1, March 2022

The latest R&D statistics are just out. Here’s what they mean, and what to do about them.

The latest headline numbers from Statistics Canada for R&D spending in Canada are:
2021 (intentions) $40.1 billion, down 1.4%;
2020 (preliminary) $40.6 billion, up 0.7%;
2019 (final) 40.3 billion, up 3.9%.

Before getting into the detail it may be worthwhile reviewing the significance of R&D (technically – gross domestic expenditure on research and development, or GERD). These statistics are often used as an indicator or proxy for innovation. However they are very imperfect indicators of innovation, for a number of reasons. First, they are input measures, not output measures. Second, they cover a multitude of different activities with very different risk/reward levels. For example, one company may be developing a new improved type of yogurt, and another may be working on nuclear fusion, and these have totally different risks, rewards and timelines. Third, several industries innovate in ways that don’t show up in R&D statistics – for example natural resource industries such as the oil sands where tweaking in the field can offer major improvements. Nevertheless, these statistics are widely followed.

International comparison

So how does Canada compare internationally?  The graph below, from the OECD, shows GERD as a percentage of GDP, for Canada, the USA and the OECD average.

Source: OECD, https://data.oecd.org/rd/gross-domestic-spending-on-r-d.htm

This doesn’t look very reassuring for Canada. However it is not that different from the UK and Australia.

Who does R&D in Canada?

Who does the R&D in Canada? The main performers of R&D in 2021 are forecast to be business (52%), higher education (40%) and the Federal government (6%).

The main funders of R&D are: business (43%), higher education (20%), the Federal government (18%) and foreign sources (9%).

How did Alberta do?

In 2019 (latest available provincial data) Alberta did $3.79 Billion of R&D. The main performers of R&D were: business (47%), higher education (45%), the provincial government (4%) and the federal government (3%).

The main funders of R&D were: business (45%), higher education (20%), federal government (15%), the provincial government (10%), and foreign sources (5%).

In terms of R&D as a percentage of GDP, Alberta’s ratio is about 1.3% of the provincial GDP, about two thirds of the corresponding rate for Canada as a whole.

Why is Canada so low?
There are a number of reasons:

  • Canada is a resource based economy and resource companies typically don’t spend much on R&D.
  • Canada has a small number of companies in industries that typically spend the most on R&D, such as pharmaceuticals and high tech companies.
  • Canada has fewer large firms than competitors and these usually spend more on R&D.
  • Canada has relatively few head offices, and there is often a ‘head office effect’ where R&D is performed near the head office. This is related to the fact than many Canadian companies are foreign owned.
  • Offsetting this, Canada’s public sector spends more on R&D than the OECD average.

It is remarkable that the five US companies in the graphic below each spend more money in 2021 than all Canada business combined. (Canada business R&D was about $17.7 USD in 2021)

Source: The Economist January 22, 2022.

Does it matter?

This topic is hotly debated. The main argument usually goes that as the world embarks on the fourth industrial revolution, with a stress on connectivity, artificial intelligence, robotics, Internet of things, and autonomous vehicles, etc., the economy is becoming more knowledge intensive and so intellectual property and R&D is becoming more and more important. That argument clearly has merit.

However, by conventional economic metrics Canada is doing well.  The table below shows a comparison between selected countries for 2020.

Country GERD as % of GDP (OECD) GDP per capita $US (World Bank)
Israel 4.93 $44,169
South Korea 4.64 $31,632
Sweden 3.39 $52,274
UK 1.76 $41,124
Canada 1.59 $43,258

So there clearly isn’t a linear relationship between R&D spending and GDP per capita.

By quality of life rankings, Canada fares very well. The table below shows the latest quality of life ranking from US New and World report:

Ranking Country
1 Canada
2 Denmark
3. Sweden
4. Norway
5. Switzerland
6. Australia
7. Netherlands
8. Finland
9. Germany
10. New Zealand

Source: https://www.usnews.com/news/best-countries/quality-of-life-rankings

What to do?

Trying to figure out what to do should be based on three ideas:

  • Canada’s low spending on R&D is primarily a business problem. Government spending on R&D is above the OECD average.
  • Low spending by businesses on R&D is part of a pattern of behavious that also includes: low spending on machinery and equipment, low spending on IT, low spending on employee training, and low productivity, all low by comparison with other countries.
  • No CEO spends money on R&D because they want to. They spend money on R&D because the have to in order to remain competive. Amazon spends $60 billion a year on R&D because their business is hyper-competitive and fast moving and if they don’t they will become uncompetitive.

So we can re-phrase the question as follows: How to incentivize companies to spend on R&D?  Clearly incentives like the SRED tax credit are not enough – Canada has among the most generous incentives in the world.

I think the best clue lies in the nature of the Canadian economy. Significant parts of it are oligopolies, with few players and low competitive pressures. Some examples:

  • Three companies dominate telecommunications;
  • Two companies dominate airlines;
  • Five companies dominate banking;
  • Three companies dominate grocery stores;
  • Two companies dominate print media;
  • There are many more examples.

So the best way to increase R&D spending – that will also improve  a host of other factor such as low spending on IT, low employee training, etc.- is to make the economy more competitive. That means more anti-trust enforcement, and updating the  Competition Act (the Canadian government has already announced some small steps in this direction). Even the the Commissioner at the Competition Bureau has noted the decline in competitiveness of the Canadian economy and called for updating the Competition Act to create a more competitive economy.

Do you agree with this approach?

Peter Josty

This blog appeared first at www.thecis.ca