Freedom to Operate: The most important economic concept you’ve never heard of
There’s recently (and rightly) been a lot of wailing and gnashing of teeth about the troubling state of Canada’s under-the-hood economic indicators, like productivity growth, and what that means for our standard of living.
As we get back into the swing of things here at Mooseworks, I thought it would be useful to zoom out a bit and look at a critical barrier to scale for the most productive and innovative companies in Canada.
In the 1980s, Canada had a big ‘free trade election’ that free trade ended up winning pretty handily. Soon after that, the Cold War ended with a decisive W for capitalism, and the secular shift to the knowledge-based economy accelerated with the advent of widespread access to computers and the internet.
Canadian economic policy moved away from domestic protectionism and towards integration into international markets. Even as industrial policy makes something of a modern comeback in the realm of clean energy and other subsidies, tariff walls aren’t coming back.
A few conclusions for policymakers flow from that. First, innovative Canadian companies have to compete globally from day one. In a post NAFTA, CETA, CUSMA and CPTPP world, no one gets to really stick to the shallow end of the pool until they feel ready to go deeper.
Second, smart, targeted microeconomic policy is a) mandatoryl and b) has to focus on where value is actually created in the modern economy and where productivity can be increased. State efforts of some kind are essential in a world of competitive subsidies for research, workforce development, and business support. But, and this is especially true as interest rates have climbed, we can’t afford to waste them on strategies that don’t work.
So where is value created? As we discussed in a previous Mooseworks, the answer is increasingly intangible assets like intellectual property, which collectively make up 40% of global investment share per one McKinsey study, and 90% of the value of S&P 500 companies.
The critical thing to understand about intangibles is that they are a negative right. Owning tangible, physical goods is a positive right; you’re allowed to do things with what you own. With intangible assets, they are essentially rights that allow you to legally prohibit others from doing something.
This is why freedom-to-operate (FTO) is such an important concept for Canadian policymakers. FTO is the ability to keep growing in an industry without infringing IP rights of others or paying steep licensing fees. When you’re a Canadian start-up or scale-up looking to scale and expand into a market, you have to be aware of the IP landscape or you could be prohibited, legally, from developing new products and services — especially competing services — because others have claimed the IP rights in that space.
This is especially true in areas like tech and telecoms, where substantial ‘thickets’ have grown up around the interconnected patent portfolios of major players, creating an additional barrier to entry for smaller companies. In a delightfully apt metaphor to fantasy fiction, thickets are also home to dangerous trolls — a common name for non-practicing entities, or companies who own patent portfolios without seeking to commercialize them themselves and instead seek revenues from licensing agreements or legal settlements for infringement — rents, or bridge tolls.
Canadian companies need to have a strong and savvy government in their corner as they export into other markets and create new ones. The historic lack of attention to this dimension of competition created what Canadian researchers Nancy Gallini and Aidan Hollis call a “sell or scale up” dilemma — as Canadian companies get larger, the rational move is often for them to sell out since they don’t have the freedom-to-operate that would allow them to commercialize their innovations in big markets like the US.
It’s a major failure of Canadian innovation policy that the public funding that goes into education and research and early-stage company support too often fails to focus on ownership of intangible assets and strategic enabling of strong, globally competitive Canadian companies. Instead it creates opportunities for American firms to acquire valuable Canadian assets at a fraction of their potential worth when they end up locked out of participating in big markets.
Bolstering Canadian freedom-to-operate which starts with a strong focus on ownership of IP. Moreover, control of data is really a critical market access issue and focusing on enhancing it should be a top priority. Funding the Innovation Asset Collective, whose mandate is to build FTO in Canadian clean tech sector, was avery encouraging start. Announced policies on the horizon, like the orientation towards IP of the Canadian Innovation Corporation, will hopefully help early-stage companies position themselves for growth more successfully.
It’s past time that governments recognized just how critically important it is to get this right.