Fostering a Constructive, Business-Friendly Regime Sustains Innovation, Not Government Money

Commentary, COVID-19, Government, Ian Madsen

For standards of living to grow, productivity growth must be strong and continually renewed. That is one notion that nearly all economists can agree on. So, it is not surprising that politicians scramble to discover new or not-so-new ways to boost productivity growth. Naturally, they also turn to ‘shiny objects’ and have a mass spending impulse that comes into play; thus, the ‘innovation fund’.

Both major political parties in this federal election campaign in Canada have announced big new spending plans to finance innovation, by which they generally mean financing or fostering technically advanced business start-ups and small, fast-growing businesses. Like many government initiatives, they sound and mean well, but may end up not just a waste of taxpayer money, but address the wrong things.

Firstly, there is no shortage of investment capital to finance promising new advanced technology firms. As the Globe and Mail noted in a story in June, a record amount of venture capital was invested in non-public technology firms in the first half of 2021: CA$7 billion, according to market data company Refinitiv. Canada is on track to have a record year of such investment, surpassing the previous near-term record of $7.9 billion for a full year in 2019, and, in inflation-adjusted terms, the $9.4 billion invested in the tech mania year of 2000.  

Among the firms funded thus far this year are those not just in software or other applications, but in hardware design, quantum computing and, of course, biotech. The Globe and Mail article was unduly conservative; the actual amount funded in the first half of this year was $8.3 billion, across 394 deals, just 64 per cent in IT, according to the Canadian Venture Capital and Private Equity Association. 

Removing 39 ‘megadeals’, defined as CA$50 million or more, there was still $2.1 billion put into 355 promising ventures. By contrast, the Liberal Party proposes to fund $2 billion over an unspecified period; the Conservatives, $5 billion. Yet, there is more than adequate funding already. Also, $7.41 billion in 74 initial public offerings in 2020, an average of about $74 million each, shows that small-ish firms can attract interest when they have compelling ideas, opportunities or assets.

There is already a major Crown corporation, BDC, formerly known as Business Development Bank of Canada, which, by charter and history, has funded hundreds of firms, many times alongside private sector venture capital, banking or private equity firms. BDC has 72,000 clients and $36.5 billion invested in small and medium sized businesses. The chartered banks, credit unions and various other financial firms provide loans and advice to many more small firms, some in advanced new industries. 

Where there is some trouble in Canada, as some entrepreneurs, engineers and scientists tell it, is getting a tiny firm to the next, investable stage. There are hundreds of firms started by university staff and private garage tinkerers, who find it hard to get the attention of ‘angel’ investors, having exhausted all their own families’ and friends’ money. Yet, it is unclear that the new schemes address this issue.

Far more important is to foster the things that provide a fertile environment for budding entrepreneurs, in any sector: predictable, stable laws, including strong but not monopoly-generating intellectual property rights; low and stable income tax rates, particularly capital gains treatment of rollover of gains into new firms; abundant professional, technical, industrial, commercial and other services to enable efficient and effective operation of new, fast-growing firms; highly educated and qualified pool of labour; safe, secure and affordable cities, power, housing, offices; the ability to attract and retain highly qualified technical people from abroad; efficient, light and honest regulation and enforcement.

All the elements cited above are hard to create and sustain at the best of times, for governments in Canada, or anywhere in the world. Anything that damages them will inhibit confidence. Politicians simply need to get the hard, basic things right; venture capital, innovation and prosperity will follow.

 

Ian Madsen is a senior policy analyst with the Frontier Centre for Public Policy.

Photo by Artem Beliaikin from Pexels.