Innovating for Impact: Unpacking Canada’s ‘Patent Productivity Paradox’

By Laurent Carbonneau
CCI Director of Policy and Research

If you’re the sort of person who reads Mooseworks, it’s a pretty safe bet that you’ve already read plenty this year about productivity and prosperity.

Canada needs to start closing our historic and growing gap with other rich countries. Bank of Canada Deputy Governor Carolyn Rogers is right to call our stagnant economic productivity a national “emergency.”

When we talk about sluggish per capita GDP growth, we are really talking about the reality that Canadians are measurably less wealthy, and Canadians are undeniably feeling pinched.

We’ve always been clear here at CCI – in line with the best evidence – that the way to put Canada on a better path is by fostering better performance in the innovation economy, including uptake of new technologies in the wider private sector.

That’s why a paper published by the Centre for the Study of Living Standards unpacking our ‘patent productivity paradox’ grabbed my attention.

Apparently, between 1990 and 2018, Canadian patents filed with the U.S. Patent and Trademark Office tripled! Unfortunately, this doesn’t seem to have done all that much good. Our total factor productivity (TFP) only increased by 7% over the same period.

By contrast, TFP increased by 20 per cent in the US, and Germany saw even better results, with a 24 per cent increase. South Korean TFP increased by a staggering 46% between 1990 and 2018.

Out of a basket of G7-and-other fast-growing-rich-countries, Italy is the only country behind Canada, with slower productivity growth since basically the fall of the Berlin Wall.

Patents aren’t a perfect stand-in for technological performance, but as we discussed earlier this year, they do work as a rough-and-ready indicator of a country’s technological capabilities. You can typically count on a significant increase in patenting to lead to more productivity. What the authors of the paper published by the Centre for the Study of Living Standards found is that the relationship between these two factors – patents and productivity – is “unusually weak” in Canada compared to other countries.

What’s driving this apparent paradox? The authors looked at three possible explanations:

• Canada being an outlier and laggard in information and communications technology (ICT),
• the high share of our economy dedicated to natural resource sectors, and
• lower invention and patent quality.

They end up knocking all of these down: no one sector is to blame for the paradox, and patent quality doesn’t appear to be an issue.

The one factor that the authors do find has some explanatory power is Canada’s high rate of foreign assignment of patents. It’s important to note a few quirks of the patent system here. First, while inventor nationality is tracked, residency is not – so many ‘Canadian’ inventions might be Canadian only in so far as the inventor’s nationality is Canadian even if they don’t live here or work for a Canadian firm. The other quirk is assignment – inventors can assign patent rights to companies and individuals.

As a small country, it’s not surprising to see Canadian patents assigned to foreign firms. But the share of foreign-assigned patents has risen. Interestingly, USPTO filings by Canadians have grown much more quickly than Canadian Intellectual Property Office (CIPO) filings. This could suggest two things about their assignees: one, that they are companies exporting to the U.S., and two, that they are based abroad.

The authors conclude via a regression analysis that foreign assignment is the factor that they can actually show is driving the weak patent-productivity relationship in Canada and controlling for it accounts for a significant portion of the gap. As we’ve argued in the past, foreign direct investment comes with upsides and downsides. There is a marked positive relationship between FDI and productivity generally. But clearly, there is something unique about innovation that complicates this.

The key to this appears to be talent. If FDI comes with an in flow of researchers to Canada, then we would expect positive impacts. But as the authors point out, the relationship seems to be running in the other direction. Canada is the biggest exporter of inventors in the world after China and India. Emigration and acquisition are definitely part of the negative picture here. And we don’t bring in nearly enough hyper-talented, specialized researchers to compensate for it. As the authors put it, our “low rate of inventor immigration relative to inventor emigration combined with a high rate of foreign-owned patents suggests that [Canada] is a net exporter of embodied technological knowledge.”

But FDI is more than just brain drain. Lots of multinationals like to set up shop in Canada to do research – we have a lot of great people who don’t necessarily have to be paid Silicon Valley salaries. Why isn’t that showing up as an offsetting factor here in the patent-productivity paradox?

One explanation that the authors tentatively propose is control and direction. As we argued in the context of reforming Canada’s SR&ED tax credit, spillovers from research don’t just happen within one country’s borders.

Foreign firms with research shops in Canada will have their people working on the overall top priorities for the company, which could mean that research which happens in Canada ultimately gets refined and commercialized outside of Canada.  Out puts of Canadian R&D could be primarily marketed or exported outside of Canada as well. “A substantial fraction of inventions with inventors based in Canada,” they conclude, “may therefore be contributing primarily to productivity growth elsewhere.”

This is an important and suggestive set of findings. As our economic history suggests, being strong in upstream inputs, even R&D, isn’t enough for us to close our productivity and prosperity gaps with our peers.

What would help? Bringing in more top international talent can help offset brain drain, to be sure. But this problem looks a lot more like an age-old Canadian problem. We are great at the upstream inputs, but not so good at the downstream — commercializing, marketing and export.

Luckily for us, there is a technological solution at hand: the big, internationally oriented company. Just as we've demonstrated thatlarge foreign multinational companies are proving to be a drain on Canada’s productivity growth, the way to reverse the trend is by building homegrown companies that compete and win globally.

Canada needs more big companies that can commercialize research and ship products both in Canada and abroad. The best policies to solve our patent-productivity paradox should focus on obstacles to their growth and scale.

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Laurent Carbonneau is CCI's Director of Policy and Research. He can be reached at lcarbonneau@canadianinnovators.org. Mooseworks is the Council of Canadian Innovators' innovation policy newsletter. To get posts like this delivered to your inbox twice a month, sign up for CCI's newsletter here .