If 2006 is remembered for anything, it may well be as the year corporate Canada’s psyche took an extraordinary collective beating. Indeed, every company(other than those protected by government policies, such as banks, media and telecommunications)seemed to be fair game for foreign buyouts.

It was a year in which the great hollowing-out debate took centre stage again, with outraged media and nationalists decrying the state of the corporate nation. The overall message was that Canada is losing its “membership card in the global economy.”

Not quite. Many of the acquired companies will retain their brand names, they’ll still employ thousands of Canadians, and they’ll still spend money on research. Besides, Canadian companies, big and small, are just as aggressive as any others when it comes to playing on a global scale. Toronto-based Goldcorp Inc. created the world’s third-biggest gold miner after a $9.5-billion deal with Nevada-based Glamis Gold Ltd. Uranium miner Denison Mines Corp., also of Toronto, in December announced it was taking over Aussie miner OmegaCorp Ltd. in a $154-million deal. Still, there’s no doubt many of the country’s titans of industry — Inco Ltd., Falconbridge Ltd., ATI Technologies Inc. and others — are no longer truly Canadian. By mid-August, 34 Canadian public companies had been taken over, representing roughly 3.9% of the country’s market value, according to Bloomberg data.

CBM magazine thumbnail“It’s reflective of the global economy, and it’s going to happen more and more,” says Evan Carmichael, an entrepreneur consultant and one-time teenage owner of biotech company Redasoft Corp. That trend, he argues, could be beneficial. Canada is more culturally diverse than the other western economic powers, with a huge and largely untapped wealth of immigrants from Asia who could provide easy access points for increasing trade with China and India. The question is who will be left standing to lead the charge, aside from BlackBerry-maker Research In Motion Ltd., itself the subject of constant takeover speculation?

Carmichael believes the next great Canadian company may very well come from the manufacturing sector. Huh? That sector has been ravaged lately by foreign competition, a strong dollar and weakening demand. “We have the manufacturing knowledge, and when you combine it with the latest innovations and the human capital to open international markets, our competitors in the G7 don’t have that kind of diversity,” Carmichael points out. He may be onto something. Manufacturing accounts for two million jobs and nearly 17% of Canada’s GDP. One-quarter of the 100 fastest-growing companies in Canada were manufacturers, according to Profit magazine, with a collective average five-year growth of 4,292%. That’s higher than software, higher than business services and, indeed, higher than all sectors.

That isn’t to say more high-tech innovation isn’t needed, says Avanindra Utukuri, chief technology officer at engineering services company Nytric Ltd., in Mississauga, Ont. Manufacturing commercial and industrial products such as robotics, medical instrumentation and defence electronics in Canada makes sense, says Utukuri, because such products require a high degree of knowledge and skill. Making consumer products here doesn’t, because there will always be someone who can make them to as high a standard, for cheaper. Utukuri says the future lies in technology-oriented fields such as biotech, gaming, telecommunications and consumer electronics, where the manufacturing might be done offshore but the intellectual capital remains at home.

Either way, Canada’s reliance on the U.S. as its sole major market, and natural resources as the main playing card, has to change. Easier said than done, of course. Change requires policy-makers to make tough decisions regarding taxation, R&D spending and — ultimately — betting on a few key sectors. Unfortunately, when it comes to figuring out where to put our resources, our leaders are a little too, well, Canadian. Or as David Naylor, president of the University of Toronto, puts it, “We sometimes build social structures with strong floors and low ceilings. We spread the furniture carefully into every corner of each room, not maximizing the opportunity for creative conversations. It makes for a nice tidy place, but it doesn’t exactly engender ambition or foster innovation.”

Yet, even if the next RIM-like success story doesn’t emerge, Canadians have shown they are just as innovative as anyone — on behalf of major multinationals. Of the top 100 corporate R&D spenders in Canada, 25 are subsidiaries of global multinationals, according to Research Infosource Inc. These include Pratt & Whitney Canada, ATI Technologies, IBM Canada Ltd. and Ericsson Canada Inc. Take ailing Nortel Networks Corp. out of the equation, and Canada’s top 100 R&D corporations spent 9.7% more on research in fiscal 2005 than the previous year. Subsidiary culture, it seems, isn’t as bad as nationalists would have us believe.

It all comes down to proving yourself, whether you’re a stand-alone company or a subsidiary, says Lionel Hurtubise, former chairman and CEO of Ericsson Canada and now chairman of three small tech companies. When Hurtubise joined Ericsson in 1986, the Swedish telecommunication behemoth’s Canadian division consisted of roughly 25 engineers in Montreal and 25 people in sales and support in Toronto. Eventually, it grew to more than 2,700 people. Now Montreal is a cornerstone of Ericsson’s worldwide R&D efforts, by developing small blocks of software that get integrated into the final product. “Bit by bit we started to prove ourselves,” recalls Hurtubise. “They started giving us more and more, and the snowball kept rolling on.” Many of Ericsson’s products have a made-in-Canada component, and that is lost on the average consumer.

That said, if you’re not exporting finished products, you’re still not seen as innovative. “You want a strong economy? You need to export,” says K. Y. Ho, the founder of graphics chip maker ATI Technologies. “You look at the economy of the four dragons and Japan, what do they do? They export. It was a good lesson. ATI’s business nature is to export, export, export.”

Today, ATI is also part of Advanced Micro Devices Inc, based in Sunnyvale, Calif. The microprocessor maker took it over in October in a US$5.4-billion acquisition. Yet nationalists need not worry too much about this so-called loss. ATI spent $451 million in R&D in fiscal 2005 and will continue to increase spending in the near future, says David Orton, former CEO and president of ATI and now executive vice-president of AMD’s visual and media businesses. “The fundamental reason we’re in Canada is that the cost structure of the talent is less than the Silicon Valley,” says Orton. And, says Orton, ATI as a subsidiary is able to offer a wider range of more interesting jobs, backed up by increased corporate dollars for R&D and branding. As Orton puts it, engineers want to work for a company that can market their ideas — and win.

Canada offers other advantages. Some point to the 20% federal tax credit for R&D(35% for small businesses), plus provincial top-ups as a positive. But the country’s generous approach to R&D subsidies, combined with relatively high taxes on the fruits of that activity, is misguided, according to right-wing think-tank C. D. Howe Institute. The report points out business R&D spending in 2004 was 1.07% of the GDP, well below the average 1.53% for OECD member countries. The solution, concludes C. D. Howe’s Kenneth McKenzie, is to fix Canada’s tax system as it affects overall productivity, not more subsidies.

It’s highly unlikely any such changes will happen in the short term, especially with a minority government that has banished the word “innovation” as being too Liberal. In the meantime, criticism for Canada’s perceived lack of innovation will be levelled at banks and venture capital firms, who have a reputation for being very cautious with their money.

Ultimately, the responsibility for creating the next great Canadian company lies with this country’s entrepreneurs. “If you’ve locked your keys in the car, you don’t give up on the car. You break a window. You call CAA. Whatever it is, you find a way to get back in to your car,” says Carmichael. “Being an entrepreneur, the door is rarely unlocked and wide open to you. You have to find other ways to get in.”

How to have lots of ideas, yet not make money

1874: Toronto medical electrician Henry Woodward invented a glass bulb that housed a filament and nitrogen, with help from Mathew Evans. Unfortunately, they didn’t have enough money to produce and sell the light bulbs, so they later sold the patent to an American named — you guessed it — Thomas Edison.

1876: Alexander Graham Bell transformed a harmonic telegraph device he was working on in Brantford, Ont., into the telephone.

1906: Quebecer Reginald Fessenden transmitted human voices and a recording of Handel’s Largo on Christmas Eve, thus modern radio was born. Unfortunately, the Canadian government backed Italian inventor Guglielmo Marconi. Fessenden was not recognized for his achievement and eventually lost his patent.

1913: Swedish-born immigrant Gideon Sundback, an electrical engineer, invented the modern zipper in 1913. Sundback eventually got a patent — four years later.

1927: Our man Reginald Fessenden also patented a television system, but rarely receives credit for giving the world the boob tube. After some legal wrangling with RCA, Fessenden later gave up many of his patents in exchange for a cash settlement.

1955: George Retzlaff at the CBC produced the first in-game replays during a Hockey Night in Canada broadcast by using a new processor to develop a kinescope(film)recording of a goal within 30 seconds.

1957: Steve Pasjack of Vancouver invented a 12-pack beer carton with a tuck-away handle.

1959: Lewis Urry, a chemical engineer, invented both the alkaline battery and lithium battery while working for the Eveready Battery Co. No Urry, no Energizer Bunny.

1964: Designer Louise Poirier invented the first WonderBra while working for a Canadian lingerie company, Canadelle. The bra apparently used 54 design elements to create its “plunge and push” effect.

1973: Mers Kutt and his team were the first to build a personal computer, the MCM/70, two years after Kutt established Micro Computer Machines in Toronto in 1971.

1999: Mike Lazaridis of Waterloo, Ont., is credited with inventing the BlackBerry wireless e-mail device. While ownership of the technology may still be in question, Research In Motion will always be known for its ability to successfully commercialize the now-ubiquitous workplace communications device.

By Andy Holloway

From the December 25-January 14, 2006 issue of Canadian Business Magazine