How Canada Can Transform More Small Companies Into Global Leaders

Marketing and sales need to take higher priority earlier in a young company’s life, says researcher

A BlackBerry employee works at the company's Network Operating Centre in Waterloo, Ont., in this file photo. BlackBerry is one Canadian company that grew into serving consumers and businesses globally. The Canadian Press/Andrew Ryan

News Analysis

Turning innovation into commercial success on a global scale is the golden goose Canada pursues. The challenges are multi-faceted and even culturally embedded, but solutions are in sight given Canada’s strengths.

Impact Centre senior fellow Charles Plant’s research notes that Canada’s innovation ecosystem is caught in a few vicious cycles. His work, “The Narwhal Project,” analyzes the obstacles Canada has to overcome in order to create a world-leading innovation economy. Canada ranks last among similar OECD countries in the number of innovation economy companies with more than 250 employees per million of population. Clearly, a better balance between small, medium-sized, and large companies is needed.

If Canada is to prove it’s not complacent, its companies must enter larger consumer markets, raise more capital at early stages of development, spend more on marketing and sales (M&S), and be willing to take financial losses to fuel growth, Plant writes.

Success Mandates Marketing Emphasis

Innovation equals invention plus marketing, writes Plant. But what Canadian companies don’t seem to realize is how much weight marketing has in the innovation equation—it’s not just about technical skills or starting up companies.

Plant describes one vicious cycle plaguing Canada: “Fewer M&S employees means less M&S activity, which slows down all the processes needed for customer traction and entry into the market. Such patterns add to the perception that Canadian companies struggle with commercialization.”

Mid-sized U.S. software companies spend 34 percent of their revenue on M&S, but Canadian firms only spend 20 percent.

Another vicious cycle that enslaves Canada relates to funding. Since its companies tend to grow more slowly than American ones, they don’t attract more capital in later funding rounds , and thus they rarely scale up to much bigger size. Instead, they generate lower venture capital (VC) returns and less appetite from investors.

Private equity and VC play vital roles in scaling up companies, and while the government’s VC initiatives and the Canadian Business Growth Fund run by Canadian banks and insurance companies are good starts, experts agree more is needed.

Even though since 2015, Canada has not produced a “narwhal,” or what Americans call a “unicorn”—a private company with a market value of over $1 billion—there’s a sense of cautious optimism as the country’s most promising firms are starting to raise more capital.

But compared to how much capital U.S. firms raise, Canadian firms fare particularly poorly. “What U.S. companies raise in four years, Canadian companies take ten years to raise,” Plant wrote.

Losses for the Right Reasons

Some of the biggest U.S. tech successes like Amazon and Uber started off losing money hand over fist. They were reinvesting in the business and didn’t fret over a lack of profitability.

But in the Canadian corporate culture, failure is shunned. “Firms should also not be discouraged by losses and should even expect to lose considerable amounts in order to drive growth,” Plant wrote.

The government must also address a conceptual policy gap. Canadian policy-makers neglect the demand side and instead focus on tax incentives and R&D subsidies to spur innovation, writes Jakob Elder, a European innovation policy expert

“Canadian businesses are poor at absorbing leading-edge technologies and knowledge,” he wrote for the Institute for Research on Public Policy. Experts have also pointed at government procurement not supporting up-and-coming companies sufficiently.

Canada’s poor track record in scaling up companies is dampening its productivity and economic growth. Research shows productivity tends to be weaker in small and medium-sized companies than in bigger companies, and only 2 percent of mid-sized Canadian companies grow into large businesses employing over 500 people, according to research from the C.D. Howe Institute.

Canada spends 1.7 percent of GDP on R&D compared with the OECD average of almost 2.4 percent. With a small-business-dominated economy, Canada is particularly weak on industrial R&D spending.

Over the last 30 years, Canada has had very few initial public offerings (IPO), which means that once private companies reach a certain size, they are usually acquired by bigger foreign companies. The consequence is that Canada also loses that economic contribution to the foreign country.

Despite the issues Canada’s innovation economy faces, the country can count on having the highest share of population with a post-secondary education, along with robust tech job creation most notably in the Toronto-Waterloo corridor—Silicon Valley North. The basic building blocks to create global leaders are there.

Follow Rahul on Twitter @RV_ETBiz