Canada has a serious innovation problem, despite Canadians exhibiting “world-leading levels of entrepreneurial ambition.” The Conference Board of Canada gave Canada a “C” rating on its 2021 Innovation Report Card, stating: “Canada continues to exhibit relatively weak innovation performance.” So, what’s killing Canadian innovation?
This is a much-debated question. The explanations often paint meddling, over-burdensome government regulation as a prime suspect. Regulators should stand clear of market forces.
Others claim that Canadians are inherently complacent and risk-averse, characteristically destined to lag the world on innovation. But what if the opposite is true? That Canadian innovation is alive and well, but Canadian regulators – tasked with safeguarding fair markets – have reveled in complacency?
Our nation has long struggled with below-average entrepreneurship rates, low business entry and exit rates, stifled innovation and high consumer prices. A key cause of these trends is industry concentration from decades of unchallenged merger waves. A nation of oligopolies, many Canadian sectors are now dominated by only a handful of players – from banks and telecoms to funeral services and self-storage. Unfortunately, industry concentration is only worsening.
Canada careened out of 2021 on a historic merger boom, with a record $359 billion worth of announced deals and more than 3,857 deals (the busiest year on record). And the boom is expected to continue.
“Despite the heightened uncertainties that some might point to for 2022, we expect the M&A train to keep on rolling,” Colin Walker, managing director of Crosbie & Company Inc., an independent Toronto-based investment bank, said in a report.
Canada’s investments in innovation need to be bolder
Prior to this, a 2019 study demonstrated that Canadian industries have become increasingly concentrated in recent decades. The number of non-financial firms listed on the TSX has dropped by 40 per cent since a 2008 peak, while the remaining firms “swelled in size.” And companies in highly concentrated product markets generated higher than average profit margins (which can be a sign of the unrestricted power to raise prices on consumers). These trends were attributed to weak antitrust (competition policy) legislation and enforcement, and higher barriers to entry for startups.
Other evidence corroborates these findings. Canada’s top companies are aging dinosaurs. The median age of the top 15 largest publicly traded Canadian firms is 122 years versus 45 years in the United States. The median founding year for Canada’s largest firms is 1899 – before the turn of the 20th century. And, according to an OECD report, Canada has the highest number of older firms among 15 other developed countries.
Older firms tend to rest on their laurels, having little incentive to innovate. They spend less on research and development, and instead acquire growth through mergers or acquisitions and expand margins by raising prices on consumers. According to the Conference Board: “Until recently, Canadian businesses have had little competition…this has meant that they haven’t had to innovate as much as businesses in other countries to be profitable.”
Meanwhile, a growing chorus of global voices recognizes the negative effects of concentrated markets on economic productivity and innovation. But Canada currently lags other developed country regulators in aggressively tackling corporate concentration through competition policy.
The OECD states that “regulatory protection of incumbents is high by international standards and arises primarily from an above-average use of antitrust exemptions.” Or, in the words of Anthony Lacavera, who founded WIND Mobile to disrupt the long-dominant telecommunications giants in Canada: “Oligopoly players are fat and happy.”
Thankfully, a robust dialogue is resurfacing on the role of Canadian competition policy in spurring economic vitality. François-Philippe Champagne, the minister of innovation, science and industry, recently announced a review of Canada’s Competition Act to better align it with 21st century market realities. This is something Competition Bureau Commissioner Matthew Boswell has also championed.
But others seek to maintain a status quo approach to interpreting and enforcing competition law. They would rather continue a competition policy agenda that is failing in its most basic goals — the bureau has successfully blocked only one merger in its entire history. Adhering to the status quo is a mistake, and out of alignment with current global precedent. This approach will only further hamper Canadian entrepreneurs and our country’s innovation prospects.
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In the U.S., the Department of Justice Antitrust Division and the Federal Trade Commission have launched a concerted attack on concentrated corporate power and its abuses. It’s something that has not been seen in decades. This historic effort has received significant pushback from big corporate-friendly groups, like the U.S. Chamber of Commerce, which paints competition law enforcement, which protects consumers and independent businesses, as a regulatory “abuse of power.”
Groups like the chamber claim to represent business interests, but concentration increasingly harms entrepreneurs and start-ups, which have a nearly Herculean task of trying to compete with highly entrenched incumbent players. Despite claims of protecting “free enterprise, competitiveness, and economic growth,” the protection of dominant players can have the opposite effect.
Access to capital is typically seen as the predominant issue facing growing businesses – lack of funding can prevent the invention of new products and services and their eventual commercialization. With this understanding, the Canadian government – through its Innovation Superclusters and the Strategic Innovation Fund – has pumped over $2 billion into entrepreneurial ecosystems and businesses to drive innovation.
However, without access to fair markets in which to compete, innovation spending efforts are akin to seeding new trees in a mature redwood forest – ineffective. Federal innovation spending will only work when it is complemented with competition policy enforcement that levels the playing field for new businesses.
Écosystèmes d’innovation et supergrappes au Canada
In the absence of regulatory challenges to dominant players, firms can use their market power to act as gatekeepers and de facto private regulators in markets – setting terms, prices and erecting barriers between smaller businesses and their customers. Whether it is Apple setting terms for app developers in the App Store, restaurant owners forced to negotiate with predatory delivery apps like Grubhub and Uber Eats, or Live Nation/Ticketmaster controlling how musicians reach fans, the largest firms increasingly preclude smaller businesses from accessing markets on fair and equal terms.
Access to Markets – an initiative of the American Economic Liberties Project – speaks regularly with business owners across a range of diverse industries. This includes brewing, farming, journalism, grocery, franchising, e-commerce, entertainment, technology, and many others. Business owners describe the crushing barriers they face due to the anticompetitive tactics of dominant players. Many are afraid to speak publicly, for fear of retaliation from the largest players – some of whom, like Amazon, are critical to conducting their business.
Canadian regulators are, thankfully, taking notice of the harmful effects of concentrated markets on entrepreneurs. In 2020, the Competition Bureau launched an investigation into Amazon’s business practices and how they may harm Canadian businesses. This is an important step in the right direction.
The Canadian Competition Act has provisions against unfair contract terms or abuses of dominance that aim to protect small- and medium-sized businesses, but more enforcement of these – and other competition laws – is critical. A full-scale review of Canada’s Competition Act, and its suitability to modern market challenges, is also critical.
What’s killing Canadian innovation? A regulatory regime that has failed to create the fair market conditions for them to thrive.
If Canada wants a robust entrepreneurial ecosystem, increased innovation, and a competitive global economy, tackling dominant market gatekeepers is non-negotiable.
This article is part of the Canada’s Competition Law is Overdue for an Overhaul special feature series.