Natalie Raffoul is an intellectual property lawyer and Neil Desai is an executive and board member with growth stage Canadian tech companies.
This essay is part of the Prosperity’s Path series. In a time of geopolitical instability and a shifting world order, the challenges facing Canada's economy have only gotten more visible, numerous and intense. This series brings solutions.
The rising global economic nationalism accelerated by U.S. President Donald Trump’s trade war has upended the Canadian consensus around free trade. There have been emotional calls to buy Canadian products and substantial new spending commitments on projects of “national interest” by the federal government to secure our economic future.
But what about the billions Ottawa already spends every year to try to diversify our economy and make it more productive?
For decades, the federal government has spent $20-billion annually on its innovation tax credits and research and commercialization programs. This is supplemented with numerous provincial incentives.
Canadians should expect that our economy would be booming with new innovations and fast-scaling, technology-intensive companies, ultimately driving our national bottom line. But the reality is that our productivity, a barometer for such development, has been plummeting over this same horizon.
While Canadians have been at the forefront of incredible technological feats that were seeded by public funding like AI and lithium battery technology, they have not translated into a meaningful boost to the economy. A troubling contradiction lies beneath the surface. Many subsidiaries of foreign multinational corporations qualify as “Canadian” despite the fact that the intellectual property (IP) they develop subsidized by our tax dollars can ultimately be owned and commercialized abroad.
A case in point is Huawei Canada, which has conducted publicly funded research with Canadian postsecondary institutions on subjects spanning AI, 5G wireless technology and semiconductors. The company, whose beneficial ownership benefits accrue to China, have filed numerous patents around their Canadian research, funded by our taxpayers.
This is not an isolated case. Other global IP-intensive companies such as Google owner Alphabet, Samsung, Sanofi and Siemens have run similar playbooks.
We cannot fault these companies for acting rationally and leveraging our public incentives, high-quality talent and research infrastructure. But if our policymakers want to achieve a real return on our vast public investments in innovation to the benefit of Canadians, a more comprehensive definition of what constitutes a Canadian company is required in the allocating of public funds.
Canada does not have an ideation problem. We have an abundance of world-class research and early-stage companies. What we lack is scale. Canada’s “missing middle” – the absence of strong mid-sized companies capable of becoming global leaders – has been well documented.
That middle is missing because many of our brightest companies hit a growth ceiling relatively early. Our ecosytem lacks many of the prerequisites for scale: investors who are in it for the long term, institutions that prioritize commercialization, talent that have scaled technology-intensive companies globally and a large enough pool of customers to test innovative products and services. As a result, many domestic startups are acquired by foreign companies or commercialize their IP abroad.
Yet we continue to distribute billions in public innovation dollars without ensuring that they help Canadian companies overcome this scaling barrier. If innovation funding is intended to help scale the next BlackBerry or Shopify, then we need frameworks that focus on rewarding companies committed to staying, growing and contributing to Canadians.
A modern, strategic definition of what qualifies as a Canadian company for innovation funding should incorporate IP ownership, revenue generation and corporate control and governance from Canada.
In the knowledge economy, intangible assets, like IP, are the core asset base. It has been estimated that 90 per cent of the value of S&P 500 assets are intangible. Such assets generate licensing revenue, export opportunities, valuation increases, and competitive advantage, especially for growth companies. If Canadian taxpayers help generate IP, then Canada should reap its long-term benefits.
Canadian companies should qualify when they own, control, or substantially commercialize their IP from Canada. This principle ensures that innovation funding supports companies contributing to Canada’s economic sovereignty, rather than just providing cost-reduced R&D for foreign parents.
The concept of a Canadian-controlled private corporation (CCPC) provides a useful foundation. This designation is used to determine eligibility for certain tax breaks and some innovation funding such as the Science Research and Economic Development (SR&ED) tax credit. CCPCs are materially owned and controlled by Canadian residents, which aligns incentives around long-term domestic value creation.
The CCPC criteria should be used as a base. Upon that base we can build a new comprehensive definition for what makes a company Canadian when it comes to research funding.
If a company books its revenue here in Canada and employs Canadians at meaningful scale, it is contributing to Canada’s fiscal and economic base. Innovation funding should follow these companies – not those that shift revenue and profits to foreign jurisdictions.
If Canada wants to stop being primarily a branch-plant economy and start scaling globally relevant, IP-intensive companies, our innovation funding must have clear strategic objectives, including increasing Canadian-owned IP within Canadian companies, creating high value, sustainable jobs and increasing our taxable revenue within globally competitive, homegrown firms.
Foreign subsidiaries will continue to play a key role in our economy, but they should not be prioritized in a limited resource environment intended to fuel domestic innovation capacity and our national bottom line.
Canadians have demonstrated our ability to ideate and develop transformational technologies. If we want those feats to contribute to our economic transformation, it will require more than research excellence. It will require an orientation that is dogmatically focused on our ability to commercialize, scale, and own the fruits of our innovation.
The question policymakers must ask is no longer simply “Who conducts R&D in Canada?” but “Who creates long-lasting economic value for Canada?”
We have the talent. We have the research base. And we have ample public funding. What we need now is a modern, strategic definition of a Canadian company – one that ensures the billions we invest in innovation strengthen our own economy, build our own globally viable companies, and secure Canada’s prosperity for decades to come.