Friday, August 14, 2009

Can Canadian Tech. Thwart the Capitalization Problem through Collaborative Clusters, Interfirm Networks, & Policy?

One issue I'm interested in is how Canadian policy affects innovation, not just in terms of taxes, but also in terms of keeping innovation in Canada. The business press has lamented how Canadian innovations and R&D has been sold to US and other foreign companies, with the recent Nortel fire sale being yet another sore point. The NDP has criticized the Conservative's increasing of the threshold for foreign takeovers exempt from Industry Canada review::
"Currently, the sale of companies with a value under $312 million are exempt from review. Within four years, it will be $1 billion. This is unacceptable...Harper’s short-sighted vision for the Canadian economy means that more and more Canadian operations are closing their doors and heading stateside.”--Malcolm Allen, MP, Welland, ON
Rather than worry about a "brain drain," which is still a concern given Obama's stimulus dollars and relaxation on stem-cell research, Canada needs to be mindful of having cookies taken from the cookie jar through mergers and acquisitions {M&A}. Stephen Harper and the current Industry Minister, Tony Clement-Conservative MP {Parry Sound-Muskoka, ON} are caught between free trade and nurturing innovation in Canada. Moreover, industry is clamoring for changes in tax policy, which is tricky as that has revenue implications for the government.

So, there's issues of the firm and its resources {various forms of capital} and retaining them in Canada, but what about regional effects of clusters of firms? I looked at the McKinsey innovation "heat map" and located the clusters for Ontario and Québec {above - click to enlarge}. The provinces have several "hot springs" {Ottawa/Gatineau, Kitchener, London} with relatively high growth in the number of patents, but relatively few firms across patent sectors. According to McKinsey::
"While innovation clusters may grow quickly in the short term, only a small proportion of these promising hot springs stand the test of time. Most hit a ceiling of limited resources that severely constrains their growth"
The provinces also have two "silent lakes" in the form of Toronto and Montréal, characterized as::
"slow-growing innovation ecosystems backed by a narrow range of very large established companies that operate in a handful of sectors. These clusters are frequently the source of a steady stream of 'evolutionary' innovations and step-wise improvements."
Analyzing these clusters in terms of a Saxenian regional advantage, where cultures of praxis and proximity to institutions matter, would be helpful in mapping the trajectories of Canada's innovation clusters. Commercialization, a Canadian strength in biotech., has been found in US cities to be linked, not surprisingly, to patent activity and university capacity in science and engineering.

One curious aspect of Canadian policy that affects M&A is the Investment Canada Act {ICA} that has a national security clause, which does not define national security. This has the potential to politicize M&A in Canadian technology. While the Conservatives are concerned with the appearance of protectionism, it will be interesting to see how they handle the sale of Nortel assets. Last year, the former Industry Minister, Jim Prentice, Conservative MP {Calgary-Centre North, AB}, turned down the sale of MacDonald Dettwiler & Associates {complex info. systems}, marking the first time a sale was blocked since the ICA was instituted in 1985. Perhaps a sign that Canada is willing to flex its muscle and not allow jobs and R&D to leave the country. While free trade might seem like an ideal, national strategic assets notwithstanding, there is an assumption that M&A is a rational affair. In the mid-2000s, we saw pharma firms with perhaps more money than good sense and it isn't clear that M&A motivations were about the creation of value versus vying for dominance through status and legitimacy in a technological field, i.e., normative financial economics versus economic sociology. The right incentives, in terms of fiscal policy also need to be addressed.

If Canada starts to limit M&A, one would expect to see more partnerships and alliances. Canada fares well in innovations, when compared to other OECD nations, but suffers from a lack of capitalization. It would be interesting to see if financial constraints fuel a highly collaborative culture of innovation in Canada, bridging the more innovative firms and regions with more the established clusters of Toronto and Montréal.

The big trade issue though is getting NHL teams back in Canada.

Twitterversion:: Should #Canada protect innovtions & foster geographic clusters? Can highly collab. netwrks overcome capitalization probs? @Prof_K

Song:: Play To Win (2006 Digital Remaster) - Heaven 17

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