To boost Canadian innovation, resist the lure of Silicon Valley

TORONTO—Kitchener-Waterloo made a big deal out of attracting Google to set up a large R&D branch plant in an old industrial building there. Not to be outdone, Prime Minister Justin Trudeau, in the early days of his government, made a high-profile visit lauding Google’s expanding R&D branch plant. He wanted Google to play a bigger role in Canada. In fact, both he and his then industry minister, Navdeep Bains, were strong enthusiasts for such R&D branch plants. Their Pan-Canadian AI strategy, for example, linked up companies like Alphabet/Google, along with Facebook, Microsoft, and other tech giants with Canada’s top AI researchers and students at our leading universities so they could use Canada to advance their commercial interests. Silicon Valley tech giants embedded themselves in our AI research centres, recruiting our talent and ideas for the intellectual property, profits and jobs to be owned and located elsewhere. But this does not do much for Canada, despite big investments by government. Canada’s frustrated tech companies, not surprisingly, felt that Trudeau and Bains were more interested in enhancing the role of Silicon Valley tech giants than in boosting our own companies. The Trudeau government’s enthusiasm for an Alphabet/Google company, Sidewalk Labs, to take charge of developing the Smart City potential on Toronto’s waterfront rather than creating an opportunity for Canadian companies was just one example of how Silicon Valley had seduced Ottawa. This is the wrong model for Canada’s future economy. These tech giants will not deliver the jobs and wealth we will need to sustain and enhance our way of life. Rather than becoming one of the top five innovation nations in the world, as Bains boasted we would, we are falling behind. Nor does the spate of recent unicorn financings—companies valued at at least $1-billion—mean we are on the right track; with a high level of U.S. venture financing, much of the profit from these investments will flow to U.S. investors, not stay in Canada. As Dan Breznitz, professor and holder of the Munk Chair of Innovation Studies at the University of Toronto harshly puts it, “Canada easily wins the wooden-spoon award for the worst innovation policy among all developed economies.” In his recent book, Innovation in Real Places, Breznitz argues that R&D branch plants “have a mostly negative impact on the local innovation system. Wages (and other perks) go up beyond the ability of local companies to compete; inequality jumps, since almost only R&D engineers are hired; social fragmentation increases, since most workers develop intense collaboration with other people within their firms around the world, and have very little time to get involved with the local high-tech community; and the innovative fruits of the R&D centres are transformed to the MNC’s HQs and then outsourced around the world without ever creating jobs for non-engineers (who end up paying most of the tax benefits awarded to those MNCs.” Our R&D branch plants are “feeder clusters” that supply new intellectual property to their head offices in California and elsewhere. Citing Israel as an example, he argues that R&D branch plants there have had virtually no spillovers in the overall economy. While they provided good jobs for the researchers they employed, these R&D branch plants rarely provided jobs in the wider economy. Likewise, while Israel has been hailed as a startup nation, the largely foreign venture capital industry, which finances many of these early-stage companies, extracts its profits as it exits the startups, often selling them to foreign multinationals, with little to show for Israelis. More recently, we have seen how Google, starting in 2008, has grown its R&D branch plant in the Kitchener-Waterloo region to more than 1,300 employees, again making it much tougher for Canadian companies to hire the talent they need for growth, writes David Crane. Unsplash photograph by Cess Idul We can see the same phenomenon in Canada—where public policy focuses on attracting multinationals and their R&D branch plants, rather than building up Canadian companies and Canadian clusters of excellence. In 2013, for example, the Ontario government signed a 10-year agreement with Cisco Systems to create at least 1,700 mainly R&D jobs in Ottawa at a new R&D centre, with a subsidy of up to $220-million from the Ontario government. As critics pointed out, the Ontario taxpayer was subsidizing Cisco at a time when local tech companies were hungry for talented workers to grow their own companies. Cisco was getting a wage boost of about $11,200 a worker per year, giving it a major advantage over local startups and scale-ups unable to match Cisco wages, damaging the growth prospects of smaller Canadian companies. More recently, we have seen how Google, starting in 2008, has grown its R&D branch plant in the Kitchener-Waterloo region to more than 1,300 employees, again making it much tougher for Canadian companies to hire the talent they need for growth. Google has benefited from the major investments made in our universities and from the R&D tax credits that subsidize their R&D activities. But, as with the examples from Israel, there is little spillover effect since foreign companies will do their research here—but their plan is to create intellectual product to be owned at their headquarters to generate jobs and wealth elsewhere. We have to focus much more on what we can do, and this has to be led by what Breznitz calls the agents of innovation—companies and individuals. Having great universities, for example, is important. But they are helpful enablers, not the drivers of innovation-led growth. This is why the scale-up of Canadian companies is critical. We have examples in Canada where we have created genuine centres of innovative growth—canola in Saskatchewan, wine in Ontario, semiconductor fabrication in Quebec. Each, in its own way, has followed Breznitz’s recipe: equip the agents of innovation with the capacities they need for success; develop, support, and sustain the economic ecosystem—the enabling institutions—that innovators need to succeed; and find effective ways to stimulate companies and individuals to become more innovative and grow their businesses. So we badly need, as some of us have argued for some time, a new look at how we build an innovative economy. There’s no time to waste—other nations already have a lead on us and the gap is widening. David Crane can be reached at crane@interlog.com. The Hill Times

To boost Canadian innovation, resist the lure of Silicon Valley

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To boost Canadian innovation, resist the lure of Silicon Valley

We have to focus much more on what we can do, and this has to be led by Canadian companies and individuals to drive innovation-led growth. This is why the scale-up of Canadian companies is critical.

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