StatCan report on foreign firms signals promise and peril for Canada’s innovation sector

Foreign-owned firms in Canada are outperforming Canadian businesses in profits, productivity, R&D activities and technological services imports and exports, according to a new Statistics Canada report.

The statistics reflect Canada’s economic structure that has existed for decades, and the numbers by themselves aren’t surprising, say innovation experts. But they warn that unless Canadian companies make R&D and innovation a core business strategy and government formulates a coordinated industrial policy, homegrown firms will fall further behind in the knowledge-intensive, competitive global market.

“Canadian business has not been particularly innovative according to any of the standard measures, because it really hasn’t had to be,” says Peter Nicholson, founding president of the Council of Canadian Academies, former advisor to the Prime Minister’s Office, and former bank executive. “We’ve chosen to develop an economy where we basically bought a great deal of our innovation” from the U.S. and other advanced countries. But we’d be in deep trouble if all the foreign investment were to disappear, because of the outsized role it plays in the economy, says Nicholson.

“In Canada, 50% of the R&D is done by 20 companies," says Richard Hawkins, professor in the Science, Technology and Society program at the University of Calgary. "Just about all of them are foreign-majority owned.” Although Canadians are talented researchers and inventors, he says, “we don’t have any industrial structures to create any value out of [their R&D and innovations] . . . We haven’t had any serious industrial policies in this country for a very, very long time, and that’s been the problem.”

Foreign firms link R&D with profitability

According to the report by Statistics Canada, profits of foreign majority-owned affiliates operating in Canada rose 16.2% to $81.8 billion in 2016, compared with just 2.5% growth for Canadian-owned firms. Foreign affiliates accounted for nearly two-fifths of R&D expenditures in the country, with the value of their in-house R&D spending rising 7.4% to $6.8 billion in 2016.

While the total number of R&D personnel in Canada declined by 13% to 141,300 workers from 2015 to 2016, R&D personnel at foreign-owned firms remained relatively stable at 45,300. Moreover, foreign affiliates generated over one-fifth of the value added in the corporate sector and were responsible for 68.8% of Canada’s imports and exports of technological services in 2016.

“If Canada wants to improve, then we must somehow learn how to create multinationals, or we will forever lag the rest of the world in productivity.” - John Reid, CEO of CATA

"[Foreign multinationals] draw a direct parallel from their R&D investments to keeping ahead in the marketplace and generating profit. And if we look globally, innovation is the leading edge of wealth creation and prosperity,” says Laura Kilcrease, CEO for Alberta Innovates. “I see [the StatCan report] as highlighting an opportunity for us to step up, because those multinationals wouldn’t be here unless there was a meaningful opportunity for them.”

John Reid, president and CEO of the Canadian Advanced Technology Alliance, says the ratio of multinationals to SMEs in Canada is on the low side compared with other OECD countries. This preponderance of SMEs — which typically have lower productivity performance than large ‘flagships’ with extensive supply chains — limits Canada’s wealth creation, he says. “If Canada wants to improve, then we must somehow learn how to create multinationals, or we will forever lag the rest of the world in productivity.”

“Buy versus make” innovation approach in jeopardy

Nicholson says Canada has produced a very successful economy by using its natural resources export revenue to acquire most advanced technologies from other countries. But, he says, this “buy versus make” approach to innovation has serious drawbacks: it can become more expensive, results in insufficient domestic technological capacity in the global knowledge economy, and lacks security as a long-term private business strategy.

In his paper “Facing the Facts: Reconsidering Business Innovation Policy in Canada,” written for the Institute for Research on Public Policy, Nicholson details several mega-trends that he argues will require a new commitment to innovation by Canadian business:

• growth in the global market is much stronger in Asia than in Canada’s major markets in North America;
• Canadian businesses are investing only a fraction on IT technology per worker compared with the U.S. and other countries;
• Canada’s natural resource base — oil and gas, mining and forestry — faces increasing environmental challenges and substitute products; and
• the number of Canadian workers is declining, which will require innovation to maintain and increase productivity.

Even though Canadian governments have provided businesses with substantial incentives to encourage R&D, business hasn’t responded in a way that has increased the innovation intensity of the economy, Nicholson says. “If business decides that they really have to make a serious, sustained effort to become far more innovative, then that will create a great deal more leverage for government programs.”

Reid says Canada needs a new branding statement that “recognizes that data is the new oil.” Canadian and foreign-owned businesses should both be coordinated and leveraged to add value to the economy, he says. “You have to do everything in your power to attract capital, deploy more of it towards growth opportunities, and get the best out of that [innovation] chain from idea to commercialization, and scale-up to flagships.”

Kilcrease says Canadian businesses have to partner more with multinationals and emulate their best practices, such as by more boldly and proactively working their global networks to expand customers and markets. Last year, Alberta Innovates launched a new annual, international conference, called Inventures, that brought together the communities of innovation, business and capital. “Over $50 million in business has so far come out of that first conference,” she says.

But Hawkins worries that Canada has already missed the boat. "We basically screw cars together and we suck oil out of the ground," he says. "We’ve been investing in two losing industries for a long time that are disappearing.”

“Business does need to wake up,” Nicholson says. “The bottom line of all this is that by far the major incentive for Canadian businesses to invest more in innovation as a business strategy are these challenges coming from the global market.”

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