Since taking office, Prime Minister Justin Trudeau has championed the Canadian tech industry to business and political audiences in the United States and Europe, and at major economic conferences around the world.

In that spirit, Trudeau told a Toronto audience in May that the country needs “a little more swagger” when promoting its achievements in innovation.

But an internal government assessment prepared for a group of industry leaders last October paints a different picture: Canada’s tech sector is falling behind the rest of the world.

“Canada’s position in the [information and communications technology] ICT global market is shrinking,” reads one header in the 20-page assessment, which The Logic obtained through an access to information request.

The document [available exclusively to subscribers here] was prepared in advance of the Digital Industries Economic Strategy Table’s first meeting last November for Graham Flack, deputy heritage minister, John Knubley, deputy innovation minister, and Shopify CEO Tobias Lütke, who chairs the working group of industry leaders convened by the government. The group’s role is to encourage economic growth in Canada’s tech sector.

It lays out several key challenges, among them that Canada is “losing ground to its trading partners,” the outsized role of subsidiaries of foreign companies in Canada’s tech sector and—given the tremendous opportunity in data analytics and machine learning—the harnessing and distribution of data.

It goes on to note that Canada’s ICT sector is the smallest in the G7 and is ranked 20th out of the Organisation for Economic Co-operation and Development (OECD) countries in terms of both GDP growth rate and size of the ICT sector as share of GDP.

When asked about the concerns in the report, the federal Departments of Heritage and of Innovation said in a joint statement that they “support the work of the Digital Industry Economic Strategy Table in identifying barriers and recommendations for economic growth in digital industries.”

Losing ground to trading partners

The report notes that Canada’s ICT sector growth was slower than the OECD average for most of the past decade, and does not anticipate this to change in the next two years.

“Current growth forecasts indicated a 2.3% compounded annual growth rate (CAGR) increase between 2015 and 2020, accounting for just 1.6% of global IT spending growth in the period.”

Canada lags behind global competition in technology adoption, which undercuts the country’s high ranking in startup capacity and innovation.

The lack of technology adoption—and the relatively small size of the domestic Canadian market—has also hurt the ability of companies to scale, according to the report. That has led to a “disproportionate number of small firms,” with 85 per cent of Canada’s 39,000 firms having fewer than 10 employees.

It also means growth past a certain point for companies will require significant global exports, which the report says Canada is losing ground in, too.

“Global exports of ICT services grew by almost 48% from 2008 to 2016 while Canadian exports decreased by 13.5% over the same period,” reads the document.

Lastly, it says Canada ranked 17th among OECD countries for specialization in ICT-related patents between 2012 and 2015, despite being ranked eighth between 2000 and 2012.

The outsized role of subsidiaries of foreign companies

Foreign direct investment in the innovation economy has resulted in a few large firms, mostly subsidiaries of foreign multinationals, playing an influential role in Canada’s ICT sector. According to the report, the 10 largest employers in the sector in Canada account for 12.6 per cent of the sector employment, eight of which are foreign subsidiaries.

The report raises concerns over the amount of research and development (R&D) being done by these foreign firms relative to their domestic peers.

Citing 2016 data from Research Infosource, the report warns that “the top 10 R&D performing foreign subsidiaries account for more than 35% of the ICT [Information & Communications Technology] sector R&D (or $1.8 billion).”

These foreign subsidiaries—which, listed in order of R&D spending, include IBM Canada, Ericsson Canada and Nokia Canada—may be conducting research in Canada, but are often keeping the intellectual property and resulting economic benefits in their home countries.

Overall, the report notes that Canada’s R&D growth rate in the sector is the lowest in the G7.

Data accessibility and distribution

The report paints a dire picture of how the data of Canadian corporations and consumers is gathered, presented and shared. Acknowledging that most data analysis is mainly under foreign control and subject to foreign decision-making, the report also flags that there is limited integration across jurisdictions and an inability to support big data analytics, given existing infrastructure.

On governance and privacy, the report states, “Canada has not found a consensus on the social implications of predictive analytics and on ways to apply results,” adding that “new business models raise privacy issues, increase the risk of cyber security threats, while creating black market opportunities.”

Ahead of national data strategy consultations, there is an acknowledgement that data stewardship and governance may have “unintended impacts on innovation, firms, consumers, and family.”

Additional concerns

The document also outlines several concerns for which little detail is provided, such as on intellectual property theft, which the report says is “driving Canadian companies out of business.”

On artificial intelligence competition from the U.S. and China, a chart in the report warns that Canada faces particularly strong competition in machine learning research—for which the U.S. holds 54 per cent of patents, China holds 13.5 per cent and Canada holds just two per cent.  

On the the topic of brain drain, the report acknowledges that leading researchers are leaving the country to join U.S. tech companies and top U.S. universities—something that senior government officials, including Trudeau, have spent the past few months publicly downplaying.

On the positive side

The report does outline some good news: Canada is third in venture capital investment in the OECD, trailing only Israel and the U.S., and is attracting an increasing share of VC money.

AI and data analytics are listed as areas where Canada has particular potential for growth. Certainly there has been a rash of good news for the AI sector since this October report was written: huge companies like Samsung and RBC are setting up R&D labs in Canada, and Element AI is currently trying to raise $250 million, which would give it a valuation of over $1 billion.

Creative industries and cybersecurity are listed as the other two potential growth areas. The presentation identifies four potential themes to address all these challenges: a strategy to increase the number of firms that scale globally; ensuring the workforce has the necessary science, technology, engineering, art, and mathematics skills; creating a national data strategy; and increasing digital technology adoption among traditional industries.

Next steps

In broad strokes, though, the report outlines concerns about Canada’s general position: “Overall, the Canadian ICT sector contributed relatively less to the economy and employment than other advanced countries & the OECD on average.

“Canadian industry, in general, lags behind global competitors in the adoption of digital technologies, impeding innovation and productivity performance.”

Ottawa is already addressing some of those themes. It launched consultations on a national data strategy in June, and is currently considering applications to run the $363-million Future Skills Centre, which is supposed to identify innovative approaches to developing skills to equip Canadians for the new economy.

The Digital Industries Economic Strategy Table has held three meetings since this presentation was prepared. Members include CEOs of growing Canadian tech companies, like Jean-Francois Gagné of Element AI and Allen Lau of Wattpad, as well as leading VCs, like Version One Ventures founder Boris Wertz.

The group’s eight-page interim report, released in February 2018, is almost entirely positive, focusing on the success of Canadian industries like AI and video games.