I visited Ontario, Canada, last Friday to participate in the Waterloo Innovation Summit – one month ahead of the country’s federal elections – to see how entrepreneurs and policymakers are faring in that part of North America.

Our neighbors to the north offer some exceptional ideas and experience for policymakers seeking an appropriate role for government in advancing innovation and entrepreneurship. Canada was one of the first countries in the world to enact a startup visa for entrepreneurs. It is a global leader in proportions of R&D funding. Its colleges and universities graduate world-class technology students.

From grassroots communities to policy prescriptions, snapshots of the Canadian entrepreneurship landscape show healthy signs. However, its ecosystem seems to be lumbering along at half-speed.

The 2015 Global Entrepreneurship Index (GEI), which evaluates entrepreneurial framework conditions in conjunction with individual-level entrepreneurial attitudes, abilities, and aspirations, positioned Canada’s ecosystem second in the world. But with increased competition in the race to offer the most startup-friendly place, many worry Canada is starting to fall. Here are some observations from visiting the Waterloo/Toronto entrepreneurship corridor.

Demands for a Comprehensive Innovation Policy

Canada is among the top public spenders on research and development. The just released Global Innovation Index (GII), which captures the multi-dimensional facets of innovation, ranks Canada 16th out of 141 economies, down from 12th in 2014 and 11th in 2013.

Mariana Mazzucato, author of the Entrepreneurial State, reminded us on Friday of her thesis that the public sector does more than simply fix market failures, fund research and guide innovative entrepreneurial behavior through tax incentives. Its role is also to drive Schumpeterian creative destruction on a massive scale by making the big bets in order to shape and create new markets, noting that Apple would not have succeeded without the active role of the state. But recent history shows large economies investing too much on too few options in pursuit of a Silicon Valley mirage, verifying the commonly stated notion that governments invariably pick the losers.

Mazzucato’s voice however in the discussion can be helpful for Canada. Generous R&D tax incentives are the linchpin of Canada’s innovation efforts but many Canadians are calling for a comprehensive innovation policy.

“Tax incentives are a very blunt policy instrument. They apply equally to all firms who meet the legal criteria, regardless of the relative size and age of the firm… [T]hey are of no help in spurring the growth of new companies aiming to create new products and services, since at the very stage of their growth, in which new companies need the most help, they rarely have profits, and hence, cannot make use of tax incentives,” recently argued the co-directors of the Innovation Policy Lab at the University of Toronto in an op-ed in The Globe and Mail.

Perhaps the question for Canada is not whether to invest in long-term basic research that supports the emergence of new industries, but how to be smarter about deploying public funds. While visiting Canada, it seemed every few minutes there was a comparison to or reference point on Silicon Valley. Mary Mazzucato’s examples of successful R&D were US-based and when I was visiting MaRS in Toronto all the excitement was around the presence in the building of the C100 – a club of 100 Silicon Valley-based Canadians.

Canadians are well connected into the next generation of startup communities in developing entrepreneurial ecosystems around the world. As Ajay Royan, Co-founder of Mithril Capital Management pointed out in our discussion, Canada needs to develop its own unique playbook. Every entrepreneurial ecosystem now knows it needs tax breaks, strong research universities and engineers. The focus for Canada’s secret sauce should be around for example how to scale companies to $1 billion, increasing density of local startup communities, leveraging the cooperative program and Canada’s culture of impromptu helping. Canada’s focus should be on devising a smarter-than-the-rest process for engaging with local level innovation ecosystems outside of Canada in guiding major top down public investment.

City-level Progress Has Not Propelled Nation-wide Improvement

It is impossible not to be impressed by the likes Iain Klugman at Communitech and the University of Waterloo where the Waterloo Innovation Summit was held last week, or by the various Toronto accelerators at MaRS, the University of Toronto and DMZ at the University of Ryerson. I also met leaders from Canada’s other strongholds – Vancouver and Ottawa and Montreal. But as a group reminded me at a meeting at Futurpreneur in Toronto, Canadians often ignore ideas born in a competing city. Victoria Lennox, co-founder and CEO of Startup Canada, recently published an evaluation of where the Canadian ecosystem stands in which she openly discusses the difficulties of building a national startup movement. “It’s hard to build a national entrepreneurship culture when Vancouver relates more to Seattle than it does to Toronto,” she illustrates.

That said, three Canadian cities – Toronto, Vancouver and Montreal – are among the top 20 in the world for entrepreneurship in the 2015 Global Startup Ecosystem Ranking from Compass. Waterloo also scored highly and was a contender for a spot among the top 20.

However, “the findings aren’t as positive for Canada as they were in 2012. Toronto and Vancouver slid nearly 10 spots from #8 to #17 and #9 to #18, respectively. Canada’s top startup cities have developed and grown over three years, but just not as fast as New York, Austin, Bangalore, Singapore, or Chicago,” interpreted Lennox. In fact, Vancouver and Toronto are the startup ecosystems which made the biggest falls, explained the report’s authors.

A Slow Start for Canada’s Startup Visa

Canada’s startup demographic has long been diverse. For example, more than half (52%) of all companies in Toronto have founders who came from overseas, according to MaRS Venture Survey results.

To lure more immigrant entrepreneurs, who have a growing menu of viable location options, Canada launched in April 2013 a Start-up Visa Program as a five-year pilot. To qualify, a foreign entrepreneur must first secure a minimum investment from either a designated venture-capital fund ($200,000), or from a designated angel-investor group ($75,000). The program links selected applicants with experienced start-up investors who help support their business expansion.

Many were worried at the end 2014, when 20 months after the program was announced, the government had awarded only five visas to two companies. The result was disappointing given the target of 2,750 visas every year.

By May 2015, the program showed signs of picking up steam. It has approved 16 applicants for permanent residency to start businesses, and had another 60 in the pipeline for processing. Nonetheless, it is unlikely that the government will have difficulties keeping visas under the current cap of 2,750. The more likely challenge will be keep the program alive if the startup community cannot organize faster but there are smart, globally connected investors working on this. For example, Sunil Sharma, managing partner with Extreme Venture Partners told me over lunch he plans to leverage Toronto being the world’s most multicultural city by setting up space for startups from overseas to come and scale in the Toronto/Waterloo corridor.

Looking to New Generations

According to Futurpreneur, half of the entrepreneurs who head small and medium enterprises – which make up 98 percent of all businesses in Canada – are retiring in the next decade, driving an urgent need for Canada to boost entrepreneurial performance by focusing on youth entrepreneurship. Canada is therefore committed to strategies to tap the talent of young Canadians given that youth unemployment is more than double that of older age groups.

I mentioned this to Dr. Feridun Hamdullahpur, president and vice-chancellor of the University of Waterloo – home of Velocity Garage – who was quick to note in my meeting with him that some of his most promising innovators are just second year students. Waterloo benefits from its cooperative university roots, combatting an historical divide between “town and gown” by having always encouraged students to be getting real world experience in the applications of what they are learning at the outset.

McGill University Principal Suzanne Fortier added to the conversation that it is no longer good enough to be smart and creative for young people. McGill is focusing on how to help them be resilient to the ups and downs of economies so as to offer Canada deep pools of specialized human capital that can iterate the circulation of knowledge between industries and find new innovation at the intersection of disciplines.

A Leader in Impact Evaluation Sets Example for Other Countries

Like in many other countries, accelerators have proliferated in Canada, without enough research to prove their effectiveness. Government has nonetheless invested both directly and indirectly in many of the 30 Canadian accelerators and accelerator-like programs that have emerged since 2010. To fill the information gap, Ontario-based MaRS Data Catalyst has set out to collect and analyze comparable data about program performance, as well as about the overall entrepreneur population. Its Seeding Success report on the Canadian startup accelerator landscape is, for example, one of the few around the world to pry open data to look for real impact.

Data is the new oil, according to Joe Greenwood, program director at MaRS Data Catalyst who is among the leader of a cross-border collaborative Ecosystem Mapping Project. As part of the Global Entrepreneurship Research Network (GERN) Ecosystem Mapping Project in partnership with Endeavor Insight, the University of Toronto, and others, in 2016 MaRS Data Catalyst will be mapping the complex connections between Ontario entrepreneurs, funders, mentors, educators, customers, partners, government, academic researchers and startup ventures to better understand the types of connected relationships that successful entrepreneurs have in common. The mapping project will produce the most comprehensive picture of Ontario’s entrepreneurial ecosystem ever seen and will deliver valuable insight for entrepreneurs, policy makers and researchers.

What’s Next?

On October 12, 2015, we will see new data from the Global Entrepreneurship Index (GEI) ranking Canadian performance against other nations. Overall, Canadian policymakers are working in the right direction while capitalizing on some competitive advantages. General elections to choose members to the House of Commons that take place on October 19, 2015, offer Canadians an opportunity to update entrepreneurship policy thinking especially around how to invest in innovation.

As John Chen, the president of Canada-based BlackBerry noted to us on Friday, changing culture is just like changing “muscle memory”. It requires patience and the perspective that building resilient foundations for an entrepreneurial economy is a marathon not a sprint. Canada however, unlike BlackBerry’s tough fight against what Chen referred to as the “other fruit company” has an advantage of being a relatively small country compared to China or the United States or Brazil – and that small is beautiful. Just as upstart new entrants disrupt established market leaders, so can smaller economies be more nimble in the fast changing dynamics of science, innovation and new firm formation.

Photo credit: Flickr