Future-proofing Canada
WE’RE WELL PLACED TO BECOME A GLOBAL TECH LEADER
By any global measure, we should be proud to be Canadian. According to the 2023 U.S. News Best Countries rankings, which measure global performance based on 10 metrics, Canada is the second-best country in the world, behind Switzerland. So we should feel good about ourselves, right?
The truth is we are reaping the benefits of previous generations’ investments in resources and infrastructure. And everyone who owns a house knows one must constantly invest in maintenance and renovations for it to keep its value. Unfortunately, in recent decades, we haven’t properly maintained our house, and we are starting to see cracks in some of the walls, if not the foundation.
Alarm bells are ringing from numerous sources regarding our current situation and how it will affect our future prosperity. Most of the recent headlines warn that Canada seems to be losing its edge. The Bank of Canada recently issued a wake-up call, saying we are losing ground on productivity, which will affect our standard of living.
Likewise, an OECD report from last year highlights real issues with Canada’s business innovation, investments and productivity. The report points to “lacklustre productivity growth since 2015 saw gaps in per capita GDP widen between Canada and better-performing economies.” The OECD predicts Canada will be the worst-performing (advanced) member country over the next few decades, as measured by real GDP per capita.
We should be taking note of these serious red flags. And yet, despite these warning signs, our view is Canada has been quietly building most, if not all, of the key ingredients to become a true global powerhouse of economic prosperity in the coming decade.
Moving away from a traditional reliance on natural resources, the future of wealth creation is now rooted in technology. In fact, the wealth of today belongs to the Silicon Valley tech companies, with the well-known success stories of Google, Meta, Apple and the like. The internet era has created dramatic wealth and prosperity for the United States.
In 2023, seven of the 10 largest companies in the world, in terms of market capitalization, were U.s.based tech companies — some with a market capitalization over 25 times higher than the world’s largest companies had in 1994. Even when adjusted for inflation, this clearly demonstrates the incredible ability of technology to create immense value.
Furthermore, the world is now entering a new phase of tech innovation with the latest breakthroughs in artificial intelligence and life sciences. It’s early days for these new fields, and already the race for supremacy has begun. The winners haven’t been determined yet, but U.S. companies are looking to protect their leadership.
And unbeknownst to most Canadians, Canada has been building amazing structural advantages over the past 30 years in the tech sector in general, and in AI in particular.
Canada is a global leader in AI research. We can claim leadership with names such as Geoff Hinton, Joelle Pineau, Yoshua Bengio and Aidan Gomez, among many others. In fact, Canada is home to many of the world’s top AI researchers, who produced more AI publications per capita in 2022 than any other G7 country, according to Deloitte.
Our universities and research centres continue to attract and develop the best global talent. Mcgill, Waterloo, UBC and the Mila and Vector institutes are only a few of the amazing Canadian institutions where the world’s best academics are gravitating.
And the facts speak for themselves: between 2020 and 2022, the growth rate of tech jobs in Canada (16 per cent) outpaced that of the U.S. (11 per cent), according to a report from CBRE. This has been supported by an attractive and open Canadian immigration strategy.
Canada benefits from a maturing business tech ecosystem. Gone are the days when Canadian entrepreneurs had to exile themselves to the U.S. to be successful. Over the past 20 years, Canada has worked hard to develop a robust support system for entrepreneurs to stay and build their businesses domestically. Companies such as Shopify, Opentext, Constellation Software, Cohere and Lightspeed Commerce are prime examples of this success.
These industry leaders and their financial backers have now built a growing, well-oiled flywheel, in which successful entrepreneurs re-inject capital into the system by encouraging the creation of new businesses, supporting a new generation of entrepreneurs, and launching or participating in angel and venture funds that further fuel innovation and risk-taking.
In addition, other important organizations and programs are contributing to the flywheel, from the groundbreaking co-op program at the University of Waterloo, to incubators such as the Creative Destruction Lab and government programs such as the Venture Capital Catalyst Initiative and the Scientific Research and Experimental Development Tax Incentive Program.
This is all very promising. And now that the flywheel is turning, our governments and institutions must take concrete steps to accelerate our momentum, leverage our competitive advantages and secure a leadership position in the coming decade.
A crucial step is to urge our Canadian pension funds (our own money) to actively invest in our tech and innovation sectors, which will create tomorrow’s global champions and generate the wealth we aspire to.
The truth is that with the notable exceptions of Quebec and Alberta, most large Canadian pension funds have shied away from supporting the Canadian venture capital ecosystem, hiding behind a principle of independence and the argument that maximizing (nearterm) returns is their only mission.
As a result, the largest pension funds have more invested in China than they do in Canadian public and private equities, according to an open letter sent to Finance Minister Chrystia Freeland that was signed by more than 100 business leaders. This is a huge missed opportunity for Canada.
Tech investing is very capital efficient. A truly inconsequential amount of our largest pension savings invested in our innovation agenda would fuel wealth creation in our own backyard. Remember that tiny investments in Apple and Google 25 years ago have returned trillions in value and countless jobs for the U.S. economy.
In short, it’s all about building long-term wealth versus entertaining a shortterm vision, with very capital-efficient investments.
Speaking of short-term vision, we must take a moment to comment on the recent capital gains tax increase outlined in the federal budget. We get that we need a fair tax system. But with the capital gains changes, we will be taxing innovation, affecting productivity, slowing down our own flywheel and putting the brakes on so much of the good work that has been done to date.
In other words, we are simply encouraging people to move and invest south of the border, the largest market in the world, given that our tax system is now uncompetitive vis-a-vis many U.S. states. The best startup founders are smart and, like capital, will flow to the best places for them to build their companies. The government should recognize that what it’s doing is a mistake, and revert to a tax system that promotes innovation and entrepreneurship.
Most Canadians have a deep attachment to our “Canadian model” of a gentler and fairer version of capitalism. Canadians are typically proud to pay their taxes but expect competent and efficient government in return. Others may question whether we have a competent and efficient government, but it’s clear to all that we can’t simply tax our way to wealth creation and prosperity.
In some ways, we truly are at a crossroads for our economic agenda. Over the past decades, many brilliant and dedicated people, organizations and programs have built the foundation for the next generation of Canadian tech innovation. Thanks to all the pioneers who have invested before us to create our tech flywheel, we now benefit from amazing assets, and a shot at the next trillion-dollar industry.
These are assets we can leverage to create the economic prosperity we aspire to, all in the context of our unique Canadian model. It is time to invest in ourselves and seize the day. Carpe diem!