Finn Poschmann is president and chief executive officer at the Atlantic Provinces Economic Council.
There are some who worry that Canada is being left behind, that we face an intellectual-property gap – that we pay more in IP royalties to foreigners than we receive in like coin – and that this is the cause of our long-lost productivity growth, and that the Trans-Pacific Partnership is likely only to make this worse.
What to make of all that?
Many economists and business folk might be puzzled by the question. After all, innovation, which drives productivity growth, is what happens when you put ideas and technology to work. And it doesn’t make much difference whether you make or buy ideas when putting them to use in new ways.
For example, Samsung makes computer chips en masse, and it makes smartphones, but that’s no guarantee that a Samsung chipset goes into a Samsung smartphone. It might be a Qualcomm chip, and it depends on the particular business line.
Here, creators of new electronic products, for example, are mostly going to buy chipsets from somebody else, and those chips may embody a thicket of other people’s patents, all bundled into the price.
A domestic firm might buy an ARM chip. But it couldn’t buy one made by the British design firm, because ARM doesn’t make or sell them. You would buy from one of the more than 1,000 ARM-licensed manufacturers, who collectively ship about 3.5 billion chips a quarter, with royalties and licensing fees of a few pence per unit heading back to ARM headquarters.
ARM spends about a third of its revenue on research and development. Our hypothetical domestic manufacturer doesn’t; it buys the results and innovates.
What else do we know, other than the net IP payment flows?
Across the economy, pure IP costs account for 1 per cent to 2 per cent of gross business inputs. Whether that is high or low is anybody’s guess. My guess is that if we were spending more on purchased IP, it would mean we were using more IP in innovative processes.
One big IP consumer is the education sector. Other big consumers: conventional oil and gas extraction; professional, scientific and technical services; and “support activities for mining and oil and gas extraction,” which I think means field services, including data.
On the IP production side, the oil and gas, pipeline and utilities sectors pump out patents at an outstanding rate. On a per-capita basis, Albertans and Ontarians are the big patent producers. (This is not a score where the Atlantic provinces do well.)
Meanwhile, the past couple of decades saw a lot of consolidation in the pharma business. That led to many Canadian-registered pharma patents being owned out of, say, Switzerland. Ownership of many patents has migrated to entities in Western European countries that happen to have kind tax treatment for IP royalty flows. Caribbean island havens have also come to domicile many patent-owning entities, who were presumably seeking shelter from the cold.
That’s just part of the international tax system – the global one. If you own a good piece of IP, you are almost always going to be better off owning it through an entity on the other side of an international border. It doesn’t much affect how domestic firms choose to employ the fruits of IP in their innovative processes.
Shifting to a more agnostic perspective, domestic research and development matters.
When manufacturing facilities co-locate with research facilities, the patent output of local scientists goes up. It appears that when R&D staff wander over to production facilities to ask and answer questions, their ideas might be more quickly adopted.
How to encourage that? One notion is the “patent box,” or “innovation box,” which grants firms a reduced tax rate for domestic income derived from production associated with developing or acquiring IP. As things stand, Canada’s tax system rewards firms for spending on R&D, rather than putting innovation to use.
A legal requirement for a close nexus between the IP and the associated activity would put a border around eligible income, and ensure compliance with emergent international tax standards. Our European competitors have already created innovation-box mechanisms in just this fashion. Similar plans have bipartisan support in the U.S. Congress and Senate.
And what has this to do with the Trans-Pacific Partnership?
Not so much. The TPP pushes out to partner countries pharma patent rules similar to those Canada and the United States already share. There are other minor changes with respect to patent lives’ beginnings and ends, but nothing to write home about. The goal of TPP is to see our partner countries adopt IP protections much like the ones we now have.
As to copyright, some current U.S. rules will apply, which means that if you are an author or composer, your grandchildren may get cheques they otherwise would not. This is an application of what is fondly known as the “Sonny Bono Copyright Term Extension Act,” and will do nothing for consumers or creativity, and falls in the category of a minor annoyance on the way to a deal.
Indeed, putting innovation to good use is an issue for the Canadian economy. Potential tools for doing so, like the innovation box, are ready to our hands, and the TPP does not tie them.Report Typo/Error
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