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December 1, 2014

Can Canada & China Innovate Together?

This article is published in the 2014-2015 edition of the Canada-China Business Forum Magazine published by the Canada-China Business Council.

As the Chinese economy quickly evolves from low- to high-value production, Canada’s role in this evolution must also shift. While Canadian suppliers have played key roles in the past three decades of Chinese development, this relationship has been far too focused on the sale of natural resources and other raw materials. As China’s domestic innovation economy develops, and as the country’s middle class increasingly demands a better qCCBC Coveruality of life, innovative Canadian firms can build mutually and highly beneficial partnerships in China.

At the heart of this relationship is a shift away from natural resources. Over the period 2004-2013, Canadian exports to China tripled from C$6.7 billion to over C$20 billion. Some predict that China could surpass the U.S. as Canada’s top export market by 2035. Despite these impressive statistics and predictions, one cannot hide the fact that natural resources drove the growth of Canadian exports to China.

Moving forward, Canadian firms must look for ways to satisfy China’s growing demand for innovative services and technologies. The country’s burgeoning middle class is demanding products and services related to education, the environment, healthcare and other products and services to improve quality of life. This demand fits neatly with Canadian expertise and the strength of the Canadian brand.

This innovation related relationship is already taking shape. In late 2012, The Zhongguancun Development Group (ZDG), a venture capital fund owned by the Beijing Municipal Government, partnered with Invest Ottawa to create an Ottawa-based international incubation centre to help Canadian high-tech firms enter the Chinese market. ZDG contributed C$10 million towards the project and the centre now houses four companies specializing in life sciences.  ZDG’s Ottawa operation is its  second foray in North America after Silicon Valley. However, this funding is a tiny sliver of the total C$1.5 billion ZDG hopes to invest internationally in search of startups geared towards the Chinese market.

The challenge facing decision-makers in Canada is finding a delicate balance between the desire to attract international capital and the desire to keep the jobs that accompany innovation and invention at home. Although ZDG’s investment is not premised on tech or job transfers to China, implicit in such deals is the likelihood that businesses will seek to move closer to their long-term customers.

However, this fear is misplaced. Interviews conducted by the Centre for Digital Entrepreneurship and Economic Performance (DEEP Centre) with entrepreneurs at the ZDG-Invest Ottawa incubation centre noted that the success of the Sino-Canadian innovation relationship would be based on their ability to leverage the Canadian brand, especially in terms of  quality and safety. “Build here, sell there.”

Moreover, as these firms use foreign capital as springboards into new markets, the experience and expertise they develop will lend itself to an international orientation necessary to continue the company’s growth. Fear surrounding intellectual property (IP) rights will remain for many Canadian companies. Negotiation will be necessary to ensure the reciprocal IP protection in both jurisdictions. A good Chinese partner can help reduce transaction costs and risks.

The ZDG-Invest Ottawa example highlights a potential path for the expansion of the Sino-Canadian innovation relationship. We should not limit our scope to just a one-way relationship. As President Xi Jinping noted in a March 2013 speech, “boosting innovation-powered development [is essential] to make China an economic heavyweight.” Doing so has largely focused on upgrading the country’s indigenous innovation program, known as zizhu chuangxin. This program sees billions invested in a range of strategic industries, including next-generation information technology, biotech, renewable energy, materials and advanced manufacturing.

These investments are part of China’s increasing prominence across a series of innovation-related metrics. For example, the number of engineering PhD’s in China has tripled since 2000, and the number of scientific researchers has grown by an average 12 per cent per year.  Chinese research in peer-reviewed journals has similarly grown by 16 per cent per year since 1995, with the Chinese share of published articles now reaching 9 per cent. China’s share of high-value triadic patents has experienced similar growth, increasing more than seven-fold between 2000 and 2007. And while the quality and consistency of this work remains a work in progress, it is clear that China is an increasing source of invention and innovation.

Exposure to and engagement with these ideas and the Chinese entities behind them are to moving Canadian firms forward. While linguistic and investment barriers remain, the Canadian government needs to do more to ensure a soft landing for Canadian companies, especially small and medium-sized enterprises. Reciprocity on investment and industrial partnerships must be a priority for federal trade negotiators.

If Canada can establish itself as a key partner in this new phase of Chinese development, both as a supplier of ideas and as a partner in the development of Chinese ones, both countries stand to benefit.

Doing so will require negotiated access that satisfies the concerns of Canadians and Canadian companies in the areas of reciprocity of national treatment, the protection of intellectual property and a transparent arbitration process. Such negotiations will not be easy, and they must be transparent in order to build the confidence of capital and labour on both sides.

Ultimately, a window is opening for a new type of economic relationship between China and Canada. This new relationship moves behind the simple exchange of natural resources and goods, and moves towards real partnerships that address the significant challenges that each partner faces. In Canada, that means using our technological prowess and innovation to create jobs to satisfy world demand.  In China, this means resolving key environmental, health and social challenges by tapping into Canadian innovation and ideas. A more mature relationship will take time to develop, and will  require a concerted effort to work together to find the rights solutions to success.

Dan Herman is the co-founder of the Centre for Digital Entrepreneurship and Economic Performance (www.deepcentre.com), a Waterl00-based innovation and economic policy think-tank. Follow him on Twitter @danherman

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