Design Engineering

Canada’s innovation paradox: Why firms struggle to scale

Mike McLeod   

General CME Innovation innovation in Canada NGen

Why Canadian firms struggle to scale despite the country’s multiple advantages.

For economists, investors, political leaders and anyone who tracks the economic growth of nations, Canada poses a bit of puzzle. On the one hand, it has plenty going for it. Canada, for example, sports one of the world’s most educated workforces. According to the 2021 census, the percentage of 25- to 64-year-old Canadians with a college or university degree is a whopping 57.5 per cent—a number that puts it at the top (as of 2022) of G7 countries, Statistics Canada says.

The country is also highly attractive to the world’s top minds, offering a substantially quicker path to residency than the U.S. In fact, highly educated immigrants account for a significant proportion of those Canadians with university degrees. Added to that, Canada boasts some of the world’s most highly regarded engineering and scientific research centers, (e.g. UofT, UWaterloo, McGill, etc.) that show up on top international university rankings year after year.

Canada’s fertile ground extends beyond just talent and research. The Scientific Research and Experimental Development (SR&D), despite the complexity of its application process, still ranks as one of the most generous R&D tax credits in the G7. Throw in the NRC’s Industrial Research Assistance Program (IRAP), the Global Innovation Clusters (formerly Super Cluster), plus more narrowly targeted federal and provincial programs, not to mention non-profits like Mitacs and the MaRS Discovery District, and there no shortage of financial and advisory assistance for the entrepreneurial. 

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And yet, despite all its advantages, Canada struggles to capitalize on them. According to the Organisation for Economic Co-operation and Development (OECD), real per capita GDP in Canada grew less than one per cent from 2007 to 2020. Similarly, The Global Innovation Index’s 2022 report ranked Canada 15th of 132 nations in its innovation rankings, behind Germany, Finland, Denmark, Japan, and the United States.

In part, this disparity between inputs and outputs is amplified by one of Canada’s biggest strengths: Its proximity to the U.S. market. In their 2019 report, To Sell or Scale Up: Canada’s Patent Strategy in a Knowledge Economy, Canadian economics professors, Nancy Gallini and Aidan Hollis, conclude that the temptation for Canadian inventors (or their short-term oriented investors) to sell the IP to large, mainly U.S. firms is often too strong. Why risk scaling up in Canada, vying with much larger and wealthier U.S. competitors, when you can cash out during the initial stages of product development? 

Nevertheless, Canada remains one of the top spots internationally to start a company. The Toronto-Waterloo Corridor, for example, ranks as one of the largest tech hubs in North America. According to the Global Startup Ecosystem Report 2023, by innovation policy research firm Startup Genome, the corridor hosts 15,000 tech companies employing 250,000 tech workers, placing it in the top 20 of technology ecosystems globally. 

Even so, most companies like these have struggled to scale historically, says Jayson Myers, CEO of NGen, the not-for-profit that oversees the advanced manufacturing Global Innovation Cluster. Over his nine years as President and CEO of Canadian Manufacturers & Exporters (CME) and the past seven years at NGen, Myers says he’s seen Canada’s innovation paradox play out repeatedly, first hand. While Canada succeeds at the input side of the equation, he says the output (i.e. commercialization) suffers from the lack of a key element.

“All the support for startups and tech is great, but there’s usually one thing missing, and that’s the customer,” he says. “Over my career, I’ve seen all sorts of programs to support research and push tech into the marketplace, but I just see it as like a train. You’ve got the engine, which is the customer, and then you’ve got service, manufacturing, tech, and then you’ve got research at the end. [Canada’s] approach has been to supercharge the caboose but then wonder why the train doesn’t move forward.”

As Myer’s analogy implies, what’s required to improve Canada’s economic performance is to focus on the demand side of the equation, supporting the end customer who in turn pulls the other components along. However, there are challenges to this approach. One, Myers says, comes down to marketing. As he puts it, in the Canadian market “nobody knows when anybody else is doing.” A larger challenge however, stems from the disconnect between technology companies and their potential customers.

“[Canada has] a problem around tech adoption, but it’s not just because manufacturers or industrial customers are risk averse,” he says. “It’s because the tech companies don’t offer them the solutions they need. Often, those solutions need to be packaged in an integrated engineering solution that can be managed by manufacturers that actually meet their requirements.”

As one of NGen’s principle architects, Myers says the solution to these challenges, and the organization’s purpose from the beginning, has been to build and support collaboration between technology companies and, in the case of NGen, manufacturers.

As a result, projects green-lit by NGen for funding are commonly a pairing of a manufacturing firm with a specific problem and one or more Canadian technology firms with a potential solution. NGen often plays match-maker for these collaborations, as well as consultant, providing feedback on the strengths and weaknesses applicants’ proposals. 

“[Canada] has all this great tech and great startups but, in many cases, they don’t understand how a manufacturing customer would use their technology,” Myers says. “On the other hand, you’ve got manufacturers who aren’t necessarily aware of what technology exists, and if they are aware, they don’t see how they could use it to improve their business.”

“What [NGen does] is integrate the technologies and research along with the manufacturer that has the problem,” Myers adds. “It’s that collaboration that, first of all, develops the unique manufacturing solution, but also generates the commercial opportunity. [NGen] bridges this chasm between the tech and the research on one side, and then the industry customer on the other. That, I think, is a very important part of what we do and a strategy that really pays off.”

And the payoff has been considerable, Myers says. At NGen’s N3 Summit in February, the not-for-profit announced that its first 165 cluster projects resulted in $7 billion in new sales for Canadian companies, a 32x return on $250 million worth of investments the organization made between 2019 and 2023 and a nearly five times return on federal tax dollars invested. To boot, NGen said 55 new companies and 3,449 new jobs were created as a result.

At the end of the day, the way out of Canada’s innovation paradox, Myers contends, is to help Canadian companies collaborate on solutions to existing problems. The resulting partnership not only provides an ongoing organic source of income so tech companies can scale the business, but also provides a concrete use-case to show the next potential customer.

“A big part of what we do is meshing together an ecosystem and filling in gaps, such as management training, integrating manufacturing with entrepreneurship courses, attracting young people into advanced manufacturing careers and leading Canadian companies to international trade shows,” Myers says. “These are measures individual governments can’t do on their own, but where we can play a catalytic role. Often it takes just a small amount of investment but results in a huge payoff.”

 

Mike McLeod is the former editor of Design Engineering magazine.

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