Canada’s post-COVID recovery depends on strong support for SMEs and IP: report

Canada’s small and medium-sized companies will be crucial to the country’s post-COVID economic recovery but need more government support to thrive, argues a new report from the Ottawa-based Information Communications and Technology Council (ICTC).

SMEs, which represent 99.8% of all businesses in Canada, require improved policies and incentives to generate intellectual property, successfully scale up and expand into global markets, according to the report, done in partnership with ventureLAB, a technology hub in Markham, Ontario.

“The makeup of Canada’s economy is comprised predominantly of micro [businesses] and SMEs. So enabling a vibrant startup ecosystem will pave the way for strong economic recovery and job growth post COVID-19,” Namir Anani, president and CEO of ICTC, said in an email to Research Money.

ICTC’s report, “Bolstering Growth: The Next Frontier for Canadian Startups,” was co-authored by Alexandra Cutean, Tyler Farmer and Mairead Matthews of the not-for-profit’s research and policy team.

The report outlines the key ingredients needed to achieve a competitive and resilient scaleup ecosystem in Canada: businesses holding formal IP; building startups to scale; and creating globally competitive Canadian companies, the authors wrote.

“What Canada needs going forward are sustainable business models and built-to-scale, IP-generating companies – in other words, more scaleups,” they said in the report.

As for the value of intellectual property, the authors noted that in 2017, SMEs holding formal IP were three times more likely to have expanded domestically than those with little or no knowledge of IP. SMEs with formal IP also were four times more likely to have expanded internationally and nearly two times more likely to have experienced high growth in the previous three years.

Yet the impacts of COVID-19 are forcing SMEs to choose between basic survivability and long-term instruments for competitiveness, including IP generation and protection, the report stated. In June 2020, 75% of Canadian companies surveyed by the Canadian Council of Innovators had either decreased their investment in IP research or patenting during the pandemic or maintained pre-COVID-19 investment levels.

SMEs need IP protection, high-quality foreign investment

“Canadian companies and academic researchers engaging in R&D activities with foreign investors and partners must prioritize IP rights early on to ensure commercialization rights and freedom to operate in key markets in the future,” the authors wrote. Governments in Canada should revisit the role of IP in international partnership agreements to ensure the development and protection of IP for Canadian firms and the domestic market.

The authors recommended that governments should incentivize the creation and commercialization of Canadian IP through policy tools such as a “patent box,” used by many countries to incentivize commercialization of regional R&D. A patent box is essentially a tax policy that allows regional corporations to receive a reduced tax rate (often around 10%) on income derived from qualifying IP.

Quebec is piloting something similar to a patent box that could be a model for the rest of the country, the authors suggested. In its 2020-21 budget, the Coalition Avenir Québec government introduced an “incentive deduction for the commercialization of innovations in Quebec,” which allows companies to be taxed provincially at 2%, rather than the current rate of 11.5%.

“Accelerating IP commercialization through policies like the patent box that incentivizes corporate tax deductions for the commercialization of innovations will further incentivize IP development and Canada’s competitiveness on the global stage,” said ICTC head Anani.

Governments in Canada also need enhanced policies and incentives to attract high-quality foreign direct investment to support local ecosystem growth, the report’s authors wrote. However, they suggested this approach should include performance requirements for FDI, such as:

• ensuring a certain portion of local goods and services are used in the project;
• achieving a certain quota of new jobs in Canada;
• carrying out a given level of R&D activity in Canada, to help local SMEs develop and/or enhance IP; and
• providing knowledge exchange from foreign investors to local businesses.

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