Indicators and targets: Growing business investment in research and development

From: Innovation, Science and Economic Development Canada

 Jobs and innovation: Tracking progress and results

Research and development (R&D) plays a critical role in the innovation process. The important relationship between R&D, innovation and economic growth is widely recognized, making gross expenditure on R&D (GERD) one of the most important indicators of innovation and for becoming a more competitive economy. GERD is the sum of R&D expenditures in four economic sectors: businesses, universities, governments and non-profit organizations. GERD includes R&D funded from abroad.

Canada's R&D intensity (GERD as percentage of GDP) has been below the OECD average over two decades (Figure 6.1) mainly driven by low business expenditure on R&D (BERD).

According to the Council of Canadian Academies, BERD "signal a firm's commitment to the systematic generation and commercial application of new ideas". Since 2014, BERD expenditures have generally been flat in Canada, at about $18 billion per year (Figure 6.2). While the business sector carries out, on average, 71% of the R&D undertaken in OECD countries, in Canada, this share is smaller, with industry accounting for only 52% of all Canadian R&D spending (OECD, 2018).

In 2016, Canada ranked 22nd in the OECD by BERD intensity, measured as BERD as a percentage of GDP (Figure 6.3). Canada's BERD intensity declined from its peak of 1.25% of GDP in 2001 to 0.89% in 2016, approximately half of the OECD average of 1.64%. BERD intensity in the U.S. (2.04% of GDP) is more than twice as high as in Canada.

Globally, governments use a variety of tools to encourage businesses to perform R&D. In 2018, 30 of the 36 OECD countries used fiscal incentives such as tax credits (OECD, 2018). Canada provides more overall government support to business R&D than the average OECD country, equivalent to 0.18% of GDP in 2016. R&D tax credits accounted for three-quarters of that support.

The Canadian Government also supports BERD more directly through grants, contributions and procurement. Several flagship initiatives that support BERD have been introduced or expanded through the Innovation and Skills Plan:

• Innovation Superclusters Initiative illustrates effectively the power of partnerships and collaboration in driving innovation and competitiveness by bringing together a long list of businesses, post-secondary institutions, and other participants.
• National Research Council-Industrial Research Assistance Program (NRC-IRAP) is delivering new initiatives that expand its current networks, removing administrative barriers to R&D collaboration, and providing companies with the innovation support they need at the right time.
• Regional Development Agencies (RDAs) are creating, growing and nurturing inclusive regional ecosystems that support business needs and foster an entrepreneurial environment conducive to innovation, growth, and competitiveness, and
• Strategic Innovation Fund (SIF) provides repayable and non-repayable contributions to firms across all of Canada's industrial and technology sectors.

Higher education expenditure on research and development (HERD) is another important component of GERD. HERD has an important function in the higher education system and is supported by all levels of government, business, non-profit organizations and foreign institutions. In 2016, Canada spent $11 billion on HERD (US dollars), placing it in the top 10 of countries in OECD for HERD as a percentage of GDP (Figure 6.4). In Budget 2018, the government allocated an additional $4 billion to encourage R&D in the higher education sector and provided researchers with access to state-of-the-art equipment and facilities. These investments will help Canada develop, attract and retain world-class R&D personnel, an area in which Canada has underperformed in comparison to its OECD counterparts. Canada ranked 21st out of 30 OECD countries in 2017 by the total number of R&D personnel per 1,000 employed (OECD, 2018).