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S.99-75

•

SIMON FRASER UNIVERSITY

School of Engineering Science

To:

Members of Senate ?

From:

John Jones, Senator

Subject:

Commercialization of University Research

Date: 23

November, 1999

Motion:

"Senate deplores the recommendation, expressed in the report "Public

Investments in University Research: Reaping the Benefits", that the

commercialization of the results of research be made a part of the university's

mission. Senate urges the government to reconsider and reject this report."

Rationale:

The federal government is currently contemplating a report "Public Investments in

University Research: Reaping the Benefits" prepared by an Expert Panel on the

Commercialization of University Research.

. ?

This report makes a number of recommendations concerning the funding of research and

the ownership of the resulting intellectual property. The report is available at

http:llacst-ccst.gc.calacst/commlhome_e.html [Executive Summary attached.]

I believe that the report is deeply flawed, and that its implementation would do serious

damage to Canadian universities and Canadian society. I urge you to read the report and,

if you share my misgivings, to write to Tim Nau, Director, Communications, NSERC,

tim_nau@nserc.ca .

The report recommends that 'innovation' be made a fourth mission of Canadian

universities, on a level with teaching, research and community service; and that

universities be required to give equal weight to innovation in tenure and promotion

considerations. From reading the report, it is clear that 'innovation' is interpreted to mean

'commercialization'.

The chief problem with this recommendation is the obvious conflict between our

traditional mission of creating and transmitting knowledge, and the proposed new goal of

pursuing commercial profit. A researcher who publishes results in professional journals

is pursuing the first goal; under the new policy, the researcher might chose to keep the

results secret to maintain a competitive advantage, and still expect to be rewarded by

tenure and promotion.

If the university is charged with pursuing commercialization, it is in an immediate

conflict of interest: how to deal with research results that, although valid, would hurt

future sales? This is not a far-fetched scenario; the recent case of Nancy Olivieri, and the

*,I

Putting commercializability on a par with research merit in tenure considerations will

skew our values: the development of a new video game now scores higher than the

discovery of a new galaxy or a new species.

The report justifies this change in the mission of the university by noting that Canadian

companies have a poor track record in commercializing university research. The change

would thus enlist publically funded universities to increase the profitability of privately-

owned companies. Throughout the report, there is an uncritical equating of 'maximizing

social returns to Canada' with maximizing the profitability of Canadian companies.

Although the report pays lip service to improving social conditions and the natural

environment, there is no link between these goals and the policies proposed.

As John Ralston Saul and other commentators have noted, the prevalent ideology of the

nineties is one of 'corporatism', that is, the unquestioned assumption that the public good

is identical with corporate profitability. Historically, a major role of the universities has

been to develop and articulate alternatives to the dominant ideology. The underlying

thrust of this report is to bring the universities to heel as servants of corporatism.

John Jones ?

Engineering Science

•1

Advisory Council Conseil consultatif

on Science and des sciences et de

Technology ?

la technologie

Public Investmenbs

in University Desearch:

Qec

ing the Benefits

1epoit of the Expert Panel

on the Commercialization

of University 1eearch

I.'

Canada

•

Executive Summary

1.0 Universities are Uniquely Poised

Drive

Economic

Growth

and

Social Well-being ?

.................................................................................................................................

2.0 ?

The Innovation Process

...........................................................................................................................................

2.1 ?

Build Commercialization Infrastructure

............................................................................................................

2.2

Access to Highly Qualified Personnel

...............................................................................................................

2.3 ?

Develop Innovation Policies and Strategies

......................................................................................................

2.4 ?

Facilitate Access to Research Funding

..............................................................................................................

2.5 ?

Identify Discoveries with Commercial Application

..........................................................................................

.6 ?

Protect Intellectual Property

..............................................................................................................................

2.7 ?

Add Value to Intellectual Property

....................................................................................................................

2.8 ?

Commercialize the Most Promising Discoveries ?

..............................................................................................

2.9 ?

Maximize the Value of the Public Investment in Research ...............................................................................

Assessment

Universities' Innovation Performance

..........................................................................................

4.0 Barriers Preventing Canadian Universities from Achieving Their Full Potential

............................................

4.1 ?

Absence of a Coherent University Intellectual Property Policy ........................................................................

4. 1.1

Lost Commercialization Opportunities ....................................................................................................

.1.2 ?

Leaked Benefits

.......................................................................................................................................

.1.3 ?

Litigation ?

..................................................................................................................................................

4.1.4 ?

Limiting Innovative Capacity of Canadian Firms ...................................................................................

.1.5 ?

Conclusions

..............................................................................................................................................

4.2

Underdeveloped University Commercialization Capacity ?

................................................................................ 21

4.3 ?

Uncompetitive Business Conditions

..................................................................................................................

.3.1 ?

Personal Taxation

.....................................................................................................................................

4.3.2 ?

Tax Treatment of Employee Share Options ?

............................................................................................ 22

4.3.3

RRSP Investment Restrictions

................................................................................................................. 22

4.4 ?

Low Levels of Investment in University Research

...........................................................................................

4.4.1 ?

Federal Support for University Research

................................................................................................

.4.2 ?

Indirect Cost of Research

........................................................................................................................

Pcpoit of the Expert Panel on the Conunercializalion of University Research ?

VII

5.0 National Vision ?

6.0 ?

Action Plan for the 21st Century

........................................................................................................................... 25

6.1 ?

Develop a University Intellectual Property Policy Framework

........................................................................ 25

6.2 ?

Strengthen Universities' Commercialization Capacity ......................................................................................

6.3 ?

Develop the Commercialization Skills Base

.....................................................................................................

6.4 ?

Establish Competitive Business Conditions

......................................................................................................

.5 ?

Fuel the Innovation Pipeline ?

..............................................................................................................................

Implementation Considerations

.............................................................................................................................

8.0 ?

Measuring Progress and Maintaining Momentum

..............................................................................................

9.0

Conclusions ?

..............................................................................................................................................................

References

.......................................................................................................................................................................

Annex

Background Reports

........................................................................................................................................

Annex 2:

Definition of Key Terms ?

.................................................................................................................................

r•

Annex 3:

Considerations in Negotiating Commercialization Agreements .....................................................................

Annex 4:

National Data Collection Requirements

.........................................................................................................

Annex

Comparative Analysis of Canada-U.S. Commercialization Performance ......................................................

Annex 6:

Detailed Tax Recommendations - Employee Share Options .........................................................................

Annex

Seed Stage Sources of Capital

........................................................................................................................

Annex 8: Comparison of the Proposed Canadian Intellectual Property Policy

andthe U.S. Bayh-Dole Act ............................................................................................................................

Annex 9: Justification for the Proposed Level of Support for University

Commercialization Offices ..............................................................................................................................

VIII

Public Investments in University Qesearek Peapm8 the Benefits

Executive ()llfllmary ?

In this report the term intellectual property will mean

the following:

anada's standard of living has been slipping relative

to the standard of living in the United States and other

countries over the last two decades. There are many reasons

for this, and many different measures will have to be taken

to reverse this trend.

This report is about one such measure. It proposes actions

that will greatly increase Canada's ability to deploy

the intellectual property created in university research

to contribute to wealth creation in the Canadian economy.

The proposed actions necessarily focus on university

research supported with federal funds, but it is our hope

that research supported with public funds from all other

sources will be accorded the same treatment.

Universities are a very important element of Canada's

innovation system. Their most visible contribution is

in the education of people who acquire the knowledge

and skills that enable them to contribute to their society

in a great many ways. However, their contribution as

centres of research is very important as well. The recom-

mendations in this report are intended to strengthen the

role of university research in Canada's innovation system.

intellectual property (IP): an invention, discovery

or new idea that the legal entity responsible for

commercialization has decided to protect for possible

commercial gain, based on the disclosure of the

creator. This definition is intended to exclude journal

articles and scholarly books, and IP created without

federal funding.

This definition makes it very clear that we are interested

only in those forms of intellectual property that can be

protected for possible commercialization. It also underlines

the fact that it is up to the creator to decide whether

an invention, discovery or new idea is to be treated as IR

For example, a researcher who immediately publishes

a discovery has made the decision that it is not to be treated

IP.

Our recommendations do not infringe on researchers'

rights to publish.

The Main Directioan

Everything that follows begins with the people who create

inventions, discoveries or new ideas in the course of their

research at Canadian universities. We are acutely aware

that their time is a scarce and precious resource.

:-' ?

•'

The Focua and the Termino!oy

This report is focussed on just one element of the contri-

bution of universities to Canada's innovation system,

but one that we consider very important. It deals with

the process for developing new goods and services for

the market from those inventions and discoveries made

by university researchers that are judged to have the poten-

tial for commercialization. We call this research-based

innovation originating in the universities.

When we use the term "innovation" in this report we mean

the following:

innovation:

the process of bringing new goods

and services to market, or the result of that process.

We will also refer to intellectual property resulting

from federally funded research. We will explicitly exclude

intellectual property created without federal funding,

which should be left to the universities and the private

sector to negotiate on a case-by-case basis. We will also

explicitly not include in that term either journal articles

or scholarly books written by university authors. There are

established traditions and practices for dealing with scholarly

publications, and it is not our intention to recommend

that they be changed in any way.

The overriding objective of our recommendations is to

increase the return to Canada on the investment in univer-

sity research made by Canadian taxpayers. That goal is

not in dispute. We believe that research-based innovation

originating in universities has the potential to contribute

much more than it does now in a form that is very impor-

tant to all Canadians, namely well-paying new jobs.

We understand that most university researchers are not

entrepreneurs, and that they do not want to learn how

to become entrepreneurs in order to take a promising inven-

tion or discovery to market. They are skilled at research,

and they believe that their time is used better in doing more

research than in learning how to start a business. But

we also understand that there may be some researchers

who have the aptitude and taste for entrepreneurship,

and who might be the best people to commercialize their

own inventions. Our recommendations address the needs

of both groups.

At issue is the commercialization of discoveries and

inventions that are the result of research in Canada's

universities. It is understood that a great deal of university

research is basic research whose goals have nothing to

do with the development of marketable products. Provided

that basic research meets high standards of excellence,

it is valuable in many ways.

the present context, it

builds the foundation for important future innovations

whose shape cannot even be foreseen today. And on the

flip side of that same coin, it may show that certain lines

Report of the Fxpeii Panel on the Commercialization of Unwertity Research

S ,

of industrial research and development (R&D) would

be dead ends, thereby saving industry a great deal of time

and money. However, publicly funded university research

also produces discoveries and inventions that immediately

show the potential to be developed into new goods and

services for the market Enhancing Canada's ability to obtain

economic benefit from such results is the objective of the

actions recommended in this report.

Canadian universities also engage in a great deal of pro-

ject research in partnership with industry. The economic

benefit from that research is more easily obtained, since

the industrial partners share in the funding of the work

in the clear expectation of a significant economic return.

Innovation resulting from project research takes place

through established channels, and is assisted by the even-

teal employment of research students who were engaged

in the projects. This process is working so well across the

country and in all

sectors of the economy that it should be

considered a national success. For this reason, we are not

preoccupied with project research in this report, although

some of our recommendations will have an impact in

this area.

Let us now be very clear in stating the main goal of the

proposed actions. It is to increase wealth citation in Canada;

it is not primarily to produce new revenue streams for

universities. The experience in the United States, which

we use as a benchmark in this report, is that in the vast

majority of research universities the revenues from commer-

cializing research constitute a small addition to university

budgets, generally well below 1 percent. It would not be

realistic to expect much more in Canada. That amount

of incremental income might be sufficient to provide useful

incentives to the researchers involved, and to pay some

of the cost of managing IP, but it could not be counted

on to relieve the financial pressures that Canadian univer-

sities face today. Discoveries that produce financial bonanzas

are so rare that policies designed to pursue them would

almost always lead to failure.

However, if policies are designed to make university

research the source of new value-added activities in the

Canadian economy, we believe that the potential benefit

is much greater. Canadian universities are a very important

element of our national capacity for innovation. They

perform 21 percent' of all Canadian R&D, account for

31 percent' of Canada's R&D personnel, generate

per-

cent' of Canadian scientific publications, conduct research

of world-class quality, and train many highly skilled people

who can function at the leading edge of important tech-

nologies. That all adds up to a great potential to play a

crucial role in the transformation of Canada's economy

into one that thrives on innovation and value-added activi-

ties in all sectors. In return, greater prosperity in the

nation, achieved with a visible contribution by universities,

could be expected to produce increased public support

for these institutions.

Pecomnienda1ion

Our first recommendation makes explicit the expectation

that if any commercial activity is created from the results

of research supported by the Canadian public, that com-

mercial activity must bring a benefit to Canada. Presently,

university researchers are under no obligation to act in

the national interest if they decide to commercialize IP

created with federal funding.

It would be best if Canadian companies had the capacity

to receive and make good use of all research-based inno-

vations that come out of the universities. The benefit

to Canada would come in obvious ways from the success

of these companies. The Canadian receptor capacity is

substantial, but not as extensive as it needs to be.

One way of increasing that capacity is to create spin-off

companies to exploit university discoveries. That is being

done with remarkable success in many cases, but more

needs to be done.

However, in some markets it may not be practical to create

Canadian spin-offs. Some technologies might best be

brought to market through multinational enterprises that

have Canadian operations. In such cases, negotiations

to use IP to create a world product mandate for the Canadian

operation would be a good outcome for Canada. At the

very least, a significant number of value-added jobs based

on the innovation should be created in Canada.

Benefit to Canada can also result if the IP attracts new

foreign direct investment (FDI) to Canada. Federal and

provincial governments have programs in place to attract

FDI, and they should be called on for assistance.

One of the least desirable options is to license IP to

a foreign company, with all the jobs and profits realized

outside Canada, and to receive only a flow of licence

revenue in return - if the licensee, in fact, decides to market

the technology.

Statistics Canada. Estimates of Canadian Research and Development Expenditures (GERD) Canada, 1987-1998 and by Province 1987.1996.

(Service Bulletin. Cat. No. 88

.001-XIB,

Vol. 22, No. 5. Ottawa, Canada, 1998).

Statistics Canada, Estimates of Research and Development Personnel in Canada, 1979-1995. (Science and Technology Working Paper

No. ST

97-14, Ottawa, Canada, 1998).

Benoit Godin, Yves Gingras and Louis Davignon, Knowledge Flows in Canada as Measured by Bibliometncs (Working Paper prepared

for Statistics Canada, Cat. No. 88F0006XPB No. 10, 1998).

Public Investments in University Desearck Ueaping the benefits

• ?

The worst option, of course, is to do nothing and lose

the potential benefit to Canada entirely.

The federal government should require an

explicit com,nitment from all recipients offederal

research funding that they will obtain the greatest

possible benefit to Canada, whenever the results

oftheirfederally funded research are used

for commercial gain.

Our second recommendation urges the federal government

to develop a coherent IP policy framework. The proposed

policy should apply to all university researchers that receive

federal research funding, regardless of their position or

affiliation. That is to say, the policy should apply to faculty

and students alike, including researchers working for

universities and their affiliated hospitals, research institutes

and Networks of Centres of Excellence (NCEs).

Canadian- universities are no strangers to innovation based

on research results. Many good practices have been devel-

oped and many successes have been achieved. What has

been achieved in research-based innovation in Canada,

has been done in an environment of laissez-faire by the

federal funding agencies, under varied and inconsistent

university policies and practices, and under many different

organizational arrangements. Rarely has innovation been

treated as a mainstream university function, and the impor-

tance attached to it varies greatly among the universities.

Moreover, university researchers cannot generally be

certain that their efforts in innovation will be supported

or recognized by the university in the same way as tradi-

tional academic work. Our recommendation addresses

these problems.

The ownership of IP is an important and controversial

issue. Presently there are a number of approaches

to determining IP ownership:

in many universities the creator(s) own IP from

federally funded research and can commercialize

it how they wish, be they faculty, graduate student

•

or post doctoral fellow;

in other cases the creator(s) own the IP but are

required to assign it to the university to manage

the commercialization process; and

in yet other cases, universities own EP and manage

the commercialization process.

Advocates of each approach can point to successes.

However, some of the people who have the most experi-

ence commercializing the results of research have pointed

out lost opportunities and other problems that are caused

when creators commercialize research results.

The Panel strongly believes that university ownership

of IP (either in the first instance or through assignment)

would greatly increase the number of commercialization

opportunities emanating from university-based research.

The Panel also believes that the benefits arising from

these commercialization opportunities must be shared

with the creator(s) of the IP. University researchers do not

need to own IP in order to benefit from successful

commercialization undertakings.

I ?

Deport of the Expert Panel on the Commercialization of University Qesearch

In order for researchers to qualify for federal

research funding and universities to qua!

jfy

for

commercialization support, universities (and their

affiliated research hospitals and research centres)

should be required to adopt policies consistent

with the principles set out below:

Universities (and their affiliated organizations)

must recognize the importance

research.

based innovation as a mainstream activity

by identifying "innovation" as their fourth

mission, in addition to teaching, research

and community service; alternatively, they

might explicitly identify innovation as an

element of

the three missions, as appropriate.

All IP with commercial potential (excluding

books and journal articles) that was sup-

ported

whole or in part with federal funding,

must be promptly disclosed by the researcher

to the university. Researchers who do not

comply will be denied access to fuure federal

research funding.

All IP with commercial potential (excluding

books and journal articles) that was sup-

ported in whole or in part with federal funding,

must be disclosed annually by the univer-

sity to the federal government, provided

that such information is not subject to the

Information

om research that was

supported in any part by federal funding

is owned either by the university or by

the researcher(s) who created it. In those

universities where the ownership

such

IP resides with the researcher(s), the IP must

be assigned to the university for possible

commercialization (subject to appropriate

sharing

benefits - see item 9).

Universities (and their affiliated organizations)

must make reasonable efforts to commer-

cialize IP that they have found to have inno-

vative potential. They must make reasonable

efforts to maximize the benefits to Canada

by deploying IP in the interest

generating

increased wealth for Canada.

Universities can assign IP back to the cre-

ator under the following conditions: when

the university has decided not to pursue

commercialization; when the university has

been unsuccessful in commercializing the

discovery within a reasonable time frame;

or when the university and the IP creator

both agree that the creator can maximize

benefits to Canada without undue conflict

interest.

7 Universities can assign IP tofinns when this

is considered necessary to ensure the success

the innovation.

Universities can assign IP to NCEs, affiliated

research hospitals and affiliated research

institutes when the university and the assignee

both agree that the assignee can maximize

benefits to Canada without undue conflict

interest.

Universities (and their affiliated organizations)

must provide incentives to encourage their

faculty,

staff

and students engaged in research

to create JR. These incentives must include

appropriate sharing

net benefits from

successful commercial undertakings whether

in the form of

equity or licensing income.

These incentives must also include appro-

priate recognition of

innovative researchers

in tenure and promotion policies.

10.

Universities (and their affiliated organizations)

will encourage the participation

of small

and medium-sized enterprises and, where

appropriate, support the creation

of spin-off

companies in commercializing publicly funded

research. Small businesses, including local

spin-off companies, will be given priority

to license innovations, dependent on finding

appropriate businesses and equitable terms.

11.

Universities (and their affiliated organizations)

must make reasonable efforts to license

or assign innovations locally or nationally.

Whenever possible, licensing should be

to a Canadian company or a Canadian sub-

sidiary

aforeign company. Commitments to

Canadian value-added must be obtained when

foreign licensing is the only feasible route.

12.

The university must designate a senior officer

responsible for innovation arising f

om its

research, and establish an organizational

capacity to carry out its innovation function.

4 ?

Public Investments in Univeraity Qeearch Peaping the Benefits

Universities will likely require two years to modify their

existing policies, or create appropriate policies in cases

where none exist.

The proposed policy framework for managing federally

funded IP is a necessary, but not sufficient, condition

for success. Additional funding is also required to help

universities strengthen their capacity to take advantage

of an improved IP management regime.

We recognize that many university researchers are frus-

trated with the level of support presently available to them

by university commercialization offices. if they are expected

to assign EP to universities, it is critical that these offices

be properly resourced, and staffed with people who are

able to manage the innovation process efficiently and

effectively. We need to develop world-class commercial-

ization offices that generate high returns to Canada,

and in the process generate higher returns to university

researchers than they could achieve on their own. The Panel

is convinced that once these offices create wealth among

researchers, the culture within Canadian universities will

change quickly and innovation will become a real priority.

The federal government should invest new and

additional resources to strengthen the commer-

cialization capacity

universities in an amount

equal to 5 percent

its investment in university

research. This new funding is to be invested in the

commercialization function and must be addi-

tional to the university's current spending. To be

eligible for commercialization grants, universities

should be required to adopt policies consistent with

federal policy requirements (Recommendation #2),

submit annual reports of

their innovation per-

formance and submit annually updated innovation

strategies to the federal Granting Councils. These

reports should reflect the shared priorities and

performance

the university and its affiliated

research organizations.

Money alone, however, will not enable university com-

mercialization offices to achieve their full potential.

Canada has a skills challenge that must also be addressed.

We do not have an adequate pool of people with the skills

required to commercialize research. The report offers

specific proposals to develop the talent that university

commercialization offices require. Part of the solution

is to provide opportunities for existing staff to network

and share best practices. A national networking forum

might also enable universities to more readily identify

opportunities for bundling

IP.

With the new funding proposed in Recommenda-

tion #3, universities should make the commitment

to use their educational resources to develop the

people with the necessary entrepreneurial, busi-

ness and technical skills required to increase

the number of

successful innovations created

from the results of

university research. The federal

Granting Councils should add to this effort by

helping to create national and regional networks

to share knowledge, expertise and best practices

in this area.

Successful innovations based on university discoveries

or inventions may often require the formation of spin-off

companies. This is much more likely when the innova-

tion arises from basic research than when the innovation

arises from project research conducted in partnership with

an existing company. A spin-off requires new investments

at a level far greater than the original public investment

in the research

. A spin-off also requires the commitment

of very skilled people aside from the researchers, most

notably entrepreneurs and managers who are experienced

in building research-based companies.

It is also important that business conditions support

the growth of established companies that form strategic

alliances with universities since most technology

transfers involve existing companies.

Without supportive business conditions, Canada is very

unlikely to reap the benefits of discoveries and inventions

arising from university research funded by the public.

If any innovations are produced from them, they will

probably be produced somewhere else.

The frderal Department

Finance is encouraged

to undertake a wholesale review

Canadian

tax policy to ensure that it does not impede and,

where possible, supports research-based

innovation.

(Specific proposals are contained in the report.)

To increase the potential of Canadian universities to

contribute to our economy through research-based inno-

vation, the federal and provincial governments should

work together to increase the time that university faculty

have for research, and to improve the tools with which

they work. This involves building further on the measures

taken by the Government of Canada in the last three

federal budgets to increase research funding. It also requires

L. '.

Qeport of the Expert Panel on the Commercialization of University Qescarch

• .. . a concerted collaboration of the federal and provincial

governments to deal with the indirect costs of research

and with the basic funding of the universities that is the

biggest factor in determining the workload pressures

on faculty and staff.

2om(datidr:

• ?

Governments should increase their investment

in university research. They should also resolve,?

•

on an urgent basis, situations where universi

ties have difficulties conducting research when

•

federal funding is provided, but when limited

- ?

provincial support is available for the asso-

ciated indirect costs.

•

None of our proposals, on their own, will position Canada

to maximize returns on its investment in research. Taken

- ?

together, however, we believe that the recommendations

contained herein would have a dramatic effect in fuelling

¼. • •

the Canadian economy and generating social and eco-

nomic benefits for years to come.

Public lnve&tinciita in Univcraity Qeaeardi 12eapin5 the Benefit