Cleantech and the Competitive Advantage of Nations

o borrow from Hillary Clinton’s famous line, “It takes a community to raise an innovation.” Innovation requires a coming together of people with entrepreneurial, financial and public policy talent, a shared vison for the future, and the means and desire to overcome the many and often seemingly intractable hurdles in the path toward realizing that vision.

The scope of these challenges, and the need for innovation in overcoming them, is immense. For example, consider clean technology alone: How might we rethink the way roads are made in order to halve the greenhouse gas emissions from materials used to build them, and from the cars that will drive on them? Or, what if we envision transportation in a new way altogether, like the California-based company Hyperloop is doing, with its proposal to transport people and freight in pod-like vehicles, in near-vacuum tubes, faster than an airplane? Or, given that 200,000 new humans are added to the planet each day, how do we tackle challenges related to climate, water, biodiversity, food supply and geography? There is a lot to do.

Communities that envision solutions to challenges such as these create future competitive advantage. Canada certainly has the desire and the potential to solve these challenges. To secure our competitive advantage we need to translate this potential into commercially viable solutions with the potential to scale globally.

For the context of this discussion, it is important to distinguish invention from innovation. Invention is the traditional realm of research and development and pre-commercial demonstration. Innovation is the commercialization of these ideas: the point when companies invest in technology scale-up, and when revenue becomes profit.

Economist Joseph Schumpeter (1950) believed that the driving force behind capitalism is innovation and that the agents of innovation are entrepreneurs. Entrepreneurs drive innovation through creative disruption.

But Schumpeter had a distinct view of entrepreneurs, distinguishing between “replicative” entrepreneurs, who set up small businesses similar to other small businesses, and “innovative” entrepreneurs, who introduce new ideas — based on good science and technology — that result in high-growth businesses that disrupt the status quo.

Innovative entrepreneurs might start small, but over time they learn how to out-compete their peers, and then outdistance them through organic growth or mergers and acquisitions, or both. In short, these entrepreneurs turn their small businesses into large ones through innovation and ambition (A.W. 2014). And their disruption of the status quo is essential in overcoming the challenges mentioned earlier.

Scarcity of Entrepreneurs

Regardless of the kind of entrepreneur, Canada’s problem is that there just aren’t enough of them. Worse, they are becoming an increasingly rare breed: entrepreneurship, and in particular first-time entrepreneurship, has been in decline for decades (Cao et al. 2015). So forget scale-ups: in Canada, we are not even maintaining our start-up performance. Given that entrepreneurs are necessary to meet the innovation challenge in general, and the cleantech challenge in particular, the situation is worrisome.

Potential Solutions Lie Both at Home and Abroad

One domestic sector that bucked the trend of entrepreneurial decline since 2000 (at least until the 2014 commodity price crash) is oil and gas. This sector has many examples of entrepreneurs, including both replicative and innovative types. While horizontal well and fracturing technologies hardly fall under the rubric of cleantech and have additional environmental externalities, these disruptive technologies were enthusiastically adopted in the production of shale oil and natural gas, even as other technologies languished — due to the time it takes to bring new technology into use, the risk of new technology reducing returns during introduction, “in-house” technical staff’s lack of understanding of the new technology and economics that do not warrant deployment on existing assets. In sectors as capital-intensive as this one, sometimes things just take time.¹

Of importance to the current problem, the sector’s innovative entrepreneurs have scale-up experience and big-capital financial know-how, two things that are lacking across the broader Canadian economy and, in particular, in cleantech. If their scale-up and big-capital know-how could be transferred from oil and gas to cleantech, the effects would be transformative.

Since this might be a long shot, Canada must also look to draw on potential solutions abroad. For this reason, organizations such as the Canadian Council of Innovators, whose membership is comprised of scale-up Canadian entrepreneurs focused on organic growth, have gotten behind public policy that encourages talented international entrepreneurs and professionals to come to Canada (Silcoff 2015). The idea is to accelerate the ability of all Canadian firms within leading, emerging and traditional sectors to not just create but to deploy innovation.
 

Cleantech and the Competitive Advantage of Nations

Forty years after Schumpeter, economist Michael Porter hypothesized in The Competitive Advantage of Nations (1990) that traditional factors of production (labour, land, natural resources, capital and infrastructure) were less relevant in a modern economy. Rather, a nation’s competitive advantage depended on its ability to innovate and upgrade. In particular, a strong scientific and intellectual property base was key. Moreover, Porter argued that the economic stock of these factors was less important than the rate and efficiency with which a nation creates, upgrades and deploys them in its leading industries.

A few years after the publication of The Competitive Advantage of Nations, Porter and Claas van der Linde (1995) argued that properly designed environmental standards could trigger innovations that reduced a firm’s costs while improving the environment. By extension, a firm that adopted such environmental technologies early would gain a first-mover advantage, through learning effects and intellectual property ownership, relative to those firms that waited. The “Porter Hypothesis,” as their theory became known, was and remains controversial (Ambec et al. 2013).

Regardless, in recent years, governments and firms have prioritized investment in clean technologies the world over, in particular in China, South Korea, the United States and Germany. In 2015, clean energy attracted a record US$329 billion² in global investment (Bloomberg New Energy Finance 2016). This compares to the US$810 billion invested in the oil and gas industry in the same year (International Energy Agency 2016).

Canada’s clean technology entrepreneurs are riding this wave, but they are falling behind their global peers. Canadian revenues for clean technologies were roughly CDN$12 billion in 2014, with a majority coming from energy-related technologies (Analytica Advisors 2016). The compound annual growth rate for clean technologies is 3.5 percent.³ Using current rates, one can project that revenues in the cleantech sector will be CDN$40 billion by 2050. By comparison, revenues for the oil and gas sector were CDN$150 billion in 2014 — a historic high (Tertzakian and Jakeman 2016). In 2016, revenues are estimated to be CDN$73 billion (ibid.). This country’s share of the global market for manufactured environmental goods fell by 41 percent between 2005 and 2013 (Analytica Advisors 2016).

The rest of the world is hotly pursuing such a competitive advantage in cleantech. Canada has the ability to lead, but time is limited.

Sustainable Development Technology Canada (SDTC) is an organization that works closely with Canada’s cleantech entrepreneurs. SDTC has invested close to CDN$1 billion on behalf of the Government of Canada in some 300 companies over 15 years. By comparison, all Canadian venture capital invested in clean technologies over this time period was about CDN$1.6 billion (Duruflé and Carbonneau 2016). Besides SDTC, other public sector cleantech funders include the federal Department of Innovation, Science and Economic Development, Natural Resources Canada, the National Research Council’s Industrial Research Assistance Program, Export Development Canada and the Business Development Bank of Canada (to name but a few). Historically, these bodies’ collective mandates have focused on research, development and pre-commercial technology demonstration — typically the precursor stage to the start-up of firms — but the picture is starting to change.

In recent years, public sector funders have begun to focus more on areas of considerable Canadian expertise and high-growth firms — in short, on areas of potential Canadian advantage.

Accordingly, SDTC and Cycle Capital, a venture capital firm, commissioned a study to gain a deeper understanding of areas where Canada might have the potential to lead. In particular, the study looked at the number of publications and patents by Canadians in key clean technology segments (ibid.).

The study shows that Canadians are very good at cleantech research. That is, the ratio of Canadian-authored scientific papers exceeds that which might be expected on a per capita basis relative to other global players, and has remained relatively stable year after year. From a research perspective, Canada is holding its own.

However, the transformation of that research into patents is very low compared to global peers, in particular China. The study shows that Chinese universities hold more than half of the worldwide patents in almost every cleantech segment — and in some segments, more than 90 percent.

Rates of industrial patent filing are similar to that of academic patents, with the most visible industrial players being foreign multinationals. Of the Canadian domestic leaders in patent filing, many are small companies, often developing pre-commercial technologies, and often years away from significant revenues and profitability.

Patents are, of course, not a perfect proxy for commercialization, but they are a necessary pre-condition, especially in a globalized world, where free trade is a priority for Canada. In such a world, ideas are the currency of economic growth and prosperity, and ideas can only be commercialized if they have strong intellectual property protections.

Why do Canadian researchers and companies not patent more often? The answer is unclear, but the experiences and views of the entrepreneurs that lead SDTC’s portfolio companies provide some clues.

Some clean technologies — for example, fuel cell catalysts and membrane chemistries for water treatment — are more typically protected by trade secrets and know-how rather than by patents. That being said, new cleantech entrepreneurs are sometimes unaware of, or unclear on, the benefits of and the need for strategic management of their intellectual property, be it patenting or freedom-to-operate analyses (which would indicate the potential for infringement of existing patents). They may also not feel they have the cash, either for filing a patent in multiple countries or to enforce their patent rights if challenged.

The good news is that there is an increasing level of awareness among entrepreneurs of the importance of intellectual property management, in no small part because of the efforts of the Canadian Intellectual Property Office (CIPO). In 2011, CIPO initiated the Green Technology Initiative, which accelerates the processing of cleantech patent applications.⁴ Nonetheless, more needs to be done, given the intense focus of other nations in this area.

It Takes a Community

Canada, in cleantech and many others sectors, has a strong base of expertise, experience and vision. Canada has a strong scientific and technology foundation. These resources are the building blocks on which to build the competitive advantage for a nation focused on innovation.

The next step is to focus on commercialization and firm growth, and to look to the future when the community will be characterized by:

• an expanding rather than a dwindling base of innovative entrepreneurs, with more of these shifting into the cleantech sector in particular;
• a vibrant business environment that supports start-up companies;
• an established set of mid-sized and large independent and multinational anchor companies that are organically growing, developing their own innovations and also buying up foreign and domestic start-ups to expand their technology portfolios; and
• a financial sector that has the products to finance every stage of the firm.

Canadians must look to a future where solving our most intractable challenges has become routine. To get there, cleantech will need these many constituents to form the community necessary for innovation: a community that looks beyond the short term, that sees the future as something different from the status quo and that has the ambition and the expertise to make it so.