Author: Dani

LIFE SCIENCES

1LIFE SCIENCES CLUSTERS IN CANADA

There are some life sciences clusters across the country, with roughly half residing in Ontario. A 2003 report by Simon Fraser University’s Centre for Policy Research on Science and Technology identifies Halifax, London, Montreal, Ottawa, Saskatoon, Toronto and Vancouver as the seven communities with life sciences clusters in Canada.11 Other communities have emerging life sciences sectors as well; a 2014 report by the Hamilton Chamber of Commerce makes a compelling argument that their city has all the necessary ingredients for a sustainable life sciences ecosystem.12 Life Sciences Ontario has estimated that, in 2014, 83,000 Ontarians worked for life sciences firms (under one definition of “life sciences”), generating more than $40 billion in revenue for Ontario’s life sciences industry.13 The Cluster Atlas of Canada identifies seven metropolitan areas as having life sciences clusters (Hamilton, Kitchener-Cambridge-Waterloo, Montreal, Quebec City, Toronto, Vancouver and Winnipeg), with Toronto’s cluster of 43,810 workers (in 2011) being the largest in terms of employment. The report author’s definition of the life sciences includes the map of the ecosystem seen below:14

lifescience-diagram

2INNOVATION IN THE LIFE SCIENCES INDUSTRY

Concerns about the pace of innovation in the life sciences industry have made their way to the mainstreammedia, with one 2015 Globe and Mail headline going as far as asking, “Why is Canada’s life sciences sector flatlining?”15 The Globe piece indicates that while by many input measures, such as peer-reviewed research papers, Toronto’s cluster is doing quite well, this does not manifest itself in a significant number of large publicly traded companies. Eric Reguly, the author of the Globe piece, believes that this is due, in part, to advantages commodity industries have over the life sciences, and argues that the flow-through shares model used in many commodity industries should be allowed in the life sciences.

The Expert Panel on Innovation also notes the disproportionately large number of small- and medium- sized enterprises in Canada’s life sciences ecosystem. It does note that Canada’s sector scores very well on many dimensions, as the nation is a top-10 competitor in pharmaceuticals and a top-5 in biotechnology. In the generic pharmaceutical industry, both Montreal and Toronto are significant players on the global stage. Similar to the Globe and Mail article, the expert panel notes that although in many areas research has been successful, much of the commercial exploitation takes place outside of Canada.

3PAST STUDIES OF CANADIAN LIFE SCIENCES INNOVATION

Recent studies of innovation in Canada’s life sciences industry include:

Advisory Panel on Healthcare Innovation (2015): Although this comprehensive study focuses on the larger issue of health care, there are some recommendations applicable to the life sciences industry, which include:

  1. Federal-provincial collaboration in identifying and accelerating the adoption of potentially disruptive technologies that benefit patients and provide value for money.
  2. Support the spread and scale-up measures to improve procurement through the Healthcare Innovation Agency of Canada.
  3. Develop a federal strategy for the sector, which would aid companies in the commercialization of products, attract foreign investment to the field, use procurement to aid “high-impact innovations” and encourage the greater availability of capital.
  4. Accelerate regulatory harmonization with the U.S. and provide advice and a road map of government policies to assist small- and medium-sized enterprises.

BIOTECanada (2013): The highlight of BIOTECanada’s 2013 paper is that access to capital is the “missing ingredient” to the success of Canada’s life sciences clusters. Their respondents advocate that governments “facilitate access to risk capital” for the life sciences sectors. Due to the difficulty of accessing capital, firms are looking to licensing agreements or mergers and acquisitions as a way to grow, rather than growing through firm-level investments.

Council of Canadian Academies (2009): As part of its Expert Panel on Business Innovation, the council examines the life sciences as a case study and provides four broad conclusions:

  1. While government research and development funding may be a necessary condition for success in the life sciences, it is not a sufficient one, as other factors play a role.
  2. Government policies in the life sciences must be coherent between various public sector actors.
  3. Given the long time frame between the discovery of a product and the introduction of that product to market, investors in the life sciences, private or public, must show unusually high levels of patience as well as “deep industry knowledge.”
  4. There is a role for public policies to increase links between industry participants given the high level of specialization in the life sciences ecosystem. They give the examples of linking companies with universities and research centres that have “great ideas, but few links to the marketplace.”

Gertler and Vinodrai (2009): In a study published in European Planning Studies, Gertler and Vinodrai examine the life sciences clusters in Canada’s three largest metropolitan areas (Montreal,  Toronto and Vancouver) and three mid-sized centres (Ottawa, Saskatoon and Halifax) to determine how life sciences clusters emerge. There are some common themes in their analysis:

  1. Path-dependency is critical and life sciences clusters emerged with the help of pre-existing strengths (and are not created out of whole cloth).
  2. The “dominant actor leading the process of cluster emergence and dependence” differed from cluster to cluster. As such, there does not appear to be a “one-size-fits-all” model of cluster development in the life sciences.
  3. Diverse life sciences clusters have lower levels of volatility than clusters that are concentrated in a small subset of the life sciences.
  4. Public policies influence the success of the life sciences through some different mechanisms, including investments in research labs, provincial health-care expenditures and local economic development and technology transfer offices.
  5. Universities and colleges do not always play the leading role in the formation and growth of life sciences clusters, despite the conventional wisdom to the contrary. Gertler and Vinodrai highlight the critically important roles that these institutions play in the development and attraction of life sciences talent to the local labour market.

Life Sciences Ontario (2014): In this “state-of-the-nation” paper, four challenges are identified for Ontario’s life sciences industry. First is the small size of Ontario’s life sciences firms, with only four per cent of companies employing more than 100 people. Second, access to capital is limited for growing life sciences companies. Third is Ontario’s below-average research-and-development expenditures relative to the Organisation for Economic Co-operation and Development. Fourth is Ontario’s surprisingly high unemployment rate for 20- to 24-year-old science graduates (18.9 per cent). The paper argues for the need for a “coordinated strategic plan to grow Ontario’s Life Sciences sector.”

4WHAT OUR ROUNDTABLE TOLD US

The day after our financial services roundtable, Canada 2020 ventured to the MaRS Discovery District in Toronto. After a tour of Johnson & Johnson’s JLABS, we sat down in a MaRS boardroom with a group of industry leaders, NGOs and regulators to discuss innovation in the life sciences. Here is some of what they told us.

Defining the life sciences: When Canada 2020 started researching the life sciences industry, we did not have a precise definition of the sector. It turns out, we weren’t alone. Our panel discussed how “life sciences” was an umbrella term for many different areas, including pharmaceuticals, medical devices and (depending on whom you ask), health care, and how there was no standardized definition. Breaking life sciences down into different areas is important, as market structures and policy challenges often differ greatly between areas.

Market structure: The domination of the Canadian non-generic pharmaceutical industry by foreign firms was also a concern. The panel noted that Canada risks having a “branch-plant” sector with the truly innovative work happening in the home markets. The sheer size of multinational players in the area creates a barrier to entry to new firms, but also offers funding opportunities for smaller firms with innovative ideas. Other parts of the life sciences ecosystem, such as medical devices, are seen as having lower barriers to entry.

Funding: Some participants saw obtaining early-stage funding in Canada as difficult , with later-stage funding somewhat easier to find. Israel was cited as a country that successfully addressed this problem through a seed funding program with the government contributing 15 per cent of the capital. Others described large bottlenecks on the path to commercialization, , with one roundtable member stating, “We have great ideas, but we’re not developing them so they can survive the component that comes after them.” Engagement with multinational enterprises and the health-care system was cited as a potential solution to the problem of commercializing innovation. commercialization problem.

The role of the Health-care System: Canada’s single-payer health-care system was seen as acompetitive advantage, as it creates enormous purchasers of life sciences products that can use their buying power to effect change. Procurement policies in the health-care system would need to change to make this happen. The focus would need to be less on obtaining the lowest cost and more on driving innovation with outcome-based metrics for success, or, as one participant described, it, “running public services with private-sector discipline.”

Collaboration: One participant talked about the need for the sector to speak in a focused and unified voice, which includes “senior political involvement.” Australia was cited as a country that does this well, and concerns were raised about Canada’s ability to compete on the international stage and win global mandates without a unified national strategy. A second participant felt that Canada was at a disadvantage because this country does not have as many economic development officers in foreign jurisdictions as its competitors do; a cluster in Catalonia (Spain) was cited for being particularly effective at attracting foreign direct investment using this strategy. Finally, another member of the roundtable noted that Toronto’s life sciences ecosystem was not well understood, as research groups had never worked together to map it out, as has been done in some U.S. cities. Roundtable members believed that such a mapping would be of value, as it would identify potential gaps in the system, as well the existing strengths of the sector.

One concern was that while Canada excels at academic research in the life sciences, the country lag behind on commercialization. One participant felt that universities and individual researchers lacked the proper incentives to drive innovation and that the idea of “selling out” creates a cultural barrier to scientists working on commercializing their findings.

“CANADIAN RESEARCHERS TEND TO BE TOO HUMBLE ABOUT THEIR STRENGTHS, THEY DON’T SPEAK TO HOW STRONG THEY ARE SCIENTIFICALLY. THE GLOBAL SCIENTIFIC COMMUNITY IS SEEING VERY IMPORTANT PAPERS AND VERY IMPORTANT WORK COMING OUT OF CANADA, ESPECIALLY BEING DONE IN NEUROSCIENCE, BUT OVERALL THERE IS AN AVERSION TO EMBRACING, TO WORKING WITH INDUSTRY, SO THE NOTION OF COMMERCIALIZING, THE NOTION OF SELLING OUT IS STILL THERE.”

Final thoughts: Participants in the roundtable were highly optimistic that an innovative life sciences sector would benefit all Canadians. The development of new medical devices and pharmaceuticals make the lives of Canadians better. Furthermore, innovation can be in how Canadians access their health data, which would allow Canadians to make more informed health and lifestyle decisions. In the words of one roundtable participant, enhanced innovation will result in “benefits to patients, to the economy through reduced health-care costs, and through job creation.”

Strong life sciences clusters can help, but there was recognition that governments have tough choices to make. As one participant put it, “We are good at some things, not good at others, and we need to put our money where can generate the best returns … . The money can’t be everywhere.” Another added , “We can’t have 10 of everything.” Finally, there was a recognition that trying to recreate the Silicon Valley and Boston life sciences clusters would be a recipe for failure; Toronto’s cluster would have to play to Toronto’s unique strengths.

11 http://www.sfu.ca/sfublogs-archive/departments/cprost/uploads/2012/06/0306.pdf
12 http://www.lifesciencesontario.ca/_files/file.php?fileid=fileOfQuhTMjbF&filename=file_LifeScience10ClusterReport2014Final.pdf
13 Life Sciences Ontario Report 2015 report
14 https://localideas.files.wordpress.com/2014/05/cluster-atlas.pdf
15 http://www.theglobeandmail.com/report-on-business/rob-magazine/why-is-canadas-life-sciences-sector-flatlining/article24030375/

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CLEANTECH AND RENEWABLES

1CLEANTECH AND RENEWABLES CLUSTERS IN CANADA

Canada is one of the world’s leaders in the production and use of renewable energy. In 2012, renewable energy represented 17 per cent of Canada’s total energy supply. This was a dramatic increase from a decade earlier. Wind and solar energy are some of the fastest-growing sources of electricity in Canada yet Canada has also started to produce energy from both biomass and tidal sources.34

In addition to supplying Canadians with electricity, renewables play an important role in our trade with the U.S. Several provinces are net exporters of hydro-generated electricity to the U.S.

2INNOVATION IN THE CLEANTECH AND RENEWABLES INDUSTRY

Canada’s renewable electricity generating capacity has increased greatly since 2002 and continues to increase as the sector continues to innovate. Collaborative work by all levels of government on both policies and programs has helped to drive and support this innovation.

3PAST STUDIES OF CLEANTECH AND RENEWABLES INNOVATION

Innovation PEI (2016): This organization’s website focuses on the goals of wind power in P.E.I. At the moment, more than 30 per cent of P.E.I.’s electricity is supplied by “a combination of provincially owned and private wind developments.”

The site, which represents an organization with members of government, post-secondary institutions and industry leaders, states that P.E.I. has always been at the forefront of wind energy development. P.E.I. is, according to the authors, attempting to diversify in the green energy field by not just focusing on the next generation of wind developments but also by investigating hydro and biomass and biofuel opportunities. In addition to exploring different types of green energy, P.E.I. is focusing on “attracting new renewable energy research and development and commercialization activity.”

MaRS Advanced Energy Centre (2014): The Canadian Energy Innovation Summit report focuses on themes and ideas that emerged from a summit hosted by the Government of Ontario and the MaRS Discovery District.

This report starts with a focus on how Canada can become “a global leader in energy innovation” with demand-driven innovation that allows for rapid action, a tolerance for risk and the ability to learn from failure. They note that many of the energy innovations are in high-tech sectors that could help the traditional Canadian energy sector diversify. This diversification could help create new jobs and reduce Canada’s sensitivity to traditional energy costs.

The first of the five ideas that emerged was to encourage greater collaboration in Canada to identify common goals and interests for the country’s natural energy assets. The second was to create more private-public partnerships to allow the private sector to play a larger role in technology innovation. The third idea was to encourage energy innovation already being developed in Canada and export it worldwide. The fourth idea was to ensure that Canadian clean technology companies could access risk capital and early stage financing. The final idea was to emphasize the social and economic benefits that are linked to clean

Natural Resources Canada (2013): The Canada – A Global Leader in Renewable Energy report focuses on the need for all jurisdictions in Canada to continue both collaborating and sharing information on renewable energy. It also noted the importance of the federal government sharing information from its research, development and demonstration projects. The final recommendation was to investigate opportunities to share information on policies and best practices through Canada’s participation in the activities of the Renewable Energy Technology Deployment technology collaboration program of the International Energy Agency (IEA-RETD).

4WHAT OUR ROUNDTABLE TOLD US

The day after our extractives roundtable in Calgary, we headed west to Vancouver’s TELUS Gardens and met with some leaders in the cleantech and renewables sector. Here is what we heard:

Funding gaps: One participant felt that government financing programs were quite useful for the early stages of product development, but not for obtaining financing for commercialization. He said that “Sustainable Development Technology Canada is terrific for early stage innovation,” and cited government support through the Scientific Research and Experimental Development Tax Incentive, the National Research Council Canada, the Industrial Research Assistance Program, and others. “There’s a lot of baked-in support before it gets to commercialization. There is help from the public sector to get across the ‘valley of death.’” he said. Then he added, “But when you get to the first market entrant, there is not a lot of debt financing or private capital. These companies are light on assets, so banks won’t lend to them. So companies, even if they do make it across the ‘valley of death,’ do not have the necessary assets or financing to commercialize.”

Another roundtable member cited investor hesitancy to invest in companies that make physical goods, stating “most angel investors invest in digital, not ‘stuff.’ There is a belief that if you produce things, produce hardware, the Chinese will just beat you to it, so these companies do not get the angel funds that tech companies do.”

Finally, a roundtable member suggested that the flow-through shares model used in the extractive industry be extended to cleantech.

Political risk: Several roundtable participants cited political risk, particularly with uncertain or changing regulations. One cited uncertainty around the future of bioenergy regulations as scaring away investment. Another said government regulatory clauses stating that programs, such as EcoENERGY, are “subject to change” frighten away international investors despite the fact they are rarely used. Finally, one roundtable participant believed companies were simply playing wait-and-see, stating “new climate and energy policies in government across Canada will take a while to become real, so the private sector is sitting back, particularly in the energy space. Policy uncertainty matters.”

Need to pick winners: As with many of our other roundtables, some members felt that government policies covered too many areas, and instead should be focused on a few key priorities. One participant forcefully argued for the need for large-scale reform, stating: “We need to make some big changes to the innovation ecosystem. We need to rip the Band-Aid off. We have been trying the same strategies for 20 years. The Canadian market is too small for mass adoption, so we need to look at other markets. We need more winners abroad. We need to be more ‘American.’”

Another suggested the use of innovation councils to pick winners on technologies.

A third cited the U.S. Defense Advanced Research Projects Agency (DARPA) as providing funding in priority areas that align with U.S. goals and noted that Canada lacked an equivalent. However, one member cautioned that if the government is picking winners, they are leaving people out: “There is a lot of opportunity for creativity if more people get at a shot at it. If the government picks winners, who gets left out?”

Regulation as a driver of innovation: Several of our roundtable members noted that strong regulations could both make society better off and spur the need for innovation. As one put it, “Being able to tie innovation to broader societal problems works. We need to get more traction with that.” Another added that “if we had stronger water-quality regulations, we would have more innovation in Canada. Water-treatment technologies are being sold down south, but, largely, not here.”

The importance of government procurement: Some roundtable participants suggested that governments should place a greater emphasis on innovation during the procurement process. One member gave a way of doing so, stating, “When government writes RPFs (request for proposals), they can embed ‘innovation.’

“They can give points to early stage demonstrations or points for first customers. Using the government’s infrastructure funds, they can incent innovation; they can find a mechanism. As well, the innovation process is a full life-cycle, so if governments are willing to fund something up front, they should be willing to fund it the entire way.”

In so doing, the government should not ignore the value of adopting innovative technologies not developed in Canada, with a participant noting, “It is frustrating that what is interesting to the government is only stuff that was developed here. While we all understand there is pressure to create jobs here, ‘CanCon’ requirements in funding rounds often ignore the benefits of global knowledge. We could be tapping into expertise from around the world.”

Need for coherence and collaboration: A common theme of this roundtable was the need for policy coherence and “systems thinking.” One member suggested that higher education could be a catalyst for this: “In Canada, we’re big, we’re provincial. What about what other countries are doing? What about the Swedish model? There, universities specialize in different areas. Think of the Horizon 2020 programs in Europe. There’s knowledge-sharing in their various innovation clusters. Canada is not part of these clusters. We may indirectly make use of them, but we don’t have a plan.”

Another added, “Systems thinking is essential. Distributive energy is a good model for Canada. It allows us to become global experts because it involves more than one system. There’s a strong digital aspect to the grid, too. But it’s hard to commercialize; it needs partners, but this is a place where the government can play a role.” Finally, one member noted that coherence would require alignment of provincial policies and priorities, stating, “Energy is not a federal responsibility. So instead we need maybe a systems- approach that’s regionally focused, but aligned.”

Final thoughts: Although Calgary’s extractives cluster and Vancouver’s cleantech and renewables cluster would appear to have little in common, many of the same themes emerged. In both roundtables, we heard that outcomes-based regulations could drive innovation. We heard about gaps in funding and about the barriers to commercialization. Finally, we heard about the need for governments to “pick winners” and avoid spreading themselves too thinly. Perhaps the two clusters are not so different after all.

WHY DO WE FALTER AT THE ADOPTION PHASE? THAT’S IMPORTANT FOR GOVERNMENT TO CONSIDER.

34 The ideas in this section are based on Natural Resources Canada’s 2013 report, A Global Leader in Renewable Energy.

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TECHNOLOGY INDUSTRY

1TECHNOLOGY CLUSTERS IN CANADA

As with the life sciences, just defining the technology or “tech” industry can be a bit of a challenge. In The State of Canada’s Tech Sector, 2016, Creig Lamb and Matthew Seddon advocate moving beyond the “information and communications” (ICT) industry and using a more broad-based definition that includes 22 different industries, including 10 in manufacturing and six in “information and cultural industries.” Using this definition, they find that the technology sector generated $117 billion, or 7.1 per cent of Canada’s GDP, and employed 864,165 people in 2015.16

Using a more traditional definition of the technology industry, Lucas et. al. identify seven ICT clusters in Canada (Calgary, Cape Breton, New Brunswick, Ottawa, Toronto, Waterloo and Vancouver), with 11,615 people employed in ICT services and another 7,165 employed in ICT manufacturing in 2006.17

2INNOVATION IN THE TECHNOLOGY INDUSTRY

Canada’s technology clusters deliver as many innovations as any in the world. Part of the reason for that may be the high quality of life that Canadian technology hubs offer. In 2016, consulting firm Expert Market ranked the top technology hubs in the world, using four “work factors” and four “life factors.”18 Three Canadian clusters made the top 20, with Toronto achieving a third-place ranking, Montreal finishing ninth and Vancouver 13th. The report found it was a particularly attractive time to start a business in Canadian cities, with Toronto, Montreal and Vancouver tying for first place on the “time to start a business” factor. Not all is necessarily well, however. The ranking of Canadian cities was diminished somewhat by the difficulty of achieving seed funding and lower start-up outputs and average salaries than elsewhere. As well, the Centre for Digital Entrepreneurship and Economic Performance (DEEP Centre) notes Canada’s relative lack of high-growth technology firms relative to the country’s global competitors, a sign of gaps in Canadian innovation.19

3PAST STUDIES OF TECHNOLOGY INDUSTRY INNOVATION

Recent studies of innovation in Canada’s technology industry include:

Cukier, Yap, Holmes and Rodrigues (2009): “Skills shortages” will be a primary focus of any discussion about the state of Canada’s tech sector. In Diversity and the Skills Shortage in the Canadian Information and Communications Technology Sector, Cukier et. al. study the skills shortage issue through five questions:

  1. What is the public discourse regarding the ICT labour market shortage in Canada?
  2. What is the empirical evidence regarding the labour market shortage?
  3. What is the participation of women in the ICT sector?
  4. What are the barriers to participation by women in the ICT sector in Canada?
  5. What strategies may be employed to increase the “pipelines” to the sector?

The study notes that there are a wide variety of positions in the ICT sector, “from highly technical roles to hybrid roles, such as business analysts, in which the ability to bridge technology and business functions is essential.” Given the broad nature of the ICT sector, it is crucial to not over-generalize when discussing skills shortages. Cukier et. al. find that “the skill sets in short supply are not primarily the core technology skills, but business skills and communication skills.” To increase the participation of women and under-represented groups in the sector, one must consider both “overt forms of discrimination” and “systemic barriers.” One such barrier is the “chilly climate” female engineering and computer science students can find in post-secondary institutions. They note that the “assumption that a degree in computer science or engineering is a prerequisite for a position in project management” may reduce the full participation of women in the industry. Stereotypes, the absence of female role models and work-life balance issues can also play a role.

DEEP Centre (2015): Building Resilience: Innovation Ecosystems as the Foundations for Growth in the 21st Century is a summary of the 2015 Waterloo Innovation Summit, which brought together “over 280 senior public- and private-sector decision-makers and leaders to discuss the development of effective innovation ecosystems.” The summit focused on three key themes: Foundations for Growth, Scaling Up and Embracing Risk and Disruption. One participant provided this succinct summary of the  Waterloo ecosystem’s challenges: “Focus on whether you are content to be the ‘farm team’ that sends talented people and companies to Silicon Valley.

What will it take to create an environment where the same players can hit home runs at home?” The report ends with the following seven broad recommendations to build an innovation ecosystem:

  1. Invest in necessary infrastructure and connectivity.
  2. Move beyond startups to scaleups.
  3. Extract better ecosystem data.
  4. Take a more aggressive approach to the recruitment of high-tech management talent.
  5. Better enable and support industry-academic partnerships.
  6. Focus on building effective research and development support systems.
  7. Pursue disruption.

Lucas, Sands and Wolfe (2009): The authors examine eight ICT clusters in Canada by asking the following questions:

  • What are the critical factors that contributed to the emergence and development of the individual clusters in their specific locations?
  • What is the relative importance of local versus non-local factors in supporting the overall dynamism of the clusters?
  • What are the most important factors that contribute to the ongoing competitiveness of the clusters?

The study takes issue with Porter, whose 1998 report concludes that governments “cannot create clusters by fiat” and finds that governments do play a vital role “in creating the antecedent conditions for cluster emergence.” They advocate that governments invest in higher education and in “cuttingedge” research in the social sciences, the hard sciences and engineering. They find that successful firms in an ICT cluster have “early and successful access to external markets” and that both local and non-local dynamics are critical to ensuring this success. Thriving clusters must ensure that both private and public initiatives “complement each other and (build) on existing regional strengths,” and local civic associations are cited as having a pivotal role to play.

Wolfe D. A. (2016): In A Policy Agenda for the Digital Economy, Wolfe lays out a set of policy recommendations with a focus on, “building on and supporting Canadian strengths in software” and scaling them more effectively. The recommendations include the following:

  1. Creation of a technology development agency: Wolfe argues that “what is lacking in the Canadian system is a focused and autonomous agency charged with the mission of stimulating radical innovations that are close to the technological frontier.” He cites the U.S., Israel, Finland and Ireland as successful adopters of this model. In his view, these agencies are successful when they are “effectively insulated from short-term political pressures to produce results” and are relatively inexpensive, with budgets typically ranging from $300 million to $400 million per year.
  2. Development of a federal strategy for the sector: The purpose of the strategy would be to identify existing strengths and “make strategic decisions about the areas where we could achieve maximum leverage in the shortest time frame with the minimum amount of additional federal spending.” Wolfe stresses that the process of developing this strategy needs to be iterative, given the constantly changing nature of the sector.
  3. Increase availability of risk capital: Wolfe advocates Canada adapt the U.S. Small Business Incentive Research program, whereby federal agencies must set aside a portion of their research and development budgets to assist small enterprises with technological innovation. Adoption would not involve simply copying the U.S. program, as the program would need to be tailored to Canada’s circumstances.
  4. Policies to build firms to global scale: The paper advocates for a new program that would identify Canada’s most promising start-ups and “provide them with resources in strategy, revenue generation, talent management and growth capital to help them scale up” and serve global markets, not just continental ones.
  5. Local and regional strategies for digital innovation: Wolfe notes that the local context is important when considering the challenges that firms and ecosystems faces. He cites The Action Plan for Prosperity and summarizes a set of policies designed to strengthen clusters at the regional and local levels. There needs to be alignment between academia (universities, colleges and research institutions) and the private sector, he concludes, particularly when it comes to research and training. Furthermore, the report advocates “the creation of a national network to share know-how and best practices on how to improve cluster competitiveness and reinforce cluster development.”

4WHAT OUR ROUNDTABLE TOLD US

At the beginning of August, we headed to Communitech in Kitchener, Ont., and met with a group of two dozen representatives from start-ups, established technology firms and government and asked them to identify the biggest bottlenecks to innovation in the technology sector. Here is what they told us.

Technical skill gaps: As with past roundtables and reports, skills shortages and technical skills gaps were cited as the No. 1 issue facing technology firms. In the view of the participants, there were simply not enough trained workers to fill the technical jobs generated by firms, though they were encouraged by expansions to the University of Waterloo and Western University’s co-op programs.

Despite these skills shortages, roundtable members recognized that there are communities that are largely locked out of the technology sector. One participant noted how Canada, unlike the U.S., lacks quality data on the participation rates of women and visible minorities in the sector. Despite the fact (according to one roundtable member) that in many cases that visible minorities are disproportionately more likely to use technologies such as Twitter, they are largely excluded from the development of those technologies. Over-reliance on “paper” credentials was seen as an issue, and roundtable participants noted that, despite skills shortages, many firms were unwilling to hire from non-traditional sources. There appeared to be universal agreement that companies, governments, universities, colleges and high-schools all need to do more to increase the technical skills of underrepresented communities, for both human-rights reasons and as a practical way to fill technical skills gaps. Infrastructure also plays a role, with access to low-cost broadband in community housing cited as one way to bridge the digital divide. A number of roundtable members lamented that the task of skills development is too often left to underfunded, or unfunded, community organizations.

Business skill gaps, commercialization and scaling up: Many members of the roundtable expressed concern that talent shortages in the tech sector are frequently thought of only in terms of science, technology, engineering and math (STEM) skills. A number of participants noted a lack of managerial talent in Canada, particularly for helping high-growth firms scale-up. Gaps were identified in business school curriculums, and there was a general feeling that business schools train their students to be managers in traditional, slower-growth industries and that high-growth firms require a different skill set. The Canadian pool of experienced managers, particularly product managers, for high-growth firms was seen as too small for Canada’s current needs, and only immigration was cited as a short-term fix. The low rate of commercialization in the sector was a related issue cited, and this could be linked to a lack of managerial talent. Participants noted that while many useful innovations were being generated, they were not being sufficiently commercialized. One roundtable member felt that this was, in part, due to a far greater focus on measuring the inputs of innovation than the outputs. Another suggested that non-tariff-based trade barriers make it difficult for Canadian companies to export to key markets, and that Canadian trade negotiators focus too much on the export of physical goods, such as cars and oil, and not enough on the export of digital goods and services.

Talent retention: Retention was cited as one of the biggest issues plaguing the Kitchener-Waterloo cluster, with more than one roundtable member lamenting the high number of technology workers and University of Waterloo graduates that migrate to Silicon Valley in California. The roundtable was largely in agreement that smart, ambitious young people migrated because they wanted to be “where the action was.” A few roundtable members felt that the Kitchener-Waterloo cluster suffered from a branding and marketing problem: Canadians were simply too polite to celebrate their successes, and so they suffered a shortage of “evangelists” for the local cluster. The participants believed that the more publicly visible visionaries there were for the cluster, the more the talent would see it as a place “where the action was.”

It was noted by several members of the roundtable that solely in terms of disposable income, technology workers were better off in the Waterloo cluster owing to the exceedingly high cost of living in the San Francisco area. It was noted that improving both intercity and intracity transit would help retain workers, as it would allow the technology sector’s workers to get around the city and get to the big city amenities of Toronto without having to pay the considerable expense of a car.

Improved talent attraction was seen as a way of also increasing talent retention, as smart, ambitious people want to be around other smart, ambitious people and it would increase the overall number of opportunities in the cluster. Finally, one participant felt that we should not see people going to the U.S. to work as wholly negative, as those technology workers are often “brand ambassadors” for Canada and create valuable links between the Silicon Valley and Kitchener-Waterloo ecosystems.

Talent attraction: There was considerable consensus around the table that Canada’s immigration and foreign-worker programs were ill-suited to the needs of the technology sector and participants were cautiously optimistic about coming reforms. Roundtable participants reported that application processes can take six months or more, a length of time unworkable for high-growth industries. Roundtable participants believe there is a global war for tech talent, and that we are losing to jurisdictions with more responsive immigration and foreign-worker programs.

Access to capital: A lack of access to capital was seen as one reason why talent migrates to Silicon Valley, though some roundtable participants felt there was reasonable access to private venture capital in Canada. One participant felt the biggest gap between Canadian and American venture capital access was the lack of appetite for “moonshots” in Canada; it was felt that very high-risk but potentially high-reward companies would likely need to go to the U.S. for funding.

Funding program coherence: Several of our roundtable participants talked about the “alphabet soup” of government funding programs, many of which have overlapping mandates. One member cited the findings of the Jenkins Report and said that the “excessive compliance costs for claimants” creates a barrier to access. Another advocated that the application process be streamlined and noted that an application process that takes six months or more is incompatible with a fast-moving industry like the tech industry. One participant suggested that the federal government could do a better job of providing “tailored advice” to help small- and medium-sized businesses navigate the system. Building on that comment, another member cited Mexico’s ProMexico as best-in-class.20

Final thoughts: At the beginning of the roundtable, one participant simply said, “Three things worry me. Access to talent, access to markets and access to capital.” Those themes permeated the discussion. It was not largely centered on what governments should be doing more of, but rather on what they can be doing better (or occasionally less of). Coherence was an over-arching theme of the two-hour discussion; it was felt that government policies, whether they be on training, infrastructure, research and development or immigration are often overly complicated or at odds with the stated priorities of those governments.

16 The State of Canada’s Tech Sector, 2016 http://brookfieldinstitute.ca/research-analysis/the-state-of-canadas-tech-sector-2016/
17 [source?]
18 Brant, 2016
19 DEEP Centre, 2015
20 These sentiments are echoed in Boothe, 2016.

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EXTRACTIVES

1EXTRACTIVES CLUSTERS IN CANADA

Extractive industries compose a major sector in Canada, the fifth-largest producer of oil and natural gas in the world as of 201328, with more than 75 per cent of the world’s mining and exploration companies calling the country home29. All of the Canadian extractives companies (oil and gas, utility, mining and water companies) are experiencing challenges as they attempt to remain competitive in the global economy. These challenges include lower commodity prices, reduced profit margins and rising costs.

The Cluster Atlas of Canada lists 16 different mining clusters across Canada and an additional 13 oil and gas clusters30. Mining clusters exist in eight of 10 provinces, with only Newfoundland and Labrador and P.E.I. lacking established clusters. Ontario leads the way with four mining clusters (Greater Sudbury, North Bay, Thunder Bay, Timmins) and Quebec is next with three (Rouyn-Noranda, Sept-Îles, Val-d’Or).31

Oil and gas clusters are less geographically dispersed, with 10 of 13 clusters found in the province of Alberta.32 The three remaining clusters are located in Sarnia (Ontario), Regina (Saskatchewan) and Fort St. John (British Columbia). Activities in the cluster include transportation and manufacturing activities in addition to extraction, as the Cluster Atlas below shows:

image_extractives

2INNOVATION IN THE EXTRACTIVES INDUSTRY

Innovation in the extractives sector has focused on minimizing costs by improving the upstream processes and improving the management, transportation, transformation and use of extractives.33

Collaboration via private- and public-sector partnership is seen as key to ongoing innovation in this field because of the cost and complexity of technology development.

Companies working in this sector have expressed concerns that recent lower commodity prices and reduced profit margins will make innovation more difficult and yet more important.

Canada has several research and development tax incentive programs in Canada to stimulate investment in innovation. Many of these programs are aimed at the extractives sector.

3PAST STUDIES OF EXTRACTIVES INNOVATION

Natural Resources Canada (2015): In Innovating for a Strong Canadian Energy Sector, Natural Resources Canada presents an overview of innovation in Canada’s energy and minerals and metals sectors. The report highlights the importance of innovation to maintaining Canada’s competitive edge in these sectors and the ongoing need for collaboration in technology development and use within this sector because of the high level of complexity of this field. The report calls for ongoing partnerships across the private and public sectors to ensure continued innovation. The report notes that as harderto- access resources are needed and companies around the world face pressure to safeguard the environment, innovation will become ever more important.

Mining Association of Canada (2013): The brief report Energy Investments and Innovation in the Canadian Mining Sector focuses on the research and development and innovation investments that Mining Association of Canada member companies have made to both improve energy efficiency and reduce emissions, which totalled $677 million in 2013. Examples such as the use of wind and liquefied natural gas to fuel both mobile and on-site power are highlighted. The need for innovation in technology that will allow more efficient energy use at remoe mining sites, including improvements in provincial and territorial power grids, is also highlighted.

Monitor Deloitte (2016): Innovation in Oil and Gas in Canada 2016 examines current perspectives on innovation in the oil and gas industry in Canada. It highlights a complex set of issues, including rising costs, multiplying risks, environmental concerns and shrinking margins. The report notes that while innovation in this environment is imperative, most companies in the sector “do not have the resources, capabilities or leadership commitment to innovate to the degree they know they should.” Through the study of 10 companies, the report authors found that this sector has begun to innovate, but the innovations are not well co-ordinated and are limited by a focus on using technology to either reduce costs or develop better extraction methods.

The report also states that driving innovation beyond the technological requires organizations to mobilize outside the technical and R&D groups in the organization. It is here that traditional structures can work against oil and gas companies. This report calls for companies in the sector to expand their innovation to include areas outside of technology and to develop an environment in which companies collaborate with both oil and gas technology providers, other sectors and stakeholders and the federal and provincial governments.

Deloitte (2015): Gaining ground in the sands 2015: Pipeline 2020 examined the role of innovation for pipeline companies. It notes the difficult situation pipeline companies find themselves in across North America. The debate over the safety of pipelines and the need for investment to keep old infrastructure safe and functional has been difficult for the sector. The authors of this report call for the industry to see these challenges as opportunities to invest in technology that can make their sector safer and more productive. Their recommendations include using big data, smart connectivity and new sensor technologies to allow for real-time evidence-based decision making. They conclude by highlighting the need for companies to begin to make budget and R&D decisions now to ensure they are competitive in 2020.

4WHAT OUR ROUNDTABLE TOLD US

The Canada 2020 team headed to the offices of Bennett Jones in Calgary, Alta., where we assembled a group of private- and public-sector leaders in the oil, gas and mining sectors. Here is just some of what we heard in our two-hour session:

Willingness to innovate: Many roundtable participants thought that other industries could take lessons from Alberta’s oil industry. They pointed to the sector’s willingness to take big risks and a lower fear of failure than seen in other industries. One participant believed that taking a risk that led to bankruptcy was seen as a black mark in most Canadian cities, but that Calgary was more open to second and third chances. Another believed that this was out of necessity, stating “without innovation, we would not have been able to turn the oilsands into a profitable industry that creates wealth for Canada.”

Another roundtable participant added that “to be competitive we have to innovate or we do not survive. Being out west, a lot of us our rural-based. That is an innovative culture baked into you, people who do not accept the status quo.” Roundtable participants felt that despite this, there was still room for a culture-shift in the sector toward a willingness to innovate.

The mining sector was seen somewhat differently, with one participant noting:

“We need to distinguish between three kinds of innovation. Core innovations are day-to-day things you do in your operations. Adjacent innovations are things that are transferred from one industry to another. Transformational innovations are technologies that create whole new industries or whole new ways of doing things. In mining, we are good at core innovations, but not good at adjacent or transformative ones. We are ‘first to be second.’ It comes down to risk, and the Canadian industry is risk-averse. When we are forced to make our operations profitable, we find a way. But when a mine is in production, we tend not to make improvements. We fine-tune, but we don’t take the next step and find significant improvements.”

Need to collaborate with other sectors: Many roundtable participants noted the need for the cluster to work with other sectors, to obtain and adopt adjacent innovations. Several noted that the cluster is both a user and a developer of high-tech innovations, particularly around the internet of things. Another gave examples of MRI technology that is used for medical innovations and for monitoring pipeline health. One participant mentioned the difficulties in collaborating with institutes of higher education, noting that universities tend to be insulated from market pressures. He noted that “part of the Canadian problem is that some guy at a university in a lab coat may think he’s developing innovations, but the output may only be theoretical or on a longer time horizon. The real innovation in Calgary is people chasing money and chasing their goals. If we spend money on innovating in a university environment, it won’t get done or be real.”

A final participant added the need for government to work directly with the sector, rather than through intermediaries like universities that do not understand the market pressures facing the industry.

Brownfield challenges to innovation: Roundtable participants felt that it was not hard to incorporate innovative technologies and processes when designing new facilities, but incorporating them into existing operations was difficult. As one participant put it, “one of the other defining features of our industry is the size of the capital investments involved. If something goes wrong, such as an unplanned outage, the impact is enormous. That impacts whether you pursue innovation, as well as what kinds of innovation you pursue. So changing something fundamental to your technology or your processes could be really risky.”

Perception consequences: Many participants made a point of noting that labour or environmental troubles at one company reflect badly on the industry as a whole meaning one firm’s poor performance imposes a negative consequence on all other firms in the industry.

“Yes, firms in the industry are competing with one another. But when it comes to the environment, we realize that this sector is competing not against each other, but against other fuels. So we are only as strong environmentally as our weakest performer,” said one roundtable participant.

The Syncrude tailings pond incident was an example cited by another participant, who stated: “When that incident happened, a negative perception was placed on every firm in our industry. Even companies without tailings ponds got labelled poor environmental stewards.”

Talent shortages: Some roundtable participants believed that these perceptions make it difficult for the sector to attract young innovators.

“We are one of the most vilified sectors in Canada and around the world. It impacts our ability to attract talent. We need creative people, and they often choose other sectors. There’s a lot of competition for innovators – why would they want to work on a problem for one of the most vilified sectors in Canada when they can work on something that instead makes them feel good?”

Another noted that these perceptions spill over to government policies, as negative public perceptions make governments disinterested in working with the cluster.

Small-business challenges: Two roundtable members noted that small- and medium-sized enterprises (SMEs) face uphill challenges when it comes to commercializing innovations, despite these companies being well-positioned to be innovative. One roundtable member noted that “SMEs face huge problems, but lots of the technological innovation comes from SMEs. Much of the problem is that they are not business savvy, they are not market savvy, and they do not know how to work the regulatory and granting systems. The IRAP [Industrial Research Assistance Program] can help these companies, but there is a limit.”

Another participant noted that “there is a bias in how innovative ideas and projects get funded. There is a place where we get stuck if we are not big enough but also not small enough to just be considered a start-up. The big guys are interested in reducing costs. The little guys are innovating and going after the gold rush. We get stuck at $2 million of capitalization.”

Access to capital: Feelings were mixed about the ability of firms to access capital. One participant noted that “Calgary is one of the easiest places to get capital and support. It is innovation-central, not because of the ideas, but because you can form capital very quickly. If you can speak about it and sell it competently, you can get money.”

Others disagreed, with one stating, “Capital is not all that available, you do have to work hard for it. It is called ‘the valley of death’ for a reason, and it exists in our industry.”

All participants agreed that the size of capital investments and the length of time it takes to put a project together creates challenges that other industries do not have. Several roundtable participants cited Sustainable Development Technology Canada as a funding partner that understands the needs of industry.

Pressures to innovate: Roundtable participants largely felt that innovation was driven by “necessity,” and without that necessity, it would be easy to get complacent. Falling commodity prices, in the view of many members, create a need for innovation. Participants felt that Governments can also create that need through their policy decisions. Several felt that prescriptive regulations that require the use of certain technologies were harmful to innovation.

Outcomes-based regulations, by which governments require companies to hit certain targets but do not force the use of particular technologies, give companies incentives to create innovative technologies and to do so at the lowest possible cost, the participants said.

Finally, roundtable participants believed that government can also create pressures to innovate through “moonshots,” such as John F. Kennedy’s promise to put a man on the moon by the end of the 1960s, or Alberta premier Peter Lougheed’s creation of the Alberta Oil Sands Technology and Research Authority (AOSTRA) and his tasking it with developing technologies to make production in the oilsands economically viable. There was a consensus that governments at all levels were trying to do too much and that they should instead focus on “picking winners” that had the potential to produce significant returns on investment.

Final thoughts: Despite the challenges the cluster has faced, from falling commodity prices to the Fort McMurray wildfires, the mood in the room was remarkably upbeat. People in the extractive industry, while recognizing the pressures they face, also believe the current situation has given them a need and an opportunity to become more innovative.

“AS AN INDUSTRY, WE KNOW EACH OTHER. WE KNOW WHO WE COMPETE WITH. IN A CAPITAL-CONSTRAINED ENVIRONMENT LIKE WE ARE IN NOW, YOU WILL LIKELY SEE US WORK TOGETHER MORE. IT WILL FORCE US TO WORK TOGETHER MORE. WHAT’S UNIQUE THOUGH, IS THAT WE HAVE FIGURED THAT OUT, BECAUSE WE KNOW ONE ANOTHER, WE TRUST ONE ANOTHER.”

28 (Global Affairs Canada, 2015), Oil and Gas Industry: Canada’s competitive advantages
29 (Mattner, 2012), Institute for the Study of International Development, The Development Impact of Extractive Industries: Policy Options for CIDA
30 (Spencer, 2014), Cluster Atlas of Canada
31 The remaining clusters are in Bathurst, N.B.; Calgary, Alta.; Cape Breton, N.S.; Edmonton, Alta.; Kamloops, B.C.; Prince George, B.C.; Regina, Sask.; Saskatoon, Sask.; Thompson, Man.
32 Specifically, Calgary, Cold Lake, Edmonton, Grande Prairie, Lloydminster, Medicine Hat, Okotoks, Red Deer, Sylvan Lake and Wood Buffalo.
33 The ideas in this section are based on Natural Resources Canada’s 2015 report, Innovating for a Strong Canadian Energy Sector.

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COMMON THEMES

The eight clusters we studied all have some unique innovation opportunities and threats. While there are many obvious differences between the clusters, a number of common themes emerged in the roundtables that affect the ability of firms in each cluster to achieve scale and become more innovative.

Access to capital: In almost every roundtable, at least one participant would describe funding gaps in their cluster. In our financial services roundtable, we were told that “there’s no shortage of people willing to write $50,000 cheques,” but there were funding gaps in later rounds, with companies often needing to seek financing from outside of Canada. The consensus in our technology industry cluster was that access to capital has improved over the past decade, but there was still little appetite in Canada to fund high-risk but potentially very high-reward “moonshots.” There was less consensus in our extractives roundtable, with some members stating that capital was easy to come by, but another participant stating “capital is not all that available, you do have to work hard for it. It’s called ‘the valley of death’ for a reason, and it exists in our industry.”

Attracting and retaining talent: The ongoing struggle of ensuring firms have access to enough skilled workers was raised in many of the roundtables. Concerns were raised about the lengthy and complicated immigration system in the financial services industry roundtable; technical skills gaps in the tech industry roundtable; negative perceptions of the extractives sector and talent retention in the culture and digital creative industry roundtable. The consensus in our tech roundtable in Kitchener- Waterloo was that attracting and retaining talent in Canada was difficult because of the appeal of Silicon Valley. Similarly, in our digital creative roundtable, participants stated that young talented workers left Halifax for more exciting cities. While not identical concerns, there was an underlying theme of needing to find new ways to compete globally to attract and keep people with valuable skills.

Risk tolerance: The ability to take risks plays a vital role in being innovative and was highlighted in three of the roundtables. In the financial services industry roundtable, this took the form of concerns about needing to balance financial regulations to protect consumers from risk with allowing the financial services industry to take the risks necessary to be innovative. In the tech industry, we heard how Canadian venture capitalists are slow to invest in “moonshots” and take high risk for high-rewards. The cleantech and renewables participants spoke of a lack of investment in the industry because of uncertain and changing policies and regulations. While not identical concerns, the underlying theme is of a need to create spaces for risk within innovation throughout the sectors.

Regulatory barriers and coherence: Working within incredibly complex regulatory environments was a theme raised by participants in several of the roundtables. For the agricultural and agri-food sector, this took the form of concerns about a complex and difficult-to-navigate regulatory environment – especially for small and medium-sized businesses. In comparison, the cleantech and renewables cluster saw regulatory coherence as a way to spur innovation by aligning priorities, policies and regulations throughout Canada. For example, one participant noted, “If we had stronger water-quality regulations, we would have more innovation in Canada.” Within the financial services industry, concerns were raised that regulations designed for large companies were inappropriate for start-ups and act as barrier to innovation. There was an underlying theme of needing to find coherence within policies in order to not just allow innovation, but to encourage it. Overly complex or incoherent regulations acted to stifle innovation, in the view of our roundtable participants.

Picking winners: Roundtable participants largely believed that governments need to focus on a few key priorities and are currently spreading funding and attention too thinly across many priorities. This theme was identified within the roundtables as a need for the government to “pick winners.” In our cleantech and renewables roundtable, several participants felt that the Canadian government needs to pick areas of innovation to fund and not to try to fund every area. However, there was not total consensus as another member pointed out that by picking winners the government would be leaving out some areas that could have been very successful. Members of our life sciences roundtable also felt that the government needed to make some tough choices and focus funding on the strengths of Toronto’s cluster. For example, one participant noted “the money can’t be everywhere,” and another stated, “We can’t have 10 of everything”

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Big Idea 1

1What is the idea?

One of the most common issues we heard in our roundtables was the lack of coherence in many areas of government policy, particularly in the area of funding programs. Policy coherence, as defined by the OECD is the “systematic promotion of mutually reinforcing policy actions across government departments and agencies creating synergies towards achieving the agreed objectives.”1 Policy incoherence can be the result of a lack of communication between departments or a result of conflicting priorities and objectives.2 It often results in well-meaning policies either conflicting or being unnecessarily confusing.

Recommendation: The Government of Canada should create a Parliamentary Coherence Office and Officer. Similar to the Parliamentary Budget Officer, this position and office will be non-partisan and will provide independent and objective analysis to Parliament on the coherence of government policies.

The Parliamentary Coherence Office and Officer will work to highlight regulatory failures in which different policies contradict each other. For example, policies that create agricultural subsidies on ingredients that are used to make junk food may be in conflict with health policies that encourage consumers to lower their intake of that same junk food. Not only do these contradictory policies confuse Canadians, they also have a long-term economic impact. The New York Times reported on a similar policy conflict in the United States and noted, “the subsidies damage our country’s health and increase the medical costs that will ultimately need to be paid to treat the effects of the obesity epidemic.”3 Similarly, in its report on policy and nutrition, the United Nations System Standing Committee on Nutrition noted the need for coherence within policies to ensure trade policy is supportive of a country’s nutritional objectives and stated:

“The degree of coherence and/or incoherence between trade policy and nutrition action depends on a wide range of factors, including the forms of malnutrition and the foods affected; the characteristics of sub-populations and food systems in countries; and the trade reforms and existing policy and institutions in place in countries and trading partners.”4

Another example is the standardization of the way the date is recorded. Different Canadian governmental agencies write the date in different ways (dd/mm/yyyy; mm/dd/yyyy; yyyy/mm/dd), which increases the chances that individuals fill out forms incorrectly. This lack of standardization is also an issue outside of Canada. The National Post reported in 2011 that “a U.S. customs form requests the day first, and its military abides by the same but spells out the abbreviation for the month — but its civilian population has agreed to write the month first.”5

A final example of this need for policy coherence is the policies that create subsidies for the fossil fuel industry. CBC News reported in 2015 that Canada has policies in place to both subsidize fossil fuel industries and to end the use of fossil fuels.6

By identifying these regulatory failures, this office can start the process of prioritizing, co-ordinating and implementing efforts in policy coherence.

Given that the “alphabet soup” of funding programs with “overlapping mandates” was frequently cited as an issue at the roundtable, we would recommend innovation policy coherence be among the first issues studied by the OPCO.

2Who will be responsible for administering the idea?

The position of Parliamentary Budget Officer was created by the federal government as part of the Federal Accountability Act (2006).7 The creation of an Office of the Parliamentary Coherence Officer would follow a similar process

3What mechanisms for accountability or measurement can be put in place for the idea?

The accountability and measurement mechanisms put in place for the Parliamentary Budget Office can be reused in the creation of the Parliamentary Coherence Office

4What failures is the idea trying to solve?

Regulatory Failure: From an innovation perspective, the overarching goal of policy coherence is to ensure that policy objectives avoid negative consequences which would affect innovation.

Market Power: Unnecessarily complex regulatory environments create both barriers to entry for new firms as well as barriers to growth, as described by the Canadian Chamber of Commerce:8

“I deal with enough policy hassles overseas. Why does Canada’s policy environment have to be so complicated?”

SME9 manufacturers in Canada often struggle to understand and comply with the underpinning details, incentives, steps and variances among the myriad of policy frameworks in which they operate. As a result, the cumulative impacts and costs of government policies can be barriers to innovation, just as thickening borders between countries — a common complaint of manufacturers — is a barrier to exporting.10

5What are the potential benefits of the idea and what are the costs?

Benefits: There are two main ways that increasing coherence will help increase Canadian innovation. First, by identifying conflicting policy objectives we can start the process of addressing these conflicts and reducing the costs associated with the resulting confusion. Second, policy coherence can exploit the potential for positive spillovers and consequences by addressing potential policy synergies across all levels of government.11

Costs and Risks: This position and office are modelled on the PBO and OPBO. The operating budget for the PBO and OPBO was $2.8 million for the 2014-15 fiscal year.12

There is a risk that the government ignores the work of the OPCO. The European Centre for Development Policy Management investigated the Policy Coherence for Development (PCD) work and found that there is a lack of political support for the work of PCD despite agreement on the importance of the initiatives. As a result, departments responsible for PCD throughout Europe are under-resourced and isolated.13

Another risk will be the potential for government interference in the work of the OPCO. Learning from the experiences of the OPBO, the OPCO will remain independent by not reporting to a cabinet minister. By ensuring the office is funded and by making the office non-partisan, these risks can be avoided as much as possible.

6Will the idea increase economic inclusion and/or enhance autonomy? If so, how?

Economic Inclusion: A lack of policy coherence often results in unnecessarily complicated systems that exclude people from participating. This lack of coherence harms small businesses that do not have the resources to navigate incoherent policy environments particularly. The federal government 16 found that “regulatory costs and their impact fall disproportionately on small businesses, as these businesses have fewer resources to devote to compliance. Stated another way, the fixed costs of regulatory compliance for larger firms can be spread over a larger employee and revenue base.” It calculated in 2011 that the regulatory burden for firms of between one and four employees was $1,029 per employee, whereas for firms with 100 to 499 employees the per-employee regulatory burden was $149.

Autonomy: Confusing regulations due to a lack of policy coherence may deter individuals from starting businesses, though we are not aware of any studies that have examined this issue. To ensure that economic inclusion and autonomy are priorities for government policy, we would recommend that within the OPCO mandate there be a requirement to consider both economic inclusion and autonomy when analyzing government policies.

1 Institute for International Integration Studies, What is policy coherence? Trinity College Dublin (2010).
2 Ministry of Foreign Affairs of Denmark, Coherent Policies for Global Development (2014).
3 Anahad O’Connor, “How the Government Supports Your Junk Food Habit,” The New York Times, July 19, 2016.
4 United Nations Standing Committee on Nutrition, Enhancing Coherence between Trade Policy and Nutrition Action (2015).
5 Kathryn Blaze Carlson, “Is 02/04/12 February 4, or April 2? Bill seeks to end date confusion,” National Post, October 29, 2011.
6 Margo McDiarmid “G20 countries spend $450B a year on fossil fuel subsidies, study says,” CBC News, November 12, 2015.
7 Parliament of Canada, Federal Accountability Act (2006).
8 Canadian Chamber of Commerce, Manufacturing Innovation: Driving Canada’s Biggest Sector through Disruptive Technologies (2014).
9 Small and medium enterprises.
10 Canadian Chamber of Commerce, Manufacturing Innovation: Driving Canada’s Biggest Sector through Disruptive Technologies (2014).
11 Institute for International Integration Studies, What is policy coherence? Trinity College Dublin (2010).
12 Office of the Parliamentary Budget Officerwebsite, Office of the Parliamentary Budget Officer (About Us) http://www.pbo-dpb.gc.ca/en/about (accessed 2016).
13 Florian Krätke, “Policy coherence: a sensible idea lost in translation?” The Guardian, November 11, 2013.

About the Authors

authortemp
Dr. Mike Moffatt is Senior Associate at Canada 2020. He is also an Assistant Professor in the Business, Economics and Public Policy group at Ivey Business School at Western University, where he teaches courses in international trade and firm-level strategy. Mike is Director of Ivey’s Lawrence National Centre for Policy and Management, a public policy centre that is taskedwith bridging the gap between business strategy and government policy.”

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Big Idea 2

1What is the idea?

A common theme that emerged during the roundtables was the importance of access to both research data and government data. Data is a valuable resource for innovation, as long as it is available and easily accessible.

Part 1. Research Data

Canada has a good track record of funding research in the sciences, social sciences and health sciences through granting councils. However, this data is often not stored in a way that means it is protected and shareable among researchers. Without a robust data stewardship program, the data that has already been generated is at risk of being lost, recreated or under-utilized. By storing the data properly, in a comprehensive network of trusted digital data repositories, it will be available to be re-used in a variety of ways, not just by other researchers, but by innovators throughout Canada.

Recommendation: The federal Minister of Science should follow through on the first “top priority” given in her mandate letter from the prime minister: “Create a Chief Science Officer mandated to ensure that government science is fully available to the public, that scientists are able to speak freely about their work and that scientific analyses are considered when the government makes decisions.”17

Recommendation: Building on the work done by Research Data Canada and the Tri-Agency Statement of Principles on Digital Data Management,18 the Chief Science Officer should create a national program to manage the digital research data funded by the federal government.

Recommendation: Any group conducting research funded by the Canadian Institutes of Health Research, the Natural Sciences and Engineering Research Council or the Social Sciences and Humanities Research Council should be required to create a robust data-sharing plan and deposit their data to be shared promptly with others in an accessible, secure and curated repository.

Researchers will not be responsible for the storage of the data. Each university and institute will need to ensure that their researchers have access to a research data management (RDM) program, both the system and policies, to easily and properly store their data.

Recommendation: The Chief Science Officer should require that universities and institutes receiving funds from federal agencies create a research data management (RDM) program to ensure their researchers store their research data properly. This RDM program would include creating policies and procedures as well as the repository itself.

Universities and institutes may choose to create their own RDM program or use an RDM program already in use at their university or institute. Either way, the data in these programs should be easily accessible to others both inside and outside of the original university or institute.

Recommendation: The Chief Science Officer should work with research institutions20 and universities to create a comprehensive network of trusted digital data repositories that provide reliable, long-term access to all research data deemed to be of enduring value that researchers and innovators can easily access.

Universities and institutes will need to be held accountable to ensure that data is properly stored and accessible in these programs.

Recommendation: The Chief Science Officer should create a national agency that monitors, oversees and sanctions specific standards for use by Canadian researchers in storing their data.

Part 2. Municipal Data

Canadian cities produce and collect a wide variety of data on aspects of city life such as employment, transit, road accidents and living conditions that are used in their decision-making processes. However, most of this data is only used internally despite the fact that it could be used by innovators (municipal administration, businesses, universities, academies, research facilities and citizens) to create new services, products and businesses.

Recommendation: Building on the work of the Helsinki Region Info-share (HRI) Service in Helsinki, Finland, and Canadian cities like Oakville, Vancouver and Toronto, we recommend the creation of Open Data Cities (ODC) a pan-Canadian coordinating organization, which will act as a bridge between cities providing open data and individuals and organizations who wish to use this data.

The ODC will be responsible for:

  1. helping cities prioritize data releases
  2. helping cities ensure data is accessible for a variety of user needs
  3. collecting and giving user feedback to cities regarding the data and service
  4. ensuring quality control of all data released

The aim of the ODC is to make municipal statistical data open, timely, free to use and easily accessible to all.

Recommendation: The ODC should create a web portal that will allow users to search for data from all participating cities.

Recommendation: The ODC should work with municipalities to help them identify new data sets they can create and should work to connect separate data sets either within the municipality or with several municipalities together. This collaboration will include the creation of a taxonomy and the standardization and description of data and data-collection methods.

Recommendation: The ODC should host events to encourage developers, public servants and members of the public who have identified problems to work with the open data to solve municipal
challenges and create innovations.

Part 3. Transparency of Past Government Records

In Budget 2016, the federal government proposed creating “a simple, central website” where Canadians could submit data requests to any government institution or department.19 While commendable, there is still a missing link. The mandate of Library and Archives Canada (LAC) is to acquire and preserve governmental records of archival value and to make them available to the public. In theory, if a Canadian wanted past documents, he or she could submit a request to LAC. However, in his 2014 report on LAC, the auditor general found that LAC was not “acquiring all the archival records it should from federal institutions, 20 and that the disposition authorities, “which tell federal institutions which records can be disposed of when no longer needed and which records must be transferred to Library and Archives Canada,” were both incomplete and out of date. Also, LAC had a backlog of 98,000 boxes of government archival records. While LAC reports that this backlog has been eliminated, it is unclear what records were found and how to access them.

This lack of clarity means that it is possible that if a Canadian submitted a request on the proposed website, they may not get the items requested. If they did get them, they might not be given in a useful format, and they may not be provided promptly.

Recommendation: A dedicated and funded program in LAC to digitize all past government records of value should be created.

Recommendation: A system of accountability by which the progress of this program is audited quarterly should be created.

2Who will be responsible for administering the idea?

For the research data proposals, we would recommend the newly created Chief Science Officer be responsible for the idea, given his or her responsibility to ensure “government science is fully available to the public.” The municipal data and transparency of data proposals should fall under the purview of the president of the Treasury Board, as the prime minister mandated he “expand open-data initiatives and make government data available digitally.”21 It may be prudent, however, to create a board formed from the participating cities to oversee the operation and execution of the ODC.

3What mechanisms for accountability or measurement can be put in place for the idea?

Universities and institutes will need to be held accountable to ensure that their research data is properly stored and accessible. For municipal data, we would recommend the ODC issue an annual
report and measure how Canadian cities are doing regarding opening their data, using measurements of readiness, implementation and impact. Furthermore, Library and Archives Canada (LAC) would need to report regularly on their progress, including measurements of the readiness, implementation and impact of the data being digitized.

4What failures is the idea trying to solve?

Regulatory Failure: We have data that is being collected and has value, but it is not being made available for use, which is preventing knowledge spillovers. By making data more easily available, researchers will have more timely and complete information to build into their research, creating an environment in which new products and processes may be developed more quickly and easily.

Inequality of Opportunity: By not releasing data and making it easily available, we are disproportionately benefitting firms and individuals that have the resources and ability to recreate thess data or discover ways to access them. Our proposal levels the playing field to ensure equal opportunity to be innovative.

5What are the potential benefits of the idea and what are the costs?

Benefits: Innovation will be encouraged by releasing research data to innovators as well as to other researchers. Opening up municipal data can help drive the creation of innovative businesses and services that deliver social and commercial value. By making government data open, we can better understand actions the government has taken in the past.

Costs and Risks: There is a risk that Canadian researchers may be resistant to sharing their data. We believe it is important to follow the lead of the United States and make data management and specifically data sharing a requirement of the Tri-Council research grants. There will be a financial cost to universities and colleges, but we believe these can be kept manageable.

For the ODC proposal, the main risk is that a system will be built that cities will refuse to join. The financial costs are relatively modest, with the yearly budget for the Helsinki Region Info-share (HRI) Service in Helsinki, Finland, being less than $100,000.22

The main risk to our transparency proposal is setting a goal the government cannot meet. In 2014, the auditor general of Canada noted that LAC was behind schedule on retrieving government documents and had a growing backlog of approximately 98,000 boxes of records.23 There is a potential that LAC will find this goal too onerous and may fall behind schedule again.

6Will the idea increase economic inclusion and/or enhance autonomy? If so, how?

Economic Inclusion: By ensuring that research data is available to other researchers and innovators, we can ensure that economic opportunities are not limited because of a lack of data. The availability of this data will be particularly valuable to small businesses that do not have the resources to collect large amounts of data.

Autonomy: Better access to municipal data will give citizens and community groups the tools they need to understand the decisions of local governments better and influence those decisions through evidence-based proposals.

17 Office of the Prime Minister, Minister of Science Mandate Letter (2015).
18 Government of Canada, Tri-Agency Statement of Principles on Digital Data Management (2016).
19 Government of Canada, Budget 2016 (2016).
20 Office of the Auditor General of Canada, 2014 Fall Report of the Auditor General of Canada (2014).
21 Office of the Prime Minister of Canada, President of the Treasury Board of Canada Mandate Letter (2015).
22 Olli Sulopuisto, “How Helsinki Became the Most Successful Open-Data City in the World,” City Lab, April 29, 2014.
23 Office of the Auditor General of Canada, 2014 Fall Report of the Auditor General of Canada (2014).

About the Authors

authortemp
Dr. Mike Moffatt is Senior Associate at Canada 2020. He is also an Assistant Professor in the Business, Economics and Public Policy group at Ivey Business School at Western University, where he teaches courses in international trade and firm-level strategy. Mike is Director of Ivey’s Lawrence National Centre for Policy and Management, a public policy centre that is taskedwith bridging the gap between business strategy and government policy.”

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Big Idea 3

1What is the idea?

In early 2015, the Mowat Centre assembled a roundtable of executives from the emerging information and communications technologies sector in London, Ont., and asked them about their bottlenecks to growth.24 They identified attraction to and retention of talent in London as their most pressing challenge. Talented technology workers told companies they were reluctant to move to or stay in London for two reasons:

  1. There are a limited number of information and communications technologies companies in the London area, so if they ever needed to change jobs, they were concerned they would not be able to find employment quickly in the city.
  2. While they could find meaningful employment in the city, they were part of a “power couple” and had concerns about their spouse’s ability to obtain a good job locally. In most cases, the spouse was highly educated and had a very specific skill set valued by only a handful of employers.

Both of these problems are ones of thin labour markets with only a handful of buyers and sellers. Thin labour markets are often self-perpetuating. A limited number of firms causes talent to migrate out of a centre, preventing new firms from emerging, causing a further erosion of talent from the market.

The “power couple” issue of both individuals having employment opportunities is a particular concern for mid-sized cities. In a seminal 2000 piece, Dora Costa and Matthew Khan examined the migration patterns of college-educated Americans between 1940 and 1990.25 They found significant “power couple” migration to large centres (defined as cities over two million in population). In 1990, 50 per cent of all dually college-educated couples lived in the cities, compared with 32 per cent in 1940. Contrast this to the proportion of couples where neither had college educations, which had only modest growth in the period (from 27 per cent in 1940 to 34 per cent in 1990). Power-couple migration to large cities is not simply due to the college educated (regardless of their relationship status) migrating to larger centres;

Costa and Kahn estimate that “coincidental couple concentration suggests that at most 35 per cent of the increase in power-couple concentration in large cities is attributable to the growing urbanization of the college educated.” Ultimately, families matter and drive location choice.

In our view, this leaves Canadian governments with two options:

  1. Focus its innovation agenda on the three census metropolitan areas with more than two million people (Toronto, Montreal and Vancouver) and recognize that, as it stands, labour markets are too thin in other Canadian cities to support sustainable clusters except in unusual cases. Develop a suite of policies that addresses the issues inherent in further migration to big cities (rapidly rising real-estate prices, lack of affordable housing, traffic gridlock and overstretched transit systems) as well as the issues inherent in de-populating secondary centres (falling property values and a shrinking tax base’s inability to properly service the existing stock of infrastructure).
  2. Actively work to “thicken” labour markets in mid-sized cities, which will allow for the emergence of clusters in these cities.

In our view, the government should take the second approach, while recognizing that “the big three” will continue to grow and have the challenges associated with growth.

In the global war for talent, workers will migrate to areas that give them the most career opportunities. As non-compete agreements limit career opportunities, talent will naturally migrate to jurisdictions that lack such agreements. One example is California, where non-compete clauses are invalid and unenforceable unless they fall under some very specific exemptions26,  which is oft-cited as a major factor in the success of Silicon Valley’s technology sector.27  Or as Bijan Sabet, a general partner at Spark Capital told Fortune, “If you’re a graduate of MIT who studied a specialty like robotics and a Massachusetts company says, ‘Come here and sign this non-compete,’ and a San Francisco company says, ‘We know this isn’t your last job — do whatever you want,’ which would you choose?”28  Peer-reviewed studies back up this phenomenon, with Matt Marx, Jasjit Singh and Lee Fleming finding that “non-compete agreements are responsible for a “brain drain” of knowledge workers out of states that enforce such contracts to states where they are not enforceable. Importantly, this effect is felt most strongly on the margin of workers who are more collaborative and whose work is more impactful.”29

A 2016 study by the U.S. Department of the Treasury on the economic impact of non-compete contracts found that “the effect of maximal enforcement of non-compete contracts, relative to minimal enforcement, is five per cent at age 25 and 10 per cent at age 50.”30 The Treasury study also found that California’s restrictions on the use of non-compete clauses both thickens labour markets and increases innovation through a process of knowledge diffusion. They find that “employee departures impose costs on their firms, but yield benefits for destination firms and act to broadly disseminate improvements in technologies and best practices. Non-compete enforcement can stifle this mobility, there by limiting the process that leads to agglomeration economies.”

While non-compete clauses are often difficult to enforce in Canada (putting us closer to the minimal enforcement end of the spectrum), no province has gone as far as California and simply banned the use in most instances.31 We would advocate that provinces consider doing so. Explicitly banning non-compete clauses would create less uncertainty of the rights of workers, increase worker mobility and help Canada attract and retain talent. Such a ban would likely lead to higher wages in many industries, so naturally firms will raise concerns about the effect even modestly higher wages will have on their competitiveness. Given that higher wages will lead to attraction and retention of talent in Canada and incent more students into entering innovative fields, we believe it is a price worth paying. Finally, given that we are trying to create economically inclusive innovation, we see higher wages that are driven by market forces as a feature, not a detriment.

Recommendation: Canadian provinces should follow the lead of California and explicitly ban the use of non-compete agreements, to attract and retain talent.

An obvious way to address the thin-market problem is through linking mid-sized cities through intercity transit. Consider London, Ont. London’s Census Metropolitan Area (London CMA) has a population of just under 500,000, which includes the city of London, the city of St. Thomas and rural areas and towns around London. The CMA is simply too small to have a significant number of jobs in every occupation, limiting opportunities for couples that work in two different occupations. Furthermore, individuals might be hesitant to take a job in a community with a small number of companies in that same industry. A large number of companies in an industry creates an “option value” for a worker; if they need to leave their job at their existing company, there are plenty of alternatives, which should make it relatively easy to switch companies. However, if there are few local companies in their industry, then workers are “locked in” to their current employer and risk prolonged unemployment should they leave that employer. This potential for “lock in” and unemployment creates significant risk for workers considering taking a position in that community. This problem is particularly acute for ‘power couples,’ where employment options for two people have to be considered.

This thin market problem has a straightforward solution. If it is easy and inexpensive to live in one community but work in other, then the effective population of the community (and its clusters) grows. Consider all of the Census Metropolitan Areas (CMAs) and Census Agglomerations (CAs) of population sizes of 75,000 or more, within 200 kilometers of London, Ont.

Community Population
London CMA 474,786
London CMA + &75K CMA/CAs less than 100km away 1,177,002
London CMA + &75K CMA/CAs less than 150km away 2,143,227
London CMA + &75K CMA/CAs less than 200km away 8,437,721

 

If Londoners can easily, affordably and reliably get to employment opportunities within 100 kilometres of the CMA, the effective size of London’s employment market grows to almost 1.18 million people by adding the Kitchener-Cambridge-Waterloo CMA (population 477,760), the Brantford CMA (135,501) and the Sarnia CA (89,555).32 Make the radius 150 kilometres, and the market size nearly doubles to 2.14 million by adding the Hamilton CMA (721,053), the Guelph CMA (141,097) and the Chatham-Kent CA (104,075). Finally, a travel radius of 200 kilometres creates an effective market of more than eight million by adding the Toronto CMA (5,583,064), the St. Catharines-Niagara CMA (392,184) and the Windsor CMA (319,246).

Currently, an individual in London who wishes to take a job in one of these communities (or an individual in one of these communities who wishes to take a job in London) can only commute by car unless they have an incredibly flexible work schedule. This time by car is essentially wasted time, where the individual is away from family and cannot work because they are driving. Taking a train or a bus, on the other hand, allows individuals to complete work while they commute. Unfortunately, the earliest a Londoner can arrive at Toronto’s Union Station by train is 8:35 a.m., assuming the train is on schedule. These time limitations makes commuting by train impractical for jobs that involve morning meetings. The situation is worse for commuters taking the opposite trip, as someone living in Toronto cannot arrive in London until 9 a.m. at the earliest. On the return trip, travellers to London or Toronto must leave before 8 p.m., which makes attending dinner meetings difficult.

Increased and more reliable train service, with earlier and later options than currently offered, would significantly help thicken mid-sized markets. Given the challenges these cities are currently experiencing, we recommend this happen as soon as possible. While high-speed rail is a fantastic technology,  these cities do not have 15 years or more to be connected to each other, so we recommend enhanced investments in existing transportation technologies happen as soon as possible.

Recommendation: Both the federal and provincial governments should increase their funding of intercity transit between cities, with a focus on projects that can be completed quickly and increase the availability and reliability of transit between communities.

Mid-sized and smaller markets not only have challenges moving people, but also moving data at the speeds necessary for global commerce. These challenges will only be exacerbated with the introduction of 5th Generation (5G) wireless technology. 5G will act as the backbone for everything from the Internet  of things (IoT) to driverless cars. However, given large capital costs and the positive network externalities generated by 5G, without smart public policy, the market is likely to under-invest in 5G infrastructure.

Recommendation: The federal government should implement policies that will foster 5G deployment by incenting capital investment, making sufficient spectrum available at affordable fees and working with local authorities to facilitate the placement and construction of tower sites and fibre backhaul.

Recommendation: The federal government should accelerate the capital cost allowance to better reflect the rapid obsolescence of telecommunications equipment in order to spur continued reinvestment in these and future generations of broadband networks.

Finally, clusters in all-sized markets could be thickened by ensuring that no Canadians are excluded from employment opportunities in clusters due to “socially determined exogenous factors, such as gender, race or socioeconomic background, beyond an individual’s control.”33 The first step to addressing barriers to exclusion is having better data so we can determine their root causes. These root causes could include those with the proper skills lacking employment opportunity as well as individuals being unable to obtain the skills they need, which leads us to the following two recommendations:

Recommendation: Statistics Canada should conduct a yearly employment survey of clusters, with a focus on employment levels for traditionally under-represented groups, including women, visible minorities and Aboriginal Canadians.

Recommendation: Statistics Canada should collect post-secondary education access rates by ethnic background and family income.

2What mechanisms for accountability or measurement can be put in place for the idea?

No new mechanisms are needed, as this idea mostly involves governments doing more of what they already do (transit funding, data collection). Changing rules around non-compete agreements
is a one-time activity.

3What failures is the idea trying to solve?

Thin Markets: This proposal is explicitly designed to thicken markets, as the goal is to increase the pool of available workers for hire in fast-growing clusters.

Inequality of Opportunity: This idea increases opportunities for those who get left out of clusters, either due to geography (lack of transit) or because they belong to a traditionally under-represented group.

4What are the potential benefits of the idea and what are the costs?

Benefits: Thicker, more-inclusive clusters create economic wealth and opportunities for all Canadians.

Costs and Risks: Transit is extremely expensive to build, so there is a risk that the benefits do not outweigh the costs. Statistics Canada could have difficulties collecting the needed data because of privacy concerns or budget. Finally, a lack of non-compete agreements could deter companies from supplying worker training.

5Will the idea increase economic inclusion and/or enhance autonomy? If so, how?

Economic Inclusion: Allowing people to live farther from work increases their affordable housing options as they are not “forced” to purchase expensive housing if they work in an expensive city. Thickening markets in mid-sized cities will lead to spin-off job creation in those centres, which too often have seen job losses through automation and globalization. Finally, a focus on increasing labour market opportunities for excluded groups increases their ability to access good paying jobs.

Autonomy: Increased intercity transit increases autonomy for individuals, as it increases the number of places they can gain employment (or live). It increases their ability to stay with and see a partner who works in a different city. It provides additional opportunities for places to travel to and people to see.

24 Michael P. Moffatt and Rachel Parker, “We asked a group of tech executives: ‘What does it take to grow in London, Ontario?’ ” Mowat Centre (2015).
25 Dora L. Costa and Matthew E. Kahn, “Power Couples: Changes in the Locational Choice of the College Educated, 1940-1990,” Quarterly Journal of Economics (2000).
26 Horwitz & Armstrong, “Enforcing Non-Compete Clauses In California,” Horwitz & Armstrong, May 12, 2014).
27 Chris DeVore, “Silicon Valley Keeps Winning Because Non-Competes Limit Innovation,” Techcrunch, February 18, 2016.
28 Claire Zillman, “Are noncompete agreements hurting tech innovation?” Fortune, July 1, 2015.
29 Matt Marx, Jasjit Singh and Lee Fleming, “Regional disadvantage? Employee non-compete agreements and brain drain,” Research Policy (2015).
30 U.S. Department of the Treasury, Non-compete Contracts: Economic Effects and Policy (2016).
31 Jason Hanson and Sandra Cohen, “Restrictive covenants in employment contracts: Canadian approach,” Practical Law Company (2012).
32 All population data from Census metropolitan area of London, Ontario (Statistics Canada, 2011).
33 Ricardo Paes de Barros et al., Measuring Inequality of Opportunities in Latin America and the Caribbean (World Bank, 2009).

About the Authors

authortemp
Dr. Mike Moffatt is Senior Associate at Canada 2020. He is also an Assistant Professor in the Business, Economics and Public Policy group at Ivey Business School at Western University, where he teaches courses in international trade and firm-level strategy. Mike is Director of Ivey’s Lawrence National Centre for Policy and Management, a public policy centre that is taskedwith bridging the gap between business strategy and government policy.”

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Big Idea 4

1What is the idea?

Canada needs to re-think both the ways firms obtain financing and how infrastructure is financed. We will start by examining the problems of bottlenecks to firm financing.

A common theme that emerged during the roundtables was the difficulty in obtaining financing, which was seen as being partly responsible for Canadian firms failing to scale-up. Problems cited included difficulty obtaining second- and third-stage venture capital, unnecessarily complicated and occasionally incoherent government funding programs and barriers to obtaining financing to commercialize innovations. Furthermore, roundtable participants discussed how government funding programs often compete with private lenders on some dimensions, while failing to address financing market failures on other dimensions. We believe Canada needs to re-invent firm financing, with a focus on addressing the core market and regulatory failures at play. Here are our recommendations on how Canada can do so.

Recommendation: The Cooperative Capital Markets Regulatory System (CCMRS) or provincial governments should create an online finance matchmaking portal (FinMatch) where eligible small and emerging companies can be matched with both private and public providers of capital.

On the demand side for capital, entrepreneurs or companies could apply to join FinMatch, for a nominal fee, at one of three levels. FinMatch would vet applications and successful applicants that met the “listing requirements” for that level would be entered into the system:

  • Level 1: Pre-startups looking for pre-seed capital for businesses they would like to start.
  • Level 2: Startups that have been in business less than two years.
  • Level 3: Established companies that have been in business two or more years.

On the supply side of capital, accredited investors could apply to join the portal with a modest yearly subscription fee. These accredited investors would include individuals, financial institutions, businesses and government entities, such as the Business Development Bank of Canada (BDC) and Export Development Canada (EDC).34  Furthermore, all firms that met the Level 3 “listing requirements” would also be given the option to obtain accredited investor status, which would allow them to act as suppliers
of capital.

FinMatch would act as a matchmaking service between suppliers of capital and entrepreneurs needing funding. FinMatch would suggest potential matches, but members of the system would also be able to view the profiles of other members.35 Within FinMatch, firms could be matched with accredited investors and raise funds in some different ways, including (but not limited to) the following:

a. Loans and other debt instruments
b. Grants and loans from government funding agencies
c. Selling (or buying) whole companies to (or from) other accredited investors

Once a company reached a certain size, it would be able to apply for Level 4 status, which would allow shares in the company to be traded on FinMatch. The Level 4 “listing requirements” would be less onerous than those for firms wishing to list on exchanges such as the TSX Venture Exchange, but would still provide protection to potential investors. As well, the “listing fees” and “annual sustaining fees” would be set substantially lower than those of traditional exchanges.

Our equity market portion of the FinMatch recommendation is adapted from a 2013 recommendation made by the U.S. Securities and Exchange Commission Advisory Committee on Small and Emerging Companies.36 In their Recommendation Regarding Separate U.S. Equity Market for Securities of Small and Emerging Companies, the advisory committee detailed a plan to reduce the barriers preventing high-growth firms from obtaining equity funding. While the proposal was intended for the U.S. market, the first four points of the advisory committee’s proposal are particularly relevant to Canada’s firm-financing ecosystem:

  1. The Committee believes that current U.S. equity markets often fail to offer a satisfactory trading venue for the securities of small and emerging companies because they fail to provide sufficient liquidity for such securities and because the listing requirements are too onerous for such companies.
  2. The frequent failure of U.S. equity markets to offer a satisfactory trading venue for small and emerging companies has discouraged initial public offerings of the securities of such companies, undermines entrepreneurship, and weakens the broader U.S. economy.
  3. Establishing a separate U.S. equity market specifically for the securities of small and emerging companies, where these companies would be subject to a regulatory regime strict enough to
    protect investors but flexible enough to accommodate innovation and growth, offers promise of providing a satisfactory trading venue for small and emerging companies, which may encourage
    initial public offerings of their securities.
  4. A possible feature of an appropriate regulatory regime for such a market would be limiting investor participation to accredited investors who meet a standard designed to assure that the regulatory protection afforded is appropriate given the characteristics of those investors.

We believe that the creation of such a portal would better match sources of capital with investment opportunities, increase liquidity and make it easier for Canadian companies to scale up through mergers. Canada’s lack of mid-sized firms is a commonly cited reason for the country’s lagging innovation and productivity;37  we believe the merger activity that FinMatch would facilitate would accelerate firm growth and assist aging business owners to receive value for their companies. Finally, FinMatch would make it abundantly clear where the holes in Canada’s firm-financing system are and where government programs are competing with private lenders (and each other).

In an ideal world, there would be a single portal at the federal level rather than separate portals in each province, though it may be possible for the five provinces and one territory that have joined the Cooperative Capital Markets Regulatory System38  to have a single portal. However, given the lack of a national securities regulator, the portals will most likely need to be administered by the provinces.

Recommendation: The federal government should continue negotiations to create a national securities system that includes all provinces and territories.

While we believe FinMatch would be incredibly useful, we also recognize that it is not a silver bullet and would take substantial time to develop. As such, we have additional recommendations, including the following:

Recommendation: Given the positive externalities created by growing knowledge-creating firms, Canadian tendencies towards risk aversion and ultra-low interest rates on government borrowing, we recommend the federal government significantly increase the funds allocated to the Venture Capital Action Plan and implement the recommendations of the auditor general39 as they pertain to selection process, performance measurement and reporting.

The cost of capital for the federal government is incredibly low, with nominal bond yields hovering around one per cent for 10-year bonds and under 1.7 per cent for 30-year bonds, both under the Bank of Canada’s two-per-cent inflation target.40 Given this incredibly low cost of capital and the positive externalities created  by growing knowledge-creating firms, the federal government is well-positioned to make equity investments in companies. One mechanism it already has at its disposal is the Venture Capital Action Plan (VCAP), which uses a fund-of-funds approach to leverage private-sector knowledge and capital with government investments. We recommend that in Budget 2017 the federal government allocate additional funds to the VCAP. Furthermore, we feel the results of the program can be strengthened by implementing the following three recommendations from the auditor general’s 2016 report on the program:41

  1. When making investments that are similar to those of the Venture Capital Action Plan, the Department of Finance Canada and Innovation, Science and Economic Development Canada should fully respect the values of fairness, openness, and transparency while meeting the purposes of the investment. Respecting these values will maintain the venture capital industry’s confidence in selection processes run by the Government of Canada.
  2. To appropriately assess the performance of the Venture Capital Action Plan and inform decision making, the Department of Finance Canada and Innovation, Science and Economic Development Canada should expand the Action Plan’s Performance Measurement Framework by considering the inclusion of performance metrics, such as exit performance of recipient companies, recipient
    companies’ export growth and their financial performance, new patents and patent citations, and the number of new or additional key investment personnel and lead investors. To increase transparency, the two departments should report publicly relevant information about Action Plan activities and performance.
  3. In formulating future interventions such as the Venture Capital Action Plan, the Department of Finance Canada and Innovation, Science and Economic Development Canada should allow for an early exit of the public-sector partners.

Finally, we believe firm financing should not just be top-down by large financial institutions or governments, but that community investors have a role to play. The State of California created a useful piece of legislation to give residents more autonomy when making investment decisions. AB 2751, also known as the “California Local Economies Securities Act” (CLESA), has the express goal of making it “easier for small businesses, farms, and renewable energy projects to raise money from local investors and to enable California residents to move their money from Wall Street to their local community.”40 In our view, the most valuable change the bill offers is to make it easier for citizens to invest in local start-ups. CLESA allows start-ups to sell equity stakes without permit requirements, provided they meet the following conditions: “The business provides basic offering and business information to the public, the total amount raised during the offering does not exceed $500,000, and no individual non-accredited investor invests more than $1,000. Accredited investors would be limited to investing no more than 5 per cent of their net worth.”43 The California state legislature has not passed CLESA, so there is no data on its effectiveness. We believer, however, it still provides a model worth investigating.

Recommendation: The Cooperative Capital Markets Regulatory System (CCMRS) or provincial governments should adopt the “small investments” exemption in the California Local Economies Securities Act (CLESA).

We recognize that many individuals would not have the ability to make direct investments in firms, but would appreciate the ability to invest in local businesses in a broad sense, which leads us to our final firm-financing recommendation:

Recommendation: The federal government should work with financial institutions such as credit unions and social finance organizations to create investment vehicles through which individuals could invest in funds that finance local businesses.

Next, we believe the federal government can improve how it finances infrastructure investments. The prime minister’s mandate letter to the minister of Infrastructure and Communities contains the following priority:44

Work with the Minister of Finance to establish the Canada Infrastructure Bank to provide low-cost financing (including loan guarantees) for new municipal infrastructure projects in our priority investment areas. This new institution will work in partnership with other orders of governments and Canada’s financial community, so that the federal government can use its strong credit rating and lending authority to make it easier — and more affordable — for municipalities to finance the broad range of infrastructure projects their communities need. This should include preparing for the launch of a new Canadian Green Bond that can enable additional investments when a lack of capital represents a barrier to projects.

We would expand this proposal and create a Canadian Infrastructure Investment Bank (CIIB) that would be responsible for federal funding of infrastructure projects. We would suggest that the U.S. model created by Korin Davis and William A. Galston in Setting Priorities, Meeting Needs: The Case for a National Infrastructure Bank, be adapted to Canada, with a focus on adapting the following items:

  • Establish the bank as an independent government-owned corporation (GOC) outside of any governmental agency. This would endow the NIB with greater budgetary flexibility and not unnecessarily narrow the scope of infrastructure projects it could support.
  • The bank’s leadership structure should feature a CEO and board of directors, some nominated by the president, others by the leaders of the two parties, confirmed by the Senate, serving staggered terms of about six years. Such a leadership model would give Congress some oversight authority but would sufficiently insulate its operations from political whims and create enough of a buffer so that elected officials would neither determine strategic choices or project selection nor be called on the carpet for unpopular or controversial decisions.
  • Create a division of the bank responsible both for analyzing the viability of proposed projects and for advising those seeking support. A strong and permanent professional staff would provide financial and technical advice to further improve resource allocation.
  • To achieve leverage, the new entity would have to attract private investor-depositors as well. Its authorizing legislation should be drafted to permit such offerings, subject to the bank’s meeting specific quantitative tests.
  • Do not limit the bank’s lending to specific categories of infrastructure, such as transportation. Instead, the bank should be free to invest in a wide array of infrastructure projects, including technology, environmental and energy projects, public utilities, or the renovation of schools and hospitals.45

Recommendation: Canada should create a “Canadian Infrastructure Investment Bank” (CIIB) tasked with providing financing for infrastructure projects.

Recommendation: Like the Bank of Canada, the CIIB should be at arms-length from the government. The CIIB should be given a five-year mandate by the government, but be free to pursue that mandate in the manner they best see fit, so that projects are chosen on their merits rather than on political considerations.

2Who will be responsible for administering the idea?

The FinMatch portals and Canadianized versions of CLESA will be created by the federal Cooperative Capital Markets Regulatory System (CCMRS) and by each province that is not a member of the CCMRS. The creation of the CIIB and increased funding for the Venture Capital Action Plan (VCAP) will come from the federal government.

3What mechanisms for accountability or measurement can be put in place for the idea?

FinMatch: One of the potential benefits of FinMatch is that it would allow the government to keep track of the performance of companies. This data could be incredibly useful for the designing of economic policy. As well, we would recommend that the government set goals for the performance of the portal (companies signed up, deals completed, etc.) and report once a year on the performance of the portal relative to those goals.

VCAP: We advise the government to put into place the three recommendations from the auditor general’s report.

CLESA: We would recommend that the program be examined once a year by provincial auditors general.

CIIB: We believe the Bank of Canada provides a useful framework that allows the CIIB to operate at arms-length but still be ultimately accountable to the federal government.

4What failures is the idea trying to solve?

Our re-invention of firm and infrastructure funding is attempting to solve some failures, including the following:

Information Asymmetries: An obvious question to ask about the creation of an online financing portal is, “If it’s such a good idea, why hasn’t the private sector done it already?” In some cases, they have, as for the buying and selling of companies at sites such as mybizon.com and successionmatching.com. Private-sector solutions, however, suffer from an information asymmetry problem, where the owners have a great deal of information about the value of the investment that the buyer does not. The buyer can obtain much of this information through the negotiation process, but this imposes significant transactions costs. The proposed portal’s listing and reporting requirements would ensure that potential investors quickly have access to the information they need to make an informed decision, similar to disclosure requirements for publicly traded companies. It is certainly possible that government could simply establish the reporting requirements and that private-sector companies would set up portals. While we prefer this option over nothing, we believe this is an appropriate area for government because of data security concerns and the fact that network externalities and co-ordination effects make having multiple portals inefficient.

Externalities and Tech Spillovers: Governments have a role to play in the financing of knowledge-creating companies, as these firms generate positive externalities through knowledge spillovers (and, as such, will be undersupplied by the market). FinMatch and increased VCAP assist in addressing this externality.

Risk Aversion: Companies at Level 1 of FinMatch can enter the system and determine if there is an appetite for their ideas by potential sources of funding before they have committed too much of their own time and capital. We believe that if FinMatch leads to more high-growth firms in Canada, this will incent others to take the risks of entrepreneurship.

Thin Markets: Making it easier for firms to be matched with suppliers of funding should lead to the creation of more firms (and more opportunities for the creation of new firms), thus thickening markets.

Regulatory Failure: The CIIB is designed, in part, to address the issues of infrastructure projects being chosen on political considerations rather than on their merits. A successful CIIB creates experience in financing and evaluating infrastructure projects on which companies and other levels of government can draw.

5What are the potential benefits of the idea and what are the costs?

Benefits: By making it easier to match sources of capital with investment opportunities (be they investments in firms or infrastructure), on both sides of the transaction, investors get more for their investments, and companies can grow faster and increase trade, benefitting the Canadian economy.

Costs and Risks: Any time individuals are granted more ways to invest their money, we risk opening them up to fraud. As well, government digital programs like FinMatch come with potentials for cost overruns and data breaches.

6Will the idea increase economic inclusion and/or enhance autonomy? If so, how?

Economic Inclusion: One of the goals of a reinvention of firm financing is to make it easier for people with great ideas but not a lot of capital to obtain funding. Obtaining superior value along with leveraging private-sector funds when financing infrastructure projects allows the government to build more infrastructure per dollar spent, benefitting all Canadians.

Autonomy: By allowing individuals to invest in their local communities, we are giving them the opportunity to regain economic autonomy. This increase in autonomy helps “solve” the ketchup
problem, where individuals are desperately looking for an outlet to assist in the economic development of their communities. Furthermore, by making it easier for people to start new businesses, we are giving them additional options.

34 The Ontario Security Commission’s accredited investor exemption includes individuals of sufficient financial means along with individuals who currently are, or once were, a registered adviser or dealer, other than a limited market dealer; financial institutions; governments and governmental agencies; insurance companies; pension funds; registered charities; certain mutual funds, pooled funds and managed accounts; companies with net assets of at least $5 million; persons or companies recognized by the OSC as an accredited investor. The accredited investor exemption, (Ontario Securities Commission, 2016).
35 Subject to the user’s privacy settings. Privacy would naturally be a concern in a system like FinMatch, but we believe dating websites provide a good template for allowing users to decide who can access parts of their profile.
36 Security and Exchange Commission, Recommendation Regarding Separate U.S. Equity Market for Securities of Small and Emerging Companies (2013).
37 What’s Happened to Canada’s Mid-Sized Firms? (Business Development Bank of Canada, 2013).
38 As of August 2016, British Columbia, New Brunswick, Ontario, Saskatchewan, Prince Edward Island and Yukon are members of the Cooperative Capital Markets Regulatory System. (Cooperative Capital Markets Regulatory System, 2016).
39 Office of the Auditor General of Canada, 2016 Spring Reports of the Auditor General of Canada, Report 1 — Venture Capital Action Plan (2016).
40 On August 26, 2016, the yield on a 10-year bond was 1.090 per cent, whereas the yield on a 30-year bond was 1.687 per cent,Market data, (Financial Post, 2016).
41 Office of the Auditor General of Canada, 2016 Spring Reports of the Auditor General of Canada, Report 1 — Venture Capital Action Plan (2016).
42 Sustainable Economies Law Centre, California Local Economies Securities Act (2016).
43 Sustainable Economies Law Centre, California Local Economies Securities Act (2016).
44 Office of the Prime Minister, Minister of Infrastructure and Communities Mandate Letter (2015).
45 Korin Davis and William A. Galston, Setting Priorities, Meeting Needs: The Case for a National Infrastructure Bank (Governance Studies at Brookings, 2012).

About the Authors

authortemp
Dr. Mike Moffatt is Senior Associate at Canada 2020. He is also an Assistant Professor in the Business, Economics and Public Policy group at Ivey Business School at Western University, where he teaches courses in international trade and firm-level strategy. Mike is Director of Ivey’s Lawrence National Centre for Policy and Management, a public policy centre that is taskedwith bridging the gap between business strategy and government policy.”

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Big Idea 5

1What is the idea?

A common theme that emerged during the roundtables was that Canada’s “one-size-fits-all” approach to financial regulations works reasonably well for large financial companies, but unnecessarily inhibits the creation of innovative fintech companies. We believe Canada needs to create safe spaces for businesses to test financial innovations without incurring regulatory consequences that are inappropriate for the scale at which those companies are operating.

Recommendation: The Office of the Superintendent of Financial Institutions (OSFI) should spearhead an initiative to create and administer the financial regulatory sandbox where eligible small and emerging companies can operate in a well-defined space and for a limited duration while offering financial products and services to Canadian consumers.

This financial regulatory sandbox would be similar to the regulatory sandboxes developed by the Financial Conduct Authority (FCA) in the United Kingdom,46 the Australian government and the Monetary Authority of Singapore (MAS).47 These financial regulatory sandboxes allow businesses to test their ideas and reduce the cost of getting innovative ideas to market, yet ensure that consumers are still protected. The sandbox would encourage and support the design and delivery of new financial products and services that benefit consumers and businesses.48

The following criteria for choosing participating projects for the sandbox are developed from the frameworks developed by both the FCA49 and MAS50:

  1. Is the new solution novel or significantly different from existing offerings?
  2. Does the innovation offer an identifiable benefit to customers?
  3. Does the business have a genuine need for testing within the sandbox framework?
  4. Has the business invested appropriate resources in developing the new solutions, understanding the applicable regulations and mitigating the risks?
  5. Does the business have the intention and ability to deploy the solution in Canada on a broader scale?

2Who will be responsible for administering the idea?

Because of Canada’s complicated financial regulatory structure, federal and provincial regulators will have to work together to create and administer the financial regulatory sandbox.

3What mechanisms for accountability or measurement can be put in place for the idea?

The projects will be monitored throughout their time in the financial sandbox. While specific regulatory requirements will be relaxed in the financial sandbox, the regulators will work with innovators to ensure that appropriate safeguards are built into their new products and services before these reach a mass market. Firms participating in the sandbox will have to report on agreed milestones, findings and risk management.

4What failures is the idea trying to solve?

Regulatory Failure: Typical financial regulations are designed, in part, to limit systemic risk. However, these regulations can also limit innovation. Thus, the overarching goal of the financial regulatory sandbox will be to ensure that regulations intended to protect Canadians from massive failures in the financial industry are not applied to smaller companies in a way that will needlessly stifle innovation.

Inequality of Opportunity: The financial regulatory sandbox will increase the economic inclusion of low-income households and under-serviced communities in Canada by providing them with financial products and services that the big banks may not consider valuable enough to create.

Market Power: Competition will be increased in a sector that is currently dominated by a few large players.

5What are the potential benefits of the idea and what are the costs?

Benefits: Fintech focuses on creating technological innovation to make financial markets and systems more efficient and consumer focused. By reducing barriers, companies can create financial innovations that are smaller and can benefit communities, such as First Nations, the working poor and new Canadians, who often lack access to affordable financial tools.

Costs and Risks: There is an increased potential for fraud as well as failure of new products and services. Also, there is the potential risk, identified at the roundtables, that the financial regulatory sandbox will create a wall for firm growth. Firms may limit their growth so they can continue to operate without regulations, or potential funders may be reluctant to invest in companies if they are uncertain those companies will be able to exit the sandbox. Or as one roundtable participant described it, “We need to ensure the sandbox does not create walls to growth.”

6Will the idea increase economic inclusion and/or enhance autonomy? If so, how?

Economic Inclusion: By creating sandboxes and giving businesses a safe space to test innovative ideas without incurring all of the regulatory consequences, we can ensure that regulations are not stopping companies from taking advantage of economic opportunities because they lack the resources to meet regulatory requirements designed for large financial firms. The reduced set of requirements benefits small businesses that do not have the resources to navigate the financial regulatory environment. Furthermore, we expect many fintech start-ups will focus on providing enhanced access to lower-cost services, which disproportionately benefits Canadians of limited means.

Autonomy: Financial start-ups that make it easier for low-income individuals to obtain capital give them more options to start businesses, invest in skills training and fully participate in a modern economy.

46 Financial Conduct Authority, Regulatory sandbox (2015).
47 Monetary Authority of Singapore, MAS Proposes a “Regulatory Sandbox” for FinTech Experiments (2016).
48 Government of Australia, Backing Australian FinTech (2016).
49 Financial Conduct Authority, Regulatory sandbox (2015).
50 Monetary Authority of Singapore, MAS Proposes a “Regulatory Sandbox” for FinTech Experiments (2016).

About the Authors

authortemp
Dr. Mike Moffatt is Senior Associate at Canada 2020. He is also an Assistant Professor in the Business, Economics and Public Policy group at Ivey Business School at Western University, where he teaches courses in international trade and firm-level strategy. Mike is Director of Ivey’s Lawrence National Centre for Policy and Management, a public policy centre that is taskedwith bridging the gap between business strategy and government policy.”

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