OTTAWA — The new Canada Innovation Corporation (CIC) will impose “significant clawbacks” if firms it funds sell out to foreign buyers or transfer publicly subsidized intellectual property abroad, according to one of the organization’s architects.

The new corporation will deliver financing faster than existing federal business-support programs, said Dan Breznitz, who helped develop the plan for it as a visiting economist at Finance Canada. But it will also have mechanisms to ensure the benefits of that backing stay in the country, following years of criticism about IP drain.

The Liberal government proposed the agency in the April 2022 budget, positioning it as a response to the long stagnation of productivity and business spending on R&D in the country. Earlier this month, it unveiled its preliminary plan, allocating $2.6 billion over four years, including rolling in the National Research Council’s Industrial Research Assistance Program (IRAP). The Liberals are promising to introduce legislation this year to establish the organization as a new Crown corporation, and appoint an operationally independent board and CEO. 

The CIC will offer businesses financing ranging from $50,000 to $20 million, backing industrial projects that develop new products and services, or modify existing technologies for new uses. Innovation-economy executives have expressed concern that the organization will be just another R&D granting agency that won’t do enough to turn Canadian-generated ideas into Canadian-held intangible assets.

Ottawa’s blueprint pledges that the CIC will use “an appropriate mix of funding mechanisms and repayment requirements to minimize the transfer of intellectual property” from the projects it subsidizes. That’s gone overlooked in the initial reaction to the organization, said Breznitz. And it means “clawbacks” and “significant fines” for firms that take the organization’s money, then patent the resulting innovations outside the country or are bought out and moved abroad, he said. 

Take the case of a tech company that develops a new form of AI, and secures patents and copyrights against its innovation. A few years later, a large U.S. corporation acquires it for a large sum, but plans to relocate it to New York. “Right now, if this was a grant of any of those programs that we already have, that’s too bad for us,” said Breznitz. “In the case of the [CIC], there’ll be clawbacks.” The Crown corporation could also offer a sliding scale, reducing the penalties if the buyer keeps IP, jobs or production facilities in Canada. 

Other countries have similar rules for accessing public financing. The Israel Innovation Authority (IIA)—which partly inspired Ottawa’s blueprint for the CIC—has required companies to pay back up to three times the value of its grants if they transfer the resulting IP out of the country, and up to six times if they shut down all their domestic operations. 

When Google acquired Ra’anana-headquartered Waze for a reported US$1.1 billion in June 2013, the IIA levied a US$3-million charge for its US$1-million grant to the navigation app. The search giant also received a US$230-million tax bill on Waze’s property rights.

“It might very well be that we will follow the Israelis,” said Breznitz, although it will fall to the CIC’s forthcoming leadership to decide how much companies must pay. To achieve its goal of creating long-term domestic prosperity, the new organization will need to ensure intangible assets are created, defended, but also retained here, he said. “We all got used to the fact that the Canadian government just gives, gives, gives and never asks back.”

Finance Canada did not directly answer The Logic’s questions about how the clawback mechanism would work, or to what business moves it would apply. “Final design features will be developed and approved by the Canada Innovation Corporation board and CEO,” said spokesperson Marie-France Faucher, adding that further details “will be made available in due course.”

Benjamin Bergen, president of the Council of Canadian Innovators, welcomed the prospect of a mechanism to secure a “return on investment” for the support the new corporation will provide businesses. The lobby group, which represents 150 scale-ups, has previously called for Israel-style penalties for government funding programs. (Some schemes, like the flagship federal Strategic Innovation Fund, do require some companies to return the capital they receive, and to accelerate the repayments if they’re acquired.)

Bergen said the design of the new requirements will determine whether they deter companies from seeking CIC funding. But he noted that similar rules do not seem to be “a hindrance for people investing in Israeli companies and [its] innovation economy.”

Some tech leaders have criticized the Liberal government for subsidizing multinationals that commercialize IP and bank their profits in other countries, and not doing enough to stem the loss of promising startups and their innovations to foreign buyers. “We fight on spray-and-pray grants,” Jim Balsillie, the former co-CEO of Research in Motion (now BlackBerry) told The Logic in response to the CIC launch earlier this month. “The rest of the world laughs, because we spend the money but they own the ideas.”

The agency as proposed won’t improve Canadian companies “freedom to operate,” Balsillie said, referring to firms’ ability to sell their wares without the overhanging threat of IP litigation from better-resourced rivals.

Breznitz, who finished his secondment to Finance Canada in December, is co-director of the Innovation Policy Lab at the University of Toronto’s Munk School of Global Affairs & Public Policy. He’s long expressed concern about the country’s declining productivity and stagnant economic and wage growth. “I would really love to see more IP and patents by Canadians,” he said. “The needle will be moved only if those lead to sustained developed innovation activities in Canada, including the creation of good jobs and prosperity.” 

The CIC isn’t just “pray and spray,” he insisted, calling the clawback mechanism “a revolution” in the federal government’s approach to business-support funding.