Not Being #1 Is Not That Bad: Ottawa’s Technology Ecosystem, Toronto-Waterloo, and Connectedness

The Ottawa Citizen recently published a special series of articles looking at the strengths and weaknesses of Ottawa’s technology sector dubbed The IT Factor. One theme that appears to emerge is that while the Ottawa’s technology sector has had several success stories, there is a general lack of recognition and appreciation of its entrepreneurial ecosystem, nationally and globally. One of the articles stated that this is one of the biggest barriers the city faces when trying to compete against other Canadian ecosystems to get onto the world stage. Autonomous or self-drive vehicle R&D has been identified as a key sector which has strong potential for leading Ottawa’s technology sector in the future and emergence as a Centre of Excellence in this next wave of technological change. As stated in the IT Factor series, Ottawa’s tech sector has long struggled to get out from under the shadow of the public service as well as its tech neighbours, Montreal and Toronto. However, neither of those two cities have a pronounced reputation for autonomous-vehicle innovation, which means Ottawa could readily take up the cause.

Has Ottawa Been Thrown Under the Autonomous Bus?

Ottawa’s Autonomous Vehicle (AV) technology cluster includes several key anchor companies. BlackBerry QNX, for example, established its AV Innovation Centre at its Kanata headquarters. QNX (previously Quantum Software Systems) was started by two University of Waterloo, who set up their new company in Kanata in 1980. QNX was acquired by Blackberry in 2010. Blackberry was also started by a University of Waterloo engineering student in 1984 as Research in Motion Ltd. Blackberry’s headquarters remain in Waterloo. Blackberry QNX has a 60% market share in telematics and infotainment software and has a technology partnership with Ford Motor Company which is also establishing a presence in Kanata.

Notwithstanding the outstanding elements comprising Ottawa’s AV cluster, the local sector has been shut out from recent federal and provincial innovation announcements. First, as part of its $950 million initiative, Innovation, Science and Economic Development (ISED) Canada announced a short list of 9 proposals which will ultimately determine the final four applicants. The 2 proposals from Ottawa led consortiums did make the shortlist. Somewhat ironically, the Minister of ISED first announced the program in May 2017 at Blackberry QNX’ Innovation Centre in Kanata.
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The ISED provides only limited information on the proposals but there is an unknown number Ottawa based partners in at least one of the submissions. It is also uncertain if any of the 9 shortlisted applicants include automation vehicle innovation specifically. One proposal does include the broader technology field of artificial intelligence headed by Quebec City based Optel Group. Another submission led by Montreal based CAE Inc. focusses on innovation and application of digital technologies in aerospace, ground transportation, and advanced manufacturing.

The second setback is the announcement of the Ontario Government this month that it was investing $80 million in an Autonomous Vehicle Innovation Network centred in Stratford. Stratford is located about 45 kms. west of Waterloo. The Province also plans to establish Regional Technology Development Sites throughout Ontario. Hopefully, Ottawa will be a no-brainer for one of the locations.

The purpose of my blog is not to focus on the AV ecosystem in Ottawa. Instead, I use the AV cluster to illustrate the competitive challenges Ottawa’s technology community faces and in particular, from the expanding strength of the Toronto-Waterloo Innovation Corridor.

Getting Passed by the Toronto-Waterloo Technology Supercluster

According to a report published by in December 2016 by McKinsey & Company, the Toronto-Waterloo Innovation Corridor has the potential global technology supercluster but warns that significant new public and private sector investments and interventions are needed to achieve and sustain this international ranking. According to the report, there are currently over 205,000 technology workers at 15,000 companies in the Corridor, second only to Silicon Valley in North America (the Corridor actually covers the broader geographic Greater Toronto Region including cities like Hamilton). The Corridor has recently attracted significant new investments from leading global technology firms such as Cisco’s $100 million innovation hub. A Toronto based innovation team headed by Communitech Corporation and MaRS Discovery District has also been shortlisted as a potential Innovation Supercluster focusing on the adaptation of technology to the manufacturing sector.

The Province of Ontario has also contributed to the growth of the Innovation Corridor. McKinsey identifies the Province’s efforts to reshape education to meet future technology-related job requirements as one of the growth factors. However, there are other location-specific Provincial infrastructure projects that have strengthened the linkages between communities within the Corridor such as expanding the GO transit service to Waterloo.

Ottawa’s technology sector and innovation ecosystem once stood at the top of the bragging pedestal during its boom years of the 1980s and 1990s as being Canada’s Silicon Valley North. However, its reputation and recognition as Canada’s leading high-tech growth centre have diminished somewhat since the new millennium. The Ottawa Citizen’s IT series included a feature on the challenges facing the local technology ecosystem such as prospective entrepreneurs leaving the community to larger cities like Toronto where there are more opportunities and the need for stronger partnerships and collaboration between local public and private sector stakeholders. Spigel argued that the collapse of the technology bubble in 2001 contributed to the breakdown of Ottawa’s entrepreneurial ecosystem and culture whereby where it no longer sees “high-growth, high-risk entrepreneurship as the norm and now encourages low-risk start-up practices”. According to the Canadian Venture Capital & Private Equity Association, there were 24 venture-capital deals in Ottawa in 2016 totaling $109 million in investment. In comparison, Waterloo–Guelph had 30 deals worth $368 million, and Toronto had 139 deals valued at $946 million. Entrepreneur and venture capitalist, Jean-François Gagné has prepared a detailed Artificial Intelligence (AI) ecosystem map for Canada showing the location of over 500 startup and enterprise firms. Toronto, Vancouver, Montreal, Kitchener-Waterloo and Edmonton represent the primary clusters of AI firms in Canada –Ottawa does not show up on the map unless it was delegated to the “Other” category.

Startup Genome publishes a report which rates and ranks leading start-up ecosystems in global cities based on several data sources providing benchmarking data. The rankings are derived across several dimensions including: start-up output (total activity of entrepreneurship), funding or risk capital, the performance of start-ups, entrepreneurial mindset, trendsetting or the speed of adoption of new technologies, management processes and business models, network support and talent.

The Startup Genome report focusses only on start-up ecosystems. The 2016 McKinsey report provides an estimate of the total equity value of technology companies from Compass. In this case, the Toronto-Waterloo Corridor stands out significantly larger at $14 billion plus compared to Vancouver at $6 billion and Montreal with $5 billion. The equity value for Silicon Valley is estimated to be $411 billion.

There are a few conclusions that can come out from the above overview.

Ottawa’s Ecosystem and Agglomeration Effects Can’t Match Toronto-Waterloo

1. Toronto-Waterloo has emerged as Canada’s premier competitive global technology mega-region. Start-ups, skilled labour and venture capital have increasingly gravitated to the region. Ottawa, on the other hand, cannot match the depth and diversity of Toronto-Waterloo’s in terms of its ecosystem. Also, whereas cities like Waterloo have become integrated into a complex, interconnected urban mega-region centred on Toronto, Ottawa (including Gatineau) is effectively a single urban node in Eastern Ontario which is characterized by smaller sized communities and a large rural area. As a result, the advantages associated with agglomeration effects are much stronger in the Toronto centred mega-region compared to Ottawa. This further limits the scale to which Ottawa can become a global technology centre.

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The pull of Toronto-Waterloo is further reinforced by Provincial policies and investments in infrastructure aimed at supporting technology growth and startups. Some examples have already been referenced above – the extension of the GO transit system to Waterloo and the creation of the AV Innovation Network in Stratford. The Liberal government also recently announced plans to build a high speed rail connection between Toronto and London by 2025 eventually ending up at Windsor (it is debatable if this proposal will survive the election defeat of the Ontario Liberal Party). The project has been described as being “transformational for the region in terms of becoming a global, technology super-cluster”.

Being the Nation’s Capital may also work against Ottawa tech companies when political decisions on where investments in projects like the Innovation Superclusters are made. Local firms already benefit from having access to federal government resources like procurement and research laboratories while other regions in Canada are eager to get their share of technology successes.

But That Doesn’t Mean That Ottawa Loses

2. Notwithstanding the expanding dominance of the Toronto-Waterloo Corridor in Canada’s technology landscape, Ottawa can still perform a key role in Canada’s technology sector and in supporting innovation as a regional or second-tier growth centre. There are many examples of dynamic regional technology centres in the world including Ottawa. Ottawa does not need to have its name in the top 20 global tech centres to be successful and there is nothing wrong with forfeiting that aspiration to Toronto-Waterloo. Indeed, having at least one truly competitive global centre in Canada is important to sustaining technology growth everywhere in the country.

Also, the local advantages and assets Ottawa offers to support innovation and growth will remain a positive factor because it is the Nation’s Capital. The last feature in the Ottawa Citizen’s IT Factor series talked about potential things that can be done to strengthen the local ecosystem. One example was lobbying for direct flights to Silicon Valley. Easy access to Silicon Valley is considered to be a lifeline for startups in terms of access to U.S. Investors. Moreover, the 2015 Genome Startup report noted that the Silicon Valley also influences the creation of entrepreneurial talent and skills. Roughly one-third of start-up founders in Waterloo had spent considerable time in Silicon Valley.

Connectedness – Looking For Ecosystem Friends

3. Most of the economic development literature about Ottawa’s technology ecosystem, whether it be the special features published in the local media or the promotional material and press releases from Invest Ottawa or the Mayor’s Office, for example, seem to take an inward-only perspective as compared to the Toronto-Waterloo scene where there is more inter-city collaboration. Part of the reason for this could be Ottawa’s geographic location I mentioned earlier. The inverse also appears the case. For example, in another blog, I wrote about how regional economic development strategies in Eastern Ontario have been designed without regards to the presence or the impact of Ottawa. An example of this is the recent mapping of the innovation ecosystem in Eastern Ontario prepared for the Eastern Ontario Wardens’ Council in 2016. The end product excluding Ottawa’s contribution to the ecosystem based on the dubious argument that the exclusion of Ottawa was necessary to understand the dynamics of innovation in smaller communities.

The 2017 Startup Genome report discusses the importance connectedness to the strength of startup ecosystems in global cities. According to the authors, “these ecosystems tap into a worldwide circulation of ideas, knowledge, talent, and capital. Through global networks that are rooted in relationships between entrepreneurs, startups in these ecosystems can access global customers at a very early stage and develop globally-leading products and business models”. The report even uses Waterloo to illustrate their finding by pointing out that start-ups which focused on foreign customers grew 2.1 times faster than others.
Although the above report was applying its research to global networks, it is also very applicable to connectedness at the regional level and indeed, it is the primary motivation behind the proposed Toronto-London-Windsor high speed rail as well as other regional technology corridors in the world. In fact, there has been considerable research and discussions about building a high speed rail between Montreal, Ottawa, and Toronto for decades. The concept appears to have hit a dead end for economic and political reasons.

However, I have not seen any discussion on the potential of an Ottawa to Montreal high speed rail link. Highway 416 between Ottawa and Montreal was, after all, constructed to improve travel between the two cities in advance of the 1976 Montreal Olympics. The population of the two combined metropolitan centres would be about 5.4 million with an approximate distance of 200 km between them. Compare this to other high speed rail corridors that have been bandied about in Canada: Vancouver to Seattle with a combined metropolitan population of 6.2 million and a separation distance of about 240 km and; Edmonton to Calgary with a total metropolitan population of 2.8 million (including Red Deer) and a separation distance of 300 km.

Setting the whole issue of high speed rail aside, there are other economic reasons for strengthening the connectedness between Ottawa’s and Montreal’s technology ecosystems. According to a recent report prepared by the Organisation for Economic Co-operation and Development (OECD) on Montreal’s economy, the international agency observed the following:

“Montreal is the driving force of the Quebec economy and possesses a wealth of assets that could transform the city into an innovative and economically dynamic metropolis on the world stage. Montreal’s workforce is growing as a result of international immigration, while the presence of high-quality tertiary and research institutions both attracts and produces world class talent. The economic structure of Montreal features both highly structured industrial clusters and a fertile ecosystem of entrepreneurs and SMEs, which nurtures the development of innovative enterprises in high value-added sectors. Other assets of Montreal include a high quality of life and an environment that encourages innovative activities.”

Startup Genome also completed a detailed analysis of Montreal’s startup ecosystem in 2016 and concluded that the city’s ecosystem is still young with several opportunities to seize enormous potential. One of these opportunities includes the concentration of expertise in the area of artificial intelligence which also has developed a strong partnership with the University of Montreal. The federal government has also contributed to Montreal’s AI cluster with a $213 million grant alongside Microsoft and Google’s investments.

Both reports also identify some weaknesses in Montreal’s ecosystem such as finding skilled talent and the strong orientation of small enterprises towards the local economy rather than globally.

The federal government is an important player in Montreal’s economy through Canada Economic Development for Quebec Regions (CED), and the Business Development Bank of Canada (BDC) as well as financial assistance in training and in supporting economic sectors such as AI.

It is beyond the scope of this blog to explore the strategies that might be pursued to strengthen the connectedness between the National Capital Region’s and Montreal’s technology clusters and innovation ecosystems or to identify potential benefits that may result but it may be worth pursuing by others.

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