The Scale and Potential of Ontario’s Intangible Economy

Newly released research from Economist Impact, commissioned by CPA Ontario, evaluates the state of Ontario’s intangible economy.

The paper, which features the latest available data on the state of the province’s ability to embrace intangibles, highlights four areas that are critical to the growth and development of Ontario’s intangible economy.

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Intangible assets are the key source of growth in the digital economy. Yet, without a concerted effort from businesses, governments and educational institutions, Ontario’s long-term growth potential will leak outside the province.

Read CPA Ontario's 2022 report, produced by Economist Impact, "The Scale and Potential of Ontario's Intangible Economy" and join the discussion.

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Ontario is Canada’s economic powerhouse

Ontario’s intangible economy, which consists of assets like data, software, intellectual property and R&D, is the biggest in the country. While the province has nurtured a vibrant start-up economy, it often lacks the capital, knowledge and policies to help innovators scale up and compete on a global stage. When companies can’t make that leap, they end up being bought by those that can with the long-term returns often moving offshore.

Key insights from the research calls for a four-pronged strategy by business leaders, governments and educational institutions to grow Ontario’s intangible economy: translating intangible investment into productive assets, scaling up the commercialization of intangibles, adapting to new digital realities in the wake of COVID-19 and boosting intangible economy-specific education and skills training.

1

Translating intangible investment into productive assets

Intangibles near 1/3 of Ontario’s total investment

Ontario invests heavily in the development of intangibles, but struggles in translating these into a productive, locally owned stock of intellectual property (IP). The province devotes an impressive 31% of its total public and private investment to intangibles (equivalent to C$60bn in 2020). This proportion is larger than every other province besides Quebec and reflects how important intangibles are to the province’s economy.

Ontario struggles to convert research dollars into new patents

Ontario struggles to translate intangible investments into assets. The province’s weak conversion rate on patent development may suggest growing pains around planning, distribution and deployment of investment. For every C$100m spent on R&D in Ontario, it only generates 4.6 new patents, compared with 11 in Alberta and 10 in Saskatchewan. Although these findings highlight potential issues within Ontario, it is important to note that patents aren’t a one-for-one predictor of intangible success, with many businesses in the intangible economy now relying on trade secrets.

Capturing homegrown benefits successfully

In 2019, the provincial government convened an expert panel on IP to develop plans to direct strategic investments and capture the homegrown benefits from research and IP commercialization more successfully. This includes a focus on retaining the ownership of intangible assets in Canada. The panel’s recommendations included a mandatory IP education curriculum for publicly funded institutions, centralized resources for legal and IP expertise, and mandates for research organizations that use public funds in pursuit of commercial benefit. Ontario also recently announced the formation of Intellectual Property Ontario, a new agency to help researchers and companies to maximize the value of their IP in global markets.

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2

Scaling up the commercialization of intangibles

Scale-up challenges in Ontario

The report finds Ontario’s economy is particularly weak in amplifying commercial value and retaining ownership of IP over the long term, hindering the ability of innovative companies to grow into global players. Ontario has a smaller share of companies that expand to more than 50 employees in under 10 years than all 50 US states. If Ontario’s companies can’t scale up as effectively, or are acquired by foreign investors before they do, it spells challenges for strengthening employment and building profits in key industries.

Bright spots for Ontario exist

Ontario does show some bright spots in commercializing intangibles, such as the ongoing scale-up of its AI industry, which added more than 32 companies and 3,600 jobs in 2019-20. The dramatic growth of Toronto’s tech sector also stands out, which added as many jobs between 2016-2020 as Boston, New York and Seattle combined. The most successful businesses achieve scale and rapid growth by capitalizing on upgrades across IP and other intangible assets such as creative competencies, supply-chain relationships, human expertise, and skilling capacity.

1/4 of ON businesses that fail to access loans have insufficient collateral

The research suggests that Ontario’s struggles in scaling up are also due to the difficulty of accessing consistent, long-term financing. This “curse of collateral” reflects the fact that many intangible-focused businesses and small and medium-sized enterprises (SMEs) lack the physical assets needed to obtain funding to expand. Across Canada, loans to SMEs made up just 11% of lending in 2018. This systemic issue, rooted in outdated credit-worthiness evaluations, is often cited as a leading barrier to enabling disruptive innovation.

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3

Adapting to new digital realities in the wake of covid-19

Ontario’s digital economy is the largest in Canada

Ontario’s intangible economy is powered to a significant degree by its digital economy–the largest and fastest growing in Canada. This digital economy includes the production of digital goods and services and digital infrastructure such as computer hardware, software, and telecommunications. The strength of Ontario’s digital economy relative to its provincial peers is further evident through high rates of public and private investment in information and communications technology products and infrastructure.

COVID-19’s impact on intangible assets

Covid-19’s push toward a more digital future has also reinforced the growing importance of intangible assets for business competitiveness and resilience. Throughout the pandemic, more labor– or physical capital–intensive companies often struggled to ensure business continuity and manage existential threats.

An intangible economy supported by infrastructure

Although digital infrastructure policies are a strong point for Ontario, clear gaps in preparedness still exist. Better access to digital infrastructure is pivotal in promoting a sustainable economic recovery from the pandemic. Experience shows intangible-led recoveries do not automatically result in an equal redistribution of wealth and can easily leave behind less productive parts of the economy. Efforts to strengthen the digital and intangible competitiveness of all types of businesses should be a priority.

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4

Boosting intangible economy-specific education and skills training

Labor shortages a barrier to growth

A major component in a well-functioning intangible economy is a productive pool of workers. Ontario’s job market is flush with intangible-intensive opportunities, with the province boasting the second-highest concentration of STEM-related jobs. However, these opportunities are only accessible to highly skilled applicants. The difficulty of finding suitable labor is evident in the rising job vacancy rates of Ontario’s most intangible sectors, which have risen to 5.2% in the third quarter of 2021, from 3.6% in the first quarter of 2021.

Investments in education not yielding results

Although 66% of working-age adults have postsecondary degrees or diplomas, 1 in 4 college graduates are not active in the labor force. Education may not always translate into appropriate skills for facilitating growth in the intangible economy. For example, more than half of entrepreneurs report difficulties in hiring employees, a talent gap that can create significant challenges for businesses looking to scale up quickly.

Policies for better preparing the labor force

Steps are already underway to rethink curriculums and better acquaint students with STEM pathways in universities and workplaces. Beyond STEM, Ontario could look to extend intangible skills training and development into the more creative and artistic professions within the intangible economy. Ontario needs to develop skills for the intangible economy and knowledge about it, to help businesses, investors and policymakers more effectively navigate it.

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