Canada faces big problems with IP including national security risks: Parliamentary report

Canada’s daunting problems with intellectual property include national security risks from the continued flow of Canadian IP to foreign countries and lack of commercial development in key sectors, according to a Parliamentary report.

Other challenges include: limited coordination between IP initiatives in Canada; barriers to commercial development of university research; high cost of acquiring and protecting IP; low levels of available venture capital for innovation; and the need for greater IP expertise across all sectors, demographics and stages of innovation.

The country’s struggles with managing, retaining and protecting IP are detailed in the Standing Committee on Science and Research report, “Support for the Commercialization of Intellectual Property.” The committee heard from 34 witnesses and received 13 written briefs.

“The number one threat to Canada right now is that we are not properly taking control of our IP and data assets,” Jim Balsillie (photo at left), chair of the Council of Canadian Innovators, said in testimony to the committee.

Canada, he said, “spent decades creating foundational AI technology and gave it to Google. Taxpayer money created foundational battery technology at Dalhousie [University] and gave it to Tesla.”

Canada’s policies on direct foreign investment (FDI) need to be changed immediately because they’re actually encouraging the flow of Canadian IP to foreign companies, including those in unfriendly nations like China, Balsillie said.

“Look at the nature of the marketing of the Invest in Canada organization [an arm’s-length federal government organization that promotes and attracts FDI into Canada]. We give them money to erode Canada,” he said. “I don’t think we want this kind of FDI under these terms.”

Canada should do like other nations and put structures and restrictions around FDI relationships to ensure the many economic and non-economic realms involved are properly managed to advance Canadians’ interests, Balsillie said. “Our extreme neo-liberalism has hurt us.”

“You can’t commercialize what you don’t own, and as a country, Canada does not own very much,” said Toronto patent lawyer Jim Hinton, co-founder of the Innovation Asset Collective, a federally funded organization that supports Canadian cleantech companies in acquiring and protecting patents.  

Various federal innovation programs, such as the Strategic Innovation Fund (SIF) are part of the problem because they create disparities in how Canada treats foreign entities compared with domestic companies, he said.

“You can’t give $40 million [through the SIF] to Nokia and then, in the same breath, give $10,000 through NRC IRAP’s IP Assist to a Canadian company,” Hinton said, referring to the National Research Council’s Industrial Research Assistance Program.

“You’re increasing the asymmetry rather than trying to catch up. You’re putting wind in the sails of the foreign companies and then you’re putting anchors on the Canadian companies,” he said.

Witnesses told the committee that Canada’s ongoing IP challenges also include:

• a shrinking proportion of intangible assets in relation to Canada’s economy since 2000
• a decline in patent applications per capita since 2005
• in the proportion of GDP spent on R&D, Canada ranks No. 20 among member countries of the Organisation for Economic Co-operation and Development
• the lowest level of corporate R&D funding among OECD and G7 countries.

IP-backed companies are 1.6 times more likely to experience high growth, two times more likely to expand domestically, and 4.3 times more likely to expand internationally, witnesses told the committee.

“Today the knowledge-based economy is in its fourth decade, the data-driven economy is in its second decade, and the age of machine learning capital is emerging, yet Canada’s deficit on IP payments and receipts is widening at an alarming pace, a position we now share with developing nations,” Balsillie said.

 Insufficient federal support for commercialization

Some witnesses said R&D by Canada’s post-secondary institutions are a strength, with Canada ranking No. 3 among OECD countries in the percentage of all private R&D done in partnership with post-secondary institutions.

But a challenge is that the federal government invests heavily in R&D at universities – putting “too many eggs in that one basket” – and then doesn’t adequately support the commercialization of this post-secondary research which limits economic returns, said Robert Asselin, senior vice-president, policy, for the Business Council of Canada.

“The federal government provides funds for research and assumes this knowledge will naturally make its way to industry. It neglects all the necessary steps to commercialization,” Asselin said.

Also, the government’s support of post-secondary R&D is unbalanced, said Jeffrey Taylor, chair of the National Research Advisory Committee for Colleges and Institutes Canada (CICan). CICan’s internal analysis shows that Canada’s colleges received only 2.39 per cent of Tri-council Agency funding in 2020, he noted.

“Our funding limits our opportunities to help businesses generate new IP, iterate on existing products and explore ways to improve labour productivity,” Taylor said. “It’s 140 colleges fighting over two per cent of the budget. I think there are 110 universities in Canada and they have 98 per cent of the budget.”

CICan said its partnership program between colleges and businesses doesn’t have the capacity to meet market demands with its current funding. CICan turned down 1,400 requested partnerships between 2020 and 2022, due to a lack of available funding.

Even when post-secondary research is commercialized, it may take seven to 10 years or more between an invention disclosure and the first royalties from a technology transfer, said Anne-Marie Larose, former president and CEO of Aligo Innovation, who testified as an individual before the committee.

Also, the cost of filing a patent can quickly become a significant portion of a startup’s initial costs, said Karim Sallaudin Karim, associate vice-president of commercialization and entrepreneurship at the University of Waterloo. While startups often already understand how important IP is, they may face challenges in how to pay for it, he said.

Balsillie pointed to a problem of fragmentation of post-secondary technology transfer offices. Germany’s Frauhofer Institute, for example, has 74 research institutions, 30,000 employees and one technology transfer office (TTO), he said. Ontario is a small fraction of the Fraunhofer’s size but it has 35 TTOs.

“That’s between about two and three orders of magnitude of fragmentation,” Balsillie said. University TTOs aren’t at the scale needed for effective technology transfer, he added. “ It's a structure problem. They are put in an impossible situation. How can you compete against an institutional apparatus that has orders of magnitude more scale than you do and national alignment from the funding agencies?”

IP lawyer Hinton noted that more than half of all industry-assigned IP that comes out of Canadian universities is assigned to foreign companies. This results in IP that “was often developed with public funding or incentives and is now generating income for foreign companies,” he said.

Several witnesses pointed to Quebec’s approach as one that realizes the importance of provincial programs in supporting IP and commercialization, including through:

• the Quebec Research and Innovation Strategy
• the Deduction for Innovative Manufacturing Corporations, a “patent box” that provides a tax deduction on the cost of acquiring patents;
• the Mouvement des accélérateurs d’innovation du Québec, a non-profit organization to strengthens the capacity of the startup support ecosystem
• Axelys, a non-profit Quebec technology transfer centre
• Synchronex, a network of college centres for technology transfer and innovative social practices.

Witnesses before the standing committee, as well as the Advisory Panel on the Federal Research Support System (which produced the “Bouchard report”), suggested that one area the new Canada Innovation Corporation (CIC) should explore is providing a matching or linking service that brings together researchers and industry partners.

Quebec-based IP lawyer Todd Bailey also suggested to the committee an education role for the CIC – whose federal blueprint stated that CIC would move “at the speed of business” – in setting a curriculum for IP education and providing train-the-trainer services to interested organizations.

The CIC won’t be able to take up either suggestion for a while, however, because the federal government announced in December a delay of up to two years in fully implementing the new agency – until “no later than 2026-2027.”

Canada failing to protect its IP

Other countries are taking steps both to increase their IP and to protect it, including patent boxes regimes (which provide tax credits for acquiring and protecting IP) in jurisdictions such as Ireland, the U.K., Spain and France.

Mike McLean, CEO of the Innovation Asset Collective, pointed to several countries, including South Korea, France and Japan, that have established “sovereign patent funds” to advance IP in their countries. China has a national plan for building its IP, including providing funding for researchers to file patents.

Unlike Canada, other countries’ national IP strategies focus on key technology sectors, such as the Netherlands (agriculture), the U.S. (aerospace and defense), and Israel (technology).

Another challenge is that Canada has a relatively low level of available venture capital, particularly early-stage investment that may carry a higher risk of failure. Funding that is available may not cover the necessary time needed to develop and commercialize.

McLean noted that investment in programs at the federal, provincial and regional level to help improve Canada’s IP capacity is extremely limited compared with the billions of dollars spent annually to encourage innovation. Such IP programs require funding at an increased scale and the political will to sustain them over the long term to deliver a system impact on Canadian prosperity, he said.

Robert Asselin and Kim Furlong, CEO of the Canadian Venture Capital and Private Equity Association, recommended allowing larger funds, such as pension funds and mutual funds, to invest in entrepreneurial ventures as alternative investments. Other witnesses advocated using federal procurement processes to support made-in-Canada entrepreneurial solutions.

Canada’s lax control, compared with some other countries, over domestic patents also raises potential national security risks.

The University of Calgary reported to the committee that the university had transferred one patent to companies in China over the past five years, had three ongoing projects with Chinese telecom firm Huawei to be completed by early 2024, and that UCalgary would be declining new projects in partnership with Huawei moving forward.

The University of British Columbia reported assigning eight patent families to Huawei between May 2014 and October 2018, before moving to a joint ownership model between October 2018 and December 2022. The joint ownership model resulted in one patent family, and a partnership model where UBC owned the IP developed in collaboration with Huawei. As of December 2022, all partnerships between UBC and Huawei will undergo a security audit before proceeding; where risks cannot be mitigated, the projects won’t be allowed to proceed.

Balsillie recommended that the federal government, under the Investment Canada Act (ICA), broaden the focus of any review of foreign direct investment to include a more appropriate evaluation lens of critical strategic technologies, which would allow for the assessment of university partnerships, licenses and transactions of valuable IP and data.

“If assets are deemed critical to Canada’s prosperity and security, then the ICA needs to ensure that they remain in our control, regardless of the type of foreign counterparty or the nature of the commercial relationship,” he said.

Moreover, the federal government needs legislative powers – similar to those in Australia – to unwind any prior investment, university partnership, joint venture, or merger or acquisition, Balsillie said.

Also urgently needed is building capacity inside the federal government for governance of today’s knowledge economy of intangible assets,” he said.

Recent FDI-driven initiatives such as the Sidewalk Toronto “smart cities” project [which was ultimately scrapped], continued university partnerships with Huawei and Invest in Canada agency marketing strategies “demonstrate that Canada’s policy-making apparatus is not just rooted in the traditional production economy of yesterday, but is decades behind the realities of the contemporary economy,” Balsillie said.

Canada needs the expertise, through some kind of economic council, to properly manage FDI, along with federal agencies with transparency and accountability that could be called before Parliament to explain the rationale for investments, he said.

“If we don't stop this before a tipping point, then all the issues we’re seeing around polarization, economic erosion, compromised security that we’ve heard of, and being bullied in trade agreements and so on, are just going to get worse,” Balsillie said.

Parliamentary committee’s recommendation to government     

The Standing Committee on Science and Research’s report made 14 recommendations, including that the Government of Canada:

• establish taxation measures, potentially including the creation of a patent box, to encourage the commercial development of intellectual property and the retention of intellectual property within Canada.
• update the National Security Guidelines for Research Partnerships to provide research institutions and organizations with clarification in regards to jurisdictions and organizations that present potential risks to Canada’s national security.
• in collaboration with the provinces, territories and other stakeholders, identify key sectors in which to foster innovation, such as through ongoing support of the Pan-Canadian Artificial Intelligence Strategy and the National Quantum Strategy.
• explore policies and incentives to encourage entrepreneurial investment from large investment funds, including public pension plans.
• review and revise federal procurement practices to increase, wherever possible, investment in Canadian startups and small and medium-sized enterprises commercializing new products and services
• in partnership with the provinces, territories and post-secondary institutions, identify promising practices for post-secondary technology transfer and fund the implementation of those practices.

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