The newspaper headline 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?

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 Organisation for Economic Development and Co-operation (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. Also, 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, oilsands plants, refineries, pulp mills, etc.)  that have lifetimes measured in decades, and these are slow to change.

The second reason is that resource companies 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.

In 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, which spent almost $2 billion in 2024, about 27 percent of revenue. They must do this to keep competitive in a hyper-competitive business.

The biggest R&D spenders in the US are the so-called Magnificent Seven (Alphabet, Amazon, Meta, Google, Apple, Nvidia and Tesla), all of whom compete in hyper competitive fast-changing markets.

But does it matter to Canada?

R&D is an input rather than an output. What really matters in the economy is the standard of living, which is an outcome measure, so not directly related to R&D.

Consider Norway, which spends about the same as Canada on R&D, about 1.8 percent 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 percent 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 six percent 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

What could Canada do?

• Canada could increase its standard of living with the current level of R&D spending by raising its labour productivity. This would likely involve several measures such as increased capital spending, reduced regulatory burden, appropriate immigration targets, and improved infrastructure for exporting commodities. It would also involve Canadian firms adopting more IT (including AI) and investing more in machinery and equipment.
• If Canada were to increase its R&D spending, there is no guarantee that its standard of living would rise – look at Israel.
• 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, health care and renewable energy. These 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 the country could increase labour productivity.

Spending more on R&D in and of itself does not guarantee an increase in standard of living.

Canada playing a bigger role in high-growth 21^st century industries would increase growth and, as a by-product, increase R&D spending.

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