Federal cutbacks and weak business spending pull down Canada's GERD-to-GDP

Canada's R&D output as a percentage of GDP has fallen to its lowest level in the past decade as a slow recovery in business performance and a freefall in federal expenditures gored the key indicator for innovation. According to the latest data from Statistics Canada, the nation's gross expenditures of R&D (GERD) as a percentage of GDP fell to 1.81, down sharply from 1.92 in 2010 and the high mark of 2.09 in 2001.

Fuelling the decline in GERD-to-GDP is the continuing under-performance of the business sector, which managed a year-over-year increase of 5% with spending of $15.6 billion but remains below 2007 levels when companies collectively spent $16.8 billion.

Federal government R&D expenditures also contributed to the worrying new data, declining an unprecedented 10.3% in 2011 to $2.5 billion from a recent high in 2010 of $2.8 billion. Federal funding of R&D also declined but to a lesser extent, dropping 3.8% to $5.8 billion. Modest gains in spending are projected for the higher education, private non-profit and provincial government sectors. Foreign funding of R&D performed in Canada remains a significant source but is projected to decline marginally to $2.1 billion (see bottom chart).

GERD is estimated to post a modest increase of 2% to $29.9 billion in 2011 but it's still well below 2008 when R&D spending reached $30.5 billion just prior to the economic downturn. After two lean years, GDP has bounced back to $1,624 billion but recovery in GERD has not kept pace, hence the disappointing GERD-to-GDP ratio, which ranked fifth in the G8 in 2009.

Israel continues to be the global leader, posting a GERD-to-GDP ratio of 4.28%, followed by Finland (3.96%) and Sweden (3.62%). In comparison, the US ratio in 2009 was 2.79% and the OECD average was 2.33%. When all 27 countries within the European Union are included, the ratio fell to 1.9%.

ontario and quebec lead the pack

Canada's two largest provinces have a significantly higher GERD-to-GDP ratio than the nation as a whole. Quebec achieved performance of 2.76% in 2009 (the most recent year for a provincial breakdown) with outlays of $7.8 billion. Ontario followed closely with 2.3% on expenditures of $13 billion.

The remaining provinces are below the national average (1.92%) with the following GERD-to-GDP ratios: British Columbia (1.46%), Nova Scotia (1.44%), Prince Edward Island (1.38%), Manitoba (1.27%), Alberta (1.18%), New Brunswick (1.17%), Newfoundland (1.05%) and Saskatchewan (1.03%).

Natural sciences and engineering (NSE) R&D accounted for 91% of all R&D performed in Canada in 2011 and is expected to increase 2.1% to $27.4 billion. The increase follows a 4% decline between 2008 and 2009. The majority of NSE R&D was spent by the private sector ($15.6 billion), followed by higher education ($9 billion), the federal government ($2.3 billion), the provinces ($298 million), private non-profit organizations ($104 million) and provincial research organizations ($36 million).

The remaining 9.0% is devoted to social sciences and humanities (SSH) R&D, which is estimated to increase 0.9% to $2.6 billion, with 89.7% spent in the higher education sector.

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