Science and Research Committee on March 28th, 2023

[The Vice-Chair, Conservative, Corey Tochor]

I call this meeting to order.

Welcome to meeting number 36 of the House of Commons Standing Committee on Science and Research.

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.

We are continuing our study on the support for the commercialization of intellectual property.

I'd like to make a few comments for the benefit of witnesses and members. Regarding interpretation for Zoom, you have the choice at the bottom of your screen. You can either choose French, English, or the floor. I remind you that all comments should be addressed through the chair. In accordance with our routine motion, I am informing the committee that all witnesses have completed their required connection tests in advance of the meeting.

I'd like to now welcome our two witnesses for the first panel. One will be online, and the other in person. They will have five minute for opening statements. It will be followed by some rounds of questioning.

We're going to start online with Mr. Schwanen. Please do your best to keep within five minutes. I will try to get your attention once we get to the conclusion of your remarks to hopefully speed it up.

The floor is yours, for five minutes.

[Daniel Schwanen, Vice-President, Research, C.D. Howe Institute]

Thank you, Chair.

I'm Daniel Schwanen. I'm the vice-president of research at the C.D. Howe Institute. I thank you for the invitation to appear before this committee.

Commercialization can be seen as the point where innovative ideas come to fruition to create or sustain economic activity and jobs. In that sense, commercialization certainly builds on prior research and innovation, but it's the part where research and innovation visibly benefit Canadians more broadly.

Research and innovation are very important foundations to the success of commercialization, but they are not the only ingredient. Successful commercialization requires capital, access to markets, and a strategy to manage and protect intellectual property. As you have no doubt heard, Canada has made progress on all of these scores.

Successful commercialization also requires management skills, design and marketing skills, branding acumen, a strategic vision for growth and knowledge about opportunities and the competition. It requires that the people who possess these skills and capabilities want to use them from a Canadian base. We also need a system that rewards commercialization.

Canada is in fact a net exporter of ideas. We have a significant surplus in our balance of payments for research and development. Consider the many multinational companies that hire Canadians to do research here in Canada that is then used to create new or improved products for those companies. In other words, these are exports of ideas that create jobs in Canada, most of which are well paid, but which help build intellectual property held elsewhere.

Canada is, in contrast, well known as a net payer for the services of intellectual property that such research or other creative or innovative activities in Canada or elsewhere help generate: for example, royalties or copyright payments. That is because the IP for what we use in this country and what our trade partners use commercially is, on the net, owned outside of Canada.

This combination of trade surplus in research services—the ideas—but net services in paying for the use of intellectual property that research helps create puts Canada in the same category as Turkey, Argentina and India, but even among these countries we're kind of an outlier—doing big research while being a big importer of the services of the IP. In contrast, the United States or the United Kingdom enjoy trade surpluses in both research services and payments for the use of intellectual property that they own.

Countries like Denmark, Finland or Sweden actually import research services from abroad on the net, but they own the IP and they generate surpluses that way. Countries like Israel—often held as an innovation model—have an off-the-charts surplus on research services but a balance of both receipts and payments for the services of IP.

The story here is a familiar one: Compared to peers, Canada is better at research than at securing the fruits of this research. To quote from a famous movie, “If you build it, he will come.” In the context of this discussion, we may think of this phrase as meaning that more research will generate more innovation, the IP rights for which can then be secured. Then, on that foundation, commercialization will—or should, maybe with a little help—follow. However, I think the dynamic runs mostly in the opposite direction. If we are better at commercializing ideas from this country, the research and innovation and the IP that embodies them will grow and stay, or come into Canada—even regardless of where it originates—because it will be good to grow an IP-based business in this country.

The reason some IP has been flowing out of Canada and into other countries is that it has been easier for others to commercialize our ideas as well as theirs. We should seek to reverse that trend. Of course, we should enhance our ability and sharpen the incentives to commercialize in Canada the products of our own research and innovation. This can be done through the use of patent boxes that incentivize but do not restrict the use that researchers and innovators in hospitals and universities, for example, can make of their IP.

Other ingredients include making it easier for innovators to find markets in Canada, for example, through a more agile and outcomes-oriented public procurement process and by rewarding small firms that grow in preference to those that stay small.

I'm at time. I'd be happy to elaborate on the above, as you see fit.

Thanks for your attention.

[The Vice-Chair, Conservative, Corey Tochor]

Thank you kindly for your presentation.

Now we will go to Mr. Durand for five minutes for his submission, and then we'll start the rounds of questioning.

Mr. Durand, the floor is yours for five minutes.

[David Durand, President, International Intellectual Property Forum - Québec]

Thank you.

Mr. Chair, honourable members of the Standing Committee on Science and Research, analysts, good morning.

The Forum international sur la propriété intellectuelle—Québec, FORPIQ, wishes to thank the committee, including the vice-chair, the Honourable Maxime Blanchette‑Joncas, for inviting FORPIQ to present its point of view in the context of your study.

Founded in 2001, FORPIQ is a not-for-profit with two principal aims: First, to raise awareness and educate companies, including startups and SMEs, about intellectual property, so that they have the basic knowledge to succeed and understand how to leverage their assets—IP, data and confidential information. Secondly, FORPIQ aims to facilitate connections between investors, entrepreneurs, and companies with the right IP and commercialization resources as part of our biannual conferences, the next one taking place on May 10.

In December 2021, FORPIQ became an observer member of the World Intellectual Property Organization, WIPO. I will come back to that at the end of my remarks, at which time I will have a few comments on the subject.

FORPIQ is supported by its members, such as the Canada Development Bank, Axelys, INO/Quantino, law firms, Bold New Edge, Deloitte, Minimum Viable Intellectual Property, and myself, David Durand, President of FORPIQ.

As you already know, the state of Canadian innovation is worrisome. This is confirmed by many sources. On this topic, we echo the comments of the Honourable Senator Colin Deacon, and Jim Hinton in his opinion piece “Why We Must Abandon Canada's Troubling Approaches to Innovation”, which appeared in the Financial Post on March 6, and Aaron Shull of the Centre for International Governance Innovation and myself, who opined, in a recent Globe and Mail article, that Canada’s national security policy, which dates back to 2004, must be updated so that it can address the relationship between intellectual property and national security.

There are other troubling statistics. For example, Quebec earned a “C” in innovation and industrial R&D, despite an “A” in public spending on research and development. In Canada, there is a rate of 0.15 to 0.20 in the creation of spin-offs per $10 million of research, while in Quebec, that rate is only 0.09.

For that matter, the burning question resulting from the 2019 IP Awareness and Use Survey dashboard is: Why do only 18.2% of Canadian businesses hold at least some kind of formal IP in Canada or abroad?

Asking the right questions today is framing our policy for the future.

As such, FORPIQ proposes a number of recommendations.

As proposed by FORPIQ partners, MVIP and Bold New Edge, we must disrupt the previous ways of thinking about innovation and commercializing IP by being business-focused. We wish to conduct an expanded survey of the 2019 IP awareness and use survey to assess our IP and business culture, as well as to map how dormant assets are found within a company and subsequently commercialized. These are key elements.

We should also create a strategy for entrepreneurs for what they have to spend now versus later, while keeping a laser focus on product market fit and protecting core technology, and being coached or mentored by seasoned operators who have already succeeded in the same space or industry.

We should engage Canada's business community to promote IP uptake as a result of IP security, national security, cybersecurity and other considerations.

We should share the knowledge academies, such as those of the World Intellectual Property Organization, which have done the same for the international community. This will allow for the upskilling of business leaders and decision-makers in the notions of intellectual property.

We should create more IP management education for students earlier on in their educational process.

Our initiatives will require significant support from you, the Government of Canada and ISED, in order to achieve our goals to the benefit of Quebeckers and Canadians, as innovation is a nationwide issue that requires collaboration among all stakeholders.

Considering the remaining time, if two sentences were to be retained with respect to the IP or patent box regime in Canada, they should be these. Our partner Deloitte noted that the tax incentive, or rate, must be “significantly lower than the rates applied” to regular “business income.” The preferential tax rates are “meant to provide firms with a stronger incentive to innovate and commercialize the innovations...domestically.”

In conclusion, as an observer member of WIPO and because of our excellent relationship with them, we would like to ensure francophone and anglophone representation throughout North America. We work closely with WIPO's IP and innovation ecosystems sector under the direction of assistant deputy director Marco Aleman and Johanne Bélisle, the former CEO of the Canadian Intellectual Property Office.

This allows us to create particular synergies between Canadian businesses, start-ups, SMEs and established businesses within the provincial—in Quebec—and the Canadian and international innovation ecosystems, where people are encouraged to invent and create.

Also, the relationship with WIPO allows us to promote Canada—which is already seen as a leader through BDC on its contributions to IP—on the international stage with respect to IP-backed financing and funding for women through the Thrive platform. This will be discussed further in an upcoming FORPIQ article that will be appearing in WIPO's special edition commemorating World IP Day on April 26 under the theme, “Women and IP: Accelerating Innovation and Creativity”, as we tackle the gender innovation gap. As was reported by WIPO, only one in eight AI inventors in Canada is a woman.

FORPIQ's next event is on May 10, and we look forward to receiving the government's support so that we can fulfill our goals and our mission, which are to the benefit of the Quebec and the Canadian IP, business and innovation ecosystems.

If you have any questions, of course feel free to ask them in the language of your choice.

Thank you very much.

[The Vice-Chair, Conservative, Corey Tochor]

Thank you for that.

Now, with our six-minute round, we will start with MP Williams.

Mr. Williams, you have the floor.

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

Thank you, Mr. Chair.

Thank you to our witnesses for attending today.

Mr. Schwanen, you were getting into some really great recommendations, so I want to hear those recommendations again, particularly on patent boxes, faster procurement and rewarding firms that grow. Can you please touch on those in a little more detail?

[Daniel Schwanen]

Yes. Here, I would refer to a recent publication of the institute: our shadow budget for 2023.

On the idea of patent boxes, I think Mr. Durand referred to these as well. You essentially would get a tax benefit in using intellectual property to build a Canadian business.

For whatever income you derive based on that, for a while you would get a lower tax rate than the general tax rate. There's a way, as we explain in that document, of maximizing that benefit so that it encourages the use of IP for innovation—for commercialization for an innovative business—while costing the government not an insignificant amount of money, but you don't give a zero rate either. There's a certain balance where you get the benefits and you don't cost in terms of revenue. We estimate that the cost of this measure to the federal treasury would be $500 million annually.

On encouraging small businesses to grow, it's actually a very difficult proposition, but the idea is that as long as you hire and keep growing, you get to keep, for example, the small business deduction. If you don't, then maybe you can lose it over time. That's a general concept.

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

You spoke about some of the better practices of the Americans and the Scandinavians. What are they doing differently from what Canada does in order to encourage business growth to protect IP and to build patent boxes?

[Daniel Schwanen]

I think the overarching comment I would have regarding all these countries is that they're really into commercializing ideas, and they're not necessarily their own ideas. They're ideas from all over the world. They have research labs elsewhere, including here in Canada, that produce these ideas.

What they do is through tax incentives or, maybe more to the point, incentives to grow or an environment where they can more easily grow a business and export and bring talent from all over the world. It's not that we can't do that here in Canada, but they are incentivizing the presence of businesses in their countries that then gather IPs locally and from all over the world and that can create a business and generate and create products, goods and services that are then sold all over the world. They each have a different recipe, so I don't want to generalize, but the whole idea on commercialization is that they have a greater laser focus on that.

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

Thank you, sir.

Mr. Durand, one of the ways to build a better innovation environment is through mentorship, and I think you are well versed on mentorship, so I'm going to ask you how we can use mentorship to increase the growth of businesses in Canada. What role does the federal government have when supporting mentorship with businesses?

[David Durand]

Thank you very much for the question, Honourable Williams.

Before answering that question, I just want to complement the first response by my colleague Mr. Schwanen.

With respect to the patent box model that you were referring to earlier, our partner Deloitte has already submitted a submission to the finance committee that we would more than gladly share with this committee as a written brief response.

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

Yes, please supply that.

[David Durand]

Thank you very much.

With respect to the other question on the models or other countries we can look to, I think that will intersect with the response I'm going to give you. Before 2021, we were asking ourselves the same questions in terms of international models, and, according to the Global Innovation Index, currently ranked number two is Sweden. Sweden and the Swedish Incubators & Science Parks have already disclosed their secret sauce, as mentioned by Sandra Ruuda and Kristian Wirsén, who explained the eight ingredients to create a strong innovation system.

One of them was Swedish culture, and then knowledge, public-private partnerships, softened hard management, how HR looks upon their bankers and how they promote invention innovation within their companies. There's the Swedish model with a high level of digitization, the start-up nation and how they get to that point very quickly as well as open innovation and collaboration, because there is a lot of collaboration amongst many stakeholders within their system.

The emphasis that they have placed is on the practice of giving back, where successful entrepreneurs, operators like Skype, have given back to the community, not in terms of their ability to share their knowledge but in terms of the financial resources that they provide. This formed part of a study that goes back to 2003 on the entrepreneurial effect of giving back. It was also the object of a paper by Stuart and Sorensen in 2003 called “Liquidity Events and the Geographic Distribution of Entrepreneurial Activity" . This is something that would inspire us. It was also written about by our colleagues, the editors Martin Bader and Sevim Süzeroğlu-Melchiors, in their recent book called Intellectual Property Management for Start-Ups, which responds to a lot of these questions. In their chapters in which they were contributing authors, as well as Lally Rementilla from the BDC, they described how this system could be promoted.

Going back to the question of operators and how the Government of Canada maintains relationships with the businesses that have succeeded in how they have managed to grow, scale their companies and have a laser focused on product market fit, those are the people we should be looking for in order to build those relationships and have them mentor and coach small and medium-sized businesses as well as Canadian start-ups through the ElevateIP fund, of course.

Thank you.

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

Thank you, sir. I appreciate it.

[The Vice-Chair, Conservative, Corey Tochor]

Thank you so much for that.

Now we'll go on to our next MP. We have MP Sousa for six minutes.

[Charles Sousa, Liberal, Mississauga—Lakeshore, ON]

Thank you, Mr. Chair.

Thank you to both witnesses. I appreciate your deliberations, your concern for IP patents and commercialization and the scaling of our domestic businesses so that we have greater success as we go forward.

I also appreciate and understand from you both that part of your recommendations are about ensuring that there are greater synergies and greater co-operation amongst the private sector as well as government to facilitate and inspire some of that engagement. I also appreciate the discussions around the tax incentives to try to inspire greater activity or motivation to do the same.

I'm also sensitive about government acting with greater care and not adjudicating deals. That's not our part, especially as we go forward with the investment of some of these patents and trademarks.

I think you all talked about the Global Innovation Index, where Canada does rank in the top 15, which is not a bad deal. We are, I presume, now engaged quite frequently in new innovative areas of AI, quantum research and so on, and that's all very encouraging.

There's a disconnect. There's a worry that we all share that we ensure the success of those investments. Can you comment on what we are doing as a government? Our concern here in this committee is what government does. What part are we playing that enables the industry to succeed while emulating what happens in Australia, the U.K. or the U.S.? They are broader markets; they're bigger. We lose some of our talent and some of our businesses that way because of financing, monetization and the ability to commercialize. Can you expand a little bit about what Canada is doing well?

I'll go to you both of you with regard to our existing programs, and then please talk about what we—and I have your recommendations—should do.

Go ahead.

[David Durand]

Thank you very much for the comment and the question.

Canada, I believe, is doing very well in how it's funding these start-ups. ElevateIP is a fantastic fund that is already in existence. That's one way, once the program gets rolled out by the business accelerators and incubators. That's being done very well. The National Research Council's IRAP fund, IP Assist, is also being done very well.

The question is more the messaging to the business culture, the business community, which needs to understand the value of intellectual property and how it can grow on that IP. My personal belief is you must have a product that fits market needs first, and then the IP gets constructed around that as you go from version one, to version two and to version three. There's always going to be an improvement in the technology as the company grows, but obviously they're going to have to put a focus on how we sell from day one. That's one key of the commercialization process, as well as scaling.

[Charles Sousa, Liberal, Mississauga—Lakeshore, ON]

Thank you, David.

Daniel, do you have any comment?

[Daniel Schwanen]

Absolutely, yes.

I think we've had an approach that was a little bit more of what I would call “spray and pray” in terms of funding research That's changing a bit, but it's almost that we fund the activity rather than paying attention to the outcome and how Canadians can benefit from it.

Don't get me wrong: we're already doing a lot of things. This committee has heard about better protection for IP, upscaling business leaders, which are hugely important. It's often not appreciated that successful U.S. business leaders, for example, tend to have a higher degree of education than our Canadian business leaders. All these sorts of soft aspects to commercialization really come into play in entrepreneurship and so on.

But there are some hard factors, as well. Canada is not doing well at all in terms of capital investment. We know that capital investment is almost in symbiosis with commercialization and innovation. The two work together. It's a very bad symptom if we don't have investment in this country. We should look at, of course, tax rates. We should look maybe at depreciation rates for capital. All these things, although they're general policies, will contribute to the use of IP in this country and to its commercialization in this country.

We have a bit of a problem, I think, with some of these soft skills, entrepreneurship, but we're also not really rewarding investment, as well as the commercialization of IP, as much as I think other countries are doing.

[Charles Sousa, Liberal, Mississauga—Lakeshore, ON]

Daniel, how do we compare against Australia with our tax benefits or tax incentives?

[Daniel Schwanen]

On that, I don't have the numbers here.

[Charles Sousa, Liberal, Mississauga—Lakeshore, ON]

How do we compare with the U.K.? Do you know?

[Daniel Schwanen]

No, I don't have the numbers handy. We did do a study on what we have to do to get there.

[Charles Sousa, Liberal, Mississauga—Lakeshore, ON]

What I'm trying to get at is that there's obviously greater risk-taking in foreign jurisdictions when it comes to these capital investments. We have huge pension companies in Canada that are investing outside Canada, for that matter. Yes, we would like to see more of that happen here internally. We would like to see the monetization of those opportunities stay domestic.

I have a pretty good sense that we have a competitive tax system when it comes to new venture deals and IP, but I'm just wondering if you know, David, how we compare with Australia or the U.K.

[David Durand]

Unfortunately, I don't have those statistics, either. I could ask my partners at Deloitte if they have that type of information available.