The public may be forgiven for shrugging their shoulders; after all, diversification has – theoretically – been a top priority since former Premier Peter Lougheed. The truth is, when it comes to diversification, we know what to do, but not how to do it.
The Premier’s Council on Economic Strategy (2011) recommended “. . . reducing our vulnerability by. . . applying knowledge in new ways to get greater value from all our natural and human resources. . .”
Luckily, the answer to getting greater value is staring us in the face: unleash the power of Alberta’s technology sector.
Like many other jurisdictions, the Alberta government spends hundreds of millions of dollars annually supporting technology related R&D (research and development). Total R&D funding in Alberta from all sources, federal, provincial and private sectors, is over $3 billion per annum, and is growing at a healthy pace.
The result, in areas of excellence like bio-refining, (space age) materials, nanotechnology, clean tech, biotechnology and health care, is very impressive. World-class innovation is being generated in Alberta and has been for many decades.
But R&D alone is not enough to diversify the economy. There is a need to build solid commercial enterprises that headquarter in Alberta, develop products, hire new staff and compete successfully in world markets.
The problem is that very few of the thousands of technology rich start-ups that exist today are able to escape the Starvation Zone and become successful commercial businesses in Alberta.
What is the Starvation Zone? It is the financial black hole that technology meets when it emerges from the laboratory. Having developed in a fully ‘oxygenated’ university environment, for example, the young technology entrepreneurs encounter a world where bank doors are closed and where alternative sources of capital like angel investor networks and venture capital are extremely limited.
Regrettably, as a result, a technology ‘success’ in Alberta most often involves the sale of a world-class technology to a U.S., Chinese, or South Korean venture firm at ‘pennies on the dollar’, and the loss of opportunity for Alberta.
So — what do we do to solve this problem?
It is now time to address the roots of the problem. Technology commercialization needs its own nutrient-rich commercial biosphere. This protective environment wants, first of all, the raw material of innovation, but it also needs access to vital nutrients including expertise in commercialization, production, global marketing, and sales and finance in order to create the conditions for life.
Clearly we have many of the ingredients for this biosphere already. Alberta is rich in innovation and has expertise of all sorts, including business development specialists, technology incubators and related support services. What it lacks is access to finance.
There are two major impediments that need to be overcome in order to ‘oxygenate’ Alberta’s technology environment, both of which can be influenced by government playing the role of catalyst.
One, strengthen the balance sheets of technology-rich start-ups by capitalizing their intangible assets(1). Doing so would formally recognize the latent value in their intellectual property; perhaps quantify leverage-able collateral. Secondly, reform Alberta’s capital markets so that we can connect the multiple billions of dollars in Albertan’s RRSP, TFSA, pension and mutual funds to local investment opportunities.
The first of these problems is a direct government problem; it’s a product of how we manage corporate tax in Canada. Junior companies are encouraged to write off their development expenses in order to reduce their tax burden and qualify for various government grants. So far so good, but the result is empty balance sheets, no assets (or collateral) and therefore no financial leverage. Solve this accounting problem (it is being done in other jurisdictions now) and Alberta technology has a fighting chance.
Capital market reforms are also something government could support. The Alberta government has two major financial institutions it influences: the ATBs (Alberta Treasury Branches) and Alberta’s credit unions. Both of which have millions of depositors and/or members. These institutions should be encouraged to establish ‘Alberta First’ mutual like funds that direct savings toward ‘investment ready’ Alberta technology companies.
None of these initiatives are particularly difficult, and with sufficient support they could ‘oxygenate’ the technology biosphere and help achieve the goal of diversifying Alberta’s economy.
Robert McGarvey is an economic historian and former managing director of Merlin Consulting, a London, U.K.-based consulting firm. Robert’s most recent book is Futuromics: A Guide to Thriving in Capitalism’s Third Wave.