Canadians can innovate, but we’re not equipped to win

The Globe and Mail

May 8, 2015

One frigid morning this January, I broke into a cold sweat thinking about the future for Canadian entrepreneurs. At a patent conference with some of the world’s foremost innovation experts and practitioners, the lead strategist from one of the world’s most valuable technology companies announced: “We don’t sue Canadian companies until they start to matter to us. The money is not worth it when they’re small and we don’t want to look like a bully. We wait until they get big enough, then we go after them. And we kill them."

What I learned in 20 years of growing Research In Motion from an idea into a global business with $20-billion in sales is that, in the realm of generating wealth from ideas, Canada isn’t equipped for global competition. This lack of capacity is no longer optional, because low commodity prices and the steady decline in manufactured exports (due to competition from low-cost countries such as Mexico and China) have placed Canada at a competitive disadvantage.

The good news is that Canadian entrepreneurs have the potential to generate great wealth. Our innovators and entrepreneurs are world class. Their desire to grow a business here benefits every Canadian. But if we don’t create an ecosystem where they can flourish, Canada’s prosperity is at risk.

Countries leading in the innovation economy do it on the back of entrepreneurs and the commercialization of their ideas. High-margin profits generated from the sale of products or services underpinned by valuable patents account for billions in profits. This has quickly made technology companies the most valuable in the world, and added great amounts of private and public wealth to their home nations. That’s why the competition is always ready to point the gun at Canadian entrepreneurs if they dare to break out and scale their companies globally.

Canada’s terrible record of commercializing its ideas won’t change until we build proper infrastructure to help our entrepreneurs succeed on the global stage, where the real money is made. The infrastructure and policies required for the innovation economy are significantly different from what’s required for our traditional resource and manufacturing economies. Policies that helped us design infrastructure for traditional industries have little impact on an innovation economy.

Ownership of ideas is not decided by traditional ownership rules. If a Canadian entrepreneur has an idea with potential to generate great wealth, ownership of this idea will be decided in courts beyond Canada, by foreign judicial and geopolitical systems designed to make another country prosperous. This difference fundamentally shapes a business’s potential global scale.

Canada’s current infrastructure and our public and private leadership do not foster the needed capacity to contend effectively in the complex, predatory and state-sponsored ideas ownership game. That means that RIM will stay an anomaly until we fix critical gaps in our prosperity strategy.

Why Canada lags behind

In Canada, policies required for the innovation economy are either absent or inadequate. That is why we have zero growth in multifactor productivity (the standard measure of the commercialization of innovation) over the past three decades, as reported by Statistics Canada.

Both the Canada-U.S. free-trade agreement and the subsequent North American free-trade agreement (NAFTA) have been critical for Canadian businesses trying to compete in global markets, because they allow a freer flow of goods across borders. Codified in the 1988 FTA is the government’s statement that Canadian companies are “ready to compete now” in emerging technology sectors such as “computers and equipment.” Our results have shown that we were not ready to compete, at least at scale. Open borders are a useful asset for Canadian oil, lumber or beef. They do enable the movement of technology products, but they don’t address the ownership of ideas, which is the foundation for their profitable commercialization.

Both the FTA and NAFTA contain little about intellectual property rights (IPR), the currency of the innovation economy. The only IPR reference is a mutual commitment to “National Treatment,” a principle in international law that means all parties agree to treat foreigners and locals equally. The National Treatment rule may work for our traditional economies, but it does nothing for a Canadian entrepreneur trying to grow a business from an idea. Ideas are not tangible goods – their possession is ambiguous and almost always decided in foreign courts.

Those courts are usually in the United States, because that’s where the market for technology goods and services is created. A National Treatment case there takes years to prosecute and carries substantial risk of failure unless it presents clear evidence of mistreatment. These enforcement guidelines may be appropriate for a softwood lumber case, but they are useless for seeking justice in fast-moving high technology markets. That’s why there hasn’t been a single case of a Canadian company using the National Treatment clause on an IPR issue with the United States since NAFTA.

While NAFTA functions well for manufacturing and resource businesses, it leaves our policy makers believing that opening more international markets is the key to success for all sectors – even as that strategy fails to provide equitable results for Canadian companies competing to scale up their ideas globally.

Industry Canada’s 2008 report Compete To Win lays out a broad premise that “removing legal, regulatory and policy impediments to competition [will provide] the conditions to better enable Canadian companies to compete in global markets.” Compete, maybe. But win, certainly not. The report completely fails to address the conditions required to win in the innovation economy.

Geopolitics is at the heart of commercializing ideas. The money is enormous and the possession of ideas (and their ensuing profits) is manipulated at the national level. Because ownership is almost always determined in the United States, and the ensuing settlements usually must be effective globally, U.S. courts are effectively the world’s IPR court system. That should make anyone else concerned with Canadian prosperity sweat, too.

Working together to win

Canadian politicians and policy-makers need to update their understanding of how the innovation economy works. Our American counterparts realized this long ago by jointly developing sophisticated intellectual property and commercialization expertise between the public and private sectors, and then aggressively using it. This was evident in the high-profile patent battle between Apple and Samsung, involving billions of dollars of annual royalty payments.

In June, 2013, South Korea’s Samsung scored a major victory over Apple in a U.S. International Trade Commission decision to ban the import of Apple products because of infringement of Samsung patents. Two months later, in August, U.S. President Barack Obama vetoed the ITC decision, the first time in more than 26 years such a veto has been exercised. Two months after that, in October, Mr. Obama declined to veto a similar ban of Samsung products in the United States, ensuring that Apple maintained its profitable leverage over its competitor. A ban of certain Samsung smartphones is still in effect.

The wealth at stake is enormous, so governments and corporations work together to win. High-margin intellectual property rights account for half of U.S. exports, contribute $3.5-trillion (U.S.) a year to the American economy and employ nearly 18 million workers in high-paying jobs. That’s prosperity from ideas commercialization.

NAFTA is just as insufficient for the American innovation economy as it is for the Canadian, which is why U.S. policy-makers are busy making major amendments to federal copyright law to ensure that the profits generated by its creative content keep flowing. The 1998 Copyright Term Extension Act and the 2011 America Invents Act are just two examples of a legislative strategy that provides flexibility to the benefit of U.S. interests and keeps all others on unstable footing.

As a major creator and distributor of creative content, the United States has a great deal to gain from lobbying for rules making it illegal to enjoy American creative work without new licences. Canada recently passed the Copyright Modernization Act, which was created in response to U.S. government and corporate interests working in a sophisticated fashion to advance American interests at the expense of other countries, including our own.

Disturbing WikiLeaks cables from the 2005-2009 period show systemic and effective lobbying by U.S. officials, who pressured Canadian politicians to implement stricter copyright laws. Cables from 2006 show Canada’s industry minister promising the U.S. ambassador that final copyright legislation “would be in line” with American priorities. Another cable, from 2009, recounts a senior Industry Canada policy official asking a U.S. counterpart to put public pressure on Canada to create the needed justification to give Washington what it wanted.

Our policy-makers need a reminder that Canada’s interests are not served this way. Without a domestic innovation lobby that can vouch for the interests of Canadian ideas and creative content, Canadian politicians are inadvertently legislating in American interests.

Canada’s Compete to Win report contains the same policy gaps as the FTA and NAFTA, failing to address the infrastructure required for idea commercialization. The report has many laudable points, but the only tangible intellectual property recommendation it made was that Ottawa bow to U.S. pressure and “ensure new copyright legislation” that will “strengthen counterfeit and privacy laws.”

I’m supportive of appropriate IPR protection, but we need strategies that make Canada prosperous, too. A couple of years ago, I participated in a conference of CEOs in Toronto where a former head of Canada’s civil service said: “The government has done everything needed, so now it’s time for entrepreneurs to step up and do their job.” I believe we haven’t even begun to deploy smart strategic public policy options that will improve our innovation record. We need a strategy to advance our prosperity beyond the incomplete mantra of greater domestic IPR protection and open borders because these policies have not contributed to the growth of an indigenous innovation economy in Canada.

Europe is equally sophisticated in its IPR strategy. This is evident in the Comprehensive Economic Trade Agreement, which ensures more prosperity in Europe for its high-margin pharmaceutical industry and higher drug costs in Canada. Canada needs to puts IPR laws at the centre of its trade negotiations.

Countries that owe their prosperity to innovation rely on sophisticated engagement between entrepreneurs and policy-makers. Google executives, including co-founder Larry Page and executive chairman Eric Schmidt, have visited the White House 230 times since Mr. Obama took office, an average of nearly once a week. If Google, Apple and other U.S. tech companies get help from all branches of government to advance their collective prosperity, why are we insisting that Canadian entrepreneurs do it alone?

How we innovate better

I remain bullish on Canada’s prospects. Outside the country, I’ve seen strategic public policy work hand-in-hand with entrepreneurs to help economies rise. We can do the same. We have invested hundreds of billions of dollars in our public and private institutions to achieve greater prosperity for all Canadians. But instead of spending more money to improve performance, we need to shift strategies.

Commercializing ideas does not automatically favour a large country. Israel, Sweden and South Korea are just a few of the smaller economies succeeding in this game. What they all have in common – and what we’re missing in Canada – is a country-specific private and public framework designed to capture wealth from ideas.

A judicial strategy is a critical place to start. Canada’s Federal Court could be given greater powers to combat unacceptable behaviour by domestic and foreign “patent trolls” – companies that do not make or sell a product but sue other companies for patent infringement based on existing patent rights the troll has secured. New legislation could allow for injunctions to prevent a troll from filing a U.S. lawsuit while Canada’s Federal Court rules on whether the Canadian company has infringed on an asserted patent. Trolls could be required to be much more specific about how the target company’s product infringes on the patent troll’s claim – right now they can send out threat letters with general claims of infringement – and they could face sanctions when they are found to be using bad-faith tactics. Canada’s Competition Bureau could be given the power to target anti-competitive activity.

As part of our new free-trade deal with the European Union, Ottawa could negotiate to become a member of the Unified Patent Court. The EU has made its patent enforcement system much more attractive and globally competitive by implementing the unitary European patent protection and court system, so that the ownership of ideas within the European market will be decided inside the UPC. By becoming a member of the court with a venue in Canada, Canadian companies can have the same standing as European entities.

Other legal measures might include creating a sovereign patent pool and a prior art library to help Canadian small and medium-sized enterprises when they encounter litigation threats.

Our policy community can also propose strategic collaborations to better commercialize our ideas in the U.S. marketplace. A good example comes from Israel, which created a comprehensive set of idea commercialization strategies, including the Binational Industrial Research and Development (BIRD) Foundation, established in 1977 to support industrial research and development co-operation with the United States. BIRD supports an average of 20 projects a year, and the cumulative sales of products developed through it exceed $8-billion.

Canadian universities play an important role helping to build the infrastructure for an innovation economy, which is why they receive most of the yearly $12-billion (Canadian) invested in postsecondary research and development. Judging by the number of incubators, accelerators and hubs that are now associated with virtually every postsecondary institution, as well as in-house university research licensing offices, it’s clear that commercializing research has become one of the top priorities for these institutions. In tight fiscal times, this is a welcome development – there is a lot of money to be made by commercializing university research.

We have a long way to go, however. The University of Toronto’s commercialization office states that it is “in a class with the likes of MIT and Stanford.” But Stanford has generated $1.3-billion (U.S.) in royalties for itself and the Massachusetts Institute of Technology issued 288 U.S. patents last year alone; U of T generates annual licensed IP income of less than $3-million (Canadian) and averages eight U.S. patents a year. Statistics Canada reports that in 2009, just $10-million was netted by all Canadian universities for their licences and IP. Even when accounting for universities that have open IP policies, this is a trivial amount by global standards.

Higher education expenditures on research and development have increased every year from 2006 to 2014, totalling more than $100-billion. The federal government’s granting councils provide more than $3-billion a year toward research, making Canada one of the world’s highest per capita government spenders on R&D. This funding covers grants that span the spectrum from basic research all the way to business-led research partnerships.

Many Canadian innovation reports speak of the importance of enhancing links between universities and business to spur commercialization of university research. Yet our universities need to create better incentives for researchers to spur commercialization.

Current tenure and promotion policies at 44 Canadian higher education institutions emphasize research, teaching and service to the institution. For hiring, the same criteria are used, except that the new candidates are judged by their potential as indicated by research publication and teaching experience. There is no evidence in these evaluation practices that any tangible value is given to commercialization of university research. Indeed, incentives for commercializing are essentially seen as perverse, because if a faculty member is spending time commercializing research then, by current evaluation standards, they are not doing their real job.

If we expect universities to be part of our prosperity strategy, then faculty interested in such pursuits should devise new institutional approaches for their career advancement that reward rather than punish them when pursuing commercialization of their research. A university’s revenues affect the entire institution, so better incentives for successful commercialization is a prudent strategy that could also ease the pressure for more public funding.

Universities also need to be part of a wider strategy to better teach and encourage the commercialization of ideas. Barry Sookman, a Toronto-based lawyer and a leading authority on IP law, recently conducted a survey of 16 Canadian law schools. He concluded that “very few programs offer courses or opportunities that focus on teaching lawyers about commercializing IP or IP law strategies.”

Our entrepreneurs graduating from law, business, computer science or engineering programs need to receive the proper education for commercializing on the global stage. Too many Canadian startups and small or medium enterprises lack IP strategies. Even businesses that do patent rarely have viable strategies for using or enforcing their intellectual property rights. In Silicon Valley, patent-protection strategies are present at all phases of R&D, from the outset.

Our government invests heavily in R&D through tax incentives and grants, with the objective of seeing Canadian companies better commercialize their ideas globally. We should explore creating an ideas-protection strategy as part of the process to obtain government funding. Robust strategies would better equip innovative companies to achieve meaningful global sales growth.

Beyond the universities, Canada has other publicly and privately funded incubators and centres of excellence, where entrepreneurs can learn to start and grow a business. These agencies and organizations represent a critical piece of our innovation economy, providing unique and intensive environments for learning, collaborating and mentoring.

One of Canada’s largest startup incubators, Toronto-based MaRS, has recently come under scrutiny owing to potentially outsized claims of its success in generating revenue and helping its entrepreneurs. In my experience, this is not an isolated problem. Kitchener, Ont.-based Communitech, an incubator I helped to create in 1997, boasted for years on its website that it had “helped build a tech cluster that now generates more than $30-billion in revenue.” But as I write this, the site no longer makes any revenue claims.

Equally troubling are superlatives that have nothing to do with business success yet are advertised as key indicators, such as the number of startups created. Creating a startup is considerably easier and cheaper than starting a traditional business. Yet the measure of success for every business, regardless of sector is the same: sales, profits, merger and acquisition expectation prospects, and value creation for shareholders.

If we are looking at these centres to play a role in our prosperity, then the success needs to be measured in revenue and company valuations from external financing or M&A. The public and private financiers of these institutions should demand these metrics as a condition of future funding.

The myth of lack of capital for private technology companies dominates the narrative in a lot of incubators and policy circles. Some of these myths have been around for decades, at least since I first set out to raise money for RIM. And yet, in 1996, after one day of meetings on Bay Street, we received $100-million in common equity investment orders for our private company. Four years later, in one week, we raised more than $900-million in common equity. There is plenty of investment money for ideas that can be successfully commercialized.

Raising capital for technology in Canada is difficult because so many investors are losing money. Venture capital in Canada is one of the worst-performing asset classes. A 2013 study by Thomson Reuters and the Canadian Venture Capital Association reported a staggering divergence in 10-year pooled average returns between U.S. and Canadian VCs. The American VCs’ return was 13.5 per cent, while the Canadian VCs’ lost 3.4 per cent. A 2014 Cambridge Associates study of early-stage VCs was even more troubling, with U.S. VCs reporting a return of 20.5 per cent and Canadian VCs reporting a loss of 5.6 per cent.

Meanwhile, Canada’s low ranking in the OECD’s business enterprise expenditure on research and development rankings is often blamed on the national tendency to “sit on dead money” because of “cultural risk aversion” or “insufficient outward-looking attitudes.” But these arguments don’t account for how business investment works. An investment in the ideas sector is made for the reasonable prospect of profit from commercialization – just like in venture capital. Business moves with the carrot of profit, not the stick of hectoring. If you own a good idea with a reasonable plan to address and protect your market opportunity, investment capital is virtually limitless. We are inadequate at protecting ownership of our ideas, which undermines commercialization and, in turn, return on investment.

‘Mission-oriented’ leadership

Canadians are capable of creating national wealth when we approach prosperity systematically and strategically. Our best 20th-century example of “mission oriented” economic development leadership was Alberta Premier Peter Lougheed’s 1974 establishment of AOSTRA, the Alberta Oil Sands Technology and Research Authority. The Crown corporation’s original government funding of $100-million increased over time to $1-billion, with the objective of developing technologies and processes that would get the private sector back working on the 90 per cent of the oil sands that were too deep to be surface mined. The intellectual property it developed was owned by the province and licensed to commercial operators, providing the critically needed “freedom to operate.”

Approaches like AOSTRA and, more recently, Own the Podium, in the field of high-performance sport, have proved that Canada can set a goal, then do what it takes to achieve it. We can make commercialization of ideas a source of our prosperity if we apply strategic approaches.

Our infrastructure needs to be updated to include forums where commercialization of Canadian ideas are given strategic and integrated policy focus. We need an indigenous innovation lobby that exclusively advances the interests of Canadian entrepreneurs trying to grow their businesses globally. I was the only Canadian ever asked to join the U.S. Business Council, whose members included CEOs of some of America’s best-known companies. At the last meeting I attended, half of a two-day event was spent discussing the protection and commercialization of American intellectual property abroad. Attending the meetings were former and current State Department officials whose roles were intrinsically linked to advancing U.S. economic interests.

There are many forums where American businesses and trade associations work closely with policy-makers to advance their economic interests. But in the innovation economy, lobbying efforts are not confined to private enterprise. Universities have a large stake in the U.S. patent system, so they actively participate in advancing their interests along with (or sometimes in competition with) the private sector. American universities shrewdly lobbied to attain an exceptionally valuable carve-out from the America Invents Act, immunizing university patents from a “prior user” rights defence in infringement suits. This advantage translates into hundreds of millions of dollars in new university revenues.

We need a Canadian complement to this innovation lobby, centred on Canadian-domiciled companies selling Canadian ideas globally, to obtain the full commitment of federal politicians and policy-makers to act in ways that support their profitable growth. And we need Canadian universities to actively participate in advancing their own prosperity. The valuable “prior use” exemption was granted only to U.S. universities, but Canadian universities could pursue a National Treatment case under NAFTA that would give them greater leverage to dramatically increase their net licensing revenues.

The commercialization of ideas is a chain of systematic and deliberate events. This is how wealth is generated in an innovation economy. Growing and scaling up a critical mass of ideas-based companies in the global marketplace is difficult, but not impossible. Yet for us to expect that the results of our current innovation policies and investments will miraculously spur new companies and significant economic growth is, as many people like to say, the definition of insanity: doing the same thing over and over again, and expecting a different result.

More than 16 years after RIM launched BlackBerry, it remains the only Canadian company listed among the world’s top innovators because it owns one of the most valuable technology portfolios in the world. My business experience is unique in Canada, but I do not claim to have all the answers. I am certain, however, that Canada’s innovation performance will not improve unless the country’s business, university and political leadership comes together to consider radically different policies, programs and tools. Canadian taxpayers deserve better returns on their enormous investments in innovation.

Prosperity is not for entrepreneurs, business or government to foster alone. It’s not exclusively for the political left or right. Every Canadian wants this country to be prosperous. We have a duty to our next generation of entrepreneurs – those with the potential to build great companies and employ vast numbers of Canadians – to build a commercialization ecosystem that will help them grow and scale up. Not merely to compete in the global innovation economy, but to win.

The opinions expressed in this article/multimedia are those of the author(s) and do not necessarily reflect the views of CIGI or its Board of Directors.

About the Author

In addition to his commitment to CIGI, Jim Balsillie is the founder of the Balsillie School of International Affairs, the Centre for Digital Rights and the Arctic Research Foundation, and co-founder of the Council of Canadian Innovators.