Peter McGeer

Rethinking our support for R&D

By Peter McGeer

Are Canadians slow learners? It would seem so. Although we have recognized that innovation is the key to growth in our economy, we have not yet learned what the drivers of innovation are. In particular, in Canada we do not understand the relationship between innovation and research. Why can't the policy makers in Canada learn and promote those actions that will effectively foster innovation. Why do they continue to push for the totally ineffective prescription of increased spending on research and development (R&D) as too many constituencies in Canada persist in doing.

In spite of all the contrary evidence, we still have economists, bureaucrats and academics appealing for an increase in spending on R&D as the way to stimulate innovation. Canada has pursued the path of fostering R&D spending for over 35 years. Federal and provincial government programs have focused on subsidizing R&D spending in industry and financing research spending in universities, in the belief that such research spending will lead to a healthy growing economy. In all that time Canada's gross expenditure on R&D, as a percentage of gross national product, has not changed, and our productivity continues to decline.

How did Canada get started on this fruitless path of providing incentives for R&D spending? Well, there is an observed relationship between R&D spending and economic growth, and our policy makers assumed that research was the cause. Unfortunately they got it backwards, economic growth through innovation is the cause, and research is the effect.

In the early 1990s, the Science Council of Canada carried out a study seeking to understand how Canada might stimulate innovation and research spending in various sectors of the Canadian economy. The study revealed that sectors relying on the sale of commodity products (mining, metals, polymers, etc), found competitive advantage through cost reduction. In these industries, innovation is limited to squeezing the last penny out of production, sales and marketing expenses. Research can contribute to such an exercise only to a limited degree and is frequently 1%, or less, of sales. Canada's economy is largely based on commodities, and this is why the Auditor General has stated that our generous R&D tax incentive program is generating relatively modest amounts of R&D.

On the other hand, in sectors where new products are continually displacing old, such as telecommunications and pharmaceuticals, spending on research may run as high as 20% of sales. Companies in these fields know that they must innovate and bring new products to market, and that R&D is a prime way to support such activities. Where a company, or indeed a country, must innovate to survive, that innovation is supported by healthy spending on R&D.

Other evidence may be found in a study conducted by the University of Cincinnati, in which researchers were seeking the source of ideas for product innovation in a number of companies. They found that more than 80% of the suggestions leading to successful product innovation came from customers. In other words, innovation is primarily driven by customer needs and desires. Companies do the research to go from idea to concept to prototype to commercial product, in the expectation of achieving earnings that will adequately reward both the expense and the risk.

We should not forget that curiosity driven research can, given time, generate whole new industries. But glorious examples with their own folklore should not blind us to the everyday world of competition in existing and growing industries. In this world, innovation drives research. Furthermore, with respect to disruptive technologies arising from curiosity driven research, we must remember that it is not where the research is done that determines the economic reward - it is where the concept is commercialized!

What Canada needs is incentives to stimulate innovation, the most appropriate of these probably being a substantial tax holiday for any firm which, from Canadian operations, introduces new products exported to international markets. We can count on such firms having substantial R&D budgets. Let's find a way to reward a successful outcome, which will include a reward for all of the activities necessary to that outcome, not just one of them.

Peter McGeer is a consultant and former head of the Ontario Centre for Materials Research.