Economic prosperity requires constant innovation.wildpixel/iStockPhoto / Getty Images
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It’s no surprise that the deep-pocketed U.S.-based big technology firms are at the forefront of bleeding-edge development in artificial intelligence (AI). What is a surprise to many is that Canada was once a leader in AI development, although it has since squandered that position. Canada had almost all the ingredients to be the global leader in the most dynamic technology of the current era except for one key factor: the required capital.
Case in point: San Francisco-based OpenAI, the developer of ChatGPT, recently raised more than US$10-billion from tech giant Microsoft Corp. Yet, much of OpenAI’s technology is based on pioneering work developed by University of Alberta professor Richard Sutton and University of Toronto professor Geoffrey Hinton, who mentored OpenAI’s co-founder Ilya Sutskever.
While Mr. Sutskever decamped for Silicon Valley, the AI researchers who have stayed in Canada have been forced to seek foreign capital. In fact, Mr. Sutton recently launched a new non-profit AI lab, Openmind Research Institute, with $4.8-million in funding from China-based technology giant Huawei Technologies Co. Ltd.
According to the Organization for Economic Co-operation and Development, Canada has the lowest forecast real gross domestic product (GDP) growth rate per capita compared with its peers and ranks in the middle of the pack for research and development as a proportion of GDP. This country has 100,000 fewer entrepreneurs than it did 20 years ago even though the population has grown by more than 10 million people over the same period.
Canada doesn’t have a talent, effort or ingenuity problem. It has an investment problem. One of the U.S.’s fundamental economic competitive advantages is its deep pool of capital earmarked for technology innovators. The U.S. venture capital industry funnels hundreds of billions of dollars into startups every year. In contrast, Canada’s venture capital industry is basically non-existent.
In addition, the “Magnificent Seven” tech giants that dominate the U.S. equity markets finance startups to the tune of billions of dollars a year. Although Canada has nothing like the Magnificent Seven, it does have the “Maple 8″ – the country’s eight largest pension plans, which control more than $2-trillion of capital. Their sheer size and high level of sophistication command respect globally.
Here’s the kicker: only one member of the Maple 8, the Caisse de dépôt et placement du Québec (CDPQ), has an explicit mandate to invest in the local economy. Most of the other comparable pension funds aim to send Canadians’ capital offshore, financing the growth of international economies.
Fortunately, most of the Maple 8 are beginning to take environment, social, and governance (ESG) or impact investing factors into account within their investment mandates. While environmental and governance factors are readily discerned, social impact investing can be up for debate.
Domestic investment is paramount
Arguably, there’s no greater social impact for a domestic pension fund than to invest in the economy in which its contributors and beneficiaries reside. Domestic investment is the main ingredient needed to resolve the country’s current economic woes.
For example, if the Maple 8 allocated just 0.05 per cent a year of their $2-trillion in assets under management, $1-billion would fund Canadian innovation each year. Assuming a $1-million investment into each high-potential domestic startup would mean the establishment of 1,000 highly innovative new Canadian ventures annually.
Under this model, Canada has a chance to establish the next Apple Inc., Microsoft, or OpenAI and address its pesky real GDP growth per capita problem.
While the main consideration regarding an investment should be the prospective risk-adjusted return, it should not be the only determining factor. How money is made in investing is becoming increasingly important. Hence, there’s an increased focus on ESG factors within asset allocation frameworks not only to help make the world a better place but to mitigate long-term risks related to elements outside of traditional financial considerations.
Contrary to popular opinion, a mandate to invest in the domestic economy doesn’t have to affect pension fund performance negatively. The proof is in the pudding. Quebec City-based CDPQ, the only member of the Maple 8 that’s mandated to invest in the local economy, has long-term investment results comparable to those of its peers.
Although Canada lost its first-mover advantage in multi-trillion-dollar growth industries such as AI, all is not lost. This country has the opportunity to become the most innovative and prosperous nation in the world – and the large pension funds hold the key to unlocking this potential for innovation and vast economic growth.
To that end, Canada’s Maple 8 should utilize ESG and social impact investing mandates to guide increased investment into the domestic economy with the goal of establishing this country as a global technology leader.
If they don’t, Canada further risks being cast as the perpetual economic second fiddle to the U.S., viewed solely as a nation of hewers of wood and drawers of water.
Julian Klymochko is founder and chief executive officer of Accelerate Financial Technologies Inc. in Calgary.
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