To sell or scale up: Canada’s patent strategy in a knowledge economy

Innovation Intellectual property Patents Small and Medium Enterprises (SMEs) Canada

Canada has many of the right conditions for innovation: a well-educated workforce, strong research institutions, openness to skilled immigration, an active venture capital scene, generous R&D tax credits and access to the large US market. However, as several studies have noted, Canada appears to fall short in exploiting this potential, relative to peer countries. One explanation for this capacity-outcomes gap could be that Canadian researchers, though productive early-stage innovators, are less inclined to scale up and commercialize their new products and processes. Instead, they sell their intellectual property (IP) to foreign entities, forgoing the opportunity to control the exploitation of the patented technologies that they pioneered.

Drawing from recent literature on the topic, the study highlights the importance of patent ownership — especially for small and medium enterprises (SMEs) — in advancing through the stages of the innovation process from discovery to commercialization. By establishing property rights through patents, innovators are better able to signal their invention’s value to potential investors, to ward off competition and to protect themselves from patent trolls.

Patents can, however, be a deterrent to firms scaling up when they are held by other (often large) firms on complementary IP that is essential for their product development. The cost of accessing those patents, through either royalties or legal battles, may simply be too high for small firms to sustain. According to the authors, these cost barriers are particularly relevant in Canada, where SMEs account for a significant share of innovation activity. Moreover, the rise of dominant, vertically integrated US firms that are competitors and potential buyers of Canadian-owned IP assets has increased incentives to sell rather than to scale up.

Based on data on US patents, the authors find that the majority of patents filed by research teams with at least one Canadian inventor are assigned on the date of issue to firms outside Canada or to foreign subsidiaries in Canada. And of the patents that are assigned to Canadian residents, a significant proportion are subsequently sold to foreign entities. While this may be a cause for concern, the authors point out that research investments in Canada by foreign subsidiaries can generate long-term and sustainable benefits for Canadians. Such investments can enhance innovative capacity in Canada through the development of entrepreneurial expertise and scientific infrastructure, especially relative to an alternative scenario that might involve the exodus of Canadian talent.

Still, these structural and institutional features of the innovation environment have important policy implications. For a small, open economy such as Canada’s, strengthening intellectual property laws is not likely to have much impact on scaling up activity.

More important to inventors is the ability to obtain and retain ownership of international patents in order to operate in global markets.

Publication Details
IRPP Study 72
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