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A drop in an empty pond: Canadian public policy towards venture capital

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Abstract

This paper presents evidence about the shortfall of venture capital in Canada relative to comparable regions in the United States, despite massive government spending on governmental venture capital programs in Canada. The Government of Canada committed $500 million towards venture capital in 2013 through the Venture Capital Action Plan. The Government of Ontario committed $29 million to the Investment Accelerator Fund in 2007, $105 million to the Ontario Venture Capital Fund in 2008, and up to $50 million per year through the Ontario Emerging Technologies Fund in 2009. We present data that shows Ontario’s expenditures would have to be higher by $4.4 billion per year to achieve levels of VC/GDP that are comparable to Massachusetts. Similarly, federal expenditures would have to be higher by $1.6 billion per year higher to achieve levels of VC/GDP that are comparable to the US. We attribute the shortfall in Canadian venture capital to two major policy failures. First, there is a persistent government venture capital support program that crowds out private investment. Second, other government programs favor established businesses. In Ontario in 2012, $4.1 billion in expenditures were allocated towards businesses, and the vast majority of these expenses are targeted towards the largest and oldest companies and the companies with the greatest revenues. We discuss the impact of such policies on the venture capital ecosystem in Canada.

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Fig. 1
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Fig. 3

Source: Cumming et al. (2014)

Fig. 4

Source: Cumming et al. (2014)

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Notes

  1. We owe thanks to Richard Remilard and his remarks at the CD Howe Institute, 2014, for making this helpful observation.

  2. Source: Thompson Reuters. http://thomsonreuters.com/en/products-services/financial/venture-capital-and-private-equity/private-equity-venture-capital.html.

  3. The calculation is as follows. For 2011, VC/GDP in the US was 0.19%. Canadian GDP in 2011 was $1,770,014 (in millions) and VC investment was $1546 (in millions). So, 0.19 × 1,770,014 − 1546 = $1835.63 million is the extra amount needed in Canada to make Canada’s VC/GDP comparable to that of the US. Calculations for the other years are similar. The $1.61 billion represents the average over these years.

  4. We faced some limitations in extending data on provincial and federal incorporations, which were estimated for some years of our sample period.

  5. This Cumming et al. (2014) report was completely confidential, and the report was buried by the Government of Ontario in 2014. The report was made public by the National Post (a national Canadian newspaper) in early 2016, 2 years after it was buried by the Government of Ontario, shortly after the authors of this paper informed an economist at the CD Howe Institute of the existence of the Cumming, Daziel, and Wolfe’s report, and informed same person at the CD Howe that Jeffrey MacIntosh successfully made a Freedom of Information (FOI) request to obtain the report and make use of its contents. We understand from the CD Howe Institute that the connection and timing of the information passed along from the authors to the CD Howe Institute and the reporting of this information in the National Post was merely a surprising and very unusual coincidence, as no reporter had every noticed the report from its delivery in 2014 until 2016, until we confidentially passed along information about the report’s existence and FOI request to said person at the CD Howe Institute. Even more of a coincidence, the National Post reported the same type of information and in the same format that we report in Figs. 3 and 4 of this paper.

  6. Business Development Bank of Canada, “SMEs at a Glance” (August 2013), page 2, http://www.bdc.ca/Documents/sbw2013/docs/SMEsAtAGlance_summer_2013_EN.pdf.

  7. Cumming and MacIntosh (2006); Richard Remilard, supra, note 2.

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Authors and Affiliations

  1. York University-Schulich School of Business, 4700 Keele Street, Toronto, ON, M3J 1P3, Canada

    Douglas Cumming & Sofia Johan

  2. Faculty of Law, University of Toronto, 78 Queen’s Park, Toronto, M5S 2C5, Canada

    Jeffrey G. MacIntosh

Authors
  1. Douglas Cumming
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  2. Sofia Johan
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  3. Jeffrey G. MacIntosh
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Corresponding author

Correspondence to Sofia Johan.

Additional information

We owe special thanks to the participants at CIRANO (Montreal, October 2016) for helpful suggestions. Douglas Cumming and Sofia Johan are indebted to the Social Sciences and Research Humanities Council of Canada (SSHRC) for financial support.

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Cumming, D., Johan, S. & MacIntosh, J.G. A drop in an empty pond: Canadian public policy towards venture capital. Econ Polit Ind 44, 103–117 (2017). https://doi.org/10.1007/s40812-016-0063-4

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