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The CATA Press Release RE Their 116 Campaign: A Just Cause Lost in a Sea of Self-Serving Rhetoric

Guest post by: Jon Hansen

Article Overview: Canada's venture capital industry is in trouble. That industry is seriously underfunded, while Canada's emerging technology and life sciences companies are so capital-starved they risk being uncompetitive in the North American market. At the same time, much needed and sought after US capital that could richly fund that industry and those companies is being blocked by Canada's cross-border tax laws.

The CATA Press Release RE Their 116 Campaign: A Just Cause Lost in a Sea of Self-Serving Rhetoric

Canada's venture capital industry is in trouble. That industry is seriously underfunded, while Canada's emerging technology and life sciences companies are so capital-starved they risk being uncompetitive in the North American market. At the same time, much needed and sought after US capital that could richly fund that industry and those companies is being blocked by Canada's cross-border tax laws.



In just how much trouble is Canada's venture world? Given the size of Canada's GDP and population relative to those of the US, Canadian venture capital firms and Canadian venture backed companies should be receiving approximately 10% of the total funds invested in those entities in the U.S. In fact, in 2008 Canada's venture capital firms received only approximately 4% of all funds invested in US venture capital firms, and Canada's venture-backed companies received only approximately 4.5% of all funds invested in US venture-backed companies. These are devastating shortfalls.



from the April 16th, 2009 article by Stephen A. Hurwitz titled "Reforming Section 116: Key to Opening Canadian Borders to Foreign Venture Capital"

In terms of the above referenced article, it is clear that government policy can inadvertently undermine the economic interests of the country it is meant to serve. A sentiment that was echoed in a recent Canadian Advanced Technology Alliance "CATA" press release which lamented the fact that "We are imperiling our Innovation future and risk squandering investments in R&D and intellectual capital, all because of a failure to put a simple amendment in place, an amendment consistent with the practices of our trading partners."

Unfortunately the problem with the CATA press release is that while the cause it is advocating may be just, such statements rarely extend beyond the limiting confines of perceived self-interest and therefore fail to gain the much needed global perspective that creates the points of context which are necessary to achieve meaningful traction beyond its own membership. In short, the CATA press release represents a form of myopia that divides and weakens stakeholder interests versus engaging and challenging key policy-makers to take the desired action.

At the end of September I wrote a series of articles related to the Buy American policy's impact on the Canadian economy leading up to the September 30th PI Window on Business special in which I had the opportunity to interview Canada's Trade MinisterStockwell Day,

In a number of the articles, I referenced the Clark and Fourastie "three-sector hypothesis of industry" (which is now four with the advent of high tech and R&D industries) as it relates to the development of a wealthy nation's economy. In one article, I even provided statistics which showed that the economies of the UK and India are potentially positioning these countries as future global economic titans.

Initially developed by Colin Clark and Jean Fourastie, this general pattern of economic development identifies four sectors through which a wealthy nation must progress to maintain its economic position starting with the extraction of raw materials (Primary), manufacturing (Secondary), services (Tertiary) and later knowledge-based (Quaternary). Effectively managing a nation's progression through each sector is critical to what Fourastie referenced in his 1949 publication "The Great Hope of the Twentieth Century" as "the increase in quality of life, social security, blossoming of education and culture, higher level of qualifications, humanization of work, and avoidance of unemployment."

While similarities with the tertiary sector are often made as they are either service-based or oriented, knowledge-based (re high tech) industries are incredibly important.

Let's look at the United Kingdom for example. The Tertiary and Quaternary sectors represents the largest part of their economy, employing 76% of their entire workforce.

With India, the indigenous software engineering talent has made that country the off shoring destination of American high-tech firms, each of which have committed to investing $1 billion into its economy. The result of this boom is that India has seen double-digit wage growth for much of the 2000s. (Note: some may argue that a key part of this growth is due to the fact that wages were previously low and that for all intents and purposes had nowhere to go but up. This of course is an interesting discussion for another day.)

While there are of course other factors and obstacles in terms of the materialization of a "titan" reality, such as the UKs bloated and largely ineffective health care system – which is also the largest government funded health care system in the world, it nonetheless bodes well for that nation's future economy. In short, both the UK and India are pointed in the right direction.

The questions to which this leads are many including how did the UK and India progress to the Tertiary and Quaternary sectors, while the economies of Canada and the United States have to a certain degree remained dependent on the Primary and Secondary sectors?

Even though there are no easy answers, at the very least the four-sector hypothesis of industry provides us with the basis for asking the right questions as it creates the necessary points of reference or context to which I had previously referred. Specifically, these are the global reference points upon which associations such as CATA should start to focus, as it moves the discussion from the realms of perceived self-interest to one that encompasses the interests of the majority of Canadians, which is the economy as a whole.

Another track that may be worthwhile pursuing deals with a January 29th, 2009 CBC News story that I covered in my September 13th, 2009 post "Is Canada really rich in natural resources?: Calculating the effects of foreign ownership." Below is both an excerpt from the original CBC story, as well as my commentary:

In Toronto, CBC business reporter Jeannie Lee said there is a great deal at stake for Canada — and especially for southern Ontario, where Canada's steel industry is concentrated and where the global slump has already gutted the auto industry.



Canadian steel plants produced almost 16 million tonnes of steel in 2007, employing about 32,000 people and, by one estimate, supporting 140,000 indirect jobs, she said.



from "Buy American" rule in U.S. stimulus bill could cost Canada jobs, CBC News (January 29th, 2009)



Expanding on the closing theme from last week's post"Buy American: Establishing Artificial Boundaries or Removing Unwanted Barriers?," in which I introduced Colin Clark and Jean Fourastie's "three-sector hypothesis of industry," the January 29th CBC News article is interesting for a number of reasons.



While there is no doubt that the steel industry is of course part of our indigenous Primary Sector which cultivates our nation's abundance of natural resources, I must admit that I had not contemplated the impact that foreign ownership of these companies had on the overall issue of free trade and the Buy American Policy.



Perhaps this is an overly simplistic view, but if we do not own the companies who employ our workforce in this Primary Sector, is it not similar to renting versus owning your home?



For example, if I am renting I would of course take care of the daily living maintenance required as part of the general upkeep of the home. However, and for obvious reasons, I would not be inclined to invest a great deal in making home improvements such as adding a deck or installing new plumbing.



The point I am making is simply this, who owns what were once our companies, what are their interests and, at what point will those interests conflict with those of our national interests?



I am asking these questions for a number of reasons including the fact that I would like to know the answers. I am also interested in understanding if we have somehow mistakenly equated having indigenous resources as being the same thing as controlling them. If memory serves me correctly it wasn't that long ago that we took legal action against a US conglomerate who arbitrarily decided to pull up their Canadian stakes.

I have referenced the above article relative to today's post, as it appears that the Government supports foreign ownership of Canadian firms while seemingly making it more difficult for foreign investors to put money into Canadian-based high tech companies, (investments which would facilitate our economy's progress through to the desired Tertiary and Quaternary sectors)? This observation is particularly significant as there is a trend in which the Canadian jobs that were going to be saved through a foreign acquisition, are ultimately lost when the foreign parent decides that it is no longer economically viable to maintain a Canadian presence.

Conversely, and according to my November 20th interview with Brad Feld titled"Diminishing Prospects: How U.S. Policy is Undermining Entrepreneurial Vision," the entrepreneurial whiz and recognized investment thought leader believes that "the US should grant permanent residency to anyone who graduates from a qualified four year university with a computer science degree." The basis for his position is that "These are young, talented entrepreneurs that have come out of a three month program with amazingly interesting start-ups," that if successful will create "US based high tech jobs." While Feld contends that the US needs to establish a Founders Visa program to fill in the gap between the H-1B and EB-5 visas as a means of stemming the brain drain flowing out of the U.S., what is relevant to this discussion is his reference to the fact that high tech firms will create jobs. To draw the parallel with the Canadian "116 clearance certification" situation, is the fact that while high tech firms will create jobs, government policy supporting foreign ownership equals job loss. Job creation versus job loss is a simple concept that everyone can and will understand.

Once again, the CATA press release provides little evidence or contextual references to support its statements which makes it more of a rhetorical dissertation than a factual assessment based on merit and research. In this regard, it is a siloed approach that does little to advance a cause that is worthy of advancement.

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