We must close the innovation gap

While our natural resources will continue to play an important role in our economy, as they have always done, they are too small a share of the economy to ensure a prosperous nationwide society.

While our natural resources will continue to play an important role in our economy, as they have always done, they are too small a share of the economy to ensure a prosperous nationwide society.

Much more is needed — and that has to be based on brainpower and knowledge, not what’s buried in the ground. That’s the way the world is headed.

As the McKinsey Global Institute underlined in a report earlier this year — Global flows in a digital age — “knowledge-intensive flows — rather than labour-, capital- or resource-intensive — increasingly dominate global flows” of goods, services, finance and talent.

They “include goods and services that have a high research and development component or utilize highly skilled labour.”

Examples include high-tech products such as semiconductors and computers, pharmaceuticals, automobiles and other machinery, and business services such as accounting, law and engineering.

The last era of globalization focused on the search for low-cost production, but the next era, it said, “will be one in which knowledge-intensive flows are an increasingly large and dynamic component of this cross-border activity.”

Canada must be part of this next globalization if it is to succeed.

One need is to much better commercialize the new knowledge that young Canadian talent is developing.

It is by successfully taking this new knowledge and converting it into commercial activity through the creation of viable new companies that Canada will develop the good jobs and wealth for a healthy future.

But Canada has an innovation gap. One reason is the lack of a financial system that effectively supports new companies.

Governments, federal and provincial, have tried to address this, and the Harper government is no exception. Since 2003, successive federal governments have committed $1.32 billion to venture capital funds as well as maintaining, with the provinces, generous tax deductions for Canadians investing in Labour Sponsored Venture Capital Corporations.

The 2013 Venture Capital Action Plan, with a $400-million commitment running over the next seven to 10 years, is the latest initiative; the goal is to persuade private sector investors and provincial governments to put up another $800 million.

While these are all positive developments, they likely are not enough.

At a recent Conference Board of Canada summit on innovation and commercialization, Stephen Hurwitz, a Boston lawyer and expert on cross-border venture capital, warned that Canada faced “a serious shortage” of venture capital, and while he praised the government’s Venture Capital Action Plan, he feared it would still fail to meet the real capital needs of emerging Canadian companies. He called this “Canada’s commercialization crisis.”

The lack of such capital, he said, was depriving Canadian entrepreneurs of the opportunity to take world-class R&D from our universities into commercial success in world markets.

“Even when Canadian companies do obtain venture capital funding, it is often insufficient to meet their capital needs,” he said, adding that an even bigger problem is obtaining follow-on financing.

“As a result, rather than blossoming into industry leaders,” he said, he has witnessed “many of these promising capital-starved, but R&D rich, companies being sold early in their lifecycles — and at low prices — and then being moved, along with the future jobs they will create, to the United States.”

Canadian venture capital firms, Hurwitz said are too small to be effective.

This is a major problem. They need a minimum of $200 million in capital, and the vast majority are what he called “sub-scale,” with well below $100 million in capital.

This means they cannot provide the ongoing funding necessary so that their portfolio companies have the chance to grow into viable enterprises.

A key reason is that institutional investors — banks, insurance companies, pension funds — are not providing capital for venture firms, in contrast to the U.S. experience.

Unless Canadian institutional investors, which have hundreds of billions of dollars in investible capital, invest in venture funds, Canada is unlikely to achieve the level of venture funding it needs, Hurwitz warned.

Canada has to be an important player in the next era of globalization.

Resources won’t do it.

We must close our innovation gap. And that won’t happen unless, among other things, we do a much better job of helping our young knowledge-intensive companies successfully commercialize and grow their businesses.

That’s why we need to build the venture funding capability that these businesses require for success. Government has done some useful things but we are not there yet.

This must be a top priority for a successful and healthy Canada.

Economist David Crane is a syndicated Toronto Star columnist. He can be reached at crane@interlog.com.