Government must stop IP supported by public funding from flowing to other countries and not benefitting Canada

Publicly funded research in Canada is generating more intellectual property and economic benefits for other countries than it is here, say critics who point to the growing number of academics’ patents transferred to foreign firms.

Individuals and organizations are calling on Ottawa to tie federally funded research to  commercial outcomes and IP retention for Canada, and to require foreign companies acquiring IP from publicly supported research to pay back the taxpayers’ investment.

“We have not been very effective in ensuring that our technologies are protected by the academics,” Dr. Peter Morand, PhD (photo at right), consultant, past president of the Natural Sciences and Engineering Research Council of Canada, and former dean of Science and Engineering at the University of Ottawa, told Research Money.

“The issue is really that we don’t seem to be very smart about just letting people into our chicken coop and letting them take what they want,” he said. “We’re not practising business innovation.”

A study last year by researchers at Boston University’s Questrom School of Business found that the share of patents with a Canadian inventor assigned to Canadian firms has stayed roughly the same during the last three decades. However, the share of Canadian-invented patents assigned to foreign firms has risen.

According to the study, Canada’s Patent Productivity Paradox: Recent Trends and Implications for Future Productivity Growth, some research indicates that when Canadian-invented patents are assigned to foreign firms, those firms are more likely to scale up the invention outside Canada.

The Council of Canadian Innovators (CCI) says its members continue to be concerned about the growing trend of academic patents being assigned to foreign firms.

Recent research shows that more than half of intellectual property generated through Canadian universities is assigned to foreign companies, including those operating outside democratic frameworks, Abu Kamat (photo at right), CCI’s director of strategic initiatives, said in an email interview.

For example, he said, Chinese multinational Huawei filed patents for technologies such as 5G wireless and AI developed in collaboration with publicly funded Canadian universities like the University of Toronto, the University of British Columbia and McMaster University, even after the Canadian government introduced restrictions in 2021 to safeguard national security.

“These partnerships mean that publicly funded research – financed by Canadian taxpayers – often benefits foreign companies rather than contributing to Canada’s innovation ecosystem,” Kamat said.

“This loss of economic and strategic value represents a critical challenge that demands immediate action. Stronger governance frameworks are essential to ensure these valuable assets benefit Canadians.”

Canada produces world-class research but Canadians are not reaping the benefits because the country hasn’t made the changes necessary to extract the value of this research, said Senator Colin Deacon (photo at right), an entrepreneur and an independent federal senator from Nova Scotia.

“Despite being a nation of innovators with a globally competitive research engine, we’ve never built the transmission,” he said.

Over the past 20 years, the number of Canadian-invented patents transferred to foreign firms has tripled from 18 percent to 56 percent, Deacon noted.

Between 2015 and 2021, Canada’s annual investment in university-based research has returned only 1.2 percent per year in cumulative income on licensed IP, he said.

Research by Kitchener-Waterloo-based intellectual property lawyer James Hinton (photo at left) and others shows that three-quarters of Canadian AI patents are transferred to other countries, with only seven per cent being held in the private sector.

The battery technology that propelled Tesla into becoming one of the world’s largest cap companies was invented by a group from Dalhousie University in Halifax, Deacon pointed out. “Tesla funded the research but kept all the IP.”  

Hinton and co-authors Mardi Witzel and Joanna Wajda, in their report last year for the Waterloo-based Centre for International Governance Innovation, said: “The evidence suggests Canadian universities have not been an answer to solving Canada’s innovation challenges. Based on FTO (freedom to operate), Canadian universities have failed at innovation.”

Canada lacks mechanisms for retaining IP as a condition of publicly funded research

Due to a lack of mechanisms for retaining IP as a condition of publicly funded research or as a matter of policy, “Canadian universities may also be seen as low-cost research labs for hire by international companies,” Hinton and co-authors said in their report, An Economic Mirage: How Canadian Universities Impact Freedom to Operate.

The report found that U15, a collective of 15 research-intensive, public research universities, accounted for 79 percent of all competitively allocated research funding in Canada – or $8.5 billion worth of research annually – and 83 percent of all contracted private sector research in Canada.

The biggest funder of research by the higher education sector is the sector itself ($7.8 billion), followed by the federal government ($3.8 billion). Based on data from AUTM (previously the Association of University Technology Managers), 40.7 percent of U15 members’ research funding comes from the federal government.

“Based on the extent to which Canadian U15 research generates IP that lands in the hands of foreign firms and reduces Canadian firms’ FTO (freedom to operate), a majority of the U15 universities receive a failing grade on Canadian innovation,” the report said.

“Inadvertently, but in very real terms nonetheless, U15 research that is funded by the federal government is generating more economic benefit for foreign companies and countries than it is for Canada.”

U15 members that receive a “failing grade” on innovation because less than 50 percent of their IP is retained under Canadian control include: Université de Montréal (49 percent of IP retained); University of Saskatchewan: (47 percent); Western University: (46 percent); University of Calgary (40 percent); McGill University: (40 percent); McMaster University: (34 percent); University of Toronto: (32 percent); University of British Columbia: (30 percent); and Université Laval: (29 percent), according toa report by Hinton and his colleagues.

The real source of pain for Canada is a function of the university sector’s mediocre economic performance outcomes, combined with the relatively scant amount of R&D that takes place directly through industry, the report said.

By comparison, other countries have massive industry-driven R&D expenditures that yield patent applications, granted patents and, ultimatel,y valuable IP that can be commercialized.

Almost twice as much of Canada’s R&D investment happens at publicly funded Canadian universities and research institutes compared with the U.S., “which highlights the importance of ensuring that Canadian universities are working for Canadian economic advantage,” the report said.

Morand said that Canadians expect a return on public money invested in research and advanced knowledge.

“The return that we’re getting from that [investment] is not very impressive. The academics don’t seem to realize that and our politicians don’t have a clue,” he said.

Compared with other countries, he added, Canada lacks the presence of a robust, vibrant, industry-led R&D program. “In Canada, a large percentage of our companies are not really interested in using academic IP to grow their companies.”

Business enterprise investment in R&D has fallen from 1.25 percent of GDP in 2001 to 0.86 percent of GDP in 2022, while the OECD average was 1.99 percent in 2021.

When it comes to commercializing university research, “we’re not competitive, not competing even with small countries in being able to commercialize those results,” Morand said.

Problem has been recognized for years but nothing done about it

Morand noted that the problem of valuable Canadian IP including patents being acquired by foreign entities has been known for years, but government hasn’t done anything about it.

For example, a 2019 study by the Montreal-based Institute for Research on Public Policy found 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. 

Morand pointed to the example of Burnaby, B.C.-based Moli Energy, which had developed the world’s first rechargeable lithium metal battery. However, one of Moli Energy’s batteries in a cell phone caught fire due to a short-circuit and caused minor burns to the user.

This news went worldwide, 10,000 cellphones were recalled, and the incident contributed to Moli’s demise and the company going bankrupt, Morand said.

But within two days of the B.C. government calling in a loan of about $20 million and Moli going into receivership, a consortium of Japanese tech companies bought Moli and its IP at a “fire sale price,” he said.

That translated into a $5-million price tag for a company that had received $120 million in investments and still held more than $58 million in assets. 

In 1998 the Japanese-owned Moli merged with a Taiwanese company, E-One Technology, and the newly minted E-One Moli Energy Corp. was formed with fresh purpose. The company became the first manufacturer of lithium-ion cells in North America and now has major supply deals with companies around the world.

“If we had a Moli Energy that succeeded, we would be reaping the benefits of huge revenues the company would generate,” Morand said.

Another example he cited is the development of an effective vaccine against the Ebola virus by Canada’s National Microbiology Laboratory.

There was little interest from the pharmaceutical company for an Ebola vaccine because the market was considered to be too small. A license for what is now known as the VSV-EBOV vaccine was eventually granted to a small U.S. company.

During the Ebola outbreak in West Africa, Merck bought the rights to develop VSV-EBOV and brought it into large-scale production for clinical trials.

“So what should have been revenue for Canada went outside the country because we’re not very smart in business innovation,” Morand said.

Kamat at the Council of Canadian Innovators said while Canada’s national AI strategy attracted foreign giants like Meta, Google and Samsung, it also exacerbated the talent scarcity for local firms, limiting their ability to capitalize on the AI boom.

“CCI believes that Canada must do more to protect homegrown innovators and their intellectual property. Without stronger measures, we risk becoming a source of innovation for foreign benefit instead of leveraging these advancements to drive economic growth in Canada,” Kamat said.

Sen. Deacon said the biggest issue is that protecting Canadian IP and ensuring that university research gets commercialized are not government priorities.

“We don’t, as an economy, look to our innovators to solve the biggest economic, social and environmental challenges. If we did, we’d give protections to creators of IP and tools to develop and deploy their ideas in Canada, generating long-term national competitiveness and wealth,” he said.

Government could do more with tools like regulatory sandboxes, a doubling down on systematic IP regime modernization, more resourcing for organizations like the Innovation Asset Collective, and changing legislation around the usage of data for commercial uses that protects Canadians while harnessing the benefits with clear, modern rules, Deacon said.

Morand said Canada needs to create an environment where academic researchers are encouraged to engage with Canadian companies and share their IP. “To me, the most important priority for Canada is to make the changes in regulatory and business requirements that would promote advanced technology companies to do business in Canada.”

Measure Canadian innovation policy by the innovation benefits provided to Canada

All Canadian innovation policy (for example, tax credits, economic development programs and foreign direct investment policies) should consider a net benefits test that measures the innovation benefit (increased or decreased freedom to operate, or FTO) to the Canadian economy and provide IP strategies and policies that can achieve economic success, said the report by Hinton and co-authors.

Without a competitive IP position from owning valuable IP and data assets, a company will have reduced FTO and can be legally limited, financially penalized, and/or entirely restricted in business operations by a competitor who does hold IP that can be leveraged and asserted, they noted.

Canada’s university R&D policy needs to be reoriented toward an innovator’s perspective, with a greater focus on outcomes that drive productivity and improve Canadian firms’ FTO, according to the report.

Recipients of public funding have a greater burden of responsibility when it comes to the technology they develop, which extends to providing non-assertion rights to Canadian industry for commercialization, Hinton and co-authors maintained.

This argument is not born out of a nationalistic ideology but out of recognition that the total effect of individually rational decisions contributes to a gap in the stock of Canadian IP, which disadvantages Canadian industry, the tax base and labour markets, they said.

Israel and other countries already protect domestic IP generated by publicly funded research, they noted.

“Canadians have ideas, invest in opportunities, register patents, generate IP and too frequently that IP is sold at an early stage to foreign firms that invest to commercialize and leverage it while Canadians go back to create another good idea for somebody else,” they said.

“This cycle is taking place through [university research] projects that are mainly funded by public dollars, and by extension, taxpayer funds are enriching foreign entities.”

They said universities receiving public funding must track and report the flow of R&D efforts with annual and concrete disclosures, including the economic benefit provided to Canada, what IP (including open IP) is being generated, and who is economically benefiting and by how much, so that Canadians can understand how public funding is providing a return on investment for Canadians.

They pointed out that there are three destinations for IP generated by Canadian universities: research that is received by Canadian industry, increasing freedom to operate; research that stays with the institution or professor and is not commercialized; and research that is transferred out of the country to foreign industry, thus reducing freedom to operate.

They recommended that measures be taken to increase the transfer of university IP to Canadian businesses, such as through no-cost contributions of publicly funded university IP to Canadian companies, “having Canadian universities work for Canadians and not against them.”

For university IP that is developed but not readily received by industry, consideration should be given to pooling these patents in a patent collective for strategic access by Canadian companies, with the collective providing a licence to these patents to Canadian companies, they said.

IP that is transferred out of the country to foreign firms should be limited by funding policies so that the universities receive a fair return on investment, they said.

Alternatively, Canadian companies should be prioritized with freedom to operate (for example, a non-assertion type licence) for the IP generated for foreign funders.

“Ultimately, there must be some incentive to retain innovation’s economic value in Canada and a price to pay for losing the economic returns that public funders expect in exchange for receiving Canada’s generous investment in research.”

There is considerable potential for the federal government to play a role, particularly as direct federal funding currently accounts for 40.7 percent of research funding at universities, “so the funding could be tied to commercialization outcomes, including IP retention within Canadian firms,” they said.

Kamat said the Council of Canadian Innovators supports several measures to safeguard Canadian AI patents and ensure they benefit Canadians, including:

• Marketplace Frameworks: Developing rigorous guidelines and policies to evaluate and mitigate the risks of transferring Canadian-developed IP abroad.
• Public Funding Conditions: Requiring domestic commercialization or significant economic returns for patents derived from publicly funded research.
• Targeted Support for Canadian Firms: Expanding investment and incentives to help Canadian companies commercialize and scale innovations, reducing reliance on foreign buyers.
• Comprehensive IP Strategies: Accelerating the rollout of a national IP strategy that prioritizes the retention and protection of intangible assets.
• Patent Protection Mechanisms: Establishing patent collectives or similar tools to defend Canadian innovations from foreign acquisition and ensure they remain a source of national competitive strength. The Innovation Asset Collective is a great federal instrument, but its work should be mandated to work much more closely with all other departments across government, the CCI said.

Said Morand: “If Canada really wants to get out of this rabbit hole, it will need the leadership of politicians and senior administrators in government, industry and universities to formulate policies that will nurture entrepreneurship and business innovation.”

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