Why does Trudeau keep sucking up to foreign tech companies?

Despite the PM’s love for Silicon Valley, relying on foreign tech firms for jobs risks turning Canada into a branch-plant economy

Prime Minister Justin Trudeau takes part in a virtual reality demonstration at the new Google Canada Development headquarters in Kitchener, Ont., on Thursday, January 14, 2016. (Nathan Denette/The Canadian Press)

Prime Minister Justin Trudeau takes part in a virtual reality demonstration at the new Google Canada Development headquarters in Kitchener, Ont., on Thursday, January 14, 2016. (Nathan Denette/The Canadian Press)

Prime Minister Justin Trudeau touted technological innovation at the recent grand opening of Google’s new Canadian development headquarters, a refurbished rubber factory in Kitchener, Ont. What’s happening here “really matters,” Trudeau opined, and not just for the region, but Canada and the world. At one point, he even gamely peered through a “virtual reality” Cardboard viewfinder, which, once a smartphone was slipped inside, offered a rudimentary glimpse of Google’s vision of the future.

Like a lot of Canadians, Trudeau and his team talk a lot a lot about the need to diversify the economy away from oil, metals and minerals as global commodity prices slump. And it’s clear he believes the Apples and Googles of the world are key to expediting the transition. After helping to open Google’s new Canadian offices in January, Trudeau jetted off to the World Economic Forum in Davos, Switzerland, where he met senior executives from Microsoft and Facebook, among others. He also delivered a carefully crafted line about the need to champion the “resourcefulness” of Canadians—not just the country’s “resources,” a not-so-subtle dig at his pipeline-preoccupied predecessor Stephen Harper.

But Trudeau’s walk through Silicon Valley is unlikely to lead Canada to innovation salvation. Experts warn that relying too heavily on giant U.S. technology firms risks creating the 21st-century version of a branch-plant economy—one where Canada’s best minds and cutting-edge research are traded for a few hundred high-paying jobs and the chance to participate in a fast-growing sector we should be exploiting ourselves. And unlike oil and gas, with their rich royalty payments, it’s not like Canadians can sit back and collect millions in tax dollars from foreign tech giants, which have perfected the use of overseas tax havens to shield their profits.

“The more the dollar drops, the more foreigners will want to open branch plants here—but that’s a race to the bottom,” says former BlackBerry co-CEO Jim Balsillie, who adds that Canada is also at risk of “brain drain” as young grads head south for better opportunities and the chance to get paid in more valuable U.S. greenbacks. Instead, Balsillie advocates doing what he did back in the day with BlackBerry, seemingly against all odds. “We need to compete by generating wealth from Canadian ideas and commercializing them globally—from Canada,” he argues. “That starts with a proper innovation strategy, something we haven’t had in 40 years.”

In the meantime, the world’s most valuable companies, from Apple to Facebook, will be more than happy to do business in Canada. But it won’t be Canadians who reap the biggest rewards.

Software engineer Dalya Gershtein scales the climbing wall at the new Google Canada Development headquarters in Kitchener, Ont., on Thursday, January 14, 2016. (Nathan Denette/CP)

Software engineer Dalya Gershtein scales the climbing wall at the new Google Canada Development headquarters in Kitchener, Ont., on Thursday, January 14, 2016. (Nathan Denette/CP)

The 350 engineers who will work in Google’s new development centre, complete with coffee bar, upscale cafeteria, climbing wall and games room, represent just half of one per cent of Google’s 55,000-person global workforce. But Canadian “Googlers,” or “Canooglers,” are hardly tinkering on the fringes of the search giant’s product lineup. They’ve so far helped develop such core Google products as Gmail, Google Fiber, Google Ads and the Chrome browser, which boasts more than a billion users around the world. Google Canada may be an outpost set up near one of the country’s top engineering universities, in other words, but it’s playing an outsized role in making Google’s newly created parent company, Alphabet, a $66-billion enterprise.

Which is precisely the problem: Canada is only receiving a small slice of the potential upside. “[At BlackBerry] we would establish foreign outposts for the very same reason,” says Balsillie, referring to the global expansion he once oversaw at the company, formerly known as Research In Motion. “In the case of the U.S., we needed the commercialization infrastructure that doesn’t exist in Canada. But the objective was always the same: make as much profit as you can and bring it back to Canada because RIM is a Canadian idea, a Canadian company.”

Similar motivations may be behind rumours that Apple plans to lease space in an Ottawa suburb across the street from QNX Software Systems, a subsidiary of BlackBerry. Why? Among the worst-kept secrets in Silicon Valley is Apple’s efforts to build an “iCar”—possibly a self-driving one—and QNX just happens to build the rock-solid operating system that underpins much of the computer technology in today’s vehicles.

That’s not to say Canada doesn’t benefit from interlopers. Not only does Google hire local university graduates, it’s a major partner in Kitchener’s Communitech incubator, which offers mentorship, financial support and even strategic partnerships to young entrepreneurs. The result is a region crackling with the electricity of hundreds of start-ups. The same goes for burgeoning tech centres in other parts of the country where rivals have set up shop. Facebook, for example, revealed plans last year to expand operations when it moved into Toronto’s MaRS building, also home to several young digital firms.

Even so, some local entrepreneurs can’t shake the feeling Canada is being raided. Mohamed Musbah is the vice-president of product at Maluuba, a small, 40-person firm developing natural language technology (imagine a Siri voice assistant you can actually talk to) for use in everything from smartphones to smart TVs. He says Canada has emerged as ground zero in the suddenly hot field of artificial intelligence, or AI, but is at risk of losing its edge. “Some of the smartest people in the AI space came out of [Canadian] universities,” says Musbah. “But what’s happening is these bigger companies like Facebook and Google are essentially offering them a lot of money and resources to go to the United States and work on the problems there . . . it’s happening in both industry and academia.”

Case in point: two of the three researchers known in computer science circles as the “Canadian Mafia” for their pioneering work in the field of “deep learning” have been tapped by Silicon Valley. Yann LeCun now heads up the AI research team at Facebook, which uses AI to power the facial recognition feature of its Moments photo app, while University of Toronto professor Geoffrey Hinton holds the title of distinguished researcher at Google. Several other academics in Canada have followed a similar path. “It’s an extraordinary problem,” says Musbah, who worked beside dozens of Canadians during previous stints in the U.S. at Facebook and Microsoft. “We have the talent and we’re doing great stuff here. But we’re losing it every single day.”

(AP Photo/Virginia Mayo, File)

(AP Photo/Virginia Mayo, File)

AI isn’t the only futuristic technology where Canada has the potential to be a world leader. Dan Breznitz, a professor and chair of innovation studies at the University of Toronto’s Munk School of Global Affairs, says Canada’s leadership in quantum computing, a field that seeks to harness the unintuitive physics of atoms to power complex computer calculations, could also prove to be a game-changer. Silicon Valley giants “will want to be where quantum computing is happening,” says Breznitz. “But if they come early and take all that knowledge in the form of a few people whose ideas are incorporated into a few Google or Facebook products then we should expect all the profits and intellectual property will go to the U.S.”

In fact, Balsillie argues the game could be forever rigged in favour of foreign tech firms if the 12-nation Trans-Pacific Partnership trade deal is ratified by Canada. In particular, he takes issue with rules that would harmonize technology standards across the member countries—a great deal for the mostly American firms who own the intellectual property buried in those standards. Balsillie, whose outlook is no doubt informed by BlackBerry’s epic fight with a U.S. “patent troll” back in the mid-2000s, also takes issue with the fact IP ownership decisions will be made outside Canada, but will nevertheless be enforced in Canada by Canadian courts.

So what should Canada do to level the playing field? The answer, unfortunately, is just about everything. Canada ranks in about the middle of 16 peer countries when it comes to innovation, according to the Conference Board of Canada. And though we’ve made recent improvements in key areas like entrepreneurialism and access to capital, Breznitz says nobody should be patting themselves on the back. The country still has a “horrific” track record when it comes to “scaling up” businesses and making corporate investments in research and development, he argues. “Even when a smart CEO looks at where he or she wants to invest, R&D doesn’t even appear in their list of priorities. And, up until now, thanks to the commodity boom and a relatively protected Canadian market, they didn’t need to.”

Related: Canada’s real economic challenge? Innovation.

Canada remains a difficult place for young companies to grow, which is why so many Canadian entrepreneurs end up selling their businesses too soon. Photo-sharing website Flickr, for example, was launched by a Vancouver company in 2004—the same year Facebook emerged from Mark Zuckerberg’s Harvard dorm. The following year Flickr was purchased by Yahoo!, which essentially went on to squander a massive opportunity in social networking while Facebook, which also owes much of its success to photo sharing, grew into the $18-billion platform it is today. “We have maybe one or two big venture capital firms in Toronto, which is one of the world’s biggest financial hubs,” Breznitz says. Indeed, it’s telling that one of the biggest backers of Canada’s tech scene is an arm of a provincial pension plan—a segment of the investing world not exactly known for taking fliers on risky, long-shot companies. OMERS Ventures, a division of the Ontario Municipal Employees Retirement System, was set up five years ago when few were willing to invest in young Canadian tech firms—particularly those that required financing to move their businesses to the next level. Among the success stories: Ottawa’s Shopify, an e-commerce firm, and Vancouver’s Hootsuite, a social media management company. “What used to drive me nuts was the conclusion that there aren’t Canadian entrepreneurs around who wanted to create these $1-billion businesses,” John Ruffolo, the CEO of OMERS Ventures, told Bloomberg earlier this year.

Venture capital investment grew by 12 per cent to $2.3 billion in Canada last year, according to numbers released this week by the Canadian Venture Capital and Private Equity Association. But that still pales in comparison with the nearly $60 billion that was invested in U.S. companies in 2015, when the relative size of the two countries are taken into account. More clearly needs to be done. “You need a whole ecosystem with public and private money,” Breznitz says. “You shouldn’t expect the private sector to do it all by itself. It’s too high-risk and it’s too long-term.” The hope is to eventually reach a tipping point where Canadian companies have the freedom to experiment with new technologies, develop products and scale up businesses. That, in turn, will attract the likes of Google, Apple, Microsoft and others—but on Canada’s terms.

In the meantime, companies like Maluuba are doing what they can to protect home-grown talent. The firm has set up a research centre in Montreal in order to give AI specialists a reason to stay in Canada. The company has its eyes on a big prize: the US$2-trillion global automobile market. With the help of $9 million in new financing, Maluuba is working closely with automakers develop self-driving cars that actually understand their owners’ voice commands—a mission-critical technology if there ever was one. “The automotive companies are seeing what’s happening in Silicon Valley and are investing heavily in the space,” says Musbah, noting that Toyota alone has sunk $1 billion into AI research. “That’s a lofty amount. So we’re working with these companies to try and bring them up to speed.”

While Trudeau may get a kick out of rubbing elbows with Google executives and peering into smartphone screens that let you pretend you’re somewhere else, Canadians elsewhere are working to solve some of the technology world’s most vexing problems. But unless something changes—and soon—foreigners will likely be the ones who cash in on the solutions. “We’re looking to outpace what’s going to be happening in Silicon Valley,” Musbah says confidently of his fellow Canadian computer scientists. “We should be doing a better job capitalizing on that, not letting U.S. companies come in and take it over.”

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