New report contends massive underreporting

A controversial new report alleging underreporting of Canadian business expenditures on R&D (BERD) has been released as Statistics Canada completes a redesigned survey that includes the social sciences and humanities (SSH) in its calculation of BERD as well as a host of other changes (see chart). The developments are being welcomed as a long-overdue kickstart to a discussion on the contributions to R&D made by SSH researchers.

StatsCan's redesign of the BERD survey is the first to be based on the 2015 version of the Frascati Manual, an occasionally updated OECD document that lays out the latest accepted methodology for collecting statistics about R&D. Initial results are expected as early as this fall. and according to StatsCan, the OECD average for BERD estimates indicate that SSH R&D could add up to 1.5% to Canada's BERD.

"We are anticipating similar estimates for Canada," says Louise Earl, section chief of StatsCan's Investment, Science and Technology Division. "Canada was the earliest adopter of the Frascati Manual 2015's new definition of R&D. The new survey methodology employs international best practices in statistical measurement."

The report — Losing Count: Canada Has Been Underreporting Business Expenditures on Research and Development — acknowledges the change in StatsCan's definition of R&D. But it says organizations continue to submit to the agency data collected to obtain Scientific Research and Experimental Development (SR&ED) tax credits.

Based on a sample of just 10 firms, authors Charles Plant and Kay James conclude that those companies are underreporting their R&D by up to 73% — a far cry from the 1.5% found in the data of other nations using the updated definition of R&D.

One expert in the field says the report is an "embarrassment" for its publisher — the Univ of Toronto — and "should never have been released".

"It is misleading, lacking in substance and not what is expected from Canada's leading university," says the expert who asked not to be identified.

The expert notes that the new StatsCan survey "severs the link" between the agency and Canada Revenue Agency, which began supplying SR&ED data for smaller R&D performers as of 1997 to reduce respondent burden. However, it also significantly increased StatsCan reporting times.

Earl says StatsCan's new survey makes the agency "less dependent upon the SR&ED data for its estimates" although she acknowledges that firms may continue to submit CRA-compliant data when responding to the survey.

"Statistics Canada will continue data confrontation exercises to monitor data quality," says Earl.

For Dr Ted Hewitt, the inclusion of SSH in StatsCan's new definition of R&D is a welcome development in longstanding effort to have the significance of those activities — long excluded from a discussion of business R&D — properly acknowledged.

"I was ecstatic to hear that Statistics Canada will now include some of these costs. The (Losing Count) report has raised the issue and in that spirit I support the effort," says Hewitt, president of the Social Sciences and Humanities Research Council (SSHRC). "We need to have a debate that puts this in context. We know SSH has not been counted until now so we're saying the report is part of that discourse."

While Canada does an excellent job of tracking data linked to physical commodities, Hewitt says it counts virtually nothing in the cultural, marketing and design industries. With services accounting for 70% of economic activity, a huge portion of R&D is being ignored, leaving policy makers in the dark.

Hewitt cites Dr Robert Dynes' concept of research and development and delivery (RD&D) as a helpful way to approach the debate over BERD.

"The second D is as important. The second D is delivery. If we do all the R and D in the world, and it isn't delivered, it's not effective," said Dynes, former Univ of California president and ex-pat Canadian, at a 2014 UC San Diego Technology Transfer Symposium.

"Delivery includes everything that goes into that larger formula. It's important for us to know for those disciplines, and work with these people as they all contribute to this RD&D platform ... It's all about the product. It doesn't go anywhere until you figure out how to get it into the market," says Hewitt. "SSH is important to the maintenance and growth of our economy. We need to understand it better and develop policies to support it."

Jean Marc Mangin, executive director of the Federation for the Humanities and Social Sciences, says the changes to StatsCan's definition of R&D are an acknowledgement that SR&ED is too narrowly defined and of little value beyond the science, technology, engineering and mathematics disciplines.

"SR&ED has a very narrow criteria and misses a fair amount of innovation in the economy," says Mangin. "Far more R&D is being done than is being reported such as marketing, software for new platform development and new ways to interact with games."

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