State of the Nation 2012

Chapter 4: Business Innovation

Business innovation is an engine of productivity growth, increased international competitiveness and higher living standards. International competitiveness is particularly important for Canada because our economic growth relies, to a significant extent, on international trade and foreign capital and we compete directly with the United States (U.S.), which remains one of the world’s largest economies (despite its sluggish growth during the global economic recession).19 Canada is also facing new competitive pressures (and opportunities) due to the rise of many emerging economies.

While some industries are inherently more innovation intensive than others, innovation occurs in—and drives the competitiveness of—all industries. Business innovation is underpinned by investments in: research and development (R&D); machinery and equipment (M&E), especially information and communications technologies (ICT); and intangible assets. Business innovation is also supported by access to, and attraction of, risk capital; and, access to new ideas and technologies through strong global connections.

State of the Nation 2010 reported that, on many of these activities, Canada performed poorly in comparison to our international peers. Two years later, the story is unchanged. Despite Canada’s relatively strong macroeconomic fundamentals, Canadian firms are not harnessing innovation to make competitive gains. In international rankings related to business innovation, Canada continues to place in the middle of the pack on most measures and, in some cases, Canada’s rank has declined.

Canada’s performance is particularly poor on measures of business enterprise expenditures on research and development (BERD). Although BERD in Canada increased slightly in both 2011 and 2012, it has not reached its pre-recession value, and BERD as a percentage of gross domestic product (GDP) has been in almost continuous decline for the past decade. As a result, Canada has fallen in the Organisation for Economic Co-operation and Development (OECD) rankings on this important measure. We also perform poorly on venture capital (VC) investment as a share of GDP, and despite strong growth in total VC investment in 2011, it is still considerably lower than the 2007 level. An additional area of weakness is our large ICT investment gap with the U.S.

Given that all OECD countries have policies in place to strengthen their innovation performance,20 the private and public sectors in Canada must acknowledge a shared responsibility to take urgent action, or Canada risks falling behind in international competitiveness and living standards. As the Government of Canada considers recommendations21 to modernize its framework policies in support of increased competitiveness, Canadian firms will need to become more innovative in order to maximize their success in the global economy.

Improving Plant Health through Innovative Micronutrients

Wolf Trax produces leading-edge, research-proven micronutrients and plant nutrition products. The company, which is based in Winnipeg, has developed DDP® technology to address micronutrient deficiencies in agricultural soil while minimizing negative environmental impacts.

Research and innovation drive Wolf Trax. Hostile soils, such as those that are too cold, too alkaline or too low in organic matter, can make it difficult to free up micronutrients and make them available to the plant. Wolf Trax’s unique formulation helps to make the nutrients available to the plant, while its innovative fertilizer coating technology allows precise nutrient placement in the field in the right quantities for the plant, even under the harshest conditions typified by a Canadian spring. The improved formulation and more precise placement result in much lower application rates than required with traditional micronutrient products, increasing farmers’ productivity and efficiency, while reducing the environmental load. While products undergo extensive testing under a variety of conditions on a wide spectrum of crops around the world, much of the preliminary testing for Wolf Trax’s micronutrient fertilizers took place in Manitoba, because of the challenging weather conditions for micronutrient uptake.

In 2012, Wolf Trax’s founders were recognized with a Manning Innovation Award for significantly improving the world of agriculture fertilizers with DDP® technology. Its DDP® nutrients are now sold in 75 regulatory jurisdictions around the world.

Innovation through Research and Development

BERD covers R&D activities performed by firms either with their own money or money from other sources (e.g., governments).22,23 While other players in the science, technology and innovation (STI) ecosystem carry out R&D, it is BERD that is most closely linked to product and process innovation24 and thus to productivity growth. As productivity growth positively impacts living standards, lower levels of BERD could adversely affect Canadians’ prosperity vis-à-vis that of citizens of other countries.

Business Performance of Research and Development

BERD intensity, which is a key indicator of innovative activity, is the ratio of BERD to a measure of output (e.g., GDP or value-added in industry25). Canada’s BERD intensity continues to lag that of key competitors, which is reflected in our continued poor performance in international rankings of BERD as a percentage of GDP (Figure 4-1). Canada also lags key competitors in terms of BERD as a percentage of value-added in industry. BERD as a percentage of value-added in industry is a measure of the degree to which a business’ resources are dedicated to R&D.


Canada’s BERD intensity continues to lag that of key competitors.

According to data from the OECD, BERD as a percentage of GDP in Canada was 0.89 percent in 2011, compared to 1.04 percent in 2008. This is considerably below the level in the U.S. (at 1.89 percent), and it is less than 40 percent of the threshold of the top five performing economies—Israel, Korea, Finland, Japan and Sweden (Figure 4-1). Canada’s rank also declined from 2008 to 2011, falling from 21st to 25th out of 41 economies.26 Significant improvement in Canada’s performance in this area will be particularly important to enhancing business innovation and ultimately helping to secure Canada’s position as a global STI leader. Over the same period, Canada’s rank in terms of BERD as a percentage of value-added in industry declined as well, falling to 26th out of 41 economies (from 20th out of 41).27

Looking at Canada specifically, for which more recent data are available, the decline in BERD intensity continued in 2011 and 2012. The picture is even worse when looking at the data over the past decade, which show a downward trend in BERD as a percentage of GDP since 2005 (Figure 4-2). As well, despite very marginal growth in total BERD in 2011 and 2012 (BERD reached approximately $15.5 billion in 2012 compared to approximately $15.1 billion in 2010), it has not yet reached its peak value attained in 2007 (approximately $16.8 billion).28,29

Innovating for Competitiveness in Manufacturing

ArcelorMittal Dofasco is a steel company focused on the development of innovative products and processes to enhance its competitiveness and its environmental sustainability.

Innovating for Competitiveness in ManufacturingThe auto industry is one of the company’s main customers, and providing innovative solutions to auto industry challenges, such as reducing emissions, is a key to the company’s competitiveness. New products and processes developed at its Hamilton research lab, in collaboration with ArcelorMittal’s global research team, have resulted in a suite of product and process innovations utilizing advanced high strength steels, called S-in motion. These steels maintain crash resistance while saving up to a fifth of a typical vehicle’s ‘body in white’ weight (the stage when a car body’s sheet metal components have been welded together, but before moving parts have been added). This results in up to a 14 percent reduction in a vehicle’s total life cycle C02 emissions. Although S-in motion uses more high-specification grades of steel, the volume of steel used is significantly less, so there is no increase in the overall cost to automakers.

As Ontario’s largest user of electricity, ArcelorMittal Dofasco is also working on innovative processes to reduce its energy consumption. Since 2009, the company has undertaken more than 80 internal energy conservation projects. In 2012, the company generated power on-site for the first time using a turbo generator to convert blast furnace and coke oven gas to power. This project, which was completed in collaboration with the Ontario Power Authority’s Industrial Accelerator program, resulted in a 2 percent reduction in total power consumption.

Changes in Research and Development Performed by Industries in Canada

In 2012, BERD in Canada was performed primarily by the following industries (Figure  4-3): ICT manufacturing industries30 (16 percent); scientific R&D services (11 percent); and, wholesale trade,31 aerospace products and parts manufacturing, computer systems design and related services, and information and cultural industries32 (all at approximately 8 percent each). These six industries accounted for approximately 60 percent of total BERD.33

State of the Nation 2010 highlighted a significant change in the industries performing R&D in Canada between 2000 and 2007, particularly the decline in ICT manufacturing and the increase in information and cultural industries (including software and telecom services). While additional change has occurred since 2007, it has been much less pronounced. Reflecting the lower overall BERD in 2012 (compared to 2007), R&D in a number of industries is also lower. Only three industries showed improved R&D performance between 2007 and 2012 and a corresponding increase in their respective share of total BERD: aerospace products and parts manufacturing, R&D services, and wholesale trade. Computer systems design and related services also increased its share (albeit only slightly), despite a small decline in its R&D performance. The biggest declines in share occurred in pharmaceutical and medicine manufacturing (down approximately 2 percent over five years); ICT manufacturing; motor vehicle and parts manufacturing;34 and finance, insurance and real estate (FIRE)35 (down approximately 1 percent each between 2007 and 2012). A small decline also occurred in oil and gas extraction, contract drilling and related services.36 Some of these changes may reflect overall changes in the composition of the Canadian economy.37

A key trend in most OECD countries is the growth of R&D in the service sector.38 In much of the OECD, services account for one-third or more of BERD, a share that has increased over the last decade.39 While the service sector accounts for approximately two-thirds of Canada’s GDP, it accounts for less than half of BERD,40 but its importance is growing. The rise in the service sector’s share of total BERD, which peaked in 2008 (at approximately 45 percent), reflects both increases in total services R&D and declines in manufacturing R&D. While the share of BERD performed by the service sector has seen strong growth (the share rose from 28 percent in 2000 to 44 percent in 2012), the share of BERD performed by the manufacturing sector has significantly declined, falling from 68 percent in 2000 to 49 percent in 2012.41

International Comparison of Research and Development Intensity by Industry Sector

While data aggregated at the country level show that Canada performs poorly in international rankings of BERD intensity, looking at specific industries tells a mixed story.42 Consistent with performance at the country level, Figure 4-4 shows that, by international standards, Canada tends to have a lower BERD intensity in a number of industries. These industries include those that are important to Canada’s economy, such as construction and food products as well as motor vehicles and aircraft and spacecraft manufacturing (which are both industries that, globally, tend to have a high R&D intensity). In these industries, Canada is below the average of selected OECD countries43 and considerably below the threshold of the top five performers. R&D is important for the long-term competitiveness of all industries, and therefore the low investment levels in these Canadian industries are cause for concern.

Conversely, Canada’s BERD intensity in some industries related to ICT (i.e., radio, television and communication equipment; and office, accounting and computing machinery) is above the threshold of the world’s top five performers (at third for the former and first for the latter). As well, Canada outperformed the average of selected countries in pulp and paper products (Canada’s BERD intensity in this industry is the highest of the selected countries); electricity, gas and water supply; total services; and pharmaceuticals.

Industry Structure

There is ongoing debate about the role that Canada’s industry structure plays in our low BERD intensity. While Canada performs well against other countries in terms of BERD intensity in industries related to ICT (i.e., radio, television and communication equipment; and office, accounting and computing machinery) (Figure 4-4), these industries make up a relatively small share of the Canadian economy. In contrast, compared to other developed economies, industries related to mining and oil and gas extraction make up a relatively large share of the Canadian economy.44 Although anecdotal evidence suggests that these industries are undertaking innovative activities in Canada, they do not engage in significant amounts of R&D. Figure 4-5 estimates Canada’s BERD intensity if we had the same industry structure as the average industry structure for OECD countries.45,46 Although this adjustment results in a slight improvement in Canada’s BERD intensity, it makes no difference to Canada’s middling position in the international ranking.

Achieving Breakthroughs in Vaccine Development and Delivery

Achieving Breakthroughs in Vaccine Development and DeliveryImmunovaccine, based in Halifax, is a clinical stage vaccine development company focused on advancing its patented DepoVax™ vaccine adjuvanting platform and product candidates for cancer therapy, infectious disease and animal health. DepoVax™ is a well-developed technology platform which has demonstrated the ability to generate fast, strong and long-lasting immune responses against a range of targets. The technology serves as the foundation for the company’s broad vaccine product pipeline, which includes two clinical-stage cancer vaccines and several additional programs in the areas of infectious diseases, addiction medicine and animal health. Patenting of DepoVax™ was supported by funding from the Atlantic Canada Opportunities Agency’s Atlantic Innovation Fund.

Immunovaccine grew out of technology developed at Dalhousie University for use in animals, later adapted for humans. In addition to its ongoing internal work on cancer vaccines, the company has established collaborations with important partners, such as the United States’ National Institutes of Health (vaccines against bioterrorism agents, including anthrax), Weill Cornell Medical College in New York City (cocaine addiction vaccine) and Zoetis, formerly Pfizer Animal Health (vaccines focused on animal health).

As a result of Immunovaccine’s early successes and focus on areas with strong growth potential, the company is well positioned to develop the next generation of therapeutic cancer vaccines and prophylactic vaccines for infectious diseases, addiction medicine and animal health. In recognition of the company’s achievements, it was selected as the “Best Early-Stage Vaccine Biotech” at the 2012 Vaccine Industry Excellence Awards ceremony during the World Vaccine Congress in Washington, DC.

Research and Development by Firm Size

According to data from the OECD, small and medium-sized enterprises (SMEs) account for over 35 percent of total BERD in Canada. This is considerably greater than the share of BERD attributed to SMEs in other key OECD countries.47 Nonetheless, data from Statistics Canada indicate that the bulk of R&D in Canada’s private sector is still performed by larger firms, with the majority of R&D (over 50 percent) performed by firms with over $100 million in revenues. The contribution of small, medium and large firms to R&D varies from industry to industry. It is interesting to note that some industries, including R&D services and computer systems design and related services, appear to have a greater share of smaller firms performing R&D.48

A high concentration of R&D in a few large firms is common in many countries, including many with high BERD intensities. While BERD in Canada is fairly concentrated in a small number of leading R&D performing firms, it has become more evenly distributed over the past decade.49 In 2012, the top 25 R&D performing firms in Canada accounted for approximately 34 percent of total BERD. This share has been fairly stable in the past few years, and although it is up from the low of 28 percent in 2008, it is down considerably from over 45 percent in 2000.50 The share of the top 100 companies has similarly decreased, from nearly 70 percent in the late 1980s to approximately 51 percent in 2012. The drop-off in concentration in R&D performing firms coincides with the decline of the ICT industries in Canada (including Nortel),51 and it may be indicative of a lack of “national champions” in Canada that make significant investments in R&D.

There is also evidence to suggest that the propensity of Canadian firms to perform R&D may be increasing although, in reality, less than 3 percent of firms in Canada are performing R&D. Despite some small declines in 2009, there has been consistent growth in the share of firms performing R&D across all industry sectors.52 The most significant growth has been in manufacturing, which increased from approximately 16 percent in 2005 to approximately 19 percent in 2009.53 While the number of firms in manufacturing decreased over this period, the number of firms performing R&D has increased. In other industry sectors, growth in the number of firms performing R&D has slightly outpaced growth in the total number of firms. This suggests a growing realization among Canadian firms that they must innovate in order to be competitive.

Innovation through Investments in Machinery and Equipment and Intangible Assets

Investment by firms in M&E (defined as business gross fixed capital formation in M&E) is important for innovation and productivity growth. Firms and countries that acquire M&E can benefit from the technologies embodied therein without having had to assume the risks associated with their development. M&E can also contribute to productivity growth by stimulating process innovation and generating enhanced skills among workers.54 The appreciation of the Canadian dollar against major currencies (i.e., the U.S. dollar, U.K. pound sterling, and the euro), especially between 2009 and 2012, has presented Canadian firms with the opportunity to increase M&E capital stock by lowering its cost.55

Investment in M&E in Canada has grown significantly over the past 20 years, as shown in Figure 4-6.56 Despite a large decline in 2009, investment increased in both 2010 and 2011.57 M&E investment as a percentage of GDP reached 5.7 percent in 2011, up slightly from 2009 and 2010 but down from the 1994 to 2008 period, when it continuously exceeded 6 percent.58

Investments in Information and Communications Technologies

Of all types of M&E, ICT59 tends to make the greatest contributions to innovation and productivity growth, and a number of studies60 have suggested that low investment in ICT is a significant contributor to Canada’s lagging productivity. Analysis from the OECD shows that ICT enables innovation, and the probability to innovate increases with the intensity of ICT use.61 As well, over the 2000 to 2009 period, ICT investments provided a significant contribution to labour productivity growth in a number of OECD countries, including Canada, where it accounted for over 50 percent of growth.62

In Canada, until 15 to 20 years ago, overall M&E investment was predominantly in non-ICT M&E. Since then, the landscape has changed, as investment in ICT has grown. In 2011, investment in ICT M&E represented 49 percent of total M&E investment.63 While Canadian investment in ICT is growing, Canada still ranks near the middle among available OECD countries in terms of ICT investment intensity (i.e., ICT as a percentage of non-residential gross fixed capital formation). Canada performs at approximately 70 percent of the threshold of the top five performers, as reflected in Figure 4-7. Although Canada ranks higher than some key advanced economies, including France, Japan, Finland and Germany, it still trails the top five performers (the U.S., Sweden, Denmark, the United Kingdom and New Zealand). This is another area where improvement in Canada’s performance will be particularly important to enhancing business innovation and ultimately helping to secure Canada’s position as a global STI leader.


The significant M&E and ICT gap with the U.S. continues to be a cause for concern.

Figure 4-8 compares the relative performance of Canadian industries to their U.S. counterparts. The significant M&E and ICT gap with the U.S. continues to be a cause for concern, as reported in State of the Nation 2010. ICT capital intensity in the business sector in Canada (i.e., the weighted average of all industries included in Figure 4-8) averaged only 42 percent of U.S. levels over the period from 2000 to 2010.

While the capital intensity gap exists for most industries, some industries in Canada perform relatively well. Canadian industries such as agriculture, forestry, fishing and hunting; and arts and entertainment exceed the ICT capital intensity levels for the same industries in the U.S. (although these industries have low ICT capital intensities in both countries64). The Canadian oil and gas extraction industry, in particular, lags the U.S. in terms of ICT capital intensity, although it is the only industry that does not lag in terms of M&E capital intensity.

Investments in Intangible Assets

Innovation also requires investments in assets that do not take on physical characteristics, such as design, organizational structure, advertising and marketing, and the development of talent.65 As discussed in Chapter 2, there is a positive relationship between investment in intangible assets and productivity, which in turn contributes to overall growth and prosperity.66,67

Investment in these assets in Canada is growing and stood at approximately 66 percent of tangible asset investment in 2008 (up from 23 percent in 1976).68 According to 2006 data from the OECD, investment in intangible assets exceeds investment in tangible assets in many highly innovative countries, including Finland, Sweden, and the United States.69

Addressing Environmental Challenges through Microbiology

Addressing Environmental Challenges through MicrobiologyDr. Monique Haakensen is a scientist who successfully bridges the business and academic worlds to address environmental challenges in the natural resources sector.

With a PhD in microbiology (focused on genomics and bioinformatics), Dr. Haakensen began her career as a university research associate and government scientist, examining the way microbiology could be applied in the natural resources sector. This experience impressed on her the large and growing need within the natural resources sector for applied microbiology research to help companies with bioconversion, a process that uses microbes to remediate contaminated water and soil, such as seepage, effluents and spill sites. This motivated her to start Contango Strategies, which opened its laboratories in Saskatoon in 2011. Specializing in the development, piloting and implementation of lost-cost and sustainable technologies for water treatment and soil remediation, Contango has since won contracts from local and multinational mining companies, oil and gas companies and waste-management firms, and it has expanded its services across Western and Northern Canada.

Dr. Haakensen also serves as an Adjunct Professor and as an advisor to graduate students in a variety of departments at the University of Saskatchewan. In 2011, Dr. Haakensen was named as a winner of Profit Magazine’s Future Entrepreneurial Leader’s awards, recognizing Canada’s top 20 entrepreneurs under the age of 30.

According to analysis from Statistics Canada,70 the largest component of investment in intangible assets in Canada is economic competencies, which accounted for 58 percent of total intangible investments in 2008 (Figure 4-9). Investments in economic competencies (e.g., advertising and organizational capital, including scientific managerial capabilities) improve the ability of firms to compete or to modify processes in order to improve efficiency. These investments also contribute to the knowledge that firms possess.71 The second-largest component of investment in intangible assets in Canada is innovative property, which accounted for approximately 31 percent of overall intangible investments in 2008. The smallest component is computerized information, which includes software72 and databases.

Mineral exploration and evaluation is considered an intangible asset and an innovation activity, which is an important part of the mining and oil and gas extraction industries in Canada. While mineral exploration and evaluation activities are not classified as R&D, they can be considered innovative, as they are constantly adapting to new challenges and making significant use of developments in STI. Expenditures on mineral exploration73 and evaluation are particularly large in the Canadian economy, standing at approximately $11.8 billion in 2008 (compared to $7.3 billion in 2000), or approximately 8 percent of total investment in intangible assets.74 While international comparisons are limited, analysis from the OECD shows that expenditures on mineral exploration and evaluation are 1.14 percent of GDP in Canada (2005) compared to 1.01 percent of GDP in the U.S. (2007) and 0.26 percent of GDP in Australia (2005–06).75

Trademarking Innovations

Trademarks (as well as other types of intellectual property) can be thought of as a type of intangible asset.76 The World Bank defines a trademark as a distinctive sign that identifies certain goods or services as those produced or provided by a specific person or enterprise. As well, a trademark provides protection to the owner by ensuring the exclusive right to use it or to authorize another to use it.77 According to the OECD, because trademarks can be applied to a multiplicity of goods and services, they “may serve as indicators of innovative and marketing activity, and may proxy non-technological innovations and innovation in services.”78

Canada’s performance with respect to direct resident trademarking79 has changed little since 2007. According to the World Intellectual Property Organization, in 2010, Canada had 20,449 trademark applications and ranked 20th out of 85 economies80 in the total number of direct resident trademark applications.81 This compares to 18th out of 105 economies with data available for 2007. By comparison, China and the U.S. ranked first and second, with totals of 973,460 and 236,826 applications, respectively. Two countries smaller than Canada (in terms of population) ranked ahead of Canada: Australia in 13th place (with 39,633 applications) and Chile in 16th place (with 30,133 applications).

Transforming the Way the World Learns

Transforming the Way the World LearnsSoftware company Desire2Learn, based in Waterloo, is helping to transform the way the world learns by providing a suite of products that offer a more engaging, intuitive and personalized learning experience. Desire2Learn’s success is driven by R&D and innovation, which are a core component of the company’s business strategy and a key part of its culture. Approximately 40 percent of the Desire2Learn team is focused on R&D, which is essential for remaining at the forefront of the growing eLearning market.

In 2012, Desire2Learn announced it had attracted $80 million in venture financing from New Enterprise Associates and OMERS Ventures. According to Thomson Reuters, this constitutes the largest-ever venture capital investment in a Canadian software company. This investment will allow Desire2Learn to tap into a new network of expertise, and to increase its investment in R&D to address new markets. As well, it will allow Desire2Learn to invest in infrastructure, retain the top talent that is already in the company, and attract new talent to keep the company innovating. Desire2Learn has also received government support, including a $4.25 million grant from the Government of Ontario in 2011.

The company’s products are used by over 700 clients and over 8 million learners in higher education, K-12, health care, government and industry (including Fortune 100 companies). Desire2Learn has been recognized as a global leader in the eLearning market, and has received numerous awards, including the Deloitte Technology Fast 50 Leadership Award.



Canada performed poorly in terms of VC investment as a percentage of GDP.

Since firms have a tendency to file trademarks first in their home country, direct resident trademarks are not a particularly meaningful indicator. While cross-border trademarks, reported in State of the Nation 2010, are a better indicator, updated data are not available. An alternate indicator, which for many economies captures cross-border trademarks, is trademark applications at the Japanese Patent Office (JPO), the European Office for Harmonization in the Internal Market (OHIM) and the United States Patent and Trademark Office (USPTO) as a percentage of GDP. According to this measure, Canada ranked 13th out of 40 economies (based on a 2007–09 average).82

Supporting Innovation through Equity Financing

Innovative young firms often depend on access to risk capital to develop and commercialize their ideas, since they are frequently perceived as too high-risk for traditional institutional funding.83 Research has found that, in Canada, equity financing accounts for over 40 percent of total financing received by innovative SMEs, compared to less than 10 percent for non-innovative SMEs.84 While 2011 data show significant growth in total investments by both angel investors85 and venture capitalists in Canada, investment levels remain considerably lower than those in the U.S., and total VC investment in Canada has yet to return to its pre-recession value.

Canada in International Rankings

As reflected in Figure 4-10, Canada performed poorly in terms of VC investment as a percentage of GDP compared to other countries in the OECD, ranking 15th out of 27 economies and achieving only 44 percent of the threshold of the top five performers.86 The five leaders, including Israel (the clear trailblazer), the U.S., Sweden, Switzerland and Ireland, all invested at least twice as much VC as a percentage of GDP as Canada did in 2009. The picture improves, however, when looking at VC investment per capita in 2010, where Canada ranked fifth out of 14 economies, and performed better than Switzerland, Finland, Denmark, France, Ireland and the U.K., among others.87,88

It is important to note that it is difficult to compare VC investment across countries due to differences in definitions and classification methods. While the OECD has made recent changes to its methodology to better enable comparison across countries, this has made it difficult to compare the results in Figure 4-10 to results in previous years. Applying a consistent methodology to Canada across several years, analysis shows that Canada’s VC as a percentage of GDP in 2011 was 0.09 percent.89 Although this represents an improvement over 2009 and 2010 (when the share was approximately 0.07 percent), it is considerably below the share achieved in 2007 (0.13 percent).

Characteristics of the Canadian VC Landscape

The effect of the economic downturn on the VC industry, which resulted in dramatic declines in investments in 2008 and 2009, was the principal story in the discussion of risk capital in State of the Nation 2010. While there was moderate year-over-year growth in 2010, a substantial expansion occurred in 2011 (Figure 4-11). VC investment totalled $1.5 billion at the end of 2011, an increase of 34 percent from the $1.1 billion invested in 2010. Although this was higher than each of the preceding three years, it remained well below the $2.1 billion invested in 2007.90

The increased VC activity in 2011 was not accompanied by large gains in deal sizes, which can impact the growth potential of VC-backed firms. Amounts invested per firm averaged $3.4 million in 2011, up slightly from $3.2 million in 2010 and from $3.1 million in 2009 (but still below the $3.6 million averaged in 2008 and the $5.1 million averaged in 2007). As a result, the gap in VC deal sizes between Canada and the U.S. was further eroded in 2011. On average, Canadian firms secured only 37 percent of the dollars going to U.S. firms in 2011, down from 39 percent in 2010.91

The availability of venture capital, from the earliest stages of funding for an initial idea or basic research through to the later stages of expansion and ultimately the exit, is important for developing innovative companies. A recent trend in VC investment in Canada has been the dramatic increase in later-stage financing, with funding for the expansion component more than doubling from 2009 to 2011. Later-stage92 financing is important because it can lead to more profitable exits for investors. In 2011, later-stage financing in Canada accounted for 71 percent (or approximately $1.1 billion) of total VC investments, up from 59 percent (or approximately $676 million) in 2010. On the other hand, there has been a small decline in early-stage93 financing, falling from $458 million in 2010 to $434 million in 2011.94 In the U.S., 2011 saw strong growth in investments at both the early and later stage.95

There are key differences between the sources of VC in Canada and the U.S. (Figure 4-12A and Figure 4-12B). The significance of foreign funds is an important feature of the Canadian VC industry, accounting for approximately 29 percent of total VC investment in 2011. On average, foreign investors invested more than two times the amount of domestic investors. The activity of U.S. and other foreign VC funds in the Canadian market showed growth in 2011, and reflects the highest level of cross-border VC investment in four years.96 Foreign funds, particularly from the U.S., are often important in later-stage financing in Canada, mostly because Canadian VC funds, being relatively small, are not well-positioned to participate in later-stage financing that requires larger deal sizes. U.S. funds bring not only capital but also expertise and networks, which result in higher exit values.97 Although foreign partners invest in only approximately 10 percent of Canadian venture capital deals, they account for approximately 30 percent of exits and almost 45 percent of exit proceeds.98

While Canadian private independent funds were also essential to the increased total investment in 2011 (investing $377 million, up 42 percent year-over-year), domestic private independent funds make a significantly smaller contribution to overall VC investment in Canada than they do in the U.S. Venture capital in Canada is further distinguished from that in the U.S. by the presence of both government and labour-sponsored funds (although the share of labour-sponsored funds in total VC investment in Canada has declined, from approximately 24 percent in 2009 to approximately 16 percent in 2011). Some economists have attributed the poor performance of the VC market in Canada to “crowding out” by labour-sponsored funds, which have traditionally played a significant role in VC in Canada despite their historically poor returns.99

Venture Capital by Industry in Canada

Almost all technology-intensive industries benefited from the increased VC investment in Canada in 2011, with ICT industries continuing to lead with 46 percent of the total (or $692 million, up from $491 million in 2010).

Within ICT, particularly large gains were registered by Internet-focused firms and software firms, which received $236 million and $201 million, respectively. Investments in life sciences industries, including biopharmaceuticals and medical devices, also grew in 2011, up 15 percent from 2010 (to total $343 million or approximately 23 percent of total VC investment). As well, VC investments in energy and environmental technologies industries increased in 2011, up 43 percent from 2010 (to total $245 million).100

While investment in ICT makes up a significant share of total VC investment in Canada, the share is even higher in the U.S. (approximately 57 percent). Investment in life sciences as a percentage of total VC investment is also higher in the U.S. (approximately 27 percent in comparison to Canada’s 23 percent).101 This suggests that a higher share of VC is invested in technology-intensive industries in the U.S. than in Canada.

Venture Capital Exits and Market Capitalization

Exit values are important measures of the wealth generated through VC. As well, higher exit values can help VC firms attract funds. An exit value is the price received for the liquidation of a stake in a business, such as through mergers and acquisitions (M&As) or initial public offerings (IPOs). Reported liquidity events102 involving domestic and foreign investors in Canadian firms totalled 27 in 2011 (2 IPO exits and 25 M&A exits), down 13 percent on a year-over-year basis, but numbering slightly more than the events reported in both 2008 and 2009.103 The average M&A transaction size in 2011 was $245 million, considerably higher than the values in 2009 and 2010, and in significant excess of the average M&A deal size for VC-backed firms in the U.S. (which was $150 million in 2011).

Conversely, the average IPO size in 2011 for Canadian VC-backed firms was less than half that in the U.S. ($72 million in Canada104 compared to $190 million in the U.S.105). This may be linked to the relatively low market capitalization106 of technology firms in Canada compared to the U.S. While the Toronto Stock Exchange (TSX) and TSX Venture Exchange together rank second in North America in terms of exchanges with the most technology companies listed, technology companies make up less than 2 percent of their total market capitalization.107,108 In comparison, worldwide in 2010, technology firms represented approximately 15 percent of total global market capitalization.109,110

There is evidence that technology companies are undervalued in Canada. According to the Business Development Bank of Canada (BDC), the price/earnings ratios of Canadian VC-backed companies listing in Canada consistently underperform those of technology companies listing in the U.S., including Canadian companies.111 Further evidence that Canadian public markets may be undervaluing technology stocks is that the value of acquisitions of Canadian companies tends to be considerably higher than the companies’ market price.112 This situation can make it difficult to grow large-scale innovative firms in Canada.

Innovation and Global Connectedness

Strong global links are important for the adoption and diffusion of new ideas and technologies that can have a positive impact on innovation performance and international competitiveness. Foreign companies investing in Canada, through foreign direct investment (FDI), provide access to new markets and new technologies for Canadian suppliers, generate knowledge spillovers, and invest a higher share of their revenue in R&D.113 Meanwhile, Canadian direct investment abroad (CDIA) can stimulate high-value-added head office activities, such as R&D, engineering and design.114 Through CDIA, Canadian companies can acquire innovations developed abroad and apply them at home. They can also identify and access new talent that enriches their firm.

Both FDI in Canada and CDIA have increased considerably since the end of the 1990s, with FDI in Canada reaching approximately $607 billion and CDIA reaching approximately $684 billion in 2011. FDI is highest in manufacturing, followed by mining and oil and gas extraction, and the U.S. is by far the largest source of FDI in Canada. CDIA is highest in the finance and insurance industries, followed by mining and oil and gas extraction, and the U.S. is the primary target for CDIA.115

According to data from the OECD, FDI inflows for Canada equalled 2.4 percent of GDP in 2011, while FDI outflows (i.e., CDIA) equalled 2.9 percent of GDP. These values exceed the OECD averages for both FDI inflows and outflows, which are 1.8 percent and 2.8 percent, respectively.116

International Technology Flows

International technology flows117 (Figure 4-13) reflect, to some extent, global linkages established through cross-border trade in R&D outcomes and production-ready technologies.118 While this includes both inter-firm and intra-firm trade, evidence points to the particular importance of technology flows between parents and affiliates (i.e., intra-firm trade).119 The importance of intra-firm trade likely holds true for Canada, given that many of our largest companies have operations in the U.S.

Despite Canada’s increased participation in international technology flows (from 1999 to 2009), as reflected in Figure 4-13 it still ranks below many key competitors, including the top five performing countries of Ireland, Finland, the Netherlands, Switzerland and Sweden. This suggests that the global linkages of Canadian firms may not be as strong as the global linkages of firms in other countries, and therefore Canada may not be capturing the innovation advantages that they can create.

Figure 4-14 shows Canada’s receipts and payments for the most technology-intensive components of commercial services trade.120 Receipts reflect the ability of Canadian firms to export the outcomes of technology-intensive activities as well as global demand for Canadian ideas and expertise. Payments reflect the desire of Canadian firms to benefit from the technology intensive activities conducted abroad and awareness of global business opportunities. While many other aspects of services trade may involve R&D activities, the categories used in the figure were chosen because they reflect explicit payments or receipts for technology transfers and the cross-border trade in R&D intensive activities.

Technology-intensive services transactions as a share of total commercial services transactions have grown significantly since 1990, although the share has levelled off in recent years.121 In 2011, the largest component of technology-intensive service exports was computer and information services (approximately 14 percent) followed by architecture, engineering and other technical services (approximately 11 percent). The largest category of imports of technology-intensive services in 2010 was, by far, charges for the use of intellectual property (approximately 22 percent).

In terms of the total value of receipts and payments for technology-intensive services in Canada, receipts for these services have typically exceeded payments, suggesting that Canada is exporting more than it is importing. In 2011, receipts for technology-intensive services were approximately $19.5 billion, while payments were approximately $18.6 billion. The only component with a historically negative trade balance is charges for the use of intellectual property.122

19Someshwar Rao et al., “The Importance of Innovation for Productivity,” International Productivity Monitor (Centre for the Study of Living Standards), Vol. 2 (Spring 2001), pp. 11–18.

20OECD, Business Innovation Policies: Selected Country Comparisons, Paris (2011), p. 14.

21For example, see: OECD, OECD Economic Surveys: Canada, Paris (2012); and, Alexandra Bibbee, “Unleashing Business Innovation in Canada,” OECD Economics Department Working Papers, No. 997 (October 2012).

22OECD, Science, Technology and Industry Scoreboard, Paris (2011), p. 80.

23This differs from business enterprise funding of R&D and business enterprise R&D funding intensity (discussed in Chapter 3), both of which cover business investment in R&D performed in all sectors (i.e., industry, higher education, government, etc.).

24OECD, Science, Technology and Industry Scoreboard, Paris (2011), p. 80.

25Value-added in industry, which is composed mainly of profits and wages, is essentially the business contribution to GDP.

26Where data for 2006, 2008 and/or 2011 were not available, data for the next closest year were used to calculate the ranking. See years used in Figure 4-1.

27Based on data from OECD, Main Science and Technology Indicators (January 2013). Where data for 2006, 2008 and/or 2011 were not available, data for the next closest year were used to calculate the ranking. See years used in Figure 4-1.

28Statistics Canada, CANSIM Table 358-0024 Business enterprise research and development (BERD) characteristics (October 2012).

29The increase is in terms of current dollars. In terms of constant dollars, BERD decreased for five consecutive years (2007–11). BERD in constant prices is calculated by using the GDP deflator. The constant dollar value for 2012, as of October 2012, is not yet available. See: Statistics Canada, Industrial Research and Development: Intentions 2012, Catalogue no. 88-202-X, Ottawa (2012).

30Within ICT manufacturing, the Science, Technology and Innovation Council (STIC) includes computer and peripheral equipment manufacturing (North American Industry Classification System (NAICS) 3341), communications equipment manufacturing (NAICS 3342), semiconductor and other electronic component manufacturing (NAICS 3344), navigational, measuring, medical and control instrument manufacturing (NAICS 3345), and other computer and electronic products (NAICS 3343 and 3346).

31Because of the nature of Statistics Canada’s classification of firms, which is based on the principal source of revenue rather than R&D objective, much of the wholesale trade R&D figure is likely attributable to firms from high R&D-intensive industries (such as the pharmaceutical manufacturing industry).

32Information and cultural industries include: publishing industries; motion picture and sound recording industries; broadcasting; telecommunications; data processing, hosting and related services; and other information services such as libraries and Internet publishing and broadcasting.

33Statistics Canada, CANSIM Table 358-0024 Business enterprise research and development (BERD) characteristics, by industry group based on the North American Industry Classification System (NAICS), annual (dollars unless otherwise noted) (October 2012).

34Motor vehicle and manufacturing includes motor vehicle manufacturing (NAICS 3361), motor vehicle body and trailer manufacturing (NAICS 3362) and motor vehicle parts manufacturing (NAICS 3363).

35Finance, insurance and real estate includes finance and insurance (NAICS 52) and real estate and rental and leasing (NAICS 53).

36Oil and gas extraction, contract drilling and related services includes oil and gas extraction (NAICS 211), oil and gas contract drilling (NAICS 213111) and services to oil and gas extraction (NAICS 213118).

37For example, see: Statistics Canada, CANSIM Table 379-0023 Gross domestic product (GDP) at basic price in current dollars, System of National Accounts (SNA) benchmark values, by North American Industry Classification System (NAICS).

38Services are the result of a production activity that changes the conditions of the consuming units, or facilitates the exchange of products or financial assets. There are 11 main industry groupings, or sub-sectors, within the service sector: wholesale and retail trade; health care and social assistance; accommodation and food services; professional, scientific and technical services; educational services; finance, insurance, real estate and leasing; transportation and warehousing; information, culture and recreation; public administration and defence; business, building and other support services; and other services.

39OECD, Science, Technology and Industry Scoreboard, Paris (2011), p. 180.

40Based on Statistics Canada, CANSIM Table 358-0024; and, Industry Canada, Canadian Industry Statistics (November 2012).

41Statistics Canada, CANSIM Table 358-0024 Business enterprise research and development (BERD) characteristics, by industry group based on the North American Industry Classification System (October 2012).

42As noted in State of the Nation 2010, benchmarking R&D expenditures by industry on an international basis poses challenges. Comparable international data are less current and there are differences in the way data are collected. This difference in methodology has the effect of some similar R&D activities being assigned to different industries in different countries.

43Countries used in the averages include: Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Italy, Japan, Korea, Netherlands, Norway, Poland, Spain, Sweden, United Kingdom and United States. In general, all data are from 2007, with the exception of data from Australia (2005) and Canada, Denmark, France, Poland and United Kingdom (2006). Exceptions include: average for aircraft and spacecraft does not include Denmark, Greece and Hungary and data for Netherlands and Korea are from 2005; average for chemicals, excluding pharmaceuticals, does not include Norway; average for food products does not include Australia; average for high-technology manufactures does not include Denmark, and data for Netherlands are from 2006 and data for Hungary and Greece are from 2005; average for low-technology manufactures does not include United Kingdom; average for office, accounting and computing machinery does not include Greece; average for pulp and paper does not include United Kingdom; average for radio, television and communications equipment does not include Netherlands; and Australian data for construction and electricity, gas and water are from 2006.

44In 2012, the ICT sector accounted for about 4 percent of GDP while mining, quarrying, and oil and gas accounted for about 8 percent. Calculations are based on Statistics Canada, CANSIM Table 379-0031 Gross domestic product (GDP) at basic prices, by North American Industry Classification System (NAICS), monthly (March 2013).

45OECD, Science, Technology and Industry Scoreboard, Paris (2011), p. 180.

46The industry structure-adjusted indicator of R&D intensity is a weighted average of the R&D intensities of a country’s industrial sectors, using the OECD industry structure—sector value-added shares in 2007—as weights instead of a country’s actual shares (which are used in the calculation of the unadjusted measure of BERD intensity). BERD data are from 2009 for the Czech Republic, Estonia and Italy; 2007 for Austria, Belgium, Finland, France, Germany, Greece, Mexico, Norway, Sweden, the United Kingdom and the United States; 2006 for Denmark, the Netherlands and Poland; and 2005 for Australia, Canada, Iceland and Ireland.

47Based on data for Australia, Finland, France, Korea, Sweden, United Kingdom and United States (2009 or most recent year) from: OECD, Business enterprise R–D expenditure by size class and by source of funds (October 2012).

48Statistics Canada tabulations for STIC (November 2012), based on Statistics Canada, Research and Development in Canadian Industry (2010).

49Statistics Canada, Industrial Research and Development: Intentions 2012, Catalogue no. 88-202-X (Ottawa, 2012), p. 8.

50State of the Nation 2010 reported the 2009 value at 33 percent. Revised data report the 2009 value at 30 percent.

51Statistics Canada, Industrial Research and Development: Intentions 2011, Catalogue no. 88-202-X (Ottawa, 2011), p. 5.

52Share refers to the number of R&D-performing firms in an industry divided by the total number of firms in that industry. Data are only available up to 2009, so the data may not fully capture the effect of the recession.

53Statistics Canada, Industrial Research and Development: Intentions 2012, Catalogue no. 88-202-X (Ottawa, 2012), p. 43.

54Kevin Girdharry, Elena Simonova and Rock Lefebvre, “Investment in Machinery and Equipment is Essential to Canada’s Future,” Issue in Focus (Certified General Accountants Association of Canada) Ottawa (April 2012), p. 7.

55Industry Canada, Business Innovation and Strategy: A Canadian Perspective Ottawa (2011), p. 1.

56Machinery and equipment is in current dollars. GDP at market prices is expenditure-based estimates in current dollars.

57The value in constant dollars is higher because the cost of M&E has been deflating.

58M&E and GDP at market prices in current dollars. See: Statistics Canada, CANSIM Table 380-0017 Gross domestic product (GDP), expenditure-based (October 2012).

59According to the OECD, ICT products are those that are primarily “intended to fulfill or enable the function of information processing and communication by electronic means, including transmission and display. OECD, Guide to Measuring the Information Society, Paris (2009), p. 90.

60Previous studies include: Andrew Sharpe, “What Explains the Canada-US ICT Investment Gap?” International Productivity Monitor (Centre for the Study of Living Standards), Vol. 11 (2005); Someshwar Rao, “Cracking Canada’s Productivity Conundrum,” Institute for Research on Public Policy, Study No. 25 (2011); Someshwar Rao et al., “What Explains the Canada-US TFP Gap?” Industry Canada, Working Paper 2006–08 (2006).

61OECD, Measuring Innovation: A New Perspective, Paris (2010), p. 84.

62OECD, Science, Technology and Industry Scoreboard 2011 (Paris: OECD Publishing, 2011), p. 83.

63Kevin Girdharry, Elena Simonova and Rock Lefebvre, “Investment in Machinery and Equipment is Essential to Canada’s Future,” Issue in Focus (Certified General Accountants Association of Canada) (2012), p. 6.

64Centre for the Study of Living Standards, Database of Information and Communication Technology (ICT) Investment and Capital Stock Trends: Canada vs. United States (August 2012).

65OECD, OECD Economic Surveys: Canada 2012, Paris (2012), p. 55.

66Conference Board, “Measuring What Counts,” Issues in Intangibles 1, 1 (Winter 2012), p. 2.

67Intangible assets have “made a significant contribution to labour productivity growth,” accounting for approximately 40 percent of the total impact of capital-deepening between 1976 and 2008 according to: Statistics Canada, “Study: Intangible capital and productivity growth in Canada, 1976 to 2008,” The Daily (June 1, 2012).

68John R. Baldwin, Wulong Gu, and Ryan Macdonald, “Intangible Capital and Productivity Growth in Canada,” Canadian Productivity Review Research Paper (Statistics Canada), Catalogue no. 15-206-X – No. 029 (2012), p. 7.

69OECD, Measuring Innovation: A New Perspective, Paris (2010), p. 22.

70John R. Baldwin, Wulong Gu, and Ryan Macdonald, “The New Investment Paradigm?Economic Insights Analytical Paper (Statistics Canada), Catalogue no. 11-626-X – No. 007 (2012).

71John R. Baldwin, Wulong Gu, and Ryan Macdonald, “The New Investment Paradigm?Economic Insights Analytical Paper (Statistics Canada), Catalogue no. 11-626-X – No. 007 (2012), p. 3.

72As noted elsewhere in this section, software is also included in the ICT component of M&E.

73According to Baldwin et al. (Investment in Intangible Assets in Canada: R&D, Innovation, Brand, and Mining, Oil and Gas Exploration Expenditures (2009)), expenditures consist of all exploration, drilling, and geological and geophysical expenditures associated with the predevelopment stage. These data cover most aspects of oil and gas or mineral exploration undertaken in Canada.

74 John R. Baldwin, Wulong Gu, and Ryan Macdonald, “The New Investment Paradigm?Economic Insights Analytical Paper (Statistics Canada), Catalogue no. 11-626-X – No. 007 (2012), p. 3.

75Alexandra Bibbee, “Unleashing Business Innovation in Canada,” OECD Economics Department Working Papers, No. 997 (October 2012), p. 14.

76OECD, New Sources of Growth: Intangible Assets, Paris (2011).

77 World Bank, Trademark Applications, Direct Resident (based on data from the World Intellectual Property Organization) (2010).

78OECD, Science, Technology and Industry Scoreboard 2011, Paris (2011), p. 144.

79According to the World Bank, these are trademark applications filed by domestic applicants directly at a given national IP office.

80Where 2010 data were missing, 2009 data were used.

81World Bank, Trademark Applications, Direct Resident (based on data from the World Intellectual Property Organization) (2010).

82OECD, Science, Technology and Industry Scoreboard 2011, Paris (2011), p. 144.

83OECD, Science, Technology and Industry Scoreboard 2009, Paris (2009), p. 22.

84Shunji Wang, “Financing Innovative Small and Medium-Sized Enterprises in Canada Working Paper,” Industry Canada SME Financing Data Initiative (2009), p. 24. Innovative firms are defined as those that spend more than 20 percent of their total investment expenditures on R&D.

85National Angel Capital Organization, Investment Activity by Canadian Angel Groups: 2011 Report, Toronto (2012), p. 12.

86Venture capital investment as a percentage of GDP measures the sum of seed and start-up capital and early development capital as a percentage of a country’s GDP.

87The Economist, What next for the start-up nation? (based on data from National Venture Capital Association, European Private Equity and Venture Capital Association, Israel Venture Capital Research Center, and UN) (January 21, 2012).

88Ratio for Canada is estimated by STIC based on CVCA data.

89Based on VC data reported by the CVCA/Thomson Reuters and GDP data from Statistics Canada, CANSIM Table 380-0017—GDP at market prices in current dollars, expenditure based (September 2012).

90CVCA, Canada's Venture Capital Market in 2011 (prepared by Thomson Reuters for the Canadian Venture Capital & Private Equity Association) (2012).

91CVCA, Canada's Venture Capital Market in 2011 (prepared by Thomson Reuters for the Canadian Venture Capital & Private Equity Association) (2012).

92According to Canada’s Venture Capital & Private Equity Association (CVCA), later stages include:

  • Expansion: An established or near-established company that needs capital to expand its productive capacity, marketing and sales.
  • Acquisition/Buyout: An established or near-established firm that needs financing to acquire all or a portion of another business entity for growth purposes.
  • Turnaround: An established or near-established company that needs capital to address a temporary situation of financial or operational distress.
  • Other stage: A Secondary Purchase, or the sale of portfolio assets among investors, and working capital.

93According to the CVCA, early stages include:

  • Seed stage: A developing business entity that has not yet established commercial operations and needs financing for research and product development.
  • Start-up: A business in the earliest phase of established operations and needs capital for product development, initial marketing and other goals.
  • Other early stage: A firm that has begun initial marketing and related development and needs financing to achieve full commercial production and sales.

94CVCA, Canada's Venture Capital Market in 2011 (prepared by Thomson Reuters for Canada's Venture Capital & Private Equity Association) (2012).

95NVCA, Yearbook 2012 (prepared by Thomson Reuters) (2012).

96CVCA, Canada's Venture Capital Market in 2011 (prepared by Thomson Reuters) (2012).

97Review of Federal Support to Research and Development—Expert Panel Report, Innovation Canada: A Call to Action, Ottawa (2011), Chapter 7, p. 7-16.

98BDC, Venture Capital Industry Review (2011). Cited in Review of Federal Support to Research and Development—Expert Panel Report, Innovation Canada: A Call to Action, Ottawa (2011), Chapter 7, p. 7-16.

99Douglas Cumming and Jeffrey MacIntosh, Crowding Out Private Equity: Canadian Evidence (2006); and, James Brander et al., Government Sponsored Venture Capital in Canada: Effects on Value Creation, Competition and Innovation (2008). Cited in Review of Federal Support to Research and Development—Expert Panel Report, Innovation Canada: A Call to Action, Ottawa (2011), Chapter 7, p. 7-13.

100CVCA, Canada's Venture Capital Market in 2011 (prepared by Thomson Reuters) (2012).

101NVCA and Thomson Reuters, Yearbook 2012 (prepared by Thomson Reuters) (2012), p. 11 (Figure 5.0).

102Note that there is no requirement to disclose deals.

103CVCA, Canada's Venture Capital Market in 2011 (prepared by Thomson Reuters) (2012).

104Data provided by Small Business and Tourism Branch, Industry Canada.

105National Venture Capital Association and Thomson Reuters, News Release (3 January 2011).

106Market capitalization, as defined by the World Bank, is the share price multiplied by the number of shares outstanding.

107Calculation by STIC based on 2011 TMX data indicating a $34 billion market capitalization of technology companies and an overall market capitalization of approximately $2 trillion: Toronto Stock Exchange, Leadership in Technology; and Toronto Stock Exchange, A Capital Opportunity: A Growth Market for Technology Companies.

108At the end of 2011, technology firms represented 4 percent of overall market capitalization on Canadian exchanges; Jos Schmitt, “Fixing Canada’s broken tech scene,” Backbone Magazine (February 27, 2012).

109Tom Tunguz, “Four Trends in the Public Technology Market,” "TechCrunch (based on CapitalIQ research for technology sector data; IMF and U.S. Census for global market capitalization figures) (July 15, 2012).

110The low market capitalization of technology companies in Canada as a percentage of total market capitalization may be an outcome of the relatively high market values of Canadian resource companies and banks. As well, the TSX Venture Exchange is used as an alternative to VC, and as a result, most technology firms listed on the exchange are very small. For more information on the TSXV as a public venture capital market: Cécile Carpentier and Jean-Marc Suret, “The Canadian Public Venture Capital Market,” Centre interuniversitaire de recherche en analyse des organisations (April 2009).

111Business Development Bank of Canada, Venture Capital Industry Review, Ottawa (2011), p. 16.

112Boyd Erman, “We undervalue our tech stocks – and pay the price,The Globe and Mail (January 30, 2012).

113OECD, Science, Technology and Industry Scoreboard 2011, Paris (2011), p. 174.

114Walid Hejazi, “ Dispelling Canadian Myths about Foreign Direct Investment, ” IRPP Study, No. 1 (January 2010), p. 1.

115Statistics Canada, CANSIM Table 376-0052—International investment position, Canadian direct investment abroad and foreign direct investment in Canada, by North American Industry Classification System and region (October 2012).

116OECD, OECD International Direct Investment Statistics 2012, Paris (2012).

117Trade in technology comprises four main categories: transfer of techniques (through patents and licences, disclosure of know-how); transfer (sale, licensing, franchising) of designs, trademarks and patterns; services with a technical content, including technical and engineering studies as well as technical assistance; and industrial R&D.

118OECD, Science, Technology and Industry Scoreboard 2011, Paris (2011), p. 108.

119For example, according to the OECD (Science, Technology and Industry Scoreboard 2011), technology flows to and from Ireland are mainly due to the strong presence of foreign affiliates (particularly U.S. and U.K. firms).

120Like the OECD data presented above (see Figure 4-13), the data for technology-intensive services trade do not separate out transactions within multinational enterprises, which account for the majority of these payments for services.

121The total value of both receipts and payments for technology-intensive services has also levelled off in recent years.

122Statistics Canada, CANSIM Table 376-0033—International transactions in services, commercial services by category (November 2012).