Senate report urges Canada to keep its ideas at home
‘Structural issues in Canada’s economy are preventing SMEs from achieving their full potential,’ says From Potential to Prosperity: The Urgent Case for Greater Investment in Canada’s SMEs, a report by the Standing Senate Committee on Banking, Commerce and the Economy. / REPORT COVER
Canada must do more to prevent valuable intellectual property from leaving the country and encourage its largest institutional investors to finance domestic businesses, according to a new Senate report warning that structural weaknesses in the financial system are undermining economic growth and competitiveness.
“Structural issues in Canada’s economy are preventing SMEs from achieving their full potential,” says the report, From Potential to Prosperity: The Urgent Case for Greater Investment in Canada’s SMEs, by the Standing Senate Committee on Banking, Commerce and the Economy.
The recommendations focus on keeping Canadian-developed intellectual property under domestic ownership and mobilizing pension funds and other large pools of capital to help promising companies expand.
The report notes that Canada does not suffer from a shortage of investment capital. Rather, its financial system struggles to direct available funding toward businesses with the potential to become globally competitive.
SMEs account for 99.7% of Canadian employer businesses and generate nearly half of private-sector gross domestic product, according to figures cited in the report. Yet many innovative firms struggle to obtain financing as they expand, leaving them vulnerable to foreign acquisition and the loss of future economic benefits.
The report calls on the government to strengthen the domestic ownership, retention and commercialization of intellectual property, particularly when its development has been supported by taxpayers. The committee proposes stronger conditions on federal grants, including mechanisms requiring companies to repay some funding if publicly supported intellectual property is sold or transferred abroad.
It recommends limiting Scientific Research and Experimental Development tax credits to Canadian-controlled companies.
Council of Canadian Innovators chair Jim Balsillie criticized the lack of a coordinated approach to capturing the value of publicly funded research.
“The government spends $7.5 billion per year on research, $4.2 billion to the granting councils and $3.3 billion internally with absolutely no strategy whatsoever to generate and corral that research money into intellectual property that has positive spillover for Canadian companies,” he told the committee.
On the financing side, the report calls for incentives to encourage pension funds and other institutional investors to direct more capital toward Canadian SMEs. Canada has more than $4 trillion in pension assets, but the scale of institutional investment operations makes smaller investments difficult to manage.
The report proposes investment vehicles that aggregate opportunities across multiple businesses, allowing large institutions to invest through venture capital funds, private debt managers and other intermediaries. The committee recommends federal guarantees, favourable tax treatment and public-private co-investment platforms to reduce investment barriers.
“Canada needs to treat capital deployment as a core component of industrial policy,” Hamid Arabzadeh of Ranovus told the committee.
"Tax reform should be one of the key policy tools used by the federal government to attract Canadian investors to SMEs and to scale and retain SMEs in Canada. A variety of measures should be introduced that provide tax incentives to investors and better enable private and publicly listed SMEs to raise and retain more capital," the report says.
The report calls the situation urgent, given the geopolitical climate and Canada’s low productivity. “Time is of the essence,” the report says. “The future productivity, competitiveness, security, sovereignty, and prosperity of the Canadian economy will depend on the actions taken today.”
