Canada’s Future Prosperity Requires Better Financing for Innovators

Despite the country’s evident success in R&D, Canada is a hard place in which to do business.

March 25, 2024
Geoffrey Hinton, who, alongside Yoshua Bengio, led the development of artificial neural networks, speaks during an interview at a Tokyo hotel on November 18, 2019. (REUTERS)

More than a century ago, economist Joseph Schumpeter hypothesized that creative destruction — the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one — is driven by entrepreneurs. If that’s true, Canada needs to get better, quickly, at transforming leading research into digital businesses. Our future prosperity depends on it.

The research and development (R&D) record is inspiring. Canadian entrepreneurs have led (or are leading) the development of three of four waves of the digital revolution. In 1988, Research In Motion, a Waterloo, Ontario-based start-up, figured out how to put a computer in a mobile device (the BlackBerry). In 2008, Canadians Geoffrey Hinton and Yoshua Bengio led the development of artificial neural networks — the technology behind today’s artificial intelligence (AI). And Canadian researchers in Waterloo (Perimeter Institute), Vancouver and Sherbrooke are leading the next wave of digital technology — quantum computing.

Indeed, a recent Deloitte report on Canada’s national AI ecosystem finds Canada tops world rankings in talent concentration, with patent growth and per-capita venture capital investments among the world’s highest. In January 2023, the minister of innovation, science and economic development announced Canada’s National Quantum Strategy.

But despite the country’s evident success in R&D, Canada is a hard place in which to do business. According to Statista, it ranks twenty-third out of 190 countries and fourth in the G7, after the United States, the United Kingdom and Germany. In addition to bureaucratic red tape, our financial institutions — accounting, banking and financing — have made life even more difficult for entrepreneurs because they have not kept up with the digital revolution. In fact, they have created a banking catch-22.

In effect, Canadian banks have failed to deliver on two fronts. First, they have yet to deliver the real-time, information-rich small payments infrastructure recommended by the Task Force for the Payments System Review more than a decade ago. Absent this payment system, small businesses lack access to the data — raw material for the digital economy — they need to grow. They also cannot achieve the efficiencies offered by process automation, including dramatically reduced payment fees, or access the management information necessary for entrepreneurs to make good business decisions.

Second, Canadian banks have failed to provide adequate financing for businesses to grow. Without it, entrepreneurs are destined to fail or sell to larger American technology companies. Canada’s accountants are complicit in this failure. As I have written elsewhere, Canada’s Accounting Standards for Private Enterprises do not recognize the intangible assets that drive the digital economy. Without formal recognition of these assets, bankers and other investors find it difficult to value the business. But valuing intangible assets requires transaction data to model the assets’ value in use. Hence the catch-22 — without the data, small and medium-sized enterprises (SMEs) cannot value their assets. Yet without the assets, they cannot access financing.

The federal government has attempted to alleviate the financing problem by introducing the Canada Small Business Financing Program. But this program does not address the catch 22 — without the data, SMEs (especially digital SMEs) cannot value their intangible assets to have them formally recognized as security for loans. Nor can banks model a company’s cash flows accurately enough to lend against future value creation. Effectively, the government is guaranteeing loans without fully recognizing the assets to secure them.

Canada’s banks were chartered to promote investment and economic development. Their ability to lend money to facilitate credit and meet the country’s payment and information needs is vital to the country’s economic future. It’s time for an institutional renewal; our future prosperity depends on it.

The opinions expressed in this article/multimedia are those of the author(s) and do not necessarily reflect the views of CIGI or its Board of Directors.

About the Author

Patricia (Pat) Meredith is a CIGI senior fellow and a global thought leader, award-winning author and consultant in the emerging field of strategic governance.