Innovation Canada: A Call to Action

Innovation Canada: A Call to ActionThe Canada–US BERD GapThe Canada–US gap in respect of BERD intensity(see chart in Box 2.3) had narrowed significantlyby the time of the collapse of the “tech boom”in 2000–01, but has widened considerably since2003. A sector-by-sector analysis of the gapover the 16-year period 1987–2003 (the mostrecent year for which a full set of comparabledata is available) considered the effect oftwo key factors in contributing to the gap:(i) variations in the sectoral composition of theCanadian and US economies and (ii) differingR&D intensities within the same sectors.It concluded that “generally lower CanadianR&D spending within the same sectors in boththe United States and Canada accounts for agreater portion of the gap . . . than doesCanada’s adverse sector mix — i.e., the greaterweight in Canada’s economy of resource-relatedand other activities that have inherently lowR&D spending” (CCA 2009, p. 6). In otherwords, relative to the US, there is a pervasiveweakness in BERD intensity across many sectorsin Canada.Differences between Canada and the US in thedistribution of firm size could affect the businessR&D gap. However, Canada’s greater proportionof small firms does not explain a meaningfulproportion of the gap (CCA 2009, p. 102,drawing on the work of Boothby, Lau andSongsakul 2008). This is because the fraction oftotal R&D performed by small firms — thosewith fewer than 20 employees — is very smalland therefore the US–Canada difference in theproportion of such firms necessarily accounts fora very small part of the R&D gap. To the extentthere is a size effect, it is within the largest firms— those with 500 or more employees. Suchfirms account for a large proportion of totalR&D and Canada’s share of them is relativelylow. (As noted above, small firms that performR&D tend to be more research intensive thanlarger firms; however, the latter have biggerrevenue bases and, despite having loweraverage R&D intensities, account for themajority of total business R&D spending.)The prevalence of foreign-controlled companiesin Canada is also relevant to the BERD gap,since corporations often conduct the majority ofR&D near their headquarters — the autoassembly industry being a prime example ofparticular significance for Canada. Thiscontributes to the proportionately lower volumeof business R&D performed in Canada (CCA2009, pp. 97–102). Several caveats arenevertheless in order. First, a number ofCanadian industries with extensive foreignownership are quite R&D intensive — forexample, pharmaceuticals, aerospace andcomputers. Second, even in instances whereforeign multinationals conduct most of theirR&D abroad, Canadian subsidiaries still benefitfrom R&D embodied in capital equipment andfrom the transfer of other innovative processesand know-how originating in the parentcompany. Finally and most importantly lookingforward, global companies are increasinglydoing R&D in the most advantageous locationsall over the world. The job for Canada thereforeis to create the conditions to attract anincreasing share of the global market for R&D.In summary, the level and pattern of R&Dspending by the business sector in Canada —as well as the gap in BERD intensity betweenCanada and the US — are the result of anextraordinarily complex combination ofinfluences. If there is one overarching factor atplay, it is the lower commitment of Canadianbusinesses, taken as a whole, to innovationbasedstrategies relative to counterparts in theUS and many other economically advancedcountries. Well-designed public policies andprograms can influence the business strategychoice toward a greater role for innovation, butthe more powerful incentive will come from theforces in the marketplace identified in thefollowing section.2-8