Large industrial sub-sectors pull down Canadian business R&D intensity

Canada’s low business R&D intensity is partly caused by a smaller share of research-intensive industries relative to the US and the low research intensity of the motor vehicles industry and portions of the service sector, according to a new Finance Canada paper. The study zeroes in on what’s considered to be the major weakness in Canada’s innovation system and effectively dispels the traditional explanations for low business R&D intensity — the high degree of foreign ownership, a large natural resource sector and the comparatively small scale of Canadian firms.

Entitled Canada’s Low Business R&D Intensity: the Role of Industry Composition, the paper was written by Aled an Iorwerth, a coordinator in the structural analysis branch of Finance Canada. It suggests that policy makers should explore why firms do not have a greater demand for R&D when working to develop supply side measures to increase R&D spending.

Using mostly OECD data for 1999, the study examines previous research by the OECD, Conference Board of Canada, the federal government and individuals such as Peter Nicholson, John de la Mothe, Andrew Sharpe and others.

“The available material on the state of research in Canada yields parts of the puzzle but no comprehensive and detailed picture exists, writes ab Iorwerth. “There has not been a thorough and wide-ranging investigation to explain low aggregate business R&D intensity.”

MANUFACTURING & SERVICES INDUSTRIES ARE KEY

The report pays particular attention to the services and manufacturing industries as they constitute the largest sectors of the Canadian economy, accounting for 66% and 20% of the economy respectively.

By digging into these sectors, the paper examines how low R&D intensity in certain sub-sectors drag down the R&D intensity of the sectors as a whole.

In the services sector, sub-sectors with higher R&D intensity tend to account for a smaller percentage of gross domestic product, whereas large sub-sectors such as wholesale and retail trade have a lower R&D intensity than their US counterparts. As a result, services R&D intensity in Canada is 0.48%, compared to 0.82% in the US.

In manufacturing, Canada has relatively high R&D intensity in many sub-sectors, such as office and computer machinery, pharmaceuticals and radio, television and communication equipment. But lower R&D intensity in the two largest sub-sectors — motor vehicles and wood and paper — pulls down the sector total. In Canada, manufacturing has an R&D intensity of 3.65%, compared to 8.27% in the US.

“Looking at the distribution of research intensities within manufacturing, it is clear that R&D intensity in motor vehicles in Canada is particularly low,” states the paper. “This factor is mostly responsible for the lower average research intensity in manufacturing.”

FOREIGN OWNERSHIP

The question of foreign ownership’s impact on R&D intensity is also tackled. The paper concludes that there appears to be little correlation.

“Foreign-owned firms have much higher R&D-to-sale intensity in services and at the same time have lower intensity in motor vehicles than do Canadian firms,” it states. “But these are the two industries that mostly account for weak aggregate R&D intensity in Canada. Existing studies on the impact of foreign ownership have failed to examine the effect of detailed industry composition.”

The paper suggests that factors which may have a bearing on research intensity include characteristics particular to specific industries and the degree of scientific or technological advance in each industry.

The paper does not specifically examine the issue of firm size in the Canadian context, referring instead to studies in other countries. The body of research indicates that “there is no robust relationship between firm size and R&D intensity”.

A copy of the paper can be obtained at: www.fin.gc.ca/scripts/Publication_Request/request2_e.asp?doc=wp2005-03e.pdf.

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