Science and Research Committee on March 23rd, 2023

[The Vice-Chair, Conservative, Corey Tochor]

I call the meeting to order.

Welcome to meeting number 35 of the House of Commons Standing Committee on Science and Research.

We will be continuing our study of the commercialization of intellectual property.

Today's meeting is taking place in a hybrid format, pursuant to the House order of June 23, 2022. Members are attending in person in the room and remotely using the Zoom application.

I would like to make a few comments for the benefit of the witnesses and members.

Please wait until I recognize you by name before speaking. If you are taking part via video conference, click on the microphone icon to activate your mike, and please mute your mike when you are not speaking. On Zoom, interpretation is found at the bottom of your screen. You can pick French, English or floor. If you are in the room, you can use the earpiece and select the desired channels.

I would remind you that all comments should be addressed through the chair.

I would like to thank our witnesses for appearing in person today. We will start with their opening remarks. There will be two statements of five minutes apiece.

Please keep your remarks within those five minutes for scheduling reasons.

We will first hear from Mr. Asselin.

The floor is yours for five minutes.

[Robert Asselin, Senior Vice-President, Policy, Business Council of Canada]

Thank you, Mr. Chair.

Scientific progress is one of the key economic determinants of our future. Simply put, the ability of states to turn their intellectual capital into economic growth is now a key determinant of their technological, industrial and economic success.

Policy-makers need to acknowledge that scientific knowledge in science-based institutions is more than just a public good. It is an essential economic enabler in a world of increased geopolitical competition. Consequently, the ways we do science, how we empower our best scientists and researchers to do frontier work on the most pressing challenges we face, and how we facilitate that knowledge transfer in the real economy must become central to how we conceptualize our growth potential, as a country.

Canada has emphasized publicly funded research and development, or R and D, as a driver of its innovation policy. As a whole, the economic returns have been insufficient, as Canada's low productivity metrics over the last few decades show. Canada put too many eggs in that one basket. The goal of innovation economics is to amass innovation assets, IP, data and the talent that creates these, then exploit those assets when they are commercialized. Creating innovation assets and divesting them before commercialization, or losing out on the potential to grow companies to global scale, is a failure of innovation policy.

Currently, Canada does not have sufficient and adequate mechanisms to translate R and D and ideas into the real economy. No matter what financial instrument is deployed, public investments won't produce better outcomes if we don't change the way we think about, incentivize and produce innovation.

This misconception that innovation is primarily a process of technological adoption means that Canada is missing out on a considerable amount of economic wealth. That's why we need to build our capacity for large-scale applied and industrial research and create mechanisms for technology transfer.

The scientific model adopted after World War II is no longer an adequate framework for the current economic paradigm. In adopting this model, it was assumed that the transfer of public research to private businesses would be automatic. Today, we know that funding basic research is not sufficient to achieve better innovation outcomes.

Building conduits so that scientific knowledge generated in universities would translate into technological, industrial and economic advances is more difficult to achieve in practice than in theory. While the academic imperative to publish in prestigious scientific journals is important and should be encouraged, so should the creation of intellectual property. We simply do not produce enough patents in Canada.

The innovation ecosystem emerging from the last decades has been characterized by a deepening division of innovative labour between universities and private firms. Universities have been essentially tasked with focusing on research, while industry has been left with the application of science and technology. The problem is that using the output of university research still requires significant coordination and integration.

In the current configuration, 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, which are development, prototyping, testing, demonstration, product implementation and diffusion, which are necessary to complete the innovation process.

In the United States, the golden age of large industrial labs, such as Bell Labs, IBM, GE and DuPont, played a key role in the commercialization of R and D from the fifties to the eighties. Canada never cultivated that kind of R and D industrial capacity, or where it did, such as at Bell Northern, it has been lost. Ensuring that research is plugged into innovation networks is a critical function of an effective industrial policy.

We have long thought that R and D is innovation. From R and D to development through production, application and diffusion, the road to innovation is long and hard. An intentional industrial policy requires a new institutional infrastructure to support the modern application of science and technology in highly competitive and advanced industries and an approach focused on mandated missions.

Thank you, Mr. Chair.

[The Vice-Chair, Conservative, Corey Tochor]

Thank you so much for that presentation.

Now we move along to Ms. Furlong for five minutes.

[Kim Furlong, Chief Executive Officer, Canadian Venture Capital and Private Equity Association]

Good morning, Mr. Chair.

I thank the committee members.

My remarks will be in English, but I will be happy to answer your questions in French afterwards.

I appreciate the opportunity to speak to you today about venture capital, commercialization and intellectual property.

It would be strange for me to sit before you today and not address the collapse of Silicon Valley Bank and its impact on Canada's innovation ecosystem. In the span of 72 hours, the financial institution that underpinned the growth of start-ups around the globe collapsed and disappeared. SVB had the mandate to take risks and provide friendly terms to disruptive industries and companies. While the U.S. decision to honour all deposits and the efforts of Canadian banks and smaller lenders to offer venture financing to Canadian innovation companies mitigated the short-term risks, the long-term availability of capital in Canada remains uncertain.

I would be more than pleased to speak to this during the Q and A session.

I'm here today to speak about IP and commercialization and their importance to the investors I represent and Canada's economic future.

According to the Canadian Intellectual Property Office, IP-backed companies are 1.6 times more likely to experience high growth, two times more likely to innovate, three times more likely to expand domestically and 4.3 times more likely to expand internationally. These companies operate in life sciences, medical devices, clean tech, ag tech, advanced manufacturing and more. They are VC-backed and have the potential to transform Canada's economic future. This is crucial for Canada's economic prosperity and creating great jobs for the next generation. If Canada is going to compete and win in the tough global economy, we must be among the most innovative on the planet and the smartest about getting these technologies to market.

In 2021, we hit a high-water mark with venture investing reaching $15 billion. In 2022, we did better than expected, with $10 billion invested across 706 deals. That's pretty good, but consider that in 2022, U.S. venture capital was $238 billion invested in 15,852 deals. Right now, 60% of Canadian venture capital comes from the United States. We want to ensure these dollars continue to flow to our market, but we also have to be mindful of the positions of Canadian companies on those capitalization tables. It's a juggling act, but IP puts us in a stronger position.

We need to do three things. We need to ensure that, while U.S. dollars ebb and flow in and out of Canadian start-ups, Canadian capital is there to seize the opportunities and benefit from the upside. We need to understand the value of the companies we are building, and protect and leverage those values. We also need to be smart about growing and protecting our assets.

Currently, Canada ranks high on innovation but low on IP creation. We remain a net exporter of IP. The federal government did well in 2018 with its IP strategy. The initiative has been successful in creating awareness and education in the importance of IP. Now we need to go deeper. We need to understand what the different verticals need and address the needs of those sectors. Since 2018, what has excited me the most is BDC's IP investment fund. It's the first of its kind in Canada—a sector-agnostic $160-million fund that offers debt, convertible notes and equity. We need to grow these types of investment funds in Canada. In essence, the fund values the IP and lends against it. BDC then takes a seat on the board and helps the company merge its IP strategy with its business plan.

As I sit before you today, Canada ranks as the second-largest tech hub globally, after Silicon Valley. This is due to the high availability of capital globally, poor immigration policies in the U.S. and opportunistic immigration policies in Canada. It's also due to great innovation flowing from our research centres and universities, and to cheaper skilled labour here.

While I'm proud that we're leading, I'm not satisfied about where we sit. Since 2015, the federal government has been a co-investor in the innovation ecosystem via the VCAP and VCCI programs. These programs return a benefit and profit to the Government of Canada, while stimulating VC investment.

Let's look at VCAP's performance. The government invested $340 million. The private sector leveraged that $340 million and raised $1.3 billion. VCAP chose 33 VC investors, which led to investments in 360 companies. These companies, in aggregate, raised $2.8 billion. The program returned every cent to the government and made 44 cents on every dollar of return. It's a prime example of public-private partnership.

I will end there, Mr. Chair.

I will be happy to entertain questions.

Thank you.

[The Vice-Chair, Conservative, Corey Tochor]

Thank you so much, Ms. Furlong, for that presentation.

We now start our six-minute round of questioning,

MP Williams, the floor is yours for six minutes.

[Ryan Williams, Conservative, Bay of Quinte, ON]

Thank you, Mr. Chair.

Thank you to our witnesses. This is an incredible study. It's nice to have you both here in person today, so thank you for taking the time to attend this committee.

Ms. Furlong, I'm going to start with you and what you ended with, venture capital.

We've had a lot of witnesses already come to this committee. We've talked about the obvious need for venture capital. We seem to have a lot of IP that's picked up from the U.S. and international partners because venture capital is more prevalent in the U.S. It seems more Americans than Canadians are able to take risks. Do you agree with that statement?

[Kim Furlong]

I think the culture in the U.S. is a lot more open to risk than Canadian culture is. I do think that over the last decade the investors and the entrepreneurs in Canada and even the business schools have pushed out better and more risk-tolerant entrepreneurs. The availability of capital, as you heard in my remarks, is much different in Canada than in the U.S.

In terms of the risk profile of Canada as a culture, in our DNA we are more risk averse. That being said, being able to stand before you today and talk about the fact that we're the second-largest technology hub after the valley tells me that we're on the right track, and when it comes to IP, the ability to scale Canadian companies and to grow them here and to IPO them in Canada is still a work in progress.

[Ryan Williams, Conservative, Bay of Quinte, ON]

I agree with you wholeheartedly. Certainly I think we're also working hand in hand on IP commercialization with scaling companies in Canada. We're equally bad at both of them, I think.

You talked about VCAP, the BDC program for IP. What recommendations would you make to generate more Canadian venture capital in Canada? Would it be to have more programs like that?

[Kim Furlong]

I think the government needs to stay the course. There have been three programs: VCAP, VCCI and renewed VCCI. The third one is in process.

I think institutional capital, our biggest pension plans, operate in U.S. VC but in very little Canadian VC. Sometimes they'll do direct deals on these capitalization tables but they don't necessarily become limited partners in GP funds, and there need to be more exits. There needs to be more success in Canada. There even need to be more M and As, because every time an entrepreneur succeeds and has an exit in venture, they become an angel investor and give a chance to the next entrepreneur to grow their own company, so success, real success.

[Ryan Williams, Conservative, Bay of Quinte, ON]

I think you're right on the money there that we need to celebrate success in Canada. We used to call it humble bragging in Canada. We're always very polite.

Mr. Asselin, you had two papers. One was “A New North Star”, which talked about the need for a new industrial strategy for an intangibles economy of which IP is obviously a critical part. The second paper says that one of the pillars of a challenge-driven industrial strategy is a focus on the entire innovation continuum.

Could you elaborate on the idea for the committee? What do you see that looking like? How does it differ from the current system, and what are the potential benefits?

[Robert Asselin]

That's a great question. Thank you.

I think it's really important to understand our strengths and weaknesses in the innovation ecosystem. My view is that we do pretty well at what I would call the beginning of the continuum, which is the intellectual capital part of it—human capital, universities, R and D—and VC is better than it was, I would say, but once we go to the continuum to scaling, I think global champions in advanced industries is where we're lacking.

This is where we need to go, because, as I stated in my remarks, competitiveness on the economic front happens in advanced industries. This is where advanced economies compete. If we don't have scaled companies in these highly advance sectors, we're not going to be competitive. Our current account deficit is not sustainable in advanced industries. In other words, if we're a net importer in all of the key advanced industries, we're not going to become more competitive. In fact, we're going to be less competitive.

This is where we need to focus. I find that in Canada we are spread too thin across the spectrum and so, when one speaks about the innovation ecosystem, I think we need to be really focused on these key advanced industries, scale our companies, create IP, retain it, leverage it and make sure we have more IPOs in Canada.

[Ryan Williams, Conservative, Bay of Quinte, ON]

We've heard from other witnesses about the failure of companies to raise capital, and you talked about R and D in your opening statement, and how that first-stage innovation piece is very important.

You talked about R and D earlier, about the 1950 strategy and World War II. Do you recommend that we as a government should perhaps look at first-stage innovation, in very specialized areas, as you said, focused on certain industries for Canada?

[Robert Asselin]

Yes. What we lack is, essentially, that bridge between research and private firms. We lack various steps in the innovation process. It's one thing to have a lab in a university coming out with a good idea, or what we can call an invention. Bringing this to a firm and scaling it so that firm can become a global champion takes many more steps in the process. I think this is where we are failing. We think being good in R and D will, in itself, translate into innovation.

I want to be specific about this. Look at what the United States has done in defence and space. It's clear they have industrial labs that connect, where they are strong in R and D, with private industry. They bring industry in to solve these problems. This is how you can scale companies, by also having the public procurement aspect of it.

[Ryan Williams, Conservative, Bay of Quinte, ON]

Thank you very much, Mr. Chair.

[The Vice-Chair, Conservative, Corey Tochor]

Thank you so much.

We'll now move on to the next member of Parliament. It's Chad Collins, who is online.

[Chad Collins, Liberal, Hamilton East—Stoney Creek, ON]

Thanks, Mr. Chair.

Welcome, witnesses.

I'm going to start with Mr. Asselin on that last point.

Your opening had a comment related to how we assume, here in Canada, that.... I think your words were about knowledge finding industry. I want to pick up on your last answer to Mr. Williams.

A previous IP study here in Ottawa highlighted the fact that private firms sometimes don't know what research is occurring or being performed in post-secondary institutions. The recommendation that came from our previous report—it's many years old, but I think it's still relevant to our discussion today—was that there be some kind of matchmaking process.

I was hoping to get your feedback on that previous report recommendation, in terms of the federal government playing a role. I think you just provided an example from the United States. I was hoping you could elaborate on that.

Who is undertaking, facilitating or supporting a mapping exercise between the private sector and post-secondary institutions, where the vast majority of research and development is occurring?

[Robert Asselin]

That's a great question.

To give credit to the government, NRC's IRAP does a bit of this. I think, in the new innovation corporation, the plan is to scale it.

I don't think we're doing enough on the industrial R and D side of things. If you don't apply research to commercial applications, you're still very far away from commercial success. This is where we need to do much better. Again, industrial research needs to be focused on these advanced industries, where you have a high level of technology intensity, R and D, and highly skilled workers.

I'll bring you back to what Secretary of Commerce Raimondo stated a few weeks ago in a very important speech she gave at MIT. She said the world is going to compete in “three families of technologies”. The first is computer-related technology—AI, quantum and microelectronics. The second is biotech. The third is clean tech.

This is where we'll need to compete. If we're not there as a country, we're going to struggle going forward, in my opinion.

[Chad Collins, Liberal, Hamilton East—Stoney Creek, ON]

Thanks for that answer.

You were constructively critical, I think, in your recommendations.

Normally, people are talking about budgets as they relate to support. Do you have suggestions about financial support the government should be providing on top of what it's doing today?

[Robert Asselin]

The government made some choices. Let's be honest. They went forward with this innovation corporation. I think it's been a matter of internal debate for some years. I was a proponent of instituting the DARPA model. The government rejected this and went for a bigger IRAP model, which I think could potentially be good in some aspects. However, I don't think it's focused enough. Unless you think about industrial strategy in very specific lanes and try to be everything for everyone.... I think we're still going to spread the peanut butter too thinly.

To the extent the government has already made some choices, I would urge them, on implementation, to focus on the three families of technology I just mentioned.

[Chad Collins, Liberal, Hamilton East—Stoney Creek, ON]

Thank you for those answers.

I'm going to switch over to Ms. Furlong.

In some of your final comments, you highlighted the return on investment from the current strategy we have.

How do we take that to the next level? This goes to your last point related to public-private partnerships and enhancing those partnerships. Is it about squeezing more out of the sponge with the current strategy we have or tweaking the strategy and building upon what we've already put forward?

[Kim Furlong]

The stats I gave you are for the program created by Harper's Conservative government. Those stats are available because of dollars that have been returned. The other two under the Trudeau government are still in market. One is fully allocated and one is currently being fundraised.

What surprises me the most is how little people know about these programs. People think the government is supporting venture capital, when really it's investing alongside it. The two VCCI programs.... The government is entering these waterfalls and agreements pari passu, which means it is an investor equal to all the other limited partners in the fund.

It generates all the money back. Think about all the government programs that just give out money and the government never sees it again. It's hard to tangibly identify the results. In these ones, the treasury gets all the dollars back. They make a significant return. It creates jobs, innovation and exports, and it commercializes IP. However, it needs to grow. As I said, 60% of all dollars that come to venture capital is from the U.S. Most of it is at a later stage. U.S. firms are able to write a $2-million cheque in a $600-million round, which very few Canadian funds can do.

My recommendation is that the government stay the course not in supporting but in investing. Institutional capital needs to meet the demand out there. Venture capital is the most efficient allocation of dollars for companies. These programs are wonderful, because the government doesn't get to pick. When the government gets to pick, politics get in the way.

[Chad Collins, Liberal, Hamilton East—Stoney Creek, ON]

Thank you.

You obviously provided some comparisons to the U.S. Are there other international examples we should be looking at?

[The Vice-Chair, Conservative, Corey Tochor]

I'm sorry, Mr. Collins, but we're already 20 seconds over.

We will now move to the next six-minute period.

Subbing in for Mr. Blanchette-Joncas is MP Simard.

I have a quick clarification for the committee. When I manage the clock, I try not to cut off the witnesses, but I will cut off the member of Parliament if they go over their allotted time.

With that, we have MP Simard for six minutes.

[Mario Simard, Bloc, Jonquière, QC]

Thank you, Mr. Chair.

Thank you, Mr. Asselin and Ms. Furlong.

Mr. Asselin, I listened to your presentation, and it reminded me of many discussions I have had about the national immunization strategy and the forestry industry. Everyone has talked to me about the need to foster collaboration among the players. In fact, I had that discussion with Rémi Quirion.

In Quebec, there is a rather interesting model related to value-added corporations, especially in the forestry industry. I don't know if you are familiar with them. I'm thinking of FPInnovations and CRIBIQ, the Consortium for Research and Innovation in Industrial Bioprocesses in Quebec, which actually work quite well. I'm also thinking of college centres for technology transfer, CCTTs, which are having some success in Quebec.

I don't know if the federal government has done anything comparable to what has been done with the small value-added corporations. To your knowledge, what is happening in that area?

[Robert Asselin]

The federal government has launched the intellectual property strategy, but as far as I know, there is no mechanism for technology transfer at the federal level.

As I tried to explain, that responsibility is given to universities that do intensive research, such as the University of Waterloo or the University of Toronto. However, I think it is almost unfair to ask universities to carry this burden, since their mandate is really about research. Commercializing the product of that research is not part of their role.

I'd like to go back to corporate labs, as that's where the research and development and the industrial problems that needed to be solved came together. There was a boom in economic growth starting in 1970, when these labs were created. They have since been lost, however, because companies found them too risky financially and did not replace them.

I admit that Quebec has a slightly more sophisticated model of innovation, as the province is focusing more on technology transfer.