State of the Nation 2012

Chapter 3: Canada’s Funding for Research and Development in an International Context


An examination of Canada’s science, technology, and innovation (STI) performance begins with an analysis of the investments that the country is making to support and incent research and innovation. While innovation is more than research and development (R&D), there are relatively few indicators of funding for innovation available, especially ones that are internationally comparable. Thus, this chapter examines funding for R&D, as an important measure of support for the formal creation of knowledge and the potential commercialization opportunities derived from funded research. Analysis focuses on the total funding of R&D in Canada, as well as breakdowns by the key funding sectors: government (including federal and provincial/territorial); business; higher education; private non-profit; and foreign. This is intended to provide a greater understanding of the funding participants in the STI ecosystem who decide to utilize R&D to advance knowledge, resolve competitiveness and productivity challenges, and/or achieve societal and economic objectives. A more detailed analysis is provided of the two major funding sectors for R&D in Canada: the business sector and the government sector.

Consistent with the intent of State of the Nation reports, Canada’s performance on funding of R&D is compared to that of Organisation for Economic Co-operation and Development (OECD) members and other countries, to the extent that data are available. International benchmarking of Canada’s funding activity is done by reporting total funding of R&D (gross domestic expenditures on research and development, or GERD) as a percentage of gross domestic product (GDP). This measure—otherwise known as GERD intensity or GERD-to-GDP ratio—not only allows comparisons with other countries of different economic sizes, but also provides an indication of the proportion of the country’s economy invested in R&D activities.

Analysis shows that Canada’s total R&D funding has declined from its peak in 2008 and, when measured in relation to the size of the Canadian economy, since 2001. In contrast, the GERD and GERD intensity of most other countries have been increasing. While there have been shifts in funding among sectors in Canada over time, the more recent declines in the country’s total R&D funding efforts are attributable predominantly to private sector funding of R&D. It is interesting to note, too, that the federal government’s direct funding of business R&D in relation to the size of the economy has essentially flatlined since 1990, and that total (federal and provincial) government direct funding efforts in Canada are below those of most of our international peers.


 

Since 2001, Canada’s GERD intensity has been declining.

Canadian Research and Development in a Global Context

As highlighted in Figure 3-1, the total funding of R&D activities in Canada (GERD) increased considerably between 1990 and 2008, when it peaked at $30.8 billion, before dropping slightly to $29.7 billion in 2009 (likely due to the impact of the recession) and then remaining relatively stable (at around $30 billion) through to 2012. Canada’s GERD as a percentage of GDP peaked in 2001, when it reached 2.1 percent. Since 2001, however, despite the growth in R&D funding in Canada, GERD intensity has been declining, to the point where it reached a low of 1.7 percent in 2011.

By comparison, most other advanced and emerging economies have increased their total funding of R&D over the 2006 to 2011 period, with a corresponding rise in their GERD-to-GDP ratio (Figure 3-2). Canada’s declining GERD intensity has, as a result, pushed its rank among 41 OECD and leading developing economies down from 16th position in 2006 to 17th in 2008 and then to 23rd in 2011. At that point, Canada’s GERD-to-GDP ratio stood at 1.7 percent, more than 1.5 percentage points below the 3.3 percent threshold of the world’s top five performers on GERD intensity.

Among these top five performers, GERD intensity exceeded an impressive 3.0 percent in 2011, with Israel leading the pack at 4.4 percent, followed by Finland (3.8 percent), Korea (3.7 percent), Sweden (3.4 percent), and Japan (3.3 percent). Denmark, in sixth position, also surpassed 3.0 percent (coming in at 3.1 percent). Some countries and regions have explicitly identified ambitious goals for increasing their GERD-to-GDP ratios. For example, in 2000, the European Union committed to bring its overall ratio to 3.0 percent by 2010 (the time frame was later reset to 2020). Similarly, during his first term, President Obama declared that the United States (U.S.) should aim for a ratio exceeding 3.0 percent.

Funders of Research and Development in Canada

Behind Canada’s declining GERD intensity is an interesting story about how the different funding sectors have contributed to Canada’s overall funding levels over the past two decades.

The most notable change in R&D funding over the past two decades has been the rapid growth of business R&D funding, which first surpassed federal government R&D funding in the mid-1980s and then continued to grow rapidly through to 2008, after which it experienced a sharp decline in 2009 as a result of the recession. This is reflected in Figure 3-3. Federal and provincial government funding16 of R&D witnessed low or declining growth in the early to mid-1990s, but both have steadily increased in dollar value from the late 1990s to 2010, with federal funding growing by approximately 128 percent during this period and combined provincial funding growing by 135 percent. The higher education sector17 in Canada has also increased its funding of R&D over this period, largely at the same rate as the federal government. Also of note is the growth between 1990 and 2000 of foreign sources of R&D funding. After marginally surpassing federal government R&D funding in 2000, peaking at $3.6 billion, foreign R&D funding declined by approximately 47 percent over the next two years, to $1.9 billion in 2002. Much of this decline was attributable to decreases in foreign funding of R&D in the information and communications technologies sector. Foreign funding of R&D in Canada has remained relatively flat since 2002.

By 2011, the business sector was the largest funder of R&D in Canada, at $13.9 billion. This represented 0.81 percent of GDP in 2011, after a steady decline from a peak of 1.1 percent in 2001 and 2002 (Figure 3-4). The federal government was the second largest funder of R&D in Canada in 2011, at $6.0 billion, accounting for 0.35 percent of GDP, followed by the higher education sector at $5.4 billion, accounting for 0.31 percent of GDP. R&D funded by foreign sources declined over the course of the decade—at $1.9 billion accounting for 0.11 percent of GDP in 2011, down from a peak of 0.33 percent in 2000. The provincial government sector accounted for $1.6 billion in R&D funding, and the private non-profit sector accounted for $1.1 billion, respectively 0.095 and 0.062 percent of GDP.

Turning briefly to performers of R&D in Canada, the amount of R&D performed by the business sector has risen considerably since the early 1990s, coming in at $15.5 billion in 2012 (Figure 3-5). However, it has yet to climb back to its pre-recession peak of $16.8 billion, reached in 2007. Over the same period, R&D performed by the higher education sector has also increased significantly, from $3.0 billion in 1990 to $11.5 billion in 2012. In comparison, the amount of R&D performed by the federal government has seen very little growth over the past two decades, reaching only $2.5 billion in 2012, up from $1.7 billion in 1990. R&D performance by the business and higher education sectors will be explored in more depth in chapters four and five, respectively.

Government Funding for Research and Development

Government support for R&D in Canada includes funding from the federal government and the sum of funding from Canada’s provincial and territorial governments. R&D funding from both these levels of government has grown significantly over the past decade, largely keeping pace with GDP growth.

Total government-financed R&D in Canada (i.e., all governments) was 0.67 percent of GDP in 2010, compared to the 0.99 percent threshold of the top five countries, which included Austria, Iceland, Finland, Korea and Sweden (Figure 3-6). This ratio of government financed R&D in Canada has increased since 2000, when it was 0.56 percent of GDP. It should be noted that, for all countries, these figures include only direct funding of R&D and do not capture indirect funding such as Canada’s Scientific Research and Experimental Development (SR&ED) investment tax credit and similar provincial tax credits. Similar to total funding of R&D for all sectors of the economy, total Canadian government direct funding efforts are below those of most of our international peers. For example, U.S. combined federal and state government direct funding of R&D ranked sixth highest, with a ratio of 0.92 percent of GDP in 2010, whereas Canada ranked 19th on this measure.

Federal Funding of Research and Development

Looking at the Canadian federal government specifically (Figure 3-7), its direct funding of R&D stood at $5.8 billion in 2012. The higher education sector has emerged as the largest recipient of federal government direct R&D funding over the past decade, receiving $3.0 billion, or 51.4 percent of total federal direct funding, in 2012. The next largest recipient sector was the federal government itself, which accounted for $2.4 billion, or 41.1 percent of the total. This was down from its peak of $2.9 billion in 2010. The next largest sector for federal government direct funding was the business enterprise sector, at $406 million. Federal direct funding to business has barely changed since 1990, when it stood at $390 million, and has declined from its peak of $533 million in 1992. The private non-profit sector, the provincial government sector, and provincial research organizations each accounted for less than one percent of federal government direct funding of R&D in 2012.


Innovative Procurement by Governments

Governments support innovation through both supply-side and demand-side policies. Supply-side policies’ main objective is to boost knowledge development in order to accelerate its diffusion throughout society by: supporting investments in researchers and laboratories; setting framework policies such as effective intellectual property rights; ensuring high levels of competition in the marketplace; and providing tax credits to encourage firms to invest in innovation. In contrast, demand-side policies aim to boost the marketplace opportunity for innovative products by increasing demand for them. Examples of such policies include the development of innovation-specific regulations; provision of consumer tax credits and rebates for new technologies; and, government procurement of innovative products—both goods and services.

By tapping into the large purchasing power of governments, public-sector procurement has the potential to positively increase the market demand for innovative goods and services and reduce the risks associated with commercializing them. It also signals to the marketplace that government is prepared to be a first customer and it provides demonstration opportunities for fledgling firms with innovative products and services. Many governments either utilize, or are considering adopting, government procurement as a means of supporting business innovation.

The Canadian Innovation Commercialization Program (CICP) (originally a $40 million pilot program launched in 2010), connects small and medium-sized enterprises with federal departments and agencies that have a need for innovative goods and services. The CICP was made permanent in 2012 as part of Canada’s Economic Action Plan, which committed an additional $95 million over three years and $40 million per year thereafter.

In the United States, the Small Business Innovation and Research Program (SBIR) requires U.S. federal agencies that contract out more than $100 million per year in R&D to set aside 2.5 percent for small business. The U.S. Small Business Technology Transfer (STTR) program requires 0.3 percent set-aside by agencies with over $1 billion in extramural R&D budgets for small business R&D partnerships with academic institutions. While these programs are not strictly innovation procurement programs per se, they can lead to some agencies, such as the Departments of Energy and Defense, being the first customer when the research is successful.

Currently, within the European Union, 22 percent of member states’ contracting authorities indicate that they include innovation within their procurement strategies and procedures. For example, since 2009, Tekes, the Finnish research and innovation agency, has provided financial incentives to Finnish public procurers undertaking procurement of innovative products. Similarly, since 2010–11, VINNOVA, the Swedish research and innovation agency, has provided financial incentives to Swedish public procurers undertaking public innovation procurements. In the United Kingdom, the National Health Service applies an integrated approach to procurement of innovation that combines the use of pre-commercial procurement, for getting solutions developed for mid- to long-term innovation procurement needs.

China intends to modify the evaluation method in government procurement to include an innovation element. China is currently implementing regulations to encourage and protect indigenous innovation, whereby the government practises a first-buyer policy for major domestically made high-tech equipment and products; provides policy support to enterprises in procuring domestic high-tech equipment; and develops relevant technology standards through government procurement.

Use of government procurement to stimulate business innovation is growing in popularity, since it provides support closer to the end-state of the innovation chain (i.e., commercialization) and is therefore better able to address the commercialization gap faced by many countries.

Indirect versus Direct Government Support for Business Research and Development

At 0.24 percent of GDP (or $3.9 billion), the Government of Canada ranked sixth highest among OECD countries in 2010 for its combined direct and indirect support for business R&D. However, as noted in the preceding chapter, the balance between direct and indirect federal support for business R&D is very different in Canada than in other countries, with substantially more support delivered through indirect mechanisms than direct. In Canada, federal government indirect support for business R&D as a percentage of GDP was the second highest (after France) among available countries in 2010, at 0.21 percent (or $3.4 billion), significantly surpassing the top five threshold of 0.14 percent of GDP (Figure 3-8). Other countries among the top five on this measure included Korea, Portugal and Ireland.

Conversely, federal government direct support for business R&D as a percentage of GDP was substantially smaller than that of almost all countries, at 0.03 percent in 2010 (or $487 million), and significantly lower than the top five threshold of 0.15 percent of GDP (Figure 3-9). Those five countries with the highest proportion of direct support for business R&D (as a percentage of GDP) were the U.S., Slovenia, Austria, Korea and Sweden. While there are advantages and disadvantages to both direct and indirect government support for business R&D, direct funding allows government to focus support on actors, priorities and sub-priorities, or activities considered more likely to achieve high social returns or to advance specific policy goals. In STIC’s view, the low level of direct support in Canada handicaps the competitiveness of Canadian business R&D on a global basis.

Provincial Funding of Research and Development

R&D funding is also provided by provincial governments. Similar to federal government funding of R&D since the late 1990s, aggregated provincial government R&D funding has kept pace with growing GDP, increasing from approximately $1 billion to just over $1.7 billion between 2001 and 2012.


Direct versus Indirect Funding for Business Research and Development

The OECD defines direct funding for business R&D to include mechanisms such as loans and guarantees, repayable advances, competitive grants, technology consulting services, and innovation vouchers. Indirect funding refers to tax incentives, such as Canada’s SR&ED tax credit.

The OECD notes several advantages and disadvantages to both forms of funding. Direct support is considered advantageous insofar as governments are able to focus R&D support on specific areas, projects, industries, and/or regions, to respond to policy priorities. Direct funding programs, however, can result in higher administration costs due to their selection and evaluation processes and the compliance costs of recipients. Indirect measures are available to all interested firms and are thus considered non-discriminatory—responsive to the market rather than based on governments “picking winners.”1 These funding mechanisms are also often easier to use and administer than direct support mechanisms. With indirect funding, however, governments cannot focus R&D support in targeted areas deemed to be priorities.

According to the OECD, the recent general trend among member countries has been to increase their use of indirect funding mechanisms to support business R&D. Notwithstanding this trend, Canada’s ratio of indirect funding (compared to direct) is still significantly higher than that of other countries. Among the world’s top ten innovative countries (as measured by business enterprise expenditures on research and development (BERD)-to-GDP and GERD-to-GDP), direct support in 2010 consisted of an average of approximately 70 percent of total government support for business R&D, while in Canada it consisted of only approximately 12 percent2 (the average excludes Israel and Chinese Taipei due to missing data). Canada’s direct funding of business R&D stood at 0.03 percent of GDP, compared to the top ten average of 0.11 percent of GDP. In contrast, Canada’s indirect funding through tax incentives accounted for 0.21 percent of GDP, whereas the average of the top ten countries was only 0.05 percent of GDP.


1 OECD, OECD Economic Surveys: Canada (June 2012), p. 21.

2 OECD, Science, Technology and Industry Outlook 2012 (September 2012), Figure 6.2.

Unfortunately, comparable statistics on individual provincial governments’ spending on R&D are not available for every province, as not all provincial governments participate in the Statistics Canada survey that compiles such data. For those reporting provinces, Figure 3-10 shows that R&D funding by the Ontario and British Columbia governments has been particularly volatile, with significant increases and decreases between 2006–07 and 2010–11. R&D funding by the Alberta and Manitoba governments was much more stable over this period. Funding by the government of Quebec grew considerably, making it the largest provincial funder of R&D amongst Canadian provinces since 2009–10.

The socio-economic objectives pursued through the R&D investments of the federal and provincial governments are diverse. They include such areas as natural resources, infrastructure, the environment, human health, industry-related research, basic research, and defence. The areas with the highest amounts of funding for all reporting provinces combined were the protection and improvement of human health (28 percent of total provincial funding); basic research (27 percent); agriculture production and technology (10 percent); and, industrial production and technology (8.4 percent). It should be noted, however, that the funding areas vary significantly across provinces, suggesting that the research and development priorities are quite different among them. Federal government funding, on the other hand, is more evenly distributed across multiple socio-economic objectives, as demonstrated in Figure 3-11.

Business Funding of Research and Development

Business enterprise funding of R&D relative to the size of the economy (i.e., as a percentage of GDP) provides an internationally comparative measure of the degree to which different  countries’ business sectors choose to invest in R&D.

While most countries increased their business R&D funding intensity18 from 2006 through 2008 to 2011, Canadian business R&D funding intensity declined. Figure 3-12 shows that there is wide variation among economies in terms of the R&D funding intensity of their respective private sectors. Korean business funding of R&D was the equivalent of 2.7 percent of its economy’s GDP, making it the leader, followed by Finland (2.5 percent), Japan (2.5 percent), Chinese Taipei (2.1 percent), and Sweden (2.0 percent), while the U.S. took tenth position (1.7 percent). Despite the growth in the dollar value of Canadian business R&D funding noted earlier, Canada ranked 23rd among 41 economies in this comparison of business R&D funding intensity, with a ratio of 0.8 percent in 2011. This is less than one-half the 2.0 percent threshold of the top five economies.

Looking more closely at the decline in Canadian business R&D funding intensity, it is clear that it is part of a long-term downward trend since 2002 (Figure 3-13). At the beginning of this century, Canadian business R&D funding stood at 1.05 percent of GDP, and it has fallen fairly steadily to 0.81 percent in 2011. Industry’s share of total funding of R&D in Canada, also reflected in Figure 3-13, has been more volatile, largely due to the economic cycle and to the steady increases in funding from other sectors, notably governments and the higher education sector.

Of the $13.7 billion that the Canadian business sector spent on R&D in 2010, $12.7 billion (or 0.75 percent of GDP) was spent within (i.e., performed in) the sector itself (Figure 3-14). The higher education sector was the second largest recipient of business R&D funding, accounting for $833 million (or 0.050 percent of GDP) in 2010. This positioned Canada seventh among 40 comparator economies with respect to business funding of higher education R&D, with a ratio twice that of the U.S. (at 0.021 percent of GDP). Canada’s ratio was also significantly higher than Japan’s (0.011 percent of GDP) and slightly ahead of the other top five business R&D funding countries of Korea (0.046 percent of GDP), Finland (0.045 percent), Israel (0.047 percent) and Sweden (0.041 percent).


 

The higher education sector was the second largest recipient of business R&D funding.


16In calculating the sources of funding, Statistics Canada combines all components of general university funds, such as R&D contracts and earmarked grants received from governments, to the higher education sector. Conversely, the OECD convention is to report the latter funds as government funding of R&D. As a result, Canadian funding statistics from the higher education sector, as reported by Statistics Canada, are higher than the OECD’s depiction of funding from the higher education sector.

17Much of the higher education sector’s contribution is calculated on the basis of its indirect contributions that support R&D, such as a percentage of faculty time and overhead costs. As direct government funding for R&D to the higher education sector increases, so do the indirect costs associated with that funding.

18Business enterprise R&D funding intensity comprises the total business sector funding of R&D, as a percentage of total economy GDP, whether the R&D is performed within industry, the higher education sector, government or other sectors of the economy. This is distinct from BERD intensity discussed in Chapter 4, which covers R&D activities performed by firms, either with their own money or money from other sources.