THE STANDING SENATE COMMITTEE ON BANKING, COMMERCE AND THE ECONOMY
EVIDENCE
OTTAWA, Thursday, March 23, 2023
The Standing Senate Committee on Banking, Commerce and the Economy met with videoconference this day at 11:30 a.m. [ET] to study matters relating to banking, trade and commerce generally.
Senator Pamela Wallin (Chair) in the chair.
[English]
The Chair: Hello everyone. Welcome to this meeting of the Standing Senate Committee on Banking, Commerce and the Economy. My name is Pamela Wallin, I’m the chair of this committee, and I’d like to introduce members of the committee who are with us today: Senator Deacon, Senator Gignac, Senator Loffreda, Senator Marshall, Senator Ringuette, Senator Smith and Senator Woo.
Today we continue our study on the issues and policies impacting business investment in Canada.
On our first panel from the Centre for International Governance Innovation, or CIGI, we have the pleasure of welcoming in person, Mr. Dan Ciuriak, Senior Fellow at CIGI, a man with a very long and impressive résumé, getting Canada through the financial crisis and also many trade negotiations. Thank you for your service and for being here.
And joining us virtually today is Bob Fay, Managing Director of Digital Economy at the Centre for International Governance Innovation.
Dan Ciuriak, Senior Fellow, Centre for International Governance Innovation: Thank you, Madam Chair, deputy chair, senators. Thank you for the opportunity to speak today. I’m Dan Ciuriak, Senior Fellow at the Centre for International Governance Innovation, where I write on the innovation economy and the digital transformation.
All human progress is underpinned by the development and application of new technology. For all practical purposes in our economy this means technology must be commercialized, which in turn means it must reside in a firm. From this perspective, economic growth is indistinguishable from the growth and the number and size of firms that create and use technology; a firm-based view of the world. A relatively small subset of all firms account for almost all productivity growth, innovation and export expansion in our economy. It’s called the “vital 6%.”
A country’s ability to foster the development of such high-growth firms goes directly to its bottom line on real GDP growth, innovation metrics and trade performance. One of the novel features of the modern economy is the “unicorn.” It’s a private firm with a prospective market value of US$1 billion. This term was coined in 2013 to emphasize how rare they were. A decade later, they are no longer rare. In 2023, there are now 1,200 such firms worldwide.
It’s well known that Canada underperforms in innovation, and the indicator I urge you to focus on is firm counts: how many firms we have in this category. Canada currently has 20 unicorns, with a total value of just over $50 billion, according to CB Insights. The United States has over 650, with a total value of US$2.1 trillion. Canada’s ratio is at 3% and 2.4%, respectively, to the U.S., and that is substantially below the rule of thumb of 10 to 1 that we would normally use to compare ourselves with the U.S.
Second, Canada punches above its weight in developing artificial intelligence technology, or AI, the critical new technology of our age, but we’re far underweight in the number of firms set to commercialize it, and that should be our main concern.
Should Canada throw money at this problem? By all metrics, innovation is getting faster, harder and more resource-intensive, which in principle creates a role for industrial policy activism. However, for a small open economy like Canada, such public sector support can and will leak abroad unless we have a business model that ensures national appropriability of the returns from the public sector investment in our innovation system.
Canadian economist Robert Mundell, who received the Nobel Prize for showing that small open economies function differently from large closed economies in the areas of fiscal policy and monetary policy — his ideas flow over into innovation policy as well. We have ignored this lesson from Canadian history at our cost.
Finally, to get from a basement workshop to a technology pavilion, an innovator must navigate a complex system of finance; intellectual property, or IP; industrial ecosystems; regulatory processes for products and processes; and much more. This can be bewildering and frustrating for an innovator whose primary expertise is scientific. There’s a saying that it takes a village to raise a child. One might say it takes a SWAT team of experts to navigate the process from basement to pavilion.
Canada has started to put in place some of this, for example, in developing an IP strategy, but, unlike the Americans, we have not fully industrialized this process. Canada needs to industrialize the process. We need to put the innovator on a “conveyor belt” where they are taken from one door to the next, one expert to the next, and taken through the process. Such a process would assign them an account and an account manager, one who is looking for a reason to believe, not a reason to exclude: “You don’t meet this checkbox, sorry.”
We need to have this account manager pestering our innovator with phone calls and appointments, taking them to financiers, to other technology companies, not leaving them listening to the sound of radio silence. This example is not taken out of the blue. This example is taken by anecdotal information that we’ve acquired from talking to entrepreneurs. New York State does this. We don’t. And so our innovators will be going down there, and the benefits of our innovation will leak out into the United States. I look forward to your questions. Thank you.
The Chair: Thank you.
Robert Fay, Managing Director, Centre for International Governance Innovation: Madam Chair, deputy chair and senators, I appreciate the opportunity to speak here today. As you’ve heard, I’m the Managing Director of Digital Economy, Research and Policy at CIGI. My remarks today will focus on the need to invest in data governance to boost productivity growth. Let me explain.
We know that data is a valuable resource. We can see it in the market valuations given to data-driven firms, and Statistics Canada has also estimated that the value of the Canadian stock of data products is in the range of $200 billion, and that is likely an underestimate.
But despite this value, data is in many respects a stranded asset. That’s for many reasons. Firms and workers may not have the resources to organize and utilize data. They may lack access to digital infrastructure and they may be unsure of the rules and regulations over how data can be used, especially personal data, and the legal risks that it may entail. Further, the nature of the big data economy has tended towards monopolistic structures, with inadequate attention paid to competition policy, leaving small and medium-sized enterprises, or SMEs, to struggle to compete effectively.
Some firms, countries and jurisdictions are strategically setting rules to benefit their own interests and to capture the economic rents associated with data. Against that background, let me make some recommendations.
First, not surprisingly, we need to invest in governance of data to unleash the value of data. Currently, there are no uniform rules or standards on how data should be used in digital technologies. It is welcome to see Canada moving forward with proposed updated privacy legislation and a very welcome review of the Competition Act, but these reforms must be thought of as a package and not in isolation. They must be coherent with trade agreements, with innovation policies, with consumer protection and so on. They must also be coherent with other initiatives, such as open banking and the digitalization of money.
All too often, governance is fractured or inconsistent, creating confusion for businesses and consumers alike, undermining investment in innovation.
Second, we need strategies for data sharing and data reuse. These strategies would include different types of data structures — commons, collaboratives or trusts — that would set rules over data access, use, reuse and control. They can be sectoral-based to drive growth in strategic areas and to allow SMEs access. Our statistical agency can play a valuable role here, just as it has done for decades in other areas of data sharing.
Third, we need to ensure governance is more inclusive. This will help to build trust in the uses of personal data and digital technologies.
Fourth, we need to invest in reforming our domestic regulatory structures to deal with the cross-cutting nature of digital technologies. With the ongoing shift towards data and intangibles as drivers of economic growth, regulatory frameworks need to adapt. Other countries have recognized this. For example, the United Kingdom has created the Digital Regulation Cooperation Forum, which brings together broadcast, privacy, competition and financial regulators.
Fifth, and finally, we need to invest in international collaboration to create global rules that meet Canadian values and provide opportunities for Canadian firms. At the same time as we consider how to revamp our domestic regulatory frameworks, actions taken in other jurisdictions have a direct bearing on Canada, given the global nature of data flows and digital technologies. Canada needs to be active in influencing these global developments so that they meet the needs of Canadian firms and match Canadian values. In this context, it’s encouraging that Canada has announced its intention to negotiate accession to the Digital Economy Partnership Agreement.
In conclusion, our natural resources and other traditional areas of activity will always be important for wealth creation in our country. However, to drive growth and to increase wealth, we need to take advantage of data, both in transforming our traditional sectors and in creating new ones. That requires us to invest in appropriate governance to unleash the value of data. Thank you. I look forward to your questions.
The Chair: Thank you both for your comments. I want to follow up with Mr. Ciuriak for a moment before we begin. You talked about the unicorns. We’re quite outgunned on that one when you look at our neighbour to the south.
We heard testimony from two witnesses yesterday. One spoke about “gazelles,” namely, the small businesses that don’t have the desire or the willingness to grow. Both of them talked about a lack of ambition, our tendency to be risk-averse, and that we’re not fearful enough so we become complacent. Could you open with a few thoughts on that before we begin our questioning?
Mr. Ciuriak: Thank you, Madam Chair. I generally don’t agree with country-specific sort of isms, like Americanism or Japanism, that explain why they’re different. Every country is different, but we have to look to general economic principles to understand why we’re seeing what we’re seeing in Canada.
If we say that it’s because Canadian innovators are just not hungry enough or they’re risk-averse, then that’s it; what can you do? However, if the issue lies in the fact that when you hit a certain ceiling of growth, you then become a target, and there are companies out there in this world of patent thickets who are simply waiting to see company innovation become successful. They scan their portfolio of non-performing IP and they find a reason to sue. Even if the suit doesn’t succeed, they may get an out-of-court settlement to appropriate part of their returns. If the company is not appropriating their returns, the board of directors will then make a decision not to go for it. To me, the issue lies in the fact that we see a general dampening of business dynamics — not just in Canada but in the U.S. and elsewhere. This reflects the fact that we have over-patented the world and created these patent thickets, which are a disincentive to innovation and growth.
The Chair: That’s an interesting take. Thank you very much.
Senator C. Deacon: Thank you to our witnesses, Mr. Ciuriak and Mr. Fay, for your excellent opening comments. We’re focused on business investment and how to increase business investment in Canada. I think you’re absolutely focused on what the necessary elements are to create a good business opportunity that people want to invest in. I’ve long said that Canada is at the wrong end of a data vacuum. We still haven’t updated our privacy legislation, and it seems stalled in the House yet again.
What worried me in reading your paper, Mr. Ciuriak — and I’d love comments from both of you — is how grateful Eric Schmidt has been to Canada’s investments in AI research and how that has accelerated the growth of Google, and the fact that we haven’t figured out how to protect our IP in ways that will even enable us to have the freedom to operate in future in certain areas where we have developed a world-leading expertise, because we haven’t put that inside our fence.
Could you speak to the importance of us getting this plumbing right? It amazes me that we’ve been focused on government investment to grow businesses like this, but it seems that we should be just investing in the plumbing at the base of the foundation that creates the assets that Canadians and others will want to invest in.
Mr. Ciuriak: Thank you, Senator Deacon.
The way I would approach this is to say suppose you capture the heights of the innovation economy. Think of the smile curve. The smile curve basically says at the front end of the smile, you’ve got research and development, or R&D, and the patents and you capture the intangible assets of your innovation. At the bottom half of the smile curve is the production of the IP and of the data models, et cetera. At the final end of the smile, the other height, is the branding and the marketing. If you capture those two heights, then you will be importing services at the bottom of the smile. Canada has not captured the heights. We have naturally positioned ourselves at the bottom, so we have a large surplus in R&D services. We sell about $5 billion to the world, import about $1 billion and have a large deficit on imports versus sales of intellectual property. On balance, we have a large deficit in knowledge trade in this sense, meaning that we’re bleeding, economically, $5 billion to $6 billion a year steadily.
The question is really not so much, Senator Deacon, about the plumbing; it’s a question about how you capture the heights of the innovation economy. That is the billion-dollar question. It’s not easily answered in a sound bite.
Mr. Fay: Thank you, Senator Deacon. I’m an economist. I’ve worked on productivity and issues related to investment for probably 20 some years now.
Going back to my days at the Organisation for Economic Co-operation and Development, OECD, we’d always say that frameworks are important; you’ve got to start with frameworks. What frameworks are in place, for example, to allow businesses to survive? Unfortunately, in Canada, we still have not really focused on intangibles. I know that an intangible, almost by definition, sounds like a concept that is hard to understand. Previous witnesses have raised this, but we really do need to reorient our policy toward new business models that are driven by data. One may wonder how data can be such a game changer, but it really is. You see it in other countries. You see it in China, the United States and the EU. They’re all shifting their policies to take advantage of data and putting in place the supporting frameworks. That means revamping privacy legislation and thinking differently about innovation policies.
The one area that I know has attracted your attention, senator, is competition policy. All other major jurisdictions are thinking about changes that are required to competition policy because the nature of the marketplace has changed fundamentally with the advent of big data and big computing power.
The Chair: Thank you.
Senator Gignac: Welcome to our witnesses. My first question will be for Mr. Ciuriak. By the way, I want to congratulate you on your opening remarks in your presentation. I like the smile curve, to be honest; it’s very descriptive.
I’ll continue with the question asked by my colleague Senator Deacon. You referred to the location of economic grants. You explained that currently Canada doesn’t have a national appropriation strategy. We invest a lot of money in universities, in research and so on. In China, it stays in China. The U.S. has the Silicon Valley ecosystem, but Canada is a small open economy.
On the IP owned by universities that have been funded with either provincial or federal money, will there need to be some legislation that places an obligation to have Canadian ownership, let’s say 50%, so that it’s impossible to sell our IP to the U.S.? I’m using the example of Google that you talked about previously.
Mr. Ciuriak: Thank you for that question; it’s an important one.
The question is at what point you sell. If you sell your R&D services, then the economic rents are captured by the IP. So if you sell that to a foreign firm, the foreign firm is capturing the IP. If you develop the IP in Canada and you sell it, you are already capturing the rents and you are now getting money in return for that IP, which you can reinvest.
The exit strategy for many small businesses which develop technology is to sell out, and you don’t want to kill that dynamic. You do want to have a certain number of them becoming the gazelles and the unicorns in Canada. But for many firms, the logical business strategy will be to exit. You don’t want to create legislation that would stop that.
What you need to think about is how to actually use your procurement funds and research and development funds in a way that will generate Canadian companies. If you think about a procurement project, you can give it to, say, an IBM. It’s too large for a Canadian firm. There’s no single Canadian firm that has the whole composite set of skills or capabilities. But if you foster a consortium of small Canadian firms to create another firm using those procurement dollars, then you wind up not just with a product for the government but with a new firm. That is what I mean by thinking in terms of firm counts. We should always be thinking about growing the number of firms. To me, it’s much more important than GDP at the moment.
Senator Gignac: On the procurement question, you point out that it has to be a Canadian firm. We have free trade with the U.S., so we have to be compliant with the free trade as well. I know the U.S. has a lot of tricks to be protectionist. In Canada, we are a little shy about moving like the U.S. Is that something for procurement? Or is there another approach that you have, and do you think that from coast to coast, some provinces are doing better than others?
Mr. Ciuriak: The trade agreement you have to think about in this regard is CETA, with the European Union, which goes below the federal level to the provincial and to social sciences, health and other services.
Now, there’s nothing wrong with having a European firm participate in the project. But what you should be aiming for is to look at the outcome of the project. Is it going to be a sole proprietorship that will be residing in Europe or the United States, or a company that will reside in Canada?
You also have the issue of procurement limits. Many projects are below the threshold where you have to consider foreign companies.
If you think about DARPA, the American Defense Advanced Research Projects Agency, many of their projects are at $50,000 or $100,000, where they get a private firm to explore a novel blue-sky technology, and if they succeed, that firm then has the skills to exploit it. I think we need to think in those terms. Think small, put out lots of seeds and think about how if we don’t have a Canadian firm, let’s create that firm. And that means talking to your firm population.
Senator Woo: Thank you, Mr. Ciuriak and Mr. Fay.
I want to further explore the tension between appropriability and openness, because there is a certain tension there, and ask you about the role of foreign direct investment, or FDI, and how it can augment rather than counter appropriability. There’s a general theme that this committee is heading in which tends to downplay the importance of FDI because of the leakage problem and the rents accrued to the ownership of the IP.
Is that your view as well? To what extent can we use FDI strategically to advance our innovation agenda?
Mr. Ciuriak: Thank you, Senator Woo. I’ll start with the observation that in the industrial economy, foreign direct investment brings technology, jobs and activity to your country and generates all kinds of spillovers and multiplier effects in your local economy. In the innovation economy, foreign direct investment usually involves an M&A, a merger or acquisition by a global giant taking over a small Canadian company and usually expatriating both the IP and the key staff and experts, so it diminishes your innovation dynamic.
Innovation works in combinatorial space; you combine ideas. The more firms you have in your innovation space, the more potential combinations there are. If you just take one out, you take out an awful lot of potential combinations that could be fruitful. That’s what you want to focus on.
The way to think about this is to think of a normal curve, and foreign direct investment into Canada takes out the far-right tail, the attractive tail. Trade liberalization takes out the weak firms and leaves us with the mediocre middle. That is where Canada has gotten itself.
With foreign direct investment, I would much rather have a strategy of outward direct investment to take over foreign technology and bring it back to Canada. I’ll give you an example. When BlackBerry was developing Chinese coding for its devices, it bought an Israeli firm and repatriated the talent to Canada. That’s a much smarter strategy for the innovation economy than having foreign giants come in and take out our companies.
Mr. Fay: If I may, I have two points. The first is with respect to FDI. One thing not considered in any takeover or merger is the value of the data asset, and that’s probably incredibly important in today’s age.
Going back to the previous conversation on IP, patents and R&D, most of our R&D is conducted by the university system. We have very poor business R&D, as you’re well aware. What happens is industry partners come in to work with universities and they capture the IP that comes out of that research. We will have a paper coming out in April that looks at patenting at the universities, and it has some shocking figures about how much of the patents leak outside the country because the intellectual property is assigned to the industry partner, which is generally foreign.
The Chair: We would appreciate it if you would send us that paper as soon as possible. Thank you.
[Translation]
Senator Bellemare: I want to make a comment first.
[English]
I think there is an elephant in the room that we don’t see to understand the problems of innovation in Canada. When we look at innovation, we invest a lot in universities and so forth, but Canada is a small country, and the labour force is small. I want you to comment on the fact that maybe investment in human capital would be an element that would increase investment within Canada out of the innovation we produce in universities.
A survey that I just did in 2021 showed that 56% of Canadians want to be trained, and almost 50% feel they don’t have the numerical skills to perform.
Don’t you think that this element is an element of policy that could explain why we are rent seekers? We invest in the production of knowledge, but we don’t disseminate that to the population.
Mr. Ciuriak: That’s a great question and a great point to make. Obviously, Canada ranks among the world leaders in human capital in terms of education levels and so forth. One of the interesting things about the highest level of education, which is where most of your R&D is happening, is that the talent will go where the innovation is happening.
For example, Waterloo is a leading school for STEM skills. Most of its graduating class every year goes to the United States, to Massachusetts or the Silicon Valley or elsewhere. We are providing the brains. We educate the people and provide the brains to the innovation hot spots.
Now, China is a major source of talent as well, and they were sending their people to the United States to get the skills. They would stay there. When they tried to repatriate them, the Americans said, “Hey, that’s American technology.”
We do get a flow back here into Canada of these talents who then come back and start up companies. The challenge, of course, then, is how we make the environment here in Canada for start-ups and growing companies such that we actually capture these top brains coming out of our universities.
Again, it brings me back to the issue of firms. Why don’t we have more firms? If we were punching at our weight compared to the Americans, we would be hiring most of those graduates here and we would be importing R&D services from the Americans, from the Europeans or from the Chinese. That would be the business model that would make us wealthy.
Senator Bellemare: Don’t you think that in the average labour force people miss the average skills to perform with those higher-educated people in technology? Don’t you think there’s a combination that needs to be done there?
Mr. Ciuriak: That is also a very good point.
Actually, in my background paper you will see that there is a table that shows the kinds of R&D personnel, and what it shows, which I find quite alarming, is that the number of technicians — the people you’re talking about, senator — has fallen over the last x number of years.
So this, again, I think points to the fact that, one, we need to be training these people, but also that we need to be retaining them in Canada, and that means, again, firms.
This is my mantra, senator, I’m afraid: firms, firms, firms.
The Chair: We’re getting the message. It’s great.
Senator Marshall: Thank you very much for being here, both of you.
Mr. Ciuriak, I was interested in the appropriation strategy that you reference in your paper. You talk about whether Canada should scale up massively in innovation investment to compete with the U.S. and China and what the risks are for doing that.
Minister Freeland has already committed billions of dollars to compete with the U.S., and I know from the work that we’ve done on other committees that there’s actually no plan. I’ve always looked at it in terms of, “Well, there is no plan.”
But you’re talking about a national appropriation strategy. What would that look like? What are the components of a national appropriation strategy? I’m just trying to think of it in terms of the billions of dollars that our government is going to invest or subsidize businesses. What are we missing? You’re saying we don’t have one; we haven’t even thought about it.
Mr. Ciuriak: We haven’t thought in those terms. Yes, senator, thank you. This is, again, a great question. This is the multi-billion-dollar question for us all: How do you actually appropriate that?
We have not worked that out yet. If I were put in charge of this —
Senator Marshall: Good point.
Mr. Ciuriak: Now, this is way above my pay grade, senator.
I would start out small. I would try to do one project and work out how to actually capture the benefit of the government investment in innovation. We can do it once and try it twice. If we can do it twice, we can do it many times. But I think we have to be pragmatic and experimental in our approach.
This is not theorized. We don’t have a theory for small-open-economy innovation. We do for fiscal policy, and we do for monetary policy, but we’re under-theorized here, and so we have to proceed in small steps, and incremental, pragmatic experimentalism would be my recommendation.
Senator Marshall: So don’t put the $15 billion out there all at once, yes?
Mr. Ciuriak: No. I would work with $50 million at a time.
Senator Marshall: Start small. Thank you.
The Chair: Mr. Fay, we’d like to bring you in on this or on the human capital, whatever is on your mind.
Mr. Fay: Sure, thanks.
While Dan Ciuriak is going to keep mentioning firms, I’ll keep mentioning frameworks; how’s that? Because we don’t have frameworks in place to support a business model based on intangibles. We just don’t have that in place in this country.
What does it mean? It means — as we’ve already heard — we have to think about IP, intellectual property, more seriously and how to reduce leakage from the country. We have to update our policies. We’ve already talked about privacy and competition. There are a whole bunch of others that follow as well.
As I mentioned before, we have to update our regulatory structures to take into account the cross-cutting nature of these technologies. This is actually being done in other countries, and they’re putting together coherent packages. We’re just not there yet in Canada.
The Chair: Thanks very much.
Senator Loffreda: Thank you to our panellists for being here.
I’ll continue on the international front, which was just mentioned, and data governance, as we know, is a valuable resource and key to growing our digital technology. I was reading recently a data governance report from the OECD, and they’ve conducted extensive research and analysis to propose policy approaches. In the OECD Going Digital Project, one of their strong recommendations is data access and sharing, not only private and public but across borders. According to their report, data flow across borders is critical, and they call it the “data free flow with trust.”
My question is this: Given our current geopolitical issues, how relevant is that? Is it still relevant? Is it attainable? Is it still critical? And which path should Canada be taking given the current geopolitical challenges we do face? Whom can we learn from the most, in terms of our global allies and partners?
Mr. Ciuriak, maybe you can start us off. Thank you.
Mr. Ciuriak: I can start. I have written a paper called Unfree Flow with No Trust to describe the world in which we actually are.
Yes, we are in a geopolitical moment where we are now very adversarial vis-à-vis China and vis-à-vis Russia, in particular. We know for a fact that Russia employs a business model of active measures, as they’re called — this is from the security literature — whereby they actually want to sow divisiveness within the West to weaken the West, to push the West apart, to push Europe apart from the United States and so on and so forth. That needs to be countered. As an open information society, we are wide open to these attacks, and these are constant.
China, behind its great firewall, excluded companies like Google and Facebook and others and built up their own ecosystem of firms, and they control that information space. If there is something trending in China that is damaging to their society, it is shut down. We don’t have that. We have things like the massive controversies, the anti-vaxxers, the convoy and so on and so forth; you’ve heard all these things. How do we deal with that?
In an open information space, Jim Balsillie refers to data as “the new plutonium.” Data is the new oil when it comes to the economy, but when it comes to social and political matters, it is the new plutonium. It is very destructive. Targeted messaging to sow divisiveness is something which can explain a lot of the bad things that we have seen happen over the course of the data-driven economy, the last seven years or so.
The question is how we deal with that. I don’t think we want to become a censorship society, but can we afford to allow bad actors to be influencing our social opinions and targeting messages to our people that then cause them to hate each other?
I’ll give you one line from the GPT-4 Technical Report, which just landed, and it said that if you take an algorithm trained on data which is designed to actually diminish hatred, for example, and tweak it the opposite way, it is very easy to get factions to hate each other. That is a line from OpenAI’s GPT-4 report.
I’ll give you another one, which is rather scary. A year ago, Nature magazine reported an AI looking for drugs that were chemical compounds that had good antibacterial properties and minimal toxicity to humans. As an experiment, they asked it to flip it so it would maximize toxicity to humans, and it came up with VX very quickly. AI is like fire. It can burn down or it can be very good. How do we deal with that in our society? I think that is the challenge of our age.
The Chair: Just before we go to Mr. Fay on that one, we’re seeing governments say, “Let’s restrict funding of research and the presence of Chinese money in universities and ban TikTok,” although we still do work with Huawei. Does it make sense to you that at this particular point in time we have to take that into consideration?
Mr. Ciuriak: Thank you, Madam Chair. I would say that this is the real challenge for us. Do we proceed down the path that China did, which excludes foreign companies from their information space? In the case of the United States, that would be excluding TikTok. Or do we find a way to partner with them but have a business model that allows us to capture the benefits?
We are a small open economy. China is going to represent a major, massive part of the innovation economy. Since we let Nortel go, we don’t have a firm like Huawei. We are then left with looking to get companies like Samsung, Nokia and Ericsson to provide our 5G networks but in competition with the Europeans and the rest of the countries that are allied with the United States. Are we going to be at the top of the list?
It’s a real challenge for us in terms of how to deal with China. We need a modus vivendi. To my understanding, it cannot be one that excludes China categorically. It has to be one in which we have a business model that safeguards our interests and security but, meanwhile, allows us to continue as a trading nation.
Mr. Fay: The senator’s question is a very good one because the control of data is now a geopolitical issue. I don’t think we would have imagined that 10 years ago. More data and more varieties of data are essential to these technologies. In fact, China’s business model is quite a weak one in that respect. They’re using Belt and Road to get varieties of data.
What we can do in Canada is to manage our own data better. We don’t do that. We need to create structures that allow government data, firm data and personal data to be harnessed by our SMEs for them to innovate on top of it. That is something we can control, but once again, to do that we have to update our frameworks.
Senator Ringuette: Thank you to both witnesses. This is extremely interesting.
You’ve spoken about the business SWAT team. I would like you to expand on that. How would you see that happening? Would it be federal-provincial? Would it be a group of CEOs of organizations that would volunteer offering their expertise to our SMEs? How do you see that?
Mr. Ciuriak: Thank you, senator, for the question. It’s a good one. This came to mind in terms of trying to characterize the stories I was hearing from talking to Canadian innovators about how to facilitate their business. The image I had in mind was that, in fact, an innovator shows up at a facilitation portal and gets put on a conveyor belt. He goes to the first door, and here is the IP expert who then works up an IP strategy. He goes next door and gets an industry standards strategy and how to deal with that. He goes on to the next portal, and so on and so forth.
Senator Ringuette: But who would be the purveyor of these?
Mr. Ciuriak: Very good. Let’s now imagine that we have an innovation facilitation agency. This is the portal. The innovator shows up, he has a few patents, a bright idea, and is looking to develop it. That innovator is then assigned an account manager. That account manager then shepherds that innovator through the process and makes the appointments.
That account manager would actually know the industry. If this is a clean technology innovator, that person coming from that environment would know which companies to call on, who to put together to get synergies and ideas, shepherd them along and basically be their guardian angel in this process because they know the ropes. They’ve been through this before, but this innovator is a scientist, and this is their first time. That’s the image I have in my mind. I don’t really have the institutional design skills to actually put this in place, but I can imagine it.
The Chair: Who do you see managing that, Mr. Ciuriak? Is this a government body that recruits people in? What’s in the back of your mind?
Mr. Ciuriak: Senator Woo has just mentioned incubators. These are probably things that work like that. The question is why our incubators don’t actually take charge of our people and bring them along. This is not a world I can delve into too much for you. There are better-placed people to take you through that.
The Chair: Mr. Fay, any comments on that model or approach?
Mr. Fay: I agree with him. This is a bit of a critique, I suppose, but the government has just announced what amounts to a concierge service for high-growth firms to navigate government programs so they can figure out which ones are the most suitable to help them scale. I think that if you need a concierge service to do that, we have a problem with our government programs. They must be extremely complicated. Maybe one of the lessons here is to simplify.
Who could run this? We do have this new Canada innovation corporation that’s going to come out. Maybe that could be a good role for them.
The Chair: You have more faith in that than some of the other witnesses we have heard from.
Senator C. Deacon: If you could, Mr. Ciuriak, make sure we get a copy of the Unfree Flow with No Trust paper. That would be very helpful if you could send that to the clerk.
Mr. Fay, if I can start with you, I want to try to get summing-up comments to help us in the plainest language possible, which you’re really great at. It seems like we’ve been investing in some very successful intellectual property development in this country. We’ve created some great ideas and opportunities. The trouble is we have a very leaky bucket, and those opportunities end up in other countries. The recurring benefit of the investment we’ve made does not flow to Canadians. In fact, Canadians have to pay a premium to get back the benefits that have been unlocked by that investment. That’s the image that you’ve clearly laid out.
I tend to agree with you very much, Mr. Fay, that frameworks are just not in place. That’s why I used the word “plumbing” to begin with because without the plumbing, we have a problem. If you were to put down an order of action, it sounds like it’s very doable and not expensive. If you could just lay out the action plan you’d like us to put forward in our report, I’d be very grateful.
Mr. Fay: First, I agree with everything you said, senator. We have different terminology, but I think we’re saying the same thing.
I’m going to sound like an economist here, but competition policy really has to be at the heart of everything we look at. I agree with the Commissioner of Competition when he says that we should have a competition angle. When new policies are created, we should be thinking about the impact on competition. It’s just not the mindset we have in Canada. It doesn’t cost any money to rethink how competition policy needs to be changed to reflect how digital technologies are fundamentally changing the marketplace.
Once again, there’s a lot of stuff before Parliament right now that seems stalled. The privacy legislation may not be perfect, but it does need to get its reading. The AI and data act does have some flaws in it, but it’s moving forward. Once again, other countries have already done this stuff. We don’t have to reinvent the wheel here. We can look at them and say, “Okay, here’s what we can pick from them that we think meets our needs in Canada and matches our values.” If we don’t, we’re actually going to be subject to their rules, which we don’t want.
I don’t think I quite answered your question.
Senator C. Deacon: You did a great job. Mr. Ciuriak, anything to add?
Mr. Ciuriak: I would look to other small open economies that are very successful. Two stand out. Israel and Korea are both at the top of the world in terms of R&D spending and are successful in terms of creating firms. Dan Breznitz tells a story about Israel having all the talent in the world, lots of money to throw at innovation and not being very successful. Then they hired a chief scientist. That chief scientist looked at what they were doing and said, “Let’s get one thing and do it right and see what happens.” That approach of taking one thing, fixing that one and then seeing if you can roll it out is what I would recommend for Canada.
As I said, I think we are under-theorized on how to do this. We do know there’s no framework. The question is what elements go into that framework and what important things to avoid are. For example, we talked about whether you put in place barriers to selling IP. Is that the way to go? Israel is a start-up nation and they sell their companies because they can’t scale up there.
The question is this: How do we design that framework?
The Chair: Is CIGI doing the theorizing on this?
Mr. Fay: Yes, we are.
Mr. Ciuriak: To be honest, I have not seen the theorizing on “national appropriability.” In fact, I think I just invented the words in this paper.
The Chair: All right. Just remember to send it along when you have it done.
Senator Woo: There is a mercantilist logic to all of this, if it’s not held in check. As we develop the frameworks, we need to keep that in mind.
I want to go back to institutional design. I know both of you have steered a bit away from it because it gets into nuts and bolts, but would you comment a bit more on what a good institutional design would be to optimize the benefits of innovation? In particular, do you have a view on the superclusters that have been in operation for a number of years now? They seem to be doing something like what you’re talking about. Do either of you have a comment to offer?
Mr. Ciuriak: Thank you very much. First, in terms of business and legal frameworks, we have to distinguish competitive markets — which the market handles by itself very well, and we don’t need to intervene very much; that’s why we have a rules-based system for that kind of business — from the area where you have significant economic rents. The market does not allocate rent; strategies do. It’s very strategic. Inevitably, you have conflict: Airbus versus Boeing, Bombardier versus Embraer. When there are rents in place, then you need strategic behaviour. In the innovation space, it’s inherently about rents and therefore inherently about strategy.
In terms of the amount of money, as I say in my background note, innovation has gotten a lot harder, a lot faster and a lot more scale-intensive. We spend a couple of billion dollars a year on superclusters. The Americans have $280 billion for the CHIPS and Science Act alone. We are not operating on a scale that is even close to being competitive in this age of very difficult innovation.
I have a chart in my background note about the declining efficiency of R&D. This is a phenomenon worldwide. It takes a lot more resources now to push out the technology frontier.
The question of institutional design, then, comes down to the question of how one strategizes the capture of economic rents. You wind up writing your playbook as you go.
Mr. Fay: That’s a very interesting question, Senator Woo. Thank you.
To follow up on what Dan is saying, we have these new business models that tend toward concentration. We need to deal with that. I’ve talked about the importance of competition policy, but there are externalities that arise. I think that is what Dan was talking about. When you have these externalities, it means that policy needs to come in.
I think the superclusters are a way to try to get that agglomeration. That is, take a bunch of small firms, get them together and maybe, together, they will scale into something larger.
I’ll be honest, I haven’t followed the supercluster developments that much. It’s not clear to me in two areas. First, do they have an IP strategy? That is something we’ve talked about the importance of. Second, do they have an evaluation strategy? I know it’s built into the documents behind their formation that they should be evaluating what they’re doing. To me, that’s fundamentally important. What are they learning as they do this?
When I think about innovation and I go back to the pandemic, another thing that doesn’t cost us anything to do is to look at the firms that managed to pivot their production in the heart of the pandemic. How did they do that? What did they bring together to do that and actually succeed? I haven’t seen any work done on that. I’d like to do it myself. That to me is where we can see innovation in action.
The Chair: Yes. We are all waiting for the “lessons learned” part of that. We’re very short on time.
Senator Bellemare: I didn’t hear from Mr. Fay on the question I asked previously, but I know you have a paper called Why Is Global Business Investment So Weak? In the conclusion, you focused on structural problems concerning demographics and so on. You were talking about frameworks, lack of plumbing and institutions in Canada.
If we had an economic council, as Mr. Balsillie proposed to us two weeks ago, do you think that could solve some of the problems? I would like a reaction from both of you.
Mr. Fay: Thank you for finding that paper, which I think is probably seven or eight years old by now. I think the paper was relevant at the time. It was trying to understand global investment dynamics and why investment was so weak globally.
You’re right. I think one of the things we pointed out in the paper was there are structural issues at play, that is, demographics. A slowing population, by itself, could lead to slower investment. I’d probably want to rethink some of the conclusions of that.
What was interesting yesterday was the announcement of the population growth figures in Canada, which are astronomical. I was thinking to myself that we need to increase investment in Canada so these new workers and new entrants to Canada actually have capital to work with.
Senator Bellemare: An economic council where leaders could try to —
Mr. Fay: Yes, a revamped economic council. I fully support the idea that we need to bring together people to, once again, going back to my frameworks, rethink the frameworks on how to drive growth in this country. As you heard yesterday and through your series of meetings, productivity growth in this country is abysmal. It has been for decades — probably 20 years now. Investment is poor. The amount of capital per worker is half that of the United States in high-tech equipment. There are a lot of fundamental things we need to think about. I think getting a good group of people together from a wide variety of backgrounds — it’s not just economists but political scientists, sociologists, you name it — is needed to help us understand this.
Senator Gignac: I’m very glad that you referred to the Israeli scientist because I met him in 2010 in Atlanta, at the BIO International Convention. After that, I created the job of Chief Scientist in Quebec.
In Quebec, we have a Crown corporation called Investissement Québec, which would have no hesitation in funding a company to grow up. So I think it’s the ecosystem, and maybe in Canada we have to think about that. Thank you.
The Chair: Thank you both for joining us today. This is helping us down the road as we try and come up with some answers and very specific guidance for government. Thank you, gentlemen, for your input, and please send the documents that we’ve asked for.
Welcome back to this meeting of the Standing Senate Committee on Banking, Commerce and the Economy, and a future look at business investment in this country. We have the pleasure of welcoming Mike McLean. He is the CEO of Innovation Asset Collective.
I believe you have some opening statements, Mr. McLean, so please go ahead.
Mike McLean, CEO, Innovation Asset Collective, as an individual: Thank you for the opportunity to speak today. My name is Mike McLean and I’m the CEO of the Innovation Asset Collective, or IAC, a not-for-profit funded by the federal government to improve the ability of Canadian companies to increase their freedom to operate and develop the IP positions they need to compete on a global stage.
Canada faces an ongoing IP challenge. Despite being a nation of innovators, we remain poor owners of intellectual property. Intangible assets as a percentage of Canada’s economy have been shrinking since 2000. Patent applications from Canadian enterprises have declined on a per capita basis since 2005. Canada is struggling to create strategies driven by IP and data. This raises concerns about our ability to compete in a global ideas economy.
Traditional incentives to increase investment, such as lower interest rates or tax breaks, are ineffective in a knowledge-based economy, as they don’t account for the ownership of IP and data required to ensure a firm’s investment and R&D turn into new revenue.
IP and data are exclusionary assets used to limit competitors or to capture the financial benefit of innovation that comes in the form of IP or data rents. You cannot commercialize what you don’t own. Only companies with sufficient freedom to operate can be assured of capturing the high returns that deliver prosperity to Canada’s economy. In comparison, many countries are implementing strategies to successfully commercialize innovation and build dominant IP positions that secure an unequal share of financial returns.
China recently released a 115-point plan called an Outline for Building a Powerful Intellectual Property Country, which highlights that country’s dedication to becoming an IP superpower. South Korea, France and Japan have each established sovereign patent funds to advance those countries’ positions. Centralized IP resources such as those in Germany’s Fraunhofer Institutes and Singapore’s Intellectual Property Office propel those nations to the top spots in global innovation rankings.
The Government of Canada has recognized the need for change and announced its IP strategy in 2019. This included a $30-million investment in a pilot project that became IAC. During our time as a pilot program, IAC has gleaned valuable insights from the businesses that form our membership.
Canadian SMEs face challenges in developing self-sufficient IP positions. The first challenge is the time required to build such a position. A single patent can take four to five years to issue, and building a portfolio of rights requires a long-term investment.
The second challenge is limited capacity of talent in Canada with the necessary expertise. The majority of IP professionals in Canada are focused on securing IP rights or litigating disputes related to those rights. Only a small minority understands the IP strategies and commercialization models required to create sustainable differentiation in international markets.
The final challenge is the expense. Companies with limited capital will often focus their spend on building and selling products rather than on securing the IP rights needed to sustain profitable growth.
Fortunately, there are solutions to these challenges.
It’s possible to build a resilient ecosystem by investing in collective approaches rather than individual firms. IAC is proud to play a role in testing and implementing some of those concepts. We’re building a patent collective that will protect Canadian clean-tech companies and increase their freedom to operate as they grow and access new markets. We have also sourced IP insurance to cover costs to defend or enforce IP rights. IAC’s collective model allows Canadian innovators to access much-needed IP resources and cost savings.
To continue building the capacity of Canadian innovators and entrepreneurs also requires IP education that is focused on IP strategy and building capabilities within businesses to commercialize IP. We need to build IP-savvy business leaders. Programs like those funded by ElevateIP and IRAP’s IP Assist, or those built by IAC or Intellectual Property Ontario will move this process forward.
Complementary to IP education is access to IP funding to encourage capital-constrained innovators to consistently act to secure the IP needed to scale their businesses.
Efforts are under way at the federal, provincial and regional levels to help improve Canada’s IP capacity. However, the investment in those programs is extremely limited compared to the billions of dollars spent annually on innovation. These programs will require funding at increased scale and the will to sustain them over the long term in order to deliver systemic impact on Canadian prosperity.
Coordination and collaboration across these efforts are also needed to maximize impact for Canadian companies.
Canada has some of the best talent and expertise in innovation and an enormous opportunity to advance the country’s economic growth, but the window of opportunity will not be open forever. We need to act quickly to establish the strategies and the infrastructure that are needed to prosper in a global ideas economy.
Thank you.
The Chair: Thank you very much. When you say you’re a collective, of whom?
Mr. McLean: We’re a collective of SMEs in the data-driven clean-tech space.
The Chair: And they contribute to the financing of this directly?
Mr. McLean: The majority of our financing is coming from the federal government. We do have a portion of our membership paying fees to contribute to that as well.
The Chair: It’s still a government body.
Mr. McLean: Correct.
Senator C. Deacon: Thank you for being with us, Mr. McLean. I started down the road of understanding a bit more about IP about 30 years ago, and I’m still making slow progress.
One thing that struck me at the time was the different models that we have in our universities in terms of how our ideas are managed, that are publicly funded. There are some universities — Dalhousie is one — where the inventor controls the IP. At other universities, it’s the university that controls. Let’s say 50 universities in Canada have a meaningful research budget, but the total amount the federal government puts into research is $10 billion a year. We are not managing any of the outputs in a way that benefits Canada at this point in time, I think it’s fair to say.
Am I wrong in thinking that this ship could turn pretty quickly if we could get the granting councils, through directive, to basically start assigning grants with the understanding that the IP that results is put into an IP collective where it is managed for the benefit of Canada and for the exploitation of it directly? Is that an unreasonable dream that we could start to move on this fairly quickly?
Mr. McLean: I think there’s quick action that could be taken with the right enablement of the institutions to buy in and participate, and obviously the ties to the funding that comes with that would be an easy way to do that. I think you need to be a bit careful of putting all the IP into collectives, because we do want IP available to firms to act on independently and to drive their own commercialization efforts. Where there is IP that is unsuccessfully commercialized, directing that into a collective support to a larger effort I think would be a great initiative.
Senator C. Deacon: If I could drill in a bit more to help me in the distinction, because I very much overstated to try and make a point.
Mr. McLean: Yes.
Senator C. Deacon: Let’s understand where those distinctions come. Can you help us with a little bit more of your insight as to two or three buckets that you see?
Mr. McLean: You will have research under way in an institution where the researcher or the institution feels it is promising. There will typically be a patent filed. That is typically a very limited activity because there are limited budgets within those institutions for that, so often it is a single provisional patent. Rarely is that enough to protect that innovation. As a practitioner in the space, to get commercial success, you want to see portfolios of rights built around an area of innovation. So there’s a starting point where there’s a challenge of limitations on what is done at the outset.
Where there’s potential for commercialization of that innovation and a desire from the researcher to pursue that, there are models within those institutions and within some of our funding agencies to help enable that.
Again, typically, the IP strategies that are linked to that are immature and underdeveloped. However, when firms are being started to commercialize that, you want those firms to have the ownership rights around the intellectual property. If they’ve turned those ownership rights into a collective, I think that creates challenges for that firm growth. However, that firm may be unsuccessful or a firm may not be started in the first place. You have a range of assets that could be put into a collective and used and managed more effectively as a group, and not a really dispersed set of very granular assets that are distributed across a range of technologies where we don’t have sufficient density and sufficient resources behind them to do anything serious with them.
The Chair: Thank you.
Senator Woo: Just to follow up on that, what does your collective do with the pool of IP that has been harnessed and what is the strategy around why you have collected IP? Where is this going to take us?
Mr. McLean: Great question. Our strategy around building an IP collective or a patent collective is to create a freedom to operate for SMEs. As I mentioned in my opening remarks, it can take 10 or more years for a firm to develop a self-sustaining IP position, a sufficient quantity of IP rights that can prove as a shield to other companies trying to create bounds or put rents on them as they move to commercialization.
We are out acquiring third-party rights, so buying patents on the open market that can be then provided out to our membership to defend themselves before they get to a self-sustaining model. As they start to scale, we expect large multinationals to get in their way, and we want to have rights that we can distribute out to them to help ease their burden in getting to market.
Senator Woo: This is only for your members, yes?
Mr. McLean: Correct.
Senator Woo: What are the barriers to entry to being part of the collective? Can anyone join, a Canadian clean-tech SME?
Mr. McLean: Yes, you need to be a Canadian SME that is a data-driven clean tech and you need to pay a $15,000 annual membership fee.
The Chair: Just a follow-up on that one. If you are buying patents on the open market, do they belong then to the federal government, seeing as that’s where your money is?
Mr. McLean: No. We are set up as an independent not-for-profit, so they belong to that not-for-profit.
The Chair: To follow on Senator Woo in terms of restrictions, does this have to be Canadian-owned and -developed? Would the people that you allow in the collective — we’re just thinking about the leakage and all the things we’ve been talking about; we don’t necessarily want Chinese companies buying that at this moment.
Mr. McLean: Correct. Our membership is limited to Canadian companies. Any outflow of IP would be only to Canadian companies; however, we are not buying only Canadian IP. We want to set up our companies to compete on the global market, so we need intellectual property to cover those markets and we’re going to find that wherever we can.
The Chair: Okay, great.
Senator Loffreda: Thank you, Mike, for being here this morning. Despite billions of dollars we put into research, you did mention that intangible assets have been shrinking in Canada since the year 2000 and you did mention IP data. We in Canada have a poor performance on that front, and it will impede our capacity to compete globally, and we are a nation of trade.
I read your publication Who’s Who in the IP Zoo and that “data is in the details.” Can you further elaborate on some of your recommendations to correct these issues? Given that we haven’t been able to do so in the last 20 years or our performance in the last 20 plus years, is it attainable? What can we do quickly to reverse this trend? The digital economy is the future; data is in the details; data is important to our well-being. I’m interested in your comments.
Mr. McLean: One, we need to act now. It’s analogous to “When is the best time to plant a tree? Thirty years ago. The second-best time is today.” We didn’t take care of this 30 years ago, so we need to act today.
We need to address the freedom-to-operate situation in many of Canada’s major industries. International companies are developing substantial IP positions that are limiting access to markets or imposing a significant cost to access those markets. Unless Canadian companies can build competitive positions that provide access, we will be at a significant competitive disadvantage. It is going to take time for Canadian companies to build those on their own. As I mentioned, this is a long-term investment; this is not something that is going to happen overnight.
We can do some things to bridge companies to that self-sustaining moment. Having collectives like the one at IAC is one model that can be followed for that. We can go out and acquire patents quickly on the open market that can be provided to companies to fill in gaps that they have. IP insurance is another model. Collective approaches allow for insurance to be provided at a lower cost and to firms that may not qualify individually.
The other piece is we need to educate our business leaders. We operate in an economic ecosystem where our large companies historically are resource companies or financial institutions. Traditionally, those have not been large IP holders. They have not needed to develop sophisticated IP strategies to compete in global markets. They’ve been able to do it because they have access to the resources that they need. We’re not building those leaders organically, so we need to take steps to start educating business leaders on how to build these strategies, why they’re important, what to do. There are a number of initiatives under way to do that, but they’re all small scale.
I would argue that there are two streams that need to be followed with respect to that. We need to find the businesses that are approaching scale, that are growing quickly, and provide them with really hands-on, active support to build their IP understanding and practices. The second dimension to it is going broad. I compare it to the tipping point for electric cars. It’s been shown that when electric vehicles in a given geography get to 5% of the cars in the market, the growth of electric vehicle purchases takes off exponentially. I would argue that if we can get a percentage of Canadian businesses practising more sophisticated IP strategies to a tipping point, then we’re going to see that takeoff. I don’t think that’s 5%; it’s likely larger. I don’t know if it’s 10%, 20% or 30%, but if we can start to get more and more businesses and business leaders understanding these issues and practising them, it will become table stakes for business leaders in this country, and that’s where we need to get.
Senator Bellemare: Following what was just said, I was listening to you, and, for me, it’s like we’re facing a market failure in a sense, and your collective tried to develop to fill a vacuum in that area.
I have two questions. First, do the provinces and the federal government have any power or rights? Can they impede? Can they improve the creation of the collective, as you’re doing?
Second, could an economic council make the business collective encourage IP appropriation? Would that help?
Mr. McLean: Yes, I think there is a role at the federal and provincial levels to enable collectives like ours. Because we’re operating in a deficit in terms of IP expertise and IP practice, there’s an incremental step that needs to be taken, and I think government support for that step is needed to make that happen.
I think there are a number of initiatives that have started, such as IRAP IP Assist, the ElevateIP program and IP Ontario. Alberta is doing a study right now. B.C. is considering some things. There are programs that have started within the last year or two. Those programs need to be sustained and scaled. Likely there are other things that need to be added to them, but the scale of those programs is too small to make a systemic impact. They need to be scaled up so we can have systemic change in the ecosystem. That would be the primary concern.
In terms of your second question on the economic council, that’s a bit outside of my area of expertise. I will say that bringing in knowledgeable and experienced experts to comment on these key questions is needed, but these are not theoretical exercises. People with practice solving these problems and addressing them in different jurisdictions within Canada, who can understand these things and add experienced input, are invaluable.
The Chair: Thank you very much.
Senator Marshall: Tell us a little bit about the collective. Our briefing notes are referring to $30 million. Is that devoted entirely to your organization? How much is the federal government putting into your organization? What is the structure? Do you report to a minister?
According to the brief, you’ve been in operation for two years. I’d like to know a little bit about the organization. I guess it’s really too early to tell whether you’re successful, but just talk a little bit about the governance structure, the money, how you feel it’s going and what kind of progress you’re making.
Mr. McLean: Thank you. Yes, we were provided with $30 million to run a pilot program that was intended to last four years. There were some delays in getting the contribution agreement signed and the organization up and running, so we really launched in late 2020. I joined in early 2021.
We report to Innovation, Science and Economic Development Canada, or ISED, and the funding comes from ISED. They’ve been very supportive in our efforts. That funding was supposed to expire at the end of March and has now been extended for another year. We have a proposal in to expand and scale our program, which is currently under consideration.
Senator Marshall: What would be considered your successes? You’re there running it, so you must have an idea as to how you’re making progress. In terms of your successes, you have to provide that to the department, obviously, in order to get more money.
Mr. McLean: Absolutely. Yes.
Senator Marshall: Tell us a little bit about your successes. You did allude to some of it, but please hit on the successes.
Mr. McLean: Absolutely. The criteria established as part of the pilot were to demonstrate market interest. In other words, would companies be interested in participating in such a program? In slightly over two years, we’ve brought on over 190 companies. We are adding companies every week, so it’s consistent growth. This hasn’t been sort of a one-time spike. As people learn about us, we are signing them up. We have proven market interest and market demand for this type of support.
One of the primary and most unique things we do is building of the patent collective as part of our initiatives. We’ve been able to acquire 167 patent families in two years. Typically, it requires 6 to 18 months to buy a single portfolio of patents. There is a search exercise that needs to happen and then an extensive negotiation and due diligence to validate the quality of those assets. We’ve been able to close a number of transactions that have brought in a relatively good-sized portfolio. That has been a big success for us.
There are two other pieces that are big wins. We are supposed to test collective approaches. Can collective approaches add value to the ecosystem? We found some unexpected ways to do that. The insurance, as I mentioned earlier, was a big win. When I joined, that wasn’t something I expected us to actually pursue. When we went to the insurance brokers, they came back to us and said that because we’re a collective, the providers will provide cost benefits of 35% to 200%. This is going to be much more cost-effective for our members to participate, so that is a huge win for us.
We are also doing a lot of patent landscape work, helping companies to identify who owns patents in their areas, where the landmines are and where the white space is so maybe they can take advantage to build out positions. To do a sophisticated landscape can cost an individual company $50,000 to $200,000. That’s quite expensive. We’ve been able to undertake that. Where we have multiple members in a common area, they share that expense.
We’ve also launched an IP education program that is focused on IP strategy and on the practices businesses need to implement within their organizations. Most of the IP education out there today is introduction to patents and trademarks, very 101-type material, or how to settle disputes related to that. It’s driven out of law firms, and that’s how law firms make their money. They educate the firms on how to make money. There are big gaps in that piece, so we’ve been working actively to fill the gaps on the education front.
Senator Marshall: As one quick follow-up, is the funding guaranteed for four years? I’m wondering: If you’re successful — and you can demonstrate that — you’re pretty confident of the funding for the next two years, aren’t you?
Mr. McLean: We’ve been extended for one more year. Our current funding will expire in March 2024.
Senator Marshall: And then the government will decide whether it will continue to support. Thank you.
The Chair: What happens if they say this actually isn’t going as well as they wanted? What happens to all the patents you’ve collected? Who owns them?
Mr. McLean: In the contribution agreement, there are several mechanisms that can be used to distribute that portfolio. The first is that we need to look for a like-minded organization that could run the portfolio in a similar way to us. There’s no such obvious entity at this point in time, but in the next year, maybe one will appear.
The next step would likely be to distribute them to the membership, so to look at members who would be interested in acquiring portions of that portfolio. The third step would be to sell them on the open market and return the proceeds back to the government.
Senator Ringuette: I have just a quick question in regards to ISED. Is there a particular program that your funding comes from?
Mr. McLean: It’s through the federal Intellectual Property Strategy that was launched in 2019.
Senator Ringuette: I notice that you were in the room earlier, when we were talking about this concept of a business SWAT team.
Mr. McLean: Yes.
Senator Ringuette: You are smiling. How would you see your organization participating in such a team in regards to your IP expertise?
Mr. McLean: The last part of your question is really important. There’s IP expertise that needs to be brought to bear into our organizations, and we have a collection of it within IAC. There are other collections of it around the country, but I think we have some very skilled and knowledgeable people.
The comments from the earlier witness about bringing businesses to a known place where they can get help building their IP strategy —
Senator Ringuette: Expertise.
Mr. McLean: I think everything needs to start with IP strategy. I think we’re a great resource for that, so I would really want to play a role as part of such a program in providing that strategy expertise.
There are other tools. Again, there is our patent collective, but there are a bunch of tools needed to implement strategy and to execute on strategy, put it into practice and have businesses further it.
I think we can help teach businesses how to use those tools and make some of those tools more readily available to them so they can start to pursue that and grow their own practices. We want businesses to be self-sustainable. We don’t want them relying on us long term. We want to get them to a point and then free them to move forward.
Senator Ringuette: So you would be a good partner in this “conveyor belt of expertise” for SMEs?
Mr. McLean: Yes. I like that thinking and would be excited to be a part of something like that.
Senator Ringuette: Thank you.
Senator Gignac: I’d like to continue the discussion you had with Senator Marshall regarding your organization. I notice on your website that you have only 13 members from Quebec and more than 100 members from coast to coast. How do you explain that? Is it due to the pool of IP in Quebec or is it due to the ecosystem offered by the Quebec government? I assume your website is updated. You have 120 members and only 13 in Quebec. I’m trying to understand why you don’t have more members based in Quebec.
Mr. McLean: We’ve had good activity and good interest in Quebec. We need to do more in terms of French-language support. That has played a role. We need to build out the French-language translation for some of our material and have more active representation there.
We’ve been talking to MAIN in Quebec and Axelys about how to partner with them. We’ve been talking to some of the colleges about how to get their help in translating some of our material. Some of it is already available in French, but more needs to be made available.
Senator Gignac: But I think a lot of people are bilingual in Quebec. Do you believe there is something more than language to explain this? You have McGill University, which is a big university. I don’t think language is relevant in McGill’s case, or Concordia’s.
Is it because the Quebec government has somebody who competes with you? I’m trying to figure it out.
Mr. McLean: I’m not aware of a program in Quebec that competes with us. Axelys has been set up as the tech transfer office, but they are not offering comparable services to ours. We are engaged in discussions with them about how we can collaborate. Our focus on data-driven clean tech limits the types of companies we can work with.
Some of the other provinces’ innovation agencies have been more active with us. Innovation agencies in Ontario and B.C., for example, have been active in directing companies in their provinces to our organization. We haven’t been able to establish that same relationship in Quebec as of yet, but I’d love to do so.
Senator Gignac: I know the people in the clean-tech cluster in Quebec. It’s a significant cluster. How can you explain that? Is it lack of effort on your side or lack of interest on their side? If you can send me a written answer, I would appreciate that, please.
Senator C. Deacon: IP is about ownership and freedom to operate. Without it, business investment evaporates. This study is about business investment, and this is at the core of that.
Again, building on understanding how the Innovation Asset Collective works, recently Canada has been investing quite heavily in battery manufacturing plants. Dalhousie University has been home to some of the most advanced battery research in the world, and it’s all licensed out of the country to Tesla.
If the Innovation Asset Collective or the Fraunhofer model had been involved earlier on, what is the different path we could have ended up on in that regard? We definitely need to be on a different path than the one we’re on, where we are publicly funding the research and the institution to do the research, but we’re renting back, in an industrial-era model, the ability to make money from that.
Mr. McLean: In the collective approach, we’re focused on the firms rather than the university institutions. Having a centralized resource like the Fraunhofer model where you have a nationwide or at least province-wide organization that has a framework for how IP will be licensed, to whom and what the priorities are, I think, would help to deal with that.
When I’ve talked to the tech transfer offices, they feel pulled in four different directions. In most cases, they haven’t been given clear guidance on where to focus.
Should their focus be on maximizing financial return, in which case they’re going to license the large multinationals?
Should their focus be on enabling local industry, in which case they need to be interfacing actively with the SMEs within their geography?
Should their focus be on enabling researchers to become entrepreneurs? There’s a different set of expertise and knowledge that needs to be pushing researchers out into the business world. They need a lot of hand-holding.
Should their focus be on looking at the IP assets they do have under management and finding ways to monetize or commercialize them?
Those organizations are not resourced to do all four of those things, so they get stretched thin. Many of them are ineffective at all four. Some have enough resources to pursue one or more, and do a good job of that. But in many cases they don’t have clear guidance and, as a result, make choices that may not be beneficial to the nation.
Senator C. Deacon: I appreciate the clarification. You’re firm-oriented, but we do have to have an effort that is university-oriented and maximize the value of our publicly funded IP.
Mr. McLean: Yes.
Senator C. Deacon: Thank you.
The Chair: The rules of the Senate are changing a bit here. I want to make sure people have time because there will be an early suspension of the sitting. Let’s have a couple of quick final points.
Senator Bellemare: One recommendation our committee could make would be to encourage training and entrepreneurship everywhere we could have it, such as in colleges and universities, to be part of the curriculum, even though they’re not in the business sector. What do you think about that approach?
Mr. McLean: I think that would be hugely beneficial. In addition to being the CEO of IAC, I sit on the Idea to Innovation, or I2I, grant committee of the Natural Sciences and Engineering Research Council of Canada, NSERC. I see applications coming out of institutions and the business cases that are built to support those. In many cases, they struggle to define the customers they’re targeting. They struggle to define the solutions they’re going to bring to those customers and how they can generate monetary return for delivering those solutions. They’re great technically. They have done incredible invention, but their understanding of very simple business issues is lacking. I think that training in entrepreneurship and in basic business concepts would be very valuable.
Senator Woo: IP is a legal concept, so what is the legal environment in our country for IP expertise to help your organization and other organizations? Is there anything in our IP law that you think needs to be improved, based on the work you’ve done?
Mr. McLean: Canada has some great legal expertise in securing individual rights, in data governance and in settling disputes related to those things. Canada is greatly lacking in terms of the business application of those concepts to drive commercial value. We need to build that capacity. We can get lots of help when we go to buy a patent and need someone to write a legal opinion on whether it’s a valid asset and whether it would be infringed. I can find any number of lawyers who can help us solve that problem.
When we work with a member company and they bring together an IP strategy that is ill-formed, there are few resources I can bring to bear externally to help them do that.
The Chair: Thank you very much, Mr. McLean, CEO of Innovation Asset Collective. We appreciate your time today.
(The committee adjourned.)