Nancy Gallini, Aidan Hollis | September 24, 2019
Are Canadians fated always to be “hewers of wood and drawers of water,” our prosperity dependent on raw resources rather than our ingenuity? Canada has the right conditions for innovation: a well-educated workforce, strong research institutions, openness to skilled immigration, generous R&D tax credits and proximity to the large US market. So why does Canada rank poorly among industrialized countries in terms of innovative output? Policymakers have wrestled with this puzzle for decades, and for good reason: innovation is essential to the wealth and welfare of a nation. It is an engine of economic growth and a driver of global competitiveness.
In our recent study for the IRPP, we argue that a key reason for the disconnect between our innovation potential and our performance is Canadians’ propensity to develop innovations and then transfer (or “assign”) their patented technologies to foreign entities rather than scaling up and commercializing their inventions. In doing so, they forgo property rights over the use of their inventions and the opportunity to profit from the innovations that they pioneered.
This growing trend is revealed in patent data from the US, where Canadian inventors are most active in filing patent applications. For example, of the over 9,000 patents granted in 2017 by the US Patent and Trademark Office that were developed all or in part by Canadian resident-inventors, 45 percent were immediately assigned to firms or other entities outside of Canada, a percentage that has more than doubled over the past 20 years. And of those that remained in Canadian hands, a significant number are subsequently reassigned or sold off. The bottom line is that Canadian invention too often does not result in Canadian ownership of patented technologies.
Why is this relevant to the innovation input-output gap in Canada? Patent ownership is key for innovators — especially small- and medium-sized enterprises (SMEs) — looking to commercialize inventions and scale up. By establishing property rights through patents, innovators are better able to signal their inventions’ value to venture capitalists, protect their assets and compete in global markets. If instead they transfer or sell their patented technologies to larger firms, SMEs could face high royalties or costly litigation on inventions they helped to create and, even worse, be deterred from innovating in related technological areas. This is particularly relevant to innovation in Canada, where SMEs accounted for more than 50 percent of the value added to Canada’s output from 2010 to 2014.
So why would Canadian inventors not obtain and retain patent rights on technologies they develop? In some cases, the inventors are employees of foreign enterprises, and are obligated to assign the patents on their inventions. In other cases, such as start-ups, exploiting the patent requires firms to raise capital for product development and production and then for scaling up and competing in global markets. This entails substantial costs of obtaining, retaining and protecting patents in global markets, which can simply be too great to overcome relative to the benefits. Indeed, the opportunity to sell the invention to large US technology firms that are both fierce competitors and keen buyers of Canadian patents can be the most attractive option in these circumstances.
What does this mean for policy? Impeding the transfer or sale of patents in Canada to foreign entities is not the answer. In fact, it could be counterproductive for the research activity in Canada (including that conducted by foreign subsidiaries) that is necessary to enhance the country’s innovative capacity. Nor would strengthening Canada’s patent system likely enhance Canada’s innovation standing in the world, as scaling up for global markets depends on the ability to obtain and retain ownership of international patents.
Rather, efforts to facilitate Canadian innovators’ access to global markets and incentivize the commercialization of their new products and processes are more likely to be effective. These would include providing legal advice on how to navigate international patent systems; reducing costs of satisfying patent standards, including searching existing patents that could undermine patent validity; eliminating bottlenecks in accessing global markets; and mitigating the risk of patent invalidity and infringement.
Some of these measures are included in the federal government’s Intellectual Property Strategy, a promising but modest policy that aims to increase awareness and exploitation of patents with the goal of increasing the value of Canadian innovations. Its impact should be carefully monitored, and if the policy is successful, it should be scaled up and sustained. Of course, patent ownership alone will not turn Canada into an innovative superpower. A greater array of public policies and private strategies will be needed to make the most of Canada’s innovation potential. However, providing appropriate support for innovators so that they find it profitable to retain patents — not for their own sake but as a strategic tool for accessing global markets — could help to tip the sell-versus-scale-up balance toward the latter and improve the country’s economic prospects.