On the Roots of the Canadian Productivity Problem

A CBC interview with Jim Balsillie gives a clear explanation of Canada's utterly unparadoxical productivity problem

I have been following Jim Balsillie’s commentary on the challenges in Canadian innovation for about as long as I have been tracking the Canadian innovation space. His is one of the clearest voices calling for policy reform and a shift in the way we think about economic value as a means to catalyze Canadian productivity, and probably the most influential voice pushing back against the long-prevailing and deeply flawed narrative that Canada’s productivity issues have cultural roots.

He recently gave a short interview for CBC on the subject that presents a concise summary of the issues facing Canadian innovators, which I encourage you to listen to before reading the rest of this article. It is only about 10 minutes long, and can be found here. This short segment is an excellent introduction to the overarching theme of the ideas that I have been discussing here over the past few months.

Here, I use the core message of the interview (that success in the modern global economy is based on ideas rather than physical production and requires an active, hands-on approach policy approach) as a bridge with which to connect much of the content that I have already been written at CanInnovate. In this article, I expand on some of the ideas that are discussed in the interview, focusing on the early stages of intellectual property development.

To paraphrase Jim Balsillie’s framing of the problem: starting about 30 years ago, the world shifted away from a tangible, production-based economy toward one based on intangibles, and Canada missed the memo. While the rest of the world enacted policies to ensure they remained competitive, Canada continued to operate according to policies that brought us prosperity in the decades prior. The result is that we are on track to soon be dead last among the 38 OECD member countries in terms of productivity.

In an economy based on physical production, policies that have historically won out are based on owning the means of production and taking a hands-off approach to what follows. This approach does not work in an intangible economy, because the system by which IP is managed is based on the idea of restricting the rights of another entity unless they pay “rent”. This restriction requires a hands-on approach, both to ensure retention of IP and to enforce IP rights

In the interview, he gives many examples of the consequences of a hand-off approach to IP development: Dalhousie giving battery IP away to Tesla, University of Toronto giving AI IP to Google, and more. According to Jim Balsillie, something like 75% of Canadian-developed IP is exported instead of being exploited domestically. As a result, our economy has devolved into one based on subsidizing companies controlled by other countries to build production capacity to exploit intellectual property here, creating the illusion of economic development while exporting the profits, often based on IP for which Canadian taxpayers footed the development bill.

There is a key point that should be made clear but which is not explicitly discussed in the interview. For a piece of IP to be rentable, it must be mature enough to justify doing so, and so the idea of using licensing of IP as the means by which to extract its value applies primarily in the context of established businesses with relatively mature technologies. To get to that point, technologies must first survive early stage development.

For a piece of IP to be rentable, it must be mature enough to justify doing so. In the case of deep tech and university-stage technologies, a significant contributor to loss of Canadian IP is early licensing by universities to large firms that have no intention or ability to develop it any further. While immature technology is not rentable, it does still have value as a means by which to restrict the operations of others, and large firms are generally happy to hold (but not develop) as much IP as they can get, and the technological immaturity of university-stage IP means that it is cheap to do so. Universities over the last few years have not come even close to cost recovery on the research dollars spent on IP generation (generating just over 1% of the cost of research in licensing fees, at last count).

This state of affairs is generally not the fault of the universities themselves. They have a mandate to produce research and to transfer the result to industry, but this mandate is provided without any guidance on what should follow, and no economic incentives are attached to particular tech transfer outcomes.

Universities should not be licensing TRL3-4 technologies to established companies for pennies on the development dollar. They should instead be facilitating the transfer of IP into domestic economic entities that can develop the IP to the point that its value can justify the rental model of IP value extraction (ideally a small business, as the Americans have thoroughly demonstrated through Bayh-Dole). Similarly, universities should not be seeking monetary return through tech transfer; rather, they should be seeking to be the anchor of a self-sustaining innovation ecosystem.

Getting there requires that all Canadian innovation support structures, including the tri-council agencies and the eventual capstone, NRC IRAP or whatever it later becomes, SR&ED, the proposed patent box, and others both provide top-down guidance on what should and should not be done (and far more importantly, when and how these things should be done) with the IP output of funded research, and condition their funding on specific tech transfer outcomes.

For this to happen, all of these agencies need to agree on the overall mission and vision for Canadian innovation and ensure that their efforts are aligned such that the output of each technology development stage is the input to the next. Fundamental research outputs of the tri-council and capstone funding should be patented and developed to the point that it can be taken by a small business or startup and passed to IRAP, SR&ED, and similarly positioned provincial level industrial innovation supports. Only with a clear intention explicitly set at the policy level driving the entire innovation pipeline and actual communication between agencies tasked with supporting its different stages can we hope to address the loss of IP that is the driving force behind Canada’s productivity issues. This in turn requires that we actually follow through with overhaul existing programs instead of taking the typical Canadian approach of creating yet another siloed policy mandate to try to fill in the gaps between existing ones, and that the government embrace the idea that reward is proportional to risk on average and create policy incentives that align with this ethos.

The winner of the knowledge economy is the one who owns an idea (or a unique and valuable set of data), has developed that IP to the point that it can be exploited, and has the standing and resources to enforce the rights granted by such ownership. We are very good at the first step, but we mostly skip the second and third. This will not change without top-down leadership from the policy makers and the programs that provide the funding to develop the IP in the first place.

In other words: if Canada wants to get good at innovation, it needs innovative approaches to public policy to lead the way. As Jim Balsillie points out in the interview: the best time to plant a tree was 20 years ago, but the second best time is right now.