Do winners pick government? How scale-up experience shapes entrepreneurs’ assessments of innovation policy mixes

Abstract

How do entrepreneurs of high-growth firms in small, open economies evaluate innovation policy mixes? In response to market consolidation by large firms, governments in such countries are using a mix of innovation policy tools to support firms with high-growth potential in digitally intensive sectors. Government objectives, however, are not being realized. Bringing actor-centric perspectives to the policy mix literature, we analyze interviews with entrepreneurs from Canadian technology firms to determine whether there is a disconnect between the objectives and instruments employed by the government. With distinct policy preferences rooted in their growth experiences specific to the country’s political economy, we find that scale-up entrepreneurs prefer a more active role of the government in the form of demand-side, direct, and targeted innovation instruments. The findings presented in this article provide a more nuanced understanding of the innovation policy landscape and the preferences of technology scale-up firms

1. Introduction

Cross-national research shows that large firms, especially those in digitally intensive sectors, exhibit significantly greater market power, higher levels of productivity, and greater innovation capacity (Manyika et al. 2018; McMahon et al. 2021). Increasingly characterized by the ‘winner takes most’ model, in which a small number of firms control a disproportionately large share of the market (Autor et al. 2020: 649), large firms dominate the economic landscape. The trend towards large firm market consolidation poses an especially grave challenge for innovation policymakers in small, open trading economies that lack a large domestic market where firms can scale. Given the difficulties in determining, ex-ante, which firms will grow (Storey 1994; Hölzl 2009; Catalini et al. 2019), devising policy strategies and adopting policy instruments to support firms with the potential to scale is an important but difficult task (OECD 2010). Innovation policymakers must find solutions to leverage the benefits of emerging technologies with higher income elasticities of growth by supporting companies with the potential to scale in the economic sectors where these technologies are concentrated (Breznitz 2007).

Viewed from this perspective, it is not the comparative advantage in resources or prices that determine the relative success of a country’s international trade flows, but national differences that stem from a competitive advantage in innovative capacity. As Dosi, Tyson, and Zysman noted three decades ago:

National development trajectories rest on the existing composition of production (the production profile of the existing economy) and on the paradigms of how to develop and exploit technology, which in turn are shaped by the market positions confronting a nation’s private and public economic actors and by the institutional structures that constrain their strategies. (1989: 13–14)

The policy choices made at any point in a nation’s development affect its future well-being through their dynamic effects over time. The evidence suggests that the effect on Schumpeterian competition from developing and adopting new technologies is pre-emptive and generates irreversible results. Initial advantages accrue to the technological leader in a particular sector, allowing it to retain and extend its competitive lead.

Technological leadership allows a firm to recover its research and development costs and realize higher-than-average returns on its investment. In effect, ‘success breeds success’, or ‘being successful today raises the probability of success in the future’ (Harris 2015: 99), but companies operating in small, open trading economies encounter structural barriers that those in larger countries do not, concerning access to capital, markets, and uneven competition (Baldwin and Lin 2002; Tourigny and Le 2004). These challenges are particularly acute in digitally intensive industries, such as information and communication technologies (Freeman and Lundvall 1988; Harris 2015).

Canada provides a particularly apt case for investigation. As a relatively small, export-oriented country, it has a comparatively strong start-up ecosystem (Langford et al. 2016; Denney et al. 2021a) and a commitment by the federal government to supporting high-growth firms, especially in knowledge-intensive sectors (Innovation Science and Economic Development Canada 2019). However, Canada’s innovation performance reveals lacklustre results in terms of narrowing the gap with competitor countries, including business expenditures on research and development (BERD), firm-level productivity, investments in digital technology, exports, and patenting (Council of Canadian Academies 2018; Gallini and Hollis 2019; Lamb and Munro 2020). Canada’s innovation policy over the past three decades has failed to break its economy out of a ‘low innovation equilibrium’, where profitability has not required investments in innovation because of a high level of resource exports and a structural reliance on foreign technology (Williams 1994; Nicholson 2018). Despite favourable start-up conditions, relatively few Canadian firms reach scale-up or high-growth status (Deloitte 2012; Lazaridis Institute 2015). The failure suggests a disconnect between the innovation policy mix provided by successive Canadian governments and the needs of the domestic technology industry.

This article draws upon insights from the literature on the comparative politics of innovation policy, the dynamics of scale-up firms, and an actor-centric approach to innovation policy mixes to address this puzzling outcome. It frames the investigation of Canada’s failure to support the growth of scale-up firms from the perspective of these bodies of literature. Focusing the analysis on challenges faced by scale-up firms, this research puts actors at the centre of the policy mix discourse. The analysis situates the opinions, experiences, and preferences of scale-up firms within the political-economic context of the Canadian innovation policy landscape to study why they have had such a limited impact on policy to date. Accordingly, the research fills a gap in the literature on innovation policy mixes by integrating firm-level perspectives on policy preferences concerning their respective growth stage and national economic context. Furthermore, it highlights the politics involved in innovation policy-making and in industrial policy debates more generally, regarding optimal policy adaptation from the perspective of the firm. It thus makes a broader theoretical contribution—how scale-ups, as a distinct category of firms, view innovation policy.

The article proceeds as follows: first, it reviews the literature on innovation policy mixes and the comparative politics of innovation in small economies, situating Canada in the international context. Then, it summarizes the literature on the dynamics of firm growth and the policy mix literature as it applies to policy objectives and instruments, focusing on the importance of scale-ups, or high-growth firms, as well as the policy perspective of these firms Next, it outlines the methodology employed in conducting the research. It then analyses the insights derived from the empirical material, followed by a conclusion and discussion of the research findings.

Overall, the article addresses how scale-up entrepreneurs’ policy preferences are shaped by their perception of barriers stemming from the interaction of their firms’ structure, as scale-ups firms, with the historically entrenched, country-specific growth models and policy mixes of the Canadian context. These experiences reflect the path-dependant political dynamics underpinning innovation policy mixes, where prevailing policy regimes reflect the outcome of distributional conflicts between different groups of actors within the innovation policy field. Understanding firms as both recipients and shapers of innovation policy mixes underscores how firms arrive at their innovation policy preferences.

1.1 Innovation policy mixes

Selecting the appropriate policy instruments to support scale-ups and high-growth companies has proven challenging for Canadian governments over the past four decades since the need for such policies was identified by the Science Council of Canada (Steed 1982). Policy mixes, defined as the combination of policy instruments and the arrangement of goals and means, have enjoyed increased attention in the innovation policy literature over the past decade (Flanagan et al. 2011; Borrás and Edquist 2013; Cunningham et al. 2013a; Magro and Wilson 2019). The literature suggests that formulating innovation policy involves the choice between three different types of instruments: (1) neutral versus targeted; (2) supply versus demand-side; and (3) direct versus indirect policy instruments (Edquist and Hommen 2008; Edler et al. 2016). With respect to the choice between neutral versus targeted approaches, innovation policy scholars have identified the scope for policymakers to target different pathways to economic development (Johnson et al. 1989; Breznitz 2007; Ornston 2012; Weiss and Thurbon 2021). Numerous cases illustrate the effect of strategically targeted policy to secure a competitive advantage in high-technology industry sectors, such as Japan in consumer and microelectronics (Tyson and Zysman 1989), China in digital technologies (Segal 2003), Israel in software, and Taiwan with semiconductor manufacturing (Breznitz 2007).

Strategic targeting of selected policy instruments also underpins the innovation success of larger, seemingly ‘liberal’ market economies, such as the USA, whose direct research programme and military procurement were instrumental in fuelling the information technology revolution (National Research Council 1999; Block and Keller 2011; Weiss 2014; Taylor 2016). This pattern of targeted government support for technology-based sectors was observed across a wider range of Organisation for Economic Co-operation and Development (OECD) countries by the Manchester review of innovation policy, which noted that ‘recent decades have seen a revival of programme targeted at strategic technologies that cut across several industrial sectors’ (Cunningham et al. 2013b: 12). Table 1 below sets out a taxonomy of firm-level innovation policy instruments and policy decisions, including examples of policy instruments available to firms operating in Canada.

Table 1.

Taxonomy of firm-level innovation policy instruments in Canada.

	Policy decisions
Firm-level innovation policy instruments	Supply-side or demand-side	Direct or indirect	Neutral or targeted	Federal policy instruments
Tax incentives for R&D	Supply	Indirect	Neutral	– SR&ED tax credits
Direct support—grants for firm R&D and innovation	Supply	Direct	Both	– IRAP grants (neutral) – SDTC grants (sector-targeted) – Strategic Innovation Fund (firm-targeted, sector neutral) – Innovation Superclusters Initiative (technology-/sector-targeted) – CanExport grant (neutral)
Technical services and advice	Supply	Direct	Both	– NRC research labs (technology-targeted) – Trade Commissioners Service (neutral) – IRAP consultations (neutral) – Accelerated Growth Service (firm-targeted)
Policies to support collaboration, clusters, and networks	Supply	Both	Both	– IRAP (neutral) – CAIP (neutral) – NCE (technology-targeted) – Innovation Superclusters Initiative (technology-/sector-targeted) – Pan-Canadian Artificial Intelligence Strategy (technology-targeted)
Public procurement policies	Demand	Direct	Both	– BCIP (neutral) – Innovative Solutions Canada (challenge targeted)

Notes: Adapted from Edler et al. (2016). Acronyms: IRAP: Industrial Research Assistance Program; SDTC: Sustainable Development Technology Canada; SADI: Strategic Aerospace and Defence Initiative; AIF: Automotive Innovation Fund; ASIP: Automotive Supplier Innovation Program; NRC: National Research Council; CAIP: Canada Accelerator and Incubator Program; BCIP: Build in Canada Innovation Program; NCE: Network of Centres of Excellence.

A second key dimension of innovation policy instruments is the trade-off between supply-side and demand-side policies (Boon and Edler 2018; Wesseling and Edquist 2018; Edquist and Zabala-Iturriagagoitia 2020). The former has received a disproportionate emphasis in the innovation policy mix of the most advanced industrial countries. However, there have been some notable exceptions, particularly in the USA where demand from the National Aeronautics and Space Administration and the space programme played a critical role in growing the semiconductor industry. Similarly, the Small Business Innovation Research programme has been highly successful (Leslie 2000; Branscomb and Auerswald 2001; Edler 2010).

On the third dimension, firm-level supports are distributed along a continuum ranging from more direct spending programme to indirect, tax-based innovation supports. Most countries deploy policy mixes that combine a range of direct and indirect, but in the majority, the emphasis tends towards direct spending programme. Canada and several other countries, such as France, are outliers with the policy mix skewed towards using tax policy instruments instead of direct-to-firm grants. Specifically, the federal government’s Scientific Research & Experimental Development (SR&ED) tax credit has constituted between 74 and 90 per cent of total spending on support for business research and development (R&D) each year since 2000 (OECD 2009).¹ Cross-national data from the OECD on business enterprise expenditure on R&D (BERD) shows that Canada spends far less, as a proportion of GDP, on direct funding of BERD and significantly more on (indirect) tax support (see Fig. 1).

Figure 1.

Direct government funding and tax support for business R&D in select OECD countries, 2019.

Source: OECD, ‘Measuring Tax Support for R&D and Innovation’. Some values are estimates, provisional, or have been revised. Countries with missing data are omitted. For documentation and more information, see https://www.oecd.org/sti/rd-tax-stats.htm.

1.2 Country context: innovation policy mixes in small economies

Scholars of national innovation systems have long studied the unique challenge of growing technology firms to scale in small trading economies, examining the role of innovation policy mixes in overcoming the obstacles in these economies (Freeman and Lundvall 1988; Breznitz 2007; Edquist and Hommen 2008; Harris 2015; Taylor 2016). Small economies have a limited domestic market, which hinders firms’ growth opportunities by meeting the local market demand for users of their technologies. In addition, the increasing technological complexity of most market segments places firms in these economies, especially small and medium-sized enterprises (SMEs), at a particular disadvantage. The challenge of competing in global markets requires greater human resources with experience operating at scale plus access to the capital needed to grow. The rapid digitization of industrial economies and the rise of the intangibles economy has raised minimum R&D investment thresholds for innovation, which, without adequate and appropriate R&D support, puts SMEs at a further disadvantage (Wolfe 2019a; Hazan et al. 2021). A growing body of evidence confirms that large firms, and especially those in digitally intensive sectors, exhibit significantly greater market power and productivity, thus making better and more efficient use of firm inputs (Bessen 2022; Bajgar et al. 2021).

Researchers for the Science Council of Canada (Britton and Gilmour 1978), as well as Harris (2015), were among the first to identify the bias encountered by firms in small trading economies competing in Schumpeterian industries due to the entry barriers associated with technological innovation. And to the degree that smaller economies are characterized by a larger number of small domestic firms in technologically intensive sectors places the entire economy at a disadvantage with respect to Schumpeterian competition, particularly in industry segments with high-income elasticities to growth (Dosi et al. 1989). Firms operating under such conditions do so within a sub-optimal industrial structure with the consequence that ‘the social incentive to subsidize Schumpeterian industries is greater in a small, open economy than in a large, closed economy’ (Harris 2015: 105).

The Canadian economy is disproportionately composed of SMEs. Its relative lack of domestic technology anchor firms, particularly since the collapse or decline of its two flagship firms—Nortel (Calof et al. 2014) and Research in Motion (McNish and Silcoff 2015)—stands in contrast to some small, open economies, such as the Netherlands, Finland, and Sweden, who are home to many multinational enterprises (MNEs) (Edquist and Hommen 2008: 454). The structural dependence on technology imports from foreign multinational enterprises has been described as a barrier to innovation, making the country a buyer of technology, not a creator or competitor (Britton and Gilmour 1978; Smardon 2014). Industrially, Canada remains strongly oriented towards extracting and exporting natural resources and continues to rely on inward technology transfers over domestic innovation (Dalpe 1988: 259; Nicholson 2016). Recent policy pronouncements recognize the need to address Canada’s longstanding inability to scale domestic innovation-based firms (Innovation Science and Economic Development Canada 2019).

The federal government has, in fact, made repeated attempts to craft more effective policies to support scaling firms, with limited success. Few Canadian firms reach scale-up or high-growth status (Deloitte 2012). Song and Bérubé (2021) found significant bottlenecks to growth at the 20+ and 50+ employee points, indicating that Canadian firms with scale-up potential face significant barriers in breaking through to the larger firm-size categories. The 2017 Innovation and Skills Plan aimed to double Canada’s high-growth firms² from 14,000 to 28,000 by 2025 (ISED, 2019; Statistics Canada 2022). The latest data indicate that Canada is not on track to meet this goal, recording only 10,700 high-growth enterprises by revenue in 2020 (Statistics Canada 2022).

The key question is why Canadian innovation policy supports have failed to address the persistent challenge of scaling technology firms. To answer this question, the article analyses these entrepreneurs’ policy preferences and their perception of the shortcomings of existing policy supports. Analyzing this firm-level perspective illuminates the politics of innovation policy mixes by contrasting the policy preferences of scale-ups to other actors in the policy process. The comparative literature on the politics of innovation policy suggests that it is politically challenging for developed, small countries to adopt targeted innovation policies that focus resources on emerging niches of comparative technological advantage (Freeman and Lundvall 1988; Breznitz 2007; Edquist and Hommen 2008; Ornston 2012; Harris 2015; Taylor 2016). Instead, small, slow-growth economies often prioritize macroeconomic ‘framework’ policies due to interest group pressure from traditional industries (and large MNEs), a lack of policy coordination, and structural resistance from key policymakers. In these economies ‘established firms and industries have generally supported and benefited from so-called “neutral” policies, rather than explicitly selective policies’ (Edquist and Hommen 2008: 469).

This differs significantly from the experience of small, rapid innovation-based (RIB) economies such as Taiwan, South Korea, and Israel, which are more selective in targeting emerging firms/industries because they have ‘fewer mature industries that would stand to benefit from so-called neutral policies favouring the existing structure of production and already established technological trajectories’ (Edquist and Hommen 2008: 469). The outcome in small, slow-growth countries is a ‘tug-of-war in innovation policy between large firms and SMEs’ (Edquist and Hommen 2008: 467), producing an innovation policy mix defined by ‘fragmentation, debate, and a lack of consensus’ (Edquist and Hommen 2008: 460). In sum, the bulk of innovation support in small, slow-growth economies tends to be neutral, benefiting large MNEs, with separate support for emerging technology sectors geared towards startups. Less evident is a focus on the policy supports relevant to scale-up firms in emerging technology sectors, partially because the distinction between ‘scale-ups’ and startups is a relatively new concern for innovation policymakers and experts.

Canada fits the small, slow-growth country archetype, with innovation policy mixes that favour more neutral instruments available to all sectors and firms rather than targeted policy supports for specific sectors, technologies, or firms (Edquist and Hommen 2008; Nicholson 2018). The relatively few direct grant programme adopted have historically targeted traditional manufacturing sectors, such as automotive and aerospace, largely bypassing the digitally intensive, knowledge economy service industries (Innovation Science and Economic Development Canada 2019). Canada has also prioritized supply-side investments in inputs to the innovation process over demand-side interventions (Edler 2019). Like its peers, Canada’s innovation policy is dominated by the ‘tug-of-war’ between neutral policy supports demanded by traditional sectors and (largely foreign) MNEs and separate start-up ecosystem supports (e.g. incubators) (Bergen 2017). The policy preferences of scale-up firms have gone unaddressed.

Scholars of the Canadian political economy recognize that business interests play an influential role in shaping Canada’s innovation and industrial policy, but that there are significant differences between firms in more traditional resource and manufacturing sectors and those in technology sectors (Atkinson and Coleman 1989; Williams 1994). These studies found that firms in technologically dependent, branch plant sectors, such as manufacturing, prefer a limited, ‘market-oriented’ role for the state in supporting innovation through supply-side, indirect, and neutral instruments (Smardon 2014). This contrasts with the preferences of the ‘nationalist coalition’ of ‘primarily Canadian-owned enterprises that hope to use the procurement base as a springboard to markets abroad … [and] wished governments in Canada to retain the option to use policy instruments such as procurement, research and development subsidies, and export financing used by other trading nations’ (Atkinson and Coleman 1989: 49–51). The nationalist coalition was historically less influential in shaping the innovation policy mix than the resource-extracting and branch-plant manufacturing coalitions (Wolfe 1978; Atkinson and Coleman 1989). However, recently formed industry associations representing the interests of scale-up companies present significantly different views of Canada’s preferred approach to business support than those of the established manufacturing and raw materials/resource exporting segments of the Canadian economy (Bergen 2017). This article addresses the lack of research exploring the policy preferences of this new cohort of scale-up firms.

1.3 Firm type: Scale-ups as actors in the policy process

Countries that successfully pursued a RIB development pattern have adopted a mix of targeted policies to support the successful scaling up of domestic technology firms. Sometimes referred to as high-growth firms, scale-ups are defined by sustained employment and revenue growth over time (Eurostat-OECD 2008; Morelix et al. 2016).³ These firms have a disproportionate economic impact, especially on net job creation (Birch 1987; OECD 2010; Rivard 2017). Scale-ups contribute more to productivity gains (Du and Temouri 2014; Haltiwanger et al. 2016; Du and Vanino 2021), innovation (Coad and Roa 2008; Hölzl and Friesenbichler 2010), research and development, and exporting (Huang 2019; Denney et al. 2021). Furthermore, scale-ups are distinct from startups and early-growth firms. Both types register high net growth, but startups tend to have high failure rates (Dvorkin and Gascon 2017) , whereas scale-ups do not.

Research on potential impediments to reaching scale-up status in Canada shows that inadequate incentive structure, weak government support, and misalignment of support to scaling up objectives hinder firms’ performance (Advisory Council on Economic Growth 2017). Surveys of finance and growth for Canadian firms find that scale-up firms are more likely than the rest of the firm population to cite financing as a growth barrier and report greater difficulties in seeking the government as a client (Vu and Denney 2021). Other studies reach similar conclusions regarding the lack of scale-up talent, especially in senior-level sales and marketing (Herman and Marion 2015). Canada’s Economic Strategy Tables report explicitly called for targeted support to help scale medium-sized firms towards globally competitive enterprises (2018).

Recent literature on innovation policy mixes has drawn attention to the need for a greater focus on the role of actors in the design and implementation of policy mixes. This research recognizes the need to focus on firms’ perspectives as recipients of policy support and the drivers of policy change. It emphasizes the need for greater analytical focus on (1) understanding policy instruments as products of policymakers’ subjective views that are sometimes at odds with those of policy recipients and (2) incorporating the subjective perspectives and preferences of firm-based actors within the policy mix analysis (Flanagan et al. 2011; Rogge and Reichert 2016; Cunningham et al. 2016; Kern et al. 2019; Lindberg et al. 2019). Some work has also shifted from being place agnostic to considering place-based policies, especially governance structures (Magro and Wilson 2019).

The new policy mix framework calls for a more nuanced analysis of the process responsible for producing the policy mix and how firms interact with other actors in the process consistency and coherence (Flanagan et al. 2011; Radicic and Pugh 2017; Cocos and Lepori 2020). Furthermore, scholars of innovation policy recognize the extent to which policy support for globally competitive firms must be designed from a firm-based and a systems perspective (Metcalfe 1995; Flanagan et al. 2011; Wieczorek and Hekkert 2012; Wolfe 2019b). Building on the call to involve both places and actors, we link the discussion of innovation policy mix to broader questions of national context, including the size of the economy, the industry structure, and international orientation, as well as the role of scale-up firms in influencing the design of the policy mix. The focus here is on the extent to which Canadian scale-up firms in technology-intensive sectors support the current policy mix that has prevailed over the past four decades or whether they prefer a more targeted approach that involves greater use of demand-side and direct policy instruments.

The failure to provide adequate support for Canadian firms to scale suggests a disconnect in the national innovation system between the policy supports provided by successive governments and the needs of the high-technology community and scale-up firms specifically. A closer examination of the strengths and limitations of Canada’s prevailing innovation policy mix from the scale-up entrepreneur’s perspective provides insight into the source of this failure. Accordingly, this study adds nuance to the treatment of actors in innovation policy studies by differentiating between the perspectives of scale-up technology firms from tech startups or early-growth SMEs. The focus overcomes ‘the tendency of some innovation policy studies to downplay variety within actor categories (e.g. individual researchers, SMEs, universities)’ (Flanagan et al. 2011: 706). This article addresses the gap in our knowledge of the innovation policy preferences of these firms by mapping the preferences of a current generation of Canadian technology scale-up firms and why those preferences have not significantly shaped the current innovation policy mix. More attention to the role of key actors, specifically scale-up entrepreneurs could afford valuable insights into the extent of policy support they enjoy or the barriers they face in scaling up their firms.

2. Data and methodology

This article draws on over 100 interviews with Canadian technology firms from July 2015 to February 2020, supplemented by additional consultations with ecosystem actors and relevant stakeholders. The core empirical analysis relies on 71 interviews conducted with the chief exeuctive officers of Canadian technology scale-ups.⁴ We focus on firms in the technology sector for two complementary reasons. As noted in Section 1, successful scale-ups in emerging technology niches are likely to achieve higher income elasticities of growth and deliver outsized benefits to the national economy. Second, a recent and comprehensive investigation of all Canadian scale-up firms finds that such firms are ‘considerably more productive than non-scale-up tech firms and scale-ups in other industries’ and thus ‘firms contribute significantly greater economic value than other firms by making better use of their inputs’ (Denney et al. 2021b: 64). Thus, focusing our analysis on technology scale-ups not only allows us to examine the unique characteristics of these high-growth firms but also contributes to a deeper understanding of the rapidly evolving technological landscape and its implications for the broader economy. The firms were concentrated in the Greater Toronto Area (35 interviews or 49 per cent of the total), but interviews span the country. In all, 55 were from Ontario, 5 each from British Columbia and Quebec, and 3 each from Manitoba and Alberta.

For identifying the firms as scale-ups, given that all but a few of the firms were privately owned at the time of the interview, we relied on self-reported metrics and publicly available information to determine their economic profiles. We only included firms who met the Kauffman Foundation’s definition of a revenue scale-up at the time of the interview: at least 20 per cent annualized revenue growth over the last 3 years, with an employment threshold of no fewer than 10 employees at the start of the observation period and revenue threshold of at least $2 million. Selecting a consistent group of interviewees enables the study to identify better patterns in how firm-level growth stage and national context inform the articulation of policy preferences.

Interview questionnaires were administered in a semi-structured way to enable open-ended answers to general questions probing the role of government in supporting innovation. The questions ask about various issues regarding their experiences as scale-ups, such as access to talent, markets, and capital; the role of intellectual property in their business strategy; and their preferred policy mix to support business growth and expansion. The interview questionnaire is reproduced in Supplemental Appendix A.

Responses were coded according to policy preferences and criticisms related to the following policy instruments: supply-side (grants, loans, and tax credits) versus demand-side (procurement), indirect (tax credits) versus direct (grants and loans), and neutral versus targeted (Edler et al. 2016). Transcripts of the semi-structured interviews were analysed using the qualitative data analysis software program Nvivo (Jackson and Bazeley 2019; Deterding and Waters 2021) for content and discourse analyses. Opinions were coded as ‘preferences’ to reflect positive sentiment or ‘criticisms’ to reflect negative sentiment with existing policy instruments. The focus on firm preferences in the policy process builds from Rogge and Reichardt (2016: 1630), who develop an ‘extended policy mix concept as an analytical framework for investigating the link between real-world policy mixes and technological change’.

For robustness checks on our main findings, we contrast the views of scale-ups with those of 30 technology startups from the Greater Toronto Area to consider differences in policy preferences by a different firm type. We also examine some of our key findings using a survey of finance and growth of Canadian firms. The point of the additional analysis is to better isolate the finding specific to scale-ups and technology scale-ups more specifically. These findings are presented in Supplemental Appendix B.

3. Results: Policy preferences of Canadian scale-up firms

Overall, our interviews show that scale-up entrepreneurs display a clear set of policy preferences for innovation policy instruments—they strongly favour a more targeted innovation policy mix that employs direct grants and demand-side procurement. Their views are conditioned by their experiences growing firms to scale in Canada, which underscores the importance of national context and firm type in how firms assess their policy mix environment. Scale-up firms identify Canada’s small internal market, lack of patient, non-dilutive capital, limited size of the domestic market, and comparatively laissez-faire innovation policy mix as barriers to their growth and expansion. The following subsections provide more detail about the preferences of scale-up entrepreneurs, illustrating how interviewees justified their three main policy preferences (targeted approaches, direct grants, and procurement) in terms of their main policy rationales—the need to overcome Canada’s neutral policy mix, correct power imbalances with foreign MNEs, replicating the policy approach adopted in other countries, and the need for better integration of the policy mix.

Figure 2 presents the findings, displaying the percentage of interviewees who expressed policy preferences and criticisms of each instrument. Preferences are concentrated in favour of demand-side policies, such as procurement, and direct spending instruments, such as grants and services. Criticisms are surprisingly concentrated in the same policy areas as preferences. At first glance, this appears contradictory, but there is a simple explanation for the finding. For example, procurement is an instrument with both preferences and criticisms because scale-up firms desire greater procurement opportunities but find the existing procurement process in Canada extremely frustrating.

Figure 2.

Policy preferences of scale-up entrepreneurs.

Notes: The percentage of interviewees who expressed policy preferences and criticisms for each instrument. Proportions are out of the total interviewees (n = 71).

3.1 Preference for targeted approaches

Scale-up entrepreneurs expressed a general desire for policymakers to adopt a more strategically focused industrial policy that deploys multiple policy instruments in a holistic fashion towards supporting promising Canadian technology firms. Of the entrepreneurs who maintained that Canada’s current policy mix was too neutral, most criticized the R&D tax credits, followed by a concern that grants and procurement were not focused sufficiently on supporting scale-up firms. Several expressed a need to emulate other countries’ more targeted approaches to supporting scale-ups or high-growth firms. The following quote is representative of the general preference for strategically targeted, whole-of-government approaches:

We’re at the beginning of a new technology war in the digital space. And we better catch up, because [other countries] are all [investing] through selected procurement, through big funding of the digital space, and the Canadians are nowhere to be seen … A lot of private sector money [in other countries] is coming from the public sector in the form of tax credits, through direct technology funding, through specialty grants, all kinds of mechanisms. Through selected procurement, preferred procurement, all kinds of policies to support the technology industry at a large scale. […] We should be doing this; we should be doing the same.

The preference for more targeted approaches is reflected in the number of firms criticizing the excessive reliance on tax credits in the overall policy mix. This sentiment was often derived from the interviewees’ experiences competing in global markets with large competitors whose home governments mobilize a wide range of innovation policies in a race to dominate fiercely competitive, winner-take-all market segments. One entrepreneur challenged Canada’s reliance on the largely neutral instrument of SR&ED tax credits, lamenting: ‘They’ve been wanting to fund a million little, tiny start-ups […], which is basically a way of sprinkling around a whole bunch of money for as many constituents as they can, but it doesn’t necessarily create the next Blackberry, Bombardier, or Nortel’.

Interviewees noted that Canada’s neutral approach of spreading support across all sectors and firm types ignores structural barriers to scaling up, such as the power imbalance with foreign MNEs in oligopolistic technology markets. While many appreciated the financial contribution made by the SR&ED tax credits, they were concerned that it was not an optimal use of funds at the national level, given the relatively small size of Canada’s economy. Scale-up entrepreneurs regard grants as a more strategic alternative. The following quote reflects their preference for the use of targeted instruments, such as Strategic Innovation Fund (SIF),⁵ over the more neutral tax credits:

Stop this ‘spray and pray’ tactic and focus on the targeted support… What is required, and what other jurisdictions are winning with, is direct support in the form of long-term vision incentives […] we need more SIF. We need less SR&ED and more SIF. […] The one thing that is going to support me the best at this stage of my company’s scale is SIF, because it’s going to be direct investment and is going to leverage other investors to come in.

Many felt that the reliance on spreading tax credits across the entire economy, rather than doubling down on domestic scale-ups, works to the ultimate advantage of foreign MNEs. Another scale-up entrepreneur noted that Canada’s small market does not afford Canadian firms sufficient revenue or investment to compete globally with larger players. They elaborated on how these ‘structural glass ceilings’ limit export growth, saying:

The dynamics, the scale, the pre-existing relationships, the cultural, financial, and regulatory burdens are just—they are material to international success. […] Canadian companies, if they have international competitors or cross-border competitors, simply lose all wars of attrition […] as they align with the gorillas in the space for economic and road map validation, they inevitably, slowly but surely, lose their ability to be independent and to be successful.

This entrepreneur argued that Canada needs to be ‘quite selective as to the areas where they want to try and position Canadian champions’ because ‘We don’t have the ability to take our limited capital and spread it across a large war front’.

Beyond targeting industries, several entrepreneurs emphasized that the prevailing barriers to growth as a scale-up in Canada’s political economy necessitates a firm-level, targeted approach. In response to the question about the relative merits of non-targeted approaches, one said:

I dare someone to actually point to something that’s been tremendously successful, that has scaled up using the process [of indirect support]. Rather, look at the successful countries in the world like Israel, Sweden, Australia […] they’ll pick an industry […] but then they try to pick winners there. You actually have to have the ability to engage with industry to determine which are the likely winners and the likely losers, you do have to make bets like that. That’s why Israel, a country of what, 2, 3, 4 million people is eating our lunch in digital technology development: because they pick winners. The government backs proven winners.⁶

This same entrepreneur articulated another common complaint that Canada lacks the state capacity to identify and support promising firms: ‘It’s not that hard to pick winners […] each one of those successful countries’ governments are informed by a Technology Advisory Board or a technology court’. They contrasted this with Canada, stating ‘we don’t have a technology court or advisors. There is no established systematic way to engage with business, and especially technology businesses, to actually get their opinion on what’s working and what isn’t working and picking the winners out of that’.

The opinions expressed earlier reflect a widespread desire for innovation policy makers to extend the targeted approach of the Accelerated Growth Service, a federal programme that targets high-growth firms for government support (currently through advising),⁷ by selecting the most promising firms into a ‘vetted’ category where policy makers identify pre-qualified firms and tailor a range of innovation policy instruments to maximize their potential to compete at a global level. This opinion echoes one noted in the report on the consultations with the federal government’s Economic Strategy Tables. ‘Canadian entrepreneurs are good at launching companies’, the 2018 report states, ‘but struggle to scale, citing insufficient access to financing, advice, global talent, markets and growth opportunities as barriers’ (Economic Strategy Tables 2018: 7).

3.2 Preference for direct grants and loans

Of the entrepreneurs interviewed, 39 per cent expressed a preference for direct grants over tax credits, making this the most popular simultaneous preference for one instrument over another (Table 2). Interviewees regularly cited the need for direct-to-firm instruments like grants and loans.⁸ They explained their policy preferences for non-dilutive grants in relation to the ‘impatient’ nature of Canada’s financial ecosystem. Interviewees noted that government grants help the firm grow while staving off pressure to dilute equity ownership. One entrepreneur noted that ‘the things that you want to finance your firm with are real customers, then grant money, then external capital, in that order’.

Table 2.

Overlapping policy preferences and criticisms of scale-up entrepreneurs.

		Criticisms
		Procurement (%)	Grants (%)	Loans (%)	Services (%)	Tax credits (%)	Neutral (%)
Preferences	Procurement	61	15	3	7	14	17
	Grants	15	62	8	20	39	30
	Loans	1	10	31	6	7	8
	Services	10	23	7	44	14	15
	Tax credits	7	23	3	4	35	8
	Neutral	0	6	0	0	1	0

Notes: The percentage of interviewees who expressed policy preferences and criticisms for each instrument. Proportions are out of the total interviewees (n = 71).

In general, scale-up entrepreneurs described patient capital as either lenders or equity investors with long-term time horizons and a risk-tolerance expectation geared towards sustained growth. Self-financed firms described their autonomy vis-à-vis their non-dilutive capital structure as a key element in enabling their growth.⁹ Interviewees emphasize the trade-off between control and funding. One self-financed scale-up firm noted that ‘entrepreneurs that want to keep control of their business will not want to use venture capital. If you work with the venture capital guys, you aren’t thinking long term, I don’t care what they tell you, they want to be out in 3–5 years, so they will find someone to sell it to’.

Entrepreneurs attribute the dearth of patient capital to Canada’s legacy as a resource-extraction economy, with financiers being more attuned to the risks associated with Canada’s resource or traditional manufacturing industries, and thus overly risk-averse in financing technology scale-ups. One entrepreneur’s indictment of Canadian banks and the financial ecosystem generally said the following:

On the debt side of things, Canadian charter banks, they really don’t understand technology businesses. They understand oil and gas, they understand mining, they understand forestry businesses, they understand how to price inventory and timber that is sitting in a yard. They [the banks] look at our inventory and they say they have no idea how to price that. They don’t understand it: ‘You tell me there is IP behind it, you tell me there is 70 per cent margin, I don’t get it because lumber is 4 per cent margin.’ They just don’t understand it.

Many of the entrepreneurs interviewed believe that Canada’s lack of non-dilutive investment is compounded by an absence of large Canadian acquirers and secondary investors, which leaves foreign acquisition as the primary solution to provide a return for the initial investors. ‘The one area that we still lack is growth stage and buyout stage PE [private equity]’, noted one. Another suggested that ‘unfortunately, and this is where the rest of the market lets down these entrepreneurs, the only exit is south of the border […] where the venture fund we would like to sell it to is a Canadian security, there just is no Canadian security to buy it’. They continued, this is because ‘the sale of companies that have not allowed a Canadian consolidator to stick around and provide that Canadian exit for those venture funds’.¹⁰

Finally, preferences for direct grants were often justified by reference to Canada’s small size and lack of non-dilutive capital sources compared to competitors whose home countries actively utilize direct grants. ‘Directly funding job creation and innovation and export sales is a virtuous circle with a feedback loop [particularly] in a small country like Canada’, notes one entrepreneur. They add, ‘There’s no question that [other small countries] get that and they will continue to fund those feedback loops’.

3.3 Preference for demand-side instruments

One of the most stated preferences for new or improved policy instruments was for the Canadian government to assume a more active role in employing demand-side instruments, such as procurement, in a targeted fashion to act as a ‘market-maker’ in support of scale-up firms in strategic technology sectors. Entrepreneurs justified their preference for demand-side procurement regarding the need to correct the Canadian market’s small size and the power imbalance with foreign multinational firms. Procurement was frequently cited as a missed opportunity to enable Canadian firms to overcome pressures for early exit by using the government as a reference customer, bolstering their credibility in export markets and their ability to retain equity in future financing rounds. Many entrepreneurs stressed the under-utilized market-making potential of combining standards, innovation grants, and procurement. One interviewee summarized the potential as follows:

Imagine there is a standard regulation that says all [levels of government] must adhere to that standard, and there is a federal funding program which helps match that standard. If [our firm] was involved in defining the standard and owning the IP around it, you just made a market for me. The government doesn’t necessarily need to pick winners in this case, but it does need to grow markets where winners exist.

A common rationalization for a targeted deployment of demand-side policies was based on the neutrality of existing Canadian approaches that failed to account for structural power imbalances vis-à-vis global competitors and, as such, favour foreign firms over domestic companies. And like perspectives on the need for collaborative capacity to identify strategic R&D investments, many firms criticize the absence of mechanisms to identify and mobilize large-scale procurement resources around solving social problems. Innovative Solutions Canada, for instance, was identified as ‘a good step in the right direction’ but strongly criticized as too small-scale, not fast enough, and not coordinated enough with significant industry players. Furthermore, firms complained that existing procurement innovation programme ignore innovative solutions from scale-up firms that are already in the market but are overlooked due to inertia and risk aversion within existing non-innovation procurement processes.

4. Discussion and conclusion

Using the Canadian case to explore how scale-up entrepreneurs’ perspectives on the prevailing policy mix correspond to their policy preferences, the article finds that these entrepreneurs perceive that the federal government’s stated goal of scaling domestic technology firms is poorly aligned with the current innovation policy mix that employs a neutral, laissez-faire approach, characterized by a reliance on supply-side investments via indirect tax credits employed in a non-targeted fashion. Scale-up entrepreneurs prefer the targeted use of direct grants and demand-side procurement to address market entry barriers to small firms in winner-take-all market segments and a financial sector that favours equity dilution and early exit. The article fills a gap in the comparative politics of innovation policy literature by considering industry actors’ opinions and experiences, especially those of scale-up firms. As such, it makes a theoretical contribution about how scale-ups view innovation policy, why they view it that way, and, for the interested policy maker, what can be done about it.

In summary, the study illustrates how firm type and political economy contexts interact to shape how actors assess the consistency and coherence of policy mixes. With respect to the value of direct versus indirect, targeted versus neutral, and demand versus supply-side policies, we argue that a firm-centric perspective is essential for understanding the innovation policy landscape. The analysis demonstrates that policies designed for high-technology startups and MNEs often fail to address the specific needs and challenges faced by scale-up enterprises. This discrepancy necessitates policy adaptation and a keen awareness of the politics involved in innovation policy-making. The delicate balance between the interests of startups and scale-ups is particularly critical in smaller economies, such as Canada, where the high-technology industry may lack significant political influence. A failure to align the interests of these key stakeholders could potentially hinder the growth and competitiveness of the high-technology sector. By adopting a firm-centric approach, our research highlights the value of understanding the unique needs of scale-up enterprises and underscores the importance of integrating their perspectives into the broader innovation policy discourse.

But will anything be done about it? One question that emerges from our analysis is how to explain the incredible continuity in the Canadian innovation policy across governments led by the major political parties since the 1980s (Peters et al. 2005). While there has been some variation in specific programme and policy instruments, the basic policy thrust has remained surprisingly persistent to the frustration of the scale-up firms. The main question is how to explain the persistent exclusion of the scale-up sector from exerting more influence over the policy mix.

The literature on the politics of Canadian industrial and innovation policy explains the relative lack of influence of the technology sector in general and scale-up firms more specifically in terms of the relative strength of the more traditional resource, manufacturing, and finance sectors in the economy, as well as the preference of the finance ministry for indirect tax policy instruments, within the federal bureaucracy. Hall and Thelen argue, ‘The principal challenge facing analysts… is to identify the coalitions of social or political actors that support a change in regulations or policy regimes and the factors motivating their support’ (2009: 20). In the Canadian case, it appears that the politics of path dependency in innovation policy is best explained by the persistent influence of certain groups/classes of political and social actors to the exclusion of other groups of actors (Chandler 1986; Atkinson and Coleman 1989; Wolfe 1989; Williams 1994; Smardon 2014). While the current federal government, in office since 2015, has undertaken several new initiatives to strengthen and support the scale-up firms in the technology sector, it is too early in the process to determine whether these will be sufficient to overcome the long-running challenges faced by these firms.

Future research should explore how firm type, growth stage, and national context animate entrepreneurs’ assessment of innovation policy mixes. A comparative research agenda on firm-level perspectives on innovation policy mixes would be a useful extension of the theoretical framework developed in this article, as well as a more in-depth analysis of how the prevailing strength of established industrial sectors and specific interests within the government bureaucracy influence or constrain the scope for the introduction of new innovation policy mixes. We see potential in most similar case designs, particularly where otherwise similar countries show divergent outcomes. One limitation of our research is the inability to delve deeper into subsector preferences. The study prioritized understanding tech scale-ups over a broader cross-sector analysis. While we believe the focus is justified and that technology firms hold significant public policy relevance, a comprehensive examination across sectors could further illuminate the policy preferences of scale-up firms This warrants additional investigation in future research.

Finally, examining the relative influence exerted by various actor groups with differing policy preferences on the evolution of innovation policy mixes would be useful. Analyzing actor influence alongside other institutional and ideological drivers of policy change and stability would shed more light on the governance of innovation policy mixes, effectively bridging the until now unconnected literature on the comparative political economy of growth regimes (Hassel et al. 2020), theories of the policy process (Weible and Sabatier 2018), and innovation policy mixes (Edler et al. 2016).

Supplementary material

Supplementary material is available at Science and Public Policy online.

Data availability

Interview data is maintained by the researchers. For further information about the data or to request access, please contact the corresponding author.

Funding

Mitacs Canada Award No. IT10712.

Conflict of interest statement.

Both Steven Denney and Travis Southin were employed under the Mitacs Canada Award No. IT10712.

Endnotes

1.

The Scientific Research and Experimental Development (SR&ED) tax credit is employed in a neutral fashion and is available to any firm that qualifies, regardless of sector and firm type. More can be read about this tax credit here: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program.html.

2.

Firms with average annual growth in the number of employees (or revenue) greater than 20 per cent over a 3-year period have at least 10 employees at the beginning of the observation period.

3.

Valuable additions have been made to the original OECD definition (2007) by the Kauffman Foundation (2016). For the revenue-based definition, used here, scale-ups are identified as those with 20 per cent annualized revenue growth over a 3-year period and with a minimum revenue threshold of $2 million at the end of the growth period.

4.

Among these 71 firms, 51 are in Information Communication Technology (ICT) software and 15 in hardware. An additional five can be counted as belonging to ‘health tech’, a notable distinction given federal health care provision in Canada, but all of the firms interviewed for the main and supplementary analysis in this research can be more broadly and objectively considered technology firms. We classified firms according to their sector per the North American Industry Classification System, following the method applied by Denney, Vu, and Kelly to identify and analyse tech scale-ups (2021b: 84, 85). Lamb and Seddon (2016) established this technology sector identification method. It was further validated by Vu et al. (2019).

5.

The Strategic Innovation Fund (SIF) is intended to support firms in strategic industrial sectors and is the policy instrument that probably most closely aligns with scale-up preferences. More can be read about SIF here: https://ised-isde.canada.ca/site/strategic-innovation-fund/en.

6.

Israel has a population of approximately 8.8 million people, as of 2018, and Sweden has a population of just over 10 million (in 2019).

7.

More can be read about the Accelerated Growth Service programme here: https://www.ic.gc.ca/eic/site/117.nsf/eng/home.

8.

While the majority of those interviewed preferred direct grants, there were also many entrepreneurs who expressed appreciation for the role played by SR&ED tax credits as a form of non-dilutive capital.

9.

Research shows that firms with ‘growth potential’ usually grow with or without venture backing (Catalini et al. 2019), but firms that take on dilutive capital, and thus surrender equity/control in the firm, tend to exit earlier than firms that do not (Wasserman 2017).

10.

Institutional investors were cited as a possible solution by one interviewee: ‘Bay Street has a trillion under management [but] it just thinks of tech as risk, as opposed to looking at the business and understanding the market and understanding the actual risk’. One solution envisioned was for ‘CPP to put 1% of its asset towards large scale PE buyouts of private tech companies […] I think that would send a signal in the market that it is time to do something about that. That is one part of the capital stock that is still broken’.