A Drop in an Empty Pond: Canadian Public Policy towards Venture Capital


Time to read

3 Minutes


Douglas Cumming
The DeSantis Distinguished Professor of Finance and Entrepreneurship, College of Business, Florida Atlantic University
Sofia Johan
Associate Professor of Finance at the College of Business, Florida Atlantic University
Jeffrey MacIntosh

The Government of Ontario and the Government of Canada have replaced their Labour Sponsored Venture Capital (LSVCC) programs with new programs without tax subsidies to retail investors, becoming in effect institutional investors funding private fund managers (similar to what is done in Australia, for example; see Cumming, 2007). The Government of Ontario committed $29 million to the Investment Accelerator Fund in 2007, $105 to the Ontario Venture Capital Fund in 2008, and up to $50 million per year through the Ontario Emerging Technologies Fund in 2009. The Government of Canada committed $500 million towards venture capital in 2013 through the Venture Capital Action Plan. 

At first glance, these figures – hundreds of millions of dollars – might seem impressive and very large. To better understand these magnitudes, in our paper we present evidence relating to VC investments in comparable jurisdictions in the US, and in specific states such as California and Massachusetts. In our recent paper, A Drop in an Empty Pond: Canadian Public Policy towards Venture Capital, forthcoming in the Journal of Business and Industrial Economics, we ask the following straightforward questions:

  1. What is the level of VC/GDP in the Canadian provinces, and Canada wide, relative to that in the US?


  1. If there is a VC shortfall in Canada, how much more VC is needed in Canada so that the level of VC/GDP would be comparable to that in the US?


  1. What is the cause of the VC shortfall in Canada?

In answering these questions, we look at the data, which provides some startling figures. It indicates that the Government of Ontario’s VC expenditures would have to be higher by $4.4 billion per year to achieve levels of VC/GDP that are comparable to Massachusetts. Similarly, the Government of Canada’s expenditures would have to be higher by $1.6 billion per year to achieve levels of VC/GDP that are comparable to the US Simply put, the governmental expenditure on VC in Canada is akin to “a drop in an empty pond”. These statistics are even more startling when one considers the fact that the government is already the largest VC investor in Canada through the Business Development Bank of Canada (BDC) and Export Development Corporation (EDC).

The VC shortfall is best seen in the context of two problematic government programs in Canada. The first involves Labour Sponsored Venture Capital Programs. Cumming and MacIntosh (2006) present evidence that such programs have crowded out private venture capital in Canada, with data up to 2001. We have undertaken similar regressions with data up to 2011, and find very similar evidence of crowding out that is consistent with the Cumming and MacIntosh (2006) results. 

The second problematic issue involves how much governments spend on different types of businesses with large established firms being favored at the expense of their smaller counterparts. In our paper we explain that in Ontario in 2012 there were $4.1 billion in expenditures allocated towards businesses. Who receives the $4.1 billion? Data from the Ontario Ministry of Finance (Cumming, Dalziel, and Wolfe, 2014) provides a clear answer: the vast majority of these expenses are targeted towards the largest and oldest companies and the companies with the greatest revenues. 

This Cumming, Daziel, and Wolfe (2014) report was completely confidential, and it was buried by the Government of Ontario in 2014. The report was made public by the National Post (a national Canadian newspaper) in early 2016, shortly after the authors of this paper informed an economist at the CD Howe Institute of its existence, and Jeffrey MacIntosh successfully made a Freedom of Information (FOI) request to obtain it and make use of its contents. We understand from the CD Howe Institute that the connection and timing of the information passed along from the authors to the CD Howe Institute and the reporting of this information in the National Post was merely a surprising and very unusual coincidence, as no reporter had noticed the report from its delivery in 2014 until 2016, until we confidentially passed along information about the report’s existence and FOI request to said person at the CD Howe Institute.  Even more of a coincidence, the National Post reported the same type of information and in the same format that we report in Figures 3 and 4 of our paper.

The difficulty of releasing information, and the discretion amongst those that debate public policy in Canada, arguably contributes to the difficulty in achieving first-best public policy outcomes.

Douglas Cumming is a Professor and the Ontario Research Chair at York University, Schulich School of Business.  Sofia Johan is an Adjunct Professor of Finance and Entrepreneurship at York University, Schulich School of Business. Jeffrey MacIntosh is a Professor and the Toronto Stock Exchange Chair in Capital Markets Law at the University of Toronto.


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