulates every company in Ontario with more than 250 employees qualifies as an Ontario company, Bergen said.

“All of these large foreign firms are now considered Ontario firms and can actually bid on all this [provincial government] procurement as well,” he said. “The rhetoric isn’t matching the reality.”

Canadian university IP sits dormant or gets sold to foreign companies

One Inventures participant commented that “There’s a ton of dormant IP sitting in universities that isn’t appropriately transferred to the private sector [and commercialized].”

 There are few incentives structurally for universities to commercialize their research to the benefit of the university, the academic entrepreneur and the research funder, Desai said. Most university tech transfer offices don’t have entrepreneurs or people who’ve actually started and run businesses on staff.

So ideas and IP generated by universities often get sold to the highest bidder, including foreign entities, he said.

For example, substantial public funding went to support research at Dalhousie University to develop lithium-ion battery technology for electric vehicles. The research funding agreement between Dalhousie and Tesla gives the technology’s IP to Tesla.

“The rents [on the ownership and use of the IP] are being generated to the benefit of foreign investors on the backs of Canadian taxpayers. That’s charity,” Desai said.

On top of that, the federal, Ontario and Quebec governments have committed nearly $38 billion to foreign EV battery manufacturers to make batteries in Canada, but all of the benefits of talent development, knowledge and IP flow to other countries.

The technologies that enabled artificial intelligence and the creation of AI large language models were developed in Canada, but sold to Google for a few million dollars, Desai said

Canada’s government-backed innovation financiers are another problem when it comes to making bets on deep tech that will take a long time to commercialize, he said.

He pointed to BDC, the self-proclaimed bank for Canadian entrepreneurs, which was created to be the funder of last resort for innovators who couldn’t get funding elsewhere and to fill those market gaps.

BDC announced in April that it would be ending its deep technology fund that among other things funded deep tech like quantum computing, he said. BDC has also shut down its financing program for startups with IP, which also included deep tech focused on quantum.

Yet the U.S. Defense Advanced Research Projects Agency (DARPA) recently selected 18 companies – three of which are Canadian – for its Quantum Benchmarking Initiative. The initiative, which provides each company up to $1 million, aims to identify and verify approaches for building fault-tolerant quantum computers that can achieve utility-scale operation.

“What market signal does that send to these [Canadian] companies that DARPA would buy the technology even though they don’t know what the use case is, but our government-backed financing [agency], which is supposed to fill market gaps, is exiting that market?” Desai asked.

“We want these [technologies] to be part of our productivity story, but my nervousness is we don’t have the strategic foresight and the patience to actually see them through.”

 Another example is Canada’s five global innovation clusters, which together have received nearly $2 billion in federal funding, Desai said. “I could not tell you what the priorities are [for these clusters]. They seem to be everything.”

Canada needs to focus on specific areas of strength and double-down on these

Bergen noted that Canada is a small, open economy that, like other countries with similar economies, needs to focus on specific areas of strength and then double down on policies that can support innovative companies in producing commercial products and services that can be exported.

Also, Canada has less venture capital and less access to such capital compared with the U.S., he said. And unlike countries that are successful in innovation, Canada keeps innovation drivers such as talent, private capital, public investment, and access to customers and markets in separate silos, with little integration to leverage each driver to maximize innovation and commercialization.

 “We have to put domestic innovators and scaling technology firms at the centre of the public policy we create when we talk about innovation and what that means,” Bergen said.

He pointed to Denmark as a “great example” of a country with a small economy that decided to focus on developing its pharmaceutical sector and making it globally competitive. The sector includes Novo Nordisk, which makes the weight-loss drug Ozempic, a technology that was spun out of the University of Toronto.

The Danish government also is now one of the world’s largest investors in quantum, after launching a national quantum strategy and investing 1 billion Danish Krone (DKK) in quantum research and innovation, Bergen said. Novo Nordisk Foundation is investing 1.5 billion DKK to build a fully functional quantum computer by 2034.

When it comes to changing the structural problems in Canada’s innovation ecosystem, Bergen pointed to the release earlier this month of the Council of Canadian Innovators’ Mandate to Innovate document, which includes specific recommendations for 14 federal departments and agencies that have some sort of mandate in innovation.

Other countries have industrial strategies and other types of strategies to focus their innovation initiatives and funding, he said. But in Canada, “We have left thinking about goals and missions,” and about what areas Canada wants to dominate, own and be world leaders in.

The challenge for Canada right now is: How does the country build an innovation economy? Bergen said.

At the same time, the geopolitical shifts and threat of U.S. tariffs present a real opportunity to build new innovation capacities and systems, he said.

Desai said Canada needs to focus on national innovation challenges and projects, such as in health care which is the country’s No. 1 liability when it comes to costs.

“This is not about who can lobby the hardest, who can get in front of the right politician at the right time,” he said. “I’m not suggesting we pick winners. All I’m asking is that we stop picking losers.”

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