CD Howe report says provincially delivered grants will help increase R&D intensity

The CD Howe Institute is calling on the federal government to provide stronger incentives for business to enhance Canadian productivity and business R&D spending. A new report from the conservative think tank concludes that Ottawa should consider direct subsidies to business delivered through the provinces and focus its efforts on improving the general corporate environment by lowering tax rates and providing additional incentives for investment.

Entitled Canada’s R&D Deficit and How to Fix It: Removing the Roadblocks, the report examines the effectiveness of direct subsidies versus tax incentives like the scientific research and experimental development (SR&ED) program from an international perspective. It also considers R&D spillover effects from the US into Canada, and the impact of Canada’s decision not to participate in US military initiatives on greater integration of the two economies.

STRUCTURAL BARRIERS

The authors — Richard Harris, Telus professor of economics at Simon Fraser Univ and John Dobson, CD Howe’s foundation scholar in entrepreneurship — acknowledge that the key barriers to improving Canadian private sector R&D performances are structural. These include a small population, an asymetrical trading pattern with the US, an industrial structure largely concentrated on natural resources, weak R&D performance by foreign multinationals and a lack of specialization in high-technology areas.

The report also cites other studies which show that Canadian firms are stronger on process R&D than product R&D.

On the policy front, the report weighs the benefits of further concentrating R&D in areas in which it is already dominant or encouraging R&D in regions where it is low. The authors tend to support the latter scenario, citing the importance of raising R&D spending in provinces like British Columbia and Alberta.

“They must be part of the solution,” states the report. “Just bringing the R&D intensity in these two provinces up to the levels now existing in Ontario and Quebec would go a substantial way toward achieving the national goal of joining the OECD’s top-five list.”

As for the debate over direct subsidies versus tax-based incentives, the report supports the introduction of a business support program similar to the Israeli direct grants program. It suggests that the provinces are best positioned to deliver them to reduce the potential for political influence. It notes that Alberta has been moving in this direction and should be considered as a model for other provinces to emulate.

For a copy of the report, go to www.cdhowe.org.

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