16, December 2025

Does Research and Development really matter?

The headline in the Globe and Mail says it all: “Canada’s research and scientific spending is declining relative to other nations, report says”. The report referred to was the Council of Canadian Academies report on the state of science, technology and innovation in Canada. This was the latest in a long series of reports noting the continued decline of R&D spending in Canada (as a percent of GDP), all with a sense of impending doom. But does R&D really matter for Canada?

Background.

R&D falls into three main categories- Business R&D (BERD), university R&D (HERD) and government R&D (GOVERD). The graphic below shows the changes from 2000 to 2023   compared with the OECD average.

Source:  Canadian Council of Academies, 2025

In terms of economic impact BERD is by far the most important.

HERD is well above the OECD average but both BERD and GOVERD are about half the OECD average.

Why is Canada’s R&D so low?

The main reason is that Canada has a resource-based economy, similar to Australia and Norway, who have similar levels of R&D spending.  So, we have relatively few companies based on fast-changing technology, such as IT, artificial intelligence, software and telecommunications. Secondary reasons are that Canada has many small firms (and fewer large firms) and small firms spend less on R&D than large firms, and Canada has fewer head offices, and much R&D is spent near the head office.

But why do resource companies spend so little on R&D? There are two main reasons. First, their technology base changes relatively slowly. Resource companies tend to have very large capital assets (mines, oil sands plants, refineries, pulp mills, etc.)  that have lifetimes measured in decades, and these are slow to change. The second reason is that they sell commodities that do not need any product development. One barrel of oil is exactly the same as another barrel of oil, plus or minus a small premium or discount for quality.

By contrast, companies whose business is based on fast-changing technology where products or services are constantly changing must spend more on R&D to stay competitive. The company that spends most on R&D in Canada is Shopify (who spent almost $2 billion in 2024, about 27% of revenue.)  They must do this to keep competitive in a hyper competitive business. The biggest R&D spenders in the US are the Magnificent Seven (Alphabet, Amazon, Meta, Google, Apple, Nvidia and Tesla), all of whom compete in hyper competitive fast-changing markets.

 

But does that matter?

R&D is an input rather than an output. What really matters in the economy is the standard of living, that is an outcome measure, so not directly related to R&D. Consider Norway, that spends about the same as Canada on R&D, about 1.8% of GDP, as expected for a resource-based country. However, Norway ranks at the top of the productivity measures as shown in the diagram below, with labour productivity about 50% higher than Canada. Productivity is directly related to standard of living. Now look at Israel, whose R&D spending is the highest in the world at 6% of GDP, more than three times as much as Canada. Its productivity is lower than Canada. So, spending more on R&D is no guarantee of higher productivity.

Source: Canadian Council of Academies report.

So, what to make of this?

  1. Canada could increase its standard of living with the current level of R&D spending by raising its’s labour productivity. This would likely involve several measures such as increased capital spending, reduced regulatory burden, appropriate immigration targets, improved infrastructure for exporting commodities, etc. It would also involve Canadian firms adopting more IT (including AI) and investing more in machinery and equipment.
  2. If Canada were to increase its R&D spending, there is no guarantee that its standard of living would rise – look at Israel.
  3. Canada could use its resource base as a springboard to focus more on high growth markets such as AI and automation, quantum computing, synthetic biology, advanced manufacturing, space industries, healthcare, renewable energy, etc. Those sectors require lots of R&D and would spur growth in future decades.

Conclusion

Canada could raise its standard of living with its current level of R&D spending if we could raise labour productivity. Spending more on R&D in and of itself does not guarantee an increase in standard of living. Playing a bigger role in high growth 21st century industries would increase growth and, as a by-product, increase R&D spending.

 

Peter Josty