Canada is failing to capitalize on its technological potential: patents and productivity

Data from the World Intellectual Property Organization (WIPO) show Canada is capturing less than half of its technological potential, allowing groundbreaking research and innovations to sit unused or be scooped up by foreign companies.

Canadian researchers generate far more research in areas such as electronics, information communication technologies, chemicals, and biopharmaceuticals than the industry is patenting, based on the data in the WIPO report.

“This shows significant gaps between academic outputs and what industry can commercialize in sectors like electronics, information communication technology, semiconductors and optics, and biopharmaceuticals, which are all highly specialized sectors with technologies that have the potential to be highly lucrative for the firms that commercialize them,” Lawrence Zhang (photo at left), head of policy at the Information Technology & Innovation Foundation’s Centre for Canadian Innovation and Competitiveness, said in a commentary.

For example, Canada filed 41,200 patents on information and communication technologies from 2001 to 2020, according to the WIPO report. But the number of potential patents Canada should be expected to have, based on its scientific publications, was 76,900.

Likewise, Canada had 39,400 patents on “biopharma” for the same period, compared with a potential of 90,900 patents. For chemicals, Canada had 12,100 patents compared with a potential of 23,800 patents.

There are two possible reasons for this disparity between actual and potential patents, Zhang said. The first could be that Canadian academics are publishing research papers that are misaligned with what the Canadian industry needs. If this is the case, more should be done to realign university research toward industry needs, he said.

As noted in a Centre for Canadian Innovation and Competitiveness’ recent report, it is not enough for Canada to simply focus on basic ingredients of innovation like scientific publications or STEM graduation rates and hope that technologies and firms come out the other end of the innovation assembly line, Zhang said. “National success comes from alignment between research and industry needs.”

Some may argue it is simply the nature of academic research to be conducted free from interference and that the knowledge created from university research ought to be democratized and available for all to use, he said.

But in an increasingly competitive global economic environment, Zhang said, government and universities must recognize that segregating academia in an ivory tower away from the greater national conversation on innovation and productivity should be eschewed in favour of mobilizing the best and brightest minds the country has to offer in helping solve Canada’s economic challenges.

There are many ways to do this, he said. Mission-driven research programming, as described in the 2023 Report of the Advisory Panel on the Federal Research Support System (the “Bouchard report”), or like the European Union’s Horizon Europe program, is one such tool.

Mission-driven research is frequently discussed in reference to grand challenges, such as solving climate change. However, there is nothing preventing Canadian governments from identifying and winning the global techno-economic competition as the mission they want to solve, as opposed to broader missions that have to do with the fate of humanity, Zhang said.

Alignment could also be nurtured by increasing funding and uptake on existing programs like the Natural Sciences and Engineering Research Council of Canada’s Alliance grants, which provide grants to researchers working on collaborative projects with private, public, and not-for-profit sector organizations, he suggested.

Canada could also copy the United States’ Industry-University Cooperative Research Centers program that provides funding to universities contingent on matching funding from industry.

Technology transfer by Canadian universities is lagging

Zhang said a second reason for Canada’s “disheartening” results could be that the country has a great deal of potential to commercialize technology from academic research, but universities are doing a poor job of it. As the ITIF noted in its report assessing Canadian innovation, productivity and competitiveness, Canadian universities lag behind U.S. universities in tech transfer. (See May 1 Short Report: “Canada trailing its peers on innovation, productivity and economic competitiveness: report).

The World Intellectual Property Organization’s data could suggest that Canadian universities are doing a poor job in transferring technology to companies compared with universities in other jurisdictions, Zhang said.

In fact, according to data from AUTM, an association that includes university tech transfer professionals, U.S. university tech transfer offices licensed patents at, on average, three times the rate of Canadian universities in 2022.

Canada’s top-performing tech transfer office at the University of Toronto made in licensing income less than half of what New York University – by no means the top performing university in the U.S. – by commercialization, Zhang noted.

McGill University, the birthplace of plastic glass (equivalent to Germany’s Plexiglas) and the world’s first search engine, had roughly the same number of invention disclosures as Arizona State University.

“Universities putting more emphasis on commercializing technologies could go a long way toward ensuring that Canadian technological potential is harnessed,” Zhang said.

The simplest thing the federal government and provinces could do is tie a meaningful portion of university funding to commercialization results in Canada, he said. “Universities that succeed in this would get more money, while universities that do not would see funding cuts.”

In addition, Zhang said, governments could encourage collaboration and permeability between academia and industry by looking towards Denmark’s industrial PhD program that grants students PhDs through their work in developing high-quality research that has business-related significance and effect, and is funded jointly by individual companies and universities.

Such a program could create industry-academia linkages at the foundational level and potentially train a new cohort of PhDs accustomed to collaboration and cross-pollination across sectors.

The World Intellectual Property Organization’s patent data on Canada should be a call to action – “actual technological potential is slipping through the metaphorical hands of the Canadian innovation ecosystem,” Zhang said.

Either Canada is failing to develop potential technologies in highly lucrative sectors due to a failure in technology transfer and industrial policy, or Canada has a fundamental disconnect between the outputs of the research ecosystem and the needs and capabilities of industry, he said.

“It is time for Canadian policymakers to stop sticking to the status quo so preferred by Canadian universities and recognize that this is a recipe for technological stagnation. It is time for government policy to be bold so that Canadian research output does more than simply go into scholarly journals or help companies outside Canada.”

Canada is losing inventors to other countries

A separate 2023 study by researchers at Boston University’s Questrom School of Business found that Canada’s production of patents actually has grown considerably during the last three decades.

In absolute terms, the total number of patents granted by the United States Patent and Trademark Office (USPTO) with at least one inventor residing in Canada roughly tripled during this period, outpacing growth in the Canadian population and in real GDP, according the study by Iain Cockburn, Megan MacGarvie and John McKeon.

Computing and communication inventions as a share of total patents have risen from less than 10 per cent of the total to nearly half of all patents granted to Canadians.

However, the study authors noted that this growth in patenting hasn’t led to increased productivity in Canada – a phenomenon called the country’s “patent productivity paradox.”

The relationship between patenting and “total factor productivity” (TFP) growth is significantly weaker in Canada than in most other countries, in that a given increase in the number of patents filed by Canadians is associated with a smaller increase in productivity than is observed in other countries, the study said.

“The relationship is unusually weak for Canada, whose recent history of strong growth in patenting but little improvement in TFP stands in sharp contrast to countries like Finland, South Korea or Sweden.”

However, Canada’s patent productivity paradox also isn’t explained by lower invention quality, the study’s authors said. Using both conventional and new measures of invention quality, they found that recent Canadian inventions are not on average less important or novel than inventions from other countries.

Their study pointed out that because Canadian firms are a small share of the world economy, many Canadian-invented patents will inevitably be assigned to foreign firms. Although the share of patents with a Canadian inventor assigned to Canadian firms has stayed roughly the same during the last three decades, the share of Canada-invented patents assigned to foreign firms has risen.

There may be mixed effects of foreign ownership on productivity, the study said. For example, subsidiaries of foreign firms in the U.K. have been found to be more productive, and inward foreign direct investment has been found to increase the productivity of domestic firms.

Foreign-owned R&D-intensive firms also often have access to cutting-edge technology developed abroad, and may generate spillovers from R&D activities located in Canada.

On the other hand, some research shows when Canadian-invented patents are assigned to foreign firms, those firms are more likely to “scale up” the invention outside Canada.

Also, there may be few benefits if foreign ownership leads to R&D being shifted out of Canada. This can happen if inventors of patents in Canada owned by foreign parent companies are transferred to other parts of the company overseas, leading to emigration of highly skilled employees.

Canada has a high rate of net emigration of Canadian inventors, the study noted. China and India are the only countries with higher rates of total net inventor emigration than Canada. “This suggests that foreign-owned patents may indeed reduce productivity if they are not accompanied by shifting of inventors to locations inside the country.”

To the extent that mobile inventors bring knowledge about best-practice technologies to their destination countries, Canada’s low rate of inventor immigration relative to inventor emigration, combined with a high rate of foreign-owned patents, “suggests that [the country] is a net exporter of embodied technological knowledge.”

World-class universities are a source of well-deserved pride for Canadians, but research has documented a “Canadian commercialization discount” in which Canadian universities are less likely to commercialize research than similar counterparts in the U.S., the study said.

Although the study’s authors said efforts to change this have made progress (e.g. via University of Toronto’s Creative Destruction Lab), they noted that a recent report, “Intellectual Property in Ontario’s Innovation Ecosystem” by Ontario’s expert panel on Intellectual Property, identified gaps in expertise in resources at technology transfer offices. The report called for clarity on the mandates of these offices and other entities involved in commercialization of university research.

Canadian-invented technologies are developed elsewhere

Another possible explanation for the weaker relationship between productivity and patenting in Canada is that, for whatever reason, new patented technologies generated by Canadian-resident inventors are less likely to be put into practice in Canadian production facilities, according to the Boston University study.

Canadian inventors may sell their ideas to foreign firms that implement them elsewhere, or even out-migrate, taking their patented ideas to other countries for implementation. Other inventions may come from Canadian employees of multinational enterprises that prioritize development and implementation of these technologies in other countries rather than in Canada.

Significantly, the study’s authors found that after controlling for the share of patents held by assignee firms located in a country different from the inventor country, the Canadian patent-productivity gap is reduced. And the gap is completely eliminated after controlling for the net migration of inventors out of Canada.

“It is easy to see how net out-migration of inventors can generate “patents without [productivity] growth,” the authors said. A patent per se has little impact on productivity and economic growth. What counts is prompt and effective implementation of the underlying invention in the form of new products and production processes.

“Without the continued engagement of the inventor this implementation step may be slow, may be ineffective, or may not take place at all. Departing inventors take this deep understanding of their inventions and the challenges and opportunities of implementation of these ideas with them, along with their human capital. If they are not replaced by inflows of immigrant inventors, productivity is bound to stagnate.”

While the scientific and technical employees of foreign-based companies may generate economically significant inventions and ideas while working in Canada, it is their foreign employers who control where, and when, subsequent development and implementation efforts take place, and which markets they will be directed towards.

“ A substantial fraction of inventions with inventors based in Canada may therefore be contributing primarily to productivity growth elsewhere,” the study said.

More research is needed to distinguish between inventions with a domestic development and production footprint, those connected to foreign development through a multinational’s internal processes, and those with little continued involvement of the Canada-based inventor, the study’s authors said.

However, rather than seeking to limit the extent of ownership of intellectual property by foreign companies, they said that policymakers could consider the conditions under which foreign ownership is associated with increases in productivity.

“Our results suggest that the foreign ownership of patents is mainly a problem if it is not accompanied by inventor immigration, which is positively associated with productivity.”

Policy could seek to encourage the location of R&D workers within Canada, the study authors said. The Netherlands, for example, uses lower social charges on science and engineering employment as a way of reducing firms’ costs of performing R&D.

Recognizing the impacts of migration and foreign ownership also suggests policymakers pay close attention to the economic incentives for inventors to locate in Canada and “scale up” their inventions, the study said.

The study’s authors said their work also raises questions for future research on the role of tax policy for innovation in the context of global tax competition. Recent policy discussion in Canada has focused on the potential of “patent boxes,” or privileged tax rates for IP-related income

However, research has suggested that IP boxes do not stimulate innovation but rather encourage profit shifting. Other research has highlighted the impact of tax havens on profit shifting on aggregate productivity.

Research is needed on to what extent can tax differences across countries explain the patterns of foreign ownership observed in patent data, and what implications does this have for productivity growth, the study’s authors said.

“Perhaps most importantly, our results raise questions about how policy should target innovation outcomes,” they said. “Simply increasing the number of patents filed by Canadian inventors may not lead to improvements in economic growth and well-being. Policies should be focused on making sure innovation outputs translate into economic activity in Canada that leads to economic growth.”

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