The Discrepancy Between Canadian Innovation and Economic Growth

Abstract

This paper explores the startling discrepancy between Canada's innovations and its economic growth. Despite Canada's notable contributions to various industries, challenges persist in effectively capitalizing on domestic inventions to foster sustained economic prosperity. This study investigates the underlying factors that hinder the translation of Canadian innovations into economic success, including the lack of benefit from inventions such as the AVRO Arrow and insulin, the dominance of large companies stifling innovation, the impact of foreign acquisitions, and the brain drain effect resulting from the loss of valuable human capital.

Introduction

There are often news articles of “groundbreaking” Canadian inventions that have “revolutionized the world” and “changed the way Canada innovates”. Notable creations like the Canadarm, nuclear reactor, walkie talkie, and pacemaker have cemented Canada's reputation as not only a modern nation, but a nation that consistently outputs new technology and inventions. However, it is widely known that Canada's economic growth has consistently lagged behind leading countries, particularly its neighbor, the United States. There is a startling lack of correlation between innovation and the growth of the economy in Canada, considering that technological advancements typically drive prosperity and wealth. This issue is surprisingly (not) rooted in various economic and governmental restrictions that hinder our economy’s growth. Canada struggles to capitalize on Canadian inventions because of the lack of competition and unfair market environment, leading to a “brain drain” effect that robs our country of the success we are capable of achieving.

Missed Opportunities and Loss of Control over Inventions

2.1 The AVRO Arrow

The cancellation of the AVRO Arrow program in 1959, despite its significant technological advancements, serves as a notable example of Canada's failure to fully capitalize on its own inventions. A high performance supersonic jet aircraft developed in the 1950s, the Arrow was the scientific pride and joy of Canada, establishing the country as a world leader in research and development. The hypersonic fighter was on the cutting edge of aerospace technology at the time: it could reach a speed nearly three times the speed of sound, traveling at an altitude of 60,000 feet. (Hobson 2013) However, the program was canceled in 1959, only a few months after its first flight. The cancellation, ordered by Prime Minister John Diefenbaker, was attributed to its mounting costs, technical delays, and impracticability. The cancellation of the Arrow devastated the Canadian aerospace industry and resulted in the loss of at least 25,000 direct and indirect jobs. (Chong, 2022) Canada lost a valuable opportunity to establish itself as a major player in the aerospace industry, and for many Canadians, the Avro Arrow now symbolizes the potential and unfulfilled promise of Canadian innovation.

2.2 Insulin

Similarly, the case of insulin demonstrates Canada's inability to maintain control over its own inventions. Despite being a significant medical breakthrough, Canada does not produce insulin anymore, instead relying on three dominant foreign companies that together control 95% of the global insulin market (Fuller, 2022). Since their conquering of the insulin market, the cost of insulin has risen by more than 600% over the last 20 years. (Inskeep and Aubrey, 2022) Not only does this mean Canada cannot profit from their own innovation, it also means the country has been dependent on other companies, not being able to fully benefit and capitalize on the potential economic advantages of its own inventions.

Stifling Innovation through Market Dominance

Canada's economy struggles due to a lack of fair competition and the dominance of large companies. A study conducted in 2019 shows that the number of non-financial firms in the TSX market has declined by almost 40% since its peak in 2008, and the remaining ones have swelled in size (Bawania and Larkin, 2019). Additionally, Canadian Companies are around three times the age of the average Canadian citizen (around 41). The median age of the top 15 largest publicly traded Canadian firms is 122 years versus 45 years in the United States. (Paikin 2021). Established corporations in monopolistic positions often become complacent, relying on past successes rather than growing. Recent empirical analyses have almost invariably found that a lack of competitive pressure is reflected by weaker innovation (Aghion et al., 2005; Griffith et al., 2006). Moreover, the absence of competitive pressure discourages investment in research and development, diverting resources towards mergers and acquisitions instead. Companies who don’t feel the need to innovate allocate fewer resources to research and development and instead seek growth through mergers or acquisitions. The Canadian Bureau is supposed to have the ability to decide whether companies should merge, however that ability has been severely limited, since companies have been exploiting loopholes and ambiguities to force the merge. Canada’s merger laws “have failed to prevent the kind of acquisitions that allow big firms to extinguish competitive threats and entrench their dominance,” (Mallees 2022). The average price increase from a merger in America is 7.2% “and of those, more than 80% resulted in price increases with averages averaging more than 10%” (Kwoka 2016). The merging of these big companies means that they will work together to crush other developing startup companies, in their own interests. Startup companies are essential to economic expansion, contributing to 25.7 percent of aggregate growth that comes through innovation (Akcigit and Kerr 1377). Consequently, this stifles innovation and undermines the growth of emerging startups, which are vital for economic expansion.

Impact of Foreign Acquisitions

The acquisition of Canadian companies, such as Nexen by CNOOC, raises concerns about foreign ownership of Canadian resources and the transfer of technology. While approved by the government, this acquisition sparked debates about foreign ownership over Canadian ressources, and the transfer of technology to a foreign entity. Critics argued the acquisition resulted in profits and economic benefits flowing out of Canada, as well as Canada’s ability to benefit from its own technological advancements. This is a popular trend, where Canadian innovations, patents, or companies created are immediately sold or transferred to foreign companies rather than being scaled in Canada. As of right now, three-quarters of the patents held by venture capital-backed Canadian startups involved in recent takeovers are now in foreign hands. (Innovation Economy Council). Additionally, a study tracking U.S. patents with at least one Canadian inventor over a 20-year period found the proportion of Canadian-invented patents transferred to foreign firms on the date of issue was 45 percent (Seksus 2019). These transactions can lead to profits and economic benefits flowing out of Canada, limiting the country's capacity to benefit from its own technological advancements. Moreover, the transfer of patents, technologies, and companies to foreign entities impedes Canada's ability to retain control over its innovative assets.

Brain Drain Effect and Loss of Human Capital

The allure of better wages, a broader job market, and fewer government regulations has resulted in talented Canadians seeking employment opportunities abroad, particularly in the United States. A recent study of LinkedIn data found that two thirds of graduates from top universities, such as University of Waterloo, University of Toronto, or University of British Columbia leave Canada, the overwhelming majority moving to the U.S (Bergen 2021). This brain drain effect reduces Canada's ability to foster domestic entrepreneurial growth and retain valuable human capital, further hampering its economic growth potential.

Conclusion and Recommendations

To bridge the gap between innovation and economic growth, Canada must prioritize specific actions. Encouraging entrepreneurship, dismantling barriers and monopolies, and protecting intellectual property rights are essential strategies for fostering an environment conducive to innovation and sustained economic prosperity. By implementing these measures, Canada can position itself as a leading and innovative nation, overcoming the challenges hindering its economic growth and capitalizing on its vast potential.

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