INST Committee Meeting

STANDING COMMITTEE ON INDUSTRY, SCIENCE AND TECHNOLOGY

COMITÉ PERMANENT DE L'INDUSTRIE, DES SCIENCES ET DE LA TECHNOLOGIE

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, May 31, 2001

• 0904

[English]

The Chair (Ms. Susan Whelan (Essex, Lib.)): I call the meeting to order, pursuant to Standing Order 108(2), consideration of the science and technology policies.

We're very pleased to have our second-to-last round table this morning. From 9 a.m. to 10:30 a.m., we have with us four different groups of witnesses. We have, from the National Research Council of Canada, Dr. Art Carty, president; from the Vancouver City Savings Credit Union, Mr. David Mowat, chief executive officer; from the Conference Board of Canada, Brian Guthrie, director of innovation and knowledge management; and from the Canadian Medical Discoveries Fund Inc., Mr. Calvin Stiller, chair and chief executive officer.

I propose that each group give their opening statement and try to keep it to five to seven minutes, if at all possible. Then we'll move to questions, and hopefully we'll have about an hour for questions from everybody.

That being said, I'll turn it over to you, Dr. Carty.

• 0905

Dr. Arthur J. Carty (President, National Research Council of Canada): Thanks very much, Madam President.

[Translation]

Thank you very much, Madam Chair, for giving me the opportunity to speak to you this morning.

[English]

I'd like to talk about technology transfers, spinoffs, and financing and give you an NRC perspective, but also say something more broadly about this particular topic.

The first overhead shows a simplified version of the mechanisms for technology transfer from an R and D organization. I want to point out that an R and D organization will do several things, including produce knowledge for the advancement of science or for policy or regulatory reasons. That will be disseminated to the public—made available to companies, etc.

But there is also a need—and I think we've recognized in Canada that public institutions in the past have not done this particularly well—to put that knowledge and technology to work, through technology transfer to companies in society, for the creation of jobs and wealth.

There are three mechanisms that do that. Collaborative research and development involving the organization with an industry or company, for example, is a very effective way of working together, making sure the company knows what's happening and transferring the technology in that way.

You can license technology to companies from an R and D organization. Just recently, there's been a much greater appreciation of the need to create new enterprises through the spinoff route. This is in recognition of the fact that in Canada we sometimes don't have ready receptors for technology. In such cases, you need to create new companies in order to be able to transfer that technology. So the spinoff route has been recognized more recently as a very effective means of doing that. Of course, these products or processes will ultimately get to the marketplace and there will be a return on that investment. But I want to emphasize that it is actually the creation of wealth and jobs, and not necessarily the financial returns, that is important.

Let me briefly give you an idea of the scope of this at the present time. Recognize that both universities and government labs are now putting much more effort into the creation of new businesses and spinoffs. An indication is that there have been about 150 estimated spinoffs from government labs, including, I might say, 110 from the National Research Council. We have a family tree of spinoffs to demonstrate that, and it includes offspring from those companies.

Denys Cooper, of our industrial research assistance program, IRAP, did a study of university spinoffs recently. He found there are something close to 800 university spinoffs in Canada. They have generated about $2 billion in sales and about 12,000 jobs. Our own estimates of NRC spinoffs alone put it at about 7,000 employees—over a considerable period of time, of course—and $1.2 billion in annual sales. I think you can see that this is a significant activity. It creates significant economic activity.

In terms of NRC itself, since 1995 we have actively pursued the creation of new companies and businesses with our intellectual property, our technology, and our knowledge. You can see that this is a growing activity. We have created about 45 new companies over the last five years. About 40 of those are new start-ups and spinoffs. There is also this group called spin-ins, where companies come to us because they recognize that we have facilities and people to offer. So that is a growing activity at the National Research Council.

What do new companies need? Obviously, if they're technology companies, they need a good technology base, and you have to be able to do the due diligence to assess it. The failure of small companies is often due to the fact that they can't access financing, for example, venture capital. They need very strong management skills, and that's sometimes a shortcoming in Canada. They need highly qualified human resources, advice, and mentoring.

Incubation is a great help to small companies, to help give them the oxygen that is so crucial to their nurturing and growth.

• 0910

It's very often the case that clusters of small companies grow around R and D facilities, be it a university or a government lab. This clustering is critical because technology companies need R and D to grow.

At NRC, since about 1995, we have had an entrepreneurship program, and as part of our vision for 2001, we resolve to become much better at this business of commercializing intellectual property, knowledge, and technology. We have set about doing it in an aggressive and entrepreneurial way.

On some of the things we are doing, we have an entrepreneurship office. We train our researchers to become entrepreneurs. We provide opportunities for them to spin off and start up companies. We have a set of tools for commercialization. We've rejigged our inventor and innovator awards to create more incentives for our people to be innovative and to transfer their knowledge and technology. We provide entrepreneurship leave for people to have business training to develop linkages to financing organizations, etc.

We have agreements with venture capital organizations, such as the Canadian Science and Technology Growth Fund, which undoubtedly Cal Stiller will talk about this morning. We have relationships with organizations that can provide this mentoring—the professional advice to small companies—to help them succeed. For example, we have an agreement with the Inno-centre, which is a Montreal organization.

I don't have time to go through a large number of examples, but let me give you one example of an organization, a company called SiGe Microsystems, which is a spinoff from NRC. It was spun off in 1997. They make high-speed chips for wireless Internet, as well as other things. The process for developing these silicon germanium chips was developed at NRC. This company has spawned another company, SiGEM, which is now on the Toronto Stock Exchange.

These two companies together employ about 200 people. They had an investment from one of the venture capital organizations represented here, in which Cal Stiller has an interest. The market capitalization is in the tens of millions of dollars. This was a company that incubated at NRC, grew quickly, and has now moved out of our incubator. It has its own facilities in Kanata.

Another example is Optenia, which is a different kind of spinoff. This is an example of where a collaborative joint venture with the Ottawa company, Mitel, resulted in a technology that has significant potential and is a major opportunity. The spinoff involved no less than 10 NRC employees leaving the National Research Council, joining up with 12 employees from Mitel. This company is now called Optenia. It is truly a joint venture.

The device shown here will be marketed shortly. There's a significant market for this, and we believe that's a great opportunity. But it's a different kind of spinoff, in that it's a joint venture between a large company and a government organization.

I want to talk now about incubation. There are a number of countries around the world that have very successful incubation facilities. Israel has a national program for high-tech incubators. The Austin Technology Incubator is very successful, as well as some others. France and England have recently started national incubator programs.

At NRC we have three facilities for incubation. We built one in Ottawa here, one in Winnipeg, one in Montreal, and we're in the process of building others in Saskatoon and other locations. These incubators are very useful to high-tech start-ups.

On the incubation process, in the middle is the company, the new start-up, the spinoff. It needs access to R and D, business planning, capitalization, and business development. It gets synergy from other companies in the incubator. Of course, the capital is there. There are services that can be provided—networking services, for example, coaching and mentoring. This is the idea of the incubator providing the oxygen and the wherewithal for these companies to survive, to get the impetus, and to grow to be medium and large companies.

On NRC's experience, we have three specially built incubators. These are industrial partnership facilities. We call them “co-location incubators” because the companies are co-located with our institutes. This has been a major success for us. We have 35 to 40 companies incubating at these facilities, including 20 NRC spinoffs.

• 0915

In addition, firms are co-locating or incubating at all 17 of our institutes and innovation centres across the country, and we are now focusing on incubators. Each one of our new facilities being built in Canada, including those that are being constructed as a result of the Atlantic innovation partnership in St. John's, Halifax, Fredericton, etc., will all have incubators for companies to co-locate with our R and D facilities and our people. The growth in the number of tenants has reached 65 companies now incubating. This represents a significant job creation and wealth creation activity.

I want to say something about the elements of success. First, over the last five years we have undergone a major cultural change at NRC. Our researchers now are much more entrepreneurial, their discoveries and their ideas becoming commercial opportunities, not that they're necessarily going to spin off with them, but they're going to put that knowledge and that technology to work.

We have business offices in each of our research institutes. They're very closely linked to the activities of the research going on. We have intellectual property management specialists, and we do IP management for 13 other federal government departments and agencies. We're providing advice on how to manage and process intellectual property for a lot of departments. We have an entrepreneurship program with tools and rewards, very strong linkages between partners and collaborators and the researchers, which is crucial as well. And we adopt a very flexible approach in trying to convey our knowledge and our technology. We license technology either exclusively or non-exclusively, we can assign it to a company, we can create new enterprises, and we incubate companies. All of this is part of the message and part of the environment we have.

The Chair: Dr. Carty, I hate to interrupt, but could I ask you to wrap up?

Dr. Arthur Carty: Yes. Allow me one word about financing, because I think this is important to the committee, Madam Chair. Last year was a great year for financing of small companies in Canada, new firms particularly. You'll see here that $3.4 billion of new money to the end of third quarter 2000 went into venture capital for new companies. The venture capital pool reached almost $20 billion in 2000. It is true that there's been a downturn since, but these are both records, and you can see the growth here. I think it's probably reached about $5 billion in new venture capital investment.

There is a downside to this. There is a severe lack of venture capital funding for new ventures, new start-ups, etc., in some regions of the country, particularly Atlantic Canada. I think something needs to be done about it. There are opportunities there, but it's very difficult to get VCs to look at Atlantic Canada. There's still this situation where many banks and VCs are averse to risk, in that they're not really interested in the true start-up, which has no assets, no cashflow, except perhaps for IP and people. Canada has relatively few angel investors compared to the United States, though again that's changed dramatically to the positive in the last three or four years. It is also still difficult for real start-ups to gain access to these small amounts of initial seed funding that will get them started.

Madam Chair, thank you very much for your time.

The Chair: Thank you very much, Dr. Carty.

I'm now going to turn to Mr. David Mowat from the Vancouver City Savings Credit Union.

Mr. David Mowat (Chief Executive Officer, Vancouver City Savings Credit Union): Thanks very much, Madam Chair, committee members.

As we fly in from B.C., we always have this feeling that we have to introduce ourselves, so I'll give you 30 seconds. Our company, VanCity, is the largest credit union in Canada. It's a unique organization. It's got $7 billion worth of assets, and what makes it unique is that it's all in one city. We're the size of the Toronto Dominion Bank or the Bank of Nova Scotia within the confines of Vancouver. That gives us the luxury of a solid earnings and equity base. We've recently created the VanCity Capital Corporation, which is a $25 million fund that seeks out technology companies.

• 0920

In my previous life, before working at VanCity, I founded three seed venture funds with the Business Development Bank with partners of Ventures West, Bank of Montreal, the Caisse de dépôt, and the B.C. government pension fund.

Rather than talk to you about what we do, I thought I'd spend my nickel on what I think you should do or what can be done. We hear a lot of success stories. If you're looking for areas for improvement, we really still have three solitudes. We have people, money, and technology. In Canada we have a pretty good supply of all of them. What we aren't able to do often is get them together, get the people mentored, get the money in the right places, or get the technology backed by the proper people and the proper money.

There are some things we can do to make it happen. We've created an environment, we've raised an awful lot of money in the country through special tax treatments. It still is an awful lot of money chasing very similar deals. If we really want to focus on spinning technologies at a very early stage out of some of our universities and crowns, like NRC, we can focus the same kind of tax treatment we give to existing venture capital funds in a general sense to be used exclusively for early stage seed-round investing.

The second thing is company creators. I think we need to get people in these companies very early who have experience in running companies. The mentorship models, the incubators, they're all needed, they're wise, and they're useful in the marketplace, but there's nothing like somebody who's run a business before, who has an interest in the business, to partner up with a scientist and drive it through in a very unbureaucratic and private sector fashion.

My third point is that if we are looking to in some way create funds, support funds, a whole bunch of little funds across the country isn't worth it. Little amounts of money don't work in venture capital. You can invest a small amount of money, but you need to be there for future rounds. There needs to be an effort to get funds in very small amounts, $200,000, $300,000, but those are just the first rounds. If it's a successful technology, you'll find yourself needing $2 million or $3 million just to stay with the rounds that could ultimately raise $10 million or $15 million or $20 million. Creating tiny little pools means the original investors who take the risk get burned out of the deals—you won't find them at the end of the deal. There are all kinds of these little funds across the country that don't have the wherewithal to follow on and aren't that useful.

My fourth point is that somehow we must try to support the universities. NRC is probably the most sophisticated at negotiating its technology out. There are lots of universities or other crowns with great technologies that aren't very sophisticated at getting that technology negotiated into a spin-out company. Lots of times those deals fall apart for want of good skills in figuring out how to get them out.

The last point gets more to the research tax credits. As companies get going, they start to develop tax credits. There would be an opportunity to make those more bankable. To finance the cashflow of these businesses as they start to get more commercialized and get into positive cashflow, the government could give a stronger assignment to the banks and credit unions. Right now it's very unsure whether you're going to see the money that comes back from the research tax credits or not.

That summarizes my opening remarks. Thanks very much.

The Chair: Thank you very much, Mr. Mowat.

We're now going to turn to the Conference Board of Canada, Mr. Brian Guthrie.

• 0925

Mr. Brian Guthrie (Director, Innovation and Knowledge Management, Conference Board of Canada): Thank you, Madam Chair.

As the gathering may know, the Conference Board is an independent organization. We take a very broad view of this subject, and I'm going to address it in a very broad way, starting with innovation generally.

We believe innovation is a systemic-type thing. It's more than just financing start-ups. That's one of the issues, but the problems aren't necessarily with financing start-ups and spinoffs specifically. There is no question in the Conference Board's mind that innovation is a core factor in competitiveness and productivity. We show that in our work, in our report called Performance and Potential. As well, the agenda of the current government in innovation is a most excellent initiative, and we're very glad to see it.

We define innovation in terms of two components—namely, generating global best ideas and then taking those ideas to market. I think that's important. Canada as a whole has been very good at generating ideas, but we've been missing the global bests. The taking to markets is one of the weaknesses we could work on.

Furthermore, we've shown, in concert with StatsCan data, that collaboration indeed is a key component of innovation for most companies and that Canadian manufacturing firms are more likely to introduce global best products if they collaborate. I think this is part of the formula here, that spinoff companies in particular may not have the right traits, the right DNA, if you like, to go global best, to commercialize, to take to market. SMEs in particular, small and medium-sized enterprises, are much less likely to collaborate than are larger firms in the Canadian economy.

I think there are success stories in Canada with regard to collaboration. The Ontario Centres of Excellence program a decade and a half ago was probably a global first in terms of university-business collaborations. Two decades ago people were saying the National Research Council was one of the country's best-kept secrets. I think it really has come out of the closet, so to speak, as Dr. Carty just showed.

The recipe in our mind has about three components. It's about the DNA of people and the DNA of organizations; it's about researching and generating those global best ideas; and it's about entrepreneurship, doing, taking to market, and managing that. I would suggest that Canada is pretty darn good at research and generates a lot of good ideas. It's pretty good at managing and collaborating and working together. It's a little weak, though, in entrepreneurship.

Now, maybe that's the DNA of the country, starting back in 1867. We're great at working together and getting multiple stakeholders together, but maybe we're not quite so entrepreneurial. This points to a couple of directions, especially with regard to spinoffs and what spinoffs might do by way of raising funds and going global.

I'll take a slightly different tack for a minute. The Conference Board over the last two years has run a leaders forum on innovation, which has included 25 CEOs, deputy ministers, and presidents of universities. We've just completed a little paper on investing and innovation. Again, it takes a broad view. The first line in the work of the forum is that we should be investing in the next quarter, in the next generation, and that venture capital to get us through the next quarter is one thing, but a skilled workforce and the systemic issues of infrastructure and taxation can be showstoppers.

The group talks about investing more in R and D—and I'll come back to both that and the targets suggested in the Speech from the Throne—at the university and government levels. It talks about reducing taxes, which is an old story, but continuing the good work that's been done in getting us down to a competitive level with our main competitor, the United States—for example, the 21% effective rate on capital gains. It talks about investing in a skilled workforce, in particular entrepreneurial skills and training targets, again as suggested in the Speech from the Throne.

• 0930

Most importantly, I think, it talks about commercializing in the global marketplace. It talks about collaborating with entrepreneurial partners in faraway lands and with our partners south of the border. There's this whole notion of nurturing partnerships.

So that's a very powerful document coming from a very powerful group of people, primarily CEOs from across the country, the business community.

I'll take just one final sidebar with regard to the target in the Speech from the Throne of moving Canada from fifteenth to fifth in the OECD with regard to R and D investment. There are some interesting implications in that. If you crunch the numbers and make some fairly simple assumptions, what we're talking about for the country as a whole is moving from $14 billion in 1999 to $34 billion in 2010. That means, for the private sector in particular, moving from $8.8 billion in 1999 to $21 billion in 2010. That's a mere 2.5 times increase.

We've actually asked CEOs if they would sign on to this. What's the answer? Of course they wouldn't. They're responsible to their shareholders. They may well do it, and they may well be incented to do it. I think that's part of the challenge here. But we're talking about 9.1% real growth per annum. And this is on very basic assumptions, short of inflation and short of our competitors not increasing their investments in R and D over that same time period. We know they will, of course. We're talking about Sweden, the United States, and others. They're on track to increase their R and D.

So I suggest that this is the big issue for the next 12 months in this innovation agenda—that is, where is this $12.1 billion going to go, and how can we incent business in particular to do it? I'd then take it a step further and say, is it the right target? Is R and D investment how we should define this thing, or should we talk about innovation? Should we talk about collaborations? Should we talk about skilled workforce and training?

We perhaps should work from Canada's strengths, not from its weaknesses, because we know we are laggards in terms of direct R and D investment. Maybe that's an appropriate place to be.

Thank you very much, Madam Chair.

The Chair: Thank you very much, Mr. Guthrie.

Mr. Stiller, please.

Dr. Calvin Stiller (Chair and Chief Executive Officer, Canadian Medical Discoveries Fund Inc.): Thank you very much.

I'd be remiss if I didn't start out by bringing it to your attention, Madam Chair, that Art Carty gets the Order of Canada today.

Isn't that right?

Dr. Arthur Carty: Yes.

Dr. Calvin Stiller: I think we should make note of that.

Voices: Hear, hear!

Dr. Calvin Stiller: I won't spend any more time lauding him except to say that the National Research Council is really a crown jewel. This is an organization I didn't have a lot of time for some years ago, because it seemed to have its feet in concrete. It has certainly changed in recent years and become a real leader.

I'm just going to make two or three comments, because quite frankly I think the discussion is going to be more meaningful. There have been some significant differences beneath the surface of what's just been discussed here.

Let me just say that we need to understand what intellectual property is. We have this myth that we are going to change Canada from a commodity-based economy, which comes out of our ground as a natural resource, and finish somewhere else. And in the knowledge-based economy, suddenly we are going to have this phoenix. We're going to rise because of these wonderful Canadian discoveries of various sorts and suddenly be an economic powerhouse where our currency's not tied to the price of commodities.

Well, I would just caution you all that intellectual property or patent is the ultimate commodity. With oil in the ground, I have to hire somebody to drill, and to get it up. I have to put it on a truck and cart it somewhere. With intellectual property, I can, as a lawyer, put it in my valise and go across the border for payment of cash or promised royalties. The key is taking our wonderful science, which needs to be funded and continue to be funded, and funded more, into products that can go to market. It is that continuum that is absolutely critical.

• 0935

What Dr. Carty and David are talking about is taking those ideas and moving them into nascent companies, developing them, and then continuing to support them so that in fact we are not the ultimate hewers of wood and drawers of water only. We will describe it as “We discover, they exploit, and we buy back the product.” That's going to be the term that's used for Canada ten years from now if we don't change things.

They talk about the amount of capital we have in Canada right now, and things have changed in terms of the amount of venture capital, which is the source of money for these early spinoffs. But the hallmark of a company that's in trouble, that doesn't get an unqualified auditor's report, that the red flag goes up on, is if they have less than one year of cash in the bank.

The venture capital industry in Canada has less than one year of cash. So although it's growing, the fact of the matter is, in my view, it's in a perilous position because we are having these unprecedented numbers of new company start-ups and company growth, and suddenly they're going to hit a brick wall if the money isn't there. So we just have to address ourselves to that.

I was a bit flippant in my remarks here, Chair, in dictating this, because I had late notice for this. I said my simplistic formula would be E=mC², economic success equals money times competitive research to the par of two.

Money is absolutely critical. The money has to be there. It has to be very close to the source of the competitive research, and that concept of clustering is important.

I would suggest it's time for us to step back and look at this whole thing again.

First of all, I take real issue with the idea that the DNA of Canadians is deficient of the entrepreneurial gene. It is not, Mr. Guthrie. The Canadian genome has that entrepreneurial gene there.

It's like going to Brampton and trying to find an NHL star. They're not there. They've gone to the NHL, and they're playing in New York. I spend my time, too much of my time, above the clouds and in other cities, but I can tell you that the number of Canadian expatriates in the U.S. with positions of leadership... and they're fantastic entrepreneurs. But they've been cherry-picked and they're down there, and we need to find ways to get them back.

Do you know why they come back? They come back for opportunity. They love living in this country, but they need money to do what they want to do.

So the bottom line is money. The answer is money. It needs to be money that in fact comes in and is risk-tolerant and marries very close to our science.

John Doer, who is the pre-eminent venture capitalist in the world, was asked why he was involved with Silicon Graphics and Sun Microsystems, but not Cisco, three of the great technology successes in the U.S.—why he was involved with the first two and not the latter when they came out of the same engineering school at about the same time with the same dean at Stanford. He said, “Well, Sun is on the first floor, Silicon Graphics is on the second, and Cisco is in the basement; I guess I never visited the basement.”

So it's the approximation of money and competitive research and a dynamic interaction, and right there it is not money from New York that's going to grow endeavours in Saskatoon. It's not going to happen; I'm telling you that. I've been both on the science and the venture capital side, and I'm telling you, you have to be in close approximation.

• 0940

So it's the approximation of money with competitive research, and we can do it. We've shown we can do it time and time again. I'll get into the discussion later about what I think are some innovative ways we might do something, borrowing on our past success in the resource area, like the oil industry.

The Chair: Thank you very much, Mr. Stiller.

You're on the list, Mr. Alcock.

We're now going to turn to questions. Mr. Penson will begin.

Mr. Charlie Penson (Peace River, Canadian Alliance): Thank you very much.

It has been a very interesting panel this morning. Thank you for coming, gentlemen.

Dr. Carty, you had the big graph up there where you showed all the different elements it takes to make this work, and we've heard some pretty good discussion about what part is probably missing the most these days, which is risk capital, venture capital. You can pour a ton of money into R and D, but if there aren't people out there to pick it up and implement it, and bring it to market, it seems to me we're still falling pretty far behind.

I want to save time for my colleague here, because I know he has an interesting question he wants to ask, but I want to ask this.

Mr. Guthrie, you talked about taxation being a showstopper in terms of some of these small companies. Isn't that really our problem here? There's lots of money out there—we heard that—but people are averse to taking risk. Maybe it's because they're not going to get rewarded for that risk. That's my question. What's really stopping this from happening? I think we have a flavour of it, but isn't that part of it, that we haven't created the proper environment in this country through low taxation and other things in that area that are hurting our chances?

It seems to me I've heard some rumours that in the next few months there's going to be a lot of money coming in from government in terms of R and D investments, but if we're missing the other element, aren't we going to fall short?

The Chair: Is your question addressed to anyone?

Mr. Charlie Penson: Well, whoever wants to answer, but I'll start with Mr. Stiller, since he was up last.

Dr. Calvin Stiller: Well, I guess compared to what? In terms of the amount of research money, we're still not competing with the amount that's being put by our major competitors, who are now the U.S. and Japan. I don't think less spending in research is the answer—

Mr. Charlie Penson: But my question is, if you—

Dr. Calvin Stiller: —but the flip side is absolutely right.

Canada may have the entrepreneurial gene, but they have a very strong gene that kicks in called “risk aversion”. We tend not to take risks, which is actually why a lot of Canadians didn't get caught up in the dot-com thing. If you see the proportion of capital that was invested in the dot-com craze in the U.S. versus Canada, that's what tells you the genetic makeup of the investors, and it's that risk aversion that gives us a problem in Canada.

Let's talk about life sciences: 50% of our investment in research is in the area of health and life sciences, and yet the investment in venture capital is very low compared to that.

My suggestion is that you have to mitigate the risk somehow of individuals investing in that area, through a change on the tax side. You absolutely have to.

Mr. Charlie Penson: So some kind of better reward?

Dr. Calvin Stiller: Absolutely.

My suggestion, if I may say, is flow-through shares, which have been time-honoured for developing resources in the ground over the last many decades out west. It was wonderful. It wasn't tax loss; it was tax deferral if profit didn't come. Why we don't do that in the area of research and development is beyond me.

We have actually sought this, bringing some people together and saying, why don't we ask for the same kind of thing? Let's do drilling funds where it's a flow-through.

Revenue Canada wouldn't give us a ruling. The rationale they gave was this: it would be double-dipping, because you would get a write-off and then the company would get R and D tax credits.

• 0945

My suggestion is, forget about the tax credits. We have one of the most attractive tax credit legislations in the G-7, and that's not bringing us enough money. It's getting the money into the companies; it's not the tax credit treatment of the companies. That isn't why they're going to locate here. We have to have local money to attract foreign money, and you have to get that money before the company actually gets going. So my suggestion is that we have a serious look at that and that we model it. We can prevent abuse in that area by very well-defined regulations. Then get out of the way, let that entrepreneurial gene of Canadians kick in, and we'll do it.

The Chair: Does anyone else wish to respond?

Mr. Guthrie.

Mr. Brian Guthrie: Yes. The report of the technical committee on business taxation in Finance Canada said about a year ago that the most significant tax burden on business comes not from taxes on profit, but profit-insensitive taxes—payroll taxes, property taxes, sales taxes, excise taxes. That's exactly my point. There's a systemic issue here, and the DNA of the country as a whole—the institution of Canada—is risk-averse.

I take back generalizing about people. We can't generalize about anybody. You should never generalize about Canadians as a whole, and we have a lot of great entrepreneurs. Part of the issue is the fact that they get poached and cherry-picked and go south of the border.

Mr. Charlie Penson: But, Mr. Guthrie, isn't that the point Mr. Stiller just made? Really, if the environment is right—

Mr. Brian Guthrie: Yes, it's the same point. We're in violent agreement, I think.

Mr. David Mowat: But be clear—it's mature businesses that want to talk about payroll taxes, burden, and things. This is not what we're talking about at all.

What we need to do is create an investment climate so you'll take your wallet out—not you; we as Canadians—and take a higher degree of risk. So it has nothing to do with burdens, taxes, and payroll taxes in this room today.

Mr. Brian Guthrie: The report of Finance Canada said, “impose a particular constraint on start-up businesses, which already frequently experience cashflow constraints”.

Dr. Calvin Stiller: What? What? That's nonsense. That's utter rubbish. If you think for a second that it's the payroll taxes that make the difference between whether we initiate a spinoff company from some of Art Carty's research... I can tell you that at SiGe, we didn't worry about payroll taxes. The issue was getting the money in the bank, taking the risk, knowing that at the end of the day we wouldn't get anything back for it. So there are two phases.

Brian, I agree entirely that the mature companies really worry about payroll taxes. And I have several of those, thank God, or I couldn't be involved in what I'm in. But, to begin with, you have to get the money in there.

The Chair: Okay. We're going to move on to our next questioner.

Mr. Bélanger, please.

Mr. Mauril Bélanger (Ottawa—Vanier, Lib.): Madam Chair, thanks for indulging me. I have to be in the House at 10:05 or so to table a report, so I'll be really quick.

Congratulations, Dr. Carty. I'm sorry that I won't be able to be there to applaud you as it happens.

Mr. Guthrie, I haven't seen that report, and we haven't been distributed anything. But I was listening to you, and I tell you, I thought I was hearing the old mantra, “less taxes and more money from the public”. I'm getting a little bit concerned that the true risk aversion, if there is one, lies with the private sector because they know that if they don't take the risk, the state will and will share it across all of the shareholders of Canada—all the Canadian citizens, if you will.

At some point, corporate Canada has to get off that wagon. They can't be asking for less taxes consistently and more money in R and D, more money in manpower training, more money in this, and more money in that. It just doesn't wash. That's not to mention the debt, which many of them have taken for granted and are a little reluctant about it being paid off.

So if that's the message that's conveyed, I would like you to know that I, for one, take strong exception to that—if that's the message. I haven't read the whole thing, so...

Mr. Brian Guthrie: I apologize, because that is not the message. Indeed, I would suggest it is the opposite message. I'm not talking out of school here, but one of the CEOs in our leaders' forum said, “We're sitting around pointing fingers, and, as my teenager tells me, when you point a finger, four fingers are pointing back at yourself.” One of the CEOs said the biggest problem here is us—and he's looking at the CEOs—in that we are not betting the farm, as though—

Dr. Calvin Stiller: How many start-ups did you have represented there, Brian?

Mr. Brian Guthrie: No, there were larger companies, and there were also universities and government people who are involved in spinoff work and whatnot.

• 0950

Dr. Calvin Stiller: We're the largest investor in start-ups in this country in life sciences. I never heard about the study.

Mr. Brian Guthrie: Anyway, they—

Mr. Mauril Bélanger: That was my question, if you care to answer it.

If you're drawing conclusions about entrepreneurship, and you haven't got start-ups there, how valid are your conclusions?

Mr. Brian Guthrie: By no means was I suggesting that the business is not responsible. In fact, I would, just as a number off the top of my head, say that 60% of R and D investments in the country are for the private sector, 40% for the public sector. And 60% of the issues, problems, and challenges are in the private sector. In fact, I would say there are more issues and problems and challenges with the private sector. As I said, when I say, “offering incentives to the business community”, I'm not talking about giving them money—absolutely not. I'm talking about it in the context of an innovation system, which includes such things as attitudes and risk behaviours.

Mr. Mauril Bélanger: All right. Anyhow, I wanted to have a chat with Mr. Stiller, if I may.

On this concept of flow-through shares, if indeed all DNA—human and of all the various species, plant, and animal—were of the public domain, as I believe it should be, then all kinds of people in start-ups and mature companies could engage in DNA mining. How would you structure a flow-through share in that sense? Would they be just as the others were?

Dr. Calvin Stiller: Yes. I think you just take the time-honoured structure that worked in terms of, say, drilling funds for oil. And the genome is a perfect example. There's this myth that the genome is owned. It's not.

We understand that North America is there and there are a bunch of roads. That's about where the genome is right now. Nobody owns them yet.

Mr. Mauril Bélanger: Well, some people have applied for patents.

Dr. Calvin Stiller: And they're applying for patents every day, every hour.

Mr. Mauril Bélanger: Yes.

Dr. Calvin Stiller: But I'll tell you, there are more Americans applying for patents than there are Canadians. And the reason is that we don't have the kind of funds where people say, “I'm going to put my money in here, and if it's all spent on mining that genome and I get nothing out of it, at least I get the tax break.”

Mr. Mauril Bélanger: How would you link the flow-through share mechanism with the labour-sponsored venture capital funds, of which I believe you're heading one?

Dr. Calvin Stiller: Yes. Well, no, I think they're different.

Mr. Mauril Bélanger: You would keep them separate?

Dr. Calvin Stiller: Oh yes. I'm not suggesting here that I'm trying to help my own endeavour. And you'll see in my statement there that I think we need to just step back a bit and look at this whole area.

How do we get more money that is smart, attached to management, risk-tolerant, has enough length of time, and fits within public policy and won't be abused?

Mr. Mauril Bélanger: I have one last question, if I may.

Would you favour the Government of Canada and other provincial and municipal governments considering the notion of ensuring that a small percentage of public pools of money—CPP, OMERS, and so forth—be directed at this kind of investment?

Dr. Calvin Stiller: Yes. The problem is it doesn't work.

Mr. Mauril Bélanger: Yes.

Dr. Calvin Stiller: I'm sorry. It just doesn't work.

Would I love that? You know I'm a two-headed monster. On the one hand, I'm a scientist and researcher and have spent my life in that area. On the other hand, I'm really in the financing and venture capital side of things. So one side of me says yes. The other side of me says we're pipe-dreaming, because that isn't going to happen. I met with all the pension funds. It—

Mr. Mauril Bélanger: What if it were directed?

Dr. Calvin Stiller: Even then they would find the definition of venture capital, which is way, way down the line.

Can I just wear another hat, which is a government hat out of Ontario?

We were involved in an experiment in the last three years. And the experiment was: how do we get more money into the transfer of discoveries out of our universities across all kinds of technology? We did two things. One, we created the Ontario Research and Development Challenge Fund, which is an investment banker, with straight government money, run by a private sector board, that invests in universities and says, “We'll invest one out of every three dollars.” So you have to have real equity there—private sector—and you have to have sweat equity, or cash—university—and we'll match it on a third, a third, a third basis.

• 0955

It's been extraordinarily successful. We had our R and D summit yesterday and in less than three years over $1 billion has been invested. That has been pushing from the university side.

The venture capital side is still a long way from there, so this last year the Ontario government differentiated venture capital. It said venture capital to the labour-sponsored fund that has 50% of their portfolio in companies that spend 50% of their capital in R and D... they're going to get a 20% tax credit versus a 15% tax credit. This is the first year of that experiment, and we'll see what happens. I think it's going to be very interesting, because it's going to differentiate venture capital between those who are way downstream and those who are in the seed area.

Mr. David Mowat: Can I support that point. I'm not necessarily endorsing that 50% of 50%, but in this room, when you're thinking about this you have to think about focusing on seed investment and the commercialization of technology. To just talk about the venture capital industry is like talking about business finance and then all the issues you have with small business financing. They are different animals, and even Cal will tell you the big funds even use different people to look for the very early stage. It's a different animal.

Dr. Calvin Stiller: Absolutely.

The Chair: Thank you.

I want to move on, Mr. Bélanger.

Mr. Stiller, I want to clarify something. The fund you set up for Ontario, is this not the same fund that partners with the CFI for university research?

Dr. Calvin Stiller: No, that's a different one. There's the Ontario Innovation Trust, which partners with CFI, and that's great. That's a great partnership.

The Chair: I wanted to clarify that.

Dr. Calvin Stiller: But then the Ontario Research and Development Challenge Fund is another. It's a $500 million fund and it's different.

The Chair: Thank you.

Dr. Calvin Stiller: By the way, let me comment, David, that Ontario asked the federal government to match this tax credit for seed and the federal government said no.

The Chair: Ms. Desjarlais, please.

Ms. Bev Desjarlais (Churchill, NDP): I have no questions.

The Chair: No questions right now?

Mr. Rajotte.

Mr. James Rajotte (Edmonton Southwest, Canadian Alliance): Thank you, Madam Chair, and thank you, gentlemen, for coming out this morning. It has been a very interesting discussion, and special congratulations to you, Dr. Carty.

I want to ask you about intellectual property, particularly in terms of the spinoff companies. It's an area I'm still not quite sure of in terms of the generation of ideas. You said that the NRC is very good at managing and processing intellectual property. So how is it in terms of when a company is spun off? Could you address that in a general way.

Dr. Arthur Carty: With intellectual property, of course, the first part of it is to actually protect it, and that can be done by patents or copyrights. If there's a technology to be transferred and that technology is to be part of a spinoff company, then there are a number of arrangements you can make with the company.

The company could simply license the technology and pay licence fees in order to access it as a company, or in fact they could decide that's not very appropriate for them because there's a burden of paying upfront cash payments. So there might be another way of doing it, which might be to forgive the licence fees and take some equity in the company. That would be the way this would be traditionally done. There can be a mix of those two things.

Mr. James Rajotte: Can you clarify this, the licence fees are paid by the company to who?

Dr. Arthur Carty: They would be paid to the crown in this case. We are very flexible on how that can be done. The company could have an exclusive licence that gives them an exclusive right to use the technology, or it could be a field of application licence by which that company would be limited to a particular field, and this would give NRC the opportunity to license it to another licensee in another field of application.

If in fact it's most appropriate for the company and this is the best way to exploit it, then it could be assigned, and that is you actually give the ownership to the company. We use all of those mechanisms where appropriate. I think that's part of the flexibility you have to have. If you're stuck with one method, you're going to be rigid, and there's still a sense it's in the concrete.

Mr. James Rajotte: Would the method be determined by the NRC and by...

• 1000

Dr. Arthur Carty: Yes, it's very much a to and fro process; you have to talk to the company and find which is the most appropriate. They will take what they can get, and they'll try to push you as hard as they can. Obviously that's business.

Mr. James Rajotte: I wanted to touch on another issue.

Mr. Guthrie, you talked about what level we should be looking at in terms of R and D. The government set a goal they want to get to in the last Speech from the Throne, and you asked if this is the right target and what is the right target. So if I could put the question back to you, what is the right target?

Mr. Brian Guthrie: I think first of all we should talk about an innovation target as opposed to an R and D target, so we can broaden it out to include start-ups, commercialization issues. The Conference Board, in its annual innovation report, suggested $6 billion rather than $12 billion, split again in a 60-40 business-public sector way comparable to what it is today. I agree entirely that we need more investment, absolutely. But I think it has to be targeting the systemic across-the-board issues of innovation, not just the R and D, and the generation of ideas. I think that requires funding, and so does the commercialization side.

Mr. James Rajotte: How do you ensure that the public investment is spurring on then the private investment, or is partnering with it and it's not crowding it out?

Mr. Brian Guthrie: I think that's the tricky bit, and I think it's where we have to engage business. My contention here was not at all to give handouts to business. It's just the opposite. It's to give business incentive to invest themselves, whether that's through innovative and creative partnerships and spinoff activities with universities and public research institutes, as an example—leverage dollars, if you like.

The Chair: Mr. Stiller, do you wish to respond to that?

Dr. Calvin Stiller: We keep mixing business and people, and they're different. People invest in investments and some investments are invested by businesses. You have to have people invest money to get this kind of thing going. That's what happened to the United States. This money doesn't come out of some Fortune 500 company that's sitting around saying we want to do a bunch of start-ups. That's not the way it happens. They get in and they partner with those. But it is recycling that wealth. It's the virtuous cycle of discovery and wealth creation. It's absolutely critical, and I see it every day of my life.

So you have to get the money in there, and then you have to have the business climate right for the companies to say the best place to put our money is in fact in new technology-type investment in innovation. It's a chain.

The Chair: Thank you very much, Mr. Rajotte.

Mr. Alcock, please.

Mr. Reg Alcock (Winnipeg South, Lib.): Thank you, Madam Chair. I have a series of questions. But let me get a couple of clarifications here first.

Mr. Mowat of VanCity, is Willie Parasiuk involved with you?

Mr. David Mowat: He has been. He's done some research in the past.

Mr. Reg Alcock: He was with VanCity.

Mr. David Mowat: He was for a short period of time, yes.

Mr. Reg Alcock: Mr. Stiller, is your fund a labour-sponsored fund? Is there a tax credit attached to investment in your fund for investors?

Dr. Calvin Stiller: I don't know which hat I'm wearing here today. I'm involved with two venture capital funds that are labour-sponsored funds. One is the Canadian Medical Discoveries Fund. The other one is Canadian Science and Technology Growth Fund. Both of them get tax credits. I'm involved with other things that do not get them, but those two do.

Mr. Reg Alcock: So there are tax credits associated with the Canadian Medical Discoveries Fund. There's a tax benefit for people who put their money into the fund in the first place, in addition to any that may come out of it.

Dr. Calvin Stiller: That's right.

Mr. Reg Alcock: I was particularly interested in this round table. I found this to be quite interesting. I want to frame, though, two or three questions here.

I think we presented a value proposition to Canada some years ago that said if we let go of some of the old systems, if we let go of some of the investments and entitlements and the like that have structured our economy for the last several decades, and refocused ourselves on investing heavily in our capacity to do, I would say, two fundamental things, build high-quality infrastructure, both electronic and trade-related, and innovate and create knowledge, the other big leg on this...

• 1005

Mr. Stiller, I was particularly interested in your comment about proximity. I'm from Manitoba, and I spend a lot of time working with the venture capital community, such as it is in a small centre like that, and our version of the labour-sponsored fund has been quite effective in the work it's done. Prior to that, in talking to some of the reps from larger companies, I always had this line coming back to me. You know, Reg, I go to the president of our fund—who's sitting in Toronto or New York—and I have a great deal for them, and he's saying to me, yes, but I've got 20 other deals in my desk and I can see them all out of my window, I can drive to them, so what's this thing over there?

So proximity is a huge issue in a smaller centre.

Mr. Guthrie, if I recall correctly, you are also supported by the provinces. This issue of the performance of the economy is something the Conference Board is constantly looking at. The distributional issue becomes huge for us. It's fine to say that one should be investing heavily in areas... Not that we want to have one medical research centre in every pot, that's foolishness, but building your capacity to do this I think is extremely important. The trouble is finding the levers that allow this to happen in smaller centres.

I made my crack about the fund in... I'm asking a question, it's coming.

The Chair: You're going to run out of time.

Mr. Reg Alcock: That's fine, but they've got to answer yet.

In Ontario they've got huge pockets; there's lots of money sitting there. It's a different situation in Saskatchewan, Manitoba, or Atlantic Canada.

Dr. Carty, you talked at some length about clustering and mentoring, and I think you're absolutely right. There's a lot at Minneapolis. That mentoring, identifying your skills, and then working hard to build on it is really important.

Dr. Arthur Carty: Well, you know, we do have some examples of clusters in Canada that have grown because there was a will in the community, there were local champions, there was partnering between the private sector, universities, government labs, to make it happen. Saskatoon is a classic example. That is a thriving high-tech metropolis. It's not a place you'd think would be a high-tech city—look where it is. But they've made it happen there because of proximity, because of communities working together, because of the presence of a series of R and D laboratories, because of some venture capital and investment. That can happen anywhere in Canada. You can bring the knowledge-based economy and principle to any community if there's some base from which to start. We are building clusters in the Atlantic provinces.

The Chair: Mr. Stiller.

Dr. Calvin Stiller: You're right, you've got to have that proximity between the money and the source of investment. I grew up in Saskatoon and I live in Arva, Ontario—I don't live in Toronto, so let me dispel that. The fact of the matter is that this 100-mile radius, “If I can't see it, I don't want to own it” thing is very real.

Let me go back to the Canadian Medical Discoveries Fund. We tried to get Manitoba, for example, to let us raise some money in Manitoba, because I love the medical research out of Manitoba. We couldn't get them to do it. Saskatchewan did. We've now raised a modicum of money there. We're going to be in the innovation park. Saskatoon is my pride and joy—they've outperformed anything in Canada, because they have that entrepreneurial gene there. They've made a commitment to research; they have a specific niche. Now they need more money, and they need it there to invest. I'll tell you, if they don't have the money and if it's not risk-tolerant, it'll be a dream.

Mr. Brian Guthrie: Absolutely. I think the data, the Statistics Canada survey on innovation, show just the same thing, with one caveat. After the 100-kilometre radius comes the United States. Why the United States? Because everybody's jumping on planes to go and visit their partners in San Jose, Austin, or whatever. Even with start-ups in Ottawa, I have a good friend who spends most of his time in Belgium, so he knows, face to face, folks there better than he does some people in Ottawa. So there is the face-to-face component, which is a core component here.

Mr. Reg Alcock: I have a clustering question.

The Chair: Very briefly, if it's just a question.

• 1010

Mr. Reg Alcock: The cause of the clustering is to create a focal point for the development of other things and to build a leverage point for value. Is that right? Why are so many of the resources of NRC clustered in Ottawa?

Dr. Arthur Carty: Historical. This is where it started. During the war years there was an enormous growth of NRC associated with the Allied war effort. So much of the activity is here.

Since then, many of the developments have been outside of the National Capital Region. We have institutes in St. John's, Halifax, two in Montreal, three in Quebec—including Chicoutimi—then London, Ontario, Winnipeg, Saskatoon, Vancouver, Victoria. So when money has allowed, recent development has been outside of the National Capital Region. But the core activity in some areas at least is historical.

The Chair: Thank you.

Thank you very much, Mr. Alcock.

Mr. Reg Alcock: We need one in Toronto.

The Chair: Well, there isn't probably going to be a next round because I have five other people.

I'm going to go to Mr. Lastewka and then to Mr. Penson.

Mr. Walt Lastewka (St. Catharines, Lib.): I've heard Dr. Carty talk about opening up entrepreneurship offices and commercialization offices and so forth. I was involved in a study on that with labs across Canada five years ago. It was proven then, and we still hear it all the time, that our commercialization offices and transfer offices and our expertise in that area is very limited in this country. Having just visited some this past winter, things haven't changed in that area.

Where we have good commercialization offices, I don't hear them talking about lack of money. I'll give you an example. We worked with the University of Alberta in Edmonton. That commercialization office has been just exploding with a number of people and a number of commercialization projects coming out of that university. A lot of the credit is due to that office.

You've now developed your office more and more. Number one, what work should we be doing across the country to make sure there are better commercialization offices in every one of those areas?

You talked about no money in venture capital in Atlantic provinces, but the federal and provincial governments and the banks invested $30 million a number of years ago in venture capital for that specific reason and still haven't spent... I think we're up to $6 million that has been invested. Maybe you can answer that. I'll let you go with that for now.

Dr. Arthur Carty: Okay, let me tackle the first one. The fact that we have to strengthen the technology transfer offices in the universities to facilitate the access to university technologies and the flow of technologies from the universities and knowledge was recognized in the study carried out by the Advisory Council on Science and Technology.

The idea of investing in that kind of office—those mechanisms for enhancing the technology transfer capabilities of the universities—is recognized, but our government hasn't yet taken any action on the recommendations of that advisory committee expert panel. But hopefully that will come along. That is a good point. One of the key elements is that it needs strengthening.

With regard to the second point about the Atlantic provinces, I don't know the state of the fund you're mentioning. But I know from having talked to a lot of people down there in the last year that it isn't very easy to attract the attention of VCs to opportunities in the Atlantic provinces. Now, the density of opportunities perhaps is lower down there, but Mr. Alcock has already mentioned that when you have many opportunities in other parts of the country, it's not that easy to get somebody to locate. Yorkton Securities has just established an office in Halifax, for example, and they're going to be looking at that as a potential opportunity. But up to this time, there hasn't been a lot of venture capital available for start-ups and spinoffs in the Atlantic provinces.

Mr. Walt Lastewka: My concern is that there are venture capital funds being set up in the Atlantic by the Atlantic provinces and the federal government and the banking community, and the money's not being spent.

Dr. Arthur Carty: Well, I don't know.

• 1015

Dr. Calvin Stiller: Can I comment on that, Art?

It gets back to this issue of whether you have somebody on the ground who's really crawling the hallways of the institutions. Do you have it? We were exasperated that we couldn't really get that thing to work. Last year we put $7 million of a $20-million fund into the Canadian Medical Discoveries Fund, and we have people on the ground now. It's amazing now the number of opportunities we're getting. But they have to actually get into those institutions and crawl the halls. You can't do it from 1,000 miles away.

Mr. Walt Lastewka: That was my point with the commercialization transfer offices, because the real successful ones are on the ground, are in tune with the funds and the researchers, and they've become the excellent tie-in of the chart that was shown—people, research, and money.

Dr. Calvin Stiller: It's all necessary.

Dr. Arthur Carty: One thing I would add is that in Canada we haven't really been training people to have expertise in science and engineering at the same time as they have experience in business and finance. Those are two silos. Unfortunately, the best people to do technology transfer are people who understand both of those things. We have to do a better job with that. They have to be entrepreneurial, too.

Mr. Walt Lastewka: You've confirmed to me today that it's the preparation for the access of capital that is so important.

Mr. David Mowat: One thing you said is that the liaison offices are in tune with what the venture capital person wants. There are lots of ILOs that don't seem to get it. So they are constantly papering the venture capitalist with deals that we wouldn't invest in, in 100 years.

Edmonton is an interesting one because the people there get it, and they've got the confidence of the venture capitalists. I think a very important one that Cal mentioned is that they create access. We shouldn't be building an NRC facility or a university without dedicating a couple of offices where the venture capitalist can come and sit and work. I mean, it sounds very trite, but it is so very true. Because you're going to go to see Jane Smith, and on your way out you're going to bump into Bob Jones, it's going to be Bob Jones you end up with. It's that immediacy; it's the opportunism. That's venture capital. That's what it's all about.

Dr. Arthur Carty: I might just add, Mr. Lastewka, that sometimes the NRC IRAP officers play a key role in this, because while their role is not specifically technology transfer, they are in the business of helping small companies to innovate. They are located on university campuses. So a closer linkage there between IRAP and the university liaison officers is going to be one of the key elements here.

The Chair: Last question, Mr. Lastewka, please.

Mr. Walt Lastewka: I agree with you 100%. My concern has been... and I've talked to a number of venture capital funds and many angels, and they continue to push me in a direction of saying that the preparation for access to capital in Canada is very poor. Part of the tie-in both Mr. Stiller and Mr. Mowat have mentioned is there has to be a better linking of all three. Until we get to that, we're going to continue on with our problem.

The Chair: Thank you very much, Mr. Lastewka.

Mr. Penson.

Mr. Charlie Penson: I want to follow up, Dr. Carty, a little bit on what my colleague was talking about regarding intellectual property rights and the spinoffs of the universities and the NRC. What's the theory here? I wonder that there wouldn't be some kind of a royalty arrangement. But that isn't the case, I gather.

Dr. Arthur Carty: Yes, there are some royalties on licences. Most universities have royalty income from licences of technology that they've transferred to the private sector.

Mr. Charlie Penson: So if a small spinoff company does well, then there's more income flow to the university, for example. Is that the way it would work?

Dr. Arthur Carty: Yes.

Mr. Charlie Penson: Okay.

Dr. Arthur Carty: When the companies grow big, then it becomes a very attractive proposition, of course.

Mr. Charlie Penson: Yes. It seems to me that there should be some kind of an arrangement like that, because more money comes back for research and development to the university, or NRC for that matter.

• 1020

Somebody said the word “confidence” here. I think that's really what this is all about. It's the confidence that's needed by investors. Whether it's a private investor or a venture capitalist, they need to know that there's going to be some kind of reward. There's risk and there's reward. If they fail, they fail, but if they succeed, they're going to be amply repaid. So isn't confidence a major factor in all of this?

Dr. Arthur Carty: Madam Chair, can I answer that one?

I think incentives are very important. Risk and reward—there's a saying that risk and reward run side by side; ignore one, and the other one will pass you by. There's a lot of truth in that. And that goes for the scientist and the engineer as well as the company.

Confidence, yes... I think you see confidence in this city—in Ottawa—because an entrepreneurial culture is extremely important in this business, and we need the role models to show us how it works. Once you get a critical mass of entrepreneurs and capital together, you really see it starting to brew. In the last year, Ottawa has been a hotbed of spinoffs and start-ups. At one point $2 billion last year in venture capital flowed into Ottawa because you've got that environment for both entrepreneurship and innovation. That's a model that I think we need to pass on to the rest of the country.

Mr. Charlie Penson: Yes. Thank you.

The Chair: Thank you very much, Mr. Penson.

Ms. Torsney, please.

Ms. Paddy Torsney (Burlington, Lib.): First, I have a technical question to you, Dr. Carty. I hear from innovators, researchers, and consultant types in my riding that they can't get access to any of the various research dollars that are out there because they're not attached to a university, and yet they have great ideas. They have wonderful things that they would like to create, invent, and what have you. Is there a process where they can tap into NRC if they're not attached to a university?

Dr. Arthur Carty: Well, there's the NRC's industrial research assistance program, which is specifically set up to provide technology advice and support to small and medium companies.

Ms. Paddy Torsney: No, I'm sorry. I'm talking about Individual Bob, who is an inventor and works out of his home, has great ideas but has no access to any of the various research funds that are out there, but who could perhaps be creating the most amazing invention.

Dr. Arthur Carty: Well, if he's incorporated, then the answer is yes. Getting a research grant as an individual not associated with an institution or with an incorporated body—I would think that would be very difficult.

Ms. Paddy Torsney: Well, I think you need to look at that as an organization because you are missing some pretty important researchers out there. There should be a way for you to be able to tap into skilled people or creative types who are out there, whether they could come in on a contract or come in on some kind of association. You're missing a really great talent pool, and I have a few of them in my riding.

Dr. Arthur Carty: There is an organization that assesses inventions. It's called the Canadian Industrial Innovation Centre/Waterloo. They have been in operation for a long time. They have an inventor's program where they will look at your idea and tell you whether it's feasible or commercializable.

Ms. Paddy Torsney: No, again. If you're trying at NRC to do some research into a specific area—let's say it was new modes of transportation or something like that—it would serve you well to be able to tap into somebody who's a transportation expert, who is out there, who might have some future developments, but who can't tap into that research group. This person can't be part of it because they're not in a university; they're not in NRC. They are an individual consultant. That's the kind of guy I'm talking about.

I don't think you have any way to do that, and I think we're missing some of those people. Until they actually have that invention to take to Waterloo, they're not accessing anything.

The second issue is that we've heard a lot this morning about early-stage financing, but I hear from a lot of entrepreneurs or really small companies that it's that next-stage money that really makes a difference. And you saw lots of great idea dot-coms and everything else just wither because there was no second-stage funding. I don't know if there needs to be a separate model for that or if there needs to be a separate attack on that, but it seems to be a huge problem out there.

Dr. Calvin Stiller: Can I comment on that, Madam Chair?

I agree with you entirely on that issue. I raised the red flag that the venture capital has less than one year of money because of the follow-on investments. The tragedy is going through all of this intellectual property transfer through the offices, and getting everybody geared up to cross the hall from academia to the private sector and risk their life in terms of what they're doing and risk money, and then to hit a brick wall that says, “Sorry, we don't have any money for the next step up”.

• 1025

So it's this continuum, and that's why I plead in here that we stand back. Let's stop saying, “Oh, this is the problem this month; let's do this. This is the problem next month; let's do this.” Let's step back and look at this from a five-year basis and ask, “What do we need to get from here to there?”—because it is a continuum.

Seed investment is a different type of venture capital than expansion capital. Expansion capital is different from that mezzanine pre-IPO, and the junior capital markets are different from the senior capital markets. Are any of them evil? No. Are any of them the answer? No. It's a continuum. Good research, entrepreneurial and enterprising types of people, seed funding, being able to kill those ones that aren't going to make it without ending your financial life... expanding those mezzanine, junior capital, senior capital... and then have some real companies that five years from now are international—the Nortels instead of this dismal—

A voice: Well...

Dr. Calvin Stiller: Well, I'm telling you, Nortel is a great international example of Canadian technology that had a global vision and went after it, whatever your current stock price is. The fact of the matter is—

Mr. Reg Alcock: That was government-supported.

Dr. Calvin Stiller: The fact of the matter is that it's a great international example of a successful company, and God grant we have 20 more of them in the area of life sciences.

Ms. Paddy Torsney: But the other issue is that there's a lot of money out there. Everyone in this room, hopefully, has some RRSP money that could be used to invest in these—

A voice: It's being used.

Ms. Paddy Torsney: —labour-sponsored funds and other venture capital.

You've got kids.

The tax credit is your immediate reward for your risk, but I don't know that it's really marketed that way as well as it could be. Certainly I know that when I, for patriotic reasons, wanted to invest in one of these funds, I was really discouraged from doing it. I put in very little money, and then I had to watch. Well, it's never actually maintained its value. It dropped, and then it stuck there, and I think it's coming back up. But I'd be more than happy to be patient. I'm just wondering how long I have to be patient, and how do we appeal more to that patriotic nature that's clearly out there? Because it's as vibrant, I think, or as strong as the entrepreneurial spirit. It's just that patience and that risk that need to be rewarded eventually. All the funds need to look at their marketing because there are, I'm sure, lots of people out there who would be happy to lock it in.

Perhaps my last question or other comment is, Dr. Carty, that you have to get to the high school teachers and to the students out there so that they pursue their education with a joint science-business degree or engineering-business degree. It's too late when you're already at school to make those decisions—

Dr. Arthur Carty: I couldn't agree more wholeheartedly.

Ms. Paddy Torsney: —and there are a lot of people who would love to do it.

Dr. Arthur Carty: This is something we don't do very well.

Ms. Paddy Torsney: Could we just get Mr. Stiller to answer as to when we will see some of those rewards?

Dr. Calvin Stiller: Venture capital in the U.S., time-honoured, is—

Ms. Paddy Torsney: It's been four years.

Dr. Calvin Stiller: —is ten-year funds, and the institutions understand that. They understand there's a kind of J-curve, because you put it out there and your value actually goes down for a period of time. And the institutions say, “Oh, we understand that”, and large pools of personal wealth in the U.S. understand that. They put their money in, and they say, “We understand that”. What happens is that, when you exit, that's when you get your return. They're ten-year funds. All these closed-end funds are ten-year funds.

Ms. Paddy Torsney: You need to market to consumers better.

Mr. Walt Lastewka: An example of—

The Chair: Okay, Ms. Torsney, I have to move on. We are going to run over time a few minutes. I hope that's okay for everyone. I know Dr. Carty has another appointment.

I have Ms. Jennings, please.

Ms. Marlene Jennings (Notre-Dame-de-Grâce—Lachine, Lib.): Thank you. I'll try to be brief.

First of all, congratulations, Dr. Carty.

Dr. Arthur Carty: Thank you.

Ms. Marlene Jennings: Mr. Stiller, when you talk about changing the taxation system in order to ensure there is a proximity of venture capital to the people, the research, etc., and that you do have the capital, that people who are willing to invest in not just the first round, the seed money, but for the second, third, etc...

• 1030

Have you any model that would show... If you look at the throne speech, there's nothing in there about that. As Mr. Guthrie said, it was investing, increasing the investments in R and D, so that by the year 2010 we're in fifth place in the OECD.

Mr. Guthrie explained quite clearly what that would actually imply in terms of increased investments every year both on the private side and on the public side in order to attain that. That's on the basis that all of the other countries don't increase their investments and maintain the same type of investments.

Do you actually have a model that would show what we could expect to see in terms of revenues to the government? If the government did that at, say, 20%, 10%, or whatever, chances are we would be able to attract this much from investors... and we know that one out of every five start-ups that continue, that expand, are actually successful? The budget, the throne speech, and the projections for the next five years, ten years, were projected on the taxation model we have now. So you're talking about changing a major chunk of it.

Dr. Calvin Stiller: We've done some modelling, although not along the same line as you have. It's return on tax diversion, that is, what is the actual time. I'm getting PricewaterhouseCoopers to really look at the numbers, because they're quite remarkable. There are some that come out of the venture capital industry themselves. We're looking at ours.

Ms. Marlene Jennings: Can you provide them to us?

Dr. Calvin Stiller: You can't say $100 into R and D is going to result in $100 of commercializable discovery. You have to do those fractions.

We're trying to work on that. I hired a student from Harvard this summer just to do some of these modellings, because I think it's a very vital issue.

As I said in my opening statements, everybody's based on this concept of “whoa, I made a discovery and I patented it”.

Ms. Marlene Jennings: Big deal.

Dr. Calvin Stiller: Yes, it's a big deal.

Ms. Marlene Jennings: Big deal if you can't take it anywhere else.

Dr. Calvin Stiller: We have a geological formation and there's going to be oil there. You have to get it developed. You have to bring that along, and you need everything there, as your colleague has said—attitudes, plus those...

Ms. Marlene Jennings: Mr. Stiller, this is the reason why I asked the question. As a result of our consultation, for this committee to come to a recommendation to the government that there be a major change in taxation policy as it pertains to venture capital, and in particular to that type of venture capital you've been talking about, we have to have some idea of what the impact is going to be. We know the present policy has determined our throne speech, our commitments to Canadians for this mandate.

If a change in policy is going to make a major change in terms of the revenues that actually flow in and can then flow out in terms of services and programs, we have to know that.

So would you be able to provide...

Dr. Calvin Stiller: The answer is yes. We absolutely would, and we're very happy to work in a non-proprietary way with Art Carty or anybody else on this issue.

Ms. Marlene Jennings: Great. Thank you.

My second question has to do with the labour-sponsored fund.

I don't really have a good knowledge of labour-sponsored funds outside of Quebec. The one I'm familiar with is the Fonds de solidarité, the FTQ. They came in and met with some MPs recently and raised a number of taxation issues that could make those funds even better, let's say, in terms of providing investments, etc.

With your experience, are there issues that would specifically pertain to the labour-sponsored funds, that federal taxation issues are either constrained? If you think there aren't any, then say so.

• 1035

Dr. Calvin Stiller: Yes, there are three issues, in my view. The first issue is whether it is the right model. It's been a wonderful social experiment. There has been no abuse.

There's been no scandal associated with that. Once they got it into the eight-year instead of that five-year thing, which was really wrongly designed, the number of new companies supported has been extraordinary. And I saw some numbers in respect to the return on the tax investment. It's quite extraordinary. Again, look at the model—things evolve.

The second issue is we treat venture capital as if it is a pool. It's not. It's like saying there's banking and there's banking. So we need to differentiate.

The Ontario government did a very interesting experiment this past year. They said, we're going to differentiate between seed—that is the very early—and the later; we're simply going to recognize that. And they asked the federal government to go along with the experiment, and they didn't. I would suggest that it would be worthwhile.

The third issue is the regulations. What do we really want out of this? We want it invested in Canadian entities that stay here. If that doesn't happen, we want the tax credits paid back, right? That's what we want.

So all of the little restrictions... we go around tightening a screw here and tightening a screw there. Before you know it, you're inside a suit of armour and you can't move. We need to come back and ask what our first principles are. If we are going to be a co-investor, i.e. the taxpayer, if we're going to allow a tax credit, then you had better demonstrate that you're going to create economic activity in this jurisdiction that's going to pay taxes. Show me how, okay?

Fine. I'm going to put an electric fence around that big broad field. You'd better perform in relationship to the spirit of that whole thing. I think we could, because it's been designed by multiple committees, over a long period of time, with different views and different economic situations.

I'd really like a group of publicly minded individuals who have been in the trenches, who understand what spinoffs are all about, to get in a room and say, let's get a white board, don't wear your corporate hat, and let's try to design something here. Let's look at it from beginning to end. We may come up with the same thing or we may come up with something that really is ultimately better.

The Chair: Thank you very much, Madam Jennings.

To follow up, we've had a lot of discussion about venture capital funds. We constantly compare ourselves to other countries. Why does the United States seem to have such a good venture capital fund system? Is their tax system so much better? Is that the answer?

Dr. Calvin Stiller: I think it was a combination of taxes, but it comes back to a great example. Why is there so much investment here now in Ottawa? It's because of the Terry Matthews, “Oh, here's how you do it”. And then it was John Doer and Kleiner, Perkins, Caulfield & Byers that started out. It was an association of high-risk capital in two centres. There was a cluster, which occurred in the bay area and in Cambridge, Massachusetts. Those were the hotbeds of venture capital. They became involved in the technology side of it, and they just outperformed.

Their tax structure is such down there that it's in fact beneficial for them to invest in these, but it also comes from leaders and great examples. If somebody's making a good return after ten years, they say, “Man, I'm in for another ten years”.

The Chair: So you're suggesting it's better because of targeting, or is it the low rates?

Dr. Calvin Stiller: It's a combination of the vehicles available, in terms of the tax attraction, on the one hand, but the other piece of it is that absolute porosity of the institutions of research with the financial community. It's called clustering.

• 1040

The Chair: To follow up on that, Mr. Stiller—and this will be my final question or comment—we haven't had a chance to delve into this as a committee, but there seems to be a real lack of managerial research in Canada and expertise, and that's something the committee may want to look at more in the fall.

Dr. Calvin Stiller: I agree with that.

The Chair: But on the whole issue of clustering and proximity and money, we seem to ignore what's happening out in society. I don't know how we fix that. We seem to have a group here that says, this is how we're going to spend government research money, and then we have industry over here, and sometimes they meet, but more often than not we ignore what industry does.

Ms. Paddy Torsney: Are you going to do the car thing?

The Chair: I'm going to do the car thing—Dr. Carty, I hope you pay attention. When we had Ms. Lapointe here from NRC, she talked about the next centre for automotive being in London. It goes against everything we've heard today. London happens to be 180 kilometres from Windsor. Windsor happens to have the large majority of research going on in automotive right now, and it also happens to be within a 50- or 100-kilometre drive of the large research places in Michigan—and head offices are looking for proximity—as well as the fact that Windsor has had the largest automotive investment in research by private industry. Yet we seem to ignore such things and go off in a whole different direction, saying, we don't really care what industry is doing, we're just going to go and do this.

That's where we seem to miss out as a country. We talk about dollars and we talk about proximity, but when are we going to look at what industry is doing? When are we going to look at the fact that one in seven jobs in this country depends on automotive? When are we going to start to become more than a branch plant economy and really delve into that, if all our jobs depend on it? That's where we'll have to see a return. We've already had the investment made, yet we continue to ignore it. So there has to be a meeting with industry. You can't just talk about research and money and not recognize that industry has to have some say.

Dr. Carty.

Dr. Arthur Carty: I think what you're saying is that industry is very important. You don't have a cluster. We've got to realize that successful clusters grow because there is a significant industrial presence. The clusters, generally speaking, have existing companies and newly created companies. They also are associated with an R and D presence and all the things we've been talking about this morning. I think in Canada we're only just realizing that the clustering strategy, the clustering phenomenon, is real and we've got to do something about it.

Mr. David Mowat: A Canadian view of a cluster, though, is that we can have a cluster in every riding or every province in the country.

Dr. Arthur Carty: That's just not possible.

Mr. David Mowat: We've had departments called the Department of Regional Industrial Expansion, which was designed to try to... You know, we're Canadian, we like to spread the thing across the country.

The Chair: Mr. Mowat, with all due respect, I'm not the one who first said automotive research should take place in Windsor; it was actually Mr. Lastewka, who comes from St. Catharines. Although I live in a riding next door to Windsor, I don't live in Windsor or represent Windsor. I represent the county. It talks about where automotive is taking place, about where the largest tool and die mould operation in Canada, and almost in the world, is in this country.

Mr. David Mowat: That's my point. If we—

The Chair: That should be a cluster. I interpreted your comment to be accusing me of saying because it's my riding—

Mr. David Mowat: No, no.

The Chair: I'm talking about where automotive is. I'm saying, why does the NRC pick a place 200 kilometres away from where the natural cluster exists?

Mr. David Mowat: I'm not going to talk about the NRC.

It is exactly my point that the Canadian thing might be to build an automotive something-or-other in Vancouver. It should all be where the centre is, and then you'll see stuff built around it. If we had one cancer research facility, you'd find business, you'd find venture capital, you'd find universities, you'd find research facilities develop around it. My only point is that our clusters tend to be too small.

Michael Porter did a research paper for the federal government and suggested that we're too small as a country to have three different things. If we want to do something really well, if it's automotive, put it in one spot, concentrate on it.

The Chair: Thank you.

We could have this conversation for another hour, but we must go, because we have—

Mr. Charlie Penson: Some of us would like to get in on this conversation.

The Chair: —another group of witnesses coming, three more witnesses.

• 1045

I apologize for running a little late, but it's an area that fascinates me, as it does others.

This has been a very interesting discussion. We do appreciate your frankness with us this morning. We're going to suspend for about three minutes while we change witnesses.

• 1045

• 1055

The Chair: If I could have everybody take their seats, please, we're going to resume now.

We're going to move to our second round table this morning, this one on intellectual property rights and protection.

We're very pleased to have with us this morning three witnesses. Please take note, because your agenda will only show two. From the Department of Industry we have Mr. Gwillym Allen, the assistant deputy commissioner of competition, economic policy and enforcement, Competition Bureau. From the University of Toronto we have Professor Nancy Gallini, professor of economics, department of economics. And from the Canadian Association of University Teachers we have Mr. Paul Jones, research and education officer. I propose that we hear opening statements from the witnesses in that order.

I will now begin with Mr. Allen, please.

Mr. Gwillym Allen (Assistant Deputy Commissioner of Competition, Economic Policy and Enforcement, Competition Bureau, Industry Canada): Thank you.

I want to thank you for inviting us to participate in this round table. The topic is very timely. In recent years there's been increasing interest in how framework laws help or hinder the process of innovation and economic growth, particularly in high-tech sectors, characterized by fast-paced innovation. Competition authorities and governments in general recognize the importance of IP in the knowledge-based economy, and they understand that the real competition in the global market is competition for innovation. Canada, like a number of OECD countries, is attempting to get its market framework laws right.

In the time I have available I wish to emphasize just two points, which I hope will help dispel the belief that there exists a tension between competition policy and IP laws. This tension flows from a common belief that the purpose of IP laws is to grant monopolies in a market, while the competition laws are there to fight monopolies. The first theme I'd like to dwell on today is the new economic learning that has created a far more positive view of IP licensing among competition authorities than existed in the 1970s and 1980s. The second theme is that this new economic learning has redefined the interface between intellectual property law and competition law and that they are now considered to be complementary. The current thinking is that both legal regimes promote innovation and enhance welfare.

Let me begin with the recent economic learning. In the 1970s and 1980s, antitrust and competition agencies were very suspicious of IP licensing and applied an extensive and rigid set of rules to it. Antitrust and intellectual property laws were seen to be operating in two separate spheres. One competition law protected the competitive process, and the other, IP, laws were designed to create monopolies. This placed the two legal regimes fundamentally at odds. In the 1970s, in fact, the U.S. Department of Justice announced what they referred to as the nine no-no's. Canada soon followed four years later with its own set of no-no's. Basically, these no-no's were certain types of business arrangements applying to intellectual property that were considered to, in and of themselves, violate the competition acts or the antitrust laws in the respective countries.

The new economic learning, however, has revealed that there are benefits from the IP licensing, and where people used to see illegal activities or business conduct in licensing arrangements that automatically, in and of themselves, violated competition laws, it is now realized that there were huge benefits from allowing a more lax and open licensing of intellectual property. It was also revealed that the contractual arrangements, such as exclusive dealing, tied selling, and territorial market restrictions were capable of stifling competition in some particular circumstances. But more often than not, particularly with regard to intellectual property, the firms employed these types of contractual arrangements that actually stimulated competition and were pro-competitive.

• 1100

It was now understood that firms that license their intellectual property are rarely monopolist, and that owning an exclusive right, or property right, even though it's an intellectual property right, did not create a monopoly or market power in a market that was selling that property or products that flowed from the use of that property.

The presence of market power, it has now become considered, must be determined through the application of the competition law analysis, which lays out a specific process that tries to identify what are viable substitutes within the market, and therefore individuals who own intellectual property are no longer considered to be monopolists in and of themselves.

This hostile prohibition of a vertical licensing arrangement has been replaced now by what is referred to as more of a rule of reason, or a case-by-case approach, where the situations are clearly analysed and determined. At the basis of this are three fundamental principles.

The first principle is that intellectual property licensing is generally considered to be pro-competitive and should be encouraged.

The second is that intellectual property is comparable to forms of other types of property in the context of competition law analysis. This is not to say that intellectual property doesn't have its own specific and unique characteristics, but for the application of the Competition Act, they're considered very much like any other property.

The third is that there is no presumption that exclusive ownership of an intellectual property creates market power or a monopoly in the context of antitrust or a competition law analysis.

IP and competition law are both necessary for the efficient operation of the marketplace. IP laws provide property rights comparable to those of other types of private property, and therefore provide incentives for owners to invest in creating and developing intellectual property, encouraging the efficient use and dissemination of that property within the market.

Basically, our belief is that intellectual property defines property laws, and that allows the owners of intellectual property to bring that property to markets and be adequately rewarded for their efforts. The market system is an efficient means of processing information that informs people where to invest in innovation in order to eventually realize a return on their investment and be adequately rewarded. In order for markets to work, you have to have well-defined property laws, and that includes well-defined intellectual property laws.

Once provided protection, society benefits from the application of the Competition Act to intellectual property for the same reasons that society benefits from the application of the act to other property. Applying competition law to conduct associated with IP may prevent anti-competitive conduct that impedes the efficient production and diffusion of goods and technologies in the creation of new products. The promotion of a competitive marketplace through the application of competition law is consistent with the objectives underlying intellectual property laws.

This leads me to my last point. The integrated market paradigm, which is the way we refer to it, has helped us define our approach at the Competition Bureau to the interface between intellectual property and competition law. Competition policy and intellectual property rights, rather than being fundamentally at odds with each other, are now seeking to serve an overall complementary objective of fostering competition and efficiency in a dynamic market environment. Both laws serve the common goal of promoting innovation and enhancing welfare.

• 1105

The complementarity of these two regimes is the fundamental principle that underlies the drafting of the Competition Bureau's enforcement guidelines—which I have distributed—with regard to intellectual property. They lay out the Competition Bureau's conceptual approach to how we view the interface between competition law and intellectual property law and outline some examples of how we would apply the competition law to situations involving intellectual property.

In conclusion, I want to drive home the fact that there's been a significant shift in how competition authorities view the licensing of intellectual property and the interface between the two legal regimes.

I think I'll end there.

The Chair: Thank you very much.

I'm going to turn to Professor Nancy Gallini from the University of Toronto.

Professor Nancy Gallini (Department of Economics, University of Toronto): Thank you very much. It's a real honour to be here today.

I have a power point presentation. I will try my best to speak for significantly less than the usual hour and a half I spend in front of my class. Stop me if I go a little bit too far, but this is a really exciting area, intellectual property rights.

I understood that my assignment today was to think about how we might change intellectual property policy—and I'm going to focus on patent policy in particular—to help Canada move from fifteenth place to fifth among the OECD countries in terms of innovation.

When I think about problems like this, I like to really start with the basics. The basics here are, first, why do we have intellectual property in the first place? Many of you know this already, but just to review it, there's a trade-off involved. On the one hand, innovations are costly to produce but cheap to copy. Patents provide the incentive to innovate, to disclose information, and also to exchange information through licensing. So even if there was an invention we would have had anyway, without patents, we still might want patents in order to get the firms to disclose their invention.

On the other hand, intellectual property grants exclusive rights to the owner, as Gwill Allen just spoke about. So patents could result in a suboptimal use of that invention. The trade-off we have here is between patents that provide incentives to innovate but then restrict the use of that invention.

Is there something else we could use? There are other kinds of incentive schemes to encourage firms or innovators to develop inventions. One is just market forces. There might be barriers to entry. Lead time might be sufficient to get firms to innovate without having proprietary rights over their invention.

Prizes have been used in the past. In the eighteenth century the English offered a prize for the first to develop a method for measuring longitude at sea. There's a great book by Sobel on this.

A third way is contracts, which we're quite familiar with. These are contracts on basic research—to universities or private labs, such as SSHRC and MRC—or on finding a specified invention that maybe the government wants. There are many other kinds of mechanisms we can use, including tax credits. The government could have in-house research. We could talk about those in the Q and A period. These are simply some of the more fundamental ones.

I guess I would like to stress that the nice thing about intellectual property is that it's decentralized. The market is the one to reward for good inventions and to punish if the inventions are bad.

From 1989 on there have been quite a few changes made to the Canadian Patent Act. These are some of the changes. I won't go through them now, but they're quite interesting because they do have different effects on innovation. They weren't all changes that increased patent protection, that made patents stronger. They've had different effects on small firms versus large firms. For example, pre-grant disclosure was said to maybe work against small firms in some ways. We can discuss that.

• 1110

It seems to me that before we start talking about making other changes to the intellectual property regime, to encourage innovation, we should at least reflect on what effect these particular changes from 1989 have had.

What appears to have happened since the mid-eighties and into the nineties is that the rate of domestic patenting has increased. True, it hasn't increased all that much on a per-capita basis, but what's more interesting than the actual rate is where the increase is and who's doing the patenting and innovation.

To a large extent, the increase has been in the high-tech sector, in biotech, telecommunications, computers, pharmaceuticals, and medicine. What's also interesting is that small firms are applying for a disproportionately large number of patents but getting disproportionately fewer granted.

The rate of foreign patenting has increased quite a bit. To show you a diagram, the top curve is the total of patent applications—it doesn't mean whether they were actually granted—and the bottom little curve is domestic applications. If you blow up that bottom line, this is what it looks like. So you have this sort of steady increase in domestic patenting in Canada, with these two peaks that correspond to when those changes in the Patent Act took place.

But you can see that domestic applications are a very small proportion of the patenting in Canada. There's a lot of foreign patenting going on.

We might ask, why the increase in patenting? Where is it coming from? Did those changes to the Patent Act spur innovation? Probably not. A lot of those innovations are foreign ones, and they came from more U.S. inventions—because around the same time, since the early 1980s, the U.S. has really strengthened its patent protection. It broadened the class of patentable items, such as business methods, software, and higher life forms. That's what's going on. It's not that the Canadian change has suddenly spurred innovation.

But it does seem to have increased the foreign propensity to patent in Canada: there are more foreign patents coming into Canada than before. Again, is this attributable to the changes in the Patent Act, or is it just a kind of global phenomenon—everybody is patenting everywhere?

These are the kinds of questions we want to ask. So if we think about strengthening patent protection even further in Canada, we want to ask, what are the benefits? Well, it gives domestic firms incentive to innovate; it gives foreign firms incentive to patent in Canada; and both these things can lead to spillovers, which may perhaps result in more innovation, and may encourage foreign firms to invest in Canada as well. This is a bit controversial; we can talk more about this later on.

What are the costs of strong patents in Canada? You have to pay higher prices for inventions that might have been developed in the foreign sector anyway and would have been made available in Canada. In a small, open economy, there's a real temptation to just hitch a free ride on innovations from other countries—which I know isn't the recent objective in Canada.

But surprisingly, strong patents can also reduce the amount of innovation if innovation is cumulative; that is, if it builds on previous research. That seems to be what the high-tech sector is all about. In order to make a drug, you need to understand the genetic composition, so you go from identifying the gene to eventually producing the drug. So innovations build on each other. In that case, the firms that get the first patent could possibly hold up future innovation.

There's a real concern that this is going on in the U.S. Tons of litigation is going on among firms with strong patent rights, to prevent follow-up research. Texas Instruments is notorious for this. Some firms also engage in what's called “wasteful patenting”—though I'm not sure it's all that wasteful—that isn't for the innovation, but for bargaining chips to transfer to other firms to avoid litigation. In the semi-conductor industry, for example, there's a lot of cross-licensing going on.

Getting back to what Mr. Allen was talking about, these problems of a strong patent field could be mitigated if firms are free to enter into cooperative arrangements such as cross-licensing, patent pooling, and so on. We see a lot of these kinds of strategic alliances in other forms of licensing taking place among innovating firms, and it's a big issue in the United States whether these cooperative agreements should be allowed.

• 1115

Now I'm going to get to the policy questions we might want to ask. The first is, should inventors be allowed to cooperate? I would say the answer to that is no problem, as long as they're cooperating on complementary inventions. But again, we can discuss this further.

Another big policy question: in the United States, there's a two-year project going on in the science, technology, and economic policy branch of their National Academy of Science. They're quite worried that patents have become too strong, and they're reflecting on many questions about these changes.

One question is, should patentable subject matter be extended to include business methods, software, and research tools? In Canada, business methods, some forms of software, and research tools like databases, are not currently patentable. Should we go that extra step and expand what can be patented, as the U.S. has done?

Should we allow broader claims? Again, there have been changes in U.S. law to allow the claims that firms make on their inventions to be much broader and cover much more ground, so they can possibly hold up against future inventions. Should we do that?

If you asked many U.S. academics and policy-makers those first two questions, they would say an emphatic no. They would say that Canada should stay where it is, that we're smart in not allowing these changes.

Should we adopt the Bayh-Dole Act? That's the U.S. act that gives universities proprietary rights and patents on publicly funded research. We don't really have a Bayh-Dole Act in Canada, and I don't necessarily want to promote it. But I will say that all the studies done in the U.S. about the effects of the changes in patent law on innovation found very little evidence that innovation had gone up—except in those areas that are now patentable that previously had not been, such as business methods and so on. There is tons of patenting in those areas, but true innovation has not gone up that much—at least, they can't detect it—as a result of changing the Patent Act.

One thing they have been able to tell is that the transfer of technologies from universities to the private sector, and the utilization of those technologies, has gone up significantly as a result of the Bayh-Dole Act. Do we want that in Canada? We can talk about that.

Should we create a special court for infringement cases? That's what they've done in the U.S., and that has appeared to have increased patent rights significantly. Again, maybe that's something we can discuss.

My last slide is “Toward Becoming a World-Class Technology Leader”. A wonderful international conference just took place between Industry Canada and the University of Toronto on exactly this issue. There were many Americans there, and the message that came across was that Canada does a pretty good job with its intellectual property. It's much more cautious about this balance between providing incentives to innovate and public access to invention. In contrast, the U.S. seems to be a bit stronger on the rights of inventors.

So perhaps strengthening our patent policy even further, beyond those ideas in the previous slide, might actually be damaging. We could end up reducing innovation or only getting any benefit at the cost of increased exclusive rights to the inventors. But we can't really weaken it any more, because we've signed so many international agreements, such as TRIPS. We certainly don't want to weaken it.

We seem to be doing a pretty good job, but what else might we do? Well, increase government investment in R and D, of course, and find creative ways to attract top scientists to Canada and keep them here. Surveys of firms show that the greatest impediment to doing research is that there's just not enough human capital. Definitely, we have to find some way to do this.

We could fund basic research at universities, including full cost-recovery—I know it's their number one priority. And I'll go a little further and say, target scholars, not necessarily projects. Sometimes it's important for the government to target particular projects it wants to have done; but you want to make sure the high-quality scholars are the ones who are doing the research—that research and scholar quality always correspond.

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We should also take advantage of our position as an importer of technology by adopting and learning from foreign patenting. We saw before that Canada relies a lot on foreign inventions as a net importer of inventions, and we shouldn't be embarrassed by that. We should take advantage of these inventions. But that doesn't mean we shouldn't do R and D. Firms need to have a very strong research base in order to absorb those inventions. Some studies have shown that Canadian plants are a little behind in absorbing new technologies, compared to the American-owned plants here.

The last suggestion might be to identify innovative sectors; the biotech, high-tech, and computer sectors, for example, are innovating quite a bit. So maybe we don't need a uniform patent policy. Perhaps we should have different protection in terms of patent breadth and length for those innovations.

Some examples: in Japan, they have patents on business methods, though the requirement to get a patent is much stricter than for other inventions. The European Union allows extension of patents for pharmaceuticals to reflect the regulatory delays, and so on. We might want to think a little bit more carefully about that.

That's all I have to say for now. Thank you very much.

The Chair: Thank you very much, Professor Gallini.

We're now going to turn to Mr. Paul Jones, from the Canadian Association of University Teachers.

Mr. Paul Jones (Research and Education Officer, Canadian Association of University Teachers): Thank you very much for giving me the opportunity to appear before you. In particular, I want to thank the chair and the clerk for adding me as a witness at the last minute.

The Canadian Association of University Teachers is basically the umbrella organization for faculty associations at universities across Canada. This morning, I want to try to bring you the perspective of our membership on the issue of intellectual property, particularly as it relates to what's going on at universities now.

Our members—professors, teachers, and librarians from across Canada—produce all kinds of material that can be categorized as intellectual property: scientific discoveries, economic research, works of literature, works of fine art, to name a few. But in addition to being the creators of this material, our folks are also voracious users of it. They use it to teach, to study, to share, but most especially they use this material as a base upon which to build new knowledge.

Every day we create IP, we share IP, we use IP, we're drenched in IP. So it's not surprising that the issue of intellectual property is one professors have strong opinions on. And because we're professors, we have a diversity of views on the subject.

At one end of the spectrum of membership views is the belief that faculty, and indeed universities as a whole, have no business being in the IP market at all. The position of this camp is that neither individual professors nor universities should own the knowledge they create. It's paid for by the public, and it should belong to the public. When it's created, it should go directly into the public domain.

The first concern of this group is that if you treat the results of academic work simply as property, scholarly communication will suffer greatly. The worry is that professors will become more interested in keeping quiet about a discovery, in the hope of making a profit from it, than in sharing the knowledge with others. The irony of this is that most new discoveries are built on previous ideas and previous knowledge. So if we start to choke off this idea of scholarly communication, then a great deal of new innovation will be choked off as well.

The second concern of this group is that when universities focus simply on creating products or intellectual property, they abandon the tradition of university research in the public interest. This is the kind of research that maybe doesn't necessarily produce immediate economic benefits: research into child poverty, for example. However, this is research that does a great deal of social good. The fear is that an IP-driven culture would ignore this kind of public interest research and only encourage and reward the production of private knowledge for the benefit of a handful of IP rights-holders.

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That's one side of our membership—I'll hold up my left hand. In contrast with this view, at the other end of the spectrum, are our more entrepreneurial members. These folks are willing to fight tooth and nail to preserve the intellectual property rights they currently have. They want to preserve them; they want to exploit them. They see these rights as a legitimate recognition of the work they've done, the scholarly toil they've engaged in. They also see these rights as a powerful incentive to be creative. I think “every professor a millionaire” is one of their rallying cries.

So in our membership we have these two diverse views. How do we synthesize them? The first thing to remember is that these are perhaps extremes. The vast majority of our membership are somewhere in the middle. There is a great deal of support and understanding for the importance of copyright protection, of patent protection. This is something that as an organization we have put a lot of energy into in order to protect those rights of our members.

At the same time, however, there is a great deal of concern about the imposition of an IP-driven model of research on universities. What we've tried to do is ensure that universities maintain their role as sources of independent study and teaching in the face of this focus on commercialization or on development of IP.

We've strongly challenged the agenda to completely commercialize universities, and at this time we're engaged in a number of battles at a number of different universities to protect the academic freedom of professors from overzealous commercial interests.

The University of Toronto recently offered the distinguished scientist, Dr. David Healy, an exciting and prestigious job opportunity. Then apparently when it learned that he had engaged in research critical of some aspects of the pharmaceutical industry, he had the job taken away from him. It appears the commercial interest trumped the public interest, and in our view the result for Canadian society is not a good one.

Not all of the situations we are involved in are as dramatic as the Healy case. But they each underscore the critical problems that develop when production of commercializable IP becomes the guiding principle of university research.

We have at the University of Guelph a member who conducts research into something known as pasture science. I'm a city boy, so I'm not exactly sure what she's doing. It seems to involve how to move cattle around on range land in order to maximize the use of available forage.

With problems of soil erosion, the crisis in the farming community, and drought conditions in southern Alberta, this is an area of critical public interest. But our member believes she is the last of her breed. No new pasture scientists are being hired in her department. And research money for pasture science is becoming increasingly difficult to find.

Why is this? It's because the results of her work are non-proprietary. That is, they're difficult to turn into intellectual property and to sell for a profit. The money at her biology department is going into biotech, as are all the new hires, because that's where commercializable IP can be produced.

Biotech research is extremely important. But so is some of this other stuff, like pasture science, that appears to be falling by the wayside. This case demonstrates in a more subtle way than the Healy case the negative long-term implications of focusing solely on intellectual property as the be-all and end-all of university research.

A biochemist at Concordia University in fact told me, not completely in jest, that there was no way that Einstein would get grant money these days because the direction of his research was too obscure and would never lead to any commercializable intellectual property. This comment is an exaggeration perhaps, but it is one that underscores our concerns.

To conclude, university research we think should be seen as more than simply turning out intellectual property. It should more accurately be described as the creation of new knowledge, not just new products. It's research that includes benefit for the broader public interest as well as the private interests of those who hold IP rights.

It's important to remember that university research, indeed all innovation, is sustained by opening communication and the free sharing of information. To keep the system alive we must resist the urge to pile on stricter terms of patent protection and longer durations of copyright, and we have to resist the urge to compartmentalize every instance of human creativity, or even human biology, as intellectual property.

Thanks very much for your time, and I'll try to answer any questions you might have.

The Chair: Thank you, Mr. Jones.

We're now going to turn to questions. For those who aren't familiar with the committee process, if the questions are not directed to you and you have something you wish to add, try to notify me, signal me, and I'll try to call on you.

Mr. Rajotte, please.

Mr. James Rajotte: Thank you, Madam Chair.

Thank you very much for your presentations. They were excellent and on a very difficult topic, so I appreciate very much your coming this morning.

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My first question is more of a philosophical question. In terms of intellectual property, if you go to the foundation of property rights, particularly in English philosophy with John Locke, it seems to be very much a moral argument he makes. It's also a little simpler I think than intellectual property, because we're dealing with either materials or that with which we mix our labour. It's more easily defined than intellectual property.

It seems—and just say if this is right or wrong—that intellectual property is more practical, which is it's not a moral argument for intellectual property, it's more to encourage innovation and encourage research and development. Am I on the right track with that? It's open to anyone.

The Chair: Professor Gallini.

Prof. Nancy Gallini: I think so. There are two ideas behind intellectual property. One is the bargaining theory, I believe it is, and the other is... I can't remember the other name of it.

One idea, which is more your philosophical approach, is that people produce this innovation; it's their property and they have the right to own it. Without a property right, this would go into the public good. Or, really, let's not get into the incentive part; it's just that this is their right to own it. That's one view of intellectual property.

The other one—and I think this is what led policy-makers to produce this, to have an intellectual property law years ago—is the bargaining idea. This idea holds that since intellectual property is effectively information that is a public good, innovations will not be produced unless there are property rights on it. So it's a kind of bargain: we will give you this protection for a limited amount of years if you produce the invention and then disclose it to the public. I think you're right. It is much more of the second view rather than the philosophical view.

Mr. James Rajotte: Should it be that second view? In reading briefly through the Competition Bureau material, and looking at “Example 8”—I believe it's ABACUS—it's very much a practical argument that deals with whether they're holding back the development of spreadsheets and whether they're not furthering competition, allowing other companies to access what they themselves have developed. If I can get all three of you to comment, should that be more of a bargaining approach to intellectual property?

Mr. Gwillym Allen: From our perspective, I'm not sure whether I can answer whether it should be. The competition law is there to protect the competitive process. The competitive process doesn't work unless there are well-defined property rights. When there are well-defined property rights, people use those property rights and the ability to exert those rights in order to exchange their property in the market and get rewarded.

Our job is to see that when people are exchanging property in a market, the rewards they extract aren't due to some anti-competitive behaviour. From our perspective, I'm not sure if it's right, but the bargaining property is the type of property that we deal with and that we're charged with the responsibility to deal with.

Mr. James Rajotte: Who defines the anti-competitive behaviour, the Competition Bureau?

Mr. Gwillym Allen: In that regard, the way the system is set up is that the Competition Bureau would look at it, examine it, and carry out an investigation. If the Competition Bureau concluded that, indeed, there was anti-competitive behaviour that raised an issue under the act—and there are two different sections of the act; there are the criminal provisions and the civil provisions. If it raised the question under the criminal provisions, then the Competition Bureau, as the investigator, refers that to the Attorney General, and then the ultimate adjudication is done by a criminal court. If it raises an issue under the civil provisions, then again, what the Competition Bureau does as the investigator is it refers that to the Competition Tribunal, which is the ultimate adjudicator to determine whether or not their evidence warrants them to make a remedial order.

Mr. Paul Jones: There are components of intellectual property law, or doctrine, that reflect the moral argument you touched on first. It's the principle of moral rights and copyright. These are considered to be rights that accrue directly to the creator or author because of the work they've done or because the art they produce is so closely attached to them. These are rights that can't be sold or transferred.

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That being said, IP rights are also a market tool—a market construct. They're a way of making economies run more efficiently. But they also arise from law, from legislation that you all work on. It constantly needs tampering to find a balance. It's easy to identify your toothbrush or your car as your personal property. It's much vaguer sometimes when it's an idea.

Mr. James Rajotte: This morning we were talking to Dr. Carty from the NRC about public or private partnerships, and, Mr. Jones, you raised some very good questions about sharing of knowledge, research in the public interest. I just want to throw out an example.

The Edmonton Protocol at the University of Alberta is doing research into diabetes. They're attached to the university so they get support through that institution. They get funding through the Alberta government, some funding from the federal government, and funding from private sources both here in Canada and the United States. There are researchers involved. They've done about thirty years of basic research, and now they're on the cusp of some very exciting discoveries.

This is the question. Should that be patentable? Should it be owned? Who owns it? I don't know if that's a fair question, but to me those are the issues we should be dealing with here. There's obviously not an easy answer to that. If any of you want to give us some guidance as to how we even approach the situation...

Mr. Paul Jones: There was an example, I believe, of a Colombian or Venezuelan scientist who developed really important work on a vaccine for malaria. He gave the rights for that to the World Health Organization rather than privately patent it or develop it through the pharmaceutical industry. There's a really powerful argument for putting stuff into the public domain in recognition of the public support for the research and the public good that will flow from it.

I don't know whether that situation is going to work in every case. I think some of our folks who are on the more anti-IP end of the spectrum are a little bit naive perhaps in not really being able to answer the question you have asked. If this work is done and it's not protected in some manner, what is to stop it from leaving Canada? How are we going to prevent a private sector company from just grabbing up the fruits of thirty years of labour paid for by the public dollar? It's a great question. I think we're going to have to keep working out what the answer to this is.

Prof. Nancy Gallini: I think it's a fabulous question. It really does impact on this whole question of the Bayh-Dole Act. As you were pointing out, should universities or faculty get patents in the first place on publicly funded research? It almost sounds like double-dipping, right? They're getting public funding and so it should go into the public domain, yet they are getting a patent on it.

One of the complications is that a lot of research isn't just publicly funded these days. As you said, it's a combination of private funding and other sources as well. Then you have to look at that bargaining question and ask whether this research would have taken place without the knowledge that there would be some patent—some proprietary right—in the future, if the public funding wasn't sufficient. I think for a lot of scientists—as a social scientist the expenses aren't as high as somebody who is working in a lab—very often public funding isn't sufficient, so they do need that patent in order to reap the fruits of their labour. In some countries or international organizations, they're very worried about innovations that really need to be in the public domain—for example, vaccines.

So there have been some proposals by economists as to how, after something is made, we can then get it into the public domain, or at least encourage it to be in the public domain—for example, an AIDS vaccine or AIDS drugs in South Africa. Some of the suggestions have been that the government might want to guarantee sales rather than give a patent.

A fellow by the name of Michael Kramer from Harvard has come up with a proposal suggesting that if you can come up with a vaccine for malaria and tuberculosis in developing countries, then countries, in an international organization, will guarantee sales on that vaccine. Then it's in the public domain, but the payment is coming from public purses basically.

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In other words, patents seem to be very important in order to encourage the innovation in the first place. But where a particular invention is so valuable that we want it in the public domain, the government may want to come up with ways of buying it.

The Chair: Thank you very much, Mr. Rajotte.

Mr. Alcock, please.

Mr. Reg Alcock: Professor Gallini, my colleague says she wants to take a course with you, because you win the clear professor award today.

I want to walk around this question. I was intrigued, Professor Gallini, by comments you made on the question of whether inventors should be allowed to cooperate. I thought that was an interesting question. My instinctive response was that of course they should. Why do we even raise that? My first question to you is, why is that a question? Help me understand the basis for that question.

Then, when Mr. Jones was talking, he was running around an issue that has some resonance with me right now. That's this issue of the pressure to commercialize. If what you're saying is the pressure to commercialize acts as a barrier to cooperation, which I thought was part of your point, I'm wondering if that relates in part to what you're talking about, Professor Gallini. But I want to add one other comment.

Peter Nicholson, who is the research strategy officer for BCE and did a lot of work with us on this policy initially, going back about five years, made the comment that BCE spent a lot of time tying its research capacity to its business lines. They felt—this is going back maybe about eight, nine, ten years—they had to drive their product development. They wanted to extract more value. So they segmented it into types of product lines. They said it worked like a charm for about five years. But he said what they ended up doing was running down their intellectual capacity, and there was nobody filling the pipeline. He calls it the pipeline of possibilities—pure research. It's what we used to call peer research.

So I'm wondering if, in addition to this issue about the cooperation, you can also talk about... I realize there's a very fuzzy boundary between what we would call basic or fundamental research and the next step of turning it into products.

Prof. Nancy Gallini: Those are all very good questions. I think that first question should go to Gwill. Why would we not necessarily want firms to cooperate? I have an answer to it, but given that Gwill is from the Competition Bureau...

Mr. Reg Alcock: I can understand why they may not want to cooperate, but why wouldn't we want them to cooperate?

Mr. Gwillym Allen: Let me give you an example of a situation that involved cooperation, not right at the beginning of the development of an intellectual property and a process, but near the end, and then the cooperation in the selling of it. This actually involved a situation not in Canada but in the United States. It was called the Visex case.

In the United States, two fronts worked initially independently to develop laser eye surgery. At the end, they finally got together and worked out some processes to perfect it. They then formed what was called a patent pool where they both individually had plans to sell the process or market the process in competition with one another, in the range—I forget what the numbers were—of about $400 to $500. But then they formed a patent pool, finalized the process, finalized the retail agreement, and then produced this pool where they would always contribute a certain amount to each treatment. The treatment went from what was planned at around $400 to $500 to you couldn't have it done for less than $2,500.

That meant, although you had the cooperation that brought this to market, the availability to individuals to take advantage of this intellectual property development was significantly reduced, because of the huge prices that were being charged. The Federal Trade Commission stepped in and broke up the patent pool, and prices again significantly fell when the two companies went into direct competition with one another. Now, as opposed to laser surgery being something that was only available to a very few people, you see the ads, and there's huge competition in the market for that. You see one eye done for $100, or something, in these ads in the newspapers and things.

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That's a situation where the cooperation did not further the diffusion of the intellectual property. So that's one reason you may not want them to cooperate.

Prof. Nancy Gallini: Further to that, patent pools or cooperation between firms may create barriers for other firms to come into the market. There is a concern that all the cross-licensing that is taking place in semiconductors is like a barrier to entry, because now firms can't enter unless they have a large portfolio of patents they can trade in the case of being accused of infringement.

Also, when firms are cooperating, they may suppress innovation. There is a concern that innovation will fall. If there were two substitute products that could be made, a patent pool would like to have really just one of those, so why increase the competition in the market? So we could see prices going up. The belief is that once firms are competing rather than cooperating, there might be patent races and we might have more innovation.

Having said that, however, where we see the patent pools is where standards are important. So if you just have competition in the market, what you could end up getting is one firm winning the standards race, and then that firm has an enormous amount of power. Through a patent pool, you pool all the complementary assets, all the complementary patents, and of course you want to make sure everyone has access to the innovations in that patent pool, and that leads to a standard that no one owns. It's in those cases of the complementary assets that you'd want to have a...

Mr. Reg Alcock: Can you speak about some of the boundary issues, differentiations that you make generally in terms of standards-setting versus just straight users? Are the boundaries as clear as that?

Prof. Nancy Gallini: You don't know you're leading to a standard until you're there.

Mr. Reg Alcock: Yes, exactly.

Prof. Nancy Gallini: That's a good point. It's not always so evident.

Firms are pretty smart. They can kind of figure out where things are headed, in a lot of computer products, for example. There have been a lot of patent pools in the U.S. for DVDs, ROM players, MPEG to video compression—I'm not quite sure what all these technologies are.

In fact, there were 54 patents among 16 firms, and these were big firms, like Sony and Mitsubishi. All the very large firms were involved in this. This is kind of the scary part, too, that even though they were pooling complementary products that led to a standard, all these firms were really competing in market for substitute products too. So you want to make sure the arrangements they're making within the pool are not affecting competition in the other goods they compete in. But that's a tricky question.

The Chair: Thank you very much, Mr. Alcock.

Madam Jennings, please.

Ms. Marlene Jennings: Thank you.

First of all, Professor Gallini, I really enjoyed your presentation.

Prof. Nancy Gallini: Thank you.

Ms. Marlene Jennings: I've had economics courses before, and I didn't enjoy them as much as I did with you. If I ever decide to go back to school and take an economics course, I'll look you up to see if you're still actively teaching—

Prof. Nancy Gallini: I'll look for you next year.

Ms. Marlene Jennings: —but you're in Toronto and I'm in Montreal.

Prof. Nancy Gallini: I know.

Ms. Marlene Jennings: That's the difficulty.

Mr. Reg Alcock: Eventually we'll all be in Toronto.

Ms. Marlene Jennings: I don't think so. I'm a Quebecker, born and raised, and I intend on taking my last breath there in about 100 years.

Mr. Jones, you explained there to be extreme diversity of opinion within your association. Have your members on the extreme left read the studies that Professor Gallini referred to about the positive impact that the Bayh-Dole Act has had on spurring innovation?

Mr. Paul Jones: I'm sorry I used the term “left”—

Ms. Marlene Jennings: It's okay. I'm making a little inside joke about it.

Let's say, on one extreme side of the spectrum. We won't say which side.

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Mr. Paul Jones: From our perspective, the debate on the Bayh-Dole Act is—and this really touches on the more entrepreneurial members—who is going to own the intellectual property? Is it going to be the individual faculty members who invent and discover it, or is it going to be the university community as a whole?

The people I talked about at the one end of the spectrum are not even involved in that debate. They don't think either should own it. They want to see the stuff treated as public knowledge, stuff that goes in the public domain for the public good. CAUT stated on the record that we have argued very strongly that individual faculty should maintain control over the stuff they invent or create. The people who don't like intellectual property have been very hard on CAUT for that position.

Ms. Marlene Jennings: Some universities here have policies where the intellectual property is owned both by the inventor or the discoverer and by the university. Would you think that would be a good way to go?

Mr. Paul Jones: Approximately half of our bargaining units have that kind of arrangement and are very happy with that. It works very well in terms of providing fair remuneration for the people who develop the stuff, and it also recognizes the university's and the public's commitment to it.

In the places where individual faculty own it, the experience there has also been very positive in terms of bringing material to market. The University of Toronto and the University of Waterloo, some of the most successful of the innovators, have that model.

Ms. Marlene Jennings: Okay.

I have one last question for you, Professor Gallini.

With the intellectual property legislation or protections we have, the regime we have in place right now, the Competition Bureau and the Competition Tribunal on the civil side and our criminal courts on the criminal side, and with all the different scenarios you mentioned, the collaboration, which could be anti-competitive or could constitute eventually a barrier, do you think the regime we have now is sufficient protection, that we don't really need to change it because we actually have sufficient protection?

You talked about, in the States, that they see we have a pretty good balance and don't see why we would want to change it.

So if we have a good balance, let's not change it except on the area you raised, that there may be some sectors we wish to strengthen. You mentioned pharmaceuticals or other areas where there is a real reason to strengthen.

Prof. Nancy Gallini: I have some trouble with targeting winners—

Ms. Marlene Jennings: Yes. So do I.

Prof. Nancy Gallini: —because we don't really know who the winners are. So I don't particularly want to even guess who those might be.

I think what is a bit problematic with our patent policy and throughout the world is that they're uniform patent policies. It's not a bad idea to entertain changes; it's more of a warning if Canada decides to patent business and other patents, many of which are very simple, one-stop shopping, Amazon.com-type things. To give them 20 years of protection would be outrageous. So those are the cases I'm thinking of more if we decide to strengthen further. Maybe we should hold back.

There are always those regulatory delays of pharmaceuticals that one might want to think about in extending patent life. We already have a kind of patent extension as it is, where you can renew your patent for more years than the original amount. You pay in maintenance fees. So that actually is an efficient process. I think it's more of a warning of strengthening in the sense of expanding the set of patentable products.

One suggestion was having a federal court that can review all patent cases, because what's happening right now—and I'm not really suggesting we want to just sit back—is that I think CIPO, the Canadian Intellectual Property Office, has a huge burden on their hands. The technologies are new, we don't really know that much about them, the applications are increasing, and I think something has to be done perhaps in the administration of that. They need more resources or something to be able to get experts to look at these patents.

Ms. Marlene Jennings: Thank you.

The Chair: Thank you very much, Madam Jennings.

Mr. Bélanger.

Mr. Mauril Bélanger: Thank you, Madam Chair.

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I just want to make a short comment in relation to the presentation by Mr. Jones. I'm glad he recognizes that the best thing one can tend to is a state of equilibrium or balance, having pointed out the concerns that might apply at the universities, where in, say, 10 or 15 years the tendency has been to try to encourage more commercializable research, if you will. That in and of itself is not necessarily a problem, but if it starts impeding and undermining the traditional role our universities are to play in our society, then it does become a problem. It's a matter of how you strike a balance.

I'm not going to tell you that I have the solutions in the university field—I have my own ideas—but I want to come back to the same dilemma being evidenced in the Government of Canada's research facilities, either in the granting councils, which is the liaison, if you will, between the universities, in many cases, and the government, or in our own labs, the National Research Council, the labs we find in various departments and so forth, the Communications Research Centre. We see in those labs too growing pressure to create technology transfer centres. Inevitably people will go with the transfer technology, because, as you say, every proper millionaire will, and that motivation can be found elsewhere as well, of earning more money. Some people are even accusing members of Parliament of that these days—there too you need to have a balance.

Here's an example. The majority of this committee have stated clearly that we'd like to see the Government of Canada put money into the long-range plan of the Astronomy and Astrophysics Society of Canada. And this again equates to what you're saying. Today Einstein wouldn't be funded, because it's not a sexy area, it's not biogenetics, and so forth. I would hope that this study we're doing, this effort, will try to create a set of principles and parameters within which we will maintain a balance, both in our universities and in our government research functions. I suspect that if we do not seize that issue and try to deal with it, 10 years from now it will be too late. We will have undermined to the point that it is no longer reliable our capacity to produce the long-term research, pure not applied research, that is essential for the species to evolve, grow, and produce the wealth that we can then share and redistribute for the betterment of all.

That's just my conclusion on what I've heard this morning and over the last few weeks, Madam Chair.

Mr. Paul Jones: Is it possible for me to comment on that?

The Chair: Go right ahead.

Mr. Paul Jones: It also touches on something Mr. Alcock raised, the issue of pure research. What we're hearing from some administrators, VPs, and researchers is that they're awash in money now, coming in with strings attached or tied to particular products, tied to particular projects. In order to maintain that balance, we need comparable money coming in for the basic research, for the things that are going to lead to 15 or 20 years down the road, not with a two- to three-year turnaround time. So it's core funding for universities, it's federal transfers to universities to spend on buildings and teaching and that kind of core research, and also money for the granting councils that's not tied to outside initiatives. The CFI has been extraordinarily successful.

Mr. Mauril Bélanger: No, it has not.

Mr. Paul Jones: Well, some of our folks like it.

Mr. Mauril Bélanger: We've excluded the National Research Council from CFI, which is senseless, as an example.

Mr. Paul Jones: Yes. Others are very concerned that things like the CFI skew the whole direction of the university community in a direction that's not entirely helpful.

Mr. Mauril Bélanger: Thank you, Madam Chair, for your indulgence.

Prof. Nancy Gallini: May I say something? I'm really happy you made this comment. John Polanyi would love you, and many of our finest scientists and researchers at the universities would love you.

There really is a sense that we are targeting too much and forgetting about the basic research sector, which is what the university is all about. In fact, I'm somewhat sympathetic with the left on this Bayh-Dole issue, in that this is what we do, we research, and this information should be part of the public good.

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A lot of the research moneys are being targeted into particular projects, and that's why we're saying fund scholars, not projects necessarily. There is a place for that, to come up with some particular projects, but you want to make them as flexible as possible, and as you were saying, even CFI money could go towards basic research rather than things that can down the road be patented.

I think there's a sense in which we all have to be accountable, and that's why there has been this movement in the direction of coming up with specific projects. But any movement going back towards what we're about, basic research, would be fabulous.

The Chair: Thank you.

Those are all the questions we have on our list for today. We appreciate your coming here this morning, and we appreciate the presentations and discussion. We have just finished our review of Bill S-17, patent legislation, so it is timely that we have this round table today. We look forward to an opportunity to meet with you again in the future. Thank you very much.

We're going to suspend for about two minutes, then we're going to move to the draft report on the Lobbyists Registration Act, and we'll move in camera for that.

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[Editor's Note: Proceedings continue in camera]