R&D performance continues to lag as GERD falls to lowest level in 10 years

Ontario & Quebec above average

The slow, inexorable decline in R&D spending in Canada shows no signs of abating, according to the latest data from Statistics Canada. The key indicator of gross domestic expenditures on R&D (GERD) as a percentage of GDP fell in 2008 to 1.84, its lowest level since 1999 and well off the all-time high of 2.07 achieved in 2005 — the last year of the previous federal Liberal administration.

Preliminary estimates for 2009 peg Canada's total R&D at $29.85 billion, up a meager $367 million or 1.2% from the previous year's estimate. Every R&D performer fell short of matching the growth rate of the economy and (with the exception of the federal government) failed to keep up with the rate of inflation.

Industry, which has long been the country's main R&D engine, managed a 1% increase in performance to $16.1 billion. Industry spending accounts for 54% of the total, compared to the 58% share it enjoyed in 1999. Part of the reason may be the freefall in venture capital (VC) investment, exacerbated by the difficulties with red tape that US VC faces when investing in Canada (see page 7).

The higher education sector, which experienced major gains from 1999 to 2005, continues to struggle, managing a 1% increase in R&D performed to $10.4 billion. The lone bright light in the new data was the federal government which boosted its funding of R&D by 2.2% to $5.7 billion and performed $2.7 billion in R&D, up 3.3% from 2008.

The downward trajectory of Canadian R&D outlays is emphasized when examined by constant 2002 dollars. From an all-time high of $25.5 billion in 2005, R&D expenditures have declined every year since then, reaching just $24.4 billion in 2008.

Canadian GERD looks better from a provincial perspective, with the two largest provinces — Quebec and Ontario — achieving higher than average performance. Quebec had the highest GERD/GDP at 2.63 in 2007 (down from 2.7 in 2006) while Ontario improved slightly from 2.27 in 2006 to 2.32 in 2007. The national average in 2007 was 1.9.

All other provinces came in below average, ranging from 1.53 in British Columbia and 1.52 in Nova Scotia to 0.9 in Alberta, Saskatchewan and Newfoundland.

Ontario was home to $13.6 billion in R&D or 47% of the total while its GDP was $585.7 billion or 38% of the Canadian total. Quebec followed with $7.8 billion in R&D for a 27% share, while its economy performed $297.4 billion GDP for a 19% share. British Columbia's R&D is $2.9 billion for a 10% share, accounting for 12% of GDP ($191.6 billion), while Alberta performed $2.4 billion in R&D for an 8% share while its provincial GDP was $256.9 billion or 17% of the national total.

As expected, the vast majority of business R&D was conducted in Ontario and Quebec. In 2007 (the latest year for which a provincial breakdown is available), business performed $7.6 billion in Ontario for 48.2% of all business R&D performed nationally in that year. Quebec was home to $4.7 billion in business R&D for a 29.7% share. Business conducted $1.7 billion in R&D in British Columbia and $1.1 billion in Alberta.

OECD comparison

From a European perspective, Canada's knowledge-based economy is performing below the OECD average according to a range of indicators. The latest data show Canadian R&D intensity in 2008 was 1.84%, below the OECD average of 1.9% and well behind the G-7 average of 2.2%.

Canada also registered one of the largest trade deficits in high- and medium-high technology goods in 2007. The same was true of the manufacturing trade balance for information and communications technology products.

In the first quarter of 2009, foreign direct investment plummeted 97%, the largest decrease in the G-7.

Canada's growth in the labour productivity rate between 1998 and 2008 was 1.3% compared to the OECD average of 2.2%. Government financing of business R&D was just 2.3% compared to 6.7% for the OECD. However, the rate of R&D tax subsidies was higher than the OECD, especially for small- and medium-sized firms.

Canada enjoyed the highest penetration rate of broadband subscribers in the OECD in 2008 at 29%.

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