Business Enterprise R&D
- Eight provinces earn “D–” grades, ranking at the bottom of the pack on business enterprise R&D.
- Quebec is the top-ranked Canadian province, but it manages to earn only a “C” and is outperformed by 10 of the 16 international peers.
- While business R&D has been rising among international peers and the OECD more broadly, it has been declining in Canada for nearly 15 years.
Why is business R&D important to innovation?
Business enterprise research and development (BERD) is an important indicator of business commitment to innovation and a key input into many high-value-added types of innovation. Although R&D is not a direct measure of innovation performance—because such investments can be poorly selected and valuable results are not guaranteed—the development of new or improved products, processes, and services frequently requires R&D efforts. R&D “signals a firm’s commitment to the systematic generation and commercial application of new ideas,” according to the Council of Canadian Academies’ Expert Panel on Business Innovation.1 Indeed, R&D indicates that a firm is serious about exploring or generating new ideas with a view to developing those ideas into new or improved products, services, or processes.
Moreover, research shows that R&D is associated with productivity and GDP growth. A multi-country study by the OECD found that a “sustained increase of 0.1 percentage points in a nation’s BERD to GDP ratio would eventually translate to a 1.2 per cent higher GDP per capita, other things being equal.”2 Thus, BERD provides a useful, albeit partial and imperfect, proxy for business innovation performance.
How do the provinces rank relative to international peers?
The provinces get very poor grades for BERD relative to international peers. Eight provinces earn “D–” grades and take up the bottom positions in the overall rankings. BERD as a share of GDP is only 0.7 per cent in B.C.—less than one-third the 2.64 per cent spent by firms in top-performing Japan. In Nova Scotia, BERD amounts to a mere 0.21 per cent of GDP—less than one-twelfth of Japan’s BERD intensity. Japan is joined by Finland (2.28 per cent) and Sweden (2.28 per cent) as the only peers to receive “A” grades on this indicator.
Quebec outperforms all provinces, with BERD of 1.31 per cent of GDP, but trails 10 international peers and spends less than half of what Japanese firms spend as a share of GDP. This performance earns Quebec a “C” grade. Ontario gets a “D” for a BERD intensity of 1.07 per cent of GDP and ranks above only the U.K. (1.05 per cent) and Norway (0.87 per cent) among the international peers.
Since the previous report card, Canada has fallen from second-last to dead-last among international peers. Despite already being a “D” performer since the 1980s, Canada’s BERD continues to decline both as a share of GDP and in absolute terms—from $15.6 billion (0.93 per cent of GDP) in 2011 to $15.4 billion (0.82 per cent of GDP) in 2013. To match the peer average of 1.65 per cent and make the top 10 among international peers, Canada would need to double its BERD intensity. Even then, Canada would achieve only a “C.”
How do the provinces rank relative to each other?
Quebec is the highest-ranking province with a grade of “C,” followed by Ontario with a “D.” Both provinces have BERD above 1 per cent of GDP. B.C. (0.7 per cent) and Alberta (0.62 per cent) rank third and fourth, respectively, among provinces, but still achieve only “D–” grades relative to international peers. Manitoba, Saskatchewan, and the four Atlantic provinces also get “D–” grades, with BERD in all six of those provinces sitting below 0.5 per cent of GDP.
How has provincial performance changed over time?
Between 1991 and 2001, BERD as a share of GDP increased in every province except New Brunswick and Alberta, where it declined only marginally. In 2001, Quebec (1.74 per cent) and Ontario (1.7 per cent) had BERD that ranked fourth and fifth, respectively, among international peers.
For one or two years following the dot-com crash in 2001, BERD dropped in most provinces and international peer countries. Since then, however, while international BERD has recovered and gradually climbed, it has plummeted in most provinces and Canada as a whole.
Between 2002 and 2012, BERD as a share of GDP fell in seven provinces. Quebec and Ontario each lost more than a third of a per cent, pushing those provinces into the middle of the international rankings. Only Newfoundland and Labrador, P.E.I., and Alberta had increases in BERD, but given their low starting points and strong growth among international peers, that growth has not been enough to lift them from the back of the class.
Why do provinces lag on BERD?
Many explanations for Canada’s weak performance on BERD have been examined and discussed over the years. Canada’s economy is weighted more toward resource-based companies than are the economies of many peers, and the resource sector tends to perform less R&D than other sectors. Notably, the economies of the top BERD provinces, Quebec and Ontario, are weighted much more to manufacturing than to mining and to oil and gas extraction. By contrast, in provinces where mining and oil and gas extraction constitute a large share of the economy—particularly in Newfoundland and Labrador, Alberta, and Saskatchewan—BERD intensity is very low.3
However, analysis conducted by the Council of Canadian Academies’ Expert Panel on Business Innovation found that “generally lower Canadian R&D spending within the same sectors in both the United States and Canada accounts for a greater proportion of the gap [in BERD between the two countries]…than does Canada’s adverse sector mix—i.e., the greater weight in Canada’s economy of resource-related and other activities that have inherently low R&D spending.”4 In fact, compared with OECD averages, Canadian R&D intensity is better in only 7 of 23 sectors, and substantially better in only 4 of 23 sectors.5 With few exceptions, Canadian businesses across sectors have lower BERD intensity than their OECD peers.
A large part of the explanation for Canada’s falling BERD intensity is related to the declining health of the manufacturing sector and the weak R&D intensity of the sectors filling the gap. Since 2000, R&D intensity in Canada’s manufacturing sector has averaged 4.2 per cent as a share of GDP—far higher than the 0.08 per cent in construction, 0.67 per cent in mining and oil and gas, or 0.82 per cent in the services sector. When manufacturing made up nearly 20 per cent of the business sector as a whole in 2000, its higher R&D intensity elevated the overall Canadian BERD performance. But given that manufacturing’s share of the business sector fell to 13 per cent by 2014 while its R&D intensity slid from 4.3 to 3.9 per cent, its past tendency to lift Canada’s overall BERD rates has weakened. That share was replaced by growth in construction and services, both of which are very weak R&D spenders. In short, the decline of one of Canada’s only high R&D sectors has exposed the weakness of other sectors.
Which companies are spending?
Just 12 companies account for roughly half of all BERD in Canada. In 2013, the top 10 business R&D spenders accounted for about $7.2 billion—or 46 per cent—of Canada’s $15.5 billion total BERD.6 That proportion reaches 49 per cent when the 11th and 12th top spenders are added to the total. In fact, the top three R&D spenders in 2013—Bombardier Inc. ($2.2 billion), BlackBerry Ltd. ($1.3 billion), and Magna International Inc. ($577 million)—together account for more than a quarter of all BERD.7
In Quebec, R&D spending by Bombardier, BCE Inc., and Pratt & Whitney Canada Corp. constituted a very large share (nearly 60 per cent) of overall BERD in 2013. In Ontario, spending by BlackBerry, Magna International, and IBM made up about one-third of overall BERD in 2013.
That BERD in Canada depends so heavily on a few firms, while persistently lagging international peers, raises concern about the resiliency of this key element of Canada’s innovation ecosystem.
How can the provinces improve on BERD?
In part, the BERD performance of the provinces and Canada as a whole is determined by structural features of the economy. Until manufacturing reclaims a larger share of the economy and exerts its higher R&D intensity impact on aggregate BERD, Canada’s performance will continue to lag. But while a manufacturing recovery may be good for many reasons, hoping for a recovery just to see an improvement in BERD risks losing sight of the larger issue, which is that nearly all other sectors in the Canadian economy are weak on R&D relative to international peers. There is need and room for improvement across the economy, whether or not manufacturing recovers.
Faced with increasing competition and persistent demographic and economic challenges, business leaders in a range of sectors may be waking up to the fact that the risks of not conducting R&D are beginning to outweigh the risks of doing so. Gradually introducing more competition—for example, by signing new trade agreements and eliminating lingering protectionist measures—while providing focused R&D incentives to key sectors of the economy may help boost R&D activity by Canadian businesses.
There may be limited advantages to simply increasing the amount of government support for BERD. In fact, the type of support may matter more than the amount of funding. Indeed, remarkably, Canadian governments’ support for BERD as a share of GDP (0.21 per cent), is higher than nine of the international peers that outrank Canada in the BERD report card—including the top four peers, Japan (0.11 per cent), Finland (0.07 per cent), Sweden (0.11 per cent), and Switzerland (0.02 per cent).
Of the four top international jurisdictions on the BERD report card, three provide no indirect support through tax incentives at all for BERD. Their support for BERD is entirely direct. Other leading jurisdictions also lean toward direct support, including 5th-place Austria (58 per cent direct), 7th-place United States (77 per cent direct) and 8th-place Germany (100 per cent direct), while 6th-place Denmark splits its support evenly between direct and indirect measures.
By contrast, only 14 per cent of Canadian government support for BERD is provided directly, while nearly 86 per cent is provided indirectly through tax incentives.
First-place Japan follows the Canadian pattern (27 per cent direct, 83 per cent indirect support), but this is the exception rather than the prevailing pattern for most leading countries. Indeed, with nearly all leading jurisdictions providing largely or entirely direct support, it is worth exploring whether a shift in Canadian policy to direct support may be warranted.
Nonetheless, BERD improves only when businesses start spending more, so actions to address Canada’s BERD weakness will need to look beyond policy and toward the factors shaping business decision-making in each province.