Canada risks relegation to the second tier of the global tech economy if it doesn’t act now

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The head of one of Canada’s most important technology companies said the country is at a crossroads: we have the talent required to be a leader in the digital economy, but a mix of complacency and poor policy means we could easily end up in the remainder bin.

“I’ve seen Canada over the last decade, sadly, turn into a little bit of a low-cost jurisdiction,” said Mark Barrenechea, chief executive of Waterloo, Ont.-based Open Text Corp. “A lot of companies today think of Canada as a lower-cost (country) for entry-level talent; first job or second job is a better way to say it.”

Put another way, we’ve become a development league, “competing more with Southeast Asia than the United States,” Barrenechea said. Open Text used to be able to hire four Indian software engineers for the cost of one worker in Waterloo. That ratio is now two to one. Canada is competitive, but maybe not in the way many of us might have thought.

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Followers of Jim Balsillie, the former co-chief executive of the company that created the BlackBerry smartphone, will be familiar with the argument that Canada has unwittingly become a staging ground for young coders who eventually take their talents to the real tech centres in the U.S., China and Europe.

But it feels like a good time to stir the fire that Balsillie started. The prospectors of the digital gold rush ignited by the COVID-19 crisis are moving at rapid speed. The big fish will be gorging on the little fish. The winners and losers are being sorted now, not years from now.

Many of Canada’s homegrown technology companies were already upset over the tendency of governments to get excited by the arrival of famous tech behemoths such as Amazon.com Inc. and Google’s parent company Alphabet Inc., which tend to monopolize the best talent before patenting their ideas, thus locking up the wealth for themselves and their home countries.

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The race to secure market share in the digital economy has added a new dimension: emerging Canadian companies are proving to be attractive targets for larger firms that want to accelerate their adoption of cutting-edge technology.

The ownership of St. John’s, Nfld.-based Verafin Inc. (cybersecurity), Montreal’s Element AI (artificial intelligence) and Calgary’s Benevity Inc. (software) all shifted abroad last year. They were local heroes and now they are branch plants. The jobs are still here, and more may come, so it’s not a dire situation. But it’s objectively the second-best outcome, because control rests elsewhere. It also puts a ceiling on what Canada can achieve since the highest performers at those companies will eventually be called up to corporate headquarters.

“Canada has really got to think through that,” Barrenechea said.

We have some time to think it through. Foreign-direct investment isn’t a one-way street and some Canadian companies are doing their share of the raiding.

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For instance, Lightspeed POS Inc., a Montreal-based developer of software that restaurants and smaller retailers use to process sales and manage inventory, on March 11 announced its intention to buy Vend Ltd., a New Zealand-based rival backed by PayPal Holdings Inc. co-founder Peter Thiel. The US$350-million acquisition would be Lightspeed’s third big purchase since November, a US$1.2-billion shopping spree.

That’s the kind of action it takes to play in what Barrenechea describes as the first tier. You take risks. You raise capital. You deploy that capital, gathering valuable intellectual property, talent and customers. You favour investment over dividends and share buybacks. You go farther afield than the U.S. The Vend acquisition would strengthen Lightspeed’s toehold in Asia, complementing its core operations in Canada, the U.S. and Europe.

Lightspeed, which Dax Dasilva founded in 2005 and took public on the Toronto Stock Exchange in 2019, is one of a few dozen Canadian technology hotshots that have been given long leashes by shareholders who are less sensitive about profitability than they used to be. Some will fail or disappoint, which shouldn’t bother anyone. That’s how innovation works.

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Open Text, meanwhile, is a survivor, so it probably warrants more attention than it tends to receive. The company is nearing its 30th anniversary and generating cash isn’t an issue. The company earned a record US$855 million in its most recent quarter, an 11 per cent increase from the previous year. Its stock price is up about 25 per cent over the past year, pushing its market capitalization to about $12 billion.

Back in 1991, its original mission was to commercialize technology that the University of Waterloo developed to digitize the Oxford English Dictionary. Now, Open Text finds itself in an ideal situation to exploit the shift to cloud computing. Barrenechea this week unveiled a streamlined range of software products that will allow companies to gather and protect information generated from employees working from home, manage supply chains and interface with cloud-storage servers, including Open Text’s own private cloud.

The opportunity is huge. Barrenechea predicted the information-management market will grow eight per cent to US$84 billion by 2024. Open Text is already the market’s leader, and its CEO predicts organic growth of two per cent to four per cent in three years, an ambitious jump from the current rate of one per to two per cent. If he pulls it off, he might force people to reassess Open Text’s reputation as a company that is only able to achieve growth through acquisitions, even though it intends to keep buying whenever it spots a good value.

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“It is a seminal moment for us,” Barrenechea said, adding that he plans to invest 14 per cent of revenue into research and development, compared with 10 per cent currently. “We’re going to invest into modern work and we’re going to invest into our growth rates.”

Open Text is here to stay, but we can’t take for granted that others have the same ambition to stay in the top division or climb their way there.

“IP and engineering is very mobile,” said Barrenechea, who took over as CEO in 2012 after a couple of decades in Silicon Valley. “You can optimize the economics by leaving Canada, but, for us, we haven’t led with that. We’ve led with talent and culture.”

The challenge for policy-makers, then, is working on the economics. We need to make it less optimal for those who don’t care about culture to leave.

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