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Canada needs to reconsider its approach to foreign direct investment (FDI) in the innovation sector as part of a COVID-19 recovery plan, industry experts say.
The Council of Canadian Innovators’ latest report, titled a “Plan for Economic Recovery and Reorientation,” highlights eight recommendations from the tech sector on how to give a boost to Canada’s economy.
The eight recommendations range from introducing better return to work policies, revisiting the analytical framework for FDI, and increasing Canada’s IP capacity to help capture COVID-19 related R&D.
Ben Bergen, executive director of the CCI, said in an interview that FDI has typically benefitted specific industries that rely on supply chains. This model isn’t applicable to most tech companies.
“If Canada wants to create a wealth and prosperity strategy from innovation, it has to be in the ownership of the IP and the data that’s generated from headquartered Canadian companies.
“What you see in FDI when it comes to large tech companies is that there are not those supply chains. Google opens an office in Toronto, it’s not like there’s a supply chain of domestic firms into Google. You’re not getting that knockoff effect,” he said.
Bergen added that the government also looks into FDI as a form of job creation, but says the tech sector predominantly has “negative unemployment,” which means there are thousands of jobs to fill.
“Really, all you’re doing is in a lot of ways, taking away talent opportunities from your own domestic firms by supporting FDI,” he said.
The report indicated that as part of the COVID-19 recovery plan, the government needs to help local firms that are working to help find solutions to the global pandemic.
“Throughout the pandemic, Canadian technology companies operating in the healthcare, education, remote work, and enterprise sectors have actively provided their services and products to help fight the spread of COVID-19 in Canada,” the report said.
Despite the contribution Canadian tech firms have made, the report adds that Canada has “featured incentivizing the expansion of foreign tech branch plants across Canada over developing strategies to grow domestic innovators.”
Government should conduct study into FDI
Bergen noted that revisiting the FDI framework would mean doing a proper government study on the spillover effects of FDI.
“We’ve called for the federal government to do a proper study,” he said. “A full approach needs to be brought in to understand what is the actual negative outputs that are coming from FDI.”
Dan Ciuriak, Senior Fellow, Centre for International Governance Innovation (CIGI), said in an interview that there is a net benefit test in the Investment Canada Act, but is only applied for investments that surpass a certain threshold. The test was used when Australia-based BHP Billiton tried to take over PotashCorp of Saskatchewan in 1975.
Agreeing with Bergen, Ciuriak said FDI typically hasn’t seen incremental benefits in the tech sector and it would be worthwhile for the government to conduct more research. He added that it might be worth instituting a “formal process notification” for foreign companies coming into Canada.
“[This would indicate] what your plan is... [and] emphasizes having an IP plan, making sure that if the Canadian government is putting money in, then you want the intellectual property to somehow remain in Canada,” he said.
Technology flow is out of Canada
Ciuriak says FDI is a net positive in some industries, but it is trickier to evaluate in the tech sector “because a lot of the technology flow is now out of Canada.”
“When a company invests in an innovation sector, for example, a U.S.-based company, they may wind up extracting the key innovation resources and taking them abroad,” he said.
Justin Trudeau’s Liberal government hasn’t shied away from investing in foreign companies to set up shop in the country in order to create jobs. In January, the government invested $50 million in U.S.-based MasterCard to build a cybersecurity centre, and in the past even pushed for Amazon to open its second headquarters in Toronto.
The MasterCard deal was widely criticized, with some arguing that the company had enough of its own capital to develop the centre without government aid. The federal government said investment would create jobs for Canadians.
“This will make Canada a world leader in cybersecurity and help us tackle the cost of cybercrime in Canada - an estimated $3 billion a year,” Innovation Minister Navdeep Bains said at the time.